Job loss warning as Rock calls for help

Sep 14 2007 by Chris Robinson, The Journal

Mortgage lender Northern Rock confirmed today that it had agreed emergency funding from the Bank of England after being rocked by the credit crunch in financial markets.

The UK’s fifth biggest mortgage lender said its 2007 profits would be more than £100 million lower than expected this year.

Chief executive Adam Applegarth said the Bank of England’s support ``reflected a recognition that Northern Rock is solvent“.

But the Newcastle-based group’s profits will be between £500 million and £540 million this year - well below the £647 million expected by the market.

The company is heavily reliant on wholesale money markets to raise cash for lending.

But its borrowing costs have soared in the recent turmoil, as banks fearful of potential losses from increasing defaults on higher risk US mortgages have hiked up the rates at which they lend to each other.

A statement from the Treasury said Chancellor Alistair Darling had authorised the Bank of England to provide a liquidity support facility to Northern Rock.

The decision was made on the basis of recommendations by the Governor of the Bank of England and the chairman of the Financial Services Authority.

The Treasury said: ``The FSA judges that Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book.

``The decision to provide a liquidity support facility to Northern Rock reflects the difficulties that it has had in accessing longer term funding and the mortgage securitisation market, on which Northern Rock is particularly reliant.”

The statement said the Bank of England, in its role as lender of last resort, is ready to make available facilities in comparable circumstances, where institutions face short-term liquidity difficulties.

Northern Rock added that the prospects of continued turbulence in money markets was likely to impact on profits in 2008.

The bank said it ``must now plan on the basis that the wholesale money markets will not return to previous levels in the short to medium term“.

The lender was already under pressure from increasing competition in the mortgage market before the current crisis hit.

Mr Applegarth added that the lender’s loan book was of ``good quality“ but the ``extreme conditions“ in global markets had forced the firm to reduce its lending.

He added that the additional available lending from the Bank of England would allow the firm to ``adapt its business model“ to market conditions.

The company said in August, when the turmoil began, that it had £275 million in combined potential exposure to US sub-prime mortgages.

Northern reaffirmed today that it would continue with its stricter lending strategy of providing only higher-quality mortgages in the UK market.

Mr Applegarth, who was unable to comment on the size and duration of the Bank of England's funding, said the lender was yet to use the emergency cash.

He said: ``We have not used the facility - this is a backstop in case we need to use it.”

The chief executive added that the current credit crunch was ``a set of circumstances I have never seen in 25 years“.

He added: ``Looking forward, I can’t see when the global liquidity freeze is going to end. We simply don’t know.”

But he warned that homeowners will face more expensive mortgages in future as the impact of the current crisis filters through to borrowers.

He said: ``What we will see is slower growth and wider margins. That is how I expect the reassessment of credit risk to roll through global markets.”

Northern Rock, which has around 6,000 staff, is likely to shed jobs under its business model for a smaller group.Mr Applegarth played down the prospect of compulsory redundancies but said the reductions were likely to be achieved through a recruitment freeze and natural staff turnover.