* Bad loans, IT costs, regulator demands mount up
* Co-op confident bondholders will approve 1.5 bln stg recap
* Repeats bank will collapse if debt swap plan not approved
* Co-op Group pretax loss 559 mln stg on bank troubles
By Steve Slater
LONDON, Aug 29 Britain's Co-operative Group apologised to customers and investors on Thursday for a 700 million pound ($1.1 billion) loss in its banking business and said sorting out problems there would take four years and involve job cuts.
The losses stem mostly from the Co-op's purchase in 2009 of the Britannia Building Society, found to hold bad loans that along with costly IT problems, the Co-op Bank's own losses and regulatory demands now mean the bank needs to find 1.5 billion pounds. The Co-op is relying on bondholders to approve a lifesaving funding proposal - the first major test of a plan asking investors, not taxpayers, to take a bailout hit.
Euan Sutherland, who became CEO in May, said he was still confident bondholders would approve the proposal. The group said in a statement the bank "will not remain a going concern" unless the bond exchange plan went ahead.
"These are challenging times for the Co-operative Group and the Co-operative Bank and for that I want to apologise to all of our stakeholders," said Sutherland. "We are sorry, but we are a new team and are grasping the nettle and getting on with fixing the situation."
Under its rescue plan, the Co-operative Group, which is owned by its customers, will provide 1 billion pounds - half from disposals and restructuring and half from bank loans - and hopes to fund another 500 million from writing down the value of its bonds. Its bondholders face a loss of at least 30 percent.
Co-operative Bank made a pretax loss of 709 million pounds in the six months to the end of June, after losing 496 million pounds on loan impairments, writing down its IT systems by 148 million pounds and setting aside a further 61 million pounds for compensating customers, including for mis-sold insurance products.
Overall, Co-op Group, which runs supermarkets, pharmacies and funeral services, reported a pretax loss of 559 million pounds, as a 117 million pound profit in food retail - flat on the year - and a 16 percent rise in profits in funerals to 42 million pounds were overwhelmed by the banking losses.
A group of bondholders are fighting the bank rescue plan, however, and have called on Britain's financial regulator to lighten the demands on them. All of the group's bondholders will be asked to approve the proposals at a vote expected in November.
"There is no plan B," Sutherland said.
BANK OF ENGLAND WATCHING
Co-op Group plans to list the Co-op Bank in the fourth quarter and will retain a majority stake in the lender, which has 4.7 million customers.
Co-op said the rescue plan will fail to lift its bank's core capital above 9 percent by the end of this year as it had expected when it unveiled the plan in June, but said it will lift it above the regulatory minimum of 7 percent.
The Bank of England (BoE) said the scale of Co-op Bank's losses were in line with the assessment it made of the bank's capital position in June and Thursday's results did not change its stance on how much the bank needed - though it warned it would be watching the recapitalisation plan closely.
The BoE's Prudential Regulation Authority "will hold the Co-operative Bank to its plans, and if they fall short of what is required, it will ask for additional action," the BoE said.
The Co-op Group said it expects to sell its general insurance business during 2014. It has already sold its life insurance and savings business.
The problems unearthed at Co-op Bank have sparked criticism of the bank, its parent group and regulators for allowing Co-op to buy the Britannia Building Society and then try to buy 632 branches from Lloyds Banking Group, a deal which collapsed in April.
Co-op said the bulk of its latest bad loans stemmed from Britannia's corporate real estate loan book, and added it had now written down the value of its IT systems by about 300 million pounds, much of which relates to integration work.
Co-op Bank's problems have also been a blow to many politicians who lauded the Co-op as a good customer-owned firm that could compete with mainstream banks.
The group said it opened 10 new food stores in the first-half and plans to open up to 160 more by the end of 2014.
Sutherland said a review of all group operations was underway, and there was scope for substantial cost savings.