10th May 2013
It is certainly quite a role reversal for the Co-operative Bank in the last few weeks. It has moved from an entity which, combined with branches from Lloyds TSB could have been a new force in UK banking, to one that ratings agency Moody’s says might need “external” support accompanied by a downgrade from C- to E+.
The Moody’s judgment reported in the Telegraph today has little to do with the failure of that deal but more to do with a deterioration in its commercial loans book. It also faces residual costs from its takeover of Britannia Building Society back in 2008. The agency concluded that its the loans book had deteriorated significantly, with the percentage of problem loans rising from 8.1pc to 10.9pc, generally seen as a rather high figure.
In terms of any state support, we are not talking about anything that would break the Bank of England. A “mere” billion might be required according to the ratings agency and even then it says it is only a moderate risk. It is more likely that the Co-op could find the finances from other parts of the Cooperative empire. But it is not particularly good news.
Mindful Money has a few thoughts in the meantime about what this all means for our troubled banking sector which we have put together in a list below.
1) The authorities need to be very wary of allowing banking mergers where one party is seeking an alliance because it is in a relatively financially weak position especially when the economic environment is far from normal. The lesson should be burned onto the brains of regulators and policymakers since the Halifax Bank of Scotland / Lloyds TSB merger, turned the latter, from being a relatively strong bank into one which desperately needed help. But Coop’s much less severe troubles are another reminder that regulators can say no to mergers when it is in the public interest.
2) Co-operative remains a mutual organisation and, on balance, we think it should stay as such. A lot of pre-crisis developments in British banking saw building societies convert, allowing them more commercial freedom. They obviously abused it. The Co-op/Britannia deal kept things within the mutual family as indeed did Nationwide’s takeover of the Dunfermline and Cheshire Building Societies. We think different forms of ownership in banking and lending are a good thing. But it is no panacea. On balance the Co-op is better as a mutual but also maybe better staying medium sized.
3) Co-op Bank’s chief executive Barry Tootell has stepped down. The bank says it is due to the failure of the deal with Lloyds and not the downgrade today. At least we now know the some bank chief executives are more honourable than others.
4) Mindful Money has been highly critical of ratings agencies in the past because of their dismal performance during the financial crisis and because of flaws in the business model. There are still many unanswered questions but maybe they have raised their game. One for further debate.
5) The biggest issue in UK banking remains the dominance of four banks – two of which remain state dependent. The key to improving performance should be competition. But is that possible with four banks? Allowing UK competition is arguably more important than creating global champions. Barclays and HSBC – admittedly with slightly tarnished reputations – are surely global enough already. A new force in UK banking needs to be domestically driven. The answer is obviously not the Co-op. But maybe rather than another big bank, we need lots of medium sized banks and some new entrants – with prudence enforced by the new Prudential Regulatory Authority.
Those are our thoughts today. But as it is in the eye of the storm, we think it is appropriate to publish the full Cooperative Bank statement here as well.
“We are disappointed by the ratings downgrade announced by Moody’s. We have a strong funding profile and high levels of liquidity, which are significantly above the regulatory requirements. 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.
“Our banking business is already characterised by excellent levels of customer service and advocacy, as recently highlighted in reports by YouGov and uSwitch. Our primary current account base in recent years has enjoyed significant growth.
“The actions we will now take to strengthen our balance sheet and simplify our business model around a core relationship banking offer, will create a compelling co-operative banking business which is truly distinctive within the banking sector.”