Nationwide warns bad loans likely to rise as household finances are squeezed

Nationwide Building Society warned that bad loans were likely to grow as the worsening UK economy squeezed households, even as profits at the country’s second-biggest provider of mortgages increased on the back of rising interest rates.

On Friday Nationwide reported a 13 per cent year-on-year rise in pre-tax profit to £969mn in the first half of the year, driven primarily by rising interest rates that touched 3 per cent this month.

The results came a day after chancellor Jeremy Hunt’s Autumn Statement which will left British households facing the steepest fall in living standards on record and the biggest tax-raising effort for 30 years other than during the pandemic.

“Household budgets are already under significant pressure, consumer confidence is low and borrowing costs are higher than they were at the start of the year as well,” warned Nationwide chief economist Robert Gardner.

The company’s net interest margin, the difference between the interest it receives on its loans and securities investments and the rate it pays for deposits, rose from 1.24 per cent to 1.48 per cent.

However, its provisions for bad loans rose to £108mn, compared with a release of £34mn in the previous year. The lender said it had not seen an increase in arrears, although expected they would rise as inflation continued to put pressure on household budgets.

Gardner said that low unemployment and savings built up in recent years could cushion the blow to households.

Other lenders have taken similar steps to prepare for worsening economic conditions, including NatWest and Lloyds who announced heightened provisions last month, despite also saying that they were yet to see evidence of credit deterioration.

Gross mortgage lending at Nationwide increased 8 per cent to £19.7bn for the six-month period.

Nationwide was also hit by the instability in gilt markets unleashed by former chancellor Kwasi Kwarteng’s “mini” Budget, prompting banks and building societies to withdraw or reprice products.

Debbie Crosbie, former TSB chief executive who took over as head of the building society in June, said on Friday that the bank remained “fully committed to helping people into a home, continuing to lend particularly when others recently withdrew products”.

The pension industry was also hit by the gilt crisis, with some funds that used so-called liability driven investment strategies having to sell liquid assets to raise cash.

Nationwide said on Friday that it provided £400mn in loans to support its pension fund last month amid the volatility following the mini-Budget.

“The most important thing to say is that the defined benefit scheme is very solvent and very well funded,” said Muir Mathieson, Nationwide’s treasurer. “At no point did it need any emergency liquidity.”

Mathieson said that the funding had been provided as a short-term loan to allow for “sufficient head room” in case gilt yields had significantly worsened. The building society has already received back a quarter of the loan, he added.

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