Northern Rock "Good" bank makes a loss, "Bad" bank a Profit

HAMISH_MCTAVISH

LONDON (Dow Jones)--In its debut set of results since splitting into a new bank and a run-off mortgage business, Northern Rock Tuesday said the "good bank" had a first-half loss and the "bad bank" made a profit, as low interest rates cut into the good bank's margins but made it easier for customers to repay their mortgages at the bad bank.

Northern Rock PLC, the ongoing business that is being prepared for an eventual return to the private sector, reported a GBP142.6 million pretax loss for the six months to June 30 and said it lost nearly GBP2 billion in retail deposits as the U.K. government lifted a savings guarantee.

Chief Executive Officer Gary Hoffman said conditions are tough for banks that rely on retail deposits for their funding, because of low interest rates and amid a relatively subdued mortgage market, and that he expects Northern Rock to post a further, though smaller loss in the second half.

The bank had a negative interest margin of 0.54% in the six months, in part because it has about GBP6.33 billion in cash on deposit at the Bank of England earning a low return. Deposits shrank to GBP17.6 billion, from GBP19.5 billion at January 1.

Hoffman said the first-half performance is in line with management expectations, and that costs will come down in the second half since the bank will no longer be paying a fee for the government savings guarantee that expired in May.

The government had agreed to guarantee Northern Rock's retail deposits after a run on the bank in September 2007 and its subsequent nationalization in February 2008. The mortgage lender at the start of 2010 was split into a "good" bank called Northern Rock PLC that holds the its deposits and some existing mortgages, and a "bad" bank called Northern Rock Asset Management PLC holding mortgages that will be gradually wound down.

The longer-term plan is for Northern Rock PLC to be sold or otherwise privatized, though no timetable is in place yet, Hoffman said. The government has said it aims to sell it for a profit, returning taxpayer money in full, though most of the taxpayer funds are now tied up in a GBP22.5 billion loan at Northern Rock Asset Management, which is unlikely to be privatized.

In the meantime, Hoffman said the bank plans to use more of its cash for new mortgage loans in the second half, boosting gross mortgage lending to around GBP4 billion to GBP5 billion for the year. Gross mortgage lending in the first six months of 2010 was GBP1.98 billion, with an average loan-to-value of 60% on new loans. The average loan-to-value on the total, GBP11.2 billion mortgage book was 59% at June 30.

Just 0.07% of the book was overdue to be paid by three months or more, which Northern Rock said reflected its "prudent lending policy." Its loan impairment charge was GBP400,000 in the period, and loan loss provisions at June 30 were GBP900,000.

The bank's underlying loss in the six months was GBP140 million after stripping out a GBP2.6 million volatility hedge, "which the management do not consider to form part of the company's underlying performance."

A Northern Rock spokesman said the GBP1.9 billion of lost deposits in the six months included about GBP400 million in funds withdrawn from the bank's Guernsey branch, which was shut down in the period, and that the decline wasn't related to the expiration of a government guarantee on Northern Rock savings in May.
"Deposits have reduced in the first half in line with expectations as we have managed the deposit book," he said.

The bank is barred from offering the most competitive rates on its products and isn't allowed to hold more than GBP20 billion in retail deposits as a term of the European Union's approval of its state aid.

In a separate filing, the bad bank, Northern Rock Asset Management PLC, said it made an underlying pretax profit of GBP167.3 million, after excluding derivatives and one-off items, as low interest rates meant customers could afford to keep repaying their mortgages.

NRAM said its loan from the government has dropped to GBP22.5 billion from GBP22.8 billion at the start of the year, following a GBP300 million repayment.

Hoffman, who also serves as CEO at NRAM, said the company aims to repay about half of the government loan within 5 years and the vast bulk of the remainder within 10 years. In addition to the government borrowing, the company must also repay about GBP38.5 billion in debt securities that helped to fuel its lending before 2007's credit crunch.

A debt repurchase in the second half generated a GBP780 million gain that was booked straight into shareholder funds.

NRAM's arrears in the period were much higher than those at Northern Rock PLC, at 5.64% of its GBP47.2 billion mortgage book, up from 5.32% at the start of January. But its impairment charge fell to GBP277.6 million, less than half the GBP602.2 million charge in the first half of 2009 and down from around GBP442 million in the second half, as its mortgage book has gotten smaller.

http://online.wsj.com/article/BT-CO-20100803-703882.html

So the "Bad" bank, with all the old "reckless lending"..... Made a profit, despite higher arrears.

The "Good" bank, with the new "sensible lending"...... Made a loss, despite lower arrears.

F*ck me that's absolutely priceless......

HAMISH_MCTAVISH

LOL, still no comment from the bears who have been railing against 2007 lending standards for the last few years......

Seems it's nowhere near as clear cut as they'd like to portray.

Graham_Devon

HAMISH_MCTAVISH wrote: »

LOL, still no comment from the bears who have been railing against 2007 lending standards for the last few years......

What do you want the "bears" to comment on?

May I remind you of the fact there is a "bad bank" in the first place. You think this is somehow a victory for lending standards?

Exocet

I'll just take a tiny snippet...

"as low interest rates meant customers could afford to keep repaying their mortgages"

Well whoop de do.

Thrugelmir

HAMISH_MCTAVISH wrote: »

So the "Bad" bank, with all the old "reckless lending"..... Made a profit, despite higher arrears.

The "Good" bank, with the new "sensible lending"...... Made a loss, despite lower arrears.

F*ck me that's absolutely priceless......

What that you don't know why or how the NR was split into the 2 parts?

F*ck me that's absolutely priceless.

Doesn't require further comment.

ruggedtoast

HAMISH_MCTAVISH wrote: »

http://online.wsj.com/article/BT-CO-20100803-703882.html

So the "Bad" bank, with all the old "reckless lending"..... Made a profit, despite higher arrears.

The "Good" bank, with the new "sensible lending"...... Made a loss, despite lower arrears.

F*ck me that's absolutely priceless......

Words fail me Hamish. Even by your standards...

Generali

HAMISH_MCTAVISH wrote: »

http://online.wsj.com/article/BT-CO-20100803-703882.html

So the "Bad" bank, with all the old "reckless lending"..... Made a profit, despite higher arrears.

The "Good" bank, with the new "sensible lending"...... Made a loss, despite lower arrears.

F*ck me that's absolutely priceless......

There really isn't the detail there to say with certainty but the profit from NRAM (the Bad Bank) has come from the company saying last year, some assets (eg some car loans) are worth £x. Now they are saying, actually those assets are worth £y. £y-x has been booked straight down to the bottom line.

Now my very poor accounting skills make me think that:

1. This is perfectly legal and normal
2. Everso slightly risky: what happens if you say, "Doh! Actually those car loans were worth £x after all"? You book a loss in the next period of £x-y.

Here's your reason for NRPLC making a loss:

Chief Executive Officer Gary Hoffman said conditions are tough for banks that rely on retail deposits for their funding, because of low interest rates and amid a relatively subdued mortgage market

Funny they couldn't make a profit, ours are running almost 25% up on the same period last year despite increasing reserves to almost 11%.

You have 2 different organisations here, a bank which relies on borrowing and lending to make money and an asset management firm which depends on the underlying value of and cash flow from its assets to make money.

GDB2222

HAMISH_MCTAVISH wrote: »

http://online.wsj.com/article/BT-CO-20100803-703882.html

So the "Bad" bank, with all the old "reckless lending"..... Made a profit, despite higher arrears.

The "Good" bank, with the new "sensible lending"...... Made a loss, despite lower arrears.

F*ck me that's absolutely priceless......

Ees seemples (as the Meerkat fella on TV says). The accounts for the bad bank anticipated future defaults. That means the accounts recognised in advance all the defaults that were expected in the future. That's why they showed a loss of £20bn (or whatever the figure was a couple of years ago). It doesn't mean that £20bn of defaults actually occurred that year. Most of the £20bn loss was due to the creation of a provision for future defaults.

For the current year just ended the defaults were less severe than expected => a profit for the year as that part of the provision can be released as no longer needed.

That profit is even greater if the good (or rather less bad than expected) experience of the last year leads the accountants to reduce the provision for future defaults.

The same thing happened in the last quarter for BP, where they showed a £22bn loss for the oil disaster. They didn't actually pay out £22bn that quarter, and the rest is a provision in the accounts for future payments. If it looks like they can actually settle it all for £20bn instead, they can suddenly show a profit of £2bn on the oil disaster.

Like I said, simple ...

Sibley

It won't be long until banks go back to lending properly and giving self certs out.
This is where the money is. Once things get back to normal you watch prices go up.

julieq

Chaos_A.D. wrote: »

Has a post ever been more wrong ?! I'm struggling to think of one.

I don't know, the classic "50% down by Christmas" comes to mind, and pretty much everything Brit1234 has ever written. Or indeed any of the bears.

Prize for the most accurate was probably Mewbie who thought he was being ironic and funny by predicting a recovery, when that was what in the event actually happened, he got it pretty much spot on. Must dig that up again actually, it was great.

[EDIT] and here it is. Never tire of reading this one

http://forums.moneysavingexpert.com/showpost.html?p=16931313&postcount=26

HAMISH_MCTAVISH

That mewbie post was a classic.....