STRATEGY
Northern Rock’s “virtuous circle” strategy is underpinned by low, sector-leading unit costs and continues to be extremely effective, producing strong growth in high quality assets and attractive returns to shareholders.
Our strategic objectives include achieving annual growth in assets under management of 20% (± 5%), whilst maintaining Return on Equity in the 18% - 21% range and Pre-Tax Profits growth of 15% (± 5%).
ECONOMIC BACKGROUND AND MARKET OUTLOOK
The mortgage market continues to be underpinned by sound economic fundamentals. UK GDP growth has stabilised and is predicted to rise to 2.3% next year, with unemployment forecasts low for the remainder of 2003 and 2004.
Current money market and swap rates anticipate increases in existing low interest rates. However, the higher level of household debt should mean that smaller changes in interest rates are required to manage aggregate demand than had been typical before the Bank of England’s independence.
A rise in UK rates may well have a dampening impact on total household borrowings, but with a more noticeable impact on unsecured and credit card volumes, rather than home loans. The shortage of other types of tenure (apart from owner occupation) together with a restricted new supply of housing stock should support the home-moving loan market. The attractive pricing for new customers and the removal of over-hanging redemption penalties should ensure the remortgage market also remains firm.
We still expect average house price inflation to return to more long term sustainable levels – around the rate of earnings growth – over the next nine months. Through a combination of being relatively small, having the lowest unit costs, good retention of existing customers and the impending new mortgage regulation helping our gross lending, Northern Rock expects to achieve its target growth in assets under management.
LENDING
Lending continues at record levels which includes net residential lending up by 41%, year to date, compared to the same period in 2002. With a pipeline of new business of over £4.4 billion at 30 September, 36% higher than a year ago, Northern Rock confirms it should meet its lending expectations in 2003. Personal unsecured and commercial lending continue to be more muted as we grow these books at a steady, prudent pace and our unsecured lending remains focussed on customers with whom we also have a secured loan relationship. However, as indicated at the Interim Results, net unsecured lending will be higher than in the first half of the year.
Reflecting the step-up in remortgaging, the sector has seen a rise in mortgage redemptions. This increase in liquidity reflects the general removal of overhanging redemption penalties in the market and is set to continue. Northern Rock’s policy of allowing existing mortgage customers genuinely to transfer to any of our “front end” products and our focus on retaining customers has ensured that our level of residential redemptions remains a step below our natural share.
The Together products have increased their share of residential completions to 25% year to date and have reduced as a proportion of residential redemptions, meaning that Together balances are back growing in line with the total loan book.
Our strong retention performance, coupled with our good gross lending has the effect of leveraging up our market share of net UK residential lending, which continues to be over 8.5% year to date, again confirming Northern Rock’s position as a growth stock.
ARREARS
The credit quality of our lending continues to be tightly monitored and controlled. Our monthly behavioural scoring system confirms that there are no early warning signs of credit deterioration and the level of residential arrears at more than three months duration remains at around half the industry average. Credit quality on our unsecured and commercial books also remains very robust.
Northern Rock has no residential loan exposure outside the UK nor any exposure to unsecured commercial lending or leasing.
Adam J Applegarth, Chief Executive, commented: “Once again we are delivering strong lending whilst maintaining tight control over costs, credit quality and lending criteria and our full year results will reflect this excellent performance. We are small, we have a unit cost advantage, we retain existing customers well and are increasingly good at attracting new loans. We are therefore well placed, as the housing market slows, to continue to deliver strong growth in high quality, low risk assets and thereby enhance shareholder value.”
