Stock Exchange Announcement

14/9/2007Northern Rock PLC - TRADING UPDATE

RNS Number:8584D
Northern Rock PLC
14 September 2007


                          STOCK EXCHANGE ANNOUNCEMENT

                               NORTHERN ROCK PLC

               STATEMENT ON MARKET CONDITIONS AND TRADING UPDATE

                               14 SEPTEMBER 2007


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 strong. 3 months plus arrears in the residential book were 0.47% at the
end of August (0.47% in June), still under half the industry average, and 1.21%
(1.11% in June) on the standalone unsecured book. 3 months plus arrears on the
Together secured book were 0.86% at the end of August (0.90% in June).

Treasury Investments

Northern Rock Treasury invests in high quality and well diversified assets. The
statutory balance sheet in our interim results reported Treasury assets of £15.4
billion. At 31 August 2007 Treasury assets were rated 35% AAA, 31% AA, 25% A and
9% BBB. Our largest exposures were 24% to sovereigns, 46% to financial
institutions and 22% to asset backed securities.

As announced on 20 August 2007, Northern Rock only has a £75 million direct
exposure to the US sub-prime market which is all rated AAA, and a £200 million
exposure to the US CDO market, within which there is indirect exposure to US
sub-prime. Of the £275 million combined exposure, £193 million is rated AAA. Our
combined exposure represents only 0.24% of total assets as at 30 June 2007.

We also have £325 million of investments in a number of Structured Investment
Vehicles (SIVs) of which £305 million is bank sponsored. Included in the £200
million of CDOs referred to above is a modest exposure of £22 million of SIV
Lites.

Northern Rock does not operate an off-balance sheet conduit, nor does it invest
in asset backed commercial paper.

Costs

Costs at Northern Rock continue to be tightly controlled, with cost growth
expected at around 3% in 2007, which is lower than previously guided reflecting
reduced business activity.

Profit and Outlook

Given the slowing of asset growth resulting from the credit and liquidity
turmoil, Northern Rock now expects underlying profit before tax* for 2007 will
be around £500 million - £540 million, compared to £588 million in 2006. Current
consensus forecast for 2007 underlying profit before tax is £647 million, which
includes around £37 million from further asset sales and swap gains beyond those
already realised. Our expectation for 2007 assumes no further programmed asset
disposals in 2007 and no further AFS gains or interest rate swap gains, other
than those already announced and booked at the time of the H1 results. It also
excludes any provisions that may have to be taken through the profit and loss
account in respect of the Treasury investments referred to above.

Northern Rock will continue its strategy of providing prime-only UK residential
mortgages through its efficient and service driven business platform. The
business model will, however, evolve in line with the developing market
conditions.

The outlook for 2008 will depend on the speed of the recovery in global
wholesale funding markets and where interest rate spreads stabilise in the
global wholesale funding markets, as well as the evolution of the company's
business model.

Northern Rock remains well capitalised as indicated in our interim results to 30
June 2007 and we expect our capital position to be strengthened further with
slower asset growth. The interim dividend will be paid as planned on 26 October
2007.


Further information on Northern Rock's 2007 trading performance will be provided
in a Preclose Trading Statement in early December 2007.


COMMENT


Adam J Applegarth, Chief Executive of Northern Rock, commented:

'We are seeing extreme conditions in global liquidity, which have impacted on
world markets. As a result, we have taken prudent action to rein back our
lending until markets normalise. Against that background it is inevitable,
albeit disappointing, that our profits will be affected. We remain focused on
prime lending in the UK mortgage market and our credit quality remains robust.
The support of the Bank of England through this facility reflects a recognition
that Northern Rock is solvent, exceeds its regulatory capital requirement and
has a good quality loan book. In these extreme times we are pleased to have a
high quality asset base and remain confident in the excellence of our strong
customer franchise, our efficient business platform and our well-known brand.'

Conference Call Details

A conference call for analysts and investors will take place at 9.30 a.m. today
(14 September). To access the call, please call 0845 245 5000 (International +44
1452 562 716) and ask for the Northern Rock conference call, ID 17098562. The
call will also be broadcast via www.northernrock.co.uk.

A replay of the conference call will be available on the website, or by calling
0845 245 5205 (International +44 1452 550 000) and keying in the pass number
17098562£.


City Contacts                          Press Contacts

Adam Applegarth                        Brian Giles
Chief Executive                        Communications Director
0191 279 4525                          0191 279 4676

Dave Jones                             John Watson
Group Finance Director                 Corporate Communications
0191 279 4366                          0191 279 5295

Richard Moorin                         Ron Stout
Investor Relations                     Corporate Communications
0191 279 4093                          0191 279 4921

Simon Hall                             James Murgatroyd
Investor Relations                     Finsbury Limited
0191 279 6090                          020 7251 3801

Important Notice

This announcement should be read in conjunction with our announcement for the
half year ended June 2007, copies of which are available from Northern Rock plc,
Northern Rock House, Gosforth, Newcastle upon Tyne NE3 4PL or on our website at
www.northernrock.co.uk.

This document contains certain forward-looking statements with respect to
certain of the plans of Northern Rock, its current goals and expectations
relating to its future financial condition and performance. By their nature,
forward-looking statements involve risk and uncertainty because they relate to
events and depend on circumstances that will occur in the future. Northern
Rock's actual future results may differ materially from the results expressed or
implied in these forward-looking statements as a result of a variety of factors,
including UK domestic and global economic and business conditions, market
related risks such as interest rates and exchange rates, delays in implementing
proposals, unexpected difficulties with computer systems, unexpected changes to

regulation, changes in customer preferences, competition and other factors.

--------------------------

* Underlying profit before tax excludes the effects of fair value volatility and
hedge ineffectiveness to present a more appropriate view of the ongoing
underlying performance of the Company.


                      This information is provided by RNS
            The company news service from the London Stock Exchange

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