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NR reports 33bn record gross lending

Northern Rock has reported record gross lending of 33bn in its preliminary results for the year ended December 31 2006.

This is an increase of 22.7% from 2005 when total gross lending hit 26.8bn.

Net lending increased 14.2% to 16.6bn from 14.5bn in 2005.

NR says prospects for 2007 are good, with a total opening pipeline of 6,230m up from 5,300m on January 1 2006, including a residential lending pipeline of 5,815m up from 4,779m on January 1 2006, an increase of 21.7%.

It adds it now has a 8.3% share of UK gross mortgage lending, with share of redemptions of 5.9% – generating a net market share of 13.4%. Its closing share of stock of UK mortgages was 7.1%.

The composition of its lending portfolios has continued to be low risk. At December 31 2006, 90% of its loans to customers were residential secured loans, 2% commercial secured loans, and 8%. This mix is not expected to change significantly going forward.

NR reports the UK residential lending market remained buoyant throughout 2006 resulting in estimated gross lending for the year of 346bn, an increase of 20% over the 288bn seen in 2005.

Gross lending associated with house moving represented around 60% of lending with 40% driven by remortgage activity. Remortgage activity reflects increased market liquidity following the removal of overhanging early repayment charges.

Estimated UK residential net lending in 2006 at 110.4bn represented an increase of 21% from 91.3bn in 2005 supported by higher levels of house moving and average house price inflation of around 10%.

The buy-to-let market continues to be strong, representing approximately 10% of UK gross residential lending and NR predicts this market will continue to be supported by demand, particularly from pre first-time buyers, for student accommodation and from migrant workers.

NR expects gross lending in 2007 to be a little higher than 2006, with house price inflation broadly in line with increases in earnings.

Lending volumes will continue to be supported by favourable economic conditions, healthy volumes of housing transactions, buy-to-let and continued remortgage business.

These conditions will provide a substantial and robust gross lending market for us to be able to achieve our lending targets.

The results show NR achieved gross residential lending of 28,972m, up from 23,618m in 2005, and net residential lending of 15,090m up from 13,350m in 2005. This represents increases of 22.7% and 13.0% respectively.

NR attributes its growing gross market share to containing levels of redemptions through customer retention process and fair and transparent policy of allowing existing customers, subject to their contractual terms, to transfer their loan to any product available to new borrowers.

It claims its approach to customer retention is unique amongst the major volume mortgage lenders, and means it does not need to significantly grow its gross lending volumes from new customers to achieve stated asset growth targets.

It reveals it intends to improve its retention performance in respect of home movers both for direct business and through intermediaries.

NR says its distribution network continues to evolve as the business grows. In 2006, 89% of its mortgage business was sourced via the intermediary market, down from 90% in 2005, with 90% of this business being conducted online by the end of the year.

It pledges to continue to develop its online facilities and intends to roll out e-commerce options for direct and product transfer customers during 2007.

In 2007, NR will continue to strengthen its key account relationships with major intermediary groups as well as opening up opportunities with new intermediaries.

It also intends to increase its branch sales network to up to 100 branches over the next three to four years, with new branches in major centres of population. It will also continue to invest in Northern Rock direct telephone operation to enhance its direct lending activities.

The results show NRs Together product made up 31.4% of new lending, up from 28.7% in 2005, and 23.4% of closing balances, up from 20.6% in 2005.

Its lifetime product made up 0.9% of new lending, down from 1.4% in 2005, and 2.7% of closing balances, down from 3% in 2005.

Finally its buy-to-let product made up 7.3% of new lending. compared to 7.1% in 2005, and 5.7 of closing balances, compared to 4.9% in 2005.

However, its traditional price-led mortgage products, fixed rate mortgages remained the most popular with 33.0%, up from 25.3% in 2005, of total new lending accounted for by short term fixed rate products up to two years, and 22.5%, up from 28.8% in 2005, by longer term fixes, normally up to five years.

The increased demand for short term fixed rate products reflected customer demand for protection against anticipated increases in interest rates.

Overall, the profile of NRs lending has remained low risk despite strong growth in volumes. Lending to first-time buyers remained stable as a proportion of new lending at 24%, a reduction from the first half at 27%, as it adjusted its risk appetite.

76% of new customers continued to have a proven mortgage payment track record. Consistent with this trend, the average LTV of new lending in 2006 has remained the same as in 2005 at 78%.

New lending at or below 90% LTV improved to 78% from 70% in 2005 of completions.

The average indexed LTV of NRs mortgage book is now 60% compared to 58% in 2005, which continues to provide strong cover in the event of default.

In line with house price increases, its exposure to large loans has increased with 5.1% of new loans by value over 500,000 compared to 3.4% in 2005.

NR says the credit risk on this lending remained excellent with such loans attracting an average LTV of only 73%. New lending continued to be geographically spread across the UK in line with the demographics of the population.

As announced at the interim results, NR will soon be launching mortgage products for the near prime, sub-prime and self-cert markets on behalf of Lehman Brothers.

It will not take any credit risk nor will it administer the loans post completion, but will earn fee income for their origination.

By offering such products NR says it will complement its existing product portfolio and gain access to mortgage intermediaries with whom it currently has no relationship, thereby expanding its distribution network.

Competition in the commercial secured lending market remained strong throughout 2006, with certain lenders being particularly aggressive on price and LTV levels at which they are prepared to lend. Both gross and net lending within NRs commercial lending portfolio remained constrained as a result of maintaining its emphasis on quality rather than volume of lending.

Gross lending in the year amounted to 423m compared to 408m in 2005 with net lending of 40m compared to 5m in 2005.

Included within advances secured on residential property are 1.0bn up from 0.8bn in 2005 of loans secured on commercial buy-to-let portfolios, which are managed within its commercial lending operation.

As of December 31 2006, the arrears position of NRs residential portfolio was 0.42%, compared to 0.45% as of June 30 2006, and 0.39% as of December 31 2005.

As of December 31 2006, the arrears position of NRs Together secured portfolio was 0.84%, compared to 0.95% and 0.84% as of June 30 2006 and December 31 2005 respectfully.

As of June 30 2006, the average arrears position, according to the Council of Mortgage Lenders, was 0.96%, compared to 0.97% as of December 31 2005.

At 31 December 2006, properties in possession held were 662, representing 0.09% of all accounts compared with 628 at the half year and 576 at the end of 2005.

This increase is in line with NRs policy of rapid movement towards recovery where it is clear the borrower is unwilling to maintain payments and where it has to have higher risk.

At 31 December 2006, seven of NRs total commercial loans (0.31% of accounts) with balances outstanding of 20.5m were three months or more in arrears compared with 10 accounts with outstanding balances of 5.8m at December 31 2005.

NR also reports total underlying assets of 100.5bn an increase of 23.9% from December 2005. Risk weighted assets increased by 17.2%.

The results show a well balanced funding mix with strong retail savings net intake of 2.5bn, four successful mortgage backed securitisation issues, raising net 10.5bn, covered bond net intake of 2.7bn and net non-retail funding of 2.9bn.

Its statutory profit before tax is 626.7m up by 26.8% compared with 2005. Statutory profit attributable to shareholders is 394.5m, up by 31.2%.

Also, underlying profit before tax is 587.7m up by 16.5% compared with 2005 while underlying profit attributable to shareholders is 367.0m, up by 19.1%.


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