Mixed fortunes as Northern Rock turns round 'bad bank'

THE two institutions formed out of nationalised lender Northern Rock yesterday unveiled starkly contrasting performances for the first half of the year, with the "bad bank" staging a surprise leap into profit.

• Northern Rock has come a long way since the dark days when people were queuing up to withdraw their money. Picture: Getty Images

In an ironic turn of events, the body set up to house the lender's risky assets - North Rock Asset Management - reported a net profit of 359 million while the so-called "good bank", Northern Rock plc, suffered losses of 142.6m. The two sets of results compared with a collective 466.7m profit for Northern Rock in its previous form in the second half of last year.

The differences were put down to falling bad debt charges at Northern Rock Asset Management, while the good bank suffered a sharp withdrawal of retail deposits after the government's guarantee, which protected savers, expired in May.

Northern Rock plc held a deposit balance of 17.6 billion on 30 June, down from 19.5bn prior to January's restructuring. However, the bank insisted the reduction was also due to the closure of its offshore savings operation in Guernsey.

Questions have been raised about the strength of the Northern Rock brand and customers' ability to disassociate it with the events of 2008, when it was brought into state ownership. But Seymour Pierce analyst Bruce Packard said the drop in deposits was not necessarily a cause for concern. "I don't think people question the viability of the bank any more, the drop in deposits just reflects the competition in the UK retail banking sector," he said.

The good bank said it also had to contend with high charges associated with the overhaul of the institution - plus costs associated with a redundancy programme. It announced earlier this year that it planned to axe 650 jobs.

While the City and taxpayers are keen to know when the good bank will be returned to private hands, Gary Hoffman, chief executive of Northern Rock, insisted that it would not happen until "conditions are right".

"We have got a business that is well capitalised and extremely liquid - a good platform for growth," Hoffman said.

Despite yesterday's loss at the good operation, hopes were raised that it is moving in the right direction with the announcement that it would soon dip its toe back into the water with a range of products - most likely to be credit cards and personal loans.

The bank said it was confident that it would soon be in a position to offer a variety of banking services in a "safe way".

"In due course, we could think about expanding the product range again," Hoffman said. He described the results as a "good news story" given the bad bank's return to profit.Northern Rock Asset Management reported that the number of mortgages in arrears improved slightly in the first six months of the year and impairment charges, at 277.6m, were less than half the figure reported a year earlier. It repaid 300m to the Treasury but still owes an eye-watering 22.5bn.

The bad bank, which is shortly to be merged with the nationalised arm of Bradford & Bingley, has 47.2bn of residential mortgages on its books plus 3.5bn of unsecured loans and 300m of secured commercial loans.

However, it warned that bad loan charges are likely to remain "high" this year amid high unemployment levels and volatile house prices.

The good bank also warned of the challenges posed by low interest rates and a subdued mortgage market.