Co-op takes £662m hit from banking division

The mutual said the banking’s arm financial strength was “solid” and that it was taking steps to improve its capital position ahead of the planned deal with Lloyds, which must offload the branches to meet state-aid rules.

The Co-op blamed the big banking loss on loan impairments on non-core operations mainly relating to its 2009 acquisition of Britannia and a further provision of £150m to cover payment protection mis-selling.

However, its core banking business still saw profits fall to £120m, from £173m a year ago.

Group results, including its food arm and specialist operations in pharmacy and funeralcare, showed an 18 per cent fall in operating profits to £431m. Including the banking hit, bottom-line losses were £599m.

The Co-op announced a deal this week to sell its life insurance and asset management arm to Royal London and confirmed yesterday it will sell its general insurance arm in a move that will unlock capital for its banking arm.

It said: “We are not complacent about our financial strength and our strategic focus is on implementing a range of measures targeted at increasing the health of our capital ratios.”

The bank’s core tier 1 ratio, a measure of capital strength, fell to 8.8 per cent from 9.6 per cent during the year, although actions taken since the year end have reversed some of the decline to 9.2 per cent.

According to a report in the Financial Times last month, the Co-op faced a £1bn shortfall in its capital position.

The Co-op’s deal with Lloyds is worth up to £750m and will boost its branch network to nearly 1,000, adding another 4.8 million customers to its existing 6.5 million base.

In food retail, total sales were marginally higher at £7.44bn, with like-for-like sales in its core convenience store estate up 1.9 per cent. The UK’s fifth biggest food retailer said there had been a marked improvement in performance over the second half of the year, helped by investment in IT and the supply chain.

The Co-op is the UK’s largest mutual business and is owned by more than seven million consumers. It has 4,800 trading outlets and employs more than 100,000 people.