Thur, Aug 7 2008

Ron Sandler, executive chairman of Northern Rock, gave every sign yesterday that he was taking decisive action to turn round the embattled bank as it reported first half losses of £585.4m.

But even though it has managed to repay £9.4bn of its £26.9bn Bank of England loan, the numbers underline the task facing Northern Rock if it is to fulfil its objective of repaying the rest by 2010.

At the time of nationalisation, ministers and bank executives alike were keen to emphasise that Northern Rock had a good quality mortgage book that would perform well even in a severe housing downturn.

However, Northern Rock's results yesterday showed a sharp deterioration in its mortgage loans and a total impairment charge of £238.2m. This was a key reason behind the bank's decision to strengthen its capital base by £3.4bn.

Arrears jumped from 0.45 per cent of its mortgage book at the end of 2007 to 1.18 per cent in the first half of 2008. This is around the industry average.

The riskier parts of Northern Rock's mortgage book have seen arrears rise still further. The phenomenon is especially noticeable in the together product, which combines an unsecured loan and a mortgage for which arrears are running at 2.14 per cent.

Mr Sandler said that 70 per cent of Northern Rock's repossessions related to together loans. The product was "proving to be exposed to a reasonable degree" to the housing market slowdown, he acknowledged.

Northern Rock also has £6.3bn of unsecured loans - including together loans - which are seen as riskier than mortgage loans secured on residential property.

The number of house repossessions has also risen from 2,215 to 3,710 - an increase of 67 per cent that represents 0.56 per cent of all mortgage accounts.

The company says this is because it is moving more quickly to repossess properties and is increasing the number of staff working in debt management from 185 to about 500.

Mr Sandler has made it clear there are potential pitfalls in Northern Rock's plan to repay the government, should house prices fall and more of Northern Rock's borrowers be pushed into negative equity.

He said: "We have seen a significant increase in our arrears. This is an issue which has been reflected in possessions and loan losses provisions. It is a reflection of the market place in which we operate. Our challenge is to navigate our way through this."

However, Northern Rock yesterday pointed to signs of progress in its task of repaying the Bank of England loan.

Its existing business plan envisages shrinking its mortgage book by 60 per cent by encouraging existing borrowers to leave and remortgage with other lenders.

The bank said yesterday that £16.2bn of mortgages had been repaid in the first half as borrowers left for other banks. This means its total balance sheet has shrunk to £99bn from £109bn at the end of 2007.

The bank has also had some success at attracting new savers. Its goal is that by 2012 retail deposits should account for half of its total funding up from 25 per cent now.

Retail deposits rose by £3.7bn to £14.2bn in the first half as savers returned to the bank which is backed by a government guarantee.

Northern Rock also pointed to its restructuring of the business to cut costs. It has additionally overhauled the bank's risk management procedures.

The Bank of England loan will be reduced by a further £3bn in the second half when it swaps £3bn of debt for equity. The action is highly controversial because this slice of the debt will only be repaid if Northern Rock is sold to a bidder.

However, Mr Sandler said yesterday: "It is not fair to say that the taxpayer is more exposed. The taxpayer has exposure with repaying the loan."

SOURCE: ft.com