Co-op in crisis after bank 'junk' downgrade

Moody’s has reduced Co-operative Bank’s deposit and senior debt ratings by six notches to Ba3 from A3.

The downgrade has plunged the bank’s ratings into junk status – below the Baa3 threshold for investment-grade ratings.

Following the downgrade, Co-op Bank chief executive Barry Tootell resigned. Rod Bulmer will run the bank on an interim basis.

Co-op Bank is part of the Co-operative Banking Group, which also includes up-for-sale general insurance business CIS General Insurance.

The Co-op is under pressure to sell its general insurance business to ease its financial problems. However, the junk downgrade now raises the prospect that the Co-op could be pushed into a fire sale of its general insurance business.

Co-op is thought to be seeing between £600m and £650m for the general insurance business. However, it may struggle to receive this price.

The general insurance business’s net tangible asset value for 2012 was £276.1m. Buyers of general insurance businesses have generally been reluctant to pay much higher than net tangible asset value.

Why did the downgrade take place?

Moody’s said the downgrade was prompted by the potential for further substantial losses in Co-op Bank’s non-core portfolio, as demonstrated recently by the “unexpectedly significant deterioration” of its commercial real estate exposures.

The agency said this would put pressure on the bank’s capital ratios, which are already low relative to its peers.

Moody’s also noted Co-op’s “slow progress” in realising merger-related revenue and cost benefits, which  has diminished its ability to replenish capital through earnings.

Co-op bank said in a statement that it was “disappointed” with the Moody’s downgrade.

The statement said: “We have a strong funding profile and high levels of liquidity, which are significantly above the regulatory requirements.

“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.”

In March, Co-op Bank announced the sale of its life business to Royal London and revealed that its general insurance business was also up for sale.