No compensation for Northern Rock shareholders

Former Northern Rock shareholders are unlikely to receive a penny in compensation following the nationalisation of the bank, a report costing £4.5m warned today.

Former Northern Rock shareholders are unlikely to receive a penny in compensation following the nationalisation of the British bank, a report costing £4.5m (€5m) warned today.

The provisional view of independent valuer Andrew Caldwell, of BDO, is that there would not have been anything left for shareholders had Northern Rock had to pay back more than £25bn (€27.63bn) Bank of England loans last year.

The terms of the assessment also included the assumption that the bank had fallen into administration instead of being rescued by the taxpayer in February 2008.

"This means that there is no value in the shares or rights as at the valuation date and therefore that no compensation is payable to affected parties," Mr Caldwell said in a letter to those affected.

The valuation comes as final details of the plan to split Northern Rock into two separate entities were published today in the wake of European approval of the break-up of the business.

Northern Rock will be a new savings and mortgage bank, active in the market place and offering new accounts. It currently has savings balances of around £19bn (€21bn) and will have about £10bn (€11bn) of the existing firm's best mortgage loans.

Meanwhile, the remaining business will become Northern Rock (Asset Management), holding approximately £50bn (€55.2bn) of the lender's existing residential mortgage book - 90% of which are expected to be "fully performing and not in arrears" by the transfer date of January 1, 2010. This business will not offer any new mortgages.

Retail deposits at the new bank will continue to be guaranteed by the Government and all savings customers will have their accounts automatically transferred on January 1.

Most of those with mortgages will remain with Northern Rock (Asset Management), with a small number transferred to the new bank.

Customers will not be informed of where their mortgage is held until January and the firm said its call centres are prepared to answer any customer queries on the issue.

The company has said the proportion of its loans more than three months in arrears edged up from 3.92% to 4.11% at the end of September.

Northern Rock's worst-performing loans include its notorious Together mortgage, which allowed customers to borrow 125% of the value of their home.

The bank originally aimed to pay back the Government loans it received but concerns over the lack of mortgage availability caused a change of focus earlier this year and the state is now upping its lending by £8bn (€8.8bn) as part of the break-up.

The increase in the loan is to provide cash that will support the new bank's retail deposit book and its new lending activity.

The Rock already owes £15bn (€16.57m) to the taxpayer, while a capital conversion is worth an additional £3bn (€3.3bn).

Northern Rock has said it expects to be loss-making this year, but has forecast a "significant improvement" in second half performance.

The bank originally planned to lend £5bn (€5.5bn) this year, but has said it will not hit its target due to capital restraints before the overhaul. It hopes to hit £9bn (€9.9bn) next year.

Today's valuation, which is to cost £4.5m (€5bn) according to BDO, was designed to assess the level of compensation due to shareholders after the bank was taken into public ownership by the Government last year.

It assumed that all Bank of England and state financial support was withdrawn from the Northern Rock last February and no further assistance would have been forthcoming.

The assessment was also based on the idea that the Newcastle-based lender had been unable to continue as a going concern and was in administration.

Mr Caldwell said it was "unlikely" that the bank could have been sold as a single entity by an administrator and therefore based his valuation on a break-up of the lender's assets.

He said the swirling financial and economic problems last February meant that the residential mortgage book would probably have had to be slashed in value by 15% in any sale.

"An administrator would have to decide how to raise value from the remainder of Northern Rock's portfolio of assets, that is whether to sell all assets immediately, or sell part and run off the rest," Mr Caldwell said.

He said that the total deficit would be approximately £5.68bn (€6.28bn).

"My provisional view is that there would be no surplus," he said.

The review is still in the consultation stage and further written representations can be made before January 29 next year.

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