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Nationwide warned of tougher trading conditions ahead in the UK mortgage market as lower one-off gains drove a 10 per cent drop in profits in the first half of its financial year.

The UK’s largest building society said mortgage demand in the six months ended September 30 had been “strong”, but repeated the cautious outlook from its full-year results in May that intensifying competition in the mortgage market was likely to hit lending.

Nationwide also said the sluggish pace of expansion in the wider economy was likely to be mirrored in the housing market — but both should accelerate once Brexit uncertainties receded and the squeeze on incomes eased.

“Competition in the mortgage market remains intense, and shows no sign of abating. Although mortgage volumes remain strong, we’re prepared for the possibility that intense competition combined with declining consumer confidence may lead to a moderation in gross lending and market share in the second half of the year”, said chief executive Joe Garner.

While it posted a 4.5 per cent rise in net interest income, which was boosted by lower funding costs, mortgage margins shrank and are expected to fall further, Nationwide said.

“Competition in retail lending markets remains intense and has resulted in more borrowers switching to competitively priced products”, it said. “We are planning for market conditions to remain highly competitive….and consequently we expect our reported margin to trend lower during the second half of the year and into 2018/19.”

A decline in other income — primarily due to a £100m gain from the sale of Nationwide’s investment in Visa Europe in 2016 that was not fully offset in this half by the £26m one-off gain from the sale of its investment in VocaLink — and higher defined benefit pension costs meant that overall, pre-tax profits fell to £628m from £696m for the same period last year.

Although deposit balances still rose — by £1.8bn, well down on the £4.7bn added in the same half last year — Mr Garner said there were “some signs of a squeeze on household finances from low wage growth and above-target inflation”.

“Our member panel tells us people are beginning to cut back, particularly on savings and discretionary expenditure, which is not surprising when real incomes are falling”, he added.

Nonetheless, Nationwide said it remained “well placed”, “financially secure” and “in very good shape”.

(Photo: Bloomberg)

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