Northern Rock posts ?461m profit for 2004

The mortgage lender Northern Rock today issued an upbeat outlook for 2005 despite a slowdown in the housing market as it reported a 13% rise in annual profits.

But shares in the bank dropped over 1% as it admitted a weaker housing market would squeeze demand for mortgages in 2005.

Kicking off the UK earnings season, Northern Rock said pretax profits rose to ?431.2m from ?387m in 2003. It had been expected to earn ?430m.

Adam Applegarth, the chief executive, said the bank's strategic targets for 2005 and beyond remained unchanged despite a slowdown in house prices, mortgage volumes and loan approvals after five interest rate increases.

"It's because we are small, are the lowest cost operator in Europe and are the best at retaining our customers that we can carry on performing even though the market is a bit quieter," Mr Applegarth told Reuters, adding that he expected to gain further market share.

The former building society has posted record profit each year since it listed its shares in 1997. Despite the recent slowdown in the UK housing market, the bank has managed to continue to increase market share. Its share of the UK mortgage market rose to more than 14% in the second half of 2004 and stood at 11.2% for the full year.

The company said it was confident of hitting strategic targets of raising profits by around 15%, growing assets by around 20% and keeping costs lower than any increase in income.

Northern Rock said bad debts on its mortgage accounts remained at half the industry average and did not expect arrears to deteriorate this year. Mr Applegarth said he expected to see a gradual concentration of business around the top seven mortgage lenders as competition increases and new entrants, such as insurers, leave the market.

Takeover speculation has swirled around the UK banking sector since Spain's Santander bank announced its purchase of Abbey National last summer, but Mr Applegarth said his strategy was based on organic growth.

He said concentration in the mortgage market might not necessarily trigger takeovers. The bank said it was recommending a total dividend of 26.5p per share, an increase of 14%. Northern Rock shares were down 1.75% at 784p in early trading.