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Co-op reveals further £400 million shortfall

Co-op reveals further £400 million shortfall

Category: Banking

Updated: 24/03/2014
First Published: 24/03/2014

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Debt-laden Co-op Bank's problems are deepening as it reveals it needs to find a further £400 million to cover mis-selling and mis-conduct payments.

Co-op bank is now only 30% owned by the Co-op Group after it found itself requiring a rescue package to deal with a capital shortfall of £1.5 billion last year. Seventy percent of the bank was transferred to bondholders, made up predominantly of US hedge funds, in return for a cash injection of nearly £1 billion.

Further scandals dogged the bank later in the year as its then chairman Paul Flowers was arrested for alleged involvement in a drugs supply investigation.

The bank, which has 4.7 million customers, is expected to post a before-tax loss of an estimated £1.3 billion when its full year results are revealed on April 8 – delayed from March 26.

The new £400 million shortfall is a result of the bank compensating customers who were mis-sold Payment Protection Insurance, technical breaches of the Consumer Credit Act and interest swap rates being higher than previously thought.

To fund the gap, existing shareholders are likely to be asked if they want to buy new shares, however this would mean the mutually owned Co-op Group would need to put in more than £100 million to maintain its 30% ownership.

The Co-op Group, the UK's largest mutual and an 170 year old organisation owning supermarkets, funeral homes and pharmacies, is also facing an overall loss of £2 billion when its 2013 results are published on April 17. These results have also seen a delay, blamed on the resignation of chief executive Euan Sutherland earlier this month, after he claimed the group was "ungovernable".

The group is making many cost-cutting moves in an effort to simplify the business and get profits up to help its survival, including selling off parts of the business, while the 10,000 strong bank staff have been cut by around 1,000.

The bank's chief executive Niall Booker has said that the £400 million capital injection would enable the bank to "reset this starting point and continue with the execution of our original business plan," but the big question is, will the existing shareholders be willing to bail the bank out again so soon after the last payout?

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