Northern Rock released its half-year results today, and the picture was predictably torrid. The UK’s safest bank, which was nationalised by the Government in February, ended the period with a worse-than-expected £585m loss. And its 'shareholders' (i.e. us) are partly to blame: the proportion of borrowers in arrears on their mortgage has more than doubled, costing the Rock about £190m (over three times more than last year). Executive chairman Ron Sandler said there was little chance of returning to the black any time soon, but insisted that ‘the foundations have been well laid for recovery and return in due course to private ownership'.
The Rock’s continuing travails provide a good illustration of the weakening mortgage market. The number of Rock borrowers failing to keep up with repayments rose from 0.38% last year to 1.18% this year (although this is actually still below the national average of 1.21%, according to the Council of Mortgage Lenders), while repossessions were up 15% to 3,710. The result is that the Rock is trimming back its exposure (mortgage accounts are down 15%) and cutting costs – 2,000 jobs are likely to go in the next three years before the bank returns to profitability (although the debt management staff probably have the safest jobs in Britain…)
The most significant consequence of all this is that the bank finds itself with an urgent need to strengthen its balance sheet. Although on the face of it this seems slightly unnecessary (given the state is effectively guaranteeing its deposits), the Treasury is determined that the Rock’s capital position must remain in line with its privately-owned rivals. So it’s agreed to a refinancing whereby up to £3bn of its giant loan gets converted into equity. As Alistair Darling pointed out on BBC Radio 4’s Today programme this morning: ‘It doesn't have shareholders now that it's owned by the government, so it's got to come to us.’
This is all very well, but it’s still rotten news for the Government. Its cash exposure to the Rock doesn’t change (because the bank will have to pay higher interest on the remaining loans) and another £3bn gets added to the spiralling national debt. What’s more, because this debt has now become equity, it means us taxpayers will be in line for an even bigger loss if the Rock keeps shrinking in value and eventually gets sold for a knock-down price.
On the plus side, the Rock said today that it’s ahead of schedule in paying back its mammoth state loan, which has been reduced by £9.4bn to £17.5bn. That means every man woman and child in the country is about 16p better off. Go and buy yourself a bag of penny sweets to celebrate.
In today's bulletin:
Taxpayers tapped again as Rock keeps sinking
Hotline for exploited employees
Ryanair spat adds to BAA woes
Captaincy a tough nut to crack for KP
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