Northern Rock profits hit £387m

NORTHERN Rock today set the scene for a bumper results season for the British banks by reporting profits at the very top of City expectations.

The bank lifted 2003 pre-tax profits by 19% to £387m, leaving analysts confident that the industry is on course for a record profits total of more than £26bn.

Surging demand for mortgages and remortgages underpinned the record year for Rock, which captured more than 8% of the net residential lending market.

Chief executive Adam Applegarth was confident the good times would continue despite the slowing housing market, as remortgage applications take up the slack.

'Prospects for 2004 are good, with an opening pipeline of £3.9bn,' he said. Pipeline is loans agreed but not yet drawn down. It was £3.5bn this time last year.

Credit quality remained good, with the number of loans more than three months in arrears down by 12%. Provisions for bad loans were raised from £43.1m to £48.7m, in line with the overall loan book.

Costs at the bank, which has recently been under fire for closing 20 branches, rose 16% to £203m, still slower than income growth. Applegarth promised there would be no more branch closures this year.

The bank claims to be the lowest-cost producer in Europe with wages in its North East heartland 20% lower than the rest of the country. It also prospered by losing fewer customers than the industry average. Its share of redemptions was 4.1% - significantly lower than its 4.8% share of the nation's mortgage stock.

One blemish was the net interest margin, which fell from 1.09% to 0.97%. The final dividend is lifted to 15.8p, making a 23.3p total, up 15%.

The typical small shareholder who received 500 free shares when the Rock was demutualised in 1997, will get a £79 cheque in May. As usual, local charities will receive 5% of profits, which this time is £19.3m.

Mark Thomas of Fox-Pitt Kelton said it was 'a good start' to the bank reporting season. All the High Street banks report 2003 figures in the next six weeks with the biggest, HSBC, expected to unveil record profits of £7.4bn , up 24%. The number two, Royal Bank of Scotland, will be close behind with an expected increase of 32% to £6.3bn.

The British consumer's borrowing splurge has boosted lending levels while low unemployment and interest rates have prevented the usual blow-out of bad debts that dent bank profits at this stage in the banking cycle. The rally in financial markets has also helped banks with investment banking arms or life assurance offshoots.