Reply To: Co-op Bank 3 years on: Q3 2016 Trading Update & Bonds
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I have been trying to piece together the trend from recent announcements by Co-op Bank and the situation is looking increasingly perilous.
1. Looking at the Bank’s CET1 ratio:
- 31 Dec 2015: 15.5%
- 30 June 2016: 13.4%
- 30 Sept 2016: 12.6%
- 31 Dec 2016: >10%
- 31 Dec 2017: <10%
So a dramatic erosion of CET1 over a short period of time to perilously low levels. The Bank has no prospect of generating CET1 internally from earnings anytime soon. There is also the pension fund issue to be resolved which could easily create a “£200m blackhole” headache for the Bank. So I really think they will need to raise more CET1 now either via an equity raise or another LME. The big hedge funds who owned the equity from the 2013 restructuring have been severely burned already and must have lost about £200 million each so I doubt equity holders will put in further money in the current circumstances.
2. Looking at the Bank’s Individual Capital Guidance (ICG)
- On 1 April 2016 the Bank announced that it expected to comply with its ICG by end of 2019 and PRA buffer by end of 2020.
- On 11 Nov 2016 the Bank announced that the PRA had set its ICG from 1 Nov 2016 at 14.1%.
- On 26 Jan 2017 the Bank announced that it is unlikely to meet its ICG over period to 2020.
Again the situation has deteriorated markedly and the Bank must be about 400bps below its ICG with the deficit expected to worsen.
3. Looking at minimum requirement for own funds and eligible liabilities (MREL)
- On 1 April 2016 the Bank announced that the PRA had reluctantly accepted its plan which included commencing MREL qualifying issuance in 2018.
- On 11 Nov 2016 the Bank announced that its MREL guidance remained unchanged.
- The Bank did not update its MREL guidance in yesterday’s (26 Jan) announcement but in light of the deterioration in the current position and forecast up to 2020 it seems unlikely that the Bank will be able to commence issuance in 2018 as per the plan agreed with the PRA.
So the PRA clearly has a big judgment call to make here. Do they repeat the mistakes of the past by affording the Bank continued forbearance and risk creating a bigger problem further down the line? Or do they insist of the Bank raising capital now?