Taxpayers will have to wait up to 15 years to recoup the money spent on rescuing Northern Rock, according to the first official analysis of potential returns from one of the highest-profile bail-outs of the financial crisis.
A report published on Tuesday by UK Financial Investments, which manages the government’s stakes in banks, forecast an eventual profit of up to £11.2bn from Northern Rock. However the bulk of that will be absorbed by funding costs on the loans provided to the bank since its nationalisation in 2007.
Overall UKFI expected to extract £46bn-£48bn from the £36.8bn of government funds that have been pumped into the bank. It said this amounted to an annual return of 3.5 per cent to 4.5 per cent excluding tax. After estimated annual funding costs of 3.9 per cent, which will eat into that return, the taxpayer is expected to break even on its investment.
“Taxpayers are going to get every pound back from their investment in Northern Rock,” said Keith Morgan, who oversees the government’s stakes in Northern Rock and Bradford & Bingley.
He stressed that UKFI also expected the government to make up to £21.8bn from B&B, taking its eventual return from the two failed banks to £33bn. This could take 10-15 years, however, as it is dependent on borrowers gradually repaying their mortgages.
Nevertheless, the research will be a relief for the government, which came under fire last year for selling the “good” part of Northern Rock - its branches, retail deposits and some mortgages - to Virgin Money for a £400m loss.
The government received £747m in cash for the Northern Rock business – far below the £1.4bn of equity it injected – and is in line for further payments based on future performance. Deutsche Bank, which advised on the sale expects it to ultimately deliver £863m-£977m for taxpayers.
That compared favourably with other disposal options, including floating or remutualising the bank, both of which would have generated less than £500m, according to UKFI. Justifying the timing of the sale, the group said that waiting until 2013 would have reduced the proceeds to £650m-£735m as a result of the deteriorating economic environment.
While the sale to Virgin Money was considered a symbolic moment in the rehabilitation of Northern Rock, the vast bulk of taxpayer returns – £45bn-£47bn – will come from the bank’s old loan book.
This legacy business has been merged with the mortgage portfolio of Bradford & Bingley, which ran out of money in 2008. UKFI expected to recoup £49bn from the £27.2bn it injected into B&B following its collapse.
The group revealed it paid out £3.2m in fees relating to the sale of Northern Rock. Deutsche Bank took £1.84m, which UKFI said was a low price compared with demands of up to £7m from other banks. The remainder was distributed among firms including lawyers, accountants and PR advisers.