All is Not Lost for the Co-operative Bank….

by Mark Johnston

All is Not Lost for the Co-operative Bank….

In April this year the Co-operative group pulled out of its planned £750 million purchase of 632 Lloyds banking group branches, blaming the ‘state of the economy’ and ‘changes in the regulatory and capital environment’.

Then in May Moody’s, the rating agency, downgraded the Co-operative bank’s credit rating to ‘junk’ status, citing the need to plug a capital shortfall.

It then emerged that analysts at Barclays estimated that the capital shortfall could potentially reach as much as £1.8 billion, some £800 million more than many in the market had surmised.

It seems that most of the Co-op bank’s problems stem from bad loans associated with its takeover of Britannia building society in 2009.

However, few industry insiders think that the Co-operative will need the type of tax payer funded intensive care which was provided to the Royal bank of Scotland (RBS) and HBOS at the height of the financial crisis back in 2008.

A senior former regulator, said “the Co-operative is a timely reminder of the need for banks to have access to plentiful sources of loss absorbing capital”.

Speculation has therefore been mounting recently over how the struggling bank will raise hundreds of millions of pounds and possibly more than a billion to fill a black hole in its balance sheet.

In the case of the Co-operative, the situation is complicated by its mutual status, which means it can not simply go to shareholders to raise more money in an emergency.

The bank will now become more focussed on making profits because of the need to generate an appropriate amount of equity.

Among the solutions being considered at the bank are assets sales, bondholder ‘haircuts’, a capital increase and dividend cuts.

The bank is also to raise a further £500 million, in 2014, from the sale of its 140 years old insurance businesses and by disposing of ‘so called’ non-core banking assets.

Taken together, these measures are expected to be sufficient to rescue the business.

Just recently it has been announced that the Co-operative is to be floated on the stock exchange as part of its £1.5 billion rescue.

Robert Peston, business editor at the BBC, said “many will argue that the culture and practices of the bank are bound to change once its shares are owned by commercial investors.

Andre Spice, professor at Cass business school, added “this change is likely to clash with the Co-op ethos of the bank and in the longer term this might undermine what has made the Co-op attractive to its staff and customers”.

Martin Shaw, chief executive of the Association of Financial Mutuals, commented that “the most important thing is that customers of the bank as opposed to investors, will not see any difference”.

A spokesperson for the bank has said that these deals will help to increase the level of asets held in reserve as a buffer against potential financial troubles.

The danger comes if the situation turns out to be worse than expected, then the impact on the wider banking system could become serious.


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