Co-operative Bank’s capital worries represents latest blow to a deal slowed by regulatory concerns

The Co-operative Bank’s deal with Lloyds Banking Group is in jeopardy as the former is facing a financial crunch of up to £1bn threatening the planned acquisition of more than 600 Lloyds branches under the deal named Project Verde, which was announced in June last year. In a move to address its deficit, Co-Operative bank is planning to sell off its non-life insurance business. The lacunae in the bank’s capital emerged from regulators’ analysis of Co-op’s balance sheets after the Bank of England’s Financial Policy Committee suggested last November that the shortfall across the sector could be up to £50bn.

Regulators, however, are planning to outline the deficits of various banks’ capital shortfalls and a list of options would be presented to the Co-operative’s board next month. Sources close to the Co-operative bank reveal that the bank is looking for a suitable partner in Europe to go ahead with the Lloyds’ bid.

Sources also claimed that to bridge the capital shortfall of £1bn, Co-operative Group, which comprises an eclectic array of businesses from funeral planning to supermarkets, is struggling with a number of potential divestments. Apart from its non-life insurance division, Co-operative Bank is mulling a sale of its pharmacies business as well, while further capital could be released through selling off parts of the bank’s loan or mortgage book.

The Co-operative Bank is also close to completing a sale of its life business to Royal London in a deal that should release about £200m. The collapse of the branch purchases plan would create a problem for Co-operative, which must sell the branches under the terms of an EU state aid ruling. In the absence of a credible alternative bidder, it would be forced to float the unit.