Royal Bank of Scotland, Northern Rock and Lloyds Banking Group - Treasury Contents

Examination of Witness (Question Numbers 101-119)


12 JANUARY 2010

  Q101 Chairman: Mr Hoffman, welcome to the session. Apologies for having kept you waiting but it is a heavy evidence session today. Can you introduce yourself for the shorthand writer, please?

  Mr Hoffman: My name is Gary Hoffman. I am Chief Executive of Northern Rock.

  Q102  Chairman: We finished our last session in November 2008 with you promising to come back to talk about competition in the North East. That competition framework is working well in the North East and nationally. Can you expand on that pregnant question, please?

  Mr Hoffman: Absolutely, Chairman. As you say, I was last here in November 2008 and I think Northern Rock has made good progress in its rehabilitation since then. We have just, as you will know, completed our legal and capital restructure. That was completed over the year-end. There were three objectives of that. The first was to make sure that taxpayers' investment in Northern Rock was minimised. The second was to ensure that we grow to success and help with the mortgage market rather than shrink to success, which you will recall was the story of 2008. The third is to prepare for return to the private sector. The legal and capital restructure is about those three things. I will just expand on all of those three, if I may, briefly.

  Q103  Chairman: Briefly.

  Mr Hoffman: On the first one, it is over two years, of course, since the original problems at Northern Rock. It was taken into temporary public ownership in February 2008, given a large loan by the Government, taxpayers' money, of £29 billion, made good progress on repaying that loan down to around £15 billion during 2008, and then in August it was recognised that it was not just cash, not just running out of petrol, but it was a profitability and a capital problem. The Government announced that it would have to invest up to £3 billion of capital, of shareholders' funds, into Northern Rock in August 2008, and that was of course before the world fell apart, Lehman's and everything else, in October 2008. So there was a real danger that the investment in Northern Rock would have to be considerably more than the £3 billion earmarked in August 2008. Following my appearance at the Treasury Select Committee in November 2008 we worked on a revised strategy, which we have just implemented, in terms of restructuring the company and I am pleased to say that we have minimised the investment because the amount of capital going into Northern Rock on 1 January 2010 is £1.4 billion, so a lot less than the £3 billion, even though the world fell apart afterwards. So that is the first objective, and we think we have met that well. The second was, you will remember during 2008 we were trying to shrink to success, so we were aligning repayment of the government loan and active redemption, as it was called, encouraging customers to leave Northern Rock, pay off their mortgages early and go to competitors, and using that money to repay the loan. That had, of course, a good impact on reducing the loan but it had an impact also on the mortgage market. It took capacity out of the mortgage market considerably. So we were asked by the Government to work on a new strategy that enabled us to grow to success and I am pleased to say that they asked us to lend £4 billion in 2009 and we have met that target. So we have begun to grow to success again. The third objective, return to private sector, there is no timetable for this, no deadline, but in restructuring the company into Northern Rock PLC, which is a small savings and mortgage bank, very well capitalised, very liquid, that I think will be attractive to private investors in due course, and in Northern Rock Asset Management, which is the old company, which has the majority of mortgages and no savings, that will repay the government loan, albeit over an extended period. In summary, I think we have made good progress against the objectives. I think Northern Rock has rehabilitated itself well. The Northern Rock brand has been very resilient.

  Q104  Sir Peter Viggers: You say the Government set a timetable but in fact there are predators already circling, are there not, preparing to make a bid? Who will decide on the timing of a transfer to the private sector?

  Mr Hoffman: The Government. Clearly, we work closely with the Government on it. They have set no deadline to me. All they asked me to do is to make sure that the return to taxpayer would be done at some time and that we minimise the amount of investment. Yes, there have been some informal discussions. You would expect that. People have been talking but there have been no formal discussions and there is no timetable and no deadline. I suppose there is no good reason why you would rush to do it, I think. We should make sure that we maximise the value to taxpayers when that transaction is done.

  Q105  Sir Peter Viggers: You used the word "rehabilitation" of the Northern Rock brand. How damaged do you think the brand is?

  Mr Hoffman: That is a good question. If I were sitting here two years ago—and of course, I was outside Northern Rock two years ago—I would have worried whether the Northern Rock brand would survive. We were all worried about that but I think it has proved to be resilient, in large part due to the fantastic work of my 4,500 colleagues. I think they have done a great job in very difficult circumstances. As you know, they are based in Newcastle and Sunderland and up and down the country. When I speak to customers, which I do most days, they are pleased that we have survived. I am not saying we are prospering yet but I think we are on a good trajectory, and I think the Northern Rock brand can be a force to be reckoned with in the UK financial services market in the future, and I am pleased about that.

  Q106  Ms Keeble: I just wanted to ask, do you still need the savings guarantee or do you think that it is time to let that go given the improvements in your position that you have described?

  Mr Hoffman: I am pleased with the progress we have made. The restructuring now enables the government, our shareholder, to review whether that guarantee remains in place. I should emphasise it does remain in place. They are reviewing it. In part, they are reviewing it because we have made progress and because the Northern Rock PLC bank is a well capitalised, very liquid bank. Our customers' money is very safe with us now and will be in the future.

  Q107  Ms Keeble: Obviously, presumably, the guarantee has somewhat distorted the market because you have attracted some people to you. Would you positively say that you think the government should not now just review it but should remove it, so that you are back on a level playing field with everybody else?

  Mr Hoffman: There was a study by the Office of Fair Trading that concluded that we had not distorted the market and of course, we have operated within a self-imposed competitive framework, making sure that we do not appear in the "best buy" tables, because I am very conscious for my competitors that we benefit from—

  Q108  Ms Keeble: Can I ask you again: do you think that the government should just remove the guarantee? If, as you say, it is not effective and you do not need it, do you think it should now be removed?

  Mr Hoffman: I think they are right to review it but they will decide the timing, not me.

  Q109  Jim Cousins: Mr Hoffman, I think it probably comes as a relief to both of us that the Committee is not very interested in you this morning. What I wanted to ask you about, because this is always overlooked in the discussion of these matters, is the old bank of Northern Rock, the remainder bank that has no savings, does no new business, but a very large number of people—perhaps you would like to tell us how many it could be, but it could well be 300,000 or 400,000 people—will find their mortgages parked with the old bank. Could you tell us what actually is likely to be the number of mortgages that are parked with the old bank? Could you also tell us how we are going to make sure that that very large number of people, many of whom of course are not terribly wealthy, are going to get a reasonable mortgage deal so that they can trade out as individuals as well as the old bank?

  Mr Hoffman: Yes, and I think I should address that head on. People have called it "the old bank", people have called it "the bad bank", and I think that is an inappropriate label. It is about 400,000 mortgage customers that are with Northern Rock Asset Management PLC. That is the old Northern Rock. That has become Northern Rock Asset Management PLC. The best way of describing it is that 90% of our 450,000 customers have remained in the same company, with Northern Rock Asset Management PLC, and my job as Chief Executive of that company too is to ensure that those customers are served brilliantly, and the job of people working for Northern Rock Asset Management will be to ensure customers are served brilliantly, that they see no change. I am pleased to say that over the legal and capital restructure at the end of the year I have written to all of those customers—I have only done that over the last 10 days. I think we have written in a very straightforward way. We are clear about the fact that their mortgage stays there but we intend to serve it well. The mortgage rates in there are not the best and they are certainly not the most expensive.

  Q110  Jim Cousins: It is going to be, in the present mortgage market, quite difficult for those 400,000 mortgage holders to move their mortgage easily anywhere else. They are stuck with the old bank. They are stuck with the old Northern Rock. I am extremely concerned because the geographical distribution is skewed to northern England, those 400,000 families represent quite a large percentage of the number of mortgage holders in northern England, and I am concerned that they get the best possible deal for themselves and that they do not find themselves forgotten, trapped in an institution which is not offering them good deals.

  Mr Hoffman: My objective is, of course, to provide those customers with good service and good deals too. I should have said that over 90% of those mortgages are good performing mortgages, so only 5% of those mortgages are more than three months in arrears. People talk about it as a bad bank but it is not true. I share your concern but I will be making sure that those customers receive a good deal and receive a great service. I am very happy for them to keep their mortgage with Northern Rock for the period of that mortgage, for 20 years.

  Q111  Jim Cousins: Most of them will not have any alternative. What pressures will you be under from UKFI, the Government, to ratchet up their mortgage rates in order to bring the Government a good return?

  Mr Hoffman: No, I am not under any pressure, and do not expect to be under pressure from UKFI to do that. We have a standard variable rate which is 4.79%, a loyalty rate for customers that have been with us over seven years of 4.54%. As I say, it is not the cheapest but it is certainly not the most expensive. That is where I expect us to be and our customers are saying generally they get a good deal from us and they are pleased with the service, and I expect that to continue.

  Q112  Jim Cousins: Do you intend to offer this very large number of people special rights of representation? There has been a lot of talk about mutuality. Do you expect—and this is one way in which perhaps it needs to be done—to create a special organisation through which the interests of those people can be talked about directly with you?

  Mr Hoffman: I talk to customers nearly every day and—

  Q113  Jim Cousins: I am not referring to talking to them individually but as a body.

  Mr Hoffman: The objective of Northern Rock Asset Management PLC is of course to repay the debt over a period but also to serve those customers very well and give them good deals. I do not think those things are mutually exclusive. It is in our interests to give customers good deals and repay the government debt, and I think we have shown so far that we can do that.

  Q114  Mr Todd: If 90% of Northern Rock is a bad bank, what was the point of the break-up?

  Mr Hoffman: To minimise the investment by the taxpayers. What Northern Rock Asset Management has become, and, as Mr Cousins said, it does not lend any new money so it does not have a deposit-taking—

  Q115  Mr Todd: So it is really about focus, if you like.

  Mr Hoffman: Yes, and Northern Rock Asset Management does not have a deposit-taking licence, therefore it operates under a different regulatory regime. The amount of capital we have to hold is a lot less.

  Q116  Mr Todd: So what risk is the taxpayer exposed to in the asset management business that you have retained?

  Mr Hoffman: The remaining government loan is in Northern Rock Asset Management and will be repaid over time by the natural maturity of that mortgage book.

  Q117  Mr Todd: Therefore one could estimate that over a period of time based on the maturity of the mortgages. Have you done that estimate?

  Mr Hoffman: Yes, and it will take an extended period because what we do not want—

  Q118  Mr Todd: When you say "extended period", what do you mean by "extended period"?

  Mr Hoffman: Up to 20 years. I think there will be significant repayment over the next three or four years, say 50% of it would be repaid, but then, because we do not want to force customers to redeem, as we were in 2008, it would be natural that if customers want to stay with us, they can, or they can take a mortgage from Northern Rock PLC or from any other competitor. It would be the natural maturity of mortgages that will repay the government debt.

  Q119  Mr Todd: What is the difference between UKFI's role in this and the Treasury's?

  Mr Hoffman: UKFI is now responsible for the governance of Northern Rock alongside RBS, Lloyds and Bradford & Bingley. So we were governed previously by the Treasury and by Shareholder Executive. That has now been taken over by UKFI but the loan is given by the Treasury.

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