Northern Rock warned yesterday that it will be "significantly loss-making" this year and would not make break-even until 2011 as the nationalised bank posted a £168m pre-tax loss for 2007.
Costs from the bank's second-half crisis and losses on loans and treasury investments more than wiped out £296m of profit from the first half. In 2006, the once-booming mortgage lender made £627m.
The bank took charges totalling £422m on its holdings of structured investment vehicles and collateralised debt obligations. It also increased provisions for customer loans to £240m from £81m as conditions in the housing market worsened and the bank predicted a "significant" deterioration in recoveries.
The results raised the spectre of large-scale house repossessions by the bank while it is in government ownership. At the end of last year properties in possession were 2,215, more than three times the number a year earlier.
Northern Rock said the increase in repossessions was "in line with our policy of rapid movement towards recovery where it is clear the borrower will not maintain payments and where we have higher risk". Ron Sandler, the bank's executive chairman, said Northern Rock's repossession policy would be unchanged under nationalisation.
The bank shelled out £41m in fees and expenses to advisers including Goldman Sachs and Blackstone in the second half of last year as it tried to find a buyer. Another major item in the £127m of restructuring costs was a £76m charge on new head office buildings ordered under a scrapped expansion drive.
The company also revealed that it would pay Adam Applegarth, the chief executive who led it to near-implosion, £760,000 for the termination of his contract. The figure was significantly more than the company indicated after Mr Applegarth's departure in December. Mr Applegarth will qualify for a company pension, worth £2.2m, in 10 years. He also gets a staff discount on £75,000 of the mortgage on his home.
Bryan Sanderson, who served as chairman from October to February, will be paid his £315,000 annual salary and £85,000 office expenses until his fixed contract expires in Oct-ober next year.
Mr Sandler, appointed by the Government in February, set out targets to flesh out the operational principles he laid down last month. The bank's third chairman in less than six months said he aimed to repay the Bank of England its £24bn of loans during 2010 and to relinquish the Government's guarantees the next year so that the bank could be returned to the private sector.
Mr Sandler aims to reduce Northern Rock radically from the inflated size it had grown to as it funded mortgage lending through the now-moribund wholesale markets. He wants to strip the bank's balance sheet to about £50bn in 2011 from £107bn at the end of last year by referring mortgage customers to other lenders when they come to the end of their deals. At the same time, he aims to double retail deposits to about £20bn in 2011 to reduce the bank's dependence on wholesale markets.
Mr Sandler faces the thankless task of getting Northern Rock into shape within the constraints of European Union state aid rules. Rivals have warned that they will not put up with Northern Rock using its government guarantees to attract customers.
The bank said it would not promote its state guarantees to customers and would maintain market shares well below recent levels. Retail deposits in the UK will be no more than 1.5 per cent of the market, and the bank will limit itself to 2.5 per cent of new mortgages. Northern Rock also pledged to stay out of the top three in best-buy tables for retail savings products this year.
How the costs mounted
Northern Rock's pre-tax loss for 2007, compared with £627m profit a year earlier
Second-half restructuring costs for the company, including £41m paid to advisers
to terminate the contract of Adam Applegarth, the former chief executive, who left in December
Temporary security measures at Mr Applegarth's home
salary plus £85,000 in annual office expenses to be paid to Bryan Sanderson, the former chairman, until October 2009
paid to the former non-executive director Paul Thompson for five weeks' workReuse content