More on Northern Rock
Northern Rock
Northern Rock is a building society turned bank, which now operates as a specialised mortgage lender. Its core business is the provision of UK residential mortgages.
Strong lending growth in 2004 resulted in assets increasing by 24.9% to £64.9bn. The estimated residential net lending market share was particularly strong in the second half at over 14%, despite a slowing market.
The bank reports that the arrears position in the residential mortgage book has improved. At the end of December the number of accounts three months or more in arrears was 2,135 (2003 - 2,414) or around 0.37% (2003 - 0.45%) of all mortgage accounts (the UK average was around 0.76% last year). The other lending portfolios also look reasonable with 1.04% of personal unsecured loans (2003: 0.98%) and 0.31% of commercial loans (2003:0.53%) in arrears.
The strong lending growth has increased the dependence on funds from wholesale sources. The bank achieved a net retail inflow of funds of £1bn during the year, a huge improvement from the net outflow of £163m in H1 but still small compared to the £3.4bn raised from wholesale sources and the increased dependency on wholesale funds is probably one factor leading to the deterioration in interest margins.
Margins and costs are a concern, interest spreads have shrunk to 0.73%, down from 0.90% last year and the cost income ratio has deteriorated to 30.4% from 29.8% last year.
An opening pipeline of £5.1bn, up 32% over last years figure of £3.9bn and representing around a fifth of this years gross lending will give a good start to next years earnings. Although the slowing housing market will reduce the demand for new mortgages, remortgage activity is expected to take up some of the slack as customers seek to refinance existing mortgages to obtain better deals, although this will probably mean greater pressure on margins and rates. Overall, the bank’s prospects for next year look reasonable, although not particularly outstanding. Trading at 775p on the prospective PE of 10.5× is in line with the sector. The yield is 3.4%.
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