The Co-operative Bank: hold on to that 20% – or else!

sharlene goffSharlene Goff, Retail Banking Correspondent of the Financial Times, focusses on the Co-operative Bank’s raising of £400m additional capital, announced in March, following higher than expected compensation bills for mis-selling products, overcharging and statement errors.

She asserts that investors have expressed confidence in the recovery of the Co-operative Bank by subscribing to a fresh capital raising that almost doubles the size of the lender’s share base. That’s one way of looking at it . . . Two large investors, hedge funds Silver Point and Perry Capital, increased their holdings and were given the right to nominate a director to the bank board.

lord mervyn daviesWorth watching: the role of Co-operative life peer, Lord Mervyn Davies, Baron Davies of Abersoch, a former Labour government trade minister, who has passed through many revolving doors – recently to Corsair Capital (approached to invest in the Co-op Bank) and Chime (Bell Pottinger-related).

It is reported in the Telegraph, that in return for four fund managers’ commitment to buy the maximum amount of shares on offer to them, they will receive almost £2m in commission payments from the Co-op Bank.

The Co-op Group is still the largest single shareholder in the bank and formerly appointed two directors to the bank board, but can now only appoint one. It still owes the bank £263m as part of its December £1.5bn recapitalisation. Ms Goff points out that due to financial pressures at the Co-operative Group it sold existing shares and reduced its stake in the bank from 30% to about 20%.

niall bookerNiall Booker, the bank’s chief executive, explained that the share placing would “reset” its capital position. It takes the bank’s core equity tier one capital ratio – a key measure of financial strength – back above the 7% minimum common equity Tier 1/Risk Weighted Assets (CET1/RWA) ratio that all banks in the world will have to hold under new Basel III rules.

Mark Garnier, Conservative MP and member of the Treasury Select Committee, said ‘But there is a serious issue about the identity of the bank. The Rochdale principles and the Co-operative ethos is a major asset, and customers buy into it. But if you’re down to 20% you’re stretching credibility to use the Co-op brand. Ultimately the Co-op bank will have to rebrand one way or another.’

More cheering news, according to Sharlene Goff, is that these changes will not affect the way the bank is run, or its ability to use the Co-op brand, because the lender must still abide by certain ethical principles as long as the Co-op Group’s stake remains above 20%.

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