More problems for the "ethical" bank

Yesterday saw the announcement by the Co-operative Bank that it needs to raise another £400m of capital as a result of uncovering potential costs relating to the mis-selling of Payment Protection Insurance (PPI), breaches of the consumer credit act and poor documentation. 

In years gone by, "Joe Public" the customer held the Co-op Bank in high esteem, believing it to be of, shall we say, "higher ethical practices" than perhaps many of the other UK high street banks that have gone through turbulent times as a result of the financial crisis or well-documented misdemeanours resulting in fines and negative publicity. 

Yet the last two years have truly been a case of one "Annus horribilis" followed by another. The bad times seemed to start not long after the July 2012 statement by Lloyds Banking Group that it was in talks with the Co-op to acquire 600 of its branches. The informal discussions ceased in April 2013, after the Co-op decided the UK economy was still weak and the increased threat of financial regulation would mean that it wasn't in the interests of its shareholders. 

The bank then got hit in June 2013 with the news that it had a shortfall of £1.5bn in its capital as a result of an investigation by the UK's Prudential Regulation Authority and that it had a chairman, Paul Flowers, who was alleged to have had some rather unsavoury pastimes, prompting a prolonged media attack on both him and the bank itself and culminating in Flowers resigning shortly after. 

Then in September came the funding gap between what the Co-op valued its loan portfolio at and what might actually be realised if the portfolio were to be sold. So the new chairman and chief executive, Richard Pym and Niall Booker, respectively, have certainly had a baptism of fire since their appointments last summer. 

So, where now for the Co-op? Normally there is no shortage of stories linking respective buyers to companies who have found themselves in not dissimilar situations to the Co-op Bank. But there seems to be a distinct lack of potential suitors, or at least publically-linked suitors, and this could be more to do with the fact that late last year two hedge funds, Silverpoint Capital and Aurelius Capital, along with other bondholders, helped support the bank in its recapitalisation plan to convert debt to equity, thus making a full takeover more than a little difficult in the short- to medium-term.

Filed under: consumer, Investors, retail, UK, Banking