Northern Rock’s ‘bad bank’ returns to profit

Northern Rock Asset Management, the so-called ’bad bank’ part of the old Northern Rock, has returned to profit.

The bank holds most of the bank’s old mortgages and has reported a pre-tax profit of £349.7m for the first six months of the year, compared with a loss of £724.2m in the same period last year.

The company repurchased some of its debt capital creating a one-off gain of £780m added directly to the company’s shareholder funds and not included in profits.

In June the company successfully completed an exercise to repurchase certain debt capital instruments amounting to £1,082.7m. This resulted in a net gain of £780.0m which, reflecting the nature of the instruments, was recorded directly in shareholders funds and is not included in the reported profit for the period.

Total income in the six months to 30 June 2010 improved to £719.6m, compared with negative income of £11.1m in the first half of 2009. Underlying total income improved to £537.2m, compared with £469.2m reflecting the lower cost of funding resulting from the change in funding mix.

The company incurred charges in lieu of operating expenses for services provided to it by Northern Rock plc under service level agreements established upon restructure. This has resulted in the company incurring a charge of £95.2m in the first half of the year.

The number of properties in possession fell to 1,846 compared with 2,061 at 31 December 2009.

The company’s impairment charge, at £277.6 million, continues to improve and is lower than the charge incurred in each of the first and second halves of 2009.

Residential mortgage accounts more than three months in arrears at 30 June 2010 were 5.64% compared with 5.32% at the start of January 2010 immediately following the legal and capital restructure, with the majority of the increase relating to book shrinkage.

The government loan reduced to £22.5bn from £22.8bn at the start of the year, following a repayment of £300m.

Gary Hoffman, chief executive of Northern Rock (Asset Management), says: “I am pleased to report that our results for the six month period to 30 June 2010 are encouraging. The Company is continuing to show improving underlying profitability and 90% of the mortgage book remains fully performing.

“We have made good progress in the first half of 2010, and recorded an underlying profit of £167.3m. We also completed a liability management exercise, which resulted in a one-off gain of £780.0m, which went to shareholders’ funds and is not included in the profit figures. This strengthens the equity base of the company and is good news for taxpayers.

“We have also seen an improvement in the impairment charge which was lower than in both the first and second halves of 2009.

“We are progressing well with our preparations to integrate Northern Rock (Asset Management) plc with Bradford & Bingley plc under a single holding company.

“The company remains committed to delivering a high standard of service for all of our customers and particularly to helping those in financial difficulty.”