Northern Rock 'crisis' hits house builders

FINANCIAL and housebuilding shares were battered yesterday as reverberations from the dramatic bailout of Northern Rock by the Bank of England due to the wholesale markets credit crisis also jolted the wider stock market.

A profits warning from Northern Rock, which said profits could be as much as 150 million below City expectations this year, slashed the mortgage lender's shares by a further near-third to 438p.

They had already halved so far this year, and Northern's chief executive, Adam Applegarth, admitted yesterday it made the bank more vulnerable to a takeover.

He said: "It must make us more vulnerable with the share price there [at current levels]." Asked if he felt Northern would still have retained its independence in a year's time, he said: "I cannot really answer that. It's hypothetical."

And the FTSE 100 closed down more than 74 points at 6,289.3 as worries set in about how far the fallout from Northern Rock and subprime lending would spread.

Other leading mortgage bank shares were caught up in the panic even though there was an almost uniform response from the banks that their business model was very different from Northern, with far less reliance on the wholesale money markets.

Bradford & Bingley and Alliance & Leicester shed about 7 per cent, while Halifax-owning HBOS, which also includes Bank of Scotland, was off 3.5 per cent.

A B&B spokesman said she was "absolutely confident" that the bank would not have to follow Northern and ask for emergency funding from the Bank of England.

She said: "We are well funded for the next half of the year because we did a securitisation and a covered bond transaction around about May-June time."

It is understood about 25 per cent of B&B's mortgage book is funded by the wholesale markets compared with 75 per cent from this source at Northern Rock.

A spokesman for HBOS, Britain's biggest mortgage lender, said: "Business continues as usual for us. We are one of the strongest financial institutions in the world with an exceptionally strong balance sheet."

One banking analyst said: "HBOS will probably play the card that they are far more than a mortgage bank. Although their market share is 22 per cent, less than 20 per cent of its profits now come from mortgages."

HBOS is understood to get 35 per cent of its funding from the wholesale markets, with an equivalent figure of 10 per cent at Cheltenham & Gloucester-owning Lloyds TSB.

A spokesman for Abbey said the bank was "well placed to deal with the current market conditions. We have a large retail deposit base and hence do not have the dependence on the wholesale markets that Northern Rock has".

Financial trade bodies also played down the crisis. The British Bankers Association said: "Northern Rock is a sound and safe bank and there is absolutely no reason for either mortgage customers or savers to worry."

Leading housebuilders' shares were also hit yesterday on worries that the sector would rein in its building given the uncertainty in the mortgage market.

There were initial falls of around 10 per cent, but Persimmon later closed off 6 per cent at 1,016p, Taylor was off 5 per cent at 313p and Barratt Developments was 4 per cent lower at 829p. Chris Millington, a construction analyst at Bridgewell, said: "People are worried the credit crunch will feed through to the housebuilding sector. If punters are scared to take out a mortgage due to illiquidity in the sector, housebuilders might not think it is worth building so many."

ECB RULES OUT CUT IN EMERGENCY RATE

EUROPEAN Central Bank governing council member Yves Mersch yesterday ruled out cutting the bank's emergency lending rate, as the US Federal Reserve has done, unless conditions on eurozone credit markets get much worse.

He also ruled out loosening the ECB's regulations on what types of securities it would accept as collateral for short-term loans to banks, saying that would create unacceptable moral hazard by bailing out banks that had invested in risky assets.

Instead, the ECB needs to focus on using its money market operations to bring the overnight lending market back to normal, he said, adding that financial centres such as Luxembourg are probably less exposed to problems in the US subprime mortgage market than those elsewhere in Europe.

PRESSURE ON FED TO EASE CONSUMER WOES

THE Federal Reserve has come under fresh pressure to act to lower the cost of consumer borrowing in the US after weak economic data.

Retail sales and industrial output both slowed in the US last month, figures yesterday revealed, as the economy felt the strain from the housing slump and credit crunch.

Shop sales grew by just 0.3 per cent in August, below market expectations of a 0.5 per cent hike and below July's 0.5 per cent increase. Industrial output rose 0.2 per cent, the slowest pace in the past three months and below the 0.3 per cent expected.

Meanwhile, figures from the University of Michigan showed that consumer confidence remained close to a 12-month low on slowing housing and labour markets on top of rising energy prices and stock market turmoil.