Upbeat Northern Rock aims for more of the mortgage market

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The Independent Online

Shares in Northern Rock surged yesterday as the mortgage bank beat profit forecasts and continued to snare business from larger rivals.

The bank also said bad debts had fallen in the second half, as it kicked off what could be a bruising banking results season for larger rivals such as Barclays and HSBC with a flourish .

Northern Rock said gross lending in 2006 surged by 12 per cent to a record £33bn with net lending rising to £16.6bn, up 14 per cent.

The company boasts a net share of new lending of 13.4 per cent compared to its natural market share - based on its share of Britain's overall mortgage stock - of only 7.1 per cent.

Pre-tax profits came in at £627m, up 21 per cent, while the company took a charge of £81.2m to cover bad debts. However, it fell in the second half to £36.7m compared with £44.5m in the first. Arrears also rose by 20 per cent, but Adam Applegarth, the chief executive, said he did not expect the situation to deteriorate significantly in 2007.

He predicted that gross home loans in Britain would grow by about 4 per cent to £360bn in the next year, and said he expected house prices to rise by the rate of incomes - about 4.5 per cent. "If you look at the Land Registry figures, which we think are the most reliable, outside of London house prices have been growing at around the level of average incomes and that is as it should be," Mr Applegarth said.

He added that new European rules on how much capital banks have to hold will benefit Northern Rock and pledged to return surplus cash to shareholders through higher dividends.

This year's final payout of 25.3p brings the total for the share to 36.2p, up 20.3 per cent.

"You can either use the excess cash to build up an acquisitions war chest or give it back to shareholders. We think the latter is better. If you want to do a deal, you should first be able to convince shareholders that it is a good idea," he said.

Analysts gave the figures a positive reception. James Eden, at Dresdner Kleinwort, said: "The results are strong and all forward-looking metrics are robust. Costs remain nailed to the floor." Mr Eden advised clients to buy.