Outlook: Northern Rock

TIMES ARE tough in the mortgage market, which is why Leo Finn has found himself between a Northern Rock and a hard place. Last year the chief executive of the building society-turned-bank decided to sacrifice margins to build market share. Handing back pounds 8,000 for every pounds 100,000 borrowed ought to have been a surefire way of achieving that.

However, the Rock figured without the major league players in the mortgage market also turning mean, not to mention Standard Life popping up with its own mortgage division. So while margins duly contracted, so did the Rock's share of the market. In the second half of the year, net lending shrank by more than a half, while the bank's share of net new lending fell from 11 per cent to 7 per cent.

In order to make up ground on those big ugly competitors such as Prudential, Mr Finn is launching a mortgage that permits housebuyers to borrow more than the value of their homes. Mr Finn calls it the Together mortgage. Most others would call it an unsecured loan. It was activity of this sort that helped create the unsustainable credit bubble of the late 1980s and then left homeowners and mortgage lenders picking their way through the rubble when the property market predictably crashed.

Never mind. Memories are short and Mr Finn has a new interest group - namely his shareholders - to keep sweet by proving that he is growing the business. The Rock certainly needs to do that. Its proportion of first- time buyers is well below the market average, forcing it to rely on the less profitable remortgage market.

Every customer Mr Finn signs up at rock-bottom rates is at least forced to buy some other product like compulsory insurance, so rising fee income is making up for shrinking interest margins.

But overall the Rock looks to have embarked on a high-risk strategy at a time when the housing market is flat in its north-east heartland and the Prudential has lain an Egg that, by the Rock's own admission, is making parts of the savings market uneconomic.

The Rock's shareholders did not like what they saw yesterday. Those who are still building society members and who are tempted to become shareholders should take note.

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