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Announcement:

Moody's reviews Co-operative Bank for downgrade

Global Credit Research - 30 Jul 2012

London, 30 July 2012 -- Moody's Investors Service has today placed on review for downgrade the A3 bank deposit and senior unsecured debt ratings, the baa1 standalone credit profile and certain junior securities of The Co-operative Bank plc (Co-operative Bank). The P-2 short-term rating is not affected by this action.

RATINGS RATIONALE

The review of the bank's ratings has been prompted by the announcement that The Co-operative Group, the ultimate parent of Co-operative Bank, has agreed non-binding terms with Lloyds Banking Group (LBG) for the Co-operative Banking Group to acquire the assets and liabilities (known as "Verde") that LBG has been required by the European Commission to sell. If the deal proceeds as announced, the acquisition of Verde would be a transformational deal for the Co-operative Bank, potentially resulting in a significant change in the risk profile. This reflects the size of the acquisition, which accelerates the already substantial growth of the bank following its 2009 acquisition of Britannia Building Society. At completion, the bank expects the Verde balance sheet to be approximately GBP24 billion meaning that the bank's total balance sheet will approach GBP75 billion at end-2013, around a 50% increase compared to the balance sheet size of the Co-operative Bank at end-2011.

The key aspects that the review will focus on are therefore (i) the steps that the Co-operative Bank would take to ensure the smooth integration of Verde; and (ii) the composition and quality of the loan assets that would be acquired. In addition the review will also consider (i) the bank's exposure to any further deterioration in the challenging UK economy, especially given its exposure to commercial property and its relatively high level of impaired loans; (ii) the impact that the acquisition could have on the bank's profitability, which is currently subdued; (iii) the anticipated impact on the bank's capitalisation under stress, and (iv) the anticipated development of the bank's liquidity and funding profile.

However, Moody's notes that the acquisition would substantially strengthen the Co-operative Bank's franchise, taking its branch network to almost 1,000 branches and increasing its customer base to around 11 million. In addition, the bank estimates that its market share of current accounts would rise to a level approaching 7%. The bank currently benefits from one notch of uplift from its standalone credit assessment, reflecting the bank's important position within the UK clearing system as well as its nationwide network and market shares, especially within the local authority sector. Although the acquisition of Verde would improve the position of the Co-operative Bank within the UK market, Moody's would not expect to change its systemic support assumptions and therefore this is not part of this review.

WHAT COULD CHANGE THE RATING UP/ DOWN

There is currently no upward rating pressure, as reflected in the review for downgrade. In addition to the factors described above as the focus of the review for downgrade, negative pressure on the Co-operative Bank's standalone credit assessment would be likely to stem from a significant decline in profitability or deterioration in asset quality. Since the debt and deposit ratings benefit from systemic support uplift, they remain sensitive to any further changes in Moody's support assumptions or the credit quality of the UK government (rated Aaa with a negative outlook).

AFFECTED RATINGS

The following ratings have been placed under review for possible downgrade:

Co-operative Bank:

A3 long-term bank deposit rating

A3 senior unsecured debt rating

C- Bank Financial Strength Rating (mapping to baa1 on the long-term scale)

Baa2 dated subordinated debt rating

Baa3 (hyb) junior subordinated debt rating

Britannia Building Society:

A3 senior unsecured debt rating (assumed by Co-operative Bank)

Baa2 dated subordinated debt rating (assumed by Co-operative Bank)

The following ratings have been affirmed:

Co-operative Bank:

P-2 short-term bank deposit rating

P-2 short-term debt rating

P-2 commercial paper rating

The principal methodology used in this ratings was Moody's Consolidated Global Bank Rating Methodology published in June 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare the rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing this review.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Ross Abercromby
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Johannes Wassenberg
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's reviews Co-operative Bank for downgrade
No Related Data.

 

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