Mortgage demand boosts Northern Rock

AGGRESSIVE expansion in the mortgage market has helped Northern Rock meet growth targets with a 13% increase in profits last year. The mortgage lender today reported pre-tax profits of £431.2m, up from £386.6m in 2003 and in line with analysts' forecasts.

The growth was seen by several City watchers as remarkable amid the slowdown in the housing market and waning demand for new mortgages in the latter part of the year. But it is likely to fuel concern among consumer groups that the major mortgage banks are profiteering.

Northern Rock is the first of the major lenders to report results. The banks will be sensitive to claims that they have taken advantage of borrowers over the past year as interest rate rises have started to bite.

Northern Rock shares dipped, however, after the bank said that new accounting standards would dent its earnings per share by some 10%-12%, substantially more than previously expected. The shares moved down almost 10p to 788p after the markets opened while the FTSE 100 index moved up 14.9 points to 4858.1.

There was good news on the mortgage front, however. Northern Rock increased its share of the UK net mortgage market from 7.8% in 2003 to 11.2% and said its lending volume in the second half had remained strong, despite the slowing market. The bank said that it expects new residential lending to contract in 2005 but that remortgaging activity should continue to support levels of gross lending.

Northern Rock chief executive Adam Applegarth described mortgage lending as 'particularly buoyant', adding that he did not expect the level of mortgage arrears to deteriorate, despite the rise in interest rates since late 2003.

{1} Applegarth said he expected the UK gross lending market to reduce to between £260bn-270bn this year and next but said he expected Northern Rock to continue to gain market share.

He predicted a concentration of business around the top seven mortgage lenders and said recent entrants to the market, such as insurers, would continue to sell their mortgage books because of tougher competition.

'Our strategy is based on organic growth,' he declared, adding that he believed the erosion the net interest margin had slowed and would continue to do so in 2005. Shareholders were rewarded with a final dividend of 18p, making a total of 26.5p for the year, an increase of 13.7% on last year.

Northern Rock specialises in low fixed rate mortgages with tie-ins. As interest rates have risen many homeowners have opted for the certainty of fixing, knowing exactly what their monthly payments will be. Gross lending at Northern Rock rose by 34.8% to a record £23.3bn in 2004, while net lending was 51.9% higher at £12.9bn. Assets under management stood at £64.9bn, an increase of 24.9% on 2003.

Commenting on the implementation of International Financial Reporting Standards (IFRS) from 2005, Northern Rock said it will announce restated results for 2004 early in the second quarter of this year.

The bank does not expect the new rules to have a large overall impact on its published pre-tax profits, with a likely restatement to 2004's results of less than 5%. But Applegarth acknowledged that the new standards will push down income recognition in the first year of a loan and increase it later in its life, which means Northern Rock's earnings per share for 2004 will be rebased downwards by between 10%-12%. This compares with analysts' forecasts of 5%.