No quick buck from Northern Rock

July 1, 2009

REUTERS– Margaret Doyle is a Reuters columnist. The opinions expressed are her own. –

The crisis at Northern Rock marked the beginning of Britain’s slide into large-scale state ownership of the banking system. Returning the mortgage lender to the private sector would be a sign that normal service is being resumed. But rumours that the British government is poised to sell Northern Rock, are premature. Suggestions the government could do so at a profit are even more far-fetched.

Prime Minister Gordon Brown is apparently keen to offload the Rock, ideally “at a substantial profit” before the general election, which must be held before next summer. According to the Times, the prime minister “wants desperately to avoid a Conservative government taking the credit”.

It would be lovely to think the government’s main worry is who might benefit from the “profits” from the banking bail-out, rather than the substantial losses it has underwritten at the state-owned banks. There are plenty of thorny matters to be settled before the Rock is sold.

The government itself has two conflicting objectives. As a shareholder, it wishes to sell its stakes as soon as it can, and to be able to dress up the sale as a profitable exit. However, as the guardian of the economy, it wants to moderate the rate at which the banks shrink their balance sheets, because that denies credit to viable businesses and would-be homeowners. Indeed, the government recently instructed the Rock to stop shrinking its balance sheet and to start lending again.

This is why the European Commission, which has to approve the bailout under its state aid rules, has demanded more information from the Rock. Given the tough stance Neelie Kroes took with Germany’s Commerzbank <CBKG.DE>, the EU competition commissioner is also likely to look closely at a Rock that is growing again thanks to its government backing.

Even if the Rock can negotiate this hurdle, the idea that the government could turn a quick profit on the bank is fantasy. The current plan is to split the Rock into two companies: a BankCo, which would hold the branches, deposits and new loans and AssetCo, which would hold the bulk of the legacy mortgage book. It is hard to see rivals falling over themselves to buy the Rock’s low-quality mortgage book. While there may be interest in the Rock’s branches and deposits, the price is likely to be minimal.

Santander paid just 150 million pounds for Bradford & Bingley’s 197 branches and 21 billion pounds of deposits. (The government took on the bank’s 50 billion pound loan book). The Rock has just 75 branches and though it has a similar deposit base, some of these savers would be likely to rethink their allegiance if the bank was returned to the private sector.

Any proceeds would have to be set against the money the Rock owes the government. This stood at 9.8 billion pounds as of March, and the government is expected to inject at least another 3 billion pounds to boost the Rock’s capital ratios, which are now below the minimum required by regulators. Gordon Brown can rest assured. No one is going to be turning a quick buck on the Rock any time soon.

(Edited by David Evans)

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