Nationwide fears grow over rising defaults on loans

Britain’s biggest building society has dramatically upped its provision for bad debts over fears that borrowers are poised to start defaulting on loans.

Nationwide has set aside £111 million to deal with loan losses, up more than tenfold from last year’s £9 million.

While last year’s figure was artificially low due to a £34 million write-back from its commercial property portfolio, it is still a striking rise which suggests lenders are fearful of a downturn.

If that level of provision for bad loans were replicated across the banking sector, it would mean many billions of pounds were being set aside in expectation of a debt crisis.

Nationwide insists that so far consumers are paying off loans and points out that the debt provision is small compared to its huge balance sheet.

Chief executive Joe Garner said: “This doesn’t reflect any deterioration in our loan book. Customer behaviour is rock solid. However we do look forward.”

Nationwide agrees with the Bank of England that the economy will slow over the next two years.

Nationwide’s chief economist Robert Gardner said: “We expect the economy to slow, inflation to rise, putting household income under pressure. But we are not seeing consumer behaviour changing yet.”

Britain’s big banks report full-year earnings the week after next. The City will be nervously eyeing the numbers for any sign that customers are struggling to pay back loans or that banks are reining in lending.

Bad debts are one of the most serious and obvious signs that an economy, and a banking system, is heading for trouble. While the City will be expecting high profits from most of its banking giants, Nationwide’s are falling. For the last nine months they are down from £1.12 billion last time to £946 million.

Nationwide says that is down to moves it has taken to support savers in a low-interest rate environment. The society says its savers get £350 million more in interest a year than they would at a bank.