Rock solid

By ANDREW OXLADE, COLUMNIST
Updated: 19:00 EST, 18 July 2001

NORTHERN Rock's 260,000 shareholders may have been left confused after its sparkling results were greeted by a dip in the share price. Analysts like the mortgage bank but suggest the price may have peaked - the shares have, after all, nearly doubled over the past year.

The former building society's shares fell 9 1/2p to 591 1/2p after the half-year results were released Thursday. But City experts say a near-8% climb in the past week meant the good news was already in the price. Some of the stock's key drivers in recent months have also lost momentum. 'It continues to be a safe haven for investors in troubled times, but without much absolute upside,' Commerzbank said, downgrading its recommendation on the stock to 'hold' from 'buy'.

Still, there was plenty for small investors to celebrate in the figures. Northern Rock has benefited from the housing boom so far this year: it has a 3.5% share of the mortgage market, but grabbed a 7.3% of all new home loan lending in the six months to June. The company believes this growth will slow as housing market cools in coming months.

'Northern Rock is a pocket battleship. These figures show it can punch double its weight,' said Mark Durling, a banking analyst at stockbroker Brewin Dolphin.

Net lending rose 16% to £2.3bn. Pre-tax profits rose 14% to £139.6m, beating analysts' forecasts of between £130m and £138m. Earnings per share rose 10% to 21.8p, and the interim dividend was hiked 12% to 5.7p per share.

The company's cost controls continue to impress the City. Its cost to income ratio fell 0.5% to 31% - well below many of its peers.

In the past year, the Northern Rock share has outperformed the blue-chip FTSE 100 by 117%. That performance has been credited to the bank's steady growth, a return to favour of banking stocks, and tech-shocked investors seeking shelter in safer 'old economy' shares.

But Fox-Pitt, Kelton, an investment bank specialising in financial companies, believes Northern Rock has now gone far enough. FPK has a price target of 575p. However banking analyst Mark Thomas said: 'We continue to rate the shares 'attractive' because of the bank's defensive qualities. We consider it one of the safest banks in Europe.'

Takeover talk has gripped the sector over the past year. Smaller mortgage banks like Northern Rock and Alliance & Leicester, which reports results on Friday, are thought particularly vulnerable.

But FPK's Thomas says predators are unlikely to make a move for Northern Rock in the short term, ironically, because the company is doing so well. Brewin Dolphin's Durling agrees. He said: 'By being efficient, Northern Rock isn't appetising for predators - there's no fat to strip off the business.' He has a 570p price target and 'hold' recommendation.

Even without the price driver of a takeover, Durling believes the stock could continue to perform well. He believes further bad news for 'glamour stocks' - such as technology, media and telecoms - will lure more investors to the likes of Northern Rock. He expects the FTSE 100, which is currently hovering near a three-year low of 5300 points, will plunge below 5000 before recovering, sending investors in search of safety.

He said: 'In a slump people still need water so investors buy water company stocks, people continue to eat food so investors buy shares in superstores. Banks are just another one of those defensive safe havens.'

Such a trend would be welcomed by the millions of shareholders holding their breath for results from their banks over the next month.