A loss of up to £1.3bn is expected to be announced by the Co-operative Bank in the coming weeks.
In a statement to the stock exchange, the Bank also said it is looking to raise an additional £400m in capital to finance extra costs from PPI misselling, alongside other areas such as mortgage product first payments, interest rate swaps, third party insurance and technical breaches of the Consumer Credit Act.
It said of the expected losses: “We expect to report a 2013 year end loss before tax and the impact of the Liability Management Exercise (LME) of between £1.2 and £1.3 billion. This is prior to an exceptional profit of £688 million generated on the Bank’s 2013 LME which strengthened its capital position. The accounts finalisation process requires the completion of work relating to a technical breach of the Consumer Credit Act, corporation tax and deferred tax.”
In addition, one-off costs and processes associated with the separation of the Bank from the Co-operative Group have proved more costly, more time consuming and more complex than anticipated. Provisions for the estimated separation costs from the Co-operative Group are expected to be approximately £40m in 2013.
As a result of these additional costs and in order to restore the capital buffer, the Bank intends to raise around £400m of additional CET1 capital in the form of new ordinary shares in the coming months.
Its branch network of 342 has been reduced by 9% and is on track to achieve the target of a 15% reduction in 2014. Employee numbers have also reduced by around 1,000 (14%) in the course of 2013.
Chief executive Niall Booker said: “The new executive team, brought in just nine months ago, is continuing to review aspects of the Co-operative Bank’s legacy operations, assets and liabilities.
“As a result of this continuing review we are unearthing a range of issues which the new executive team is having to address. While these risks were identified in the Liability Management Exercise prospectus, the review means we are now quantifying the financial impact of some of those risks.
“The result of providing for these items together with the cost of separation from the Co-operative Group is that the starting capital position of the bank for the four- to five-year recovery period is weaker than in the plan announced last year. The proposed capital raise would enable us to reset this starting point and continue with the execution of our original business plan.
“The objectives of this plan remain unchanged and there are some early indications of progress. We have started to simplify the business, reduce costs and de-risk assets as we drive the change needed to return to our roots as a bank focused on our retail and SME customers. However, there remain significant challenges ahead.”
In the Bank’s upcoming annual report, it said its focus is on individual customers and not on big business. Its core retail banking franchise remains “resilient”, according to the Bank and it expects retail net interest income to be up 7% to £428.1m and retail deposit balances to be broadly unchanged at £27.9bn from £28.1bn in 2012 (a decline of less than 1%).
In a statement, the Bank also said it is doing fewer things, but doing them better: “We will stop doing things that distract from our focus on individuals and small businesses. We are actively managing the exit from our non-core businesses. We are reducing non-core assets and expect to announce that the Bank has made progress towards our target to reduce non-core assets to less than £11.5 billion by the end of 2014. It is anticipated that non-core assets were reduced by a total of £2 billion in 2013 through a combination of formal trade sales, proactive re-banking of our corporate clients and the natural run off of the corporate book.”
• The Co-operative Bank’s annual report is expected to be released by 8 April.
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