Northern Rock withholds dividend

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Northern Rock will not pay the interim dividend it announced in July before August's market turmoil, BBC business editor Robert Peston has learned.

The firm has bowed to pressure from the Financial Services Authority (FSA) and the Treasury not to make the payment - worth £59m - Mr Peston said.

An official announcement is expected later on Tuesday or on Wednesday.

It is another blow for shareholders, who have now joined forces in an action group to promote their interests.

Action group

The group has been set up by the UK Shareholders Association (UKSA), which says "many shareholders were persuaded to invest in shares in the company in recent months based on the apparent strength of the business when in reality the company was in great financial difficulty".

The group is opposed to a quick disposal of Northern Rock that might not reflect the true value of its assets.

Northern Rock's decision on the dividend may only be temporary because it is likely that the bank will defer the dividend payment, not cancel it altogether.

Treasury 'deeply unhappy'

Northern Rock had been due to pay shareholders 14.2p a share on 26 October - a promise made before the bank was thrown into crisis.

However, two weeks ago it applied to the Bank of England for emergency funding.

And following a run on the bank, the government pledged to guarantee all Northern Rock deposits held in accounts as of midnight, 19 September.

"The Treasury was deeply unhappy about Northern Rock paying a dividend at a time when the government has been forced to underwrite all deposits and loans to Northern Rock," Mr Peston said.

The bank is trying to win back customer confidence

"In the event, I would expect it to defer the payment of the dividend - rather than cancel it altogether - pending a resumption of more normal conditions in money markets, when the bank should be able to repay the emergency loans it has received from the Bank of England."

Shares in the bank - which have lost nearly 75% of their value since it was forced to seek emergency funding - slipped a further 5.2% on Tuesday.

Northern Rock got itself into financial difficulty because, unlike most UK banks, it raises the majority of its funds via the global wholesale credit market.

This market has dried up over the past month as a result of the crisis in the US sub-prime mortgage market, which has made banks and other investors a lot less willing to lend to each other.