Fitch Ratings has downgraded the Co-operative Bank from BB- to B and placed it on negative watch as it casts doubt on the firm’s recovery plans.
Earlier this month, the Co-operative Bank unveiled a plan to close at least 15 per cent of its branch network and cut thousands of jobs after bondholders and hedge funds took over 70 per cent of the institution.
The Co-op was plunged into chaos earlier this year when a £1.5bn capital shortfall was discovered and it abandoned its plans to buy 632 Lloyds Banking Group branches.
Fitch says the Co-operative Group’s reduced stake of 30 per cent could damage the bank’s brand and lead to loss of UK business.
Former Co-op group chief executive Peter Marks says the bank can no longer be considered ethical and should consider changing its name.
Fitch welcomed the bank’s cost cutting plan and sales of its insurance businesses earlier this year as a way of rebuilding capital but concerns over the firm’s profitability could hamper plans to fill the capital shortfall.
However, it said a necessary £500m investment in the bank’s creaking IT systems over the next three years will hit its credit worthiness.
Fitch has put the Co-op on negative watch because of the “significant downside risk” of further credit impairment its commercial loans book.
The Co-op bought most of its controversial commercial loans business from Britannia Building Society in 2009.
The rating agency statement says: “Fitch considers that the new strategy, including the deleveraging of some non-core portfolios, while ultimately beneficial for senior debt holders in the long term if successful, to pose significant challenges over the medium term and preclude the bank from being capital-generative for some time.
“In addition, Fitch believes that the reduction of the Co-operative Group’s stake to 30 per cent as a result, has the capacity to diminish Co-op Bank’s small but stable domestic franchise and loyal customer base.”