Co-op bank boss quits as Moody's downgrades credit rating and raises spectre of 'external support'

Chief executive quits amid news that ‘external support’ may be needed to plug £1bn hole in balance sheet

Just weeks after its ambitions to create a new force in banking were dashed, the Co-operative is in crisis after being warned that its banking arm may need “external support” to plug a near £1bn hole in its balance sheet.

Co-op chief executive Barry Tootell resigned in the wake of a devastating downgrade to the bank’s credit by Moody’s which pushed it down six notches from “investment grade” to junk at the stroke of a pen.

The ratings agency cited mounting losses from the £9bn commercial property portfolio that came to the bank through its 2009 merger with Britannia Building Society, which it has still failed to completely integrate.

Moody’s then followed up with a second downgrade affecting various Co-op bonds, and warned that there could be worse to come.

The Co-op had been hoping to create a new challenger to the big four banks by taking over Verde, made up of more than 600 branches that Lloyds banking group was ordered to sell by the EU as the price for its £20bn bailout, before the deal collapsed.

The bank, whose 6.5 million clients include the Labour Party, charities and millions of individuals attracted by its ethical stance, immediately took to Twitter in a bid to reassure skittish customers that it would not need Government support.

It told them: “There’s no need to be concerned, we have a strong funding profile and high levels of liquidity.” It was forced to repeat that message again and again throughout yesterday as it was contacted by worried customers.

The state of the bank was worrying many figures on the left in Britain given its importance to the Labour movement and as a banker, and lender, to the Labour Party. The bank declined to comment on reports that Labour owes it more than £3m, saying it wouldn’t discuss the banking details of customers.

Its problems are also thought to have been discussed at the annual meeting of the Unity Trust Bank in London. The Co-op owns about a quarter of the business, along with several unions. However, reports of a “crisis” meeting were denied as “untrue”.

The problems will present the first major challenge to the Prudential Regulation Authority (PRA), set up as a subsidiary of the Bank of England by Chancellor George Osborne. The PRA, which is supposed to oversee the financial soundness of banks, declined to comment yesterday.

Asked if the Government would inject capital into the Co-op, Mr Osborne would not be drawn. He 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.”

In a statement, the bank said it was “disappointed” by Moody’s action. But it also admitted that it did have problems: “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 Co-op statement went on: “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.”

Moody’s voiced concerns that the actions so far taken, including the sale of the bank’s life insurance business and the pending sale of its general insurance arm, would not be sufficient saying that there was “material uncertainty” over whether they would do the job.

“The bank faces the risk of further substantial losses in its non-core portfolio, as demonstrated recently by the unexpectedly significant deterioration of its commercial real-estate exposures,” it said.

It criticised what it said were the low level of provisions against those losses and warned that the bank will struggle to make money in the current economic environment.

While the Co-op’s management are under fire over the Britannia deal, Ismail Erturk, a banking specialist at Manchester Business School, said the Government was partly to blame and that bailing out Royal Bank of Scotland and Lloyds had “distorted the market” making it tough for mutuals such as the Co-op to generate profits.

“Co-op’s downgrading cannot be simply seen as an individual failure. It also shows increasing concerns about the failure of serious reforms in British banking as Moody’s points out in its downgrading note the deterioration of the credit rating of the UK government,” he said.

Mr Erturk called for the Co-op to be broken up and sold with the “good” part going to Nationwide building society and the problematic property portfolio handed to Royal Bank of Scotland to wind down with the help of the Government.

Asked whether the Government would be prepared to step in to help the Co-op if required, David Cameron’s official spokesman said: “I’m not going to speculate on something that hasn’t happened yet.”