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Rock unveils profit drive

NATIONALISED bank Northern Rock is reportedly undertaking a “liability management exercise” in a bid to generate £700m in profit and reduce the cost to the taxpayer of running down the lender’s so-called ‘bad-bank’.

According to reports in the Telegraph, some £1.6bn of state money has been set aside to recapitalise the business, now called Northern Rock Asset Management (NRAM).

The funds will be moved into the bank as losses eat into reserves. But, by raising an extra £700m, NRAM will increase the buffer protecting the taxpayer to £1.2bn.

The taxpayer was offered further encouragement by news that NRAM has been profitable in the first four months of the year, following a £140m loss in the second half of 2009. NRAM has been helped by the low interest rate environment, which has kept bad debts to a minimum and contributed to a 10pc rise in house prices. Profits will be used to build up reserves.

NRAM is offering to buy holders of $1.55bn of dollar bonds and £200m of sterling bonds out of their investments in cash at a quarter of the original value. At current market prices, the deal is attractive because the selected debt instruments are trading at less than 20p in the pound and are not paying any interest – a condition of state aid.

NRAM will fund the potential £300m cost out of existing funds and will not require an extension of the Government’s £22.8bn loan. It is paying just 0.75pc interest on the loan, generating just £171m a year for the taxpayer.

The announcement came as Northern Rock’s “good bank” – the £10bn of performing mortgages, £20bn of deposits and 76 branches spun out of the business – revealed that its Guernsey operation is to be shut down. No jobs will be lost, as management of the accounts was outsourced to rivals, but 6,000 customers will have to find a new home for their near-£1bn in deposits.

This was posted in Bdaily's Members' News section by Ruth Mitchell .