The Co-op Bank puts itself up for sale

LIKE other businesses, banks are easily wrecked. They are less easily repaired. In June 2013 the Co-operative Bank, a smallish lender but a familiar name on British high streets, confessed to a £1.5bn ($2.3bn) shortage of capital. It was rescued by American hedge funds. The stake of the Co-operative Group, its erstwhile owner, was reduced to just 20%. The bank has since cut costs by more than a fifth, stripped out lots of unwanted loans and spruced up its creaking computer systems.

It’s not fixed yet. The Co-op Bank expects to report a loss for 2016, its fifth in a row, and needs more capital to stay on the right side of regulators in the next few years. On February 13th it put itself on sale; it is also exploring other ways of raising money. One reason for its continuing woe is that interest rates have stayed low for longer than it bargained for, which has crimped its ability to accrue capital from retained profits. Another is that the repair job has been costlier than expected.

The bank’s problems go back to 2009, when it merged with the Britannia building society, another mutually owned lender. Although the Co-op Bank entered the financial crisis of 2008 in good shape, its partner did not. Britannia’s lending had spread beyond residential mortgages, the staple fare of building societies, into commercial property, prices of which were collapsing even as the merger was discussed. A report in 2014 by Sir Christopher Kelly, an ex-civil servant, concluded that the Co-op Bank, eager for Britannia’s retail customers and branches, did not look closely enough. Bad management and bad luck—a weak economy and demands for more capital from regulators—made matters worse.

Why buy it? Improved IT could be a draw: the bank has just shifted its core mainframes to data centres run by IBM. So might its 4m customers, many of them loyal to its “ethical” brand, a legacy from the co-operative movement. Most stayed despite the bank’s purchase by—horrors!—hedge funds and the trashing its name took under the old management. Along with less high-minded lenders, it set aside hundreds of millions to cover claims of mis-selling payment-protection insurance for loans. Paul Flowers, its chairman until June 2013 and, at the time, a minister of religion, was filmed buying drugs (and dubbed the “Crystal Methodist”).

Some suggest that there may be interest from TSB, which was spun out of Lloyds, Britain’s biggest retail banking group, in 2013 to provide competition for bigger lenders. But TSB is absorbed in a huge IT project of its own: 1,600 engineers are working flat out to separate its systems from those of Lloyds by the end of the year. With that, it already has a full plate. Others may be tempted. But if interest rates stay low, profits may be hard to come by.

The repairs at the Co-op Bank are far from Britain’s longest or dearest. On February 24th the Royal Bank of Scotland, which was bailed out by the state in 2008, is certain to report losses for the ninth year running. Its underlying business has been making £1bn a quarter, but the bills from past transgressions keep rolling in. Last month it said it was setting aside another £3.1bn, anticipating possible fines in America for mis-selling mortgage-backed securities before the crisis. Further cost cuts, of around £800m, are thought to be on the way. At least the Co-op’s bosses have only been a burden on the private sector.