Comment: Co–operative banking not always beneficial

THE fall from grace has been headlong. The Co-op Bank was “ethical”. It had gritty roots in the north of England and scrutinised carefully to whom it gave loans, be they households or small businesses.

Martin Flanagan

The bank was, in short, embedded in the fabric of the community. Not for the Co-op Bank sub-prime loans, collateralised debt obligations, structured investment vehicles and “casino” banking.

But now, swamped in losses and complex financial restructuring, the finance arm of the Co-operative Group looks a shadow of its former self.

The bank struck a £700 million-plus interim loss yesterday, laid low by nearly half a billion pounds of bad debts. Most of the latter can be laid at the door of its acquisition of the Britannia Building Society and that group’s toy town loan book four years ago, a hubristic diversion from commonsense banking in hindsight.

That was a foretaste of how the Co-op Bank was beginning to see itself: expansionary, on the front foot. It led the business under previous management to try to acquire more than 600 bank branches from Lloyds Banking Group, which would have doubled its market share in Britain to about 5 per cent. Fortunately, the regulators and Lloyds rumbled late last year that the acquiror’s capital cushions had loads of feathers coming out before that deal was able to go through.

Yesterday the Co-op admitted that the bank’s core tier one banking ratio had slumped from 8.8 per cent to 4.9 per cent in the first trading half, although the £1.5bn rescue plan – involving bondholders taking a hit – should rectify that.

The wider recovery will be harder. The mutual admitted that its banking arm may not make a profit for years, and said unspecified job losses among its 10,000 banking staff are likely.

Many of the rank and file will pay for the intoxication of parts of the Co-op Bank’s board with big ideas above its station.

Of a piece with this, the Co-op says that a near-£150m writedown of a new IT system had been designed for a “much bigger institution”. It is not difficult to join the dots of the group’s star-crossed attempts to join British banking’s top table.

The Co-operative Group’s Scots-born new chief executive, Euan Sutherland, has his work cut out charting the bank’s lengthy row back towards quieter banking waters. He will want to limit as much as possible how the Co-op’s other businesses, from supermarkets to funerals, are impacted by the bank’s woes.

It should be said the Co-op is not the first mutual to come unstuck forgetting its roots. The Halifax and Abbey National took the stock market shilling, the former part of HBOS’s dramatic collapse and the latter snapped up by Santander when it bet on investment banking markets it did not understand.

Alliance & Leicester and Bradford & Bingley also demutualised, only to be snapped up by Santander in the financial crash. Moral: sticking with the knitting is unsexy, but often outdistances the opposition.

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