Nationwide profits dive puts backers of big banks on alert

Cut-throat competition in the mortgage market led to a plunge in profits at Nationwide building society, leaving investors in big banks nervous about upcoming results.

Since the society does not have shareholders, its plunge in third-quarter profits from £880 million to £691 million is of relatively small concern for members.

But for bank investors it suggests that the fight to retain market share is intense and that margins are being squeezed.

Nationwide said its profit margin fell from 1.33% to 1.26% and expects it to keep dropping.

There seems little chance of the government being able to resume its auction of Royal Bank of Scotland shares at anything other than a fire sale price. Today RBS was down 3p to 236p, compared with a break-even of 500p.

Other bank shares have tumbled of late.

Nationwide took a £167 million charge for writing down the value of technology and investing in new kit as the banking sector gets ever more reliant on tech.

Write-offs for bad loans hit £69 million, down from £79 million last time, indicating that low interest rates and high levels of employment mean nearly all customers are keeping up home-loan repayments.

Chief executive Joe Garner agreed that banks are finding it hard to grow profits. “There’s quite a lot of questions about margins at banks. That will continue while great rates are available. We are 10 years into a low-base-rate environment.”

He added there is “quite a bit of oversupply” in the mortgage market as old players scrap to keep share and new players battle to grow. Nationwide wants to move into small business banking and has applied for £50 million from the RBS Alternative Remedies Package, money the treasury is handing out as part of the EU conditions for that bank’s state bailout in 2008.

Garner was gently scathing about the supposed challenger banks who imagine they are going to grab that cash and change the industry.

“The long-term nature of financial services needs real care and thought. We are really breaking through in the current account market, but it has taken us quite a long time,” he said.

“It is easy to grab share, it needs much commitment to sustain it.”

Nationwide is luring more than one of five of those who choose to switch their current account provider.