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Co-Op bank to raise £400m in new capital as losses grow Co-op Bank’s ethical investors fret over another £400m hole
(about 7 hours later)
The Co-operative Bank is aiming raise an extra £400m by issuing new shares in a bid to strengthen its capital position. The stricken Co-op Bank has abandoned plans to float this year as it admitted it needs a further £400m just three months after raising £1.5bn to fill the hole in its accounts.
The bank also said it now expects last  year’s trading loss to be between  £1.2 billion and £1.3 billion, almost twice the £709 million loss it revealed for the first half. Hedge fund investors and the wider Co-operative Group, who bailed it out last time, must now decide whether they want to throw further cash at the loss-making bank.
The news scuppers any plans Co-op Bank had to come to the stock market this year. It follows 12 months in  which Co-operative Group had to hand control of the bank to its bondholders and the bank’s former chairman, Paul Flowers, was arrested for alleged drug dealing." Chief executive Niall Booker, who joined last June, said the Co-op had uncovered a further £400m of mis-selling PPI and interest rate-hedging products to customers, as well as technical breaches of the Consumer Credit Act and failure to manage properly those struggling to make their mortgage repayments. It now expects to have lost £1.2bn to £1.3bn last year.
Chief executive Niall Booker, who joined in June last year, said the bank had identified a further £400 million of charges relating to mis-selling PPI, lapses in mortgage provision, interest rate hedging products and technical breaches of the Consumer Credit Act. Co-op Bank will turn to its shareholders – now largely consisting of the hedge funds and institutions which agreed to swap their bonds for equity last year – for the extra  £400m.
He said: “The result of providing for these items together with the cost of separation from Co-operative Group is that the starting capital position of the bank for the four to five-year recovery period is weaker than in the plan announced last year. If the Co-op Group decides it does not want to add to the £462m it has already given or pledged to the bank as part of the original bailout, its 30 per cent stake will be diluted even further, leaving the hedge fund investors owning a larger majority.
"The proposed capital raise would enable us to reset this starting point and continue with the execution of our original business plan.” Co-op Group is itself in turmoil after the resignation of its chief executive, Euan Sutherland, this month, and the publication of Lord Myners’ excoriating review of its governance and management. It would need to put up more than £100m extra to maintain its shareholding at 30 per cent.
He said the extra costs had only come to light since the bank completed its £1.5 billion refinancing in December. He added that the cost of separating the bank from Co-op Group would be around £40 million in 2013. But if it decides not to, it would risk alienating further the ethical investors who have traditionally been attracted to the Co-op Bank’s previous co-operative ownership structure. Some charities began looking for alternative places to bank after the hedge funds became the majority shareholders.
The effect of the extra £400 million of losses will cut the bank’s key balance sheet ratio (core tier 1) from almost 9 per cent to 7.2 per cent which is only just above the minimum 7 per cent required by regulators. Tim Jones, a spokesman for Jubilee Debt Campaign, an NGO which argues for better repayment terms for poor countries’ debts, said: “We were already in the process of finding a more ethical and viable financial option than the Co-op Bank. If the Co-operative Group’s share diminishes even further, we’re concerned the ethical principles will be put further at risk.”
Co-op Bank will turn to its new shareholders — the hedge funds and institutions which agreed to swap their bonds for equity last year — for the extra  £400 million.  Mr Booker said the extra costs had come to light since the bank completed its refinancing in December. He added that the cost of separating the bank from Co-op Group would be about £40m in 2013.
It is not immediately clear whether Co-op Group, which is the largest shareholder with a 30 per cent stake, will take up its rights.  It has already pledged to pump another £263 million into the bank this year as part of the original bailout. The effect of the extra £400m of losses will cut the bank’s key balance sheet ratio (core tier 1) from almost 9 per cent to 7.2 per cent, only just above the minimum 7 per cent required by regulators.
But Co-op Group is itself in turmoil following the shock resignation of its chief executive, Euan Sutherland, earlier this month, and the publication of Lord Myners’ excoriating review of its governance and management. Co-op Bank confirmed yesterday it had cut 1,000 jobs out of its 10,000-strong workforce and closed 30 of its branches with a further 15 to go this year. In addition, it said savers had stuck with the bank, with retail deposits down only 1 per cent from £28.1bn to £27.9bn at the end of last year.
It would need to put up more than £100 million extra to maintain its shareholding at 30 per cent. Lord King has spoken out for the first time since stepping down nine months ago as Governor of the Bank of England to stress that he knew nothing of an alleged political stitch-up to sell Lloyds bank branches to the Co-op.
Co-op Bank also confirmed today that it had cut 1000 jobs out of its 10,000-strong workforce and closed 30 of its branches with a further 15 to shut this year. In addition, it said that savers had stuck with the bank, with retail deposits down only 1 per cent from £28.1 billion to  £27.9 billion at the end of last year. In a letter to the chairman of the Treasury Select Committee published yesterday, Lord King said he would have considered such a deal “improper conduct”. The City financier Lord Levene has claimed the bidding process for 631 Lloyds branches was conducted in “bad faith” because the Treasury was determined the Co-op should succeed. He said his own bid never stood a chance.
Booker said the bank had seen some progress in its recovery plan.