Co-Op Bank mulls plan to fill capital hole

 
Tim Wallace
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THE CO-OPERATIVE Bank could issue more debt, slash borrowing more quickly or sell off other chunks of its business over the coming months to raise capital and reassure markets, if the sale of its insurance arms brings in less cash than hoped.

The lender and the government have both told markets that the Co-op does not need taxpayer support, though new rules make it increasingly difficult to move capital from the other parts of the group to the bank.

In a serious double blow, ratings agency Moody’s downgraded the bank’s debt to junk and its chief executive Barry Tootell quit on Friday. The run of negative news, coming so shortly after the Co-op dropped plans to buy 632 branches from Lloyds, has made markets nervous about the financial position of the mutual’s bank.

The Bank of England’s Financial Policy Committee has told all big banks to raise more capital, and is expected to tell the Co-op exactly how much it needs in the coming weeks, running through the lender’s options to improve its position.

Its life arm is being sold to Royal London for £290m, while it hopes to receive around £500m for its general insurance arm. Those divestments will also free up capital, as well as raising funds.

Combined with the running down of the non-core loan book bought as part of the Britannia – largely bad commercial property loans – it hopes to fully cover the capital gap.

But that plan includes a range of uncertainties, including the sale price of the insurance unit and the size of the capital hole identified by the authorities.

Additional moves could include cutting lending further – net lending fell £299m from June to December – or selling off further chunks of the bank.

Shifting capital around within the group could prove problematic, not least because group bondholders may not want their money moved to the riskier banking arm. And the incoming ring fence rules are likely to crack down on groups moving capital to and from the banking unit, again making an internal solution tougher.

Selling off the whole banking arm could also be an option, though it would likely need to repair the balance sheet in any case before that is possible.

But the Co-op denied it would need state aid.

“We have a strong funding profile and high levels of liquidity, which are significantly above the regulatory requirements,” said the bank in a statement.

“We would like to reassure customers and members that we haven’t sought nor do we need government support.”

It came after Moody’s cut the bank’s credit rating to b1 from bbb1, even including a degree of government support.

“These imply a risk of write-downs on junior debt instruments and, potentially, the need for external support to maintain regulatory capital levels,” said the agency.