Northern Rock shares plunge on emergency loan from BoEBy Richard Fletcher and Richard Blackden
Last Updated: 4:54pm BST 14/09/2007
Shares in Northern Rock tumbled today after the lender was forced to issue a profits warnings and turn to the
Bank of England for emergency financial support.
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In a trading update this morning, the Newcastle-based lender confirmed it had arranged an emergency financial
assistance from the Bank of England and that profits will be hit both this year and next.
Despite the insistence of the bank that there was no need to panic, its website is struggling to keep up|
Chief executive Adam Applegarth declined to give a figure on the loans it has arranged with the Bank of England
but said: "It's clearly a substantial amount because we've been using mortgage paper as collateral." The under-fire boss also
declined to say how much interest Northern Rock will have to pay.
Philip Aldrick: Northern Rock customers have no reason to panic
My Telegraph: The UK Economy..
However, the bank did admit that profits for the current financial year will now be around £500m-£540m, down
from the City's current forecast of £647m. The news sent the shares plunging and they ended the day down 31pc at 438p.
Q&A: The future of Northern Rock
Adam Applegarth: CEO under fire
Northern Rock: What the City says
Analysts at Credit Suisse said: "The loan from the Bank of England is temporary. Fundamentally Northern Rock
depends on debt investor confidence in its model, and without that, there is no model."
Mr Applegarth, who has run the bank since 2001, added: "I can't see when the global liquidity freeze will end.
It started on August 9 and banks basically stopped lending to each other."
The court of the Bank of England is understood to have met last night to approve the unprecedented support.
Bank stocks and sterling tumble on Northern Rock crisis
Northern Rock statement
HM Treasury, Bank of England and FSA statement
Northern Rock is believed to be paying the Bank of England a penal rate of interest believed to be 6.75pc -
a whole percentage point above base rate. "Customer deposits are safe," said a source to close to the Bank.
Mr Applegarth is likely to face severe criticism for building a business based on short-term funding and could
even come under pressure to quit the firm he has worked for since he left university.
Unlike many other mortgage lenders Northern Rock relies on borrowing from other financial institutions, rather
than using customer deposits. As the sub-prime mortgage crisis in America has spread contagion around the world the money
markets which Northern Rock borrows from have seized up.
Last month, Northern Rock admitted it was struggling to raise money in the markets and in June was forced to
issue a profits warning. The lender is now the highest profile UK casualty of the so-called credit crunch reaping havoc across
Paul Kavanagh, a partner Killik & Co, said: "Northern Rock's model is unique, but this is nevertheless
still a sign of the lack of liquidity in the lending market. The market is not going to like this - banks will lead the market
One City analyst, who wished to remain anonymous, said: "This is a potential disaster… it is already
the most shorted stock in the FTSE. This will be a major blow for it."
But despite the insistence of the bank that there was no need to panic the bank's website was struggling to
cope as customers attempted to transfer funds.
The crisis in the credit markets has caused several banks to raise their mortgage rates this week after the
cost of their own funding soared due to the market crisis.