Councils weigh up risks following Co-op sub-investment downgrade

Councils are feeling a little spooked after Moody’s downgraded the Co-operative Bank six notches to sub-investment grade last Friday.

The Co-op is banker to 35% of UK councils, according to the bank. Spokesman Patrick Tooher told Room 151: “We may be the market leader in terms of local authority clients. It has been a focus for us.”

The Moody’s downgrade was the second for the Co-op’s banking arm in recent weeks. Although Fitch downgraded the bank in April, it does retain investment grade status with that agency. Tooher explained: “With Fitch we are still investment grade but the Moody’s downgrade has taken us to sub-investment grade. For some of these local authority clients that may make a difference in that they may have a mandate to invest in securities like corporate bonds such as the Co-op Bank’s, at or above investment grade level. That will vary from authority to authority depending on their risk appetite.”

But in the current risk-averse climate councils are rethinking even just banking with the Co-op. Stephen Harding is chief accountant at Torridge District Council. He said that the council was still considering its position. “We don’t have money with them long term although they are our council’s bankers,” said Harding. “The issue is that we have quite significant cash-flows going in and out and of course if something went very wrong at any point in time there is a risk to the council.”

A treasurer who did not wish to be named said: “They’re our bank, and yes, they’re pretty poorly-rated now. Although they are our bankers we don’t like to invest any money with them: they’re not on our counterparty list for exactly this sort of reason. I did find it a bit concerning the other week when they pulled out of buying the Lloyds TSB branches. You do wonder about them and the banking sector.”

Tooher confirmed that much of the Bank’s local authority business was in day-to day-banking services. There is £290m of local authority money in Co-op current accounts, £130m in instant access accounts and £125m in fixed term deposits.

While Moody’s and Fitch arrived at different conclusions within a month of each other, Tooher said they used the same data. The Co-operative Bank took a write-down to its non-core portfolio (mainly commercial real estate) at its full-year results, and Moody’s also highlighted the level of provisioning the Co-op has against its portfolio. “They also draw reference to the ability of the bank to replenish capital through earnings, in other words retain profits,” said Tooher. “Clearly our profits were down at the full year.”

What the agency didn’t highlight, he added, is the strong liquidity position of the bank. At 92% its loans to deposit ratio is one of the highest in the sector. As a result of this it is relatively unreliant on the wholesale funding market.