Delayed opening for Northern Rock on the London market on Wednesday – as the weight of sellers caused a backwardation in the price. When a formal quotation finally kicked in, the bank was immediately marked down 10 per cent. But why so dire?
In an unusually detailed statement, Northern Rock took seven dense paragraphs to explain why their full-year profits were set to fall below expectations, rising about 15 per cent against the consensus forecast of 17 per cent.
Expectations for higher interest rates in the UK have risen faster than anticipated, said the bank, causing a “structural mismatch,” between libor and the bank’s base rate. The higher base rate takes a while to pass onto customers because of fixed rate deals, it added.
The markets are super-twitchy about banks, mortgages and housing in general. HBOS, the UK’s market leader, fell sharply after it reported a dramatic loss of new business, blaming increased competition.
But it’s a different story at Northern Rock. The UK mortgage market, it says, remains robust, with gross lending to May running 13 per cent ahead of the same period in 2006, and its gross market share running ahead of last year at 10 per cent. At 19 per cent net market share in the period, point out analysts at KBW, Northern Rock is operating at record levels.
Credit quality too is “robust” across all loan categories, the bank said, adding that while higher rates may slow house moving there should nevertheless be a boost in remortgaging.
So why the panic? With their long and complex statement, Northern Rock may have reminded the market that it is not not just a simple off-the-shelf retail lender. In fact, the bank has been at the forefront of securitisation of mortgages in the UK, including at, ahem, the “sub-investment” level.
Wednesday’s pre-close announcement began with a long explanation of the bank’s strategy, including its intention to “pass through some higher risk weighted loans directly to third parties.”
Its ability to securitise its mortgages has moved on part of the risk of default to new investors and has in turn funded faster lending growth, crystallising debts owed to it as cash on its balance sheet. The securitisation route has also opened up a source of global funding to lenders like Northern Rock. If the world goes cold on this type of issuance, and the instruments created with relevant securities, such as CDOs, the global funding merry-go-round could slow.
In an already jumpy market, that seems to be a good enough reason for the sellers to come out in force.