Co-op Group plunges to 2016 loss as Bank stake is written off

Mark Kleinman, City Editor

The Co-op Group will next week write off the value of its shareholding in the bank that bears its name – incurring a £140m hit that will plunge the mutual into an overall statutory loss for 2016.

Sky News has learnt that Co-op Group directors and their advisers will opt to reduce the value of its 20% stake in the Co-operative Bank to zero, reflecting mounting uncertainty about the troubled lender's future.

The decision, which sources said reflected a conservative approach to accounting by the Co-op Group board, reinforces a widely held belief in the City that the bank's shares may now be worthless.

The development will emerge in the group's annual results on Thursday, which will show a statutory loss because of the Bank writedown but report a healthy operating profit, according to insiders.

It will come in an important week for the bank, six weeks after it was formally put up for sale.

Potential bidders have been asked to submit initial expressions of interest by 4 April.

While Virgin Money and CYBG, the owner of the Clydesdale and Yorkshire bank networks, are expected to register proposals, there remain serious doubts about whether any party will seek to acquire the Co-op Bank in its entirety.

Thursday's results will mark the third consecutive reporting period at which the Co-op Group has slashed the value of its bank shareholding, which was reduced to 20% in 2013 when a group of hedge funds injected funds into it to save it from collapse.

At its half-year results in September, the group said it would reduce the value of its holding by 25% to £140m, which it said was "consistent with falls in bank valuations generally".

The Co-op's 2016 results are expected to paint an otherwise-rosy picture of the state of Britain's most prominent mutual.

A revamped membership scheme has attracted more than 600,000 new members since last autumn - ahead of executives' targets.

Its food retailing business is performing strongly, with 18 consecutive quarters of outperformance of the wider grocery market.

The Co-op's chief executive, Richard Pennycook, has just handed over the reins of the Group to Steve Murrells, who had run the food operations since 2012.

Mr Pennycook, who was dubbed the Co-op's "saviour" by colleagues, announced in January that he would step down, almost a year after he asked fellow directors to sanction a big pay cut to reflect the mutual's transition from crisis to recovery.

The Co-op, which declined to comment on the bank stake writedown, says it is now moving from a "rebuild" phase to "renewal", marking an appropriate time for a new leader to take over.

However, next week's loss will serve as a potent reminder of the lingering curse of its shareholding in the Co-op Bank, which has been hit by a string of legacy issues and the problem of ultra-low interest rates.

Mr Pennycook is remaining as an adviser to the mutual on the future of its bank stake.

In a statement last month, the bank said it had been contacted by "a number of credible strategic and financial parties".

It added that it would "proceed to a second phase of the sale process where selected parties will be provided with additional information in order to continue their due diligence with a view to making an offer for all of the issued ordinary share capital of the Bank".

Doubts over bidders' intentions have also forced the bank to consider a plan B, which involves "discussions with existing equity and debt security holders as well as new potential investors on a capital raise alternative to the sale process".

The Bank of England and the Prudential Regulation Authority are taking a close interest in the process, with the former having engaged Deutsche Bank to advise it, according to The Sunday Times.

The Co-op Bank's huge pension liabilities are among the major obstacles to a sale.

Senior Co-op Bank bonds have been trading at little more than 80p in the pound in recent weeks, underlining investors' pessimism that a £400m repayment due in September will be made.

The lender announced an annual loss last month £477m, taking its total losses since its rescue in 2013 by a group of American hedge funds to well over £2.5bn.

If new capital is not forthcoming, regulators would have little choice but to put the Co-op Bank into a resolution process, which would involve an orderly wind-down of the company's operations.

At that point, the likes of Nationwide could be asked to step forward to take on some or all of the Co-op Bank's four million customers.

A number of other parties, including OneSavings Bank and Santander UK, are said to be more interested in acquiring individual loan portfolios from the Co-op Bank.

PricewaterhouseCoopers (PwC) was drafted in last year to help the Co-op Bank find buyers for a £350m portfolio of commercial real estate loans.

The Co-op Bank has been continuing to grapple with some of the issues that took it to the brink of collapse in 2013, although its customer base has been remarkably resilient during its period of turmoil.

The Co-op Bank's balance sheet ballooned following a disastrous merger with the Britannia Building Society, and then ran into trouble when it tried to buy more than 600 branches from Lloyds Banking Group.

Last summer, the mutual exercised its right to appoint a director to the board of the bank for the first time, raising the prospect of it playing a significant role in the resolution of the lender's future.

The Co-op Bank's former chairman, Paul Flowers, brought it into disrepute when his drug-taking and sexual proclivities were exposed by a tabloid newspaper, while his financial competence was questioned by MPs.

By using Yahoo you agree that Yahoo and partners may use Cookies for personalisation and other purposes