(The following statement was released by the rating agency)LONDON, November 14 (Fitch) Fitch Ratings has downgraded The Co-operative Bank Plc's (Co-op Bank) Issuer Default Rating (IDR) to 'B' from 'BB-' and placed it on Rating Watch Negative (RWN). The Viability Rating (VR) has been downgraded to 'c' from 'bb-'. A full list of rating actions is at the end of this rating action commentary.KEY RATING DRIVERS - IDRS AND SENIOR DEBTThe downgrade of the IDRs and senior debt ratings reflects the implications that Fitch considers the bank's revised strategy is likely to have on its internal capital generation ability. This is particularly important for the ratings in light of management's forecasted common equity Tier 1 (CET1) ratio following the bank's anticipated recapitalisation by way of a planned liability management exercise (LME) on junior debt and a capital injection from shareholders. When Fitch last reviewed the bank's ratings on 20 June 2013, the fully loaded Basel III CET1 ratio was projected to reach 9% by end-2013 following a planned LME and increase thereafter. It is now likely CET1 will start from a lower level following the bank's planned recapitalisation (the upper end of a 7%-9% guidance) and that it is unlikely to improve materially from this level in the foreseeable future, with potential further erosion in the following two years at least. New disclosures show greater weaknesses in some non-core portfolios since June.Along with the higher execution risks of Co-op Bank's revised strategy, which calls for significant cost-cutting and balance sheet deleveraging, the full extent of historical IT underinvestment has led to Co-op Bank announcing GBP500m of mandatory and strategic development costs over three years, which will impinge more on profitability than expected. As a result, 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% as a result of the LME has the capacity to diminish Co-op Bank's small but stable domestic franchise and loyal customer base. The ratings factor in some benefit from Co-op Bank's acceptable liquidity and so far stable funding profile.The RWN reflects Fitch's belief that there are still material risks to the success of the LME, which is scheduled to be completed by end-December 2013. While the IDR reflects the underlying risks inherent in the strategy and potential tail risks over the rating horizon should the LME be successful, the RWN signals that if the LME fails the bank would likely be placed in resolution (Co-op Bank has confirmed this possibility in the prospectus for the LME), at which point the IDR would likely be downgraded to 'D'.The senior debt has been assigned a Recovery Rating of 'RR4' in line with our 'Recovery Ratings for Financial Institutions' criteria. This reflects Fitch's expectation that in the event of a default, recoveries on unsecured senior debt would be in the range of 31% to 50%, due to the bank's considerable share of encumbered assets (about 29% at end-1H13), potential additional stress for the loan book and a reduced Tier 2 buffer after the LME. Management has indicated that it does not expect Co-op Bank to be profitable in 2013 or 2014 and cannot guarantee profitability after that. This lack of underlying profitability severely constrains Co-op Bank from being capital generative in the medium term. Fitch also considers potential significant conduct redress to be a further risk to the bank's capital base. Significant downside risk associated with the asset quality of the non-core portfolio remains. Furthermore, non-core, non-prime and commercial loan portfolios (44% of gross loans at end-1H13) have fair values well below their carrying values, which is likely to hinder the pace of deleveraging, leaving material tail risk in the portfolio for several years. This could cause a larger spike in credit impairment charges, damaging the bank's capital ratios.RATING SENSITIVITIES - IDRS AND SENIOR DEBTThe bank's IDR's and senior debt ratings are on RWN and will be downgraded if the LME is not successfully completed. If the LME is successfully completed, the ratings would remain sensitive to the extent of losses incurred from restructuring and credit impairment charges as well as strategic drift. Fitch considers that the current strategy leaves very little margin for error and downside risk still exists for the IDR if the combined weak operating performance and asset quality impairments become significantly destructive to capital ratios. The ratings are also sensitive to a revision of strategy following the change in ownership structure. Upside potential is limited until the bank becomes capital generative. KEY RATING DRIVERS - VR The VR has been downgraded to 'c' as Fitch considers the terms of the offer to represent a distressed debt exchange for subordinated debt holders and the enforcement of losses on them is considered a failure of the bank under Fitch's definitions. At the same time, senior creditors (the obligor category best represented by the IDR) will benefit from a successful LME. Consequently, as an exception to Fitch's 'Global Financial Institutions Rating Criteria', dated 15 August 2012, Co-op Bank's VR and Long-term IDR are no longer aligned. RATING SENSITIVITIES - VRThe VR would likely be downgraded to 'f' on completion of the LME as subordinated bondholders realise losses in order to restore the bank's viability. The VR would then be upgraded to the appropriate level reflecting the bank's underlying creditworthiness. In Co-op Bank's case, Fitch considers that the successful completion of the LME and consequent recapitalisation of the bank would restore the bank to a viable position and the VR would likely be upgraded to 'b', realigning it with the Long-term IDR.KEY RATING DRIVERS AND SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR The bank's Support Rating of '5' and Support Rating Floor of 'NF' have been affirmed and are consistent with Fitch's view of a clear political intention to ultimately reduce implicit support for banks in the UK. Fitch does not expect any change to these ratings. KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIESThe rating actions on Co-op Bank's subordinated debt are driven by expected non-performance of these instruments and taking into account expected recoveries in line with the proposed LME terms. The recoveries were calculated based on the net present value of expected cash flows of the exchange proceeds in comparison with the original net present value of these instruments using a discount rate of 5% in both cases (for more information on Fitch's approach to ratings of non-performing hybrid obligations see, 'Assessing and Rating Bank Subordinated and Hybrid Securities', dated 5 December 2012).Fitch has affirmed the bank's 5.5555% upper Tier 2 perpetual securities at 'CC' and assigned a 'RR3' Recovery Rating. The 13% upper Tier 2 note has been downgraded to 'C' from 'CC' and 'RR4' has been assigned. All other subordinated securities have been downgraded to 'C' from 'CC' and 'RR5' has been assigned.RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIESIf the LME is successful, Fitch would likely withdraw the ratings on the hybrid instruments, reflecting that they have been extinguished.The rating actions are as follows: Long-term IDR: downgraded to 'B' from 'BB-'; placed on RWN Short-term IDR: 'B' placed on RWNViability Rating: downgraded to 'c' from 'bb-', removed from RWESupport Rating: affirmed at '5' Support Rating Floor: affirmed at 'NF' Senior unsecured notes' Long-term rating: downgraded to 'B' from 'BB-'/'RR4'; placed on RWNSenior unsecured notes' Short-term rating: 'B' placed on RWN5.5555% Upper Tier 2 securities GB00B3VMBW45: 'CC'/'RR3'; placed on RWN13% Upper Tier 2 securities GB00B3VH4201: downgraded to 'C'/'RR4', from 'CC', removed from RWELower Tier 2 subordinated notes: downgraded to 'C'/'RR5', from 'CC', removed from RWEContact: Primary Analyst Denzil De BieDirector+44 20 3530 1592Fitch Ratings Limited30 North ColonnadeLondon E14 5GNSecondary Analyst Christopher KeelingAnalyst+44 20 3530 1494Committee ChairpersonAlexander DanilovSenior Director+7 495 956 2408Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com.Additional information is available on 
  www.fitchratings.com
 Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 15 August 2012, 'Evaluating Corporate Governance', dated 12 December 2012, 'Distressed Debt Exchange', dated 2 August 2013, 'Assessing and Rating Bank Subordinated and Hybrid Securities', dated 5 December 2012 and 'Recovery Ratings for Financial Institutions' dated 24 September 2013 are available on 
  www.fitchratings.com.
 Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria
  http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686181
 Evaluating Corporate Governance 
  http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=694649
 Distressed Debt Exchange
  http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715005
 Assessing and Rating Bank Subordinated and Hybrid Securities
  http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695542
 Recovery Ratings for Financial Institutions 
  http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=717538
 Additional Disclosure Solicitation Status 
  http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=808062
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