Will taxpayers get their money back on Rock?

BBC business editor Robert Peston runs the rule over the bank's balance sheets

What brought Northern Rock to the brink of collapse in the boom years before September 2007 was that it lent too much too quickly, fuelled by finance that could not be relied upon to be permanently available.

So there is something of an irony that the £232m of pre-tax losses generated by new Northern Rock - which is owned by taxpayers and was stripped of its historic loans - stem from its inability to lend enough.

The bank has been cleaned up for privatisation. But that means it is lending too little to cover the costs of its overheads and the interest paid on deposits.

It started life a year ago with £19.5bn of deposits and £10bn of mortgages. It ended the year with £16.7bn of deposits and £12.2bn of loans to customers (with some of that fall in deposits the result of the closure of the offshore savings operation in Guernsey).

So the Rock's income from interest on loans was £407m. But it paid out £448m of interest, and administrative expenses were £251m.

When fee and commission income are taken into account, and restructuring costs are deducted, the net result is a fairly thumping loss.

Which sounds serious. But it isn't a disaster, because overheads can be cut and lending can be increased.

That said, it is pretty difficult to say when the Rock will be back in profit, which means that if the government presses ahead with an early privatisation - and the Treasury shows every sign of wanting to do that - it can't expect a bumper price for the bank.

Does that mean there's a risk of taxpayers not getting back the £27bn they lent and invested in Northern Rock in the autumn and winter of 2007-8, to keep it afloat?

Well there is a risk of losses for taxpayers, but - absent a return to cripplingly recessionary conditions in the UK - I wouldn't say it is a huge risk. On the other hand, it doesn't look as though taxpayers will do much better than break even on the Rock rescue.

Certainly in the case of a sale of new Northern Rock - the bank I've been musing about above - there is a chance that taxpayers won't be repaid all of the £1.4bn they've injected into the bank to capitalise it (unless, as I said, the privatisation is delayed until the Rock is back in profit).

With the outlook for the British economy - and for the housing market - uncertain at the moment, lossmaking retail banks aren't the easiest businesses to flog right now. Even so, the likelihood is that at the end of April, UK Financial Investments - which manages taxpayers' stakes in banks on behalf of the Treasury - will initiate some kind of auction of lossmaking Rock.

But let's say the sale of the Rock generates less than the £1.4bn taxpayers have put into it. Would that be a disaster?

Well it would be wrong to see that £1.4bn in isolation. The more important asset on the public-sector balance sheet which stems from the nationalisation of the Rock is the so-called "bad bank".

That is the part of Northern Rock, called Northern Rock Asset Management (NRAM), which was hived off from the branch network and deposit-taking business, and took ownership of £50bn of the banks' older mortgages.

The irony is that this supposed bad bank was in substantial profit at the half year and probably was for the year as a whole (its results aren't being published today). The reason for the profit is that the economy has recovered a bit, so borrowers aren't finding it as difficult to repay debts. And, unlike new Northern Rock, NRAM has relatively low overheads and a stream of interest receipts on all the loans it made.

In other words, the much more important determinant of whether taxpayers get back their £27bn is whether borrowers repay the money they owe to NRAM, and as and when borrowers default, whether their seized properties can be sold for more than the value of the debt.89

NRAM has net equity on its balance sheet, largely because it succeeded in buying back £1.1bn of its own debt at a very substantial discount.

So for taxpayers to end up as losers on the Rock, the deficit on any privatisation of new Northern Rock, when netted from any profits or losses from the winding up of NRAM, would have to exceed £800m.

Which probably leads to the conclusion that - in years to come - the rescue of the Rock will be seen to be have had negligible fiscal consequences, for all its massive impact on the financial and political environment of three years ago.

You can keep up with the latest from business editor Robert Peston by visiting his blog on the BBC News website.

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