Northern Rock hits 3-year low on funding worries

LONDON, Aug 15 (Reuters) - Britain's Northern Rock NRK.L tumbled over 9 percent on Wednesday to hit a three-year low as fresh signs of credit market deterioration sparked concern over the bank's revenues and speculation of a fresh profit warning.

The bank, which raises most of the funds for its mortgage lending on wholesale credit markets, said in June that profit growth would slow this year as it feels the impact on its borrowing costs of five UK rate rises in less than a year. “Northern Rock is being heavily shorted on rumours of another profit warning,” one London trader said.

The bank was not immediately available for comment.

"Capital market funding is likely to remain extremely difficult over the next couple of months," another trader said, adding this would most affect banks with a high loan-to-deposit ratio, like Northern Rock or Bradford & Bingley BB.L.

These banks depend mostly on the increasingly tight credit markets -- and not deposits -- to fund lending and so will be most hit by rising costs.

At 1241 GMT Northern Rock was trading at 671.5 pence, down 7.5 percent against a 2.1 percent drop in the DJ Stoxx index of European banking stocks .SX7P and a 1.5 percent drop in the FTSE. Earlier the stock touched a low of 658.5 pence, its lowest since August 2004.

Analysts had said after interim results last month that the bank’s positive medium-term prospects, a higher dividend and buyback plans outweighed concerns over the year ahead.

But since then, the bank has seen a flurry of downgrades.

Analysts at Credit Suisse, which have the bank on an underweight rating, said in a note published on Tuesday that they saw “material risks” to Northern Rock’s expectations of a 15 percent profit rise this year if current market conditions continue.

“With about 87 percent of incremental funding from wholesale sources last year, Northern Rock would be the most affected bank from a sustained period of difficult credit market conditions,” Credit Suisse analysts said in a note. “We have, however, a more immediate concern on the 2007 guidance.”

Planned sales of commercial loans could also be tougher, the bank said, and that would hit the prospect of a share buyback.

(Additional reporting by Dominic Lau)

((Reporting by Clara Ferreira-Marques; editing by Paul Bolding;

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