2013: The Co-op’s annus horribilis

WHEN the Co-op Group’s chief executive Euan Sutherland settles down with a drink tonight – surely a double whisky – he’ll probably reflect on one thing. It can’t get any worse in 2014.

He was appointed a year ago from B&Q owner Kingfisher to take over from Peter Marks in May. At that point the Co-op Bank was still working on Project Verde, its £750m bid for more than 600 Lloyds branches, which would give it nearly 1,000 and make it a new force in UK banking.

But things soon unravelled, and the bad news didn’t stop coming until the allegations of drug use by Paul Flowers, the bank’s former chairman and a methodist minister. At one point there was talk of the group being broken up and sold off, but the bank has stayed afloat by other means, although it will shrink, with 50 of the 324 branches scheduled to close along with corporate banking centres and the loss of hundreds of jobs.

It started in April when Project Verde collapsed and the bank reported a pre-tax loss of nearly £700m. Soon after, Co-op bonds held by investors were downgraded to junk status by the Moody’s ratings agency.

When Sutherland arrived at the group’s new headquarters at One Angel Square on May 1, he discovered there was a £1.5bn hole in the bank’s finances. This has been blamed on spiralling IT costs associated with the planned Lloyds deal and bad property loans which the Co-op inherited when it acquired the Britannia building society. All of this has been raked over throughout the year as various executives have been summoned by the Treasury Select Committee which is trying to get to the bottom of the Project Verde failure.

Sutherland told The Daily Telegraph in November that he spent the morning of his first day in a meeting of the mutual’s executive committee. He then began what he thought would be a series of one-on-one meetings with senior executives. “We started with Barry [Tootell, then chief executive of the Co-op Bank] and I haven’t got to the second one-on-one yet.”

Senior banking figures were quickly appointed, including former Alliance and Leicester chief executive Richard Pym as the bank’s chairman and Niall Booker, HSBC’s former US head, who became chief executive when Tootell decided to step down.

Within months Sutherland’s team had drawn up a plan, labelled a ‘bail-in’ by the Co-op in a bid to distance itself from the bank bailouts of 2008. It would draw on three sources: capital from the Co-operative Group, a debt for equity swap for bondholders, and revenue from the sale of the Co-op’s general insurance business. This plan required the approval of bondholders who were told there “was no plan B”. Failure to support the proposal would lead to the Bank of England taking control.

But several New York-based hedge funds had other ideas and spied an opportunity. They moved in, buying a large proportion of the junk-rated bonds and leading a revolt against the Co-op’s original proposal. It seemed there was a plan B after all, one which gave bondholders a better deal and will leave the Co-op Group with just 30% of the bank when it completes a stock market flotation.

Sutherland and his executives put on a brave face and stressed the Co-op would still be the single largest shareholder. But the two hedge funds that had forced the situation – Aurelius Capital and Silver Point – will have about 35% between them. Their involvement has alarmed many who were attracted to the Co-op Bank because it offered a mutual alternative to the big High Street names, and was known for its ethical stance.

At a presentation in the City Sutherland bent over backwards to explain how the hedge funds understood the ethical position and saw it as a defining quality for the bank. The ethical values will be written into the bank’s constitution, and it will only be able to use the Co-operative name if it keeps an ethical stance that will be overseen by an independent director who will chair an ethics and values committee.  

Sutherland had placated the bondholders, apparently sealing a rescue deal. Then more good news. In November the Queen and the Duke of Edinburgh officially opened One Angel Square and the new HQ was dubbed the most environmentally-friendly building in the world. “At last”, Sutherland must have thought, “We’re back on track”.

But days later the Mail on Sunday splashed with an incredible story. Paul Flowers, the Co-op Bank’s chairman from April 2010 until June 2013, had been caught on camera allegedly buying drugs. He was then arrested in connection with a drugs supply investigation and bailed until the New Year. Footage of his Treasury Select Committee appearance, shortly before the revelations, showed he had little grasp of key figures, guessing that the bank had assets of £3bn when the correct number is £47bn. All of this threw the Co-op back under the spotlight and new questions were asked about corporate governance in the years leading up to the bank’s near collapse.

The Co-op Group has been left battered and bruised by 2013, and while it must have come through the worst, 2014 will not be an easy ride. The board is now scrutinising the profitability of all parts of the business, and expects to unveil a new strategy in May. As for the bank, there will be hundreds of redundancies and executives have already said it will not be profitable in 2014, and they “can give no assurance that the bank will generate a profit for some years thereafter”.