Northern Rock: Trading statement

10:04 a.m. Tue 04 Oct 2005

Northern Rock issued a surprisingly strong trading statement for the nine months to September 2005. The trading for the period was described as "strong" and the company seems confident of achieving asset growth of 20% (+/- 5%) and profit growth of 15% (+/- 5%) for the year.

Loan growth has been strong, with net lending for the first nine months 17% ahead of 2004. The pipeline of agreed business (£6.3bn as at end September) is 11% ahead of last year and should ensure that the bank reports solid lending figures for the year. The lending growth has been driven by re-financing. Re-financing accounted for 45% of gross new lending.

Credit quality is said to be still good, despite a slight weakening in asset quality in some areas of consumer lending. Residential arrears in excess of three months are said to be "below half the industry average".

Lending growth has been underpinned by good growth in the fund base with strong retail deposit flows seen in the first half of the year. The company has securitised some of its lending, raising £4.75bn in two large deals at attractive rates.

Lending margins have contracted slightly but will be offset by cost savings.

Prospects for the current year look sound but sustainability of this growth in the light of the weakening housing market is doubtful. Lending has grown sharply due to re-financing, but this is likely to slow unless interest rates keep increasing rapidly. (The driver for the growth in re-financing is probably the increase in interest rates, as customers attempt to switch from variable rate to fixed rate mortgages before rates rise further.) While a further rise in interest rates is possible, a sustained rise (that will drive further re-finance lending) seems unlikely.

Rising interest rates will also bring margins under pressure while the slowing housing market will dampen new lending.

The share trades at 820p, on a prospective PE (2005 earnings) of 11x, in line with the sector, with a yield of 3.5%.