The ‘bad bank’ that was created when Northern Rock split its lending and savings arms at the start of the year has announced that it returned a profit in the first three months of 2010.

Northern Rock Asset Management (NRAM) – the new bank which got the majority of the nationalized institution’s loan book when it split – was deemed a ‘bad bank’, while £19billion of savings went with Northern Rock plc, the ‘good bank’.

Northern Rock is widely seen as the catalyst of the financial crisis, when large chunks of its mortgage book, riddled with bad credit loans that were going to default, got bundled up and sold across the global markets.

The Government saw fit to rescue the Newcastle-based bank by lending it more than £25billion in 2007, and then taking it into national ownership in 2008.

NRAM saw a £140million loss during the second half of 2009, but it has announced that income from interest on its loans, and lower-than-expected impairment charges have helped to pull it into the black.

“The underlying financial performance has continued to strengthen in 2010 and, on the basis of its unaudited management accounts, NRAM was profitable at an underlying pre tax level for the first four months of 2010,” the bank said in a statement.

But, it added, “there can be no certainty that this improving trend will be maintained given the uncertainties that remain in relation to the general economic environment, including such factors as the impact of rising interest rates and unemployment on future arrears and impairment charges.”

For the time being, Northern Rock’s bad bank will continue to be reliant on Government support, and, it says, the cost of its loan from the taxpayer has a significant impact on its profitability.

The Government has the right to change the loan facility provided, including costs, fees and additional charges for converting the loan into capital if further funding is needed at the bank.

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