The Co-operative Bank reported a loss of £177m in the first half as the lender continued to shrink under a significant restructuring plan, and was hit with higher than expected costs as it bolstered its systems.
The UK bank’s pre-tax loss for the first six months of the year marks an improvement from the £204m loss delivered in the same period in 2015.
Part of the loss stems from a £97m writedown of old Britannia loans, following its merger with the building society in 2009.
Although the narrowing losses are “ahead of plan”, the results include a number of one-off gains such as the sale of its stake in card provider Visa Europe following the merger with its US parent.
Operating costs came down to £223m in the first half from £263m as part of a cost reduction programme.
However, remediation and strategic project expenditure “was greater than planned at £106m, up from £84.7m, as the bank moved to address the “historic under-investment” in systems and processes. It is currently separating its IT systems from the Co-operative group and outsourcing them to IBM.
The lender was forced to set aside £33.5m for payment protection insurance following the UK financial watchdog’s recent announcement that it would extend the claims deadline by a year.
The bank’s common equity tier one capital ratio dropped to 13.4 per cent from 15.5 per cent at the end of last year, as it incurred losses from shedding risky loans.
In the wake of the Brexit vote, the bank warned of a “possible contraction” of the UK mortgage market, which would impact its loan growth. In the first half, net customer loans increased to £15.4bn, from £14.7bn a year ago.
The management team added that it is “still targeting sustainable core bank operating profitability in late-2017”.
Niall Booker, chief executive, said addressing the bank’s historic legacy issues “will continue to impact our overall financial performance”.
“As noted by others, today’s market conditions are challenging for all retail focused banks and the macroeconomic uncertainty following the result of the EU referendum, including the likelihood of lower for longer interest rates, may restrict our ability to increase revenue in the short term.
“We have always been clear that turning the Bank around would be a significant journey of at least five years and so far the overall story remains one of progress and improvement.”
Mr Booker added that management has “not ruled out” an initial public offering of the business at some point, but noted that it “is not something that is on the agenda for any time soon”. He said there have not been any expressions of interest to buy the bank.
For UK challenger banks more broadly, he said that the fixed costs of IT renewal and regulatory compliance mean it is tough for some of the smaller lenders to grow, especially in a low interest rate environment. As a result, he said consolidation in the sector was likely.
The latest set of results come after a torrid period for the Co-op bank after it was bailed out twice by investors, including a group of hedge funds, after unearthing a £1.5bn capital shortfall three years ago.
The bank also came under fire in 2014 after former chairman Paul Flowers was fined for possessing illegal drugs.
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