Northern Rock returns to profit

Northern Rock branch sign Northern Rock was nationalised in February 2008

Northern Rock Asset Management (NRAM), the so-called "bad bank" part of the old Northern Rock business, has reported a return to profit.

NRAM holds most of the rescued bank's old mortgages and unsecured loans.

Pre-tax profit came in at £349.7m for the first six months of the year, compared with a loss of £724.2m in the same period last year.

However, Northern Rock PLC, the "good bank" holding savers' deposits and new loans, made a pre-tax loss of £142.6m.

This is the first set of results since Northern Rock was split into two.

Since 1 January, savers' money and some existing mortgages have been held by Northern Rock PLC, which was spun off from the old bank, now renamed NRAM.

Government loan

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The swing from loss to profit over the past six months looks pretty impressive”

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NRAM said it was "continuing to make good progress".

"The company is continuing to show improving underlying profitability," said chief executive Gary Hoffman.

Part of the reason for the swing to profit was a big reduction in the money set aside to cover loans that may not be repaid. This is because, as economic conditions improve, the bank expects more loans to be paid back.

Cheaper costs of borrowing from wholesale markets also contributed to the profit.

The bank also said the percentage of mortgages in arrears rose slightly, but this was largely due to the overall number of mortgages shrinking.

NRAM also made a repayment of £300m to the government during the period, meaning it now owes £22.5bn to the Treasury.

'Growth opportunities'

'Good' Northern Rock

  • Northern Rock PLC holds savers' deposits, some older mortgages and lends to new borrowers
  • It holds £11.2bn worth of mortgages
  • It holds £17.6bn of retail deposits
  • Total income for the first half of 2010 was £28.5m
  • The aim is for the bank to be sold back to the private sector

'Bad' Northern Rock

  • Northern Rock Asset Management holds the risky assets of the old Northern Rock bank
  • It holds £50bn worth of mortgages
  • It owes the government £22.5bn
  • Total income for the first half of 2010 was £719.6m
  • It will be merged with the nationalised part of Bradford & Bingley

The "good bank", Northern Rock PLC, said that its financial performance in the first half of the year was "in line with expectations", and that it was "continuing to prepare the business for a return to the private sector when conditions are right to do so".

"The company is well positioned to capitalise on future growth opportunities and is now able to compete on the same terms as other banks and building societies," said Mr Hoffman.

The business lent almost £2bn to home buyers during the period, but lost almost the same amount in retail deposits, which fell to £17.6bn from £19.5bn at the start of the year.

The bank made a loss because of the interest it paid on savers' deposits and the fees it paid the government for guaranteeing deposits, Chris Skinner, a banking analyst at the Financial Services Club, told the BBC.

Until 24 May, the government guaranteed all deposits at Northern Rock. However, now only the first £50,000 of each customer's savings is guaranteed, in line with other UK banks.

The collapse of Northern Rock in the autumn of 2007 signalled the onset of the banking crisis.

The bank lent huge sums of money to residential home buyers, but ran into trouble when wholesale credit markets dried up.

The government stepped in with funds to try to stop a run on the bank, and Northern Rock was subsequently nationalised in February 2008.

The government hopes to get its money back through the sale of Northern Rock PLC and by being repaid outstanding loans due to NRAM, although analysts say this could take a number of years.

"It is a reasonable expectation to at least break even," said Gary Fawcett, investment manager at Brewin Dolphin.

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