The company made a profit of £111.5m in the first half of the year, compared to £107.2m last time.

Competition was particularly tough in the savings market, where Northern Rock faces competition from new lenders like Sainsbury, Egg, and Standard Life.

Selling other products is the key to success

Chief executive Leo Finn said: "Competition and conditions in the UK retail deposit market have continued to be extremely difficult resulting in aggressive pricing and a consequential reduction in margins."

The bank was also hit by the rush to buy Peps, the tax-exempt share purchase scheme, which was ended in April. It has never sold Peps itself.

Mortgage market

The bank said it was gaining share in the highly competitive mortgage market, with 6% of the market for new mortgages - double its market size.

But it has had to create new products to boost sales, including the very popular Together product, which includes a 95% mortgage and a personal loan worth 30% of the value of the property. That accounted for 13% of its net lending in the first half of the year. Total net lending was down from £1.21bn to £1.03bn.

The bank said its low cost structure would give it the flexibility to maintain profit margins.

Other banks report

The Northern Rock is just the first of a clutch of banks that report their financial results over the next few weeks.

Many analysts are expecting record profits.

That could fuel calls for an excess profits tax and tighter regulation of the banking sector. The government has already announced a review of mortgage lending, to consider whether it should be regulated by the Financial Services Act.