The Rock hopeful of return to profit next year

The bank, a high-profile failure during the banking crisis, confirmed it had received indicative offers from interested parties after being put up for sale by Chancellor George Osborne in June.

The lender also said it expected to make a profit during the second half of next year, after underlying losses during the six months to the end of June dropped to £78.8m, compared with £140m losses a year earlier.

Northern Rock was nationalised in February 2008 after it collapsed amid the credit crisis, sparking the first run on a UK bank for 150 years.

While the lender expects to be loss-making for the full year, it said this will be a “significantly improved position” compared with last year.

Northern Rock’s chairman, Ron Sandler, said: “We are very satisfied with our progress. We’re clearly building momentum in the business.

“The company expects to begin trading profitably during the second half of 2012.”

The Government split Northern Rock in two in 2010, forming a mortgage and savings bank called Northern Rock plc and Northern Rock Asset Management (NRAM) to house its more toxic loans.

Dubbed the “good bank” because it took about £10bn of prime mortgages plus the savings book, Northern Rock plc has yet to return a profit.

However, NRAM, labelled the “bad bank”, last week reported a surge in pre-tax profits in the six months to June to £344.1m, from £181.8m last year. UK Asset Resolution, the state-owned umbrella company which runs NRAM and Bradford & Bingley, also said it had paid back another £1bn to the government.

NRAM, which is expected to remain in public hands for the foreseeable future, still owes the state £20.7bn.

Northern Rock plc is being sold by UKFI, which was set up to manage the Government’s holding in banks bailed out during the crisis, such as Lloyds and Royal Bank of Scotland.

Virgin Money, Sir Richard Branson’s banking business and JC Flowers, the US private equity investor, are understood to have tabled first-round bids for the bank last week.

However, despite a vocal campaign from the mutual sector to remutualise the former building society, Coventry and Yorkshire building societies both withdrew their interest on Friday.

Mr Sandler said: “We are pleased with the level of interest we have received, and will continue to explore the sale option over the coming months. In the meantime, it is business as usual.”

Reports claim the sale will deliver a loss of £400m for taxpayers as both Virgin and JC Flowers have indicated they could offer between £900m and £1bn, compared with the £1.4bn pumped into the bank by the Government.

“A key objective of the company remains a return to the private sector, at the right time and in the best interests of taxpayers,” said the bank.

Mr Sandler added: “I’m convinced the taxpayer will be well rewarded for the totality of its support.”

Northern Rock has struggled to achieve profitability amid a fiercely competitive mortgage market, with lenders offering cut-throat rates in an attempt to lure in the most attractive low-risk borrowers.

“Market conditions remain challenging for a small bank like Northern Rock, with subdued mortgage demand, competition for volume and pressure on margins in both mortgages and savings,” said the company.

With this is mind, the bank is being “managed for value”, it said. The Rock plans to grow income by boosting lending and improving its products, but insisted this will be done “within the company’s” risk appetite. During the first half it added new products including returning to the 90 per cent loan-to-value market, and plans more products.

It has also started freeing up some of its capital, or liquid assets, which had been held “almost exclusively” with the Bank of England. This has allowed it to place some of this capital in higher-yielding investments.

Its liquid assets stood at £7bn at the end of June, giving it a tier one capital ratio of 34.5 per cent.

Northern Rock said in part as a result of being able to lend out more of its capital in mortgages, its underlying interest margin hit 0.25 per cent in the first half, compared with a 0.54 per cent negative interest margin a year earlier.

Northern Rock saw total income increase 42 per cent in the period to £40.6m, including net interest income of £29.8m, compared with negative net interest of £48.4m.

Gross lending was £1.5bn in the period, versus £2bn the previous year.

The bank’s balance of retail deposits increased from £16.7bn at the end of 2010 to £17bn at the end of June, exceeding its £12.5bn mortgage book.

Following the split from NRAM, the Rock’s operating expenses were £106.8m, compared with £170.7m during the comparative period a year earlier.

In March the bank announced 680 job losses, which it said would cut costs further.

QUALITY CONTROL ON MORTGAGES

Unlike its pre-credit crunch ancestor, Northern Rock plc is a book of high-quality mortgages.

Prior to its February 2008 nationalisation, the Rock was infamous for products such as its Together mortgage, which lent up to 125 per cent of the value of a property.

Last year the “good bank” Northern Rock was split from the “bad bank” NRAM, which took on the toxic loans.

Now, the Rock’s £12.5bn book of home loans has an average loan-to-value of 61 per cent.

The number of mortgages three or more months in arrears stands at just 0.26 per cent, up from 0.17 per cent at the end of 2010.