Northern Rock warns on arrears

By Clara Ferreira-Marques

LONDON (Reuters) - 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 -- the 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 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.