Northern Rock Blames IVA Providers For Increasing Bad Debt Figures

Lender Norther Rock yesterday reported that its adverse debt costs had almost doubled, but the increase failed to take the gloss off a forecast-beating set of first-half results.

The Newcastle-based mortgage lender kicked off the latest round of banking results by lifting its profit growth target from 15 to 20 per cent, after unveiling a 14.4 per cent rise in underlying pre-tax profits to £273.7 million, fuelled by the strong housing market.

First-half growth was underpinned by record net lending of £7.3 billion, up 22 per cent from a year ago. The low-cost mortgage lender also managed to reduce further its cost-to- income ratio to 28.9 per cent, from 29.8 per cent a year ago.

The company played down the rise in bad debt charges, which spiralled from £22.5 million to £44.5 million, arguing that they represented just 0.12 per cent of mean customer advances and would fall in the second half. Loan arrears also ticked up after Northern Rock wrote a larger proportion of higher risk mortgages, targeted at first-time buyers, under its “together” family of products. Nevertheless, the company said that the level of arrears in this higher risk element of its loan portfolio were still below the industry average for all secured residential loans.

Adam Applegarth, the chief executive, said: “Unemployment is the main driver for arrears and that is drifting higher, so we are seeing a drift up in arrears. But I wouldn’t use a verb more racy than drift.”

He said that the rise in bad debt charges was prudent, given Northern Rock’s expectation of a “moderate deterioration” in credit risk across the retail banking sector amid slowing economic conditions, rising interest rates and higher energy costs. The company went on to say that it planned to work in partnership with Lehman Brothers to enter the self-certification and so-called “near and sub-prime” mortgage market, which is targeted at borrowers with patchier credit records.

Britain’s eight biggest banks said that the loans would be off balance sheet and would not involve any credit risk, but it would earn fee income from the arrangement.

The news came as Mr Applegarth launched a blistering attack on the recent liberalisation of the UK bankruptcy laws. “The goals it was trying to achieve were good — the Government was trying to encourage entrepreneurs — but the way it has been implemented has been lousy,” he said.

Mr Applegarth added that the bankruptcy reforms had triggered a knock-on effect on the number of people entering so-called individual voluntary arrangements (IVAs). Under an IVA, interest on debt is frozen in exchange for an agreed amount being repaid each month for a set period.

“We have seen a number of ambulance-chasers springing up and chasing business for IVAs by advertising on television,” he said.

The Enterprise Act reduced the time that it takes for someone to be discharged from bankruptcy from three years to just one year, making it more attractive to people struggling with bad debts. Northern Rock said that the legislative changes had not made a big impact on its business, because it has only a small book of unsecured loans.

The Times