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Rock's 拢500m loss

• Robert Peston
• 4 Aug 08, 09:00 PM

I have learned that Northern Rock will tomorrow morning announce a substantial loss of around 拢500m before tax - or a 拢200m loss on a so-called underlying basis, stripping out one-off charges - as it presents its first trading results as a nationalised bank.

However it will also disclose that it is paying back the huge loan it received from the Bank of England, which is guaranteed by taxpayers, faster than it had expected to do.

The Rock's slump into bigger-than-expected losses has three main causes.

There will be one-off charges associated with reorganising and shrinking the business, including the cost of 1300 redundancies which were announced last week.

Also it has changed its approach to accounting, which has had the effect of increasing reported losses.

But most attention will be on the charges it takes to cover losses it expects to suffer on mortgages made to financially stretched homeowners who are having difficulty keeping up the payments.

These loan impairment charges have risen sharply - just as those of HBOS, Alliance & Leicester and Bradford & Bingley have all done.

Mortgages provided by the Rock where the borrower is three months or more behind with payments rose dramatically in the first four months of the year, by two thirds as a percentage of all its mortgages.

The Rock is expected to say tomorrow that the loss is towards the worse end of what it expected when it created its business plan in the spring but is consistent with that business plan.

But even if trading conditions became much worse, there would be nothing for the Rock's savers to worry about because the bank is state-owned and therefore cannot collapse.

The better news for taxpayers is that the Rock is making faster-than-expected progress in paying back the 拢26.9bn it owed to the Bank of England at the end of last year.

The reason for the early repayment is that it has been applying pressure to borrowers to pay off their mortgages or take their business to other banks.

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HSBC: Half right

• Robert Peston
• 4 Aug 08, 10:31 AM

this morning that will turn out to be more than the sum of the profits (and losses) of every other major British bank.

So it's worth taking notice of remarks made by the boss of this uber-bank.

, HSBC's chairman said:

"It is clear that growth models in our industry based on high and increasing leverage will no longer be sustainable. It is also clear that complexity in financial services and the recent consequences of failed risk management needs to be addressed.

"Along with its supervisors, our industry - including lenders, underwriters and investors - needs to reflect on the lessons for risk management, capital adequacy and funding.

"Ultimately, the real economy will recover from this crisis, though it may get worse before it gets better. Financial markets will not, and should not, return to the status quo ante".

For those of you not completely fluent in bankese, I'll translate. Green said that most banks over many years lent far too much to borrowers with scant chance of repaying. And they did so in such a complicated way that they couldn't understand the risks they were running.

Both of these bad habits have to be dropped for good, he added.

Oh, and as we approach the anniversary of when most of us date the onset of the credit crunch, he implied that the world's great banks are in large measure responsible for the mess we're in - and that the mess may well get worse before it gets better.

Green will be viewed by some of his banking peers as veering dangerously close to being a smug b. But HSBC has probably earned the right to lecture, because it still has buckets of capital (its important tier 1 capital ratio is a healthy 8.8%) and unlike so many of its competitors it hasn't needed to impoverish its shareholders by demanding they stump up more cash.

Which is not to say that HSBC's record is unblemished. Its first half results, released this morning, show that its pre-tax profits fell by 28% or almost $4bn to $10.2bn.

But $10.2bn of profit, or more than 拢5bn, will turn out to be more than combined earnings in the comparable period of Royal Bank of Scotland (which is expected to make a loss by analysts), Barclays, HBOS, Lloyds TSB and Alliance & Leicester.

Some of HSBC's success is an accident of its birth: it's massively strong in the still-buoyant economies of China, Hong Kong, Asia and the Far East. But some is also due to its long and strong tradition of penny-pinching prudence and caution - old-fashioned banking virtues neglected by so many of our financial institutions.

But HSBC is a human institution, it makes mistakes. These are manifest in a 58% rise to $10bn in loan impairment charges and in a $2.9bn loss generated by its US operations.

HSBC's error in the last banking cycle was - true to its soul - of an old-fashioned sort: it paid too much for a business that turned out to be something of a dog.

In 2002, , a US subprime lender which even then was described as "troubled". At the time, the FT reported analysts as saying that "Household needed to sell because its funding costs were being driven up by worries among investors about its accounting methods and business practices".

So there may have been a touch of hubris in HSBC believing that it could fix a model already identified as a touch rickety.

However HSBC's then chairman, - who is now chairman of Vodafone - justified the deal by saying: "If you look at the low inflation, low cost environment, consumer finance is one area you would want to be in."

He couldn't have been more wrong. Household gave HSBC direct exposure to the collapse of the bottom end of the US housing market, and has delivered loss after loss to the group.

Which is why any applause for Green's lecture on the evils of modern banking practices should perhaps be three and a half fingers and not the full hand.

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