The Co-operative Bank will next week attempt to draw a line under its ill-timed merger with Britannia building society by writing off at least £500m of bad commercial property and mortgage loans it inherited four years ago.
Analysts are braced for loan writedowns of up to £1bn this year at the Manchester-based lender, the bulk of which they expect to be taken in the first-half results, due to be published on Thursday.
The charges, which analysts say will drag the Co-op into a loss for the first six months of the year, come as the mutual prepares for a sweeping restructuring of its banking business in the coming months.
The Co-op Group is battling to fill a £1.5bn capital hole at its banking arm, which was identified by the financial regulator earlier this year. It is planning a debt exchange, which is expected to raise £1bn of fresh capital for the bank this year. A further £500m should be generated next year, largely from the sale of the group's insurance businesses.
Announcing the restructuring in June, the Co-op said that the measures took into account "significant additional impairment charges" in 2013.
These will relate to poor quality commercial real-estate loans and subprime residential mortgages that the Co-op took over when it merged with the Britannia building society in 2009.
The loans have been hived off into a non-core division, which the Co-op is gradually running down. Last year it took an impairment charge of £351.1m against the loans.
Since arriving at the Co-op in May, chief executive Euan Sutherland, and Niall Booker, who Mr Sutherland brought in to run the banking business, have conducted a detailed assessment of the mutual's deteriorating loan book. Critics say that this task had been largely ignored by the former management team.
The Co-op is not planning to provide any more details on the debt exchange with its results. It will publish a prospectus setting out the structure - including the proposed "haircuts" for bondholders - towards the end of this year.
The measures are intended to boost the bank's core tier one capital ratio - a key measure of balance-sheet strength - to above 9 per cent by the end of this year, up from 8.8 per cent at the end of 2012.
The restructuring has come under attack from several groups of investors, including retail savers and pensioners and US hedge funds, who are set to suffer large losses on their investments.
The non-core portfolio amounts to about £15bn, evenly split between commercial lending and riskier mortgages - and a large share of the Co-op's £33bn loan book. The group said in June that it would expand the non-core division to include larger corporate and commercial customers with complex product and servicing requirements.
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