Britain's fifth biggest mortgage lender has been engulfed in crisis since the Bank of England stepped in to offer emergency funding on Sept. 14, sparking the first run on a major British bank for more than 140 years.
Politicians said since the government has now guaranteed deposits at the bank, a dividend payment would send the wrong message to taxpayers and customers. On Sept. 14 the bank said it would pay the dividend.
"They are in a very difficult situation," said Bruce Packard, analyst at Pali International. "If they pay it, it could be seen that shareholders benefit at the expense of taxpayers. But if they don't pay it, it contradicts what they said on Sept. 14."
The shares are due to trade without the right to the 14.2 pence half-year dividend on Wednesday.
Northern Rock shares fell another 5.2% on Tuesday to 163.1 pence, after hitting an all-time low of 159.8p, down 75% since the BoE's funding help and valuing the bank at under 700 million pounds.
Business is "Sound"
The report of the dividend retreat came after Britain's government appointed U.S. investment bank Goldman Sachs to advise it on Northern Rock, a source close to the Treasury said.
The bank is advising the U.K. Treasury on matters relating to the guarantee safeguarding depositors, the source said.
After guaranteeing the lender's deposits the government is closely involved with the bank's future options, but those options have narrowed as the bank appears unlikely to attract a takeover offer from one of its major domestic rivals.
Matt Ridley, Northern Rock's chairman, said in a letter sent to members of parliament late on Monday that the bank remained "profitable and sound, with assets well in excess of liabilities."
Less than 10% of accounts have been closed since the crisis began, however, and savers had been returning, Ridley said in his letter, adding the bank had not lent recklessly.
The bank's priority "is to find the best way forward for our customers, our shareholders and our staff," Ridley said.
A group of investors headed by a Spanish entrepreneur is interested in buying the bank, Spanish daily El Mundo reported, citing sources close to the entrepreneur's company Nueva Rumasa.
The group wrote to Northern Rock saying Jose Maria Ruiz-Mateos represented a group of Spanish investors and would be interested in acquiring a package of shares large enough to give him control of the bank, the paper said. Northern Rock had acknowledged receipt of the letter but had not responded, it added.
Northern Rock has been seen as a likely takeover target since the Bank of England stepped to help. But the major U.K. banks are not interested in buying it as a credit crunch has made refinancing the mortgage book difficult and costly, and most banks are targeting their capital at faster-growing areas than domestic mortgages, industry sources have said.
If no bidder emerges, Northern Rock is likely to consider a break-up, which could include the sale of parcels of its mortgage book, or going into "run-off" -- gradually winding down its business and mortgage book, sources and analysts have said.