Northern Rock: good brand, shame about the losses
Northern Rock has proved the law of unintended consequences. Having split this year into a “good bank” and “bad bank”, it is the bad half that is making profits while the good half has reported a loss. Maybe the government will have to sell the “bad bank” and be stuck with the good.
Northern Rock plc is the good bank but its first independent results show a £143m loss for the first half of 2010. Northern Rock Asset Management, into which all the bad loans have been dumped, meanwhile made a £350m profit. And that profit at NRAM is before adding in a £780m gain from buying in £1bn of its own debt cheaply.
NR plc, as I’ll call the good bank, offloaded £50bn of rotten mortgages to the bad bank but the loans have not turned out to be as bad as thought. Impairments – as bad debts are called in polite banking parlours – have fallen from £1bn last year to £278m in the latest period and repossessions are down.
NR plc has only 0.7 per cent of its borrowers more than three months in arrears – but so it should, having got rid of its worst customers. Its problem is that borrowers seem more averse to using the tainted bank than savers. So while it has £17.6bn of the public’s money in its accounts, the good bank has a loan book of just £11bn.
That has left NR plc as a cash-rich vehicle with around £6bn deposited at the Bank of England and a ridiculous tier-1 capital ratio of 75 per cent when before the crunch, 7.5 per cent was regarded as good. But it is paying more in interest to the public for those funds than it receives from mortgage holders in monthly payments. Hence the whacking loss.
Northern Rock may be a better case study in marketing than finance. This was the first and most public victim of the credit crunch, with customers queuing to withdraw funds. If it is a miracle that it is still trading it is more so that it is doing so under its own name. It is the bad bank that changed (or extended) its name – not the good bank.
NR plc, trading as Northern Rock, now relies wholly on the public for its funds – yet rather than shun the tarnished brand, the public is still depositing more than the bank needs. You wonder how well Ratners would be doing if it had not changed its name at the first whiff of trouble and whether BP should abandon thoughts of reverting to the Amoco name in the US.
But it will be the strength of that brand, not Northern Rock plc’s losses, that allows the government to sell it at some point to recover the taxpayers’ investment.
