Why Does The Co-Operative Bank Need Another £400m?

The Co-operative Bank completed a £1.5 billion recapitalisation three months ago. So why is it trying to raise another £400 million?

The last few months have seen troubled times at The Co-operative Bank to say the least. Early in November 2013, The Co-operative Bank announced a large-scale restructuring plan which was designed to help it reach its goal of filling a £1.5 billion hole in its capital reserves by the end of the year. Then its ex-chairman, Reverend Paul Flowers, brought the bank into disrepute when a journalist filmed him allegedly attempting to buy illegal substances. This month it lost its chief executive, Euan Sutherland.

Although it might appear that issuing new shares to raise funds when confidence in the bank is relatively low is far from desirable, today news has emerged that this is exactly what the Co-op is planning to do. So why is it seeking another £400 million three months after a large recapitalising project?

Losses have been deepening at the embattled bank thanks to sudden increases in costs, many of which are related to penalties for poor conduct. A substantial part of the additional funds are needed to provide compensation for customers who were mis-sold payment protection insurance (PPI), as well as violations of the Consumer Credit Act. Mortgages customers who were overcharged for their repayments will also have to be refunded, while small businesses who were mis-sold hedging products also need to be compensated.

It’s a long list of regulatory issues for a bank that sold itself on the grounds of ethical practices. But the impact has taken analysts by surprise. Losses at the bank for 2013 have now been revised from £1.2 billion to £1.3 billion and, for many observers, the real shock is that these costs weren’t noticed during the recapitalisation process last year.

In an update to his blog on the BBC News site, Robert Peston says that chief executive Niall Booker told him the new costs have only been found recently – because efforts were focused on keeping the bank going last year, there was no time to look into customer care issues. Either way, shareholders will be given first refusal on buying new shares.

Though Mr Peston says it is likely they will do so – after all, there doesn’t seem to be another way to keep their existing shares from becoming worthless – it will be interesting to see how their confidence, and that of the markets, will be affected.