Northern Rock upbeat despite rate rise

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Northern Rock on Wednesday kicked off the banking reporting season with a better-than-expected full year profit, and said the outlook remained positive, despite the Bank of England’s surprise interest rate rise earlier this month.

The UK’s eighth-largest bank, which specialises in residential mortgages, said pre-tax profit for the year to December 31 2006 was £626.7m, an increase of 26.8 per cent on the same period the previous year.

Underlying profit attributable to shareholders was £367m, up 19.1 per cent and above analysts’ expectations of £360m.

Adam Applegarth, chief executive, said the increase was fuelled by continued strong demand for home loans, with gross lending for the year up 22.7 per cent to £33bn.

He said mortgage volumes would be supported by continued demand for buy to let lending, and by customers reorganising their finances away from more expensive unsecured debt.

The bank, which has taken a conservative approach to mortgage lending by lending primarily to borrowers with strong credit history, said the proportion of accounts in arrears rose to 0.42 per cent at the end of 2006, up from 0.39 per cent a year earlier.

“We have low levels of arrears, strong credit risk management and a low risk balance sheet. We do not expect to see a significant deterioration in overall credit quality going forward, given the current economic environment,” Mr Applegarth said.

“Our focus on customer retention, with planned improvements to retaining home moving customers means that our volume targets can be achieved without significant increases in our share of gross mortgage lending from new customers.”

Northern Rock also raised its final dividend to 25.3p a share, giving a total dividend for the year of 36.2p.

Return on equity was 21.9 per cent on an underlying basis, up from 20.8 per cent for the same period last year.

The shares gained nearly 3 per cent to stand at £11.98 in lunchtime London trading.

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