Co-op Bank’s second half results

The rumours were correct – The Co-operative Bank’s losses have increased significantly in the first half of the current trading year.  This confirms what seemed to be the view of the Moody’s credit ratings agency, as well as those of Mark Taber of Fixed Income Investors, representing many of the individual bondholders in the bank, and the implication from the Prudential Regulatory Authority’s requirement for an extra £1.5bn of capitalisation for the Bank.  The net half year loss after tax is a staggering £781.5m.


However, these figures are not an end to the story.  It looks as if the Bank will not meet the regulatory requirements for risk capital or leverage by the end of the year.  The leverage ratio for banks is increasingly becoming regarded as important – it is the ratio of a bank’s own capital to that which is borrowed.  We need to now look forward to the publication of the share prospectus – due sometime in the last quarter of this year and not necessarily, as was assumed, in October – to see how the sums add up for the future operations.


These latest results will at least put an end to the suggestion that the directors and the PRA have over-stated the seriousness of the situation.  Instead, let us quote the auditors, KPMG.  The lead auditor warns there is “the existence of a material uncertainty which may cast significant doubt on the Bank’s ability to continue as a going concern”.  To put this in simple language, without a viable rescue package, the Bank is potentially bust.


The burden from the nil payment acquisition of the Britannia Building Society is immense and is mostly responsible for the write down on the value of loans by £496m.  But other factors in the loss are clearly the direct result of past errors by the Bank itself.  It has had to set aside a further £25m for compensation for the mis-selling of Payment Protection Insurance and there is a further write-down of £148.4m on the value of the investments into new IT systems.  I hope that Sir Christopher Kelly’s investigation into the failures in the Bank does not overlook the issue of the disastrous IT procurement.


Inevitably there will now be a heavy focus on past lending policies by both Britannia and the Bank.  The Sunday Times has begun this, with a report claiming that Celtic Football Club has a £34m loan from the Bank, on which interest is charged at 1.3%.  This is, claims the paper “cheap money” of a scale that is equivalent to the club’s total wages bill.  The Bank declines to discuss the suggestion, responding that to do so would be a breach of client confidentiality.  It insists that all loans with all its clients are conducted on a commercial basis.


A look at the Bank’s accounts does assist us in understanding the situation better.  These state that the bank has outstanding £34.4m in loans to “football clubs”, plus £15m which is in default.  It would seem that the viable loan is the one to Celtic and the loan in default is to another club.


As recently as 2006 the Bank reportedly had loans outstanding to seven clubs – Derby County, Bolton Wonderers, Sheffield Wednesday, Coventry City, Stoke City and Manchester City, as well as Celtic.  Lending to the clubs, it was reported, totalled £105.5m.  Again the Bank was unable to comment on this report for reasons of client confidentiality, but it must be assumed these are mostly now repaid.  There is no suggestion that it is a loan to any of these clubs that is in default.  We do not know the interest rate charged on these loans.


However, we do know the rates charged on other loans.  It is a matter of opinion or judgement what constitutes “cheap money” and what is actually a “commercial rate”.  It also depends on the cost of funds – which we do not know – and the nature, quality and value of any assets pledged as collateral.  According to the accounts of Industrial Common Ownership Finance, it sources its lending from the Bank at a cost of 1.5% PA.


The rate charged to Midcounties Co-op, according to its annual report, is even lower – currently at 1.17% on a variable rate, for a loan of £17m.  Its other sources of finance include a variable rate loan from RBS of £2.125m which is currently paying 1.43%.  The fixed rate loans are much more expensive – £3.924m was borrowed from The Co-operative Bank at 6.53% and £26m was borrowed from RBS at 5.73%.


The most controversial lending from the Bank has been to the Labour Party, which currently has a £1.2m loan outstanding and has borrowed several million pounds more over recent years.  According to records deposited with the Electoral Commission this is charged at a rate of 3.5% over base rate.  Past substantial loans – £2.61m in 1999 and £2m in 2009 – were charged at rates of 2% and 3% over base rate.  The money was hardly a gift at those rates – providing the debts were properly controlled and repaid on time.  That, however, is in the doubt from press reports.


In addition, the Labour Party has borrowings of an additional more than £1.2m from the Unity Trust Bank, which is 26.66% owned by The Co-operative Bank (the balance is owned by trades unions).  This is charged at base rate plus 3.5%.


To make any sense of these business decisions requires more information than is publicly available – and perhaps more than will ever be available, given that the Bank cites client confidentiality as preventing it discussing the matter.  There is a clear tension between this, however, and accountability to the Group’s members, who are likely to want far more information on how the Bank reached its parlous state.


From the point of view of member accountability we need a clearer idea of how decisions were taken, who by and which decisions, if any, involved board members.  We also  need to know how much was loaned to different classes of borrowers on what terms.  There is limited information available on this from the published accounts of some borrowers.  We can also see from the Bank’s own statements information on broad classes of borrowers.


The second largest class of debtor is actually Private Finance Initiative schemes, to which the Bank loaned £1.25bn, only just below the figure for conventional commercial property lending.  Among the other classes of borrowers to which large sums were loaned include renewable energy (£620m) and the care sector (£317m), public sector entities (£173m) and education sector (£126m).  The sectors in which there has been substantial levels of default were commercial investment (£1.3bn), hospitality (£259m) and residential investment (£131m), which are presumably legacies of the unwise lending practices of the Britannia.


For some people it will be the lending to the Labour Party, and its well reported difficulty in servicing debts, that will be the controversial issue.  For others, it will be loans to Celtic Football Club – and its perception of being tied to just one part of a very divided Glasgow.


However, there is an intriguing irony here.  The perception of the Group and the Bank in Northern Ireland is very different from one associated with an allegedly favourable lending policy towards Celtic FC.  Rather, and because of the legacy with the Belfast Co-operative Society which it rescued, the Group is associated with the Protestant part of that divided country.  This helps to explain why the Society’s main department store in Belfast was repeatedly bombed by the Provisional IRA.  A few days ago, however, it was razed to the ground by developers to make way for a new university campus, having ceased to be a store many years ago.


I find it a shame that this symbolic part of the movement’s history has been knocked to dust.  But, to be honest, right now there are other parts of our movement in more urgent need of protection.






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