Even Northern Rock is seeing loan book improve

The so-called 'bad' bit of the Rock is back in profit, but the 'good' bit is loss-making as savers pull out.

by
Last Updated: 09 Mar 2011

Here's a telling indication of the banking sector's return to health: Northern Rock, the one-time basket case nationalised by the Government in 2008, announced this morning that it returned to the black in the first six months of 2010. Moreover, this was only because of its 'bad bank' - the bit containing all those dodgy loans that it doled out in the good old days; the Rock's 'good bank', which includes all its higher-quality assets, actually made a £143m loss. All a bit strange - although it increases the chances of the taxpayer being able to sell the Rock back to the private sector for a decent return...

This is the first set of results from the Rock since it hived off all of its dodgiest debts (including all those unsecured loans and the notorious 125% mortgages) into a so-called 'bad bank', Northern Rock Asset Management - the idea being that this would make it easier to sell what was left as a 'good bank'. But in fact, the supposedly bad bit is performing much better than the supposedly good bit - the former made a £350m profit, a vast improvement on its £724m loss last year, while the latter made a £143m loss.

The reason - as we saw with HSBC yesterday, and as we'll see with the other big UK banks this week - is that fewer of these loans are going bad than people predicted; so NRAM is continuing to rack up interest payments even on some of its dodgiest lending. CEO Gary Hoffman says charges on bad loans were down during the period, while 90% of its mortgage book is still performing. Now admittedly that's still a lot of borrowers in arrears - but since the Rock was famously more liberal with its mortgage lending than any other bank, it's better than anyone expected.

Hoffman also says that the bank's underlying profitability is improving, and that it's now competing for business on the same terms as everyone else. Although that's not necessarily a good thing: one notable development in the good bank is that its savings balance has dipped by nearly £2bn to £17.6bn, after the Government removed its 100% guarantee for savers (which made the Rock the safest bank in town).

The subtext of all this, of course, is that Hoffman's main job is to get the Rock into a state where it will look attractive to a private sector bidder. And so far he seems to be doing a pretty decent job. If he can not only flog the 'good bank', but also get a decent price for the 'bad bank' (as he may do, if it can stay as profitable as this - presumably dependent on the state of the economy overall), the taxpayer may yet find themselves turning a healthy profit on our bailing out of the Rock. Which, presumably, can disappear promptly into the black hole that is our structural deficit...

In today's bulletin:
Even Northern Rock is seeing loan book improve
'It's the deficit, stupid', Cameron and Clegg tell ministers
A bushel and a peck: wheat prices rise by half
The Milkybars could be on you as Nestle taps nostalgia vote
Editor's blog: The not-so-green green grass of home

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