Northern Rock shrinks mortgages, warns on arrears
LONDON (Reuters) - Britain's troubled Northern Rock, nationalised earlier this year, boosted savings in the first quarter and kept to plans to radically shrink mortgage lending, but warned of rising arrears in an uncertain home market.
The bank -- Britain's most aggressive home lender until it became the biggest UK casualty of the credit crisis -- plans to halve its mortgage book by 2011 as part of its turnaround efforts, while boosting savings to diversify funding sources.
"It is early days and the market outlook is clearly uncertain, but we are encouraged by our progress to date," Executive Chairman Ron Sandler, who took the reins at the bank in February, told reporters on Monday.
In its first trading update since the bank was brought into public ownership, it said gross residential mortgage lending shrank to 1.2 billion pounds ($2.4 billion) in the first quarter -- in line with its target of some 5 billion a year but a fraction of 2007's level of around 30 billion.
Arrears, however, almost doubled from the end of last year as the bank encouraged customers to remortgage elsewhere but was left with riskier borrowers on its books.
Though overall credit quality remained in line with the bank's plans, mortgages three months or more in arrears made up 0.95 percent of the total at the end of April, up from 0.57 percent at the end of December.
TOUGH MARKET
"As we continue to build the redemption programme there will be a degree of adverse selection," Sandler said, adding many customers able to remortgage had done so, leaving behind those for whom the process will take longer.
The bank said it was working to set up a panel to help borrowers whose mortgage deals were expiring look for a new mortgage, but gave no details.
It warned, however, that a tough UK mortgage market, with falling house prices and higher lending rates, could make it difficult to meet its aim of shrinking the mortgage book still further -- despite efforts by some large competitors to lure its better customers.
"This environment presents Northern Rock with challenges, especially as regards the company's ability to meet its targeted mortgage redemption levels in the future. Nevertheless, given this backdrop, the company's progress against its plan to date is encouraging," the bank said.
Several larger competitors have seized on Northern Rock's near exit from the market, cutting some rates to lure customers, but the broader UK trend has been for banks to raise rates when faced with worsening market conditions.
The bank also said it was on track to boost deposits. Retail savings balances ended the quarter at 12.8 billion pounds ($25 billion), up from 10.5 billion in December.
Sandler, however, brushed aside concerns the bank's state support was undermining competition, telling reporters its rates were "far from market leading."
Northern Rock, which expects to remain "significantly loss-making" in 2008, owes the Bank of England 24 billion pounds and said on Monday it aimed to repay that by 2010.
The bank also confirmed plans to reduce staff by 2,000 by the end of 2011, with the bulk of the cuts to be made this year.
(Additional reporting by Steve Slater; Editing by Rory Channing and David Holmes)
