Taxpayers reassured over Rock loss

8:19pm Tuesday 5th August 2008

The Government has taken further steps to shore up Northern Rock's balance sheet after the lender unveiled half-year losses of almost £600 million.

Treasury officials are providing up to £3 billion of extra share capital for the recently-nationalised bank to help it cope with increased housing market uncertainty.

The announcement came as Northern Rock reported a £585.4 million loss for the first half of this year amid soaring levels of customers defaulting on mortgage payments.

The capital will be made available through a debt-for-equity swap which will effectively see taxpayers become shareholders in the lender, on top of providing billions of pounds in loans to keep the business going.

Executive chairman Ron Sandler defended the move and said taxpayers would not be any more exposed to the recently-nationalised bank as a result.

In tandem with the economic and housing market slowdown, Northern Rock saw the numbers of homes in its possession soar by two-thirds to 3,710 during the first half of this year, while its bad debt charge more than trebled to £191.6 million.

Mr Sandler warned the external environment had "deteriorated" with the resulting increased credit losses being suffered by its £84 billion loan book. The proportion of Northern Rock's mortgage accounts more than three months in arrears at June 30 more than doubled during the six months to 1.18%.

Particularly badly hit have been customers who took out the lender's "Together" mortgages, which allowed people to borrow up to 125% of the home value before being stopped in February. Arrears levels for the products more than doubled during the first half to 2.14%. And in a further sign of customers finding it harder to make ends meet, the lender said it was increasing staff numbers in debt management from 185 to around 500.

But the lender managed to pay down £9.4 billion of Bank of England loans during the six months to leave £17.5 billion outstanding. Up to £3 billion of the outstanding debt will be swapped into shares under the capital scheme.

Mr Sandler defended the £3 billion sum as a "prudent" figure, and countered accusations that it meant taxpayers' backing was open to more risk. He said: "I think that the taxpayer already clearly has an exposure to this bank. We are repaying down the loan and at the end of the day the Government still anticipates that any of the amount transferred into equity will be recouped through the ultimate value of the bank."

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