Moody's downgrades Co-op Bank's debt rating to 'junk'

 Co-operative Bank branch in Derby Last month, the Co-op pulled out of a deal to buy 630 bank branches from Lloyds Banking Group

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Ratings agency Moody's has downgraded the Co-operative Bank's debt rating to "junk" status, citing fears that it is vulnerable to potential losses.

The agency warned that the bank may need "external support" if it could not strengthen its balance sheet.

The Co-op said it was "disappointed" by Moody's decision.

The news preceded the resignation of chief executive, Barry Tootell, following the bank's failure to buy 631 branches from Lloyds Banking Group.

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What I think the downgrade highlights... is whether the Co-operative group, with its leading position in supermarkets and funeral homes (for example), is the best owner of a bank, at a time when profit margins in banking are so low, and may remain so”

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Mr Tootell will be replaced temporarily by Rod Bulmer, the bank said.

'Clear plan'

Responding to the Moody's downgrade, the Co-op said it had a "strong funding profile" that was "significantly above the regulatory requirements".

But in a statement, the bank admitted there was a "need to strengthen our capital position in light of the broader economic downturn and the pending introduction of enhanced regulatory requirements".

It added: "We have a clear plan to drive this forward throughout the coming months."

These plans include selling off its life and general insurance businesses, and simplifying its operations.

In March, the Co-op Bank reported annual losses of £674m for 2012.

Moody's reckons the bank's "problem loan ratio" rose to 10.9% in 2012, up from 8.1% in 2011, reflecting a deterioration in its commercial property portfolio.

Most of Co-op Bank's problems stem from bad loans associated with its takeover of Britannia Building Society in 2009.

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