August 15, 2007 / 5:07 PM / 12 years ago

Credit market worries batter Northern Rock

LONDON (Reuters) - Northern Rock NRK.L tumbled over 9 percent to hit a 3-year low on Wednesday as fresh signs of credit market deterioration sparked concern over its earnings and speculation it could issue a fresh profit warning.

The mortgage bank, which raises most of the funds for mortgage lending in the wholesale credit markets, said in June that profit growth would slow this year due to the impact on its borrowing costs of the five UK rate rises in the past year.

Credit jitters on Wednesday prompted more worries over the impact of the liquidity crunch on banks like Northern Rock, which are hit by a rising cost of funds and the narrowing margin between this and what they earn on loans.

The lender declined to comment on market speculation it could issue another warning on growth — just weeks after it published results — but said it saw conditions improving.

“We have continued to fund during these difficult conditions — which are now easing — because of our strong, diversified global funding franchise, with four main sources raising a balanced mix of funds from both wholesale and retail markets,” a spokesman for the bank said in a prepared statement.

The bank could also, for example, hold back on lending in the second half to control costs, if tough conditions persist. Thanks to a strong first half, it could still hit its targets.

Shares in the bank, however, closed down 5.3 percent against a 0.9 percent drop in the DJ Stoxx index of European banking stocks .SX7P and a 0.6 percent drop in the FTSE. Earlier the stock touched 658.5 pence, its lowest since August 2004.

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

Bradford & Bingley shares ended 4.45 percent lower.


Analysts had said after interim results last month that Northern Rock’s positive medium-term prospects, a higher dividend and buyback plans outweighed concerns over 2007.

But since then, the mortgage bank has seen a flurry of rating and price target downgrades.

Analysts at Credit Suisse, which have the bank on an underweight rating, said in a research 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 the 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.

Collins Stewart, in a note published on Wednesday said there were “clear risks of profit warnings, at least at Northern Rock” if current market behaviour continues.

Additional reporting by Dominic Lau

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