Dismay as struggling Northern Rock to pay out £60m to its shareholders

CRISIS-HIT Northern Rock sparked controversy yesterday by pledging to pay shareholders a 30 per cent higher dividend, following its bail-out by the Bank of England.

It said it would honour its 14.2p dividend announced in July - up from last year's 10.9p a share - that will cost the group nearly 60 million, or 7 per cent of the value of shares in the bank.

The payout is expected to be scrutinised by MPs on the Commons treasury select committee.

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Stuart Glendinning, the managing director of Moneysupermarket.com, said: "There will be a lot of people bemused by the whole process - how Northern Rock found themselves in the position they are in at the least.

"Now that they are effectively being backed by a government guarantee, most people will be astonished by the fact that shareholders are still receiving a significant dividend.

"It does seem inappropriate that shareholders should be getting a dividend at the same time the organisation is being underwritten by the Bank of England."

Northern Rock is understood to have taken legal advice before deciding to go ahead with the dividend payment. The firm is not believed to be legally obliged to make the payout and is thought to have until Friday to change its mind. The payment is due on 26 October.

A spokesman for Northern Rock said: "We confirmed on 14 September that the intention was to pay the dividend.

"We are well aware of our obligations and if there is anything new to announce on that, then we would make that announcement."

Shares in Northern Rock have plunged from a February high of more than 12 to a new all-time low of 166.5p yesterday, before they recovered slightly. The bank is now valued at some 728 million.

A weekend report that three hedge funds were considering a break-up of the bank also hurt the stock, as it would leave shareholders with virtually nothing.

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The shares have lost nearly three-quarters of their value since it was announced on 14 September that Northern Rock had asked the Bank of England for help with emergency funding.

The Bank, in its role as "lender of last resort" to the UK banking system, is believed to have stumped up 3 billion to stabilise Northern Rock, a loan that has effectively been underwritten by UK taxpayers.

The company's troubles were prompted by a drying up of the wholesale credit market following a crisis in the US subprime mortgage market, which has made banks and other investors wary of lending to each other.

People queued for hours outside branches to transfer their money elsewhere after the Northern Rock admitted it faced financial problems. Panicked depositors pulled out about 2 billion in only a few days, despite assurances their cash was safe.

Mr Glendinning said: "It's worth making the point that no saver has lost a penny as a result of the troubles of Northern Rock, but shareholders have taken an absolute bath. People who were holding shares at the new year have seen a six-fold decrease in the value of their shares, which is pretty painful."

Shares in the firm plunged 10 per cent in the first hour of trading yesterday amid reports it was struggling to find a white knight to buy the firm. At least 12 of the UK and Europe's biggest banks have ruled out a bid for the Newcastle-based lender.

It is now feared any sale will be at a fire sale-style discount, with hedge funds suggested as the most probable buyers as rival banks steer clear of its tarnished image and funding difficulties.

Gordon Scott, the managing director responsible for financial institutions at Fitch Ratings, said: "It depends on how markets evolve and how markets normalise. Whoever takes over Northern Rock - if, indeed, someone does take them over - still needs to get access to the markets, so that will be critical to any solution."

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Analysts at the investment banker JP Morgan, who calculated the share-price value of Northern Rock at 250p, said: "Given the share-price performance, we see no reason for potential acquirers to pay any premium to the share price and think their bargaining position is becoming continuously stronger."

Meanwhile, Barclaycard has cut the credit limits of half a million of its customers to reduce the number of people defaulting on their debts.

It has also tightened its criteria for new customers and is monitoring its existing cardholders.

The group said the strategy, which it began last year, aimed to cut the level of bad debt it incurred.


SAVINGS levels reached a new high during the second quarter of the year, as consumers tightened their belts in the face of rising mortgage rates.

Britons took advantage of the interest rate increases to set aside a record 47.2 billion during the three months to the end of June, according to a finance website, Unbiased.co.uk.

At the same time, the amount of money people borrowed through credit cards, overdrafts and loans fell to 3.8 billion, the lowest level since the group first began gathering figures in 2001.

That means, Britons borrowed only 8p for every 1 they saved, the lowest figure on record and well down on the 32p they borrowed for every 1 saved during the previous quarter.

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David Elms, the chief executive of Unbiased.co.uk, said: "It is extremely encouraging to see that savvy consumers are taking advantage of the recent rate hikes, with previously unseen record levels of savings now taking place."

The research was based on figures from a number of groups, including the Bank of England, the British Bankers' Association and the Association of British Insurers.

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