Northern Rock told its shareholders yesterday that it would make £10 million less in profit this year than they had expected. The reaction? Almost £500 million wiped from its stock market value. Since this is a company that traditionally trades on about ten times earnings, not 50, the punishment looks overdone.

However, these are uneasy times for financial companies. No one knows quite how the sub-prime mortgage saga will play out in the US but it is beginning to dawn that an awful lot of people - and not just a couple of Bear Stearns hedge funds - may be sitting on an awful lot of toxic waste. The valuing of Collateralised Debt Obligations in times of market stress is proving to be more art than science.

The souring of sentiment on Northern Rock - which has no sub-prime exposure - is much more narrowly focused. The bank has always been vulnerable in environments of rising interest rates because of the time lag between making mortgage offers and hedging the interest risk in the swaps market. When interest rate expectations worsen, as they have done in the past six months, the pain is magnified. Prices in the swaps market have moved rapidly and adversely in the past two months as traders see UK rates rising faster and for longer.

Elsewhere the lender has a good story to tell, winning a huge chunk of the new mortgage market - mainly by retaining its existing customers when they come to remortgage.

The new Basle II regime means that it plans to rejig its balance sheet, no longer holding higher-risk loans on its own books, but packaging them up and selling them on. This has two potential benefits, reducing risk and releasing cash to return to shareholders.

Such has been the steep slide in the Rock share price this year that it has gone from being one of the lowest-yielding British bank stocks to one of the highest.

Markets are right to be nervous about parts of the financial sector, but the jitters over Northern Rock look misdirected.

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