Falls in house prices of as little as 5 per cent a year could put a strain on Northern Rock's plan to pay back the Bank of England's loans and shed its Government guarantees, the nat-ionalised lender's management said yesterday.
Ron Sandler, the bank's executive chairman, told the Commons Treasury Select Com-mittee: "If things were to remain as they are, I'm confident the plan can be delivered." House price falls of 5, 10 or 15 per cent "would put a great deal of stress on our ability to deliver the plan", he added.
Ann Godbehere, the finance director, told MPs a recession similar to that of the early 1990s, with a 10 per cent fall in house prices this year and next, would force a six-month delay for repayment of the Bank of England's £24bn loan and would require the Government's guarantees of deposits to remain for longer.
Mr Sandler said the plan to repay the Bank of England money, which supports the bank's loan book, depends partly on the ability of Rock customers to find mortgages elsewhere when their initial rates end. The best customers will find it easier to get deals elsewhere, raising the prospect of the lender being left with riskier customers in a process of "adverse selection", Mr Sandler said.
"We are operating in extremely hard to predict economic circumstances," he added. The bank will review its plan in the third quarter of this year to check "whether or not it remains robust in the world as we see it".
Despite the risks involved, Mr Sandler and Ms Godbehere said their plan was "robust" and that they expected to repay 25 per cent of the central bank's loans this year, 75 per cent by the end of 2009 and the rest in 2010. A key element of the plan is to raise retail deposits to replace the wholesale funding that Northern Rock relied on too heavily before it nearly crashed in September. Mr Sandler said the bank would consider increasing its 76-branch network if European state aid rules did not place such big constraints on expansion.
Mr Sandler said Northern Rock's brand had been damaged but that he had decided to keep it. It is in Northern Rock's commercial interest to keep its sponsorship of Newcastle United and the Newcastle Falcons, he added.Reuse content