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| What does Moody's downgrade of Co-op bank mean? | What does Moody's downgrade of Co-op bank mean? |
| (34 minutes later) | |
| A couple of seemingly bad things have happened at the Co-operative bank in the past 12 hours. | A couple of seemingly bad things have happened at the Co-operative bank in the past 12 hours. |
| Its credit rating has been downgraded by Moody's to "not prime" (a euphemism for junk) and it's losing its chief executive, Barry Tootell. | Its credit rating has been downgraded by Moody's to "not prime" (a euphemism for junk) and it's losing its chief executive, Barry Tootell. |
| How serious are these events? | How serious are these events? |
| Well I am told that Mr Tootell had been planning to leave for some time - in part because the big part of his job, preparing for the massive expansion of the bank through the takeover of 631 branches from Lloyds, is no longer happening. | Well I am told that Mr Tootell had been planning to leave for some time - in part because the big part of his job, preparing for the massive expansion of the bank through the takeover of 631 branches from Lloyds, is no longer happening. |
| He has been replaced on an "acting" basis by Rod Bulmer, already in the bank and who is apparently a good thing. | He has been replaced on an "acting" basis by Rod Bulmer, already in the bank and who is apparently a good thing. |
| In a way, what is most interesting is that, as I understand it, Mr Tootell's departure announcement was brought forward a bit, because the Co-op felt it needed to be doing something, in the wake of the rather dour assessment of its bank's prospects by Moody's. | In a way, what is most interesting is that, as I understand it, Mr Tootell's departure announcement was brought forward a bit, because the Co-op felt it needed to be doing something, in the wake of the rather dour assessment of its bank's prospects by Moody's. |
| So what is the significance of Moody's downgrade? | So what is the significance of Moody's downgrade? |
| Well, to state the bleedin' obvious, in the aftermath of the ratings agencies' catastrophically poor performance in the run-up to the great crash of 2007-8, their pronouncements don't have the quite the authority they once did. | Well, to state the bleedin' obvious, in the aftermath of the ratings agencies' catastrophically poor performance in the run-up to the great crash of 2007-8, their pronouncements don't have the quite the authority they once did. |
| That said, the downgrade is likely to make it a bit more expensive for the Co-op Bank to borrow, which doesn't help when its profitability is so squeezed (as it is). | That said, the downgrade is likely to make it a bit more expensive for the Co-op Bank to borrow, which doesn't help when its profitability is so squeezed (as it is). |
| But it makes four big points that the Co-op can't simply bat away: | But it makes four big points that the Co-op can't simply bat away: |
| Now one of the most striking things about Co-op Bank's customers is they seem to love their bank rather more than would be true of customers of the bigger banking groups. That is certainly the evidence of letters and emails I was sent by many of them after the takeover was abandoned of all those branches and assets from Lloyds. | Now one of the most striking things about Co-op Bank's customers is they seem to love their bank rather more than would be true of customers of the bigger banking groups. That is certainly the evidence of letters and emails I was sent by many of them after the takeover was abandoned of all those branches and assets from Lloyds. |
| So should those customers be anxious about Moody's downgrade? | So should those customers be anxious about Moody's downgrade? |
| Well there is no reason to believe that their savings are seriously at risk of incurring losses. As Co-op says today, it has plenty of cash or liquidity to hand - I understand it has a cash liquidity buffer of £3bn. | Well there is no reason to believe that their savings are seriously at risk of incurring losses. As Co-op says today, it has plenty of cash or liquidity to hand - I understand it has a cash liquidity buffer of £3bn. |
| Also, the parent group is huge, with assets of £82bn and cash not far off £7bn. If the worse came to the worst, there is plenty of other stuff that could be sold, to provide additional capital to the bank. | |
| What I think the downgrade highlights is a point I made after the collapse of the Lloyds deal - which is whether the Co-operative group, with its leading position in supermarkets and funeral homes (for example), is the best owner of a bank, at a time when profit margins in banking are so low, and may remain so. | What I think the downgrade highlights is a point I made after the collapse of the Lloyds deal - which is whether the Co-operative group, with its leading position in supermarkets and funeral homes (for example), is the best owner of a bank, at a time when profit margins in banking are so low, and may remain so. |
| How would those who work in all those other Co-op businesses feel about any profits they generate being poured into the bank, thus limiting the ability of their operations to expand? | How would those who work in all those other Co-op businesses feel about any profits they generate being poured into the bank, thus limiting the ability of their operations to expand? |
| Moody's downgrade will further sharpen a debate within the Co-op, under its new chief executive Euan Sutherland, about whether it should get out of banking. | Moody's downgrade will further sharpen a debate within the Co-op, under its new chief executive Euan Sutherland, about whether it should get out of banking. |
| There is a bit of nonsense in my blog, for which I apologise. | There is a bit of nonsense in my blog, for which I apologise. |
| When I was away from my computer screen, I asked the Co-op to email me a number for the value of group assets, so that I could give you some sense of what it could flog - in a worst case - if it needed cash in a hurry. | When I was away from my computer screen, I asked the Co-op to email me a number for the value of group assets, so that I could give you some sense of what it could flog - in a worst case - if it needed cash in a hurry. |
| What it sent me was the assets including banking and insurance assets - i.e. including the loans and investments it has made. For some reason, it didn't occur to me that the £82bn included all those tens of billions of pounds of financial assets (my pathetic excuse is I have a cold). | What it sent me was the assets including banking and insurance assets - i.e. including the loans and investments it has made. For some reason, it didn't occur to me that the £82bn included all those tens of billions of pounds of financial assets (my pathetic excuse is I have a cold). |
| Anyway, that enormous number is only semi relevant. | Anyway, that enormous number is only semi relevant. |
| More relevant for assessing the ability of the non-financial part of the group to support the bank is the Co-op's gross assets in non-financial operations of £6.3bn and the larger Co-op's net equity of £4.5bn. | More relevant for assessing the ability of the non-financial part of the group to support the bank is the Co-op's gross assets in non-financial operations of £6.3bn and the larger Co-op's net equity of £4.5bn. |
| So there is value in the rest of the Co-op, but it is not unlimited. | So there is value in the rest of the Co-op, but it is not unlimited. |
| Which rather reinforces the notion that the long-term health of the broader Co-op may require it to find a buyer for the bank. | Which rather reinforces the notion that the long-term health of the broader Co-op may require it to find a buyer for the bank. |