Profit outlook hits Northern Rock

Northern Rock says it has gained market share in mortgage lending

Northern Rock shares have slumped more than 10% after the lender warned that its earnings growth would not be as strong as some analysts had predicted.

The mortgage firm said that its 2007 earnings would probably climb by about 15%, and not the average growth rate of 17% forecast by analysts.

Northern Rock said there was "an adverse interest rate environment".

The comments by the UK's eighth-largest lender sparked fears that other banks also would feel a rate squeeze.

Northern Rock's shares closed down 11.9% at 834p in London.

"Today's effective profit warning, which has battered the share price in an already nervous market, could hardly have come at a worse time," said Richard Hunter of Hargreaves Lansdown Stockbrokers.

"It remains to be seen whether the initial share price reaction has been overdone," he continued, adding that "the damage will take some time to repair."

Pain today

UK interest rates have risen four times during the past year, making it more expensive for banks to get money to lend.

While today will be painful, we recommend investors look through the near-term interest rate strain Keefe, Bruyette & Woods See Northern Rock's shares

However, many lenders have delayed passing on the higher borrowing costs to consumers for fears of slowing demand for mortgages and loans.

At the same time, many borrowers took out fixed-rate mortgages before the recent round of interest rate rises.

Northern Rock said the adverse rate conditions probably would dent its interest income by between £180m and £200m in 2007.

Despite the problems, many analysts said that current situation would be short-lived and would ease as borrowers came off fixed-rate deals and had to take out loans at higher rates. Northern Rock said that even though borrowing costs had risen, and were seen climbing later this year, the UK mortgage market remained "robust" and was trading strongly.

Analysts at Keefe, Bruyette & Woods said that Wednesday's announcement reflected "a period-specific strain in 2007 and does not indicate the business model is not working".

"While today will be painful, we recommend investors look through the near-term interest rate strain and at a business model that can clearly deliver superior returns at lower risk," they continued.

Northern Rock said it had gained market share in mortgage lending, with its gross market share running at about 10%, above the level seen in 2006, in the first five months of this year.

Net market share of residential mortgage lending during the same period was about 19%.