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Retour au sujet NTHN.ROCK ORD 25P

NTHN.ROCK ORD 25P : bonsoir a toutes et tous

10 août 200821:02

Northern Rock is pressing ahead with plans to reduce its workforce by 1,300 people. But there is one department in the embattled bank that is hiring; debt collection, which is expanding from 185 to 500 staff.

Shortly after Ron Sandler took over as chairman in February, he made it clear that Northern Rock would be 'significantly' loss making throughout 2008. Few predicted, though, how bad things would get. Last Tuesday, the bank posted a £585m loss for the first half, reversing a £300m profit a year earlier.

A prime cause of the worsening financial picture was the sheer number of Northern Rock customers falling behind on their mortgage payments. The provision for customers falling into arrears was £191m, a near fourfold increase on the £57m a year earlier. The bank has repossessed 3,710 homes. Former boss Adam Applegarth described 9 August last year, when the credit crunch began, as the 'day the world changed'. Arguably, it had changed much earlier, when the bank began offering mortgages of up to 125 per cent of a property's value in the misguided belief that house prices would climb inexorably higher.

According to Northern Rock's own figures, 140,000 of its customers will be in negative equity should house prices fall by 10 per cent, which many would now conclude is an optimistic estimate. Even without the credit crunch, it has become increasingly clear that Northern Rock would have had difficulty riding out any kind of prolonged crash in the housing market.

'The fact that the Rock's arrears have risen so quickly over recent months clearly casts some doubt on the government's assertions, when the bank was nationalised back in February, that its loan book was of generally good quality,' says Jonathan Loynes, chief economist at Capital Economics.

The government this week agreed to swap £3bn of Northern Rock's debt for equity and convert another £400m of preference shares into ordinary shares in an effort to strengthen its crumbling capital base and allow it to absorb future losses, attracting furious criticism from opposition parties. Sandler argued that the cash was no more at risk than it had been before - 'It is not fair to say that taxpayers' exposure will be increased' - but shareholders are forced to the back of the queue if all goes wrong, and the sum will only be repaid if the government manages to find a buyer for the bank or successfully floats it on the stock market. So, has the rapidly deteriorating housing market blown the plans to restore Northern Rock to health off course?

Since it was taken into public ownership, Northern Rock has managed to repay £9.4bn of its £26.9bn Bank of England loan, bringing its outstanding debt down to £17.5bn. That figure will fall by another £3bn following the debt-for-equity swap. In the original business plan, Sandler pledged to pay down a quarter of the loan by the end of 2008. In fact, it has paid more than that by the end of the first half, as borrowers have been persuaded to move to other banks and building societies in droves.

'You shouldn't try and think of Northern Rock as a company looking to be profitable this year. The object is to repay the Bank of England loan - that is the key measure by which to assess how well the management is doing,' says one insider.

The plan is to repay the debt and reduce the bank to a more manageable size. The bank aims to encourage 60 per cent of its customers to switch to other lenders and in the first six months of the year, the mortgage book fell from £90bn to £77bn. At the same time, it wants to attract new savers, with the goal of retail deposits accounting for half its total funding by 2012, up from 25 per cent now. The first-half figures show that retail balances are now £14bn, up from £10bn at the end of last year, but still down on the £24.3bn before the run on the bank last September.

In some respects, Northern Rock is in no different a position to other lenders post-credit crunch. HBOS, Barclays, Royal Bank of Scotland and Bradford & Bingley have all gone to their shareholders for further capital. '[Northern Rock] needs more shareholder capital; it does not have shareholders so it has to come from us,' Chancellor Alistair Darling said this week. The private-sector bidders for Northern Rock - one led by management, another by Sir Richard Branson - had both intended to inject capital into the bank, albeit far smaller sums than £3bn.

The business plan is to repay the loans by 2010 and return to profitability. If that is achieved, then it seems likely the bank will want to try and demonstrate a couple of years of growth again before it is offered for flotation or sale.

That is the plan, but there are many uncertainties still. The chief fear, highlighted by this week's figures, is that after the initial rush of customers deserting the bank for other lenders, Northern Rock will be left with a large swathe of loans that no other bank or building society wants to take on, especially as the market worsens. That could mean racking up further losses, hindering its ability to pay back the Bank of England. 'Other banks have taken the cream of Northern Rock's mortgages, leaving the rest to curdle,' said Liberal Democrat treasury spokesman Vince Cable, with typical exactitude.

Although Northern Rock needs to build a profitable business to make it more attractive to buyers, under state-aid rules it is not allowed to offer particularly competitive products. The bank arranged £1.9bn of new mortgages in the first half, a fraction of the £17bn it sold in the first half of last year, when it was still aggressively grabbing market share.

Another complication is Granite, the offshore vehicle that is used to package up loans and sell them on to other banks - something that caused a furore at the time of the nationalisation and has since been largely forgotten. Northern Rock insists that Granite is broadly representative of the Northern Rock loan book and does not, as was widely suggested in February, include only the best-quality mortgages. But the bank is obliged to replace mortgages in Granite when they are redeemed, which means that some of the new business being written could be siphoned into the offshore vehicle. It will be one of the first among many questions the new chief executive, former Barclays high-flyer Gary Hoffman, might want to ask when he starts on 1 October

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