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It’s valued at zero, but the Co-op Bank is still worth something to someone

Chief Business Commentator

There may yet be hope for the Co-operative Bank but it isn’t out of the woods yet. Having commenced a sale process in February, which resulted in a certain amount of scepticism, Britain’s only ethical bank has announced that it has received “a number of non binding proposals” from potential buyers. A shortlist has been put together, and those on it will enter a second phase in which they will receive some more information (financials and the like) to chew over.

Co-operative members whose eyes light up at the prospect of maybe getting something for the troubled operation shouldn’t be deceived. The key paragraph in the bank’s announcement is this: “Each of the preliminary offers selected includes some form of liability management exercise.” I imagine that was written by a lawyer, or someone in compliance, because it doesn’t appear to say very much.

However, my understanding is that “liability management exercise” means the bank’s bond holders can expect to get some equity from a new owner, or fresh paper on (most likely) less favourable terms than they have now if a deal is agreed. The shareholders (including the Co-operative Group) might get a nominal £1 if they’re lucky.

The group’s decision to value its stake in the bank at zero is therefore entirely justified, even though the thumping loss it had to report from taking the write down took the gloss off some otherwise decent numbers. It might not come as too much consolation to investors in the bonds, or to the Co-operative Group’s members and the bank’s other shareholders, but a deal would still represent a welcome development, particularly for the British banking industry.

The Co-operative Bank’s difficulties have already provided a handy test of the procedures adopted by the Bank of England for dealing with troubled banks in the wake of the financial crisis. A successful resolution would show that they have worked.

Secondly, if the Co-operative Bank does find a new owner, you might expect it to retain the bank as an ethical subsidiary, with some form of screening body ensuring that customers’ money doesn’t touch the bad businesses or nasty regimes that it currently refuses to lend to. That would also be a good thing. As I have written before, there is clearly a demand for “ethical” banking, otherwise a lot more of the bank’s customers would have high tailed it out at the first signs of trouble.

While inertia will have kept some in place, others have stuck around because the Co-operative ethics matter to them. It’s why they joined the bank in the first place. There are chinks of light towards the end of the latter’s long, dark, tunnel. But be advised that they could still easily be snuffed out. It’s a hopeful sign that the Co-operative Bank is drawing interest. But right now that’s all this amounts to.