The Co-operative Bank has had its credit rating downgraded to “junk” status by ratings agency Moody’s who say that the bank is vulnerable to potential losses.
The bank has moved to reassure customers that there money is safe and the bank will not need state help via a bailout after its credit rating was downgraded and chief executive Barry Tootell resigned.
Moody’s warned that further downgrades were possible unless the bank found a way to cover the gaps in its funding levels as it moved the Co-op's investment grade rating to junk, down from C- to E+.
Moody's suggested that the bank may need help, perhaps from other parts of its business, to help plus gaps in its funding.
However, the Co-op says that it has not experienced a mass departure of customers following the ratings downgrade and that it is taking steps to ensure it has the required capital buffers.
A spokesman said: “We were obviously disappointed by the downgrade, however, we have not noticed any change in customer behaviour.
“Customer activity, in terms of in-flows and out-flows, has been entirely in line with what we would expect from normal day-to-day trading.
“We have been encouraged by the fact this is a bank with values people clearly appreciate and want us to have.
“We would like to reassure our customers once again there is no need for them to be worried about their savings.”
The Co-op says it has submitted a Capital Action Plan to the Bank of England which presents the actions it is taking to strengthen its balance sheet.
The plan includes details of the sale of its life and savings division to Royal London and the sale of its general insurance division.
The move was announced before the Co-op’s chief executive, Barry Tootell announced his resignation, following last month’s decision that the bank was pulling out of buying 631 Lloyds TSB bank branches.
He will be replaced by Rod Bulmer on a temporary basis, according to a statement released today by the bank.
The downgrade was of six grades and surprised city analysts. It means it will raise the cost that the bank borrows at on the financial markets.
In March the Co-op announced that it had made a loss of £674 million for 2012. The following month the bank pulled out of the purchase of the Lloyds bank branches citing onerous regulatory requirements as the reason.
It is expected that the UK's new financial regulator, the Prudential Regulatory Authority (PRA) will tell a number of UK banks that they need to raise their capital reserve levels within a matter of weeks. This comes after the Bank of England said that between them UK banks need to raise their reserves by £20 billion.
Moody’s, in a statement released today said the bank may require “external support” if it did not strengthen its balance sheet. It said the Co-op’s “problem loan ratio” went up to 10.9 per cent in 2012, from 8.1 per cent in 2011, mainly due to increased debts in its commercial property division stemming from its purchase of the Britannia Building Society in 2009.
Moody’s added: “Moreover, the bank's ability to generate the earnings needed to replenish capital, if higher losses materialise, is diminished by its slow progress in realising merger-related revenue and cost benefits.”
The bank used social media site Twitter to tell customers that it will not need a bailout. The bank tweeted: “We haven't sought nor do we need government support.”
Speaking at a meeting of G7 finance ministers, the chancellor, George Osborne said: "The Co-op have put out a statement last night about how they are going to strengthen their capital position.
"Those plans, like the plans of any bank, will be supervised by our new independent PRA and in Britain we now have a very strong independent regulatory system that looks at all of our banks including the Co-op."
The Co-op responded to Moody’s decision by saying that its balance sheet was "significantly above the regulatory requirements". It said its liquidity levels are very high and for every £100 deposited with the bank just £9 is being lent out.
However, the bank admitted it needed to increase its deposits.
A statement said: “We do acknowledge, like the rest of our banking sector peers, the need to strengthen our capital position in light of the broader economic downturn and the pending introduction of enhanced regulatory requirements, and we have a clear plan to drive this forward throughout the coming months.
“The actions we will now take to strengthen our balance sheet and simplify our business model around a core relationship banking offer, will create a compelling co-operative banking business which is truly distinctive within the banking sector.”
The development is also a disappointment to the government. The Co-op has 1.5 per cent of the current account market and it was hoped that it could become one of the banks to challenge the dominance of the "big four" – Barclays, Lloyds, HSBC and RBS – in the current account market.
The Prime Minister David Cameron’s official spokesman was asked whether the government would support a bailout at a regular media briefing in Westminster.
He said: “I'm not going to speculate on something that hasn't happened yet.
“I would simply say that we are committed to having a strong and stable financial sector, and when we say 'strong and stable' we also mean well-regulated.”
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