Page last updated at 18:09 GMT, Tuesday, 4 August 2009 19:09 UK

Northern Rock makes hefty losses

A woman walks past a Northern Rock branch
Northern Rock was nationalised in February 2008

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 first bank to seek emergency aid, it was nationalised in February 2008 and owes the government £10.9bn.

It had to be bailed out by taxpayers in 2007, when its model of borrowing short-term funds from wholesale markets to lend to mortgage borrowers was hit by the credit crunch.

Taxpayers are currently nursing a pretty hefty loss on their ownership of the Rock
Robert Peston, BBC business editor

BBC business editor Robert Peston said that there were tentative signs that Northern Rock may be over the worst.

But he added that its mortgages were continuing to go bad at an alarming rate and at a faster rate than most of its rivals.

And he said the chances of the government being able to sell the Rock back to the private sector at a profit, ahead of next year's General Election, were "very slim".

The bank said the total value of all of its loans had fallen by £602.2m in the first six months of the year.

Bank profits

Better deals

Martin Weale, director of the National Institute of Economic and Social Research said there was a danger that things could get worse for Northern Rock's mortgage book.

Kevin Peachey, personal finance reporter, BBC News

Deep in the figures is news of how more and more customers of the nationalised bank are falling into negative equity, meaning they owe more money than their property is worth.

This figure has risen from 33% of mortgage customers at the end of 2008 to 39% now.

For those not intending to move, this is not a great problem. Others who might like to move home will find they must stay as Rock customers, unable to remortgage elsewhere.

But it also shows the effect of falling house prices.

Earlier in the year, the National Audit Office calculated that half of the Rock's mortgage loans would be in negative equity if house prices fell by 10%. So far, both have fallen short of that level, but if interest rates start to rise or job losses increase, repaying these loans could become more of a problem.

"House prices may well go on falling this year, and with falling house prices and rising unemployment you will have more and more people who have taken out 100% or 125% mortgages saying 'sorry, we can't keep up the repayments'," he said.

The proportion of Northern Rock customers whose properties are worth less than the amount they owe on their mortgages has risen to 39%, from 33% at the end of last year.

This is partly because the bank spent much of last year trying to encourage borrowers to move to other banks. The borrowers most likely to have moved would have been those who owed a smaller proportion of the value of their property, as this would have enabled them to get a better deal elsewhere.

Additional funding

Northern Rock is in the process of splitting itself into two companies, one of which will hold savers' money and be responsible for new lending, while the other will hold many of the existing loans and be responsible for paying back loans to the government.

Once the restructuring has been completed, the Treasury will provide additional funding if the European Commission agrees to allow the plan.

Chief executive Gary Hoffman told reporters he was making "good progress" in discussions with the Commission and expected to receive clearance in the autumn.

Earlier in the year, Northern Rock announced a change to its strategy, which has meant that it has reduced the priority of repaying its loans to the government and instead has tried to increase the amount of money it is lending.

But it has warned it is unlikely to meet its target of £5bn of new lending for this year and is more likely to hit a figure of £4bn.

'No coherency'

Northern Rock mortgage arrears

Mr Hoffman said that the target would be missed, because it was constrained by not yet having received state aid clearance from Europe.

But he added that there would have been demand for the extra money if it had been available and said applications for Northern Rock mortgages had doubled in the second quarter of the year, compared with the first three months of the year.

In addition to reporting statutory losses, Northern Rock also released an underlying figure, which it said gave a better reflection of the state of the business.

The underlying loss fell to £269.6m for the six months to 30 June, compared with £443.3m for the same period of 2008.

The underlying figure excludes a £156.4m rebate that it will receive if it gets state aid clearance from the European Commission.

It also excludes what it calls a volatility charge of £298.2m on the way it accounts for the value of certain assets.

Labour MP Jim Cousins, a member of the Treasury Committee, said that ministers did not have a "coherent model" for the lender.

"There have always been two policies. One is that it was embarrassing to have it nationalised and get rid of it as soon as possible and get the taxpayers' money back as soon as possible," he said.

"The other is to consider it to be an important business... and to nurse that business back into strength in the longer run.

"But I don't think they have ever quite been worked out."

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