That’s an understatement: the results showed pre-tax profits have plummeted from a £1.2m profit last year to a £457.6m loss this year. That’s a £458.8m fall. We’d call it ‘devastating’.
By now, the world is painfully aware of the gaping £1.5bn hole the government’s Prudential Regulation Authority discovered in the Co-op’s balance sheet, mostly as a result of bad loans by the Britannia Building Society, which it rescued in 2009.
Indeed, the biggest contributor to its losses in the six months to the end of June was £496m on bad loans. Of that, only £126m was new defaults or a drop in customers’ abilities to pay. £124m was attributed to a ‘better understanding’ of its bad loans portfolio, while £246m came from a ‘new approach’ to managing those loans. The rest, presumably, was bad loans it could have identified earlier.
The company also took a £148m write-down on investment in new IT systems it expected to have to use once it doubled in size by taking over the 600 Lloyds banking branches it was planning on buying. The deal fell through earlier this year. That now seems like a distant memory.
The results may be disappointing, but nothing about them is unexpected (as the bank's share price, which has dropped a mere 2.2% today, suggests). The only surprising thing is just how candid the Co-op is: in his intro, Pym admits without the ‘bail-in’ now slated for the fourth quarter, ‘we will not remain a going concern’.
(The bail-in, for those not versed, means bondholders – those who own little slices of Co-op debt – will have to swap their debt for shares in the bank. Not a great situation when those shares might not be worth very much, but better than the other option: if the company collapsed, they’d get nothing at all. At least the shares have a chance of recovery…).
For the bank’s management, there are big questions to be answered: why, for instance, did they not recognise the gap in the balance sheet earlier? Why did no one spot the potential for loans to go bad when the Co-op originally took over Britannia in 2009?
As with most of these situations, the people who will take the real hit are the employees: in an effort to plug that gap, the Co-op will have to shrink significantly from 330-odd branches. Poor timing for the UK finance sector’s tentative recovery.