These assets were found to be susceptible to severe stress, and Co-op has estimated a reduction in 'risky' assets by approximately £5.5bn by the end of 2018.
As a result, the Bank does not expect to be profitable in 2014, 2015 and 2016, and expects the Non-core division of the Bank to be significantly reduced in size by 2017. The Bank has not been required at the present time to raise new equity capital as a result of the severe stress test.
The plan is a revised version of a 'Turnaround Plan', previously announced at the time of the 2014 interim results, and remains broadly unchanged other than the rapid deleverage of the Optimum mortgage portfolio.
The bank emphasised that the results of the most recent stress test, conducted against the Bank's balance sheet as at December 2013, do not reflect the work the Co-op have already done to reduce risk weighted assets, including £400m capital raising in May 2014, and the disposal of assets by the Bank over the 6 months to June 2014 which resulted in a significantly improved CET 1 ratio.
The Prudential Regulation Authority confirmed that the bank's original plan achieved the targets set over the last 18 months in terms of building its capital base and improving resilience.
Niall Booker, Chief Executive of The Co-operative Bank, commented:
"The Bank is much stronger than a year ago. As the regulator notes today, we have achieved the target of building our capital base and the actions we have taken during the first year of our business plan have made the Bank more secure for the benefit of all stakeholders. Our key ratios around capital, liquidity and leverage at the present time are significantly strengthened, we're ahead of schedule in the disposal of Non-core assets and the stability of our core franchise is improving. However, given we are in the early stage of our plan, the original capital deficit and the nature of our assets, it is no surprise that we have not met the severe stress test hurdle today.
"We fully support the Bank of England's objective that all firms should maintain capital buffers that provide insulation against severe stress scenarios and this is an important goal for the Bank. Our revised plan, accepted by the regulator, will see us accelerate our strategy to significantly reduce risk weighted assets. As we have indicated before this will be driven primarily through a reduction in Non-core assets and the exit of certain portfolios which are vulnerable to this type of stress. This will build greater capital resilience earlier than previously anticipated. Our plan is not reliant on raising additional equity capital.
"The economic conditions in the UK are better than originally expected and since the application of the severe stress test to our balance sheet as at last December, we have significantly strengthened our capital position. In addition, the recent sale of the Illius portfolio and the announced sale of the clean energy assets are deals that have been in gestation for some time and clearly indicate our readiness and ability to execute these plans under current market conditions.
"The key now is to continue the progress we are making. Under the management team brought in to strengthen and simplify the business, we are reshaping the Co-operative Bank around our individual and small business customers. We have begun reinvesting in our brand and re-engaging with customers on the values and ethics that we share and that make us different. There is, of course, more to do but, given a continuation of recent positive market developments, I'm confident the steps we are taking are building a stronger and better business for our customers, colleagues and shareholders alike."
