What does Moody's downgrade of Co-op bank mean?

The Co-op bank

A couple of seemingly bad things have happened at the Co-operative bank in the past 12 hours.

Its credit rating has been downgraded by Moody's to "not prime" (a euphemism for junk) and it's losing its chief executive, Barry Tootell.

How serious are these events?

Well I am told that Mr Tootell had been planning to leave for some time - in part because the big part of his job, preparing for the massive expansion of the bank through the takeover of 631 branches from Lloyds, is no longer happening.

He has been replaced on an "acting" basis by Rod Bulmer, already in the bank and who is apparently a good thing.

In a way, what is most interesting is that, as I understand it, Mr Tootell's departure announcement was brought forward a bit, because the Co-op felt it needed to be doing something, in the wake of the rather dour assessment of its bank's prospects by Moody's.

So what is the significance of Moody's downgrade?

Well, to state the bleedin' obvious, in the aftermath of the ratings agencies' catastrophically poor performance in the run-up to the great crash of 2007-8, their pronouncements don't have the quite the authority they once did.

That said, the downgrade is likely to make it a bit more expensive for the Co-op Bank to borrow, which doesn't help when its profitability is so squeezed (as it is).

But it makes four big points that the Co-op can't simply bat away:

  1. The bank needs hundreds of millions of pounds of additional capital, to absorb potential future losses.
  2. Regulators may force the bank to raise more than the £600m to £800m of capital it is set to obtain from its parent, the wider Co-op group, through the disposal of life insurance and general insurance operations.
  3. The bank faces substantial further losses on poor quality loans it has made, especially property loans made by the Britannia Building Society, with which it merged in 2009.
  4. In a low interest rate environment, prospects for substantial profits growth at Co-op bank are limited.

Now one of the most striking things about Co-op Bank's customers is they seem to love their bank rather more than would be true of customers of the bigger banking groups. That is certainly the evidence of letters and emails I was sent by many of them after the takeover was abandoned of all those branches and assets from Lloyds.

So should those customers be anxious about Moody's downgrade?

Start Quote

Is the Co-operative group the best owner of a bank, at a time when profit margins in banking are so low, and may remain so?”

End Quote

Well there is no reason to believe that their savings are seriously at risk of incurring losses. As Co-op says today, it has plenty of cash or liquidity to hand - I understand it has a cash liquidity buffer of £3bn.

Also, the parent group is huge, with assets of £82bn and cash not far off £7bn. If the worse came to the worst, there is plenty of other stuff that could be sold, to provide additional capital to the bank.

What I think the downgrade highlights is a point I made after the collapse of the Lloyds deal - which is whether the Co-operative group, with its leading position in supermarkets and funeral homes (for example), is the best owner of a bank, at a time when profit margins in banking are so low, and may remain so.

How would those who work in all those other Co-op businesses feel about any profits they generate being poured into the bank, thus limiting the ability of their operations to expand?

Moody's downgrade will further sharpen a debate within the Co-op, under its new chief executive Euan Sutherland, about whether it should get out of banking.

UPDATE 13:22

There is a bit of nonsense in my blog, for which I apologise.

When I was away from my computer screen, I asked the Co-op to email me a number for the value of group assets, so that I could give you some sense of what it could flog - in a worst case - if it needed cash in a hurry.

What it sent me was the assets including banking and insurance assets - i.e. including the loans and investments it has made. For some reason, it didn't occur to me that the £82bn included all those tens of billions of pounds of financial assets (my pathetic excuse is I have a cold).

Anyway, that enormous number is only semi relevant.

More relevant for assessing the ability of the non-financial part of the group to support the bank is the Co-op's gross assets in non-financial operations of £6.3bn and the larger Co-op's net equity of £4.5bn.

So there is value in the rest of the Co-op, but it is not unlimited.

Which rather reinforces the notion that the long-term health of the broader Co-op may require it to find a buyer for the bank.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 341.

    Once again, Peston's partisan tendencies have muddied both his reporting and his reputation; it is no good blaming the Agencies for the naive incompetence of an irrelivant also ran, popular with those similarly blinded by the headlights of socialist illusions.

  • rate this

    Comment number 340.

    The real problem, which has been suspected for sometime, is that the CoOp Bank is somewhat amateurish. The bid for the Lloyd's branches has exposed this, and it has been left 'showing is slip' as they say.

  • rate this

    Comment number 339.

    If the Co-op are in such a perilous state why did Lloyds spend so much time and money on Verde. Was due diligence not carried out?
    oh wait a moment - we've been here before with the HBOS take over -"Those who fail to learn from history are doomed to repeat it"

  • rate this

    Comment number 338.

    Does anybody really care what Moody's says? Why hasn't Moody's been given a substantial downgrade?

  • rate this

    Comment number 337.

    "NOT equal partners
    NOT partners at all"
    But, they COULD be

    IF all 'lenders' are businesses, & all 'borrowers' businesses, & if all individuals are equal shareholders in all businesses by virtue of agreed equality of share in national income (other arrangements, secondary, falling to be revised), THEN all transactions become professional, regulated in conscience & audit, for the best

  • rate this

    Comment number 336.

    332: The borrower and the lender are not equal partners, not partners at all': they are debtor and creditor. If the business fails the borrower must pay down to the last cufflink before the creditors lose out. And that includes the creditors who deposited the money which the borrower lost.

  • rate this

    Comment number 335.

    On the day the BBC reports 400ppm CO2. Compare * and ** . Coal Power station funding: Barclays: €12Bn, Deutsche Bank: €11Bn, RBS: €11Bn, HSBC: €4.5Bn. Cooperative Bank: Carbon Neutral.

    -cheers from julz

    * http://www.skepticalscience.com/whos-paying-for-gw.html
    ** http://www.co-operative.coop/corporate/sustainability/downloads/

  • rate this

    Comment number 334.

    Underlying bank profits are not marginal buy magnificent thanks to a fourfold increase in their spread (the difference between savings rates and lending rates).

    How on earth could the Co-op bank have been considering buying 631 Lloyds branches when it is loosing money and couldn't borrow?

  • rate this

    Comment number 333.

    Does anyone know if the £85,000 safeguard covers businesses too?

  • rate this

    Comment number 332.

    "negative interest rate
    money will be kept under mattress"

    Even if 'negative rate' conceived as 'tax on idle capital', fun & games with increasing 'capital requirements' in times more uncertain, 'work' at least for accountants & tax-lawyers

    There really is no solution in such 'wheezes' against conflict of interest, becoming culpable distractions from the necessity of equal partnership

  • rate this

    Comment number 331.

    305: If you have a negative interest rate the money will be kept under the mattress - or are you going to ban withdrawals too? - and the banks will have nothing to lend: let alone to be forced to lend to every crackpot with a scheme for a lead helicopter and a perpetual motion machine.

    Grow up.

  • rate this

    Comment number 330.

    ASM @298
    'interest the cancer'
    Cyclically, fraudulent but for small print

    We need 'a model' beyond reproach & so beyond attack

    With recognition of vulnerability: every individual, nation, planet

    But recognition also of strength & resilience IF in equal partnership

    Any local loss of little impact, even global only 'incentivising'

    Ceaseless the circulation of equal money, economic life-blood

  • rate this

    Comment number 329.

    30. The_Snial

    The appeal for Cooperative Banking are its ethics:
    Unless of course they sold you PPI, then it is the compensation you might get from them.

  • rate this

    Comment number 328.

    Brilliant banking service. Pity about the collapse of commercial property values causing a problem . It is our bank. Got to keep it that way.

  • rate this

    Comment number 327.

    I joined the Co-op bank in 1984, and joined Smile a year or so after it started. I love it, as RP said many of us do! My partner is very upset at the problems it is having, the idea of having to change banks isn't welcome. It was started as a service to Co-op customers and should stay that way!

  • rate this

    Comment number 326.

    It must be over 20 years since Co-op surveyed customers re offering insurance and other peripheral products. I believe 'we have talked to our customers' is always a complete smokescreen but replied that I didn't want such products ,that Co-op should concentrate on developing a secure and attractive banking service. Fat chance, and look where their polices have taken us.

  • rate this

    Comment number 325.

    323. JamesStGeorge
    I'm afraid I take the opposite view.
    Keynes in 'The general theory' chapter 23 alludes to the work of Silvio Gesell & his theory of interest.
    The idea being that if money carried a cost just as any of the goods & services it is used in the exchange of do, then the interest rate would then be subject to market forces. Important to point out it would apply to money & not savings.

  • rate this

    Comment number 324.

    It's how assets, wealth, gets transferred to the banking hierarchy.

    But why should we care anyway?
    It's all one big spreadsheet anyway.

    Except you cannot eat spreadsheets.

  • rate this

    Comment number 323.

    320A Seditious Malcontent
    This is the main problem.The trouble is the politicians and the BofE are all fundamentally wrong. They neither appreciate human behaviour or reality. Low rate, negative returns will not ever encourage anyone to spend away their capital. If they would they would be the sort in debt. The indebted meanwhile won't borrow more to spend. High rates would enable savers to spend.

  • rate this

    Comment number 322.

    Being a leftie explains why I'm with the Co-op Bank. I use Smile 'cause it's the easiest internet bank and doesn't cost me anything.

    All the mutual financial bodies should co-operate with each other, and issue Bonds & capital raising together. And share IT & policy making.

    There's scope for a powerful range of brands that might encompass Nationwide, TSB, Co-op and other mutuals like JLP.


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