Northern Rock shares slide after update

Attempts by Northern Rock to soothe concerns about its exposure to recent market turmoil failed to lift its share price today.

The banking group’s shares slipped 2% – the biggest drop of any stock in the sector – as investors gave a lukewarm reaction to a statement from Northern last night highlighting its “minimal” exposure to US sub-prime mortgages.

It said it had £275m (€404m) in US collateralised debt obligations (CDOs), or mortgage-backed securities, accounting for 0.24% of its total assets.

The Newcastle, England-based company added: “These investments are intended to be held to their maturity and none have been downgraded or had their outlook changed by any rating agency.”

The group also said it sold £465m (€683m) of commercial property loans to a division of Lehman Brothers, following a similar sale to Lehman worth £838m (€1.2bn) in June. It said the latest disposal reflected its previously stated strategy of removing higher risk assets from its balance sheet.

However, Northern’s statement drew concern in some quarters of the City, amid earlier fears it was heading for its second profits warning since June.

Shares have reflected the market turmoil of recent days, with the stock down by more than 10% during one day’s trading last week.

Northern’s update did not address concerns that the rising costs of wholesale funding would limit its ability to compete in the UK mortgage market. Most of the group’s funding comes from wholesale markets, including through borrowing from other banks at the London interbank offered rate (LIBOR).

Sandy Chen, an analyst at Panmure Gordon stockbrokers, expressed surprise that a UK mortgage bank had exposure to US mortgage-backed securities and pointed out it was unclear what gains – if any – were recorded on the Lehman sale.

He added: “We put our forecasts and price target on Northern Rock under review last week and we continue with that given the market fluctuations, but this news adds to our perception of downside earnings risk.”

Northern warned in June it would not meet annual profits growth expectations and cut its forecasts by 2% after rising interest rates took their toll on margins.