Northern Rock braced for more share price drops

Source: Stock Market Digital

Date :17/09/2007 09:24:35

Northern Rock is facing another day of share price drops and customers withdrawing savings following its emergency bail-out from the Bank of England last week.

The troubled bank's share price slumped by 32 percent on Friday on confirmation of the emergency loan, while reports suggested that customers had withdrawn some two billion pounds – eight percent of its total deposits – in savings since the announcement.

Worried customers besieged Northern Rock branches on Friday and Saturday to withdraw their savings - despite assurances from politicians, regulators and the bank itself that it would not fall victim to the global credit squeeze.

More of the same can be expected this morning, with the bank extending its opening hours by two hours in anticipation of long queues.

As well as extending its opening hours, Northern Rock has also increased bandwidth on its online banking, which has struggled to cope with the volume of people trying to access the website.

It is the first major British financial institution to reveal a serious reaction to the global credit crunch sparked last month by a crisis in the US sub-prime, or high-risk, mortgage sector.

Commercial banks are nervous about lending to each other because of fears centered on bad investments linked to US sub-prime home loans. This has led to a shortage of cash for banks like Northern Rock to lend to customers.

Takeover target

The drop in the bank’s share price has made the bank a takeover target, the bank’s chief executive conceded in a Sunday newspaper interview.

"Our share price has come off 30 percent," Adam Applegarth was quoted as saying by the Sunday Telegraph. "You have got to be vulnerable if your share price has come down. It's up to the bidders to make a bid."

It is understood Northern Rock was almost sold to rival bank Lloyds TSB.

However, the deal fell through because of the difficulty of borrowing money in the current financial climate.

Prospects for a potential bid were boosted when the Bank of England said that any bank that buys Northern Rock would still have access to the emergency loan that the troubled lender received, the Press Association reported, citing an unnamed central bank source.

According to the Sunday Telegraph, one rescue plan involved carving up Northern Rock's mortgage book -- totalling 100 billion pounds -- and distributing it amongst other lenders.

Borrowing

Meanwhile, David Cameron, leader of the Conservatives, has accused Gordon Brown of failing to rein in borrowing during his decade as chancellor from 1997.

"This government has presided over a huge expansion of public and private debt without showing awareness of the risks involved," Cameron wrote in the Sunday Telegraph.

Chancellor Alastair Darling said Cameron was "jumping on a bandwagon" in an interview with Sky News, adding that the British economy would weather recent developments.

Northern Rock's share price closed down 31.46 percent at 438 pence on Friday.

In early trade in London the bank's shares, which had lost 32 percent on Friday, fell from 438 pence to 300 pence. And shares in fellow bank Alliance & Leicester fell by 13 percent.

September 17 2007