Credit ratings agency Moody’s has downgraded the credit status of the Cooperative bank by a surprising six notches in a move which even surprised the City.
Such a downgrade, from A3 to Ba3, effectively makes the Cooperative’s debt junk status, and will raise the price at which the bank can borrow from the financial markets. The bank itself, whilst expressing its disappointment at the downgrade, is reassuring its customers that it will not need a bailout following the downgrade and a rapid deterioration in the bank’s financial position.
The Cooperative, having 6.5 million customers, a 1.5% share in the current account market, and an enviable reputation for ethical banking and customer service, posted losses of £600m in March. Admitting that it needed to raise fresh capital, in reassuring statements it insisted that current shortfalls could be plugged via selling off its insurance arm or by scaling back its banking interests. Additionally, money could be sought from its parent group which owns a chain of groceries, pharmacists and funeral homes. The bank is careful to stress that it does not need a government bailout, and that it is still liquid.
It is the latest in a rapid series of events to overtake the Manchester based bank. On top of the slow integration of Britannia Building Society – bought out three years ago by the Cooperative- recent months have seen the collapse of a deal to buy 632 branches from Lloyds Banking Group, and the sudden departure of chief executive Barry Tootell. Having replaced former Britannia boss Neville Richardson in 2011 (who left with a pay out of £4.6m), he will himself be replaced temporarily by Rod Bulmer until a permanent successor is found following Mr Tootell’s resignation.
It will be challenging times for Mr Bulmer. The downgrade comes when Britain’s biggest trade unions are attending the AGM of union- backed Unity Trust Bank- which is 26.7% owned by the Cooperative. Union leaders are very worried at the situation facing the Cooperative, despite reassurances from the Unity Trust Bank. Managing director Richard Wilcox stated that, whilst the Cooperative had been discussed in scheduled meetings as a major investor, “the relationship with Co-op continues to be managed as normal. We work as an independent entity and are not impacted by changes to the credit rating of the Co-operative Bank.”
The situation at the Cooperative comes at a time when the new Prudential Regulation Authority has identified a £25bn shortfall in capital amongst UK banks, in an effort to strengthen the capital position of the UK’s financial institutions. City analysts believe that the Cooperative Bank accounts for between £80m to £1bn of this national shortfall; a shortfall which the same analysts state the Cooperative could fill by selling its insurance business, selling its life insurance interests to Royal London, and simplifying the bank itself.
Moody’s is not so certain that such measures or similar would be able to improve the bank’s closely watched capital ratio. This is low (at 8.8%) compared to other banks, and Moody’s was uncertain that the bank would be able to generate the extra capital needed.
Whatever happens next at the Cooperative, it will happen under great external scrutiny and amidst great uncertainty indicative of the banking sector currently.