New Northern Rock awarded stable rating

4 January 2010 | By Natalie Thomas

A new bank has been formed out of the restructure of Northern Rock, splitting the old company in two.

The new Northern Rock will hold all existing savings accounts and some mortgages and will offer new savings and mortgage products to new and existing customers.

The remaining company, Northern Rock Asset Management, will hold most of the mortgages as well as unsecured loan accounts.

The restructure came into effect on January 1 2010, following approval from the European Commission, the Financial Services Authority, and the government.

Retail deposits worth approximately £19bn were transferred to the new Northern Rock from the old company, as well as £10bn worth of residential mortgages.

The new Northern Rock was also capitalised by a government equity injection of £1.4bn, and given a government guarantee covering the bank’s deposits and other liabilities.

Standard & Poor’s has assigned the new Northern Rock a counterparty credit rating of ‘A-/A-2’ and says that the outlook for the bank is stable.

Richard Barnes, credit analyst at Standard & Poor’s, says: “The ratings on Northern Rock reflect our view of its robust asset quality, funding, liquidity, and capitalisation.

“We consider that these attributes have been achieved as a result of the restructuring, which was designed to enable Northern Rock to make a fresh start with legacy risks left behind in Northern Rock Asset Management.”

Standard & Poor’s predicts that the new Northern Rock will record weak earnings at first, but expects that the bank will make more profit as it begins to originate new mortgages.

The government has stipulated that its guarantee can be withdrawn with a minimum of three months notice.

But Barnes says: “A withdrawal of the government guarantee of retail deposits would require close management in our view, but we consider that following the restructuring Northern Rock is better placed to operate without this extraordinary external support.”

Northern Rock’s rating could be subject to change if it is sold by the government as expected, or if the bank’s balance sheet or earnings performance differs wildly from the rating agency’s forecasts.

It emerged today that National Australia Bank, parent company of Clydesdale and Yorkshire, is considering taking over Northern Rock and has held meetings with City advisers to discuss the move.