Page 1: Introduction
Northern Rock is the eighth largest bank in the UK by market capitalisation. In other words the value of the shares in the business. Its main business is residential mortgage lending. It also carries out other lending activities, such as commercial and personal lending. In addition it offers insurance protection, in conjunction with its insurance partners. On the funding side of the business, Northern Rock offers its customers a competitive range of savings accounts.
Northern Rock became a public limited company (PLC) in 1997, meaning that anyone can buy shares. The shares are listed on the Stock Exchange. One of the reasons for going public was to raise more capital for growth. The banking industry is competitive and large businesses have a strong advantage.
Growth is therefore an extremely important strategy. The chart shows the growth in the total assets of Northern Rock since it went public - giving a good picture of the expansion of the business.
People who want to keep their savings secure and earn a competitive rate of interest deposit them with Northern Rock. These funds, along with funds generated through other means, can then be used to lend to people who want to invest in property (or to borrow for other reasons). People saving money with Northern Rock in savings accounts (retail funding) is of course one very important part of its funding strategy.
Northern Rock also raises major volumes of funds through:
- covered Bonds
- wholesale (treasury raised) funds.
These are different and more complex concepts but are just as critical in the generation of funds to lend to its borrowers.
Typical borrowers will be people wanting to move home. These may be families wanting a bigger house, people who want to take out a new loan with a better interest rate (re-mortgaging) and some people wanting to buy their first home.
Savers receive interest and borrowers pay back their loans with interest. The type of loan taken out to buy property is usually a mortgage. Mortgage repayments are typically based on a long-term (about 20 years) period, but many people remortgage at a much earlier stage (about 3-5 years) and try to get a better rate of interest. The mortgage is repaid with interest and is secured against the property. It is called a secured loan because if the borrower runs into trouble, the property may have to be sold to repay the loan, although this is only in extreme cases.
This case study shows how Northern Rock's strategy (plan) is to keep growing. It is successful in this because it:
- focuses on what it does best
- has lower costs than rivals
- gives a top priority to the needs of customers
- is well managed.
Northern Rock's shareholders have put funds into the business by buying shares and in return they receive an income in the form of dividends, which is their share of the profits. There are therefore three main stakeholder groups who have an interest in Northern Rock's growth: