Northern Rock still had some stock market value on Friday – £1.8bn – but the lender’s franchise and business model have been severely damaged. And that limits the options facing this former trailblazer of the banking world.

Its only reliable source of funding – customer deposits – is walking out of the door of branches from Gallowgate to Moorgate. The bank’s use of emergency funding from the Bank of England has evidently weakened the value of the Northern Rock brand name.

Meanwhile, the capital markets remain closed to business.

Thanks to the Bank’s intervention, Northern Rock should be able to meet debts to institutional lenders that fall due in the coming months. But its ability to continue new lending is in doubt.

Adam Applegarth, the chief executive, is confident the business has a future, saying his request for Bank funding was granted on the basis that Northern Rock has a “sound business plan”.

“The media coverage makes it look as if the Bank has pulled up a dumper truck and dumped cash in,” he said, stressing that he approached the Bank and not vice versa. “In time, with good customer service, customers who leave us will come back.”

He anticipates that one day Northern Rock will be able to tap the capital markets again, and will be capable of being a competitive element in the mortgage market. “We would expect Northern Rock to be a lower growth business with higher margins,” he said.

But as things stand this weekend, that seems a long way off. And assuming there is no dramatic and immediate thawing in the capital markets, that leaves Northern Rock facing only two options.

First, it can shut doors to new customers and let the business go into “run-off”. As existing customers paid off their mortgages, so the company would pay off its debts to the Bank in an orderly way. Second, it can try to find a buyer. Neither is an attractive way forward.

Going into run-off would see the mighty Rock quietly wither away. And a sale to a stronger parent – the option likely to be favoured by the regulator – looks hard to pull off, say investment bankers.

People familiar with the Northern Rock situation say buyers have been sniffing around in recent weeks. But no one was willing to put an acceptable price on the table.

HSBC is large enough to gobble up the company. However, it is coming under fire for not devoting more energy to its Asian roots. Lloyds TSB might be interested, although it already has a standalone mortgage business in the form of Cheltenham & Gloucester.

Overseas, Citi looks like a contender. Indeed, the US bank bought Egg earlier this year.

But the strategic benefits of buying Rock are probably not large enough to impel a conventional lender to move.

Bankers say alternative buyers may be found among Wall Street investment banks such as Lehman Brothers and Morgan Stanley, or private equity and hedge fund firms such as Cerberus and Fortress. Yet with Northern Rock so weakened, and its share price and market value continuing to fall, it is hard to see why even these buyers – traditionally fond of taking a risk – would want to move in a hurry.

Home-grown chief with youthful air
Adam Applegarth, Northern Rock’s chief executive, has, like many of its senior people, moved up by promotion through the company ranks. He is also – again typically of the Rock – a product of the company’s home region, to which he has retained a strong allegiance.

He became chief executive in 2001 while still in his late thirties, having joined Northern Rock in 1983 as a graduate. Born in Sunderland in August 1962, he studied pure maths and economics at Durham University. He lives with his family in Tyneside.

Mr Applegarth, now 45, has an energetic and youthful air, doubtless helped by his passion for sport. He is particularly fond of cricket, which he plays to a high level, and rugby. Regarded within Northern Rock as dynamic and astute, he is intimately involved with the company’s operations, tending to leave the job of appearing on platforms within the region to foster Northern Rock’s public role to other directors, including the chairman Matt Ridley.

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