Northern Rock scraps dividend because of takeover talks

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The Independent Online

Northern Rock bowed to political pressure yesterday by cancelling its interim dividend as it emerged that the bank was in talks about being bought.

The troubled bank said it had scrapped the £59m payout to shareholders. It pledged last week to honour the commitment but had weakened its line on Monday. Northern Rock said the decision was taken because it was in talks with potential buyers.

"The board believes that it would not be appropriate to make any interim dividend payment until it can make a full announcement regarding the outcome of discussions with other parties and the development of the business model," Northern Rock said last night.

The bank added that it was in early talks with more than one suitor but that no price had been discussed.

The dividend had become a source of controversy because of the perception that the Government's guarantee of deposits was being used to pay shareholders. The Chancellor, Alistair Darling, has said the Government is prepared to support Northern Rock's savers by guaranteeing deposits but that shareholders should pay the price for management's actions.

Northern Rock announ-ced a 30 per cent increase in the dividend to 14.2 pence in its first-half results on 25 July, after issuing a profit warning in June and saying its funding was under pressure. MPs on the House of Commons Treasury Committee want to question the bank's chairman, Matt Ridley, and the Financial Services Authority over the dividend.

Jose Maria Ruiz-Mateos, a Spanish investor, has made a written approach, but Northern Rock is not thought to be considering this seriously. Northern Rock's shares fell to a new low of 163.1p yesterday bef-ore it announced that it was in talks.

Lloyds TSB came close to buying the bank two weeks ago but pulled out because of the risks of funding the business. Chris Flowers, the former Goldman Sachs banker who specialises in turning round distressed financial companies, is rep-orted to be part of a group of hedge fund investors looking at breaking up the business. Citigroup and Nat-ional Australia Bank might also be interested.

Northern Rock's near-collapse was caused by the drying up of liquidity in the banking system. The Bank of England is trying to address the problem today in an auction of £10bn of three-month money to Britain's banks. Industry sources said the Bank might reduce the 6.75 per cent penalty rate for its standby facility, which is the minimum that bidders in the auction for three-month money must pay. This could help to reduce the stigma if a bank needs to borrow in the auction. The rate at which banks borrow from each other has fallen to well below the Bank's penalty rate, increasing the impression that a borrower in the auction would need the money badly.

The Bank of England will not disclose who takes part in the auction but banks fear chaos if one of them borrows at the penal rate and is identified. Last month Barclays was forced to publicly explain its use of the Bank's overnight facility after it became clear it had drawn on the facility.

The auction was announ-ced last week and was seen as a U-turn from the hard-line stance on the credit crunch taken by the Bank's Governor, Mervyn King.

Jitters over the strength of the banking sector persisted yesterday. Financial stocks and sterling were sent lower by concerns about the deposit protection scheme holding just £4.4m, raising the prospect of a huge levy on the banking industry if there was a major bank failure.