Northern Rock, the mortgage lender, is considering a £1.5 billion-plus sale of its commercial loan portfolio and returning the proceeds to shareholders.

A successful sale of its secured book would transform the £4.9 billion Tyneside-based business into a residential-only lender. However, the bank is understood to be exploring the idea of continuing to write commercial loans, while passing on the risk of default to a new owner.

Adam Applegarth, Northern Rock’s chief executive, said that the UK’s eighth-largest bank was considering the sale because the new Basle II rules make it less capital-efficient to retain the portfolio.

He made clear that the book was profitable and that a buyer would be expected to pay a premium. He added that Northern Rock hoped to up-date investors on the potential sale around the middle of the year.

This came as Northern Rock said that it was on track to make profits of just over £430 million for the year and that the mortgage market was holding up well, despite three interest-rate rises. Net residential lending jumped by 42 per cent during the first quarter of the year, it said, adding that its lending pipeline had reached £6.1 billion, up 19 per cent on the same time last year.

Northern Rock launched a new set of loans aimed at sub-prime borrowers. The bank said the move, which comes as the US markets continue to reel from repayment problems in sub-prime loans, would not entail it taking additional credit risk because the loans would be underwritten by Lehman Brothers, the investment bank.

Its shares fell 12p to £11.33.

Times Recommends

• Minister in talks with Saudis to protect creditors
• Premier Inn hits back in £29-a-room row
• Bankers hit back at 'populist' bonus supertax