Rock falls into the red but its bad arm heals

NORTHERN ROCK’S boss insisted there was no timetable for returning the bailed-out bank to private ownership yesterday as it slumped to a £142.6m loss in the first half.

Chief executive Gary Hoffman said there was no deadline for a sale of the “good” part of Northern Rock, which holds savings accounts and lends new mortgages, despite speculation a disposal process could begin in the autumn. The institution fell into the red due to the cost of attracting retail deposits in a low-interest environment and the weight of carrying £6.3bn cash on its balance sheet.

Northern Rock also saw £1.9bn of customers’ money leave after the government withdrew its 100 per cent guarantee for deposits in February.

In contrast, Northern Rock Asset Management – the “bad” part of the bank, housing £51bn of potentially toxic debt – made a pre-tax profit of £349.7m. The rebound from a £724.2m loss last year was driven by a 90 per cent repayment rate on mortgages and a swing in the value of its derivatives portfolio.

The bad bank reduced its reliance on a government loan from £22.8bn to £22.5bn over the six months.

Northern Rock was split in half at the start of the year, two years after it was nationalised at the start of the banking crash. The government plans to merge the bad bank with Bradford & Bingley by the end of the year and return the good side to the stockmarket at an unspecified time.

In a statement alongside its results, Northern Rock said: “The company continues to prepare the business for an eventual return to the private sector, but only when conditions are right to do so, in the best interests of taxpayers.”

Q&A: NORTHERN ROCK EXPLAINED
Q. WHAT IS NORTHERN ROCK’S BACKSTORY?

A. Northern Rock has its roots as a quiet regional bank formed through the merger of two building societies. But under the control of former chief executive Adam Applegarth the bank pursued an aggressive expansion strategy, selling a record £10.7bn mortgages in the first half of 2007 alone.

Q. WHY IS THE BANK IN PUBLIC OWNERSHIP?

A. The company’s business model relied on bundling up mortgages and selling them on as securities to repay loans from the wholesale market. When demand for mortgage-backed instruments dried up in summer 2007, Northern Rock was forced to ask the government for emergency funding. The news sparked the first run on a British bank for 150 years as panicked savers withdrew cash. After months of procrastination, the government finally took Northern Rock into state hands in February 2008.

Q. WHAT HAPPENS NOW?

A. Yesterday’s first half results point to a remarkable turnaround in the “bad” part of Northern Rock’s business. A spokesperson says that bit of the bank is on course to be merged with the nationalised part of Bradford & Bingley, the building society, by the end of this year. The “good” bank is experiencing short-term difficulties driven by the Bank of England’s 0.5 per cent interest rate. Northern Rock is coy as to when the government will begin winding down its exposure, but there are suggestions it could come as early as autumn.

Q. WHO IS IN CHARGE OF NORTHERN ROCK?

A. Adam Applegarth resigned at the end of 2007. Andy Kuipers served as an interim chief executive before Gary Hoffman, previously vice-chairman of Barclays, joined in July 2008. Hoffman is in charge of piloting Northern Rock through the next phase of its history.