News Column

Co-operative Group expects its stake in bank will fall to 20%: Fears that appeal of ethical stance will be weakened Chairman to depart early once funding is assured

May 10, 2014

Sean Farrell

The Co-operative Group is to lose more control over the Co-op bank after the lender was forced to ask its shareholders for pounds 400m of new capital, raising questions over whether it can retain customers who were attracted by its ethical stance.

As the bank confirmed it would raise the money, partly needed to pay for past misconduct such as mis-selling of payment protection insurance (PPI), it also announced that the chairman brought in to secure its future would be leaving earlier than expected.

Richard Pym, who ran Alliance & Leicester before it was sold during the crisis, joined to make the Co-op bank secure, and the raising of additional capital will see his work complete, a spokesman said.

But the wider group, which owns 30% of the bank while struggling under its own pounds 1.4bn of debt, declined to put up any new money for the bank capital raising. It will instead sell some of its stake to raise the cash to take part.

The exact size of its stake will not be known until the fundraising is completed, but it is thought to be expecting to retain more than 20%. However, if it fell below that threshold the bank would have to renegotiate key agreements, including its use of the Co-op brand.

"In the court of public opinion the Co-op bank brand becomes less and less credible as the amount of Co-op Group ownership falls," said John Thanassoulis, professor of financial economics at the University of Warwick.

"The question will come when the bank does something that appears . . . not to be in tune with the ethical values of the Co-operative Group," he said.

The group said: "While the size of the group's shareholding will be reduced following the capital raising, we will retain a significant stake and expect to remain the single largest shareholder. The group remains supportive of the bank and its strategy."

The Co-op bank said four of its other biggest shareholders had committed to taking up 31% of the new shares.

"We have the support of our five largest shareholders for this transaction," the bank's chief executive, Niall Booker, said.

In the prospectus for the share sale, the bank warned that its outlook remained challenging and that bad publicity could lose it customers and deposits.

The Co-op bank was regarded as one of the jewels in the mutual organisation's array of businesses, which also spans funeral parlours, pharmacies and food stores. The bank was hailed for its ethical policies and supposedly low-risk behaviour when the industry was in crisis.

The group owned the bank outright before it was thrown into turmoil last year when its bid to buy hundreds of branches from Lloyds Banking Group failed. Regulators told the bank to strengthen its finances against rising bad debts, many inherited from the Britannia Building Society, which the bank acquired in 2009.

In the subsequent pounds 1.5bn rescue the bank's creditors took control of 70%, but within months the new management revealed that it needed more money to pay compensation for mis-selling of PPI and other bad practice as well as the cost of separating from the Co-operative Group.

Despite the further reduction of the group's stake, the bank intends to keep the Co-op brand. This is because the group enshrined ethical policies in the bank's constitution before selling any of its holding, a spokesman said. He said the bank's stance, which includes not investing in arms or tobacco, appeals to socially conscious customers and makes it a distinctive investment for hedge funds.

Booker, who joined last June, said: "I remain extremely grateful for the continuing support and loyalty of our customers and shareholders and would like to reassure them that the completion of this capital raising will assist the new management team in the implementation of the business plan that aims to return the bank to health over time."

Richard Pym, who joined from the Alliance & Leicester to help make the bank secure, now plans to leave early

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Source: Guardian (UK)