Northern Rock's deposit base cut

By THIS IS MONEY
Updated:

 

Northern Rock kicked off the banks' reporting season with the confession that competition from new entrants such as Egg and Standard Life created an outflow of deposits of more than £400 million. At the same time, mortgage lending declined.

'We've been constrained in the business we write,' said Rock director Adam Applegarth.

Consumers deserted traditional operators, forcing the Newcastle-based bank to use the wholesale market to fund its mortgage business. 'It is cheaper for us to raise capital through the wholesale markets than to fund instant access accounts, a situation I have not seen in the 15 years I have been working here,' said Applegarth.

In the first half of last year, Northern Rock's deposits rose by £485 million; this year they fell £414 million. In compensation, the group raised £1.2 billion in the wholesale markets this year, compared with £968 million last year.

Net lending fell from £1.2 billion to £1 billion. The figure equates to 6% of the mortgage market, almost twice as high as Rock's size would dictate but smaller than the 7% that the market was expecting.

'Last year, there was a large imbalance between our first and second halves. This year, we are aiming for greater balance so we don't expect lending to slow down in the second half,' said Applegarth.

Pre-tax profits rose 4% to £111.5 million in the half-year to 30 June and the dividend is 15% ahead at 4.5p, generously covered by earnings per share of 17.1p. The cost-income ratio rose from 30% to 31.8% as the net interest margin fell from 1.59% to 1.47% and operating expenses increased by 12% to £63.1 million.

'The fall in the margin comes from competition but as we grow, we can afford a decline in margins. The rise in expenses is primarily due to higher spending on advertising, marketing and IT,' said Applegarth. Northern Rock will

be securitising a small proportion of its mortgage book in the second half to enhance its funding abilities. Securitisation is likely to be a regular occurrence.

On consolidation, Apple-garth said: 'We are too busy running Northern Rock to worry much about that. All I know is, it's cold in the North.' The company believes it is prepared for the year 2000.

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