Co-Op Bank Says It Doesn’t Need Government Aid After Ratings Cut
Co-Operative Bank Plc, which began in Britain’s 19th-century industrial north, said it doesn’t need a government bailout after Moody’s Investors Service cut the lender’s rating to junk status, citing a capital shortfall.
“We have not sought nor do we need government support,” the Manchester, England-based lender said in a statement after Moody’s reduced its rating by six steps and said Co-Op Bank may require “external support” if real-estate losses escalate.
Barry Tootell today quit as chief executive officer, less than a month after Co-Operative Bank abandoned a 750 million-pound ($1.2 billion) bid for 632 Lloyds Banking Group Plc (LLOY) branches. The customer-owned lender struggled to complete the Lloyds purchase, originally struck in July, as regulators expressed concern the firm lacked capital. The purchase would have more than doubled the number of the bank’s branches.
“Co-Op are really going to regret ever attempting that purchase,” said Simon Maughan, a banking analyst at Olivetree Securities Ltd. in London. “It shone an unwelcome light on their capital position. In the modern world it’s very difficult to be an unlisted bank because you don’t have the same access to capital.”
Moody’s yesterday cut the lender’s deposit and senior debt ratings to Ba3/not prime from A3/prime, and said it may reduce the ratings further. That’s three steps below investment grade. Moody’s said Co-Operative Bank may require aid if losses stemming from its 2009 purchase of the Britannia Building Society increase and deplete the lender’s already low capital.
The downgrade triggered speculation junior bondholders may be forced to take losses as part of a bail-in of the U.K. lender. In February, the Dutch government expropriated about 900 million euros ($1.2 billion) of SNS Reaal NV’s junior debt after property losses brought the fourth-largest Dutch lender to the brink of collapse.
Co-Operative Bank’s 9.25 percent subordinated notes due April 2021 fell 27 pence to 75 pence on the pound, according to Bloomberg pricing data. The securities, issued in April 2011, were at 101.92 pence yesterday and have been quoted above par since July.
“People are concerned the problems at the Co-Op are worse than they had thought,” said Roger Francis, a credit analyst at Mizuho International Plc in London. “Subordinated bondholders in today’s world know that they are the first line of stakeholders to suffer, and the example of SNS is fresh in people’s minds.”
Co-Operative Bank’s core Tier 1 capital ratio under the latest round of Basel rules was 6.7 percent in January, less than the 7 percent target set by U.K. regulators, Moody’s said.
The Prudential Regulation Authority, the unit of the Bank of England that took over supervision of the industry from the Financial Services Authority, has yet to disclose how much capital each U.K. bank will have to raise to plug a 25 billion-pound industry shortfall the regulator identified in March. The PRA may inform the banks at the end of this month.
We acknowledge “the need to strengthen our capital position in light of the broader economic downturn and the pending introduction of enhanced regulatory requirements,” Co-Op said. “We plan to significantly simplify our business, which will greatly improve our operational effectiveness and also enhance our capital position in the process.”
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