vallierojas: Nationwide rules itself out of the race for Northern Rock

Wednesday, May 25, 2011

Nationwide rules itself out of the race for Northern Rock

Nationwide boss Graham Beale reveals 30% surge in profits

Nationwide ruled itself out of the race to acquire Northern Rock, the mortgage lender that was nationalised in 2008 after the first run on a British bank since the late 19th century.

Graham Beale, head of Britain's largest building society, on Wednesday declared Nationwide "out of the running", just weeks before a report is published on Northern Rock's future by Deutsche Bank.

Deutsche was mandated in March to make proposals to UKFI, the government body that looks after taxpayers' stakes in banks that collapsed during the financial crisis.

Ministers are seeking an exit that will allow taxpayers to get their money back, with Deutsche looking at a number of possibilities that include remutualisation, a sale, or a stock market flotation.

City sources said that although Deutsche is still putting the final touches to its findings, remutualisation via a takeover by a rival such as Coventry and Yorkshire building society remains "a real possibility". Both Coventry and Yorkshire have already declared their interest in buying Northern Rock, where the government retains a �1.4bn stake.

But Nationwide suggested there was too much geographical overlap between its branches and Northern Rock's outlets, raising the spectre of thousands of job losses and branch closures if the two were combined. Beale said: "Northern doesn't interest us; there would be an almost 100% overlap with our branches. Nor do we think such a deal for us would be transformational for our balance sheet."

Beale was speaking as Nationwide unveiled a surge in underlying profit to �276m, up 30% for the year to April, as impairment losses and mortgage arrears fell, and the society boosted market share.

As well as the possibility of a straight sale to another mutual, sources say remutualisation of Northern Rock could happen by handing it to customers, who would become its members. There would be no immediate payment to taxpayers ? instead the born-again Rock would create profit-deferring shares, to be held by the government, enabling it to share in future profits.

The government has sunk �49m into Northern Rock since it almost collapsed in 2007, but most of that value is tied up with the "bad" part of the bank that has been rolled into a state-run group called UK Asset Management (UKAM).

UKAM owns most of the mortgage portfolios of Northern Rock and Bradford & Bingley (which was also bailed out by the state), and the government recoups its money as the mortgages are paid off.

Deutche's report will form the basis of recommendations that UKFI will make to chancellor, George Osborne this summer. Osborne is said to favour a sale ? possibly to a new player such as Virgin Money ? but powerful voices within the coalition are sympathetic to the idea of remutualisation, if it looks like a good deal for taxpayers.

Political pressure for the remutualisation of Northern Rock has gained traction with 100 MPs signing an early day motion backing the return of the nationalised lender to the mutual sector.

The motion was tabled by Chuka Umunna, the Labour MP, who told the Guardian: "A remutualised Northern Rock would inject a valuable dose of participatory democracy into an industry that too often puts the short-term interest of shareholders above all else."

Northern Rock was run as a mutual since its formation in 1965 but was demutualised in 1997 and later adopted a highly risky business model under former boss Adam Applegarth.

Beale claimed that Nationwide's strong financial results showed how a well-run mutual with a good balance sheet offered both security and financial benefits to its members.

Beale forecast that interest rates would increase to 2.5% by April 2013, but refused to be drawn whether they would eventually rise to the long-term average of around 4.5%. He said Nationwide expected the UK housing market to more less flatline over the next two years.