Nationwide accused of cashing in on credit crunch as profits soar by £112m

BRITAIN'S biggest building society has cashed in on the credit crunch by pushing up profit margins on some mortgages and savings to make an extra £112.1million.

Nationwide said yesterday that profits surged by 17per cent last year to £781.1 million.

The credit crunch has been good for Nationwide's bottom line for it has been able to push up interest rates on fixed rate home loans.

The virtual collapse of Northern Rock also saw thousands of people switch billions of pounds in savings to accounts at the society last year.

The society opened 1.5 million new savings accounts - equivalent to 4,000 a day - with almost £1 in every £5 saved in the UK going into one of its accounts.

As a result, the total value of retail deposits, the money held in savings accounts, trebled at Nationwide to a staggering £9.1 billion.

Despite this dramatic spike in income, the society cut the amount of money loaned in new mortgages by 40per cent last year to £6.7 billion.

This decision by Britain's second biggest mortgage lender contributed to the current home loans drought that has plunged the property market into gloom.

 At the same time, the society was also able to push up the interest rate charged to customers taking out short-term fixed rate deals.

The Nationwide said the average rate on a two-year fixed rate home loan rose by 1-1.5percentage points in a year for someone borrowing 90per cent of the purchase price.

This was a period when the Bank of England was cutting the base rate. The Nationwide's increases were possible because its big bank rivals had increased their home loan rates after finding it more expensive to borrow on the international money markets.

The Nationwide said a decision to turn away potentially risky home loan customers meant its mortgage arrears are less than a third of the industry average.

The net effect of the increase in savings deposits and fall in home loans was to double the society's liquidity - the amount of cash it can call on - to £27.3 billion.

The society is predicting a single digit fall in house prices this year and said it was 'difficult to predict' how long the tough current market conditions will last.

Chief executive Graham Beale described the crunch as 'unprecedented'. He said: 'It will be the first quarter of next year before we are through the worst of this.'

Nationwide said it had no direct exposure to the crisis hit US sub-prime housing market - which sparked last year's crunch - although it took a £102.2 million write down on other financial vehicles hit by the market turbulence.

Nationwide completed its merger with Portman last August, giving it more than 900 branches and 14 million members. The society plans to make around £90 million in cost savings through the deal by 2011.

Mr Beale said: "Whilst the outlook for the UK housing and mortgage markets is subdued, we remain positive about the household savings market."

He said the society, a mutual run in the best interest of customers rather than shareholders, would continue to rely on savings deposits to fund its lending rather than new borrowing.

"Until current market conditions normalise, we will continue to manage the business with the aim of funding our retail asset growth from retail savings balance growth," he said.

Nationwide denied it has profited from the credit crunch. While profit margins on particular products have changed, the society  insisted that its profit margin across the full range of products was broadly flat when compared to the year before.

However, the fact the society has 1.5m more savings customers, largely as a result of the crunch, means it is taking profit from a much bigger customer base.

Nationwide said: 'The additional profits we have made in the last financial year are partly because of the increased size of the business following the Portman merger and partly because our sales have increased by more than 20per cent, particularly the sales of General Insurance products.'

The society claimed it had planned to scale back lending before the credit crunch emerged 'as part of our prudent and responsible approach to lending'.

Regardless of the motivation, the decision has contributed to the mortgage drought. A spokesman said: 'A strong and stable Nationwide is important for consumers.'