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Economy

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Financial

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Capital Markets, Financial

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Banks

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Categorized | Banks, Financial

Co-op set to offload risky assets


Posted on December 28, 2014

A pedestrian passes the entrance to a Co-Operative Bank branch©Bloomberg

Co-operative Bank is under pressure to offload risky assets and strengthen its capital position, after a year of intense regulatory scrutiny.

In December, it became the only UK lender to fail the regulator’s stress tests, making the bolstering of its capital buffers an imperative in the next 12 months.

    This test showed the Co-op would significantly undershoot the 4.5 per cent core tier one capital needed to weather a severe economic scenario.

    However, the bank points out the test measures its balance sheet as at the end of 2013, and does not account for the actions it has undertaken this year to buttress its capital position.

    “These were tough tests and saw RBS and Lloyds Bank scrape through whilst the Co-operative Bank failed,” says Tim Maloney, a partner at law firm Dorsey & Whitney. “To survive, Co-op Bank will need to shed its non-performing assets.”

    The regulator has forced the lender to submit a new capital plan following the failed test result. The plan requires a “rephrased and significant” reduction in its riskier assets, which lowers the need to hold higher levels of capital. The bank emphasised that it does not “at the present time” need to raise new equity capital as a result.

    But the successful sell-off of certain portfolios — namely Optimum, its £7.1bn closed book of bad home loans acquired through the merger with Britannia in 2009 — will largely depend on market conditions.

    While the “economic conditions in the UK are better than originally expected”, according to the bank, market uncertainty in the run-up to next year’s general election could hinder investor appetite for potential sales.

    The focus on strengthening capital buffers could also rein in lending in certain areas. Ray Boulger, a technical analyst at John Charcol, says the bank’s troubles have so far not stopped them from being competitive in the mortgage market.

    “As the only bank to fail the stress test, it they want to expand lending, it makes sense to do so in a lower-risk area that needs less capital,” he says.

    Mr Boulger notes the bank offers competitive rates on fixed-rate, lower loan-to-value mortgages.

    “But this is where all the lenders want to be, so competition is strong,” he says. Concentrating on lower-risk lending will also mean profit margins will not be as high, Mr Boulger adds.

    Indeed the bank has already warned that it does not expect to be profitable until at least 2017. The lender had started to substantially stem losses to £76m in the first half of 2014, down from £845m the previous year.

    But customers are voting with their feet: more than 38,000 current account holders walked out the door in the first half following the storm of negative publicity surrounding the bank.

    With more banks coming to market offering slicker, faster services and as switching becomes easier, the Co-op Bank could find itself struggling to stem the exodus of customers.