What the Co-op Bank downgrade means to you

Coins on a noteThe Co-op Bank has been downgraded by Moody's this week and could require taxpayer support to stay afloat.

It's the banking arm of the business which is in trouble and the ratings agency has warned that the bank could need "external support" to recover.

This news comes after the banking group failed to buy 630 branches from Lloyds Banking Group last month, as we covered in The Co-op pulls out of Lloyds' branch sale.

Shortly after this announcement was made the chief executive, Barry Tootell, resigned.

Moody's downgrade
The agency has downgraded Co-op as it thinks the bank is no longer protected against potential financial losses.

In a report Moody's said the bank faces the risk of further substantial losses and references the recent failed acquisition of branches from Lloyds. It said the bank had been slow to react to the merger and has now diminished its ability to fill the current funding gap.

Earlier predictions of financial growth, which mainly stem from 2009 when the bank acquired Britannia Building Society, have not come to fruition. This acquisition was poorly underestimated, according to Moody's, and the bank is now suffering for it.

"External support"
The Co-op's debt rating has now been moved to "junk" status and it's in dire need of strengthening its balance sheet.
Moody's has suggested the bank could need external support if it's not able to get back on track. But although there has been no mention about exactly where the support would come from, as with the case of NatWest and RBS, it could be met by the taxpayer.

The exact amount of debt is not known but in March the bank reported annual losses of £674 million.

The Co-op
In response to the downgrade the Co-op has said it is disappointed. It acknowledged the need to strengthen its financial position in light of the broader economic downturn and the impending banking regulations and said it has a clear plan to do this.

The bank also highlighted a recent sale to Royal London of its life business and its intention to sell off its general insurance business. It also said it intends to significantly simplify the business to improve effectiveness and increase its capital position.

"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," a statement said.

What does this mean for customers?
If taxpayer money is used to fill the gap the bank will be able to reclaim its losses but it's not expected this decision will go down well with the public. In an already unbalanced economic climate, finding the money to fund a failing bank will not be a priority for the Government, nor a popular decision from the public.

The 40% state-owned RBS has received much criticism in the past few years, especially when looking at the size of its bankers' bonuses, and therefore paying out more money to support the financial industry will not be a decision taken lightly.

With such a poor credit rating, it does mean that Co-op will likely find it harder to access cash through the markets. That may mean interest rates on mortgages and loans need to go up, though we'll have to wait and see on that one.

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