Countrywide move eases woes for UK mortgage banks

LONDON (Reuters) - A $2 billion move to shore up finances at U.S. lender Countrywide CFC.N fuelled a recovery of UK mortgage banks on Thursday, led by Northern Rock NRK.L, though analysts said worries over funding conditions remained.

As the UK bank most reliant on wholesale markets to fund mortgage lending, Northern Rock has felt the brunt of the banking sector's pain in recent credit market turmoil.

Its shares tumbled to 4-1/2 year lows last week on concerns it could be forced into a second profit warning if higher funding costs keep eroding earnings and by wider worries over the securitisation market.

On Thursday, however, boosted by news of Bank of America's (BAC.N) move overnight to inject $2 billion into Countrywide, Northern Rock shares were up over 6 percent.

The cost of insuring Northern Rock's debt against default also fell, with five-year credit default swaps trading at 90 to 105 basis points -- still triple what they were a few weeks ago but marking a 10 basis point improvement from Wednesday's close.

Shares in HBOS HBOS.L, Britain's largest mortgage lender and another focus for recent funding worries, were up almost 3 percent.

"The idea that someone could bail them out is providing a floor, but all the underlying issues persist," one industry analyst said. "It is not clear to us that the securitisation markets are open for business."

Earlier this week, HBOS stepped in and provided funding from its own balance sheet for its vehicle Grampian -- one of the world's largest asset-backed commercial paper conduits -- saying market pricing was unattractive.

Analysts said this was not a threat for HBOS but was evidence of a wider disconnect in the market.

PREY?

Others, however, said Bank of America's move highlighted the underlying attractiveness of the mortgage market. It also revived the idea that an undervalued Northern Rock could become an attractive target, despite a "poison pill" in the shape of the Northern Rock Foundation, which receives 5 percent of profits but would receive 15 percent of shares in a takeover.

"The Bank of America move just highlights the fact that the underlying core mortgage market in the UK and the U.S., over any medium-term view, presents a profit opportunity," analyst James Hamilton at brokerage Numis said.

Several banks have been named as possible bidders for Northern Rock should credit market conditions further damage its funding model or if its shares continue to underperform.

"People could be interested, but I can't see what an acquirer would really bring to Northern Rock as a business," Numis's Hamilton said. "All they would be doing is identifying that the market is undervaluing the company as it stands -- it is already a very efficient business."

Cazenove named HSBC (HSBA.L) this week as a possible buyer for Northern Rock, saying a bid may be justified, and market speculation early on Thursday added ING (ING.AS).

HSBC declined to comment, and ING denied any interest. "It is not on our radar screen," an ING spokesman said.

(Additional reporting by Natalie Harrison, Maya Thatcher and Gilbert Kreijger)