Nationwide Margins Squeezed Amid Competition From State Banks

Nationwide Building Society, the U.K.’s biggest customer-owned lender, said profit margins will come under pressure this year and next amid “aggressive” competition for deposits from state-owned banks.

Net interest margin, the difference between what Nationwide pays for funding and what it earns on loans, narrowed to 0.93 percent in the year through April 4, from 1.12 percent the previous year, the Swindon, England-based company said today in a statement. That will further reduce profit, which fell 67 percent to 162 million pounds ($260 million) last year.

“That Nationwide can be flagging a potential decline in profits towards zero (or even negative?) in the next 12 months is clearly bad news for the U.K. domestic banks,” said Jonathan Pierce, an analyst at Credit Suisse Group AG in London, in a note to investors.

Margins are being squeezed by lower interest rates, rising funding costs and increased competition from government-owned banks for customer deposits. Northern Rock Plc and National Savings & Investments took more than 70 percent of the U.K. savings market in the second half of 2008 as savers turned to the security of nationalized institutions, Nationwide said.

Building societies, which account for about 18 percent of the U.K. mortgage market, also face more defaults as unemployment and corporate failures increase.

“Nationwide are rightly concerned that the presence of the nationalized and part-nationalized banks are creating a very uneven playing field,” Vince Cable, the opposition Liberal Democrats’ spokesman on economic issues, said in an e-mailed statement. “The government must make it absolutely clear that deposits held in building societies are safe.”

Deposit Guarantees

Nationwide said it has asked the government to increase deposit guarantees to 100,000 pounds from 50,000 pounds to reassure savers that independent institutions are just as safe as state-owned banks.

State-controlled banks also face pressure on margins, said Simon Willis, an analyst at NCB Stockbrokers Ltd. in London.

“Competition for deposits has left deposit margins under pressure for many banks including Lloyds Banking Group Plc (LLOY) and Royal Bank of Scotland Group Plc,” he said. “Both saw the net interest margin down in the first quarter and we expect this to remain the case for the full year.”

To contact the reporter on this story: Jon Menon in London on jmenon1@bloomberg.net Andrew MacAskill in London at amacaskill@bloomberg.net.

To contact the editors responsible for this story: Willy Morris at wmorris@bloomberg.net.

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