Examination of Witnesses (Questions 520
TUESDAY 16 OCTOBER 2007
Q520 Ms Keeble: How did that compare
with the interest rates on the lending that you were doing?
Mr Applegarth: The interest rates
on our lending, including fees that are effective interest rate
were about LIBOR plus 90 basis points.
Q521 Ms Keeble: Because looking at
the profile of the business falling due, I have to say again it
would be helpful if we could see the graphs as you had them because
looking at the profiles it looks very much as if you were borrowing
short on the markets and that business was falling due at the
same time as you were lending quite long, or longer, which obviously
Mr Applegarth: If that was the
case it would be, but it was not, and maybe I can write and give
you the liquidity level.
Q522 Ms Keeble: If we can have the
figures and if we can have the exact profile of the business,
I think that would be very helpful.
Mr Applegarth: I am very happy
Q523 Ms Keeble: Moody's Investors
Services noted in August 2006 that your funding profile remained
your biggest challenge and the relative lack of retail funding
was the one that was most likely to put a negative pressure on
your ratings in the future. How did you react to those concerns
and what assessment did you make of those?
Mr Applegarth: One of the things
we have been able to do with Moody's, by moving into securitisation
and lengthening the maturity of our funding, is to encourage Moody's
and we actually got upgraded by Moody's to Aa3 on the back of
our longer funding profile.
Q524 Ms Keeble: When you said you
lengthened it, what by and when?
Mr Applegarth: Effectively by
adding securitisation. We started securitisation back in 1999
and then we introduced covered bonds in 2004. Both of those have
maturities considerably longer than traditional wholesales. On
covered bonds in particular we have only done deals of a minimum
of five years' duration and a maximum of 15, which is how you
get the average life of seven years, so it was by introducing
securitisation and covered bonds that lengthened the maturity
of our funding that Moody's actually upgraded us.
Q525 Ms Keeble: Also your share price
fell by 20% between February and June this year. What assessment
did you make of that?
Mr Applegarth: I think you can
ascribe the share price fall to the matters that the Chairman
was highlighting earlier in terms of the tightening of the credit
markets, so you saw the price of funding increase, you saw a slowdown
of our lending in the second quarter and therefore clearly people
were assuming that in volume terms our profits would be lower
over the next two years than had previously been the case, and
indeed that was confirmed when we did a pre-close statement to
the market at the end of June.
Q526 Ms Keeble: You had some warnings
then that there was suspicion about your business model and how
robust it was, and you were already seeing the impact of that
on the business, so what did you do as a result of that?
Mr Applegarth: We had certainly
some warnings that the credit markets were tightening and therefore
the price of funding was increasing, so the action was to change
our strategy and announce that publicly to the market. That was
one of the reasons why the share price was coming down around
the half year because we had made extremely transparent the change
in strategy, so we were slowing down lending, we were removing
high-risk assets from the balance sheet and we had announced a
programme to sell commercial lending; our unsecured lending books
and our commercial buy-to-let books.
Q527 Ms Keeble: Do you regret now
with hindsight, which is always a wonderful thing, that you put
so much reliance on wholesale funding?
Mr Applegarth: Hindsight is a
wonderful thing. It is distressing that the global freeze was
not in a year's time when we had slowed down the lending and removed
assets off the balance sheet.
Q528 Ms Keeble: Would you accept
that to some people it looks suspiciously like gambling?
Mr Applegarth: No I do not accept
that because I think we reacted reasonably and properly to what
we were seeing in the market place in terms of the tightening
of the credit spreads, and therefore we slowed down the rate of
asset growth and publicly announced a change in strategy, even
though we knew that would mean lower profit growth going forward,
because it was the right thing to do.
Q529 Chairman: But other banks' share
prices were not falling at the same rate as yours. You mentioned
my comment on the credit crunch but it does seem a wee bit unreal
to us. It seems that you were out of step with all other banks
here, you say that it was only because a global credit crunch,
which nobody foresaw by the way, that you find yourselves in this
position. It does seem a wee bit unreal to us as a Committee that
you are the only bank in this country to have precipitated a bank
run in 140 years, so there really must be something deeper at
stake here. If I could extrapolate from your point, at the end
of the day I think you are blaming the Bank of England because
you did not get a credit line early on?
Mr Applegarth: We certainly did
not have access to a facility that is available to European banks
and American banks, and that would have helped us, but it was
a sensible and prudent thing to do to put the backstop facility
in place. Ironically, it was the announcements and the leaking
of the backstop that caused the retail run and it was the retail
run that reduced our liquidity.
Q530 Chairman: It had to be announced.
At the end of the day you are blaming Mervyn King.
Mr Applegarth: I am not blaming
anybody. The cause was the chain of events from worries about
the credit quality on US sub-primes linked all the way through
to a UK-only prime lender.
Chairman: At the same time, Mervyn King
points out that Countrywide in Los Angeles had a different strategy
from yourself and did not get into that position. Andy?
Q531 Mr Love: Dr Ridley, would you
agree that whatever else happens in the future that the good name
of Northern Rock will be a casualty of your failures?
Dr Ridley: I would agree that
there is some damage to the brand of Northern Rock and that is
a matter of enormous distress to me and my colleagues. I am part
of the group, so is Adam, who took Northern Rock through flotation
in 1997 and we were very proud of the decisions we took on that
occasion to make Northern Rock into a good corporate citizen.
We have created 3,500 jobs since then. We have set up the Northern
Rock Foundation and Adam and I were on the Board that took that
Q532 Mr Love: I understand all of
that but with all the financial services organisations and others
that you are now talking to about the future of Northern Rock,
are any of them suggesting that they will retain the name "Northern
Rock" into the future? Is there anybody that is suggesting
that Northern Rock will survive as a name?
Dr Ridley: That is a matter for
them, not for us, but it is true to say that on the retail funding
side, the name Northern Rock is unlikely to continue. It is worth
pointing out that on the mortgage lending side all our feedback
from other brokers is that they know we are a good and responsible
and careful lender, and that has not changed.
Q533 Mr Love: I think you are accepting
that Northern Rock is now finished as a name. I have just returned
from the United States and New York and Washington and all they
wanted to know about was Northern Rock. They have not heard of
any other British banks but they know about Northern Rock and
they know about the queues outside your bank over a period of
time. Do you fully understand the depth of the reputational damage
you have done to the banking system in the United Kingdom?
Dr Ridley: I fully understand
and it causes me enormous distress. As I said, we had tried very
hard to be a good corporate citizens, creating jobs in this country,
delivering fair and good deals to customers, and giving 5% of
our profits to charity.
Q534 Mr Love: Where does your share
price stand today compared with the high earlier this year? Is
it a quarter, is it a fifth, is it a tenth, where do you stand
in terms of your share price?
Dr Ridley: I think it is about
Q535 Mr Love: So your share value
is about a sixth of what it was; your name is in the dustbin of
history; the reputational damage you have done to the British
banking industry is severe. Can I turn to Sir Ian Gibson, why
have you not accepted his resignation, thinking about all of those
things that have happened in the last few months?
Sir Ian Gibson: Perhaps it would
be helpful at this point Chairman, if I explain the process that
I have followed about resignations from the Board.
Q536 Chairman: Sure.
Sir Ian Gibson: First, back on
30 August I asked Board members, both executive and non-executive,
if they would be willing and would present their resignations
because that might well have affected the ability to reach some
corporate solution, which we were actively seeking at that time.
All of them did and those have been on the record in the Board
minutes from that point. Later, in the days of the run, the Chief
Executive to the Chairman and the Chairman to me similarly said
they would be willing to resign. In the week following the run,
starting on the Monday following, I consulted with brokers, with
shareholders, with other board colleagues and said, "Is this
what you believe is right because if it is it is clearly what
the Board is prepared to do?" At that point there was no
contradictory feedback, the overwhelming feedback was: "You
can worry about that later. What you need to do right now is direct
the bank through a crisis, find a way to keep people motivated
within the place, and respond to customers through that crisis,
and when the immediate crisis is passed, Ian, then that is the
time you think about the make-up of the Board." That is what
I shared with colleagues, that is what I shared with the authorities,
and that is what I continue to do with the Board. It is an issue
I discuss weekly.
Q537 Mr Love: When you come to share
that with the shareholders at the annual meeting, do you think
they will be as sympathetic?
Sir Ian Gibson: Yes I do.
Q538 Mr Love: We will find out when
you get to that. Can I move on to Mr Applegarth. We have already
heard that over the first six months of this year one in five
of all mortgages, including remortgages, were sold by Northern
Rock, and if you just take new mortgages I think it was one in
ten. By anybody's estimation that is aggressive lending. You said
earlier on that the quality of your book for that six-month period
was probably better than it was previously because of lessons
you had learned. Would you like to think again about that statement?
Are you putting your name and your reputation on the quality of
the lending you have done earlier this year?
Mr Applegarth: Yes, it is really
a fallout from the work we had to do over the previous two and
a half years in order to get a Basle II waiver. You have to show
that you dynamically manage scorecards from new lending all the
way through to arrears and possessions and put that information
back into your front end score cards, so, yes, I am quite happy
with that statement.
Q539 Mr Love: We mentioned earlier
the Together product that you have where you give up to 95% secured
against a home and the rest, 30% I think it is, in unsecured lending.
What is the level of loans you have as a result of this Together
Mr Applegarth: The Together project,
you are quite right, is a first-time buyer product which allows
them to buy their home and also pay for furniture, so it is a
secured loan bundled together with an unsecured loan. There are
two separate products. It accounts for about 20% of our share
of stock. Its three month plus arrears at the half year stage
were 0.84% which is still lower than the industry average for
secured from the CML, which is 1.06, so it is for us a higher
risk book and therefore it is charged at a slight premium but
it still performs better than the industry average.
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