UK Asset Resolution, Northern Rock Asset Management, Bradford & Bingley

Most coverage of UKAR's recent results is terribly superficial and seems to miss the point, for example from the BBC:

Northern Rock Asset Management (NRAM), the so-called "bad bank" that manages Northern Rock's mortgage book, repaid £2bn of the government's loan in 2011.

But the bank still owes £19.7bn, said UK Asset Resolution (UKAR), the firm responsible for running down the bad loans of NRAM and Bradford & Bingley... UKAR as a whole - including both NRAM and Bradford & Bingley - saw profits rise to £1.1bn in 2011, up from £444.1m a year earlier.

Well done to the people at UKAR, but neither the profit nor the government loan repayment are particularly relevant in themselves, when you are looking at banks, always start off by looking at the balance sheet (taken from their 2011 results, pdf):What is striking is the speed at which they are winding down the balance sheet!

They have persuaded borrowers holding £7.5 billion's worth of mortgages to either repay or re-mortgage elsewhere (a few might have been repossessed); they have managed to offload (or realise) £5 billion of "wholesale assets" (which is presumably mortgage backed securities issued by other banks); and they have unwound net £1.7 billion of "derivative financial instruments" (whatever they are).

They used all this surplus cash and the profits of the year to repay £13.4 billion of "wholesale funding" and £2.1 billion of government funding. If it were up to me, I'd repay the government funding first, which would only take three or four years at this rate, and then hand over what's left to the "wholesale funders", but hey.

The profits of £1.4 billion or so are not actually that spectacular:Gross interest income of £2.7 billion on average total assets of over £100 billion means that the average interest rate they charge/earn is about 2.7% which is incredibly low; and the net interest margin of £1.7 billion on average assets of over £100 billion is less than two per cent (which is the historical norm), but only because their average borrowing/funding costs are laughably low at 1%.

Then you knock off £0.3 billion admin/running costs (very good value indeed) and other pluses and minuses to arrive at their pre-tax profit of £1.4 billion.

So the people at UKAR can be quietly pleased with what they have achieved - winding down the balance sheet, which is their main purpose - but maybe they could try and push up their interest rates a bit? Either borrowers will pay up (hooray) or they will re-mortgage cheaper elsewhere (hooray - because this means the balance sheet will shrink all the faster).