Record profits fail to prevent fall in Northern Rock's shares

Northern Rock believes it can do well in 2005 despite a predicted slowdown in the housing market - its core business - and a consumer credit crunch. As the lender kicked off the bank reporting season with record 2004 profits, it insisted it was a "poor proxy for the housing market".

Because the bank is best known for its mortgages, the City tends to regard it as susceptible to the vagaries of house prices, but it argued that its strength in the remortgage market and drive to retain customers would insulate it from a general downturn.

Even so, it was among the biggest fallers in the FTSE 100, but analysts believed this was in part because of its admission of the impact that new international accounting rules will have on its earnings per share. Its shares fell 23p to 775p.

After weeks of speculation, Northern Rock revealed its EPS would fall by 12% as a result of the new rules.

Bob Bennett, the finance director, said: "It's a bit like a banana. If you look at it sideways or edgeways, it doesn't change that it's a banana. International accounting rules just look at profit in a different way."

The EPS is affected because interest payment on debt no longer goes through the profit and loss account. This helps to boost the profit line, but knocks the profits attributable to shareholders, Mr Bennett said. The Newcastle-based former building society made record pre-tax profits of £431m in 2004 on record gross lending of £23.2bn, up 35%.

Mr Bennett said 2005 had started strongly for the mortgage market where it has an "opening pipeline" of £5bn, up 32% on the same period last year.

Northern Rock's provisions against bad and doubtful debts rose to £56m from £48m. Mr Bennett said this was not the result of missed mortgage payments but because of a rise in its unsecured loan business.

While the Council of Mortgage Lenders data showed that arrears were rising for the first time since 1998, Mr Bennett said that arrears were not rising at Northern Rock.