Northern Rock PLC Financial Strategy - Essay Example

?Northern Rock Plc Financial Strategy Introduction Northern Rock Plc is currently embarked on a financial strategy that seeks to reach its first yearof profit since it was nationalized in February 2008. The Government had taken over the bank at that time under the Temporary Public Ownership (TPO) provision, with ?27 billion loan. In March, 2011 the bank reported a pre-tax lost of ?232.4 million for 2010 (NRP, 2011). The financial strategy must work toward securing profit. It is currently based on either selling the bank or merging with another bank or group of banks. In this way the government, representing the taxpayers, may recoup its investment and the bank may be returned to the private sector. A bank that shows consistent profit is attractive to potential buyers. To do this its financial strategy must continue its plans of further restructuring its business model. It must reduce its capital costs base by better cost management. And while pursuing and adjusting to medium term growth, Northern Rock must focus on innovation and new markets, and continue to build on transparent and open communication with its stake-holders. Discussion Today, under Government ownership, Northern Rock Plc has kept together some 70 branches over which it must wield a steady hand toward corporate profit in the interest of its stakeholders, the taxpayers, and its depositors. Since its black day of 17 September 2007, when depositors were shown on worldwide TV queuing in long lines outside the bank to make their withdrawals, the bank has went through several stages of restructuring. The initial one was the takeover by the government. Throughout these restructuring processes, the bank has sought to rebuild a substantial market for its mortgage loans, a market that is different from the business plan that the bank had pursued before 2008. Previous to 2008 and after Northern Rock became public in 1997, the bank soon embarked on a risky business plan that was coupled to a flawed bank regulatory system. Since 1997 Northern Rock was regulated by the newly created Financial Services Authority (FSA). The FSA did not share any information it had with the Treasury or with the Bank of England who was responsible for monetary policy. Both the FSA and the Bank of England were slow to step in and stop Northern Rock’s demise. The FSA had, in June 2007, instead allowed Northern Rock to decrease its amount of required on-hand capital. This action exemplified the regulatory system that allowed the bank to overextend itself in the speculative mortgage derivative market. But even today the bank as a retail and savings bank must rebuild its image and processes in the same waters of financial risk. During the period of the default, Northern Rock’s business plan was based on securitizing mortgages in the short-term wholesale market to support its long-term longs. It was packaging multiple mortgage loans and selling them as bonds to investors. This business model had depended on stability in the mortgage securities market and the confidence of those who traded in the debt packages. When the housing prices begin to show full scale plummeting from speculated highs, lenders stopped extending rollover loans to Northern Rock and they eventually took their money from the bank. In August 2007 credit froze up in the bank liquidity market and Northern Rock could no longer sell bonds over the face of a broad liquidity freeze. It could not make any new loans. On August 13, 2007, the bank requested emergency funding from the Bank of England. It was only after the Chancellor of the Exchequer guaranteed all deposits at the bank in later September did the resulting bank run stop. The present Northern Rock Plc was created from The Northern Rock Transfer Order which on 1 January 2010 restructured the bank into two banks, Northern Rock Plc, the savings bank with new mortgages, and the Northern Rock Asset Management Plc (NRAM) (NRP, 2011). The latter took over the "toxic" mortgage assets and is concentrating in mortgage loans. North Rock Plc began its restructuring by closing its Guernsey subsidiary 2 September 2010. The bank has experienced an expected slow growth as it wins back the confidence of the public. Total pre-tax loss for Northern in 2010 was ?232.4 million, while total income was ?104.9 million (NRP, 2011). The first half of the year saw the losses at ?140 million. This figure decreased the second half of the year to ?92.4 million. Employees were able to receive yearend bonuses from a total of ?13.1. Gross residential lending at the bank was ?4.2 billion in 2010, while net residential lending stood at ?1.9 billion. Retail deposits were ?16.7. Part of the financial strategy now is to attract at least ?1.4 billion more in deposits to at least meet the ?1.4 billion in taxpayer capital the bank received as it emerged from the split with NRAM (Jenkins and Wembridge, 2011). The bank's loan-to-deposit ratio is 72. In order to profit this ratio must be reduced by taking in more loans. The bank has formed a number of new consumer mortgage packages, including a loan offering 90 percent of the house's value. Some industry watchers have commented that this places Northern back in the high-risk market, but it opens the bank up to serving the under-served population and also generating more capital (Goff, 2011a). Another move to reduce its cost base lies in the bank's plans to cut some 680 more employees from its staff, adding to the already 2,000 redundancies that bank performed and cutting its operating staff to about 2,000 (2011b). It is in communication with Unite, respecting the union's consultation period. Northern Rock has recently announced that it intends to re-enter the securitisation market, a move it must make to diversify its market base and raise the requisite capital that will make it competitive. The bank said it will tentatively enter the market with a sale of ?370 million in bonds backed up by high-value mortgages (Goff and Hughes, 2011). Conclusion Northern Rock is one among several major UK Banks that were pulled into debt by the economic recession. The bank was rescued by the taxpayer with funds committed by the government. The bank’s financial strategy must include reducing its cost base so that it can turn a profit and begin to show positive numbers. The bank has new mortgage saving packages for the public. Although these packages may appear as the bank again taking up higher risk, there is better transparency and regulation from the government. The need is still strong for the under-serve to have housing and to have banks that can serve them fairly. Works Cited Northern Rock pls, 2010. Directors’ report and financial statements for the period 3 July 2009 to 31 December 2009. [Online] Available at: [Accessed 28 March 2011] Northern Rock pls, 2011. Full Year Results 2010. [Online] Available at: [Accessed 28 March 2011] BBC, 2010. Former Northern Rock bosses fined. BBC NEWS, 13 Apr [Online] Available at:< http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/8617345.stm> [Accessed 28 March 2011] Goff, S., 2011a. Northern Rock unveils new mortgages. Financial Times, 28 Feb [Online] Available at:< http://www.ft.com/cms/s/0/6c55954a-4370-11e0-8f0d-00144feabdc0.html#ixzz1IM1GMkF8> [Accessed 28 March 2011] Goff, S., 2011b. Northern Rock to axe extra 680 jobs. Financial Times, 28 Mar [Online] Available at: [Accessed 16 March 2011] Goff, S. and Hughes, J., 2011 Rock returns to selling bonds. Financial Times, 23 Mar [Online] Available at:< www.ft.com/cms/s/0/6b56fc9e-54b7-11e0-b1ed-00144feab49a.html> [Accessed 28 March 2011] Jenkins, M. and Wembridge, M., 2011. Northern Rock losses restrict sale options. Financial Times, 9 Mar [Online] Available at:< http://www.ft.com/cms/s/0/961563fa-4a24-11e0-b802-00144feab49a.html#axzz1ILvW1tVj> [Accessed 28 March 2011] Read More