Chair's statement

2007 was a challenging year for CFS. The summer's extraordinary flooding and the banking crisis provided us with an opportunity to show our mettle and despite such external influences having direct, negative impacts on our results, there has continued to be an excellent improvement in our underlying profitability, especially in general insurance.

It was also a year of significant internal change for CFS. In July, the Board approved an investment of £250m in our business to support our planned growth. In order to maximise the return on this investment and to ensure that we offer our customers the most attractive deals, we also needed to reduce our costs by £100m per year by the end of June 2008. To help us achieve this, CFS introduced a major programme, 'Transformation 07,' to implement a rapid restructuring across our back office areas to streamline and improve our structures, simplify some of our business processes and reduce some duplication of activities.

During 2007, we also implemented three strategic outsourcing partnerships, all of which contribute to providing improved customer service at lower cost. These were with Capita to manage our Life and Savings administration, Xansa to handle our Information Systems Development and Delivery work and with Communisis to handle our unified print and mail service. Overall, more than 1,000 employees were transferred successfully under TUPE regulations.

Our huge commitment to change and investment has already to started to reap rewards. In particular, our motor insurance policies, which for a number of years have underperformed against the market, have started to demonstrate positive trends with some growth in the number of policies in operation.

New technology has allowed us to improve our customer service, particularly in terms of telephone answering. The investments we have made in new systems, people and processes were tested during the summer as we handled approximately 4,500 weather-related insurance claims, but we believe that we admirably repaid the trust our customers put in us.

In addition, new strategies in the management of claims have delivered savings, particularly in relation to fraud management, where we have realised benefits of more than £20m. Cutting out these fraudulent claims enables us to provide more competitive pricing for all of our other customers.

Despite this year's backdrop of higher consumer indebtedness and personal insolvency, combined with a weaker economic environment, CFS exceeded year end targets for mortgage sales, average loan values, Payment Protection Insurance, current accounts and Smartsaver accounts.

In 2007, we opened four new Corporate Banking Centres in Bristol, Oxford, Derby and Preston respectively as part of our programme to double our representation by mid-2009. A further five new centres will open in 2008, taking the number of Corporate Banking Centres to 19 from a start point of ten in late 2006.

A major achievement for CFS in 2007 was reaching the 15th anniversary of the launch of our famous ethical policy. We believe that our ethical positioning is a positive factor in growing the business. Our corporate loans have grown by 250 per cent since 1992 and we have research that shows many customers join us purely for ethical reasons. The Bank's ethical policy clearly states who we will or will not do business with, and in the last 15 years we have declined loans totalling more than £700m for ethical and ecological reasons.

One of the key features of CFS as a co-operative organisation is a commitment to return a share of profits to our customer members. This strategy sets us apart from other plc competitors in the marketplace and offers significant opportunities to the customer and to CFS in terms of developing the loyalty of customers and their relationship with CFS. As at September, more than 370,000 Co-operative Group members held CFS products and there is plenty of scope for more of the Group's two million members who are not yet CFS customers to become so. Next year will also see the completion of the roll out of our stronger new 'good with money' brand, giving a huge boost to the strength of our high street bank and other financial services businesses.

CFS has had an exciting and challenging 2007 and has proved, not least by the many awards won over the last 12 months (see performance and achievements), that we remain a progressive and socially responsible organisation, whose social goals are the wind in the CFS sails that powers the progress of the business. We have a clear sense of where and how we want to take our business forward and while our profit figure for the year was severely hit by the worst weather storms in 60 years, this should not overshadow real improvements made throughout our business. We know that we still have much to do to achieve our vision for CFS, but our journey is the right one.

I would like to take this opportunity to thank Craig Shannon, Executive Director of Business Management, who left CFS in August 2007 and also to thank Independent Professional Board Director, Tony Lancaster, who has retired from the Board to be replaced by Bob Newton. Bob's speciality is general insurance and he brings with him much valuable experience and expertise. I would also like to record my thanks to Martin Beaumont, who retired as Group Chief Executive, Deputy Chair of the Bank Board and CFS Board member in July. The Group made tremendous progress under Martin's leadership - including closer working between the Group and CFS. Finally, we welcome Martyn Wates, who joined the CFS Board in November, reflecting his role as Chief Financial Officer for The Co-operative Group.

Bob Burlton
Chair