Co-op Bank plans sell-off after failing stress test

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THE Co-op Bank plans to sell £5.5bn of mortgage assets by 2018 after failing the Bank of England’s “stress test” of its ability to withstand another financial crisis.

The bank’s chief executive Niall Booker had already conceded that it would probably not pass the test, having insufficient capital to cope with the most severe economic shock.

To improve its balance sheet position the Co-op Bank has drawn up a new capital plan, accepted by the Prudential Regulation Authority, to sell more “risk weighted assets”, typically historic residential mortgages that are susceptible to “severe stress”.

Under the plan the bank does not expect to be profitable until after 2016 and expects its “non-core” division to be “significantly” reduced in size by 2017.

The Bank of England tested eight major banks and building societies to assess their resilience to a very severe housing market shock and to a sharp rise or snap back in interest rates.

It tested the lenders’ resilience to a 35% fall in house prices, and a 30% drop in the value of the pound, as well as an unemployment rate of nearly 12%, inflation rising to more than 6%, and interest rates rising to 4.2%.

The eight were: Barclays Bank, Co-op Bank, HSBC Bank, Lloyds Banking Group, Nationwide Building Society, Royal Bank of Scotland, Santander UK and Standard Chartered.

It found three of them – Co-op, Lloyds and Royal Bank of Scotland – needed to strengthen their capital position further. But only the Co-op was required to submit a revised capital plan.

The stress test was conducted against the Co-op Bank’s balance sheet as December 2013, which means it did not reflect the £400m raised in May or the disposal of assets since then.

In the six months since June the bank has disposed of £1bn of risk weighted assets, most recently the £157m sale of its Illius portfolio of repossessed properties to Salmon Real Estate for £157m.

Chief executive Niall Booker said: “The bank is much stronger than a year ago. As the regulator notes today, we have achieved the target of building our capital base and the actions we have taken during the first year of our business plan have made the bank more secure for the benefit of all stakeholders.

“Our key ratios around capital, liquidity and leverage at the present time are significantly strengthened, we’re ahead of schedule in the disposal of non-core assets and the stability of our core franchise is improving. However, given we are in the early stage of our plan, the original capital deficit and the nature of our assets, it is no surprise that we have not met the severe stress test hurdle today.”

The bank has hired Bank of America Merrill Lynch to advise on the sale of its non-core mortgage portfolio which is known as Optimum.