DBRS Places Co-operative Bank’s BB LT Rating Under Review with Negative Implications

DBRS Ratings Limited (DBRS) has today placed The Co-operative Bank plc (The Co-operative Bank or the Bank) Under Review with Negative Implications, including its BB Long-Term debt and deposit ratings. As part of the review process, the Intrinsic Assessment (IA) of BB will also be re-evaluated.

The rating action follows the March 24 announcement that the 2013 year-end capital ratios will be lower than previously expected and that the Bank needs to raise a further GBP 400 million of equity. At the time of the completion of the capital restructuring in December 2013 the Bank had been expecting to post a year-end common equity tier 1 (CET1) ratio at the upper end of the 7 - 9% range, including the expected loss for the full year 2013. However as a result of further charges relating to conduct and legal documentation, including charges related to payment protection insurance (PPI), and higher costs relating to the separation of the Bank from the Co-operative Group, the Bank now expects the end-2013 CET1 ratio to be substantially lower, at around 7.2%. Details of the proposed capital raising are still to be finalised.

The review of the BB Long-Term debt and deposit ratings will focus primarily on the proposed capital raise and its implications for the bank’s future financial flexibility. If the capital raise is unsuccessful then a multi-notch downgrade is a potential outcome. DBRS continues to view the far-reaching restructuring of the Bank as extremely challenging. In DBRS’s view the proposed capital raise, only three months after the liability management exercise, confirms the Bank’s susceptibly to event risk, and further reduces the Bank’s capital flexibility. As a result of this, there is potentially also downward pressure on the Bank’s ratings even if the Bank successfully raises the proposed GBP 400 million.

Additionally the review will focus on the shareholding structure of the Bank. This reflects that, although details of the capital raising are still to be finalised, DBRS anticipates The Co-operative Group (the Group) will be required to make a further contribution to maintain its approximate 30% shareholding in the Bank. In DBRS’s view, however, there is a risk that the Group may choose not to participate in the latest proposed capital raising, which could potentially weaken the Bank’s franchise as its connection with the wider Group reduces. DBRS also notes that as part of the capital agreement reached in 2013 the Group is still contractually committed to contribute GBP 263 million to the Bank in 2014.

DBRS considers that the performance of the Bank’s Core retail banking business in 2013 has proven to be relatively resilient despite the potential adverse impact of the widespread media coverage of developments at the Bank and the change in the ownership structure. Progress has also been made in reducing non-core assets with the Bank anticipating a reduction of GBP 2 billion in 2013 through trade sales, the exit of corporate banking relationships, and loan repayments.

Notes:
All figures in pound sterling (GBP) unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include the DBRS Criteria: Support Assessment for Banks and Banking Organizations and DBRS Criteria: Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities. These can be found can be found at: http://www.dbrs.com/about/methodologies.

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

This rating is under review. Generally, the conditions that lead to the assignment of reviews are resolved within a 90 day period. DBRS reviews and ratings are under regular surveillance.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulation only.

Lead Analyst: Ross Abercromby
Rating Committee Chair: Alan G. Reid
Initial Rating Date: August 10, 2009
Most Recent Rating Update: December 23, 2013

For additional information on this rating, please refer to the linking document Located at:
http://www.dbrs.com/research/236983/banks-and-banking-organisations-linking-document.pdf

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.