Northern Rock shares leap as profits harden to £122.4m

Shares in Northern Rock, the smallest of the converted building societies, jumped 10 per cent at one point yesterday after it claimed to have turned the corner on margins.

Shares in Northern Rock, the smallest of the converted building societies, jumped 10 per cent at one point yesterday after it claimed to have turned the corner on margins.

Speaking as the bank kicked off the half-year results season with a rise of 9.8 per cent in pre-tax profits to £122.4m, Leo Finn, chief executive, said that the figures showed the bank had seen off the competition and was now able to grow its share of the mortgage market without sacrificing margins.

"Northern Rock has been revitalised. We have returned to rapid growth. This is clearly demonstrated in our first-half results with all areas of our business performing strongly," Mr Finn said.

Analysts were cheered by figures showing the mortgage bank more than doubling its net lending to £2bn in the first half, giving it a market share of 7.8 per cent - more than twice its natural market share of 3.2 per cent. They were also encouraged by figures showing that interest spread, a key indicator of profit margin, was at 1.09 per cent in the first half compared with 1.10 per cent in the previous half and 1.19 per cent in the first half of 1999, indicating that the pace of margin erosion had slowed to a crawl.

There was a net inflow of savings of £552m suggesting that here too the tide had turned as new competitors, such as egg, dropped their savings rates in the first half. Northern Rock has seen its shares underperform the UK stock market by 20 per cent this year on concern about its ability to stand up to the fierce competition in the mortgage and personal savings market.

Bob Bennett, finance director, said that the figures were showing the benefit of efforts over the past year to reduce reliance on retail savings balances to fund its mortgage lending and the renewed focus on costs. The ratio of costs to assets under management improved to 0.57 per cent, enabling the bank to continue cutting rates to borrowers without sacrificing profits.

"To make profits you need either volume growth or margin growth. We are getting volume growth without sacrificing margins," Mr Bennett said, adding that he was highly sceptical about the likelihood of the new internet banks meeting their sales targets.

Over the past six months the bank had securitised £750m worth of mortgages through the wholesale bond markets and planned a further issue of £1bn before the end of the year. This would take the total of mortgages securitised to £2.35bn by the end of this year. John Tyce, analyst at SG, said: "Northern Rock has such a powerful head start on costs, it is already living with what the others in the sector have yet to face up to." Northern Rock said it was encouraged by the take-up of its equity withdrawal product for pensioners, which bundles mortgage loans, a credit card and an unsecured loan together. The bank says it will not enter the current account market. Its shares fell back slightly before the market closed to end up 9.3 per cent, or 24.5p, at 325p.