Northern Rock shares advance after UK guarantee

Investors greeted the UK government's move to step in and guarantee all deposits held by Northern Rock, sending shares of the struggling mortgage lender as much as 13% higher Tuesday.

September 19, 2007 07:45
3 minute read.


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MarketWatch: In-depth global business coverage Investors greeted the UK government's move to step in and guarantee all deposits held by Northern Rock, sending shares of the struggling mortgage lender as much as 13% higher Tuesday. Chancellor of the Exchequer Alistair Darling made the announcement late Monday in a bid to restore confidence in the bank, which has seen an estimated £2 billion of deposits withdrawn by customers worried they may lose their savings. "I want to put the matter beyond doubt," Darling said in a statement. "This means people can continue to take their money out of Northern Rock. But if they choose to leave their money in Northern Rock, it will be guaranteed safe and secure." Adam Applegarth, Northern Rock's chief executive, was ebullient about the decision, exclaiming "bloody hurrah," in a memo to staff, who have been struggling to cope with queues of customers demanding their money. The bank also took out full-page advertisements in several UK newspapers Tuesday apologizing to customers and emphasizing that branches are "open for business as usual." The measures appeared to stem the tide of withdrawals. The lines outside one branch in the City of London on Tuesday were much shorter than those at a suburban branch the previous day. One local newspaper, the Newcastle Journal, encouraged readers to open accounts and deposit as much as £2,000 each. UK regulation guarantees savers will receive their first £2,000 back as well as 90% of the next £33,000, though those rules have been eclipsed by the government's latest announcement. Shares of Northern Rock rose 11.3% to 314 pence, after rising as much as 13% in early trading. The shares had lost more than half their value over the two previous sessions - with selling driven by news late Thursday that Northern Rock had to arrange an emergency loan facility with the Bank of England after the credit crunch left it unable to raise financing in the market. Other UK mortgage lenders also rallied. Shares of Alliance & Leicester gained 29%, clawing back much of the prior session's 31% plunge, with Bradford & Bingley adding 5.1%. J.P. Morgan analyst Ashley Stuart said the sharp fall for Alliance & Leicester on Monday seemed to be linked to fears of a second potential Bank of England bailout. "There were specific concerns among some investors we spoke to in the afternoon that Alliance & Leicester had been refused additional liquidity by the Bank of England," Stuart said in a note to clients. The current situation remains "highly fluid," Stuart said, adding that there could be market participants with access to information the wider market doesn't have. "In this context we would advise investors that only the bravest and most risk tolerant would enter a position in the stock," he said. Also supporting the banking sector, the Bank of England moved to inject £4.4 billion into money markets through a two-day repurchase agreement at its 5.75% base rate. Analysts at Goldman Sachs belatedly downgraded Northern Rock to "sell" from "neutral" and cut their price target to 296 pence from 1,100 pence, saying any potential buyer of the business is likely to wait for signs of stability in the market first. "Ultimately, the longer the business remains unstable and the credit markets remain shut the more we believe that this maximum realizable value is likely to fall," said Goldman analyst James Chappell. In a separate statement late Monday, Northern Rock said it isn't in discussions with parties over a deal at the moment. "However the board is aware of its fiduciary duty and is actively considering all strategic options," the bank said. The UK government's decision to guarantee deposits came after a meeting between Chancellor Darling and US Treasury Secretary Henry Paulson to discuss turmoil in the credit markets and the liquidity crisis that banks are facing. "Many banks and other financial institutions all over the world are experiencing problems," said Darling. He added that regulatory changes are needed to encourage greater transparency from market participants and to strengthen cross-border cooperation and communication. Darling said the issues will be discussed further during an International Monetary Fund meeting in Washington next month. MarketWatch: In-depth global business coverage

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