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Northern Rock shares plummet as it seeks Bank of England emergency funding

Northern Rock has issued a stock exchange announcement following the news that it has asked the Bank of England to provide it with emergency funding.

Shares in the lender have plummeted by 24 per cent after the decision was confirmed last night.

In the announcement, Northern Rock says that if the current market conditions remain until the end of 2007 it expects underlying profit before tax for 2007 to be around £500m to £540m, compared to £588m in 2006.

It says the outlook for 2008 will depend on the speed of the recovery in global wholesale funding markets and where interest rate spreads stabilise in the global wholesale funding markets, as well as the evolution of the company’s business model.

Although Northern Rock expects its new lending volumes to increase once the wholesale funding markets return to more normal volumes and prices, it must now plan on the basis that the wholesale funding markets will not return to historic levels in the short to medium term.

Northern Rock says although it has continued to raise new funds, these have been mainly in the short term wholesale debt markets and the amounts raised have not allowed the lender to refinance maturing liabilities as well as to write new business at previous levels.

It says it has been using its cash and other liquid reserves to support the funding of its business.

Northern Rock says that it concluded that it was important to ensure that additional standby liquidity arrangements are available so has agreed with the BoE that it can raise such amounts of liquidity as may be necessary by either borrowing on a secured basis from the BoE or entering into repurchase facilities with the BoE.

Such repurchase facilities would include securities that have prime residential mortgage assets as underlying collateral. The lender says that this additional source of funding will enable it to adapt its business model in line with the developing market conditions.

In the first 8 months of the year, Northern Rock’s total net lending was up 43 per cent over the same period in 2006, with net residential lending up 55 per cent. Given the current global liquidity squeeze, Northern Rock expects total asset growth for 2007 to be around 9 per cent.

The stock exchange announcement also includes information on the credit quality of its loan books. It says that 3 months plus arrears in the residential book were 0.47 per cent at the end of August, still under half the industry average, and 1.21 per cent on the standalone unsecured book. Three months plus arrears on the Together secured book were 0.86 per cent at the end of August.

Chief executive Adam Applegarth says: “We are seeing extreme conditions in global liquidity, which have impacted on world markets. As a result, we have taken prudent action to rein back our lending until markets normalise.

“Against that backgroun it is inevitable, albeit disappointing, that our profits will be affected. We remain focused on prime lending in the UK mortgage market and our credity quality remains robust. The support of the Bank of England through this facility reflects a recognition that Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book.”

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