So – the Northern Rock results are out.
Losses at nationalised bank Northern Rock have grown by 24% amid mounting losses on its mortgage loans. Losses at the bank totalled £724.2m in the first six months of 2009, compared with £585.4m in the first half of 2008. The Newcastle-based lender said that 3.92% of its mortgage loans were more than three months in arrears, well above the national average of 2.39%.
The plan now seems to be to split the bank into a ‘good bank’ for sale and ‘bad bank’ to run down the ‘legacy assets’.
Now possibly isn’t the best time to be offloading our stake…
How far off would such a privatisation be? Well on the evidence of these figures, many in the City – except those angling for a sale fee – would argue that it would be better not to rush into disposal.
Taxpayers are currently nursing a pretty hefty loss on their ownership of the Rock – though this is not what the chancellor said would be their fate.
The best way to recover that loss is probably to allow Gary Hoffman and his team the time to demonstrate – which is not impossible – that there is an attractive banking franchise hidden beneath those poor quality mortgages and personal loans. Which may take a good couple of years. Any earlier sale could well deprive taxpayers of full value.
I suspect he’s being optimistic. The longer we hold for, the better the value.
I’ve just been reading the balance sheet. The key information is as follows.
On the asset side, loans outstanding of £67.1bn now down from £84bn a year ago.
On the liabilities side, deposits of £19.6bn now up from £14.6bn a year ago.
(the difference is the use of wholesale markets to fund lending).
So the loan-to deposit ratio has contracted to 342% from 575% a year ago. I wouldn’t be comfortable owning a bank with an LDR above 120%. I doubt many private sector buyers would be either.
So we need, if we’re looking for a sale, to concentrate on either growing deposits, cutting back the loan book or both. What we shouldn’t be doing is trying re-engineer a housing price boom. That won’t end well. Thankfully the bank’s battered state is already causing some pull-back here:
In February 2009, the Company announced that it intended, as part of its revised strategy, to lend up to £14 billion over the next two years, 2009 and 2010, including up to £5 billion in 2009. Reflecting its constrained capital position prior to completion of the legal and capital restructure and capital injection, Northern Rock’s new lending in 2009 is expected to be nearer to £4 billion than the previously envisaged £5 billion.