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EU clears Northern Rock split

Source: Reuters - Thu 29th Oct 2009

State-owned lender Northern Rock won clearance from European regulators to be broken up, paving the way for a sale, as Britain named a top dealmaker to oversee its banking investments.

UK Financial Investments, which manages the government's stakes in bailed-out banks including Royal Bank of Scotland and Lloyds, named veteran UBS banker Robin Budenberg as its chief executive on Wednesday.

He will be charged with selling down billions of pounds in bank shares and finding a buyer for Northern Rock's assets.

The European Commission is reviewing a raft of bank bailouts across the 27-country EU and is expected to tell many lenders to divest assets, close branches and cut market share.

On Monday state-aided Dutch bancassurer ING said it would split its operations, leaving the firm's balance sheet 30 percent smaller than before its bailout.

RBS and Lloyds are awaiting Commission state-aid rulings, along with Dexia and Belgium's KBC.

The Northern Rock blueprint was aimed at easing EU antitrust concerns after the bank received billions of pounds in state aid and deposit guarantees to rescue it from the brink of collapse.

The restructuring will split the lender in two, creating a new savings and mortgage bank, Northern Rock Plc, which will take deposits and offer savings and home loans. 

The rest of the group, once one of Britain's most aggressive lenders before it succumbed to the credit crunch, will become Northern Rock Asset Management, holding existing mortgages and unsecured loans, and closed to new lending.

This portion has been dubbed the "bad bank" though Northern Rock said on Wednesday 90 percent of mortgages included in the unit would be fully performing and are not in arrears.


Northern Rock is set to be the focus of interest from suitors hoping to step into the competitive but lucrative UK market, though the Treasury indicated on Wednesday it also hopes to sell off the closed books. Analysts say there are few obvious buyers, despite government support for increased competition.

The bank did not comment on expressions of interest.

"It is clear the UK market is overconsolidated and Northern Rock is a brand that has proven to be very resilient" Chief Executive Gary Hoffman told reporters on a conference call.

"There is no process or timetable, but Northern Rock can potentially play its role (in increasing UK competition)."

British retailer Tesco, which announced 1,000 jobs in Northern Rock's hometown of Newcastle, northern England, on Wednesday as part of its plans to expand in financial services, has been named as one potential suitor.

Virgin Money, the consumer credit arm of Richard Branson's Virgin Group, has also said it is keeping an eye on opportunities. 

The head of National Australia Bank's UK arm told Reuters on Wednesday it would consider acquisitions that would add to its capability, but did not comment on specific banks.

Any potential buyers of Northern Rock assets would not benefit from a government guarantee on deposits, which is already under review. They would, however, be subject to lending constraints, though that would affect price, Hoffman said.

New lending volumes are capped at 4 billion pounds in 2009, rising to 9 billion in 2010 and 8 billion in 2011.

The overhaul will see the government increase its existing 15 billion pound loan by at least 8 billion to boost new lending, but it will force Northern Rock to keep retail deposit balances at or below 20 billion pounds, near the current level, to the end of 2011.

The government loan could rise to 27 billion pounds, if Northern Rock takes up standby liquidity facilities.

It expects to repay that over "an extended period." Hoffman indicated a timeframe of around a decade would be appropriate.

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