The MT interview: Adam Applegarth

The youthful CEO of Northern Rock is the FTSE-100's champion of regional commitment - as rooted in the north-east as the bank he runs. Having kept the focus on mortgages, he has shown broader-based lenders the way to cost efficiency. But the future could be tougher ...

by Andrew Davidson
Last Updated: 31 Aug 2010

It's cloudy down south, but up in Newcastle the sun is shining. 'And over there,' says Adam Applegarth, pointing outside the panoramic window that runs round two walls of his fourth-floor Gosforth office, 'is the only other FTSE-100 company up here.'

He gestures at a large white cluster of buildings off near the horizon.

'That's Sage, the software firm,' he smiles with a knowing look, as if he likes to keep them visible from the centre of power.

Applegarth, bullet-headed chief executive of mortgage lender Northern Rock, is a deeply competitive man. You can tell that from the way he picks out his rivals in conversation, and from the way he has driven his company on to become a regional giant of the north-east, sponsor of both Newcastle's football and rugby clubs and, with 5,000 staff, one of the biggest employers in the area.

Perhaps it's his relative youth that makes it obvious too. Just 39 when he took the top slot at Northern Rock, Applegarth at 42 has the experience of an executive 10 years older in the lean, powerful frame of someone still sulking that he has only just been pushed down to Sunderland cricket club's 2nd Eleven. Note the big painting of Sunderland's pavilion that dominates his office: some of his best times, he says, have been spent playing cricket there.

And he's a serious, one-company man too - virtually one region, as well: born in Sunderland, exiled west to boarding school in Sedbergh, then back to Durham University and zip into Northern Rock in 1983, popping up at the top in 2001. Never thought of leaving the area? Not really, he says, not since he came back from Sedbergh. And now ...

'I just don't get offered jobs much any more, but that's because not many offer bigger pay than here' - he earned £759,000 in 2002. 'I do get the occasional offer, and then it comes down to what drives you. And what drives me,' he adds, 'is working in a company that I thoroughly love and am immensely proud of, in an area that I like that's a nice place to bring up a family in. And it was great to come home to it after boarding school.'

Applegarth, you suspect, is the most well-rooted boss in Britain. But he doesn't boast about it. He talks quietly and meticulously, surprisingly sensitive in posh Geordie tones. With his bold pinstripe suit, trademark yellow tie and shaven head, he looks like a rather vulnerable bouncer - but don't mention appearance. He says he doesn't like giving interviews, because he isn't comfortable projecting himself and is very uneasy about how he looks. 'I've been described as so many things,' he says, rubbing his bald pate, 'a cross between Alexei Sayle and Vinny Jones; someone else said I was like the goblin banker in Harry Potter.'

For a moment, Applegarth looks rather mournful, as if the whole media burden is too heavy a load to carry. Then he pulls a mocking face. 'That amused my children no amount, I'll tell you.'

Yet perhaps he deserves his overgrown goblin status. In the past decade Northern Rock, built up from an amalgam of regional building societies before floating in 1997, has leapt across the finance world to become one of the most effective banking outfits in Britain. In January it posted profits of £431.2 million (up 13%) on net lending of £12.9 billion (up 51.9%). Specialising in home loans and remortgaging, the bank now claims to be the lowest-cost operator in Europe - well, almost.

'Actually I think there may be a very small German operator who has lower costs than us ...' One man and dog? 'Yeah, and I am going to get him!' laughs Applegarth.

Yet walk around Northern Rock's fast-growing base in Gosforth, with its slate-desked reception, indoor cafes, walkways between buildings, and planning requested for big new developments, and this looks like a well-heeled army on the march.

How has he kept costs down? 'Two real ways,' he says. 'First, our headquarters in the north-east means that our wages are typically 15% less than those of somebody based in the south-east. And second, and most importantly, we are a growing company, our costs are actually going up but our unit costs are coming down.

'Selling a mortgage is not like selling a Mars bar - selling a mortgage means you then have several years of the customer being with you, and you have to service them, so because you are growing your lending, you are bound to see your costs go up. But our unit costs are going down because we are getting increasingly efficient. If you are not growing, it is very difficult to drive down your unit costs.'

And conversely, the reason why his competitors are not growing as fast is simply because they are too big. 'HBOS - which I happen to think is a really well run company - has 25% of the market,' he says. 'It has to get one loan in four just to stand still. We only need one loan in 17 to hit high growth targets. Which is why you see them diversify, becoming a much more universal bank, whereas we are very much driven by home loans.'

On that argument, won't Northern Rock have to diversify, eventually?

'No, you only look to expand outside your core product if you have exhausted the geography, exhausted the product or you cannot compete. We still only have 5% share of mortgage stock; our share of new business is double that, so we clearly haven't exhausted either product or geography, and we are hugely successful in competing in this segment, so at the moment there is no expansion outside the core product.

'We are more likely to expand by geography than product, but ask me in 10 years' time, and I may give you a different answer.'

It is breathless, logical stuff. Those around Applegarth say he combines a relentless memory for detail with a rare ability to see the bigger picture. His weak spot is a shyness that makes him less confident with people than he is with arguments. But hang on ... he talks lean and mean well enough, but isn't the evidence all around Northern Rock's base somewhat to the contrary?

The Gosforth HQ, with its grand expansion plans, is becoming a mini-city.

'Actually,' cuts in Applegarth, 'we are fairly Presbyterian here compared with some of the banks I have been in; you don't see much marble here.

I'm not building a huge monolith that is going to be rattling around empty in 10 years' time. As for the slate in reception, it probably comes from someone's kitchen!'

Once you win his confidence, Applegarth moves easily from earnest number-crunching to joshing banter. The only thing that really irritates him is the perpetual press suggestion that Northern Rock is a balloon puffed by the UK's booming house market. If house prices collapse, so the argument goes, Northern Rock's business will shrivel in tandem. Then there's speculation that the new international financial reporting standard (IFRS) being brought in this year could dent Northern Rock's profits further. In the face of that, it's almost as if he can't wait for a downturn so he can prove the doubters wrong.

'Oh, people have been saying our success won't last for as long as I can remember,' he says, looking exasperated. 'And you know, I am glad I'm seeing you today, because the housing market has become noticeably slower, and this morning we've released a statement saying we have done what we have said and we have delivered. And we're not good proxies for the housing market - we don't compete in the housing market, we compete in the home loan market, which also includes people refinancing, remortgaging; it's investment in residential property, it's older people stripping out equity to support lifestyle ...'

But don't, he corrects me, make light of downturns. 'You never hope for a downturn, because that affects families, individuals, and in home loans that involves arrears and repossessions, so you are very sensitive about that. But the slowing down of the housing market from this company's perspective is not a bad thing, so we can show why we are a poor proxy and how we can outperform the market.'

And as he points out, the slow-down actually started two years ago, when transactions peaked. He expects the housing market to bump along for a bit, as first-time buyers find it difficult to get into the market.

'People always talk about house prices and forget about transactions, and in terms of transactions, the slowdown has already taken place. The peak was in 2002, and 2004 was at the bottom end of cycle. I think it will bump along the bottom for the next few years as the rate at which first-time buyers come back into the market will be slower than usual.

'What usually happens is that when you have a period of strong house price growth, first-time buyers get out of the market - that has happened. The average age of first-time buyers is now up to 34, an all-time high. As house prices slow down, they come back in, but there are a couple of reasons why that's going to take longer than usual.

'First, if you look at indebtedness in UK: the age band which has seen the biggest increase is 18 to 25. That's student loans. If you're 18 to 25, the key age band beneath 34, that is bound to be a dampener.

'Second, we have had some buy-to-let activity, concentrated in urban areas in first-time buyer properties. So we have excess demand for first-time buyer properties, and could really do with buy-to-let slowing down a little and allowing first-time buyers to come back.'

As for the speculation over IFRS, which one broker suggests could reduce Northern Rock's profits by 10% under new rules covering recognition of income, Applegarth has already said the effect will be minimal, though precise figures are not yet available.

For Northern Rock, he says, the priority in the next five year is delivery.

'We have got to make sure our operational performance is as good as possible, and we want to improve customer service. A huge amount of our systems time has been spent this year sorting out regulation of one form or another; having that freed up will help us to improve on customer service.

'If we are completely transparent in terms of products to our customers, they are running out of reasons to leave us, unless we bug up their service. So let's improve their service, because if we're not losing customers then we don't have to work so hard in the gross market to hit our targets.'

But won't success mean that there is more pressure on Northern Rock to loosen its north-east ties? It is already secured tightly by its workforce and by its charitable foundation, set up on flotation, which takes 5% of the company's profits each year to spend in the region. That, you would think, would be harder to justify as the company spreads its business across the UK and outside it.

Not at all, counters Applegarth. 'There is pressure on our sales side, and we are constantly improving the number and quality of our sales staff. But in terms of administration, we are concentrating ever more in the north-east - not just in Newcastle, but also in Sunderland.'

The foundation, run separately by executives appointed by Northern Rock, makes the company one of the biggest corporate givers in the UK, by proportion of profit. It also makes a powerful statement about the firm's purpose and roots - founded in the 19th century and deriving initially from two organisations, the Northern Community Fund and Rock Permanent Benefit Building Society, and later incorporating more than 50 other small re-gional outfits.

'We are 155 years old,' says Applegarth. 'When we floated, we were not just realising the value of the company to our members, but much of that value was from members who weren't with us any more - they'd died. However, the bulk was from the north-east, as we were regional building societies, and as the value was not created totally by today's membership we decided 5% should go to charities in the region.'

Not something the board may later regret? 'It is a lot to give,' he acknowledges, 'but remember, this is an area undergoing huge transformation. The north-east needs to look after itself. There are not many out there who help us to look after ourselves, not many major employers here, and I think it is good for the company and community spirit too.' And as it is the area where the vast majority of Northern Rock's staff are drawn from, its impact is pretty immediate too.

There is a Germanic pragmatism underpinning all Applegarth's arguments: everything has a purpose, all is in order. You only have to look at his desk - a vast, clean space with two neat piles of paper and four exactly spaced pens in a tidy line to the right - to see this is a man who values organisation to the point of obsession.

He laughs when I point out the pens. 'Yeah, I am obsessive. I like straight lines on lawns, that kind of thing, and I love collections, getting full sets of things.'

Northern Rock's chairman Matt Ridley cites Applegarth's extraordinary numeracy and quickness of thought as the key drivers. 'His capacity for remembering the tiniest detail from within the business is phenomenal, and he's also very good at taking decisions. Speed to market with new products is what we are known for, and that's because he's cultivated an atmosphere of quick but careful decision-making.'

The downside, adds Ridley, is that perhaps too much goes up to the chief executive, so good is he at giving quick answers.

Applegarth says he gets that yen for organising from his father, a physics teacher who taught in Newcastle's state schools. 'Though my mother, who was a classicist, was pretty organised too.' Applegarth - it's an old Northumberland name meaning apple farmer - was one of five siblings, nearly all sent away to boarding school from the age of seven. 'It was the education my parents thought was best for us,' he shrugs.

He has one brother who is a lawyer and another who is a pilot; some siblings are still in the north-east, others not. Applegarth's interests while growing up were cricket, rugby and economics, in that order. He was hoping to get a job in finance or research when he left Durham University and sent out a lot of job applications. 'I thought I'd have to go to London or Edinburgh, because those were the big financial centres.'

In the end, he got two trainee offers, one from a jobbing firm in the City of London and another from Northern Rock. 'The jobbing firm no longer exists, so I'm pleased I didn't take that one.' Others never responded at all. Then he grins. 'I'm still holding out for a reply from Austin Rover.'

Back then, Northern Rock was 'a regional building society with national aspirations'.

Applegarth's early memories are of an ambitious company hampered by prevailing economic conditions and a building society cartel that effectively ran all pricing within the home loans market. That broke up in the 1980s, then the ERM 'shambles' and the nosedive of the economy hampered growth, just as Applegarth's career was gaining momentum.

'I remember in 1992 setting a mortgage rate of 15.7%, and we had 10% unemployment. It was a bad time, but as we hadn't been growing, we didn't have to make loss provisions, and that allowed us to take business when others weren't concentrating on new business. It started the period of growing the assets strongly that became the theme for the last decade and a half.'

Applegarth's knack for organisation caught the eye of chief executive Christopher Sharp, ensuring rapid promotion. When Sharp died of a heart attack shortly before Northern Rock floated in 1997 and his deputy Leo Finn took charge, Applegarth was already an executive director. Four years later, when contenders jostled for the chief executive slot, he was the bold choice. But the board were not taking a gamble on a solo act. Applegarth's success owes a lot to the effective partnership he maintains with his number two, chief operating officer David Baker, with whom he has worked since 1983.

'They're very much a double act,' says Ridley. Applegarth does the pushing, whereas Baker is more 'touchy-feely'. Applegarth himself describes Baker as the 'company glue', providing the people skills that he sometimes lacks.

'I am less glue than David is; I am by nature impatient, I want things to happen, I want perfect customer service. But it's about translating that desire into practical, achievable goals - which is where the rest of team find a counterbalance to me.'

Others outside the company broaden it further. 'The thing about Northern Rock,' says David Prosser, group chief executive of Legal & General, 'is that it's a really good team, and Adam is an excellent team player. He's followed the strategy of his predecessor, keeping a focus on the mortgage business, and the company has enjoyed the benefits. Other businesses went different ways.

'And don't underestimate how difficult it is to stick to your focus. The temptation round every boardroom table is to diversify.'

The well-rootedness of the firm, and its boss, play a part in that focus, and Applegarth is quick to articulate a tradition of 'stewardship' at Northern Rock that you don't often hear promulgated by other FTSE-100 bosses.

'My job description is the same as for other CEOs,' he says, when I ask him, 'but it is developed by my background as an individual, and if you have spent a large chunk of your working life under another individual, Christopher Sharp, who saw part of the role as stewardship - looking after staff and providing welfare, providing a good place to work - then you are going to be influenced by that.'

Likewise, when I ask whether he feels Northern Rock is vulnerable to predators, he turns it into a question about stewardship.

'You're always vulnerable to takeover, but I don't worry about it. It's only worth worrying about what you can have an effect on. If the company is running well and performing well, and delivering to shareholders, then it will require somebody to make an exceptional offer to acquire it. But as we are a lowest-cost operator, no-one is going to do it to run it more efficiently.

'You are going to buy it to expand Northern Rock as currently is, so in terms of providing a role of stewardship for staff and employment, that would be continued if we were taken over.' He stops and smiles. 'The fact that I might be hoyed out the door is irrelevant.'

So is stewardship his key role? 'It's part of the CEO's role that is embedded in us, and that goes back to our former mutual status.'

And does his relative youth now pose a problem, blocking the promotion of others? 'I guess that would be a danger if we were not a growing company, but the range of options here is constantly expanding, there are whole new areas coming up. It's only five years since we started securitisation, for example; now it's an area covering 40% of our funding. Roughly £30 billion of securitised notes are managed there.'

And would he ever leave? He doesn't think so, he says; he likes it too much. 'But obviously the shareholders might force me to,' he adds.

Yet much of banking nowadays is about size. Even as the ultimate local-boy-made-good, couldn't he be tempted elsewhere by the thought of running something really big? 'You mean megalomania?' he smiles. 'Well, I'll think about a bigger job if someone puts it to me.'

I'm putting it to you. 'But you're not really offering it to me, are you?'

I guess not. Applegarth smiles, point proven. Anyway, working somewhere else would mean that he couldn't get round his beloved sporting circuit, watching Newcastle football and Newcastle rugby, playing Sunderland cricket.

Northern Rock, as shirt sponsor for Newcastle FC, is an ever-present on Geordie streets, and the team is never far from Applegarth's thoughts.

Shearer or Kluivert? He purses his lips, reluctant to commit on that one. 'Shearer,' he says eventually. 'But you can see what the future could be.'

Then he adds that what he is really worried about is whether the team is going to sort out its internal problems. New centre-halfs, unhappy forwards, grumpy managers. He rubs his hand over his never-ending forehead one last time. Problems, problems. It makes running Northern Rock look like a doddle, so far.

THREE CHALLENGES FACING APPLEGARTH

1. Maintaining strong growth in a slowing housing market.

2. Continuing to provide a high level of customer service in a

fast-growing company.

3. Keeping tight control over costs to build on industry-leading cost

ratios.

APPLEGARTH IN A MINUTE

1962: Born 3 August in Newcastle, educated at Sedbergh School and Durham

University

1983: Joins Northern Rock as graduate trainee

1989: Appointed head of planning

1992: Assistant general manager

1993: General manager

1996: Executive director

2001: Chief executive, Northern Rock plc

Hobbies: Playing cricket and supporting Newcastle's rugby and football

teams.

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