Co-Operative Bank Hires Adviser for $10 Billion Mortgages

Co-Operative Bank Plc appointed Bank of America Merrill Lynch to help sell 6.6 billion pounds ($10 billion) of mortgages after failing U.K. stress tests.

The bank will focus on the reduction of a group of residential mortgages called Optimum, Chief Executive Officer Niall Booker said on a call with investors today. Co-Operative Bank was the only one of Britain’s eight largest lenders to fail the Bank of England stress tests published today.

“We’ve no intention of a fire sale here,” Booker said. “Market circumstances have improved for these assets,” which has allowed the bank to pull forward the timing of the sale.

Co-Operative Bank, will cut its risk-weighted assets by about 5.5 billion pounds by the end of 2018 under a plan agreed with the regulator after it scored a core capital ratio, a measure of financial strength, of minus 2.6 percent in the BOE assessment. The minimum pass mark for lenders was 4.5 percent.

The Manchester, England-based lender is seeking to sell the mortgages it acquired when it bought Britannia Building Society in 2009 to free up the capital it must hold against loans to meet regulatory capital requirements.

“The primary source of the stress is the Optimum portfolio,” Booker said. Bank of America Merrill Lynch will help in “structuring the reduction of Optimum over time,” Co-Operative Bank said in a statement.

The bank won’t be required to raise additional equity as a result of the stress test, with Booker saying he doesn’t expect the lender to be profitable until 2017 at the earliest.

Co-Operative Group Ltd., whose businesses range from supermarkets to funeral parlors, was forced to give up control of the bank last year as part of a deal with creditors. U.S. hedge funds, including Silver Point Capital and Perry Capital, and other investors own as much as 80 percent of the bank, while Co-Operative Group owns the rest.

The lender was forced to raise an extra 400 million pounds in May after plugging a capital shortfall of 1.5 billion pounds last year, which was uncovered after its failed attempt to buy branches from Lloyds Banking Group Plc.

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