* Says faces 400 million pound bill for past misconduct
* Expects 2013 loss of 1.2-1.3 billion pounds
* Co-op Group considering whether to contribute
* Capital raising expected to take place in Q2 -source
* Ex-BoE governor King defends Lloyds branch sale process
(Adds details on likely timing, structure of sale)
By Matt Scuffham
LONDON, March 24 Britain's Co-operative Bank
needs to raise another 400 million pounds ($660 million) to
cover the cost of past misconduct, dealing a fresh blow to the
lender which promotes its ethical standards but has been hit by
a funding gap and drugs scandal.
Co-op Bank was controlled by the Co-operative Group
, Britain's biggest mutually-owned company, until last
year, when regulators identified it had a 1.5 billion pound
This led to a refinancing in which control of the bank
passed to a group of hedge funds - including Perry Capital and
Silver Point Capital - and the bank's problems were exacerbated
when former chairman Paul Flowers was arrested as part of an
investigation into the supply of illegal drugs.
Co-op Bank, which has about 4.7 million customers and is
Britain's eighth-largest provider of current or checking
accounts, said on Monday an internal review had shown it needed
to set aside about 400 million pounds to meet costs related to
This would cover compensation for mis-sold loan insurance,
breaches of consumer credit rules, repayments to mortgage
customers who were overcharged and compensation to small
companies mis-sold complex hedging products, it said.
"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,"
Chief Executive Niall Booker said.
The bank, whose ethical stance is based on policies such as
not lending to the likes of weapons makers, said it expected to
post a loss before tax of between 1.2 and 1.3 billion pounds for
2013, excluding profit generated by its restructuring.
Many UK banks are facing hefty fines and compensation bills
due to a variety of misdeeds, but analyst Gary Greenwood at
brokerage Shore Capital said Co-op's latest charge was higher
than expected. "The scale of the provision is obviously quite
material. The surprise is more around the size of it," he said.
Banking group UBS has been hired by Co-op Bank to
advise on the capital raising. Sources familiar with the matter
said existing shareholders would be given first option to buy
new shares, but new investors could be sought if they fail to
take up all of the offer.
Co-op Group, which still owns around 30 percent of the bank,
said it was considering whether to participate. "As a
shareholder in the bank we will consider our position in
relation to the proposed additional capital raising as and when
appropriate," it said in an emailed statement.
Co-op would need to contribute 120 million pounds to
maintain its stake at 30 percent.
Co-Op Group had in January scrapped the planned sale of its
general insurance business, saying Co-op Bank's restructuring
plan at that time would not require it to contribute as much
capital as originally envisaged.
Co-op Bank said that, as a result of the charges, its core
equity buffer was expected to be around 7.2 percent, only just
above the 7 percent minimum requirement set by Britain's
financial regulator and below previous guidance of towards 9
Preparations for the capital raising will be stepped up
after Co-op Bank's annual report is published on or before April
8, sources said. One banking source told Reuters it was likely
to be completed in the second quarter.
The bank said last November it had lost current account
customers amid the negative publicity around its former chairman
and its capital shortfall. But it said on Monday that core
retail deposit balances had fallen by less that 1 percent to
27.9 billion pounds by the end of 2013, compared with a year
Co-op Bank had planned to buy 631 branches from state-backed
Lloyds Banking Group last year, but the deal collapsed
prior to its capital shortfall being exposed.
In written evidence to parliament's Treasury Select
Committee published on Monday, former Bank of England Governor
Mervyn King rejected a claim by Peter Levene, chairman of rival
bidder NBNK, that he had been told by King that there was
political interference in the bidding process for the branches.
In a letter to select committee Chairman Andrew Tyrie, King
said he believed the government wished to ensure that a
plausible bid from the Co-op be considered if possible but "that
was a far cry from any improper conduct in the bidding process".
Co-op Bank said its objectives remained unchanged, namely to
restore its capital position, focus on retail and small business
customers and ditch non-core activities.
The bank had reduced its loan book by 2 billion pounds by
the end of 2013 and cut its staff by 1,000 or 14 percent.
($1 = 0.6063 British Pounds)
(Additional reporting by Kate Holton and Huw Jones; Editing by
Mark Potter and David Holmes)