RegulationMay 15 2013

‘Lack of solvency created bank’s problems’

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Speaking after the mutual plunged into crisis last week, Ian Gordon, a banking analyst for Investec, said the Co-operative Bank’s problems were rooted around a lack of solvency.

Last week ratings agency Moody’s downgraded the bank’s creditworthiness on concerns it could need a government bailout, taking the mutual’s credit rating from A3 to Ba3 junk bonds.

In a statement, Moody’s said that the bank’s disposal programme, which included divesting its life insurance business to Royal London Group for £220m, was insufficient to shore up a £1bn hole in its balance sheet.

The size of the hole in the balance sheet could be as high as £1.8bn, according to an analyst note from Barclays this week.

The note said Co-op bond holders may be targeted, as the mutual cannot issue equity. The subsequent downgrade in its credit rating led to an almost immediate resignation of the bank’s chief executive Barry Tootell, and the announcement of a strategic review of the entire business by new group chief executive Euan Sutherland.

Mr Gordon said: “Unlike the liquidity problems faced by the likes of HBoS, Northern Rock, and Bradford & Bingley in 2008, the Co-operative Bank’s problems lie in solvency, or a lack of it.”

The bank had a £113,300 fine in January from the FSA over failure to handle 1629 PPI complaints correctly. It also wrote down £150m on Finacle IT project (to date).

He added that the price action seen last Friday, which saw bond prices fall by 25 per cent, “suggested that the market was pricing in the prospect of a default”.

He added: “The bank is less capitalised than some of its peers and as a mutual it has been allowed by the regulator to be run with less scrutiny.

“For the bank to be made as safe and secure as possible it needs a cash injection, but I don’t think that will necessarily lead to a bailout. It’s more likely the Co-operative Group itself will step in.”

When asked whether the bank had a lack of solvency, a spokesman for the Co-operative Bank said: “We are aware of the solvency issues and the need to improve capital ratios.”

When asked about Mr Gordon’s comments that the bank had been run with less regulatory scrutiny, the spokesman added: “It is true that the bank is not a plc but we regularly publish our accounts and engage with investors, the press and regulators, and are subject to considerable scrutiny.”

According to its results for 2012, the banking division contributed 17.6 per cent of revenue to the group, with its revenue of £2.21bn for 2012 dwarfed by the food retail division’s revenue of £7.44bn.