Protection scheme hits Nationwide

The Nationwide warned of more bad debts as the recession continues

Nationwide, the UK's biggest building society, said profits had been hit by its "unfair" level of contribution to the savers deposit protection scheme.

Pre-tax profits fell by 69% to £212m for the year to 4 April.

It said the £241m it had to pay into the Financial Services Compensation Scheme - which guarantees savings up to the value of £50,000 - was "illogical".

Meanwhile, low interest rates led to poorer returns from mortgage customers, while it was also squeezed by bad debt.

Bad debt provisions, due to a combination of falling property prices and residential and commercial mortgage borrowers defaulting on their loans, rose almost four-fold in the past year to £394m.

But the Nationwide said it remained strong "in the midst of turbulence".

'Disproportionate'

Chief executive Graham Beale added that Nationwide was the only major UK banking institution not to have to raise capital or seek access to government bailout schemes.

"This reflects a combination of our naturally high capital and prudent lending practices which are the hallmark features of a strong building society," Mr Beale said.

The firm added that only 0.6% of its home mortgage customers were more than three months in arrears - compared with the Council of Mortgage Lenders industry average of 2.39% as at 31 March.

Nationwide profits were also hit by costs linked to it integrating the Portman, Cheshire and Derbyshire building societies.

But the building society complained about the way that its FSCS contributions were calculated.

"We regard the fact that the FSCS charge is not linked to the level of risk posed to the financial system by individual institutions, but instead is allocated by share of the retail savings market, as illogical and unfair, producing a disproportionate outcome for the low risk retail funded institutions, particularly building societies," Mr Beale said.

Pressure

The Nationwide's results highlight the extreme pressures on mortgage lenders in the past year.

Higher levels of unemployment and business failures will inevitably lead to increased loan loss provisions Nationwide

The industry-wide lending drought meant that its lending to home owners rose by only £19bn in the past year, 80% less than in the year before.

Like other building societies, it relies mainly on money from savers to fund its mortgage lending.

But the Nationwide said that government owned bodies, such as National Savings & Investments (NS&I), and the nationalised Northern Rock, were competing so fiercely that they had taken more than 70% of all new savers' money in the second half of last year.

The society warned that the recession would last until at least next year, with only a sluggish recovery afterwards, and that this would inevitably mean more borrowers defaulting on their loans.

"Higher levels of unemployment and business failures will inevitably lead to increased loan loss provisions," it warned.