Northern Rock shares slump

Shares in crisis-hit mortgage lender Northern Rock slumped again today as traders speculated over the future of the company.

The UK’s fifth biggest mortgage lender closed more than 11% down after briefly surging 13% higher earlier in the day amid market rumours of a possible private equity takeover.

Northern Rock’s shares touched a record low during trading after weekend reports of a lack of buyers. City experts said the volatility would last as long as the uncertainty over the firm remained.

Panmure Gordon banking analyst Sandy Chen said: “The shares could trade in a range of 1p to 400p and the longer it goes on the closer that will get to 1p.”

Any sale is now expected at a discounted price. Hedge funds are seen as the most likely suitors, as many rival banks are believed to be put off by the lender’s tarnished image and funding difficulties.

Northern Rock was forced to call on the Bank of England as lender of last resort earlier this month amid a meltdown in the wholesale money markets, on which it relies for most of its funding.

The news caused a run on the bank by savers worried that the bank would collapse.

Today’s fresh losses leave Northern Rock with a market value of £728 million - just over a quarter of its £2.7 billion worth before the crisis began 10 days ago.

But despite its financial woes, the mortgage lender said today it still intends to pay shareholders a 30% dividend hike.

The company is set to honour the 14.2p a share dividend announced on July 25 for all investors on the share register by the end of Friday.

The move is reportedly set to come under scrutiny by MPs on the Treasury Select Committee, who are said to be concerned that the dividend – up from 10.9p last year – was announced even after Northern Rock began to see funding come under pressure.

Northern Rock is understood to have taken legal advice over the dividend payment, which it is thought will cost the group £59 million.

While it has confirmed plans to pay the dividend, Northern Rock is not believed to be legally obliged to make the payout and is reported to have until Friday to change its mind.

The crisis at Northern Rock has hit savers’ confidence after highlighting the limits on the cash people would get back if a bank went under.

Six out of 10 people said they thought the amount of money paid out by the Financial Services Compensation Scheme (FSCS) to consumers who lost savings as a result of a bank or building society collapsing should be increased, according to a survey by financial website MoneyExpert.com.