The Co-operative Group will reveal this week it has fallen back into the red for the first time since its tumultuous 2013 year, after writing off the value of its investment in the Co-operative Bank, The Guardian reports.
The mutual is set to take a £140m hit as it slashes the value of its 20 per cent stake in the bank to zero, amid ongoing uncertainty about its former financial arm’s future.
The Co-op Bank, which is now controlled by US hedge funds after a 2013 rescue deal, put itself up for sale in February in a bid to raise more capital and give greater stability to its 4 million customers.
The Co-operative Group, which now focuses on its grocery chain, funeral homes and insurance services, was forced to relinquish the majority of its stake in the bank after it emerged it required £1.5bn in the wake of a disastrous takeover of the Britannia building society. The financial woes were compounded by revelations that the bank’s former chairman, Paul Flowers, took class A drugs. This led to thousands of customers leaving the scandal-hit firm.
The mutual is currently considering a sale of its remaining stake as part of the current talks and it’s not clear if the bank’s brand will survive.
The group has written down the value of its stake in Co-op bank twice in the past year, taking it to £140m in September, well below the £333m it pumped into the troubled operation nearly four years ago to keep it afloat.
The latest writedown will mean the Co-operative Group will report a statutory loss for the year to the end of December 2016 on Thursday, its worst performance since reporting a £277m loss in 2013. In 2015 the group achieved a £23m profit down from a £124m a year before.
But the underlying performance of the Co-op, excluding the bank, is going well, according to insiders. The group has modernised its stores and food ranges and benefited from a move towards shopping in small local grocery shops in recent years.
While discount rival Aldi overtook the Co-op to become the UK’s fifth-largest grocer in February, the Co-op has increased sales ahead of most other rivals helping it maintain a 6 per cent market share.
However, in September, the Co-op revealed that pre-tax profits more than halved to £17m in the first six months of 2016 after restructuring costs and price cuts. The company insisted that its three-year turnaround plan was on track. Richard Pennycook, who stepped in as chief executive to lead a turnaround plan, left the business last month after handing over to Steve Murrells but remains on the payroll as an adviser.
Sources said the writedown of the Co-op bank did not mean the bank was worthless, but was a mark of the uncertainty of its future.
An update on the sale process is expected by mid-April, but could come as early as this week. It has been reported that the bank has plunged in value to as little as £45m.
Late last month, the troubled bank said a number of “credible” potential buyers have expressed an interest.
Virgin Money and CYBG, the owner of the Clydesdale and Yorkshire bank networks, are thought to be set to put forward bid proposals, but fears are growing that the Co-op bank will be broken up rather than sold as an entity.
It has emerged that the Bank of England has placed Co-op bank under “intensive supervision” with contingency plans to ensure an “orderly failure” if a sale or an injection of fresh capital is not agreed.
The 150-year old, ethically-minded bank failed a Bank stress test in 2014, and recently reported a £477m full-year loss. The Co-op bank’s huge pension liabilities are among the major obstacles to a sale.
The mutual has 2 million members who are Co-op bank customers. When the bank put itself up for sale in February, the mutual said: “Our goal is to ensure the continued provision of the type of co-operative banking products our members want.”
In February, the Co-operative Group’s chairman Allan Leighton said the group was open-minded about the future of the bank stake and did not rule out being part of a plan to inject more capital into the beleaguered lender.