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12.05.2008NORTHERN ROCK TRADING STATEMENT
“SOLID PROGRESS AGAINST BUSINESS PLAN””
“I am pleased to report that solid progress has been made against our business plan. The Bank of England loan facilities are reducing and the balance sheet is contracting as a result of planned mortgage redemptions. While arrears have increased, the credit quality of the loan book remains satisfactory and at a level assumed in the plan. Clearly the outlook for the UK mortgage market is uncertain but progress against our business plan to date is encouraging. We remain firmly focused on our business priorities of repaying the Government debt, releasing the guarantee arrangements and, in due course, returning Northern Rock to private ownership.”
Ron Sandler, Executive Chairman
Progress against Business Plan
The Northern Rock (the “Company”) business plan (the “Plan”), which was approved by HM Treasury on 31 March 2008 subject to State aid approval, includes as a priority the repayment of the Bank of England debt, through the contraction of the Company’s balance sheet and withdrawal from non-core lending activities.
In order to reduce the size of its balance sheet to a sustainable level, the Company must achieve a significantly higher level of mortgage redemptions than has historically been the case. To this end, activities aimed at assisting borrowers to transfer their mortgages to other lenders at the end of their fixed or discounted period are progressively being implemented. Utilising its historical relationships with mortgage intermediaries, the Company has established a panel to assist maturing borrowers in searching the market for a new mortgage product to meet their needs. The Company intends to develop this panel further in the months ahead. The mortgage redemption programme is progressing well, with redemption levels in the first four months of 2008 in line with the Plan. More difficult economic and market conditions, combined with a shrinking mortgage book have contributed to increased arrears levels; mortgages 3 months and over in arrears were 0.95% at the end of April, (31 December 2007: 0.57%). However, the overall credit quality of the loan book remains at a level assumed in the Plan.
As previously reported, the size of the Bank of England loan facilities stood at £24.1 billion at 31 March 2008, having been reduced from £26.9 billion at the end of 2007. The loan facilities are continuing to be repaid in line with expectations.
Northern Rock presently offers a limited range of new mortgage products. Gross residential mortgage lending in the first quarter was a modest £1.2 billion. Looking ahead, the Company intends to gradually increase new mortgage origination in line with the Plan while remaining significantly below historical levels. The Company will continue to focus on prime UK residential mortgages, with loans originated through intermediary and direct channels. The standalone and Together unsecured portfolios have continued to reduce following the Company’s decision to withdraw these products.
In line with the Plan to achieve a more balanced mix between retail and non-retail sources of funding, Northern Rock has begun to rebuild its retail savings deposit base and is on track to meet its targets under the Plan. Retail savings balances have begun to recover and ended the quarter at £12.8 billion. The Company has complied at all times with the commitments set out in its Competitive Framework, subsequent to its publication at the end of March. Following the announcement of Northern Rock’s decision to close its Denmark retail savings office, the majority of these customer balances have now been repaid.
Northern Rock continues to meet its obligations as they fall due in relation to its outstanding wholesale debt programmes, including its securitisation and covered bond issuances. The Company did not issue any new wholesale securities in the first quarter of 2008.
Under its Plan, Northern Rock has undertaken to strengthen its risk and control environment, and has announced a review of its risk management policies. As an early output of this review, the Company has strengthened its procedures regarding mortgage arrears capitalisation. The Company’s general policy to capitalise any outstanding amounts in arrears following receipt of three consecutive full monthly payments remains unchanged. However, the Company has concluded that the controls over its policy to permit discretion in certain circumstances to capitalise amounts in arrears when the borrower has paid less than three monthly payments have been inadequate. Under revised procedures, any such discretion has now been removed. This change will result in higher reported arrears in coming months, with Northern Rock’s performance here expected to move much closer to the industry average. This change, however, does not reflect any change in the underlying quality of Northern Rock’s mortgage portfolio, as demonstrated by the low level of realised losses which the Company has experienced on its mortgage portfolio over many years. This change also does not alter the adequacy of Northern Rock’s provisions for loans and advances as reported in its Annual Report and Accounts for the year ended 31 December 2007.
Satisfactory progress has been made with the restructuring programme set out in the Plan. Following the submission of the HR 1 form to the Department for Business Enterprise and Regulatory Reform on 1 May 2008, the Company entered a formal 90-day consultation period with Unite and other employee representatives. Subject to the outcomes of this consultation, staff numbers are likely to be reduced by around 2,000 by the end of 2011, with the majority of this reduction likely to occur in 2008.
As announced on 2 May 2008, the existing Bank of England facilities have now been amended, as of 30 April 2008, but remain on the same economic terms. The Bank of England and HM Treasury have agreed to make a committed reserve facility available to the Company for contingency purposes. The amended facilities (including the committed reserve facility) are subject to appropriate clearance being obtained from the European Commission for State aid, and are secured against the assets of the Company.
Governance and Reporting
Northern Rock was taken into temporary public ownership on 22 February 2008 and this period is governed by a shareholder relationship framework document (the “Framework Document”) between the Company and HM Treasury. The core principle of this Framework Document is that subject to appropriate controls, Northern Rock should operate on a commercial basis, at arm’s length from the Government, and the Board has the freedom to act to deliver the Plan. The Company’s governance arrangements will, as far as practicable, follow the provisions of the Combined Code on corporate governance.
The Framework Document also provides for monitoring by HM Treasury of the Company’s performance against the Plan, with regular meetings and provision of information appropriate to its position as sole shareholder.
Consistent with the spirit of the Framework Document, Northern Rock intends to report publicly in a manner similar to that of a listed company. Specifically, the Company will publish audited annual report and accounts, plus an interim report including management commentary and interim financial statements. The Company will also issue trading statements following the end of the first and third quarterly periods.
Northern Rock held its Annual General Meeting on 1 May 2008, in which the 2007 Report and Accounts were received and the Directors’ Remuneration Report was approved. Simon Laffin and John Devaney were both re-elected as Non-Executive Directors of the Company and, as previously announced, Michael Queen retired as a Director. PricewaterhouseCoopers were re-appointed as Northern Rock’s auditors.
Outlook
While recent actions taken by central banks to improve the functioning of financial markets are welcomed by Northern Rock, the outlook for the UK mortgage industry remains highly uncertain. The Company does not expect market conditions to normalise in the short term. This environment presents Northern Rock with challenges, especially as regards the Company’s ability to meet its targeted mortgage redemption levels in the future. Nevertheless, given this backdrop, the Company’s progress against its Plan to date is encouraging.
Media Conference Call Details
A media telephone conference call hosted by Ron Sandler (Executive Chairman) and Ann Godbehere (Chief Financial Officer) will be held at 11.30am today. The access details for the call are as follows:
Telephone number: +44 (0)1452 556 620
Conference Id: 47394829
Press Contacts
Northern Rock
Brian Giles
John C Watson
0191 279 4676
City Contacts
Northern Rock
Simon Hall
0191 279 4676
FD
Geoffrey Pelham-Lane
Ed Gascoigne-Pees
020 7269 7132
Important Notice
This announcement should be read in conjunction with our announcement and the Annual Report and Accounts for the full year ended December 2007, the Summary of the Proposed Business Plan and the Shareholder Relationship Framework Document, copies of which are available from Northern Rock plc, Northern Rock House, Gosforth, Newcastle upon Tyne NE3 4PL or on our website at www.northernrock.co.uk
This document contains certain forward-looking statements with respect to certain of the plans of Northern Rock, its current goals and expectations relating to its future financial condition and performance. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. Northern Rock’s actual future results may differ materially from the results expressed or implied in these forward-looking statements as a result of a variety of factors, including UK domestic and global economic and business conditions, market related risks such as interest rates and exchange rates, delays in implementing proposals, unexpected difficulties with computer systems, unexpected changes to regulation, changes in customer preferences, competition and other factors.