So much for the revived Rock.
From the bank’s just-released interim results:
In February 2009, the Company announced that it intended, as part of its revised strategy, to lend up to £14 billion over the next two years, 2009 and 2010, including up to £5 billion in 2009. Reflecting its constrained capital position prior to completion of the legal and capital restructure and capital injection, Northern Rock’s new lending in 2009 is expected to be nearer to £4 billion than the previously envisaged £5 billion.
That “capital position” being the fact that Northern Rock, is err, very below its minimum regulatory capital requirements.
However, the bank effectively has a waiver from the FSA on its capital rules, with the financial regulator agreeing to waive the limits on the Rock’s use of Tier 2 capital — thus enabling all of its available Tier 2 capital to be included within the bank’s total capital resources to meet its minimum requirements.
That’s pretty important — since Northern Rock’s capital position now looks something like this:
By way of contrast, FSA rules require core Tier capital to account for at least 50 per cent of total Tier 1 capital, and they limit total Tier 2 capital to 100 per cent of Tier 1 capital and lower Tier 2 capital to 50 per cent of Tier 1 capital. You can see above that Upper and Lower Tier 2 capital actually exceeds Tier 1.
Of course, Northern Rock plans to rectify its capital conundrum by splitting itself into what is essentially a good bank/bad bank structure. The bank’s structured finance stuff (Granite and its covered bond programme) will go into Asset Co., while its wholesale deposits will flow into Bank Co.
It’s not a bad solution per se, but it won’t do much for the bank beyond capital arbitrage.
Northern Rock’s actual mortgage business — with bad loan charges amounting to some $602m in the first-half of this year — is still looking a bit sickly.
Related links:
Northern Rock covered – FT Alphaville
Northern Rock bad loan charges triple – FT