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Northern Rock makes loss of £724m

Published 04/08/2009

Northern Rock reported a half-year loss of £724.2 million today.

Government-owned lender Northern Rock reported a half-year loss of £724.2 million today.

The Newcastle-based company also said the share of its mortgages in arrears had risen to 3.92% by June 30, from 3.67% three months before.

Northern Rock - which was taken into public ownership in February 2008 - said it incurred an impairment charge on its loans of £602.2 million and expected that figure to be similar in the second half.

Northern Rock was notorious for its Together loans which lent up to 125% of home values.

As the recession bites and house prices fall, it is these loans that are responsible for its soaring rates of mortgages more than three months in arrears. When these loans are stripped out the share falls to 2.85%.

The lender said the number of properties repossessed as of June 30 were 2,522, compared with 3,620 at the end of 2008.

Chief executive Gary Hoffman said the lender might continue to see a small increase in the three-month arrears rate, but added that the share increases were slowing.

The Rock was at the centre of the first bank run in 140 years in September 2007 as the credit crunch exposed its over-reliance on money markets.

The crisis forced it to turn to the Bank of England for £26.9 billion in emergency funding before being nationalised when sale attempts fell through.

Northern Rock now owes the Government £10.9 billion after paying back the loan with mortgage redemptions as it encouraged borrowers to seek deals elsewhere.

But this has drained money from the mortgage market and in a change of plan earlier this year the bank is now increasing lending and delaying the repayment of the loan.

Today it said the Government loan would increase after its planned restructuring.

Mr Hoffman said the loss was "disappointing", but on an underlying basis the £269.6 million deficit was far smaller than the £443.3 million in the same period last year.

The £724.2 million figure includes a non-cash accounting charge as well as £156.4 million of Government funding charges which the firm expects to recover in a rebate later this year if it gets state aid approval from the European Commission.

The lender plans to split into two in order to smooth the path for a planned move back into the private sector.

It intends to hive off its residential mortgage book as well as the Government's loan and other packaged mortgages and financial vehicles - considered to be more risky - into one bank, AssetCo.

The other lender, BankCo, will undertake new lending and hold the retail deposit book.

Mr Hoffman said both banks would be attractive to the private sector, while the move would also reduce the amount needed from the taxpayer.

But he added that it was too early to speculate about a timetable for returning to the private ownership.

"There is no process under way and there is no timetable," he said.

Northern Rock said new lending in the year as a whole would now be around £1 billion short of the previously envisaged £5 billion, as it reins in its balance sheet ahead of its planned restructuring.

Gross residential mortgage lending in the first half of the year amounted to £1.3 billion, with the amount of new loans doubling in the second quarter as the firm looked to step up its mortgage lending. It also has £1.2 billion in the pipeline.

Mr Hoffman said the bank still intends to lend around £9 billion in 2010.

But he warned that the outlook for the mortgage market "remains uncertain".

"The impairment charge going forward will be influenced by changes in house prices and the levels of unemployment," he said.

"Lower interest rates have resulted in improved affordability for mortgage customers, but confidence remains finely balanced, reflecting expectations for increased unemployment in the coming months.

"The current environment continues to present Northern Rock with challenges particularly in managing the quality of its loan portfolios."

But he added that the lender was making "encouraging" progress.

Meanwhile, retail deposits at Northern Rock were down to £18.4 billion from £19.6 billion at the end of December.

Mr Hoffman said this was because there had been a "flight to safety" during the banking crisis last year and the bank, as it was already Government-owned, was a beneficiary of the panic.

But he said the market had returned to a more normal state, where consumers were assessing the quality of the product and its suitability.

Belfast Telegraph

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