Nov. 10 (Bloomberg) -- Nationwide Building Society, the U.K.'s biggest customer-owned lender, said mortgage lending fell 72 percent in the fiscal first half as it funded loans from customer deposits amid the seizure in capital markets.

Residential home loans declined to 1 billion pounds ($1.6 billion) in the six months ended Sept. 30, from 3.6 billion pounds a year earlier, the Swindon, England-based company said in a statement today. Nationwide wrote down 416 million pounds of credit-related investments, adding to 418 million pounds of writedowns posted in April.

``Wholesale market conditions remain fragile and we expect the challenging economic environment in the U.K. to persist well into 2009,'' Chief Executive Officer Graham Beale said. ``We will continue to moderate our lending to make sure it's covered by group deposits.''

Nationwide gets almost 70 percent of funding from deposits and is less dependent than most peers on capital markets to support mortgage lending. While it agreed to lift its capital reserves by 500 million pounds under the U.K.'s bank rescue plan, it isn't using government money to do so, unlike rivals including Royal Bank of Scotland Group Plc, HBOS Plc and Lloyds TSB Group Plc.

Net income increased 14 percent to 270 million pounds, compared with 236 million pounds a year earlier, the company said. Its residential mortgage market share dropped to 5.6 percent from 6.2 percent a year earlier.

Lending in the U.K. mortgage market may fall by as much as 80 percent to 20 billion pounds this year, Beale said. Beale, who has forecast U.K. house prices will drop 25 percent in the economic slowdown from their peak in 2007, said property values will continue to decline through 2010.

Iceland Charges

Bad loans climbed 21 percent to 74 million pounds. Customer deposits fell 37 percent to 2.6 billion pounds. The Tier 1 capital ratio rose to 10 percent from 9.7 percent in April, when Nationwide reported its fiscal 2007 results.

The bank took writedowns on investment securities and assets linked to Lehman Brothers Holdings Inc. and Washington Mutual Inc. As well as the 416 million-pound writedown on investments it intends to hold until maturity it took a 39 million-pound profit charge on the securities.

Nationwide will take charges in the second half related to the 19 million pounds of investments it has in Icelandic banks. The bank said there is a ``risk'' of defaults that may affect the 21 billion pounds it has in U.K. commercial real-estate loans.

The company is in talks with regulators about how much it will contribute to the bank-funded U.K. rescue plan. The so- called Financial Services Compensation Scheme guarantees customer deposits in the event of a bank failure.

``It's highly regrettable that the cost of failure of banks who took on substantially greater levels of risk than we are prepared to should be borne by Nationwide's members,'' Beale said.

To contact the reporter on this story: Ben Livesey in London blivesey@bloomberg.net

Last Updated: November 10, 2008 10:15 EST