The Co-operative Group has admitted its 20% stake in the Co-operative Bank is worth zilch after it lost £477.1m in 2016.
The bank was valued at £185m in 2015 but this has since been slashed to zero based on what it deemed a “prudent valuation”.
Co-op Bank has been up for sale since February, with Virgin Money seen as a likely candidate to make a purchase.
Its struggles originate from purchasing Britannia Building Society in 2009, which burdened it with loss-making loans.
Ray Boulger, senior technical manager at John Charcol, said: “Problems stem from Britannia’s commercial loans.
“When Co-op bought Britannia it was presented as a merger because it wasn’t in anyone’s interest to highlight the problems.
“But in reality Britannia had to be rescued.
“I suspect the problems were greater than Co-op realised when they took it over.”
He compared the situation to Lloyds Banking Group’s acquisition of HBOS in 2008 – where the deal had to be completed quickly to stop the bank going bust and there wasn’t time to undertake full due diligence.
So why would a firm like Virgin Money want to acquire a loss-making bank?
Boulger explained: “Virgin would be acquiring a lot of customers and branches.
“One area where Virgin is weak is with business customers. If it wants to have a more diverse range acquiring a bank with them may be a way forward.
“Of course they would need to make sure they don’t acquire losses and exclude purchasing bad debt.
“As long as they do their due diligence so they know what they’re buying it’s a quick way of significantly expanding their share of the market.
“However they need to ensure they are able to integrate IT systems, as that can be an absolute nightmare.”