Bosses at the Co-operative Bank have admitted that it will take several years before the firm returns to profit after massive writedowns on its soured loans dragged it deeper into the red.
The scale of the lender’s troubles were unveiled as its new management team, led by former HSBC North America chief Niall Booker, attempt to plug a £1.5 billion black hole in its finances.
Core tier one capital ratio, a key measure of the firm’s financial strength, slumped to 4.9 per cent, from 8.8 per cent a year earlier, and the bank expects to miss its target of improving that to 9 per cent by the year-end.
Triggered by its disastrous acquisition of Britannia Building Society in 2009, the Co-op Bank wrote down the value of its loan book by £496 million, while it took a £148.4m hit on a new IT system.
Those writedowns pushed the bank to a pre-tax loss of £709.4m for the six months to 30 June, from £58.6m a year earlier, and chairman Richard Pym warned it “will not remain a going concern” if investors do not support its rescue plan.
Booker added: “We do not expect to be profitable for some years and legacy issues will continue to have an impact on the bank for some time.”
Under plans drawn up by Euan Sutherland, the Scots-born chief executive of the parent Co-operative Group, bondholders will be forced to take losses on their investment as part of a “bail-in”. This move will generate about £1bn in capital, while the group is seeking to raise a further £500m by selling parts of its business.
Scottish Life-owner Royal London has already bought its fund management and life insurance arms for £219m, and Sutherland said “good progress” was being made on the sale of its general insurance business, with a deal expected next year.
He added: “There are no quick fixes here. This will be a challenging four-year turnaround that begins with our comprehensive plan to restore the bank to stability, agreed the Prudential Regulation Authority (PRA).”
The Co-op, which has interests spanning retail and funeral services, employs more than 100,000 people and warned of job losses as it restructures the wider group as well as the bank, but did not say how many staff could be affected. Sutherland said: “It’s inevitable in a restructuring of this size that there will be some jobs at risk.”
Co-op Bank once harboured ambitions of challenging the established high street lenders, but a £750m deal to buy 632 branches from Lloyds Banking Group collapsed in April, leading to a £34.6m charge in the first half.
Former Treasury official Sir Christopher Kelly has been drafted in to carry out a “forensic” inquiry into the Lloyds deal and Britannia takeover, and is due to report back in May.
A spokesman for the PRA said the banking regulator will continue to keep a close eye on the Co-op as it works to address the £1.5bn capital shortfall it identified in June.
Losses at the bank dragged the wider Co-op group to a £559m loss, from an £18m profit a year ago.