Northern Rock Hikes Dividend As H1 Profits Rise

British mortgage bank Northern Rock announced a sharp rise in first-half profits and 30 percent jump in its interim dividend.

British mortgage bank Northern Rock announced a 30 percent jump in its dividend and plans to buy back shares on Wednesday, but repeated that interest rate rises would restrain 2007 profit growth.

Northern Rock's underlying pretax profit for the six months to the end of June, stripping out 17.8 million pounds from asset disposals, was up about 20 percent from a year ago.

Including gains from disposals, profits were 346.6 million pounds ($713.9 million), up 27 percent on the year.

The Newcastle-based bank said it expects profit growth to slow to about 15 percent for 2007 as it repeated a warning from last month that a rise in funding costs following five UK interest rate rises in less than a year would have an impact.

But Adam Applegarth, chief executive, said it continued to lend aggressively due to its market-leading ability to retain customers.

"We knew that would dampen 2007 and 2008 but the reason we did it was because we retain 80 to 85 percent of these customers when their product periods are up, therefore for medium term earnings it was good news," Applegarth told Reuters.

"We took a squeeze this year and next year in order to drive up earnings in 2009 and 2010."

It gains over 70 percent of its funding from wholesale markets, making it more sensitive to debt market moves than rivals such as HBOS, which gets about half its funding from the wholesale market and half from customer deposits.

The bank said its share of net mortgage lending was 18.9 percent in the first half, above its traditional share of 8 percent, which might lift it above HBOS as Britain's biggest new lender during the period.

By 0815 GMT Northern Rock shares were up 0.3 percent at 804 pence, recovering from a fall to 791p, their lowest level since November 2005. The shares have slumped by almost a third this year to cut the bank's market value to 3.4 billion pounds.

SHARE BUYBACKS

Northern Rock is likely to buy back 300 million to 400 million pounds worth of its shares in the next two to three years, as a move to Basel II capital requirement reforms frees up capital, Applegarth said.

He said 100 million to 150 million pounds of shares could be repurchased in the next year, but the timing of buybacks would depend on further asset disposals.

The bank recommended a first-half dividend of 14.2 pence, up from 10.9p last year, and said its dividend payout ratio would rise to 50 percent from 40 percent. The payout ratio would remain at 50 percent beyond this year, so would rise in line with profit growth, Applegarth said.

He said the impact of the past year's interest rate rises would continue to be felt by British households for the next 18 months as two-year fixed rate deals move to higher rates, but most of the impact on financial market spreads had now worked its way through.

Northern Rock said its underlying interest spread in the first half fell to 68 basis points from 75 a year ago, and is expected to be just above 60 for the full year.