Northern Rock's 'bad bank' makes a profit, 'good bank' a loss

The "bad bank" - Northen Rock (Asset Management) - made a £349.7m profit in the six months to June 30, compared with a £724.2m loss in the same period last year.

This was because borrowers, helped by low interest rates, have been able to meet payments on 90pc of its mortgages.

Northern Rock plc, the "good bank", made a £142.6m first-half loss, which could hamper Government plans for a quick sale of the business to the private sector.

The 'good bank' has been hit because the income it receives from its £10bn of mortgages is not enough to cover interest it has to pay on £20bn of deposits.

It made £191.7m from mortgages payments but had to pay £240.1m to savers.

The nationalised lender was broken in two last year, with £70bn of assets, including around £51bn of potentially risky loans and mortgages, transferred to the "bad bank" to be run down over 20 years.

Around £10bn of performing mortgages were placed in the 'good' one.

Gary Hoffman, chief executive of Northern Rock plc, said in a statement that conditions remained challenging with the mortgage market relatively subdued.

At the 'bad bank' charges for loans that have turned sour fell to £277.6m. This is lower than in first and second halves of 2009, Northern Rock (Asset Management) said in a statement. It also said the number of properties in possession fell to 1,846 compared with 2,061 at the end of last year.

However, the company said increases in interest rates, unemployment and a fall in house prices remained a risk.

The Government loan to the 'bad bank' has been reduced to £22.5bn from £22.8bn at the start of the year.

Full separation of the 'good' and 'bad' banks is expected to be completed in the second half.