Newcastle Building Society announces Capital Issue

Newcastle Building Society has announced it has boosted its capital through the issue of £10m of Permanent Interest Bearing Shares (PIBS). The PIBS have been issued on a private basis.

The issue of the PIBS was made given the expectation of the Society experiencing exceptional write-offs resulting from its exposures to Icelandic banks. The Society's gross exposure to these banks, before set-off positions and recoveries, is £43m. In order to ensure that Members' interests are protected, the Board has assumed only nominal recoveries for capital planning purposes. In the view of the Board, this approach is conservative and leaves the potential for further improvements to capital if recoveries are made and/or set-off achieved.

The Society's total capital base is very strong; with Tier 1 capital levels being approximately 10% even after absorbing these exceptional losses, leaving the Society well capitalised. Moreover, further to the announcement made by the Chancellor on 8 October about the Government's recapitalisation scheme, the FSA has reviewed the Society's capital position and is satisfied that it has the capital and strategic plan in place that would be necessary if the Society were to apply for access to the Government's recapitalisation and guarantee schemes.

Both the capital raising and the background circumstances have been discussed fully with the FSA and those agencies that provide ratings on the Society, Fitch and Moody's, before their recent ratings announcements.

The Society will make an underlying operating profit for 2008; however, due to the exceptional circumstances already identified in this announcement, it will post an overall loss for the year.

Chief Executive, Colin Seccombe said, "This additional strengthening of our capital, coupled with our well funded balance sheet, leaves the Society in a very strong position.

"The vast majority of our lending is to the traditional prime residential market, with no exposure to the sub-prime and self-certification sectors and very low exposure to buy to let. We operate with high levels of retail funding and benefit from a diversified income base including through our Strategic Solutions division. Because of all of this, our existing members can continue to have full confidence in the long-term future of the Society.

"The capital is being raised as additional comfort in these unprecedented market conditions. Even though the Society will report an overall loss for 2008, it enters 2009 with a strong capital and funding base, a robust business model and a clear strategy for a successful future."