Northern Rock has distanced itself from a house market slowdown which it predicted would last for at least two years as it reported a 13 per cent rise in annual profits and a rising share of mortgage lending.

The bank said that house price growth would remain weak as first-time buyers, facing competition from buy-to-let investors and lumbered with student loan debt, continued to be "excluded" from the market.

"We expect to see muted house price inflation with some price falls in areas that have seen excessive growth," Northern Rock said,

The slowdown would prompt a fall to between £265 billion and £270 billion in UK mortgage lending over the next two years compared with £290 billion in 2004.

However, the bank said that its continued growth despite the house price hiccups showed it was a "poor proxy for the housing market".

Net mortgage lending, a figure which includes redemptions, rose by 44.8 per cent to £11.3 billion last year. The bank’s share of the home loans market rose from 8.2 per cent in the first six months of the year to more than 14 per cent in the last half.

Yet the level of arrears declined to 0.37 per cent of the mortgage book at the end of December compared with 0.45 per cent a year before.

Pre-tax profits rose by an underlying 13 per cent to reach a record £431.2 million for the year.

However, Northern Rock shares slipped by 21p to 777p after the bank admitted that it would by hit by the international financial reporting standards (IFRS) regime introduced at the start of the year.

The rules, introduced to allow easier pan-European comparison between companies, will change the accounting treatment of mortgage profits.

"The adoption of IFRS will push down income recognition in the first year of a loan and increase it later in its life," Northern Rock said.

Earnings for 2004, on a per share basis, would have been reduced by between 10 and 12 per cent.

"People are focusing on the impact of the new accounting standards," Bruce Packard, the ING analyst, said.

"People had thought that the reduction [to earnings per share] would be around 5 per cent."

Bob Bennett, the Northern Rock finance director, dismissed the changes forced by IFRS as of presentational rather than structural signifiance.

"Whether you look at a banana from the top or the bottom, it’s still a banana,” he told AFX.

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