Which kidder asked about share buybacks on the Northern Rock analyst call this morning, wonders Lex? After trudging cap in hand to see the Bank, the chance of Northern Rock remaining independent are slim.
Compared with the UK banking average of 7 per cent, Northern Rock used wholesale market securitisation for 43 per cent of its funding, notes Lex, eschewing customer deposits and expanding its loan book rapidly. New lending growth will now plummet, and may even turn negative. Lex notes:
This over reliance on one form of funding now looks foolish, irrespective of exceptional credit market conditions.
Potential buyers of the bank – Lloyds TSB is thought to be keen – will be more interested in determining whether Northern Rock is solvent, adds Lex.
Charles Pretzlik in the Business Blog is taking a hard line, taking issue with chief executive Adam Applegarth’s broad message that the bank was an innocent victim of far-off events:
If Northern Rock is not bust it is only because of the Bank of England and the government don’t want it to be. Call it what you like, but this bank ran out of money and can no longer fund all its liabilities, let alone finance its aggressive business model…..it has had to be rescued because its strategy made it more vulnerable to those events than others’.
Pretzlik is on board with Willem Buiter though. The LSE professor argued that the collapse of Northern Rock would not have threatened the financial system – and so this did not meet the Bank’s own criteria for a bail-out.
Lex asks where other vulnerabilities in the UK might lie:
In the UK, Alliance & Leicester, and Bradford & Bingley, use the wholesale markets for half of their funding, but in general the sector is well capitalised. Europe is more conservative, with considerably higher deposit-to-loan ratios than the UK. More at risk may be some hedge funds and investment bank vehicles, that look scarily similar to Northern Rock. Worse, they are geared.