CO-OPERATIVE Bank is expected to unveil a rescue plan this week that could hit thousands of its small investors.
The mutual – which pulled out of a £750 million deal to buy 632 branches from Lloyds Banking Group in April – is finalising efforts to plug a capital shortfall of more than £1 billion, and an announcement could come as soon as today.
One of the options being considered is a cut in payouts to more than 5,000 investors who hold securities called permanent interest-bearing shares, which currently pay dividends of up to 13 per cent a year.
The group, which recently stopped lending to new business customers, has also appointed Deutsche Bank to sell its general insurance arm. Talks with interested parties are ongoing, but no deal is expected to be announced this week.
Co-op has already sold its fund management and life insurance division to fellow mutual Royal London for £219m, and is also said to be mulling the sale of a £2bn loan portfolio to help shore up its balance sheet.
The lender was thrown into crisis last month after credit rating agency Moody’s downgraded its debt to “junk” status, forcing it to issue a statement that it did not need to be rescued by the taxpayer.
The downgrade, which came just weeks after the sale of Lloyds branches fell through, was accompanied by the resignation of bank chief executive Barry Tootell, who has since been replaced by Niall Booker, the former head of HSBC’s North American operations.
Euan Sutherland, the Scots-born chief executive of parent company Co-operative Group, earlier this month named former Alliance & Leicester chief executive Richard Pym as chairman of its banking arm. Richard Pennycook, previously of supermarket chain Morrisons, starts next month as group finance director.
Lloyds chief executive Antonio Horta-Osorio and chairman Sir Win Bischoff are due to appear before MPs on the Treasury select committee tomorrow to explain the collapse of the state-backed lender’s deal with the Co-op.
Committee chairman Andrew Tyrie said: “We will want to know how the Co-operative Bank’s bid was allowed to progress to such an advanced stage, why it collapsed and what will now happen to these branches and their customers.”
Analysts at Barclays had estimated that the Co-op Bank’s capital shortfall could be as high as £1.8 billion, but it is now understood that the Prudential Regulation Authority (PRA), the new City watchdog, has agreed with the bank that the figure stands at no more than £1.5bn.
The black hole in the Co-op’s capital reserves largely stems from commercial property loans acquired through a merger with the Britannia building society in 2009. “Non-core” write-downs related to the Britannia takeover, along with a £150m charge to compensate customers who were mis-sold loan insurance, pushed the bank to a £662m loss last year.
Other institutions have been in talks with the PRA after the Bank of England’s Financial Policy Committee said banks needed another £25bn of capital to prop up their balance sheets.
It is thought that the likes of HSBC and Santander UK will get a clean bill of health; Lloyds and Royal Bank of Scotland have already agreed with the PRA that their capital requirements will be met without having to raise funds through the issue of new shares or securities.