‘It’s been a pretty rotten day’

Sep 15 2007 by Iain Laing, The Journal

NORTHERN Rock told customers not to panic yesterday as its share price plunged after it agreed an unlimited borrowing facility with the Bank of England.

The Newcastle-based bank said it had imposed a recruitment freeze and was likely to up mortgage lending rates after its cash flow had been so badly affected by stock market turmoil it had to ask for a loan.

Queues of worried customers formed outside branches of the UK’s fifth biggest bank up and down the country as news of the cash problems hit the headlines.

The Rock, which has 6,500 staff nationwide, said it expected to continue to grow and stressed there was no danger of collapse, at least in part because it has assets of around £113bn.

Chief executive Adam Applegarth said: “It is business as normal for borrowers and for savers. The Bank of England wouldn’t have provided this large facility for us to use as we need it.

They only do it to support well-run companies who for short-term liquidity problems need it.

“I know that a lot of people are asking questions. We are getting a lot of phone calls and getting more traffic than normal at branches and we are dealing with these concerns.

There are those that just want reassurance and we are giving them reassurance.

“I think there is a high degree of regard for Northern Rock in terms of what we have achieved, what we have made in terms of jobs and the Northern Rock Foundation, and that is especially so in the North-East.

You don’t need to panic, you don’t need to worry about jobs.”

Northern Rock employs 4,700 in the region, and has plans for a new development at Rainton Bridge, in Sunderland, with a view to creating 900 posts initially, and a further 1,500 in phase two.

The Northern Rock Foundation has given £175m to many community organisations, charities, arts and music groups and good causes.

Last night, Mr Applegarth’s words were echoed by Nick Brown MP, Minister for the North-East, who said: “Northern Rock has done a lot for the region and they are very important to the region.

“The current difficulties are not of their own making and the conditions seen today are the result of something that has happened in the USA and I think the Chancellor and the Bank of England are right to intervene to stabilise the situation.

“The Government and the Bank are standing by Northern Rock and so should we.” When asked what he would say to shareholders, Mr Applegarth said: “I am a major shareholder and it’s been a pretty rotten day. I am bitterly disappointed. I feel a lot of sympathy. It’s been a rotten day for us all.”

He also stressed the causes of the Rock’s current problems were “not Northern Rock specific” but affected all banks. He said it was because of the bank’s exposure to the lending market that it had experienced problems.

He said he did not know whether the bank would use the lending facility or when it would tell the Bank of England it no longer needed it.

“I have no idea when the storm will end, which is why we have decided to go to this contingency,” he said.

Mr Applegarth denied the bank’s rapid expansion had made it more vulnerable to financial problems, but said the bank would change the way it borrowed money, relying more on cash deposits and less on borrowing from lending markets, which currently makes up 75% of its funding, but that it was too early to give any details.

Mr Applegarth said: “Northern Rock is very important to the North-East economy. We are pretty confident that there is no need for us to have redundancies. It may mean that we reduce the number of staff by natural turnover.”

Speculation that the bank would become a takeover target spread, with Mr Applegarth conceding it was probable, after the Rock’s share price opened 23% down after falling more than a third already.

It came after the bank said its annual profits were likely to be between £500m and £540m this year – well below the expected £647m – and asked for backing from the Bank of England as a “lender of last resort”.

Northern Rock issued a profit warning in June and went on to report flat earnings in July, although they were pushed up 26% by disposals to around £346m, on sales up by a third to £3.3bn.