Northern Rock Reports Strong First Quarter Trading

British mortgage bank Northern Rock reported strong first-quarter trading on Monday, driven by a 34% rise in net lending, and said the outlook was sound, though less benign than in recent years.

The low-cost mortgage specialist said it was on track to increase its assets in the top half of its 15% to 25% target range this year.

It said it was comfortable with analysts' consensus forecast for a 2007 underlying profit of 434 million pounds ($850 million), which would be up 18% from 2006.

Credit quality remains under control and although the economic outlook appears less benign, the bank predicted the U.K. mortgage market will grow at least 4% this year.

"It's a strong performance in line with the guidance they've given before," said Ian Poulter, analyst at stockbroker Teather & Greenwood. "The pipeline looks good and has picked up since December and the net lending is going strongly in the residential mortgage book."

Northern Rock shares were up 0.4% at 11.49 pounds, to value the bank at about 4.8 billion pounds ($9.46 billion).

Analysts said earnings estimates were unlikely to change much after the update and there remained some concern about margin pressure.

Northern Rock said it might sell its commercial secured loan book and would return the proceeds of any one-off disposals to investors by buying back shares, which would boost earnings.

Analysts estimated the return of cash could amount to between 70 million and 125 million pounds.

Predictions for 2007

Northern Rock expects to get approval to adopt the Basel II regulatory accord by the end of June and said it should be a major beneficiary of the move that seeks to better align a bank's capital needs with its risks. Excess capital would be distributed by higher dividend payouts, Northern Rock said.

Britain's eighth biggest listed bank and one of the fastest growing mortgage lenders said its lending pipeline stood at 6.7 billion pounds at the end of March, up 16% from a year ago.

The U.K. mortgage market is likely to be worth over 360 billion pounds this year, it predicted, up from a record 345 billion last year, with house price inflation in line with the pace of earnings growth, a liquid remortgage market and a strong buy-to-let market.

Britain's mortgage lenders have been benefiting from a decade-long housing market boom. However, three increases in interest rates since August have raised fears that the market may start to cool.

"U.K. economic fundamentals remain sound. While indications remain for a less benign outlook, with gently rising unemployment, we expect conditions overall to remain supportive for the U.K. mortgage market," the bank said.

The firm said its net residential lending was 42% higher in the three months to the end of March than in the comparable period the year before.