From FT Alphaville:
Here’s what Deutsche Bank are telling their clients regarding Northern Rock on Friday:
As the most leveraged bank in Europe, with assets to equity of 58x, a modest reduction in Northern Rock’s net interest margin has a significant impact on the group’s profitability, sustainable returns and valuation. If we assume that Northern Rock’s cost of deposit funding converges to its cost of wholesale funding, driven by a re-pricing of NRK’s deposits and increase in wholesale funding mix, we estimate that the normalised cost of funds is c22bps above base rates compared to our previous estimate of 16bps. This reduces the normalised return on tangible equity to 10%. Conventionally, a bank earning cost of capital ought to trade at book value. Current tangibleNAV per share is estimated at 439p.
We retain our Sell recommendation given the risks of a sustainable and significant increase in the cost of funding for the bank. However, until more detail on the term and size of the potential liquidity provision are made clear, our target price remains under review.
And here’s what Credit Suisse have to say:
At this stage, we think any attempt to value Northern Rock on 2008 earnings is pointless. Resorting to the Bank of England as a lender of last resort effectively means Northern Rock will, at least for a period, be running the bank in “safe mode”. We expect new mortgage lending to slow sharply, and asset growth to stop or even go backwards in the near term.
Even before the Bank of England announcement, secondary market spreads suggested writing new mortgage business was barely profitable anyway…We suspect spreads will widen out further as a result of this announcement.