Comment: Co-op needs review after bank debacle

JUST a few weeks ago the Co-operative was poised to become a new force in banking by acquiring more than 630 branches from Lloyds. Now it is contemplating the future of its own financial services operations.
Terry Murden. Picture: TSPLTerry Murden. Picture: TSPL
Terry Murden. Picture: TSPL

The turnaround in fortunes will not come as too much of a surprise to those who doubted its ambitions from the moment it “won” the auction for the businesses that Lloyds is being forced to sell as a condition of being rescued by the taxpayer.

There were questions about its capital strength from the beginning, not least from the Financial Services Authority. Last week’s downgrading of its credit rating by Moody’s from investment grade to junk was a devastating blow but was a result of bad debts inherited from the acquisition of Britannia Building Society in 2009.

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That merger was still being worked on as the Co-op was named preferred bidder for the Lloyds branches at the end of 2011. The full extent of the mess that remains led directly to Moody’s decision and to the City slashing the price of the Coop’s bonds by 20 per cent. Barry Tootell, the bank’s chief executive resigned amid speculation there could be more bad news to come.

The Co-op now admits it needs to raise capital, probably as much as £800 million, but moved swiftly to reassure its 6.5 million customers, who include the Labour party, charities and trade unions attracted by its ethical culture, that it will not need a taxpayer bail-out.

There should be some belief in the statement, given that it can draw on substantial funds from the wider group and has strong deposits to support its loan book. This does not appear to be another Northern Rock in the making and the Co-op insists that it is committed to banking. But the Co-op has been tarnished by this turn of events and new chief executive Euan Sutherland is thought to be running the rule over the financial services division which has already offloaded its life assurance business to Royal London and has put the general insurance business up for sale.

The markets were shocked last month when the Co-op announced a £257m operating loss against the previous year’s profit of £136m. Sutherland will want to reverse the decline which may require major surgery.

This episode may also be a warning signal to the supermarket banks (see opposite) which are attempting to carve out a niche of their own.

Banking requires huge amounts of capital, much of it kept in reserve, and shareholders may one day ask why it is being tied up in risky financial services ventures and not being used to support their core activities.

BT ready to tackle BSkyB

As a director of Celtic Football Club, Ian Livingston is well used to winning and he seems determined as chief executive of BT to get one over BSkyB in the battle for pay-TV sports viewers.

Others have tried and failed, leaving BSkyB in a seemingly indomitable position. Livingston, though, may have come up with a formula that will seriously challenge his rival. He is driving up broadband subscriptions by offering the new BT Sport channels free to those who sign up.

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Cynics immediately accused the Scot of a short-term gimmick, a charge he denied. The key to both companies is the ability to bundle broadband, television and phone services into attractive packages and BT’s move may prompt some aggressive marketing and cut-price deals.

Footsie heads for new highs

The FTSE 100 closed the week at a five-year high, defying the economic gloom and boosted mainly by the measures taken by central banks and by investors switching into equities from bonds and other asset classes.

Other markets have seen similar rises – the Nikkei in Japan is at its highest since January 2008 and the S&P and Dow Jones in the US hit new records last week.

At 6624.98 the FTSE 100 is heading close to the all-time high of 6930.2, achieved on the last day of 1999, and a surge through 7000 must be a possibility before the year is out.

Twitter: @TerryMurden1