'Good progress' at Northern Rock

The bank said it would make a loss this year

Nationalised bank Northern Rock has said it is making "good progress" in restructuring its finances amid accelerating mortgage lending.

The bank said gross mortgage lending rose to £1bn in the three months to 30 September, and added that the "quality of new lending remains high".

However, it said conditions in the mortgage and housing markets remained "subdued".

Mortgage arrears continued to grow, but at a slower rate than previously.

Housing market

The proportion of Northern Rock's residential mortgage holders who were more than three months in arrears on their home loan repayments rose to 4.11% by the end of September.

All mortgage lending will continue to be responsible, with affordability for customers remaining a key consideration Northern Rock statement

This was higher than the 3.92% seen three months earlier, but the rate of increase has slowed in the last quarter.

The Rock said that it had helped more than 1,000 customers facing financial difficulty to stay in their homes by maintaining repossession as a last resort, supporting government schemes and working with the debt advice sector to renegotiate people's payment plans.

It has not published a figure outlining how many homes have been repossessed in the past three months, but the stock of repossessed homes on its books has halved in the past year to 2,193. This probably signals its success in selling off repossessed homes to new owners.

The bank has increased its mortgage lending but with the average loan-to-value rate at 55% - including remortgaging - it continued the post-nationalisation change of culture to "safe" lending.

"All mortgage lending will continue to be responsible, with affordability for customers remaining a key consideration," the trading statement said.

Although there are signs that the housing market is recovering, the Rock implied that there would be no swift return to a housing boom.

"The company remains cautious as to the medium-term outlook, given rising levels of unemployment and weakness in the wider economy," it said.

"While recent trends have been encouraging, loan loss impairment is expected to remain a driver of the company remaining loss making for the full year."

The amount that people saved with the bank grew compared with the previous three months.

Good and bad banks

The results come after the European Union (EU) approved plans for Northern Rock to be split into two banks.

One business, described as the "good" bank, will hold savers' money, carry out new lending and hold some existing mortgages.

A second "bad" bank will be set up to hold the rest of the mortgages and repay outstanding government loans.

While the good bank will eventually be sold to a third party, the bad bank will run down its remaining assets and eventually be liquidated.

"I am encouraged by the improving financial performance of the company," said Northern Rock chief executive Gary Hoffman.

"The EC's recent decision to approve state aid is an important milestone in the process of implementing the legal and capital restructure of the business."

Northern Rock also confirmed it would make a loss for the year.

It said its remaining loan to the UK government remained at £14.5bn. The bank has stopped paying off its loan early in order to work towards its new business plan.