Northern Rock makes £1.4bn loss
Northern Rock was nationalised in February last year
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Nationalised bank Northern Rock has confirmed that it made a loss of £1.4bn in 2008 following hefty write-offs on its mortgage loans.
Last year, the bank repossessed about 4,000 of its borrowers’ homes, amounting to 10% of all repossessions.
The bank said it was ahead of target in repaying the £26.9bn government loan, having cut the amount owed to £8.9bn.
It also confirmed its plans to increase mortgage lending, saying it would lend an extra £14bn in the next two years.
“Northern Rock has made good progress against the business plan objectives laid out in March 2008,” said chief executive Gary Hoffman.
Its stock of repossessed homes also rose to 3,620 at the end of 2008, up 63% from 2,215 a year earlier.
Arrears
The huge annual loss was driven by write-offs on its mortgage loans, especially its now notorious Together mortgages, which granted borrowers loans of up to 125% of the value of their homes.
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  I think that the politicians should hold their heads in shame for how they’ve treated the small person  Dennis Grainger, Northern Rock Shareholder Action Group
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The bank’s arrears have shot up six-fold in the past year, with 2.92% of all its mortgage borrowers – amounting to 17,264 households – more than three months in arrears.
But those with the Together mortgages, which the Northern Rock stopped offering at the start of last year, are in an even worse position, with 4.53% of accounts more than three months behind.
Both figures are far higher than the current industry arrears average of just 1.88%.
As a result, the bank has had to write off £894m from the value of its mortgage book.
The rest of the loss was made up of exceptional expenses, such as redundancy payments, associated with the government rescue of the bank, as well as losses on its own investments.
Worse to come?
With the bank shrinking its business rapidly in the past year, the number of mortgage borrowers dropped from 777,000 to 591,000.
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It is likely that repossessions will continue to be a feature of the market over the coming year Gary Hoffman, Northern Rock chief executive
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But those with Together deals now make up a much larger proportion, up from 24% to 29%.
They have found it much harder to move to other lenders and many will now be in negative equity as a result of sharply falling house prices.
This has also meant that the average loan-to-value of its remaining borrowers has shot up from 60% a year ago to 73% now.
This exposes the bank to further potential losses if borrowers lose their jobs in the recession and even more fall behind with their repayments.
“Unfortunately, given the external economic backdrop, it is likely that repossessions will continue to be a feature of the market over the coming year,” said Mr Hoffman.
‘Responsible lending’
The move to increase mortgage lending – which was announced last month – marks a big U-turn in Northern Rock’s lending policy.
Since being nationalised in February 2008, the bank had sought to reduce its mortgage book – a policy which it says has helped it make good headway in repaying the government loan.
New mortgage lending at the bank was only £2.9bn in 2008, compared with £29.5bn in 2007.
However, to help the government increase the flow of funds to potential home buyers, the bank will now increase its lending, including to existing borrowers whom it had been encouraging to leave.
“We can now return to what we do well – mortgage lending,” said Mr Hoffman.
Executive pay
Mr Hoffman was appointed as the bank’s new chief executive last October on an annual salary of £700,000.
The bank’s annual report reveals that in addition he is being paid a further 40% of his pay – £280,000 – in contributions to his private pension funds.
The continued clear-out of former directors during 2008 proved very expensive for the bank.
In line with their contracts, which typically gave them a year’s pay and pension payments if made redundant, four directors were paid £1,988,743 between them.
The highest payout was to former chief executive Adam Applegarth, who received £840,304.
Soured from The BBC
Lloyds defends staff bonus plan
Lloyds insists it is right to offer financial
rewards to staff who hit targets
Lloyds insists it is right to offer financial rewards to staff who hit targets Lloyds Banking Group has defended plans to reward retail and commercial staff with bonuses, worth a reported £120m.
Its subsidiary HBOS – bought with government backing last year – is to record a loss of nearly £11bn, raising concerns it may need more state help.
But Lloyds, already 43% taxpayer-owned, said its employees deserved “financial recognition” for hitting targets.
Shadow business secretary Ken Clarke has accused ministers of overseeing a “shotgun marriage” of the two banks.
In most cases staff bonuses would amount to £1,000 or less for employees earning about £17,000 per year, the bank said. The report comes amid speculation that the government – which has already poured £17bn into the group – may be forced to take a majority stake in Lloyds, or even nationalise it.
“We have stretching performance targets and if they are met we believe it is right that colleagues receive some financial recognition” Lloyds Banking Group statement
Mr Clarke accused Prime Minister Gordon Brown of forcing through the tie-up between Lloyds and HBOS, which resulted in “disaster”.
“They should never have been allowed to merge. Lloyds TSB was a boring bank, it was a steady bank, it hadn’t done silly things,” he said.
Former chancellor Lord Lamont also criticised the government for “infecting” a good bank, calling the merger an “absolute scandal”.
However, Labour MP and former Treasury minister Geoffrey Robinson said: “The reality is – and everybody knows this – that we’ve got to get the banks operating again.
“We’ve re-capitalised them and now it’s up to them. I believe that they will do this because if not we shall have to take further measures.”
Chancellor Alistair Darling has insisted the government was forced to act quickly to save the entire banking system from collapse.
While he has not ruled out further taxpayer support for Lloyds, he has stressed that ministers feel banks are “best run in the commercial sector and privately owned”.
Liberal Democrat treasury spokesman Vince Cable has said it looks “increasingly as if Lloyds HBOS will now go into majority public ownership, followed inevitably by nationalisation”.
‘Financial recognition’
Lloyds’ share price plummeted on Friday, after chief executive Eric Daniels revealed the extent of HBOS’s expected losses.
However, the Sunday Telegraph claims Lloyds is still planning to hand over £120m in bonuses to staff.
It said the bank was in talks over the bonuses with UK Financial Investments (UKFI), the Government-owned body which oversees the taxpayer’s stake.
A UKFI spokesman refused to comment on the report.
A Lloyds spokesman said: “We are a retail and commercial bank where most colleagues earn approximately £17,000 a year.
“We have stretching performance targets and if they are met we believe it is right that colleagues receive some financial recognition.
“In most cases this means an annual bonus of £1,000 or less.”
Last week, Prime Minister Gordon Brown’s spokesman said he was “very angry” about proposed bank bonuses and wanted bankers to consider waiving their right to them.
He was speaking after reports suggested taxpayer-saved RBS group was to pay out £1bn in bonuses.
When the Government bought shares in Lloyds/HBOS and RBS last October it secured agreements that there would be no cash bonuses for board members this year.
However, no ban was imposed on payouts for staff below this level.
Unlike the plans being considered by RBS, Lloyds is not believed to be planning payouts for significant numbers of highly-paid City traders.
It is understood any bonus package would be smaller than last year’s reported £150m total.
sourced from The BBC
Treasury takes 65% Lloyds stake
The taxpayer is taking a controlling share of 65% in Lloyds Banking Group, up from the previous 43%.
The government has said new lending from Lloyds will jump to £28bn in the next two years, dwarfing similar figures from Northern Rock and RBS.
The taxpayer will also insure toxic loans worth £260bn ($367bn).
The group had to turn to the government for help following its takeover of HBOS, which recently reported an annual loss of nearly £11bn ($15.5bn).
BBC business correspondent Joe Lynam said: “[The government] is absolutely imposing its writ on the banks that it now controls.
‘No more dice’
“It is saying we will impose political decision-making on a bank, rather than just commercial or financial decision-making.
“Basically they’re going to install their people on the board of Lloyds banking group and say, right, we’re going to see £28bn is set aside for lending, ” he said.
“This is the last throw of the dice before full nationalisation of Lloyds and RBS; in economic terms the government will control approaching 80%, in real voting terms, 65%, which means they can impose their will on the bank and they are already starting to do so.”
The Treasury Minister, Stephen Timms, spelt out what the deal involved.
He told the BBC the deal committed the banking group to £14bn in lending this year, of which £11bn would go to companies and £3bn for mortgages.
There would then be a similar commitment next year, he said.
Mr Timms said: “It’s a very important announcement. It provides new certainty for Lloyds enabling it to commit new lending into the economy.
“Lloyds will bear the initial loss on the assets being insured up to £25bn. It will pay a commercial fee of £16bn for participating in the scheme.”
However Mr Timms admitted the government did not know how much of the total losses would be borne by the tax payer.
No way out
Asked about speculation that the taxpayer could lose up to £100bn on the deal, Mr Timms replied: “Precedents would suggest that the loss would be a great deal less than that but as I said we just don’t know.”
The Liberal Democrat treasury spokesman, Vince Cable, said the government now had to make sure Lloyds Banking Group made good on its commitment.
Mr Cable told the BBC: “The government can’t now just sit back as it has with the other banks that it’s taken over and just watch them.
“It has to make sure that they are run in the national interest – to make sure for example that they do make lending available to sound borrowers, particularly to companies which are not able to keep going because they can’t get working capital.”
Mr Timms said the deal meant the bank now had a “legally binding commitment” to fulfil its obligations on public lending.
[They think] it would be simpler and easier for the government to nationalise the banks, and that in the long-term it would save the taxpayer a lot of money BBC political correspondent
Hugh Pym, BBC chief economics correspondent said the deal, which was agreed on Friday night, would be “very awkward” for the Lloyds chief executive Eric Daniels and chairman Victor Blank.
They have come increasingly under fire from shareholders for their decision to buy rival HBOS.
It was the January takeover of HBOS – a move that was supported by the government – that has caused the problems at Lloyds.
Lloyds was forced to announced last week that HBOS made a pre-tax loss of £10.8bn in 2008, which it has had to absorb.
By contrast, Lloyds, or Lloyds TSB as it was then known, made a profit of £807m last year, albeit an 80% fall on 2007.
The £260bn insurance deal is part of the Treasury’s taxpayer-backed Asset Protection Scheme to insure banks’ riskiest assets against further losses.
Restore confidence
The scheme was put forward by Chancellor Alistair Darling in a bid to restore confidence in the banking sector.
Royal Bank of Scotland was the first bank to sign up, announcing last month that it would ask the government to insure £325bn worth of so-called toxic assets, which are difficult to value and currently cannot be sold.
BBC political correspondent Carole Walker said there were now many people in Westminster who believed that full nationalisation of the banks would restore confidence in the sector more quickly than the Asset Protection Scheme.
“[They think] it would be simpler and easier for the government to nationalise the banks, and that in the long-term it would save the taxpayer a lot of money,” she said.
Some have pointed out that the government has put more money into RBS than its total share value, she added. sourced from The BBC
It sounds like you’re creating problems yourself by trying to solve this issue instead of looking at why their is a problem in the first place
There is obviously a lot to know about this. I think you made some good points in Features also.