Northern Rock 2008 Half Year results

Northern Rock 2008 Half Year results - from www.northernrock.com

Northern Rock plc (the “Company”) today issued its Half Year Results for the six months ended 30 June 2008.

Highlights

Bank of England loan

* Net borrowings provided by the Bank of England have reduced by £9.4 billion to £17.5 billion from £26.9 billion at the end of December 2007, representing a 35% reduction (net of balances held with the Bank of England for liquidity purposes of £3.5bn)
* Loan repayment is well ahead of the business plan
* Bank of England loan to be transferred to HM Treasury during second half of 2008

Retail funding

* Net inflow of £3.7 billion in retail deposits in the first half of 2008
* Retail balances of £14.2 billion at 30 June 2008 (compared with £10.5 billion at 31 December 2007), although these remain substantially below the level at 30 June 2007

Redemptions

* Cash inflows from redemptions of loans are ahead of the Plan
* Total redemptions of £16.2 billion in the first six months of 2008 (including £2.2 billion asset disposal)
* The Plan is not without challenges, given external market factors, but the experience so far is encouraging

Balance sheet reduction

* Total assets have reduced to £99.0 billion at 30 June 2008, compared with £109.3 billion at 31 December 2007
* Loans and advances to customers have reduced by £14.5 billion in the first half of the year to £84.4 billion

Earnings

* Under the Plan, the Group is expected to be significantly loss-making in 2008
* Loss before tax for six months to 30 June 2008 of £585.4 million – including various exceptional charges
* Underlying loss before tax of £176.3 million reflecting loan loss provisions, lower interest margins and reduced volumes of new business

Arrears

* Residential arrears over three months have more than doubled since the start of the year to 1.18% (0.45% at the end of 2007)
* CML average of 1.21% at 31 March 2008

Capital

* The deterioration in market conditions, particularly the downturn in the housing market, has led to the need to strengthen the capital position of the Company to meet regulatory capital requirements
* HM Treasury has committed to reinforce the Company’s capital base through conversion into Ordinary shares of both its holding of £400 million of Preference shares and swapping up to £3 billion of the outstanding debt into equity (following transfer of the Bank of England loan to HM Treasury)
* This capital restructuring will not involve any cash transfer and will be finalised following a review of the Plan and will be implemented subsequent to State aid approval
* With this balance sheet strengthening, Northern Rock is well placed to press ahead with delivery of the Plan

Organisation

* Strengthening of leadership team with appointments of Gary Hoffman as Chief Executive Officer, Rick Hunkin as Chief Risk Officer, Richard Smelt as Human Resources Director and Andy Tate as Director of Debt Management
* 90 day collective consultation period with staff concluded and individual consultations are underway – downsizing likely to be achieved with around 800 compulsory redundancies
* Focus on strengthening of the risk and control environment and upgrade of debt management capabilities
* Steps have been taken to strengthen the Board with the appointment of Kent Atkinson and Richard Coates as Non-Executive Directors

Northern Rock Foundation

* Donation to The Northern Rock Foundation of £7.5 million in the first half of 2008

Ron Sandler, Executive Chairman said:

“Significant progress has been made on all of the key priorities of the business plan since it was approved in March.

“On a net basis the Government debt has reduced by £9.4 billion since the start of the year, which is considerably ahead of Plan. Operational restructuring is well advanced and both the Board and management team have been bolstered by key new appointments. We have also substantially overhauled the risk procedures in the Company.

"I am delighted with the appointment of Gary Hoffman who will take over as Chief Executive from 1 October. His appointment is complemented by further outstanding new recruits into key executive positions in the Company: Rick Hunkin as Chief Risk Officer, Richard Smelt as HR Director and Andy Tate as Director of Debt Management. These appointments serve to strengthen considerably the senior management team of Northern Rock.

"However, the external environment has deteriorated and the consequences of this for Northern Rock are increased credit losses. Following a review in July of the Company’s ongoing regulatory capital requirements, HM Treasury has committed to a significant strengthening of the Company’s capital base. This will not involve any cash transfer to Northern Rock and will be provided by HM Treasury through conversion into Ordinary shares of both its holding of £400 million of Preference shares as well as up to £3 billion of the outstanding debt following transfer of the Bank of England loan to HM Treasury. This capital restructuring will be finalised following a review of the Plan and will be implemented subsequent to State aid approval.

"Finally, I wish to thank all members of staff and applaud their maintenance of the highest levels of customer service and professionalism in what has undoubtedly been a most difficult time for Northern Rock’s employees."

Note

* The full version of the 2008 Half Year Results for Northern Rock plc is available on the Company’s website at www.northernrock.co.uk