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14/09/2007 STOCK EXCHANGE ANNOUNCEMENT: NORTHERN ROCK PLC
STATEMENT ON MARKET CONDITIONS AND TRADING UPDATE

Please Note: This article pre-dates the company restructure of 01 January 2010

INTRODUCTION

In light of the continuing extreme conditions in global liquidity, Northern Rock plc (Northern Rock) takes the opportunity to update the market on its trading performance and outlook.

It has now become clear that the global credit and liquidity markets have not recovered in the early part of September, and that there continues to be a severe liquidity squeeze. In the UK, this is demonstrated by 3 Month Sterling Libor currently running at over 1% higher than Bank Base Rate. In these circumstances, Northern Rock has taken action to preserve liquidity and to maintain margins on its current loan book, while modifying its lending approach to avoid writing new business that is unprofitable in current conditions.

Although Northern Rock expects its new lending volumes to increase once the wholesale funding markets return to more normal volumes and prices, it must now plan on the basis that the wholesale funding markets will not return to historic levels in the short to medium term. In addition, the previously announced decision to dispose of more capital inefficient assets has been suspended but will be resumed once the pricing environment for such assets improves.

On the assumption that the current conditions remain until the end of 2007, there will clearly be an impact on Northern Rock's 2007 asset growth and, therefore, on profits. There will also be a consequential impact on its 2008 profits, which will be driven by developments in global liquidity conditions and the interest rate and credit risk environment, as well as the prospects for the UK mortgage market.

FUNDING

Global investor appetite in the medium and long term markets, for either senior unsecured or asset backed securities, is currently greatly reduced. Whilst we expect conditions will improve over the medium term, potential volumes and pricing levels for the remainder of 2007 are likely to remain less favourable than those which have been achieved during the last two years. While Northern Rock has continued to raise new funds, these have been mainly in the short term wholesale debt markets and the amounts raised have not allowed Northern Rock to refinance maturing liabilities as well as to write new business at previous levels. In view of the difficulties Northern Rock has had in accessing longer term funding and the mortgage securitisation markets, the Company has been using its cash and other liquid reserves to support the funding of its business. Northern Rock expects current market conditions to continue for some time.

In light of the above, Northern Rock has concluded that it is important to ensure that additional standby liquidity arrangements are available. Accordingly, Northern Rock has agreed with the Bank of England that it can raise such amounts of liquidity as may be necessary by either borrowing on a secured basis from the Bank of England or entering into repurchase facilities with the Bank of England. Such repurchase facilities would include securities that have prime residential mortgage assets as underlying collateral. The collateral that can be used under this "Repo" facility is similar in nature to the collateral currently utilised by many Eurozone banks with the ECB. This additional source of funding will enable Northern Rock to adapt its business model in line with the developing market conditions.

LENDING VOLUMES

In the first 8 months of the year, Northern Rock's total net lending was up 43% over the same period in 2006, with net residential lending up 55%. Given the current global liquidity squeeze, Northern Rock has slowed new lending volumes and we expect the effects of slower lending to be reflected in fourth quarter figures. We therefore expect that total asset growth for 2007 will be around 9%.

ASSET QUALITY

Northern Rock is a prime-only lender and credit quality on all its loan books remains str