Comment: Plasters won’t be enough to heal Co-op

A big hole has emerged in the balance sheet of its banking business, which is now burdened with the same sort of problems that hit its bigger rivals.

Having promoted itself after the banking crisis as different and more ethical than the troubled high-street beasts, it has got itself in a right old mess of its own making.

As with Lloyds and Royal Bank of Scotland, it teamed up with another financial institution in a bid to become bigger, in its case the Britannia Building Society. But poor due diligence failed to spot a toxic loan book that meant it too attracted dodgy sub-prime borrowers on to its balance sheet. Result: a huge loss for 2012.

But it cannot hide behind one mistake. Like its rivals, the Co-op has been guilty of mis-selling payment protection insurance, and its claims to be ethical raise eyebrows among those who point to its UK Growth Trust’s holdings in British American Tobacco and Royal Dutch Shell, companies which are usually avoided by such investors.

The decision to freeze loans to new business customers has not only sent shockwaves through the small business community in particular, it has emerged that the decision was taken in March but was only admitted last week.

Withdrawing from the loan arena is an embarrassment to the Labour Party, which has strong links to the Co-op. A number of MPs, including shadow chancellor Ed Balls, are sponsored by the group. But it will cause broader political discomfort. Business Secretary Vince Cable has talked up the Co-op as one of the “challenger banks” to provide alternative funds, while the Chancellor George Osborne publicly backed its expansion plans.

One of the big tasks that Euan Sutherland, the Co-operative group’s new chief executive, was expected to take on was the integration of its banking operations with various assets it had agreed to buy from Lloyds Banking Group, including 632 branches of Lloyds TSB and Cheltenham & Gloucester. But it pulled out of the deal earlier this month.

Instead, and as I predicted in this column two weeks ago, Sutherland is conducting an “extensive review”, raising questions about its long-term commitment to banking.

The downgrading of its credit rating by Moody’s to junk status and the need to raise as much as £1.8 billion to repair its balance sheet may require more extensive surgery than selling its insurance businesses.

Sutherland is talking to the Prudential Regulation Authority, the new watchdog, although suggestions that the bank may be split into a “good bank and bad bank”, akin to the solution imposed on Northern Rock, are being played down.

But the Co-op boss needs to find a solution quickly, and applying more sticking plasters will not be enough. At this stage he looks unlikely to call on the taxpayer for a bail-out. He may just decide that selling the whole banking business is the only option left.

Privatisation set to be delivered

After so many failed attempts at transferring Royal Mail into private hands it looks as if the momentum behind it is unstoppable.

What form it takes is yet to be agreed. A flotation looks the more likely route but the trade unionists say there is no guarantee the government would not opt for a trade sale. A buyer with cash available would be a simpler, cheaper and quicker solution and would give the Treasury some leeway in funding other pet projects.

But to pull out of a share issue now would be politically difficult to negotiate. Business Secretary Vince Cable is trying to tempt unsupportive employees with an offer of free shares. To withdraw that offer now would look like a betrayal.

Those among the public who either support or concede the need for private finance would probably prefer an opportunity to buy a stake in the business rather than see another company acquire it.

The arguments for privatisation, however, are slowly being won. Modern means of electronic communication and the Royal Mail’s need to access capital from non-public sources point in only one direction.

Moya Greene, the Canadian brought in to turn it around, has done her bit by modernising its systems, cutting costs and last week reporting a return to profit. With the Treasury sorting out the pension deficit, the way is clear for a £3bn flotation in the autumn.

Twitter: @TerryMurden1