Co-op bank needs £400m as losses deepen

Co-op Bank needs to raise £400m.hi Photograph: Jonathan Nicholson/ Jonathan Nicholson/Demotix/Corbis

The Co-operative Group is facing a demand to pump more cash to its troubled banking arm which risks being crippled by a new £400m bill to pay compensation for mis-selling to customers.

The 170-year-old debt-laden mutual was confronted with a new request for cash after the bank admitted its losses for 2013 could amount to £1.3bn and that it needed more capital – on top of £1.5bn poured in last year – to cover the cost of a string of conduct issues ranging from mis-sold payment protection insurance to mistakes in the paperwork. Mortgage customers who were offered leniency on home loans will also get some redress because they faced charges on missed payments.

The scale of the problem announced by the bank's new boss Niall Booker was larger than had been expected and comes after the rescue of the bank last year left the Co-op Group with just a 30% stake. Bondholders, led by US hedge funds, own the remaining 70%.

Booker admitted he had already axed 1,000 jobs, 14% of the workforce, in an effort to shed costs and return a slimmed down bank to profitability in five year's time. Sources believe more jobs are on the line and a stockmarket flotation of the bank has been delayed to 2015.

He said the fundraising would take the form of a rights issue – where existing shareholders are asked if they want to buy new shares first – which would suggest the Co-op Group would need to put in more than £100m if it wanted to maintain its shareholding.

The bank played down the significance of the Group's stake potentially falling to 20% even though Vince Cable's business department can strip the bank of the right to use the Co-operative name if its use is "misleading to the public". Since its rescue last year, the bank has enshrined its commitment to an ethical stance in its constitution in an attempt to prevent such an eventuality. Unusually, the Group said it had not yet decided whether to back the emergency cash call, after promising to put in £462m during last year's crisis, which began with the bank pulling out of buying 630 Lloyds branches and was exacerbated by allegations that its former chairman Paul Flowers had been buying illegal drugs.

The Group has yet to hand over £263m of the promised sum and is itself on track to report losses of at least £2bn while it struggles with £1.2bn of debts.

"As a shareholder in the Bank we will consider our position in relation to the proposed additional capital raising and make a further statement as and when appropriate," the Group said.

If the Co-op Group does not want to put in more cash, the bank can offer shares to outside investors although this would reduce the size of the stake owned by the UK's largest mutual. "We are in dialogue with them (the Group)," Booker said.

The bank had been due to publish its full-year results on Wednesday – alongside the Co-op Group – but has now delayed publication until on or before 8 April after giving a preliminary estimate of a £1.3bn loss. Last week the Co-op Group delayed its results until 17 April, following the turmoil caused by the departure of its boss Euan Sutherland who branded the organisation ungovernable after his £6.6m two year pay deal was leaked – including a £1.5m a year "retention payment".

Booker was part of the team appointed by Sutherland last May to run the bank and when asked if he and his team at the bank were on similar retention packages, Booker deferred questions to the release of the annual report next month.

Booker, who is on track to shut 50 of its 324 branches, said that the deposit base – its savers – had been very stable despite its problems, with some £27.9bn of deposits held at the bank compared with £28.1bn in 2012, a fall of less than 1%.

While stressing he was not a financial adviser, Booker said customers should retain their money in the Co-operative Bank. Last year's fundraising had made the bank stronger, the bank's values and ethics policies had been written into its constitution for the first time and the customers were still dealing with the same staff, he said.

Its crucial measure of financial strength, the core tier one ratio, had been expected to be to be just below 9%, well above the regulatory minimum of 7%, after last year's fundraising but would have plunged to 7.2% without the latest request for funds. "We can't live on a sliver of a core tier one ratio," said Booker of the need to raise more capital.