More on Northern Rock
Northern Rock: H1 Results
Northern Rock announced excellent results for the first half of 2005. Pre tax profits up by 45.4% to £294m. Net lending in the first half was a record £6bn (up 17.2%) and the bank’s share of UK net mortgage lending rose to 14.2%, from 11.2% last year. Total assets rose to £72.5bn - an increase of 26.9% over last year. The cost:income ratio improved to 28.3% compared to 29.9% last year.
The strong results were driven by loan growth, made against a market where gross lending was down by 14% and net lending down 25% in the first 5 months of the year. This does raise the spectre of poorer lending although the company remains confident of the quality of its portfolio citing that only 21% of its loans are to high-risk first time buyers and only 4.8% of its loan portfolio is exposed to the buy-to-let market.
The overall number of accounts in arrears has risen slightly to 0.82% from 0.78% in December and 0.80% in June last year. The quality of the secured residential loans appears to have improved with just 0.37% of accounts in arrears, compared to 0.39% last year. The charge for loan loss impairment amounted to £25.5m for the first half (2004 - £26.5m).
Both interest margins (1.07% against 0.85% last year) and the cost:income ratio (28.3% against 29.8% last year) have improved. Solvency has deteriorated however; the tier 1 ratio is 8.2% (acceptable but down from 9.2% last year) while the total capital ratio has declined to 12.8% (2004:15.8%).
The concerns with this stock are the prospects of future growth, given the weak housing market and a possible increase in bad debts, given the aggressive lending growth, although, admittedly, there is no sign of deterioration as yet. The share trades at 831p, on a prospective PE of 10.3x , in line with the sector, with a yield of 3.5%.
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