Co-op Bank raises questions about mutual’s future

Co-op Bank raises questions about mutual’s future

Before yesterday it had been assumed £500m of capital raised by the Co-op Bank through a controversial “exchange offer” with its bondholders, along with a £1bn injection by the group, would be enough to put it back on a sound financial footing.

However, the lender has admitted that even if it succeeds in raising the money, it will not be enough to make it compliant with the Bank of England’s new leverage ratio that requires banks to hold core equity equal in value to 3pc of total assets.

On top of this, the new capital will also be insufficient to raise the Co-op Bank’s core equity Tier 1 above the 9pc threshold it had said in June it would reach by the end the year.

“It looks like management was forced to announce the rescue plan before they had a proper chance to assess the full extent of the problems,” said one London-based banks analyst.

Mr Sutherland has repeated that there was “no Plan B” for the bank but the rapid deterioration in its capital position – Tier 1 capital nearly halved over the six months to the end of June from 9.4pc to 5.3pc – points to questions about the business’s future even if its rescue plan is successful.

“Even if everything goes their way they are still not going to have any extra capital to restructure the bank with,” said the analyst.


More worrying than the bank’s acute capital problems has been the deterioration in its “core” business.

Of the close to £500m impairment charge taken by the lender, £166m came from what is supposed to be its “good bank”. The result of this was that a division that is supposed to consist of all the bank’s best businesses reported a loss of £102m in the first six months of the year, compared with a profit of £29m in 2012.

Analysts and investors were both surprised by the decline, particularly given that bondholders are effectively being offered shares in the core bank as part of the exchange offer.

“The total size of the impairment didn’t surprise but its distribution did,” said one investor in Co-op Bank bonds.

Another concern raised by the core bank’s loss is that it undermines the argument that the lender’s problems are almost entirely the result of its disastrous acquisition of the Britannia Building Society, whose aggressive lending has largely been blamed for the Co-op Bank’s asset writedowns.

“The retail bank numbers are very worrying,” said one City analyst. “I really hope the Co-op Bank survives but this sort of numbers gives me pause for thought.”


Many banks have in recent years sold off large amounts of gilts to boost their returns. Yesterday’s results showed the Co-op Bank following the same path, selling off its entire £960m book of trading assets, in the process freeing about £490m of capital that had been required to back up the book.

Much of the assets sold is likely to have been gilts, as well as other sovereign debt and high-quality corporate bonds. The profits from the sales netted the bank about £40m but such gains can only be taken once.

Other disposals have been less successful. The bank has given up any chance of getting back any of its £300m investment in a new IT system, writing off the entire cost of building a platform it has never used.

The admission that it will not need the system points to the continued shrinkage of the business, as the IT project was a hangover from the days when Co-op Bank saw its mission as becoming a real challenger to the UK’s established high street banks. The contrast with the position it finds itself in today could not be more stark.

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