Forget profits: all Co-op Bank can promise is blood, sweat and tears

It may be over a year since the former chairman of Co-operative Bank, the Methodist minister Paul Flowers, was fined £525 after pleading guilty to possession of crystal meth, cocaine and ketamine, but it is going to be at least another two years before the bank even sniffs a profit.

Chief executive Niall Booker – the Scottish banker who was parachuted in from HSBC to run Co-op Bank in 2013, after a £1.5bn black hole was discovered in its balance sheet – has made that quite clear.

“We won’t be profitable in 2015 or 2016 and we are not giving guidance any further forward than that,” he said.

The Co-op Bank also made it starkly clear just why regulators backed off fining it £120m last week for the string of failings between 2009 and 2013 that led to its near collapse and £1.5bn bailout by hedge funds. In the first half of this year, the bank said its pre-tax losses had trebled from £77m to £204m as its new management strives to turn things around.

Last week, the Co-op was censured by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), but the regulators said they would not impose a substantial fine because it would damage the business and so be counter-productive. Georgina Philippou, the FCA’s acting director of enforcement, said: “It is vitally important that Co-op Bank’s capital resources are directed towards improving its resilience. Co-op Bank’s statements about capital in the 2012 financial statements were misleading.”

It new chairman, Dennis Holt, said: “I would like to apologise again to customers for these past failings and reassure them that the bank is a significantly stronger organisation today under the leadership of the current senior management team.”

Co-op Bank’s near downfall dates back to its infamous takeover of Britannia building society in 2009, driven by its then chief executive Neville Richardson.

A combination of excessive bad loans made by Britannia, mainly on commercial property, and a failure to integrate two creaking IT systems would culminate in Co-op Bank’s withdrawal of its planned £1bn takeover of hundreds of Lloyds branches in April 2013.

The following month the Bank of England, through the PRA, discovered the bank had a capital shortfall of £1.5bn and initiated the first bank bail-in in the UK, with bondholders converting some of their debt into shares.

A second round of refinancing in September 2013 led to many of the same bondholders, largely US hedge funds, taking control of the bank – leaving the Co-operative Group with just 20 per cent of the shares. It was an arrangement, as Mr Booker likes to remind people, that rescued the UK’s seventh-largest lender while costing neither taxpayers nor customers anything.

In the meantime Mr Booker, helped by an independent report by the City grandee and former Co-op board member Lord Myners, oversaw a root-and-branch overhaul of the bank’s corporate governance, removing political board appointees in favour of a more plc-style regime. The bank reinforced its ethical investment policy too, making it part of its legal set-up.

Mr Booker also set about slashing costs and selling off non-core assets. He has halved the number of branches since 2013, taking the total down to 165, and axed more than 2,000 staff. The result has been a lower cost base and stronger capital base – but still not strong enough for the bank to pass the PRA’s stress test at the end of last year.

Part of the increased first- half loss was down to the bank increasing the amount it is spending on putting things right, along with losses on the sale of unwanted assets. It still has legacy problems too, from mis-selling and bad loans in the past, although it did not have to raise provisions for those significantly.

Mr Booker said the result was actually slightly better than had been expected and added that the flight of customers that started in 2013 seemed to be coming to an end. The bank lost just 2,250 current account holders in the first half, against the 62,646 who disappeared in the same period last year.

He refused to be drawn on the future ownership of the bank. There have been suggestions that the hedge funds that pumped money into it twice in return for an 80 per cent equity stake are looking at buying up the Co-op Group’s remaining 20 per cent holding. But Mr Booker said: “We have had no meaningful discussions about that.”

And although he remains convinced that Co-op Bank will be part of the consolidation of some of the country’s smaller banks, he would only comment: “We talk to people from time to time but that is all we will say at this point.”

The alternative of a stock market flotation of the bank remains “an option – but it will be a bit of time before we are ready for that.”

Mr Booker continued: “Although the core bank remains a work in progress, its performance is already beginning to improve.”

It remains to be seen just how and when the bank’s big shareholders will be able to cash in on that improvement. It could be some time.