Co-op bank resists bailout after its rating is slashed to ‘junk’ status

The Co-op defended its banking business today after a ratings agency said it may need 'external support'.
The Co-op defended its banking business today after a ratings agency said it may need 'external support'.
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THE Co-operative today insisted its bank did not require government support after a ratings agency warned it may need a taxpayer bail-out.

In a message to reassure customers and members, the Co-op said “we haven’t sought nor do we need government support” and insisted it was taking action to strengthen its bank’s balance sheet.

A downgrade from Moody’s last night saw Co-op Bank’s investment grade rating slashed to “junk” status - followed just hours later by yet another blow as the lender’s chief executive Barry Tootell resigned.

He had been brought in to lead the group’s failed deal to take over more than 600 branches from Lloyds Banking Group.

The group has been at the centre of intense speculation over its financial strength after pulling out of the bid, which is thought to have collapsed as the Co-op Bank struggled to fill a £1 billion shortfall in its reserves to cushion against potential future crises.

It has been working to address this with the disposal of assets, such as its life insurance and asset management arm to Royal London and plans to sell its general insurance business.

But Moody’s said the bank’s capacity to absorb future losses was now too low to support an investment grade rating following hefty losses after rising bad debts and costs linked to its takeover of Britannia Building Society in 2009.

Moody’s added it may need “external” support and said there was “moderate potential for systemic support likely to be forthcoming from the UK authorities”.

Moody’s said the Co-op under-estimated the risks of the Britannia acquisition, especially against the backdrop of weak economic conditions.

It also calculated that the Co-op’s “problem loan ratio” had increased to 10.9% at the end of 2012 from 8.1% in 2011, reflecting a deterioration in its commercial property portfolio.

It said: “Moreover, the bank’s ability to generate the earnings needed to replenish capital, if higher losses materialise, is diminished by its slow progress in realising merger-related revenue and cost benefits.”

The Co-op said it was disappointed by the downgrade, but stressed it had a “clean plan” to bolster its financial strength.

It said: “We have a strong funding profile and high levels of liquidity, which are significantly above the regulatory requirements.

“We do acknowledge, like the rest of our banking sector peers, the need to strengthen our capital position in light of the broader economic downturn and the pending introduction of enhanced regulatory requirements, and we have a clear plan to drive this forward throughout the coming months.”

The group added that Mr Tootell has been replaced on an interim basis by Rod Bulmer, who joined the Co-op six years ago from Santander.

The Treasury and Prudential Regulation Authority (PRA) - the UK banking regulator - said they declined to comment on individual banks.

But the PRA is expected this month to tell a number of banks to raise new capital.

It has been in discussions with lenders after the Bank of England’s Financial Policy Committee discovered a combined £25 billion shortfall in bank capital reserves.

Regulators are ordering banks to increase their capital cushions to avoid a repeat of the financial crisis, but there are fears these new rules are also impacting on the sector’s ability to lend.

The Co-op, which holds its annual general meeting (AGM) in Manchester on May 18, recently disclosed that its banking division racked up annual losses of £662 million in 2012.

It 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 £150 million to cover payment protection mis-selling.

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

Long-standing Co-op head Peter Marks, who led the Britannia deal, retires at next week’s AGM.

Asked whether the Government would be prepared to step in to help the Co-op Bank if required, Prime Minister David Cameron’s official spokesman told a regular Westminster media briefing: “I’m not going to speculate on something that hasn’t happened yet.

“I would simply say that we are committed to having a strong and stable financial sector, and when we say ‘strong and stable’ we also mean well-regulated.”