THE RISKY loan portfolio that has been branded Northern Rock’s “bad” bank jumped back into profit in the first half of the year, outstripping the performance of the loss-making “good” part of the UK-based nationalised bank.

Northern Rock yesterday broke out the performance of each of the two businesses for the first time since its formal separation at the start of this year.

The new Northern Rock bank, which houses its savings accounts and writes new mortgage lending, recorded a £142.6 million (€171.9 million) pretax loss for the first six months, as the high cost of providing savings accounts eroded margins.

Northern Rock Asset Management, which houses the bulk of the old residential mortgage portfolio and the £22.5 billion government loan, made a pretax profit of £349.7 million compared with a £724 million loss a year ago.

This business returned £1.4 billion to the British taxpayer in the first half – the profit, together with a £300 million repayment of its government loan and a £780 million gain from the purchase of its own debt. The proportion of customers in arrears was 5.64 per cent, considerably higher than the industry average.

Gary Hoffman, chief executive of both parts of the bank, said the rump mortgage business did not deserve its “bad bank” tag.

“The key driver [of the first-half profit] is that our arrears have stabilised and our impairment number has come down,” he said.

Loan impairments more than halved from £602.2 million in the first six months of last year to £277.6 million. However the profit performance was flattered by a swing in the accounting value of derivatives. Stripping this out, underlying profit was £167.3 million.

For the slimmer Northern Rock bank, market conditions remain tough. Its saving book is almost 60 per cent bigger than its mortgage book. Retail balances fell to £17.6 billion at the end of June, from £19.5 billion in January, following the withdrawal of government saving guarantees and the closure of its Guernsey operations but, with competition for retail deposits so fierce, this imbalance has weighed on income.

The business generated £192 million of interest income in the first six months but paid £240 million to savers. It is also carrying high levels of cash – its core tier-one capital ratio is more than 75 per cent, some 10 times the typical ratio of other UK banks. – Copyright The Financial Times Limited 2010