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Co-op downgrade: is your money safe? Co-op downgrade: is your money safe?
(about 2 hours later)
There are turbulent times for Co-operative Bank which has been downgraded to junk status by the credit agency Moody's, leading to the departure of its chief executive, Barry Tootell. We look at what this means for its 6.5 million customers.There are turbulent times for Co-operative Bank which has been downgraded to junk status by the credit agency Moody's, leading to the departure of its chief executive, Barry Tootell. We look at what this means for its 6.5 million customers.
Should I move my money? Should I move my money?
The standard advice is never to keep more than £85,000 in any one bank, and that applies to Co-op as much as any other bank. Anything above that is not covered by the Financial Services Compensation Scheme. But at this stage there is no reason to move sums below that.The standard advice is never to keep more than £85,000 in any one bank, and that applies to Co-op as much as any other bank. Anything above that is not covered by the Financial Services Compensation Scheme. But at this stage there is no reason to move sums below that.
Could there be a run on the bank?Could there be a run on the bank?
There are no signs of this. When the Guardian called the bank's customer service helpline this morning posing as a worried customer, the operator said it was only the second such call today. The operator was already well versed in key messages for customers – that the bank has strong funding and liquidity and a strong capital base, far above the minimum required for a bank.There are no signs of this. When the Guardian called the bank's customer service helpline this morning posing as a worried customer, the operator said it was only the second such call today. The operator was already well versed in key messages for customers – that the bank has strong funding and liquidity and a strong capital base, far above the minimum required for a bank.
Will it need a bailout?Will it need a bailout?
Co-operative Bank's Twitter feed has been reassuring customers that despite press reports suggesting it might need a government bailout, they should not be concerned.Co-operative Bank's Twitter feed has been reassuring customers that despite press reports suggesting it might need a government bailout, they should not be concerned.
On its @CoopBankPR feed, it said: "In light of today's news, we would like to reassure customers and members that we haven't sought nor do we need government support."On its @CoopBankPR feed, it said: "In light of today's news, we would like to reassure customers and members that we haven't sought nor do we need government support."
But at the end of March, Bank of England policymakers warned that UK banks need to find additional capital of £25bn. Names weren't mentioned, but in the City the rumour is that Co-op is among those that will need to seek additional capital. However, that doesn't by any means mean a bailout – the bank can access capital in other ways, and this morning said: "We have a strong funding profile and high levels of liquidity."But at the end of March, Bank of England policymakers warned that UK banks need to find additional capital of £25bn. Names weren't mentioned, but in the City the rumour is that Co-op is among those that will need to seek additional capital. However, that doesn't by any means mean a bailout – the bank can access capital in other ways, and this morning said: "We have a strong funding profile and high levels of liquidity."
So what's the problem at Co-op? So what's the problem at Co-op?
Moody's said the "problem loan ratio" had increased by the end of last year to 10.9% from 8.1%. Most of it is commercial real estate (CRE) – in other words, office blocks, shopping centres and industrial premises. Moody's said the "problem loan ratio" had increased by the end of 2012 to 10.9% from 8.1%. Most of it is commercial real estate (CRE) – in other words, office blocks, shopping centres and industrial premises.
The bank's accounts for the end of 2012 show that it had £1.9bn in CRE loans, and that 7% of these were "impaired", which means the repayments are not being met on time. But its total impairment losses were £351m in 2012 and it said that a significant proportion of its CRE loans had been downgraded, with many moving into a "default category". Given the Moody's report, the worry is that these impairments are worsening. The bank said today that of its total commercial loan book of £9.4bn, £1.7bn is classified as "impaired", which means the repayments are not being met on time. The big problem is with 12 big loans (it won't say to whom) that account for £900m of the problem.
To put the loan impairments into context, the total income for the Co-operative Banking Group in 2012 was £1.4bn and its operating costs were £713m. So the impairment losses, plus the fact that it had to set aside £150m for payment protection insurance claims, sent the bank into a huge loss of £662m. The latest report and accounts show that total impairment losses were £351m in 2012, and that a significant proportion of the Co-op's CRE loans had been downgraded, with many moving into a "default category". Given the Moody's report, the worry is that these impairments are worsening.
To put the them into context, the total income for the Co-operative Banking Group in 2012 was £1.4bn and its operating costs were £713m. The impairment losses, plus the fact it had to set aside £150m for payment protection insurance claims, helped send the bank into a huge loss last year of £662m.
Has the bank got enough capital? Has the bank got enough capital?
It meets minimum regulatory standards, but it's not comfortable. At its results in March, it said its core tier-one capital ratio – closely watched by regulators as a measure of financial strength – had increased to 9.2% from 8.8% at the end of 2012 and was above the regulatory minimum. But it compares poorly with Lloyds Bank, which said last month that is core tier-one capital ratio had risen to 12.5%.It meets minimum regulatory standards, but it's not comfortable. At its results in March, it said its core tier-one capital ratio – closely watched by regulators as a measure of financial strength – had increased to 9.2% from 8.8% at the end of 2012 and was above the regulatory minimum. But it compares poorly with Lloyds Bank, which said last month that is core tier-one capital ratio had risen to 12.5%.
Is it another Northern Rock? Is it another Northern Rock?
Northern Rock not only gave homebuyers 100%-plus loans, it didn't have the deposits to back them. Co-op, which took on Britannia Building Society, is in a different position, although like most banks, it still has fewer deposits (assets) than it has loans (liabilities). At end 2012 it had £37bn in customer deposits, but still needed £9.6bn in "wholesale" funding to cover its book. Northern Rock not only gave homebuyers 100%-plus loans, it didn't have the deposits to back them. Co-op, which took on Britannia building society, is in a very different position.
A look through its mortgage book balances shows that the average loan to value on its residential home loans was 54% at end 2012. But the bank said that 10% of its loans were above 100% – in other words, these loans are higher than the value of the house they are secured against. It has £23.4bn in outstanding mortgages compared to £36.9bn in deposits from customers, so on the face of it the bank looks very comfortable. But drill deeper into the accounts and you see that once other lending is added in, the bank needs £9.6bn in "wholesale" funding (ie: in excess of its deposits) to cover its book.
A look through its mortgage book balances shows that the average loan-to-value on its residential home loans was 54% at end 2012. But the bank said 10% of its loans were above 100% – in other words, these loans are higher than the value of the house they are secured against.
Problem mortgages at the bank are focused in what is called the "Optimum" book. These were the mortgages that a subsidary of Britannia known as Platform granted through intermediaries – some of them of the self-certification and "non-conforming" variety, where income checks were minimal. Arrears on the Optimum mortgages (£7.5bn of the bank's total £23.4bn mortgage loan book) are running at twice the industry average.
I have a mortgage but no savings at Co-op. I have a Co-op credit card. Should I be worried?I have a mortgage but no savings at Co-op. I have a Co-op credit card. Should I be worried?
Why would you be? You owe them money. The only risk would be that the bank would make its products less attractive - ie put up interest rates – but there is again no sign of this. For example, its five-year fixed rate mortgage is currently very near the top of the best buy tables with an interest rate of just 3.69%.Why would you be? You owe them money. The only risk would be that the bank would make its products less attractive - ie put up interest rates – but there is again no sign of this. For example, its five-year fixed rate mortgage is currently very near the top of the best buy tables with an interest rate of just 3.69%.
Is customer service now going to suffer? Is customer service now going to suffer?
Hopefully not. Co-op tends to score highly on customer service. Last year Which? ranked Co-op bank second out of 28 banks with a score of 79%. JD Power gave Co-op bank a score of 734 out of 1,000, again putting it in second place.Hopefully not. Co-op tends to score highly on customer service. Last year Which? ranked Co-op bank second out of 28 banks with a score of 79%. JD Power gave Co-op bank a score of 734 out of 1,000, again putting it in second place.
Will it junk its commitment to ethical banking?Will it junk its commitment to ethical banking?
Highly unlikely, as that would result in its customers leaving in droves – which is the last thing the bank wants right now.Highly unlikely, as that would result in its customers leaving in droves – which is the last thing the bank wants right now.