Northern Rock 'will make the taxpayer £9bn-£11bn'

The taxpayer will make £9bn-£11bn profit on the £37bn bailout of Northern Rock when it is eventually run down, the body which holds the public's shareholdings in banks said yesterday.

UK Financial Investments (UKFI) said the sale of the good part of Northern Rock to Virgin Money for up to £1bn and the run-off of the so-called bad part of the bank over the next 12 to 15 years – including interest payments and repayment of loans – could see a return of £46bn-£48bn. That would mean the taxpayer makes a substantial profit.

UKFI pointed out that the annual return to the Government on such an outcome would be between 3.5 per cent and 4.5 per cent, while the cost of funding state loans to the former building society ran at 3.9 per cent. That debt has now been cut to £20.7bn.

Northern Rock was nationalised in February 2008 after the Government was forced to back it following the first run on a UK high street bank for more than century in September 2007.

It was split into the good bank and bad bank at the start of 2010 and the former sold to Virgin Money in November for £747m up front and other potential payments of up to £280m. The bad bank has stopped selling mortgages and simply collects and services outstanding loans.

UKFI also claimed that its analysis showed that the sale of Northern Rock to Virgin Money had been the best result for the taxpayer.

It said Deutsche Bank, which had been brought in as its adviser on the sale, had put an estimate on the proceeds of between £863m and £977m.

This compared with Deutsche's estimates of the proceeds for the taxpayer from an initial public offering from £270m to £495m, a remutualisation worth between £415m or a sale of Northern Rock's deposits and run-off of its loans which could have made from £561m to £625m.

UKFI also said its analysis showed that holding on to Northern Rock until 2013 (when it had to be sold under EU state bailout rules) would not greatly have added to its valuation, which even then would have been a quarter less than Virgin paid.

It said that while there had been some political support for remutualising Northern Rock, it would have been the least productive outcome for the taxpayer. This is because the Treasury would have had to give free shares to the bank's customers as they converted into members of the mutual.

At the same time, the value of taxpayer stake in a mutual would have been far less certain over time.

The sale to Virgin also provided the most attractive outcome in terms of new competition in the UK banking sector, according to UKFI. It preserved the existing branch network and has the potential to "devlop into a challenger bank in the future".

At the start of the auction in June last year, 52 parties indicated an interest in Northern Rock and 24 signed confidentiality agreements. Of these, 10 were private equity firms, four mutuals including at least two building societies, eight new banks or bank vehicles and two existing financial institutions. Only five made first-round bids and only two were in the second and final round.