Page last updated at 11:58 GMT, Tuesday, 3 March 2009

Northern Rock makes 1.4bn loss

Northern Rock sign
Northern Rock was nationalised in February last year

Nationalised bank Northern Rock has confirmed that it made a loss of 1.4bn in 2008 following hefty write-offs on its mortgage loans.

Last year, the bank repossessed about 4,000 of its borrowers' homes, amounting to 10% of all repossessions.

The bank said it was ahead of target in repaying the 26.9bn government loan, having cut the amount owed to 8.9bn.

It also confirmed its plans to increase mortgage lending, saying it would lend an extra 14bn in the next two years.

"Northern Rock has made good progress against the business plan objectives laid out in March 2008," said chief executive Gary Hoffman.

Its stock of repossessed homes also rose to 3,620 at the end of 2008, up 63% from 2,215 a year earlier.


The huge annual loss was driven by write-offs on its mortgage loans, especially its now notorious Together mortgages, which granted borrowers loans of up to 125% of the value of their homes.

Northern Rock shareholder
I think that the politicians should hold their heads in shame for how they've treated the small person
Dennis Grainger, Northern Rock Shareholder Action Group

The bank's arrears have shot up six-fold in the past year, with 2.92% of all its mortgage borrowers - amounting to 17,264 households - more than three months in arrears.

But those with the Together mortgages, which the Northern Rock stopped offering at the start of last year, are in an even worse position, with 4.53% of accounts more than three months behind.

Both figures are far higher than the current industry arrears average of just 1.88%.

As a result, the bank has had to write off 894m from the value of its mortgage book.

The rest of the loss was made up of exceptional expenses, such as redundancy payments, associated with the government rescue of the bank, as well as losses on its own investments.

Worse to come?

With the bank shrinking its business rapidly in the past year, the number of mortgage borrowers dropped from 777,000 to 591,000.

It is likely that repossessions will continue to be a feature of the market over the coming year
Gary Hoffman, Northern Rock chief executive

But those with Together deals now make up a much larger proportion, up from 24% to 29%.

They have found it much harder to move to other lenders and many will now be in negative equity as a result of sharply falling house prices.

This has also meant that the average loan-to-value of its remaining borrowers has shot up from 60% a year ago to 73% now.

This exposes the bank to further potential losses if borrowers lose their jobs in the recession and even more fall behind with their repayments.

"Unfortunately, given the external economic backdrop, it is likely that repossessions will continue to be a feature of the market over the coming year," said Mr Hoffman.

'Responsible lending'

The move to increase mortgage lending - which was announced last month - marks a big U-turn in Northern Rock's lending policy.

Since being nationalised in February 2008, the bank had sought to reduce its mortgage book - a policy which it says has helped it make good headway in repaying the government loan.

New mortgage lending at the bank was only 2.9bn in 2008, compared with 29.5bn in 2007.

However, to help the government increase the flow of funds to potential home buyers, the bank will now increase its lending, including to existing borrowers whom it had been encouraging to leave.

"We can now return to what we do well - mortgage lending," said Mr Hoffman.

Executive pay

Mr Hoffman was appointed as the bank's new chief executive last October on an annual salary of 700,000.

The bank's annual report reveals that in addition he is being paid a further 40% of his pay - 280,000 - in contributions to his private pension funds.

The continued clear-out of former directors during 2008 proved very expensive for the bank.

In line with their contracts, which typically gave them a year's pay and pension payments if made redundant, four directors were paid 1,988,743 between them.

The highest payout was to former chief executive Adam Applegarth, who received 840,304.

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Northern Echo Rock boss: 'We are growing, not shrinking' - 14 hrs ago
Channel 4 News 15 things to know about 'your' bank - 38 hrs ago
Big News Network Northern Rock starts paying off its loan - 44 hrs ago
Financial Times N Rock's bad loan impairments treble - 47 hrs ago

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