The British taxpayer will make a £9 billion to £11 billion profit on the £37 billion bailout of Northern Rock when it is eventually run down, the body that holds the public's shareholdings in banks said yesterday.
UK Financial Investments (UKFI) said the sale of the good part of Northern Rock to Richard Branson's Virgin Money for up to £1 billion ($1.9 billion) and the run-off of the so-called bad part of the bank over the next 12 to 15 years - including interest payments and repayment of loans - could see a return of £46 billion to £48 billion. That would mean the taxpayer makes a substantial profit.
UKFI pointed out that the annual return to the Government on such an outcome would be between 3.5 per cent and 4.5 per cent, while the cost of funding state loans to the former building society ran at 3.9 per cent. That debt has now been cut to £20.7 billion.
Northern Rock was nationalised in February 2008 after the Government was forced to back it following the first run on a UK high street bank for more than a century in September 2007.
It was split into the good bank and bad bank at the start of 2010 and the former sold to Virgin Money in November for £747 million up front and other potential payments of up to £280 million.
The bad bank has stopped selling mortgages and simply collects and services outstanding loans.
UKFI also claimed that its analysis showed that the sale of Northern Rock to Virgin Money had been the best result for the taxpayer.
It said Deutsche Bank, which had been brought in as its adviser on the sale, had put an estimate on the proceeds of between £863 million and £977 million.
This compared with Deutsche's estimates of the proceeds for the taxpayer from an initial public offering from £270 million to £495 million, a remutualisation worth upwards of £415 million or a sale of Northern Rock's deposits and run-off of its loans which could have made from £561 million to £625 million.
UKFI also said holding on to Northern Rock until 2013 (when it had to be sold under EU state bailout rules) would not greatly have added to its valuation, which even then would have been a quarter less than Virgin paid.
It said that while there had been some political support for remutualising Northern Rock, it would have been the least productive outcome for the taxpayer. Treasury would have had to give free shares to the bank's customers as they converted into members of the mutual.
The sale to Virgin was also the most attractive outcome in terms of new competition in the UK banking sector, said UKFI.