Bloomberg News

U.K. Lost $762M on Northern Rock Sale: Audit

May 17, 2012

British taxpayers are expected to book a loss of 480 million pounds ($762 million) on the sale of Northern Rock Plc to Virgin Money Holdings U.K. Ltd., the National Audit Office said.

The sale “at the earliest opportunity” was the best option for the taxpayer to minimize the losses, the government- spending watchdog said in a report published today. Making the bank back into a customer-owned lender or selling the shares would have made less money, it said.

Northern Rock was nationalized in February 2008 after the Newcastle, England-based lender suffered the first run on a U.K. bank in more than a century. In 2010, Northern Rock Plc, the consumer bank, separated from Northern Rock Asset Management Plc, which holds mortgages. Billionaire Richard Branson’s Virgin Money agreed to buy Northern Rock Plc in November 2011 for 747 million pounds, marking the first sale of a British government bank holding since the 2008 financial crisis.

U.K. Financial Investments, which manages Britain’s holdings in banks, “handled the sale process well,” said the report. “In final negotiations, UKFI improved the overall offer from Virgin Money.”

UKFI expects the taxpayer to about break even on the 37 billion pounds of support supplied to both parts of the bank, assuming gilt yields of about 4 percent, over about 10 to 15 years, said the report. The taxpayer would lose about 2 billion pounds should the cost of funding rise to 6 percent, closer to an amount demanded of a commercial organization, said the report.

Taxpayer Stakes

The sale of Northern Rock Plc left the taxpayer with stakes initially valued at more than 65.5 billion pounds in Lloyds Banking Group Plc (LLOY) and Royal Bank of Scotland Group Plc. The U.K. also holds the remainder of Northern Rock and Bradford & Bingley.

The losses on the Northern Rock Plc sale include 248 million-pound reduction in book value the report said. Another 232 million-pound loss was posted at the sale, as Virgin paid between 80 percent and 90 percent of the bank’s book value, the National Audit Office said.

The U.K. Treasury didn’t do detailed due diligence on the decision to split the bank into Northern Rock and NRAM, said the report.

“The decision to split the bank was based on a business plan prepared by Northern Rock management which events quickly showed to have been optimistic,” the report said. “Our analysis indicates that there remained little difference in financial terms between splitting the bank and selling the deposits.”

-- Editors: Jon Menon, Steve Bailey

To contact the reporter on this story: Howard Mustoe in London at hmustoe@bloomberg.net.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net


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