Bank losses raise doubts over Co-op branches deal

The mutual group, which sealed a deal on Tuesday to sell its fund management and life insurance businesses to Royal London for £219m, also unveiled plans to offload its general insurance arm to strengthen its balance sheet.

It is understood that the Financial Services Authority is concerned over the capital strength of the Co-op, which blamed the £662m loss at its banking group on “non-core” write-downs related to its 2009 takeover of the Britannia building society, along with a £150m charge to compensate customers who were mis-sold loan insurance.

Outgoing chief executive Peter Marks said the disposal of the insurance and asset management divisions would “unlock significant capital that is currently allocated to our insurance business for recycling into our core banking business”.

The bank’s core tier 1 ratio, a measure of capital strength, fell to 8.8 per cent from 9.6 per cent during the year, although actions taken since the year end have reversed some of the decline to 9.2 per cent.

Marks said: “We are not complacent about our capital strength and our strategic focus is on implementing a range of measures targeted at increasing the health of our capital ratios.”

The group is understood to have attracted the interest of a number of potential trade buyers for the general insurance business, which saw its pre-tax profits fall to £3m last year, from £32.3m in 2011.

The overall Co-op business, including the group’s retail and funeral arms, made an underlying operating profit of £431m for the year to 5 January, down from £523m a year ago.

Total sales at its food retail business were marginally higher at £7.44 billion, with like-for-like sales in its core convenience store estate up 1.9 per cent. Including the banking hit, the group fell to a statutory loss of £599m, compared with a profit in 2011 of £373m.

Gary Greenwood, analyst at Shore Capital, said the Co-op’s figures made “very grim reading” and would raise questions about the group’s ability to buy the Lloyds branches, known as Project Verde.

He said: “This may not be such a bad outcome for Lloyds, in our view, given the rally in bank share prices since the deal was originally announced last year on what appeared to us to be terms that were very penal to Lloyds.

“Although the Co-op continues to work towards completing an acquisition of Verde, Lloyds is building towards the alternative of an initial public offering [IPO]in parallel, with Verde expected to be a standalone business by summer of this year.”

Lloyds chief executive Antonio Horta-Osorio insisted earlier this month that the state-backed lender was “absolutely committed” to the Co-op sale, but the option of a stock market flotation of the branches remained on the table.

He said: “By the end of Q2 we will have to make a decision. By then we will be clear whether Plan A will go ahead or whether we revert to an IPO”.

Lloyds is being forced to sell the branches to meet European Union rules on state aid following its £17bn taxpayer bailout in 2008, and has until November to complete the disposal.

The deal would boost Co-op’s branch network to nearly 1,000, adding another 4.8 million customers to its existing 6.5 million base.

Royal Bank of Scotland is also drawing up plans to float off 316 branches after an agreement to sell them to Spanish group Santander for £1.65bn collapsed last October, although it is understood that a number of trade and private equity have put in bids for the business.

The Co-op is the UK’s largest mutual business and is owned by more than seven million consumers. It has 4,800 trading outlets and employs more than 100,000 people.

Marks is set to retire as chief executive in May after 45 years in the co-operative movement and will be replaced by Scots-born Euan Sutherland, who is currently chief operating officer at B&Q owner Kingfisher.