Nationalised lender Northern Rock announced a 24% jump in half-year losses today and warned rising unemployment could pile further pressure on its mortgage book.
The Newcastle-based company posted a pre-tax loss of £724.2 million for the six months to June 30, compared with £585.4 million for the same period last year as the amount of loans turned sour tripled.
Northern Rock - which was taken into public ownership in February 2008 - said impairment charges on bad loans rose to £602.2 million, from £191.6 million last year and expected that figure to be similar in the second half.
The lender also said the share of its mortgages more than three months in arrears had risen to 3.92% by June 30, from 3.67% in March.
Northern Rock now owes the Government £10.9 billion and expects to receive state aid permission from Europe in the autumn as it works towards splitting the businesses in two to prepare for a return to the private sector.
Chief executive Gary Hoffman warned the outlook for the mortgage market "remains uncertain".
"The impairment charge going forward will be influenced by changes in house prices and the levels of unemployment," he said.
"The current environment continues to present Northern Rock with challenges particularly in managing the quality of its loan portfolios."
Northern Rock was notorious for its Together loans, in which it lent up to 125% of home values and as the recession bites and house prices fall, it is these loans that are responsible for its soaring rates of mortgage arrears.
Mr Hoffman said the lender might continue to see a small increase in the three-month arrears rate, but added the share increases were slowing.
The lender said the number of properties repossessed as of June 30 was 2,522, compared with 3,620 at the end of 2008 as a result of attempts to lean less heavily on customers hit by the recession.
Mr Hoffman said the historically low rates of interest had also reduced the number of people falling into arrears as those coming off fixed rate deals were given a soft landing.
"Lower interest rates have resulted in improved affordability for mortgage customers, but confidence remains finely balanced, reflecting expectations for increased unemployment in the coming months," he said.
The Rock was at the centre of the first bank run in 140 years in September 2007 as the credit crunch exposed its over-reliance on money markets.
The crisis forced it to turn to the Bank of England for £26.9 billion in emergency funding before being nationalised when sale attempts fell through.
It initially worked to pay back the loan with mortgage redemptions, encouraging borrowers to seek deals elsewhere.
But this drained money from the mortgage market and in a change of plan earlier this year the bank is now increasing lending and delaying the repayment of the Government loan. Today it said the loan would increase after its planned restructuring.
The lender plans to split into two in order to smooth the path for a move back into the private sector.
It intends to hive off its residential mortgage book as well as the Government's loan and other packaged mortgages and financial vehicles - considered to be more risky - into one bank, AssetCo.
The other lender, BankCo, will undertake new lending and hold the retail deposit book.
Mr Hoffman said both banks would be attractive to the private sector, while the move would also reduce the amount needed from the taxpayer.
But he added it was too early to speculate about a timetable for returning to the private ownership.
"There is no process under way and there is no timetable," he said.
Liberal Democrat Treasury spokesman Vince Cable urged the Government to be "patient" about returning Northern Rock to the private sector.
He told the BBC Radio 4 Today programme: "I don't think anybody is disputing the principle that at some point this bank is going to go back into private ownership, the issue is about the timing.
"I think if the Government aim to do this quickly this would be a very bad mistake indeed, because they will get a very poor price for it. It will mean that overall the taxpayer will take quite a heavy loss on this overall transaction. So they have got to be patient, they have got to hold on to it.
"And in the meantime, the bank can provide a useful function in providing mortgage lending to sound borrowers."
Northern Rock said new lending in the year as a whole would now be around £1 billion short of the previously envisaged £5 billion, as it reins in its balance sheet ahead of its planned restructuring.
Gross residential mortgage lending in the first half of the year amounted to £1.3 billion, with the amount of new loans doubling in the second quarter as the firm looked to step up its mortgage lending. It also has £1.2 billion in the pipeline.
Mr Hoffman said the bank still intends to lend around £9 billion in 2010.
Meanwhile, retail deposits at Northern Rock were down to £18.4 billion from £19.6 billion at the end of December.
Mr Hoffman said this was because there had been a "flight to safety" during the banking crisis last year and the bank, as it was already Government-owned, was a beneficiary of the panic.
But he said the market had returned to a more normal state, where consumers were assessing the quality of the product and its suitability.
He described the loss as "disappointing", but said on an underlying basis the deficit was £269.6 million.
The lender's losses includes a non-cash accounting charge as well as £156.4 million of Government funding charges which the firm expects to recover in a rebate later this year if it gets state aid approval from the European Commission.
Northern Rock's results are in stark contrast to those of Barclays and HSBC, which together reported first half profits of around £6 billion yesterday.
The pair, which were able to shun taxpayer bailouts, are likely to be the highlights of the week's banking results.
Lloyds Banking Group and Royal Bank of Scotland - 43% and 70% Government owned respectively - are not expected to have fared as well as their independent rivals.
Labour MP Jim Cousins, a member of the Commons Treasury Select Committee, said: "Northern Rock's workers deserve a huge pat on the back because £18 billion out of £27 billion has been repaid.
"But of course what people must bear in mind is that the £18 billion of repayments have meant the best mortgages in Northern Rock have now been disposed of."
The MP for Newcastle upon Tyne Central told BBC Radio 4's The World At One that ministers did not have a "coherent model" for the lender and had never had one.
He said: "There has always been two policies - one is that it was embarrassing to have it nationalised and get rid of it as soon as possible and get the taxpayers' money back as soon as possible ... the other is to consider it to be an important business ... and to nurse that business back into strength in the longer run.
"But I don't think they have ever quite been worked out."Reuse content