CompaniesMay 10 2013

Co-op hit by double whammy as Moody’s hints at bailout

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ByDonia O’Loughlin

Moody’s Investor Services has downgraded the credit rating of Co-operative Banking Group and warned that the bank may need “additional help” to raise new funds, raising the spectre of a fresh taxpayer bailout in the banking sector.

The downgrade comes on a day of bad news for the bank, as it confirmed Barry Tootell, chief executive, has stepped down from his role and the board following the decision to abandon its agreed purchase of 630 Lloyds branches this year..

Moody’s Investors Service has downgraded the bank’s baseline credit assessment to b1 from baa1, saying it faces the risk of “further substantial losses in its non-core portfolio, as demonstrated recently by the unexpectedly significant deterioration of its commercial real estate exposures”.

The ratings agency also pointed to “vulnerability to losses” caused by an apparent low level of capital reserves held against its lending portfolio.

Co-operative said it was “disappointed” with the ratings downgrade, in a statement that asserted the bank has “a strong funding profile and high levels of liquidity”. It added that its reserves are significantly above the regulatory requirements.

Co-op said: “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.

“In March, we announced the sale of our life business to Royal London and also our intention to sell our general insurance business. In addition to these measures we plan to significantly simplify our business, which will greatly improve our operational effectiveness and also enhance our capital position in the process.”

Questions about The Co-operative financial strength have been raised since it pulled out of buying 630 branches from Lloyds Banking Group last month.

The Co-operative Bank, which had agreed in principle to pay around £800m for the unit, abandoned the deal citing a difficult economic backdrop and increasing regulation.

A statement from the Co-op said that Mr Tootell’s decision to leave was driven by the decision to pull out from the sale.

The statement said: “Barry took over the role of CEO to lead the banking business through the potential acquisition of the Lloyds Banking Group Verde Business. Following the recent decision... to withdraw from the Verde process, Barry has decided that the time is now right for him to stand down from his role.”

Rod Bulmer has been appointed acting chief and a director of The Co-operative Bank plc until a permanent replacement is announced. He has been with the group for six years.