Thursday, July 27, 2006

Northern Rock profits up 22% and bad debts charges up 100%

Northern Rock's bad debt charges double to £44.5m

Northern Rock played down a large increase in bad debt charges by announcing a large 22% rise in mortgage lending over the last year. The company also announced that it was working with Lehman Brothers to enter the "near and sub-prime" mortgage market which is aimed at "riskier" borrowers.

Posted by denzil @ 09:40 AM (605 views)
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4 thoughts on “Northern Rock profits up 22% and bad debts charges up 100%

  • I wonder if someone can help explain this?.

    If a lending company such as NR lend you money, how can profits go up so soon. I mean say they lend me £100,000 over 25 years, I would be paying aprox £850 per month for the term of the mortgage, would’nt the profit only be met after the full term?. And what happens if in the near future thousands of people enter into IVAs, as the interest is frozen so would’nt the profit (interest) be lost?.

    Sorry if this is a dumb question, I’m sure banks must make the money some how.

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  • autopilotengage says:

    Sure kpjcomp, all down to clever accounting. When a bank lends you money, the outstanding amount, plus any interest, becomes an “asset”, and appears on the accounts as so. To protect against the possibility that you won’t pay up, they make a bad debt provision in the accounts, and this is shown as a liability or a cost. Thus, the bank/building society doesn’t recognise the money loaned as a loss, only the interest you will pay, net any inflation minus any bad debt provision and operational costs, as profit forecasted over the term of the loan. The chance of you not paying back the money is therefore already “dealt with” via the bad debt provision. Obviously, if the bad debt provision minus inflation plus operational costs plus the original loan amount exceeds the total repayment amount, the company would not make any profit and would therefore be unwise to loan you the money. Quite a simplistic model explaination, though essentially right i think.

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  • I guess that means that their ‘profits’ are closer to being estimates.

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  • Ontheotherhand says:

    Why is it that when companies borrow money and they are not AAA rated the debt is called JUNK, but when our banks lend mortgages to people who might not repay it is called “SUB PRIME”. I guess the press release would not look so good if Northern Rock was planning to enter the junk mortgage market.

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