The Co-operative Bank, due to acquire 632 branches from Lloyds including 185 in Scotland, saw profits plunge by two-thirds to £37 million in the first half of 2012, while it set aside another £40m for miss-sold payment protection insurance.
Bad debts doubled to £92m, but the group was rescued by its general insurance arm which increased profits by £23m – almost two-thirds of the bank's operating profit, which was also impacted by the £45m cost of restructuring and bidding for the Lloyds Project Verde assets.
Mortgage lending to retail customers, however, doubled to £1 billion and lending through intermediaries was up by two-thirds at £500m.
The bank's performance was revealed as The Co-operative Group reported half-year results which it insisted were in line with expectations.
The group employs 11,000 people in Scotland, where it has 370 food stores, 120 funeral outlets, 60 pharmacies, three farms and only four bank branches.
Peter Marks, the outgoing chairman who has led Co-op's transformation in recent years, said the Lloyds deal was "the highlight of the ongoing strategic progress across our strong family of businesses".
He added: "It is in times like these when our ownership model as a mutual really comes into its own. We have been able to continue to invest for the long-term development of all our businesses and to protect our customers even though we, like all businesses, have felt the impact of the tough headwinds of the unrelenting consumer downturn."
Mr Marks admitted the bank had been hardest hit, in bad debts and the squeeze on interest rate margins. "None of this was unexpected and we had planned for this outcome, so we're well prepared," he said. The group's finances were healthy, with a robust balance sheet and strong cash position.
"Looking ahead, we remain confident and we expect an improvement in sales and profit in the second half. The environment is tough and we see no let-up in that. But we believe that the work we have done over the past five years to scale up in our core businesses means we are better placed than ever before to thrive when the economic upturn does come."
The Co-operative Group's core food division reported sales down 2.2% overall and 1.2% on a like-for-like basis in the first 26 weeks of the year. But it said same-store sales in the core convenience chain were up by 1.4%, with new trial stores showing 12% sales gains. Operating profit fell by 16.2% to £119m.
The banking group maintained a core tier one capital ratio of 9.6%, unchanged from 2011, and the loan to deposit ratio was 101%.
The group's specialist businesses, largely pharmacy and funerals, lifted revenue by 1.5% to £777m and underlying operating profit by 19.3% to £62m.
It plans to start rolling out banking and electrical services in its food stores after successful pilots, and legal services through its bank branches.
The Co-operative opened its £25m regional distribution centre at Newhouse in North Lanarkshire a year ago.
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