Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 520 - 539)



  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 looks unsustainable?

  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 to.[4]

  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 decision.

  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 a sixth.

  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 project?

  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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