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Northern Rock Says Customers Come Back

Embattled British bank Northern Rock said a majority of customer calls it had received on Tuesday were to reinvest money in accounts, and queues for cash withdrawal were considerably down from past days.

Britain's government late on Monday promised it would guarantee the savings of depositors at the bank -- an attempt to halt the worst run on a major UK bank in recent memory.

The crisis was sparked by news on Friday that the Bank of England was making emergency funding available to the Newcastle-based group.

Customers line up to enter a Northern Rock branch in Bromley, in south-east London, 14 September 2007.
AFP
Customers line up to enter a Northern Rock branch in Bromley, in south-east London, 14 September 2007.

Northern Rock, also Britain's number-five mortgage lender and the top seller of new mortgages in the first half of 2007, said confidence among customers was returning. "The tide has turned ... the picture is quite obviously changing," a spokesman said.

Its call centres had received 3,472 calls by 1030 BST, less than 10% of the volume at the same time on Monday, and 80% of the calls were to reinvest money, it said. Customers were also cancelling previous orders to withdraw money, it said.

Long queues at branches seen on Friday, Saturday and Monday were not as evident on Tuesday, and the bank said there were lines at just four branches by mid-morning on Tuesday.

Calling Customers

One customer said the bank was calling clients to ask them if they still wanted to withdraw their money after the government guarantee.

The bank said any customers who have had to pay a charge or transaction fee to withdraw money in recent days will have that charge refunded if they reinvest the money in a similar account by Oct. 5.

Half as many customers were accessing Internet accounts compared with Monday, and most people were logging onto the accounts at the first attempt, it said, after widespread problems with its Web site in previous days.

Northern Rock's problems stem from its unusually high reliance on wholesale markets to fund its mortgage lending. The cost of borrowing in that market rose sharply in recent weeks and liquidity dried up, as banks, fearful of potential exposure to dodgy U.S. home loans, became reluctant to lend to each other.

Northern Rock itself has negligible exposure to U.S. subprime loans and it and the government have said it remains solvent.

Its shares rebounded on Tuesday after the government guaranteed its deposits and regulators said they would consider overhauling the safety net for all U.K. savings.

Shareholders May Still Lose

Northern Rock shares, which had more than halved in value since Friday, jumped over 10% at one stage as the government's measures offered reassurance after the worst run on a major U.K. bank's savings in recent memory, and prompted hopes of a concerted effort to boost liquidity in the credit markets.

"Saying depositors are guaranteed still means equity holders can lose everything," banking analyst Alex Potter at Collins Stewart said. "What this will do is stem the outflow (of savings). It doesn't fix their problem without a reversion to normality on the wholesale markets."

There have been mounting concerns that Northern Rock's problems would spread across the industry, and the government's move on Monday helped shares rebound across the sector, as the Treasury reiterated on Tuesday that no other banks beyond Northern Rock had asked the BoE for help.

The cost of insuring U.K. mortgage banks' debt against default fell in credit markets, with five-year credit default swaps on Northern Rock tightening 33 basis points to 165 basis points.

Attempts by Northern Rock's chief executive Adam Applegarth, as well as government, bank and regulatory chiefs, to allay customer fears and unease across the sector had done little before Tuesday to reduce panic among some account holders.

But credit analysts said it was still unclear what the outcome would be for other obligations, including for bondholders.

"By law, senior creditors are pari pasu with depositors but you can bet that the government has no intention of underwriting NR's debt," Royal Bank of Scotland analysts said in a note.

"Upside for bondholders remains a full bid -- outside of that, sub debt looks vulnerable even at these levels."

The liquidity crunch on the credit markets and ensuing turmoil at Northern Rock have left the bank's wholesale funding-focused strategy in tatters, and analysts agree it is now likely to be taken over -- should a buyer be found.

The bank said late on Monday that it was not in any talks but would consider all strategic options.

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