N.Rock sinks to loss, says will repay govt by 2011

LONDON (Reuters) - Northern Rock, the British government-owned bank, sank to a loss last year and expects more losses for the next three years as rising bad debts on risky assets and home loans added to the impact of its funding crisis.

Britain's biggest casualty of the global credit crisis, Northern Rock on Monday reported a statutory loss before tax of 168 million pounds ($334 million) in 2007, swinging 795 million pounds from its profit of 627 million in 2006.

The UK's fifth-biggest mortgage lender, nationalised last month and which owes 24 billion pounds to the Bank of England, said it expects to remain "significantly loss-making" in 2008.

It expects to break even in 2011 and is confident of repaying its emergency loan from taxpayers by the end of 2010 by shrinking its balance sheet, but it refused to say if it could return to profit any earlier.

Ron Sandler, the troubleshooter running Northern Rock for the government, said he will limit the bank's share of UK retail deposits and new mortgage business so it does not get an unfair advantage as he gave more details of his business plan.

The government aims to return to the bank to the private sector once taxpayers have been repaid.

"We intend to contract to a smaller, more sustainable business," Sandler told reporters on a conference call.

The bank aims to redeem about 60 percent of mortgages when they come up to maturity, and is considering working with other lenders who could take on the loan. Sandler said between 25 and 30 billion pounds of loans will come up for renewal this year.

But the UK housing market is getting increasingly tough and further deterioration could hamper plans, he said.

"In the event ... the housing market becomes softer, there is no doubt it becomes more challenging to achieve the redemption targets," Sandler said.

Northern Rock took a 240 million pound charge in 2007 as it faced more bad debts on home and personal loans, up from 81 million pounds in 2006.

It also took a 127 million pound charge for fees and costs incurred from its five-month strategic review, and a 410 million pound hit on risky assets whose value has been cut by financial market turmoil.

In its annual report also released on Monday, Northern Rock said Adam Applegarth, its former chief executive and architect of its flawed business model, will be paid 760,000 pounds for the termination of his contract last December.

Applegarth was paid 723,000 pounds in salary for last year up until his exit.

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He had been expected to get a maximum of 380,000 pounds, a person familiar with the matter had said when he quit.

Sandler outlined his core plans to streamline Northern Rock this month. He will cut 2,000 jobs and shrink its lending book to about 50 billion pounds from 107 billion, by the end of 2011. The bank will halt unsecured and commercial loans.

Finance Minister Alistair Darling said the bank will maintain, but shrink over time, its Granite securitisation vehicle.

The Newcastle-based lender said it will limit its share of retail deposits in the UK to 1.5 percent and will not rank in the top three of "best buy" tables for major savings products this year.

Rivals had been concerned that state ownership would give the bank a competitive advantage.

Almost 14 billion pounds of retail savings were withdrawn in the second half of last year, after thousands of customers queued for hours over a four-day period when its emergency loans were revealed.

It was the first run on the deposits of a major UK bank for more than 140 years.

The bank will now limit its share of gross mortgage lending to 2.5 percent, it said, compared with its estimated 8 percent share of the overall mortgage market.

Its new home loans will average about 5 billion pounds a year, which Sandler said was needed to retain its position in the marketplace and relationships with brokers, and provide "a sufficient stock of mortgages" if it needs to replenish Granite.

Northern Rock was the most aggressive lender in the first half of last year, grabbing a 19 percent share of net UK mortgage lending, until its model collapsed when it was unable to raise funds in financial markets.

(Editing by Quentin Bryar, Sue Thomas and David Hulmes)