Northern Rock "improving" despite uncertain outlook

Northern Rock branch

Northern Rock says its financial performance is improving thanks to “encouraging” economic trends, but has warned that the number of mortgage borrowers falling behind with repayments is rising.

The nationalised lender adds that although its performance in the second half of the year is expected to show a “significant” improvement, it still anticipates making a loss for the year as a whole – driven by losses on loans. Rising unemployment, the fragile economy and subdued housing market also give it cause for concern.

Northern Rock says it has helped more than 1,000 struggling mortgage customers stay in their homes, as part of its commitment to helping people unable to cope with their debt. However, the number of outstanding mortgage loans with more than three months’ missed payments stood at 4.1% of its total book at the end of September – up from 3.92% just three months earlier.

“We remain committed to working with all our customers and to assist those who may be facing financial difficulty,” says Gary Hoffman, chief executive of Northern Rock. “We continue to invest a lot of effort in our approach to debt management and to providing the best possible support we can in all circumstances.”

Last week, the European Commission gave the green light for Northern Rock to be split into a "good" bank and a "bad" bank, with the former being sold back to the private sector.

Despite competition restrictions, the bank increased its mortgage lending to £1 billion between June and September, bringing lending for the first nine months of the year to £2.3 billion.

Saving deposits, meanwhile, increased to £19 billion, up from £18.4 billion at the end of June.

As part of its nationalisation deal, Northern Rock agreed to keep its share of the savings market below 1.5% in the UK and 0.8% in Ireland. It was also restricted to limiting its mortgage origination to no more than 2.5% of the market by value each year.

However, at the start of this year, the Treasury announced that Northern Rock would extend its lending activities to issue £5 billion of new mortgages this year, increasing to £9 billion in 2010, eventually taking its mortgage book to £14 billion by 2011.

The bank says it is on its way to meet its lending targets, and continues to take a prudent approach to lending. As a result, a new customer borrows, on average, 55% of their property's value.

Northern Rock has been in public ownership since February 2008, after a run of the bank forced the government to use public money to bail it out. Although its initial policy was to repay the loan as quickly as possible, this was revised in order to allow Northern Rock to focus its cash funds on beefing up its mortgage lending activity.

As a result, the company still owes the government £14.5 billion.