Co-op Group's stake in Co-op Bank set to fall

The Co-operative Group is set to see its 30% stake in the Co-op Bank reduced further under a plan to shore-up the bank's finances.

As a result, a group of investors who injected almost £1bn into the bank last year will own an even bigger stake.

Co-op Group will still be the single biggest shareholder after Co-op Bank's move to raise £400m by selling shares.

Co-op Bank also announced that its chairman, Richard Pym, intends to step down by the end of the year.

The bank announced the need for extra funding in March when it uncovered significant new costs.

The costs related to PPI mis-selling and lapses in mortgage provision.

Exactly how much Co-op Group will own of the bank will not be known until the fundraising is complete and that could take a few days.

'Return to roots'

In a statement, Co-op Bank chief executive Niall Booker said: "We have the support of our five largest shareholders for this transaction.

"If successful, the additional capital to be raised through this transaction will enable us to reset our starting capital position for the execution of our business plan to return to our roots as a bank focused on our retail and SME customers with values and ethics at the heart of our business."

The Co-op Bank had to be rescued last year after it was left with a £1.5bn capital shortfall, with many of its troubles stemming from the merger with the Britannia building society in 2009.

The bank was rescued by a group of investors, mainly hedge funds, last year who injected almost £1bn into the bank in return for a 70% stake.

At the time of the rescue the new owners included ethical values in the constitution of the bank.

Co-op bank says that as long as it keeps to those values, it is free to use the Co-operative brand.

But experts says the if the Co-op group's stake in the bank becomes too diluted, it could lead to conflict.

John Thanassoulis is professor of financial economics at Warwick Business School, who looks at governance in banking and finance, he said: "In the court of public opinion the Co-op Bank brand becomes less and less credible as the amount of Co-op Group ownership falls.

"The question will come when the bank does something that appears to the bank and the group not to be in tune with the ethical values of the Co-operative Group".

It is an issue that Co-operatives UK, the national body that works to promote, develop and unite co-operative enterprises, is keeping a close eye on.

Its secretary general Ed Mayo, said: "We are continuing our dialogue with The Co-operative Bank to agree a way forward that reflects the intent of the bank alongside co-operative identity."

Tough times

In April the bank reported a trading loss of £1.44bn for 2013.

And last year, before the rescue, the bank was hit by a separate scandal when its chairman Paul Flowers was arrested in connection with a drugs supply investigation.

Earlier this week he pleaded guilty to charges of drug possession.

Former Co-op Bank chairman, Paul Flowers, has pleaded guilty to charges of drugs possession

Last month, a report by Sir Christopher Kelly said the Co-operative Bank's merger with the Britannia building society in 2009 should never have happened.

His report stated both companies had problems that were exacerbated by the merger.

It also pointed to failings in management and governance "on many levels".

Sir Christopher added the deal might have worked had the organisation received first-class leadership, but "sadly it did not".

Despite all the problems, Co-op Bank says it is still considering listing its shares.