Shareholders in Northern Rock, the Newcastle-based home mortgage bank, could benefit from dividend rises after the bank implements rules stipulating how much regulatory capital banks have to hold.

The bank, expects to start adopting the new Basel 2 rules in January 2007, and said yesterday that as a low-risk residential mortgage lender it expected to benefit by holding less regulatory capital. Its tier-one capital ratios – a measure of financial strength – already stand at a healthy 9.2 per cent.

Adam Applegarth, chief executive, said: “We would expect tier-one capital to rise under Basel 2. Building up a war chest for acquisitions is not the greatest use of it. We are more interested in using it for dividend increases.”

Shares rose by 81¼p to close at £11.28 yesterday.

Northern Rock reported interim pre-tax profits up 13 per cent to £293.9m against £259.4m in the first half of 2005. It said it would raise its target for annual growth in underlying profit from about 15 to 20 per cent.

Mr Applegarth brushed off market speculation linking Northern Rock with rival Bradford & Bingley, saying: “We are probably the worst acquirers of B&B.”

He said any such transaction would be value-destroying, as new customers would have to be given the same mortgage deals as existing Rock customers, which have lower profit margins.

Northern Rock made net new mortgage lending of 14.3 per cent at the end of May 2006 – higher than 13.5 per cent last time. Its traditional share of the mortgage market is 6.7 per cent.

But bad debts rose sharply. The loan loss impairment rose to £44.5m for first half against £25.5m in the first half of 2005, reflecting higher mortgage arrears.

The interim dividend is 10.9p (9.4p) payable from earnings per share of 45.1p (39.6p).

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