More on Northern Rock
Northern Rock: FY05 results
Strong loan growth has seen Northern Rock report a 13.5% increase in statutory profits for the year to December 2005. Statutory pre tax profits rose by 13.5% to £494.2m.
The company has been lending aggressively, its share of UK gross mortgage lending rose 8.1% from 6.8% in 2004 last year. Net share of UK mortgage lending rose to 14.4% from 11.2% in 2004. Gross lending has increased to a record £26.9bn (+15.2%), with net lending growing by 12.6% to £14.6bn.
This appears to have lead to an increase in arrears (accounts in excess of 3 months in arrears), which have risen to 0.39% (from 0.37% last year) although the bank says this is still less than half of industry average.
The top line growth has seen the cost:income ratio improve slightly to 29.8% (from 29.9% last year).
The bank has been riding the boom in the housing market aggressively but rising interest rates will also bring margins under pressure while the slowing housing market will dampen new lending.
Results in the second half of year have been weaker than in H1, when Northern Rock’s pre-tax profits rose 45.4% to £294m. The tier 1 capital ratio has weakened further to 7.7% from 8.7% last year (8% is considered the norm).
Our concerns are the slowing housing market, weakening capital adequacy, and the slight deterioration in the loan book.
The share trades at 935p, on a prospective PE (2006 earnings) of 11.4x, within the sector range with a yield of 3.4%.
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