Northern Rock loan repayment ahead of schedule

LONDON (Reuters) - Nationalised mortgage lender Northern Rock said it was repaying its emergency government loan more quickly than planned, but warned the housing market slump could hinder further progress.

A pedestrian walks past a branch of Northern Rock bank, in York, northern England, on August 5, 2008. REUTERS/Nigel Roddis

In a trading statement, Northern Rock said the outstanding balance on the loan was 11.5 billion pounds at Sept 30, down 57 percent from 26.9 billion pounds at the end of December last year.

In March, the lender set itself a target of repaying 25 percent of the loan by the end of 2008, with the remainder to be paid off over the next two years.

But Northern Rock warned on Tuesday that falling property prices and efforts by other banks to rein in their lending could slow the pace of repayment in the months ahead.

The lender has been paying off its government loan mainly by raising its rates in an effort to encourage customers to take their business elsewhere, redeeming their existing mortgages.

In a conference call with reporters, Northern Rock chairman Ron Sandler said the bank was sticking by its repayment timetable, as well as its target of returning to profitability by 2012.

“We have set out our targets,” he said.

Sandler also confirmed that Northern Rock had held informal talks with the government about merging its loan book with that of Bradford & Bingley, the failed mortgage bank that was taken into partial public ownership last month.

“The subject has come up informally and obliquely on a couple of occasions. It would not surprise me if a closer look was taken at the possible merits of merging the management of the loan books of ourselves and Bradford & Bingley,” Sandler said.

Northern Rock added that more of its customers were having trouble repaying their loans, with the proportion of mortgage accounts more than three months in arrears climbing to 1.87 percent by the end of September, up from 1.18 percent three months earlier.

Northern Rock’s Sandler said customers who signed up to the bank’s Together mortgage product, which allowed them to borrow up to 125 percent of the value of their homes, accounted for half of all accounts in arrears.

“The Together book is the principal source of the profitability challenge for Northern Rock,” he said.

The bank also said on Tuesday that it would not be taking legal action for negligence against its former directors or auditors after a review concluded that there were insufficient grounds for doing so.

Northern Rock was forced to seek an emergency loan from the Bank of England in September last year after the global credit crunch shut down the wholesale money markets, its principal source of funding.

Ron Sandler was appointed as Northern Rock chairman in February this year, when the bank was nationalised after government efforts to find a private sector buyer fell through.

Reporting by Myles Neligan