Council bosses are set to leave the crisis-hit Co-operative Bank and find a new home for millions of pounds of taxpayers’ cash.

Southampton City Council expects to name a new bank to manage the authority’s “current account” – which manages hundreds of millions of pounds of payments and income each year – next month.

The Co-op had written to the council to say it was axing its banking services for local authorities.

But Labour council leader Simon Letts said they were already considering leaving the Co-op at the end of their current contract in September due to the bank’s continuing financial woes.

The Co-op Bank last week announced a £1.3 billion loss for 2013 after a deal to buy 632 Lloyds branches collapsed last year. Its parent company, the Co-Operative Group, lost control of the bank to a rescue bid launched by a group of US hedge funds.

The bank’s chairman, Rev Paul Flowers, resigned last year amid allegations that he bought crystal meth and crack cocaine, just days after being grilled by MPs over the bank’s dismal performance.

The former Hampshire clergyman, who ran churches in Netley, Hedge End and Sholing and was a leading Hampshire Labour party member, was convicted of carrying out a sex act in a Hampshire public toilet more than 30 years ago.

Southampton City Council signed a contract with the Co-op in 2007, with the bank responsible for managing the council’s “general banking”.

The general bank account is similar to a current account, with most payments into the council, including £73m in council tax payments, and some of its £600m annual expenditure, going through it.

Cllr Letts said the Co-op wrote to the council, and 129 other councils, to let them know it would no longer offer banking for local authorities.

He said: “The contract was up anyway. But I am sure their difficulties would have been a fact we would have taken into account when we looked at whether to renew the contract.”

The Cabinet is set to start the process of finding a new bank at its meeting tomorrow.