Fishburn Hedges

14.09.2009

Jason Nisse, director of Fishburn Hedges, recently examined the communication challenges faced by a Northern Rock preparing to return to the market, in an article published on Gorkana.

September has been the cruellest month in the credit crunch. Two years ago there were queues outside Northern Rock branches as customers, unsettled by Robert Peston's exclusive about the bank's cry for help, demanded their money back and prompted Government intervention. Last September regulators stood by as Lehman Brothers collapsed, delivering a jolt to financial markets, commentators and consumers just as they could sniff recovery.
 
This September has seen talk of green shoots and renewed speculation about the Government cashing in on one or all of its stakes in Lloyds, RBS and Northern Rock. The City is making noises that it could warm to this prospect - particularly in its reaction to Lloyds' figures last month.
 
Setting aside the political ramifications – which Darling, Brown and co will understand all too well - the crucial audience to consider when selling out of Lloyds and RBS is the City. It will decide the price it is willing to pay for these stakes, and that is the yardstick by which the success of any sale will be judged.
 
However, the communication challenges around Northern Rock are altogether more complex. As the events of 13 September 2007 and onward have shown, there is a complex relationship between consumer confidence and City confidence at play.
 
What shored up the Rock's balance sheet was not green shoots, local support or the actions of the new management, it was a guarantee from HM Treasury. Selling out of the banks is not about turning a profit on the investment - that's not why the Government ended up with majority stakes in Lloyds and RBS and 100% of Northern Rock. It is about returning a private sector banking system back to the private sector. And that means taking away the Government guarantee.
 
So, it follows that if you take the safety net away, with it will go the savers seeking safety.
 
Is this a problem for Lloyds and RBS? Half year figures published last month indicate these banks have stabilised. In any case there wasn't any real danger of savers deserting RBS and Lloyds - lynching their senior management was more likely. So HMT can return the banks to BAU without having to worry about a massive SNAFU.
 
However Northern Rock is a different kettle of fish. The most recent figures tell a dismal story, with mortgage arrears two or three times worse than its rivals, no momentum in savings, no momentum in new business and no way of seeing how this bank can be recreated as a prudent, medium sized mortgage bank.
 
Try to float the Rock and - even with a Government guarantee still in place - customers will be looking over their shoulders to when the guarantee is removed. And you can't remove the guarantee on the other banks and leave Northern Rock protected. This is exactly the sort of thing the European Commission would see as state aid.
 
The challenge for the Rock (and the Treasury) is to convince commentators, analysts and consumer groups that Northern Rock has a secure independent future before you test out this hypothesis by floating it. And that will take patience and prudence and time that this Government does not have.