The Church Commissioners – the Church of England’s investment arm – have won the bid to buy more than 300 UK bank branches from RBS, in partnership with other investors.
The Church Commissioners have a 10% stake in the £600m (€720m) deal and are the largest investors after the consortium leaders, investment company Centerbridge Partners and Corsair Capital, a private equity firm specialising in global financial services.
Other investors include RIT Capital Partners and, reportedly, Standard Life.
RBS – 80% owned by the UK government – had been forced by the European Commission to sell its 308 branches in England and Wales and six NatWest branches in Scotland as a condition of its bailout by the state.
The new bank, to be called Williams & Glyn’s – the branch network’s previous name, dropped in 1985 – will act as a “challenger” bank to the major players, with a focus on ethical standards and servicing the needs of retail and small and medium-sized enterprise customers.
As at 30 June, the business had total assets of £19.7bn, customer deposits of £22.2bn and risk-weighted assets of £13.3bn.
It made an operating profit of £168m for the first half of 2013.
The Church Commissioners’ stake equates roughly to 1% of its £5.5bn portfolio, which is used to finance Church activities and fund pensions for pre-1998 service.
This is its first direct co-investment in private equity, which forms 3-5% of the overall portfolio.
The first private equity investment was made in 1997.
Tom Joy, director of investments for the Church Commissioners, said: “This represents a good investment opportunity, so we are comfortable with the risk/reward trade-off.”
He added that the stake was not seen as an impact investment – i.e. one which supports businesses furthering the investor’s mission, while returning the capital invested, often with an added financial return.
“First and foremost, it would have failed as an investment idea had it not met our return hurdles,” Joy said. “It is not our intention to sacrifice a certain level of return.”
The Church Commissioners have the right to appoint an independent director to the board of Williams & Glyn’s, and the intention is to be proactive investors, particularly since the bank is intended to operate as a “good bank” operating to the highest ethical standards.
According to Joy, this includes treating customers fairly and not getting involved in non-core activities such as investment banking or proprietary trading.
“We were the instigators of good bank principles, and they formed part of the bid documents,” he said.
Joy said the stake was seen as a long-term investment, although this will be reviewed if and when an initial public offering takes place.
Even so, the present intention is that the shares will not be sold, although they would then be classified as UK equities.
The Commissioners’ investment objectives are a return on investments of inflation (retail prices index) plus 5%.
Over the past 10 years, the returns from their private equity holdings have outperformed the returns from the portfolio as a whole, at 14.9% per year compared with 9.1%.
However, private equity only returned 2.9% over the year to 31 December 2012, compared with 9.7% for the total portfolio.
The investment policy includes ethical guidelines drawn up by the Church’s own Ethical Investment Advisory Group (EIAG).
The Church Commissioners engage with all the banks they invest in. In particular, they have had discussions with Barclays Bank on concerns over the LIBOR-rigging scandal, and the mis-selling of payment protection insurance.
In June, the EIAG’s 2012-13 annual review said: “We have been encouraged by the determination of the bank’s new leadership to turn a corner and foster a more ethical culture.”