Britains Northern Rock feels pain of recovery - Summary
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Published
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Mon, 18 Aug 2008 08:34
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London - Britain's nationalized mortgage lender Northern Rock unveiled massive half-yearly losses of 585 million pounds (1.17 billion dollars) Tuesday, prompting a government pledge to inject a further 3 billion pounds of taxpayers' money into the ailing bank. The Newcastle-based bank, which was taken under "temporary" government control in February, said it suffered a bad debt hit of 191.6 million pounds during the first six months of 2008 as customers failed to keep up with their mortgage payments. "The external environment has deteriorated and the consequences of this for Northern Rock are increased credit losses," said Ron Sandler, the bank's chief executive appointed by the government following nationalization. Northern Rock, Britain's first high-profile casualty of the credit crunch triggered by the US subprime market, last week announced 1,300 job cuts out of a total of 7,000. However, Sandler stressed that the bank, which was saved from collapse by a massive 27-billion-pound-loan from the Bank of England last September, had managed to pay back 9.4 billion pounds, reducing the amount it owed to 17.5 billion pounds. "While the losses reported today are likely to continue as the restructuring proceeds and as the credit environment remains difficult, I am confident that the foundations have been well laid for recovery and return in due course to private ownership," Sandler said. Alistair Darling, Britain's Chancellor of the Exchequer, said Northern Rock was facing a "very difficult time" in common with other banks around the world. Darling announced that the government would make a cash injection of 3 billion pounds to strengthen the bank's capital base, in what analysts described as a "mega rights issue that taps its one shareholder."They said that if the mortgage market failed to recover, that money would be at a "serious risk of loss.""It means the government writing off 3 billion pounds of our money," said Robert Peston, the BBC's business editor. Northern Rock's losses compare with 296 million pounds of profit during the same period in 2007, when the bank was offering 125-per-cent mortgages to borrowers under a private ownership copying the practices of the US subprime market. That picture has now radically changed. Figures released Tuesday showed that the size of Northern Rock's residential mortgage book fell by 13.4 billion pounds to 77.4 billion pounds. The proportion of Northern Rock's mortgage accounts which are more than three months in arrears doubled to 1.18 per cent in the first six months of this year, while the number of home repossessions increased by 67 per cent. Northern Rock, which now has 662,000 mortgage accounts - 120,000 fewer than 12 months ago - was paying the price of its previous aggressive lending, analysts said. According to analysts, "the risk of adverse selection" meant that poorer-quality customers were forced to stay with the group because they could not afford to remortgage elsewhere. "The only people that are left holding mortgages at Northern Rock are really those that are unable to find alternative mortgage providers and they are very high risk people," said banking analyst Ralph Silva. Reasonable customers with acceptable credit ratings and a moderate proportionate mortgage would have already left the bank, he said.
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