The UK's biggest building society today said profits had been squeezed by bad debts and a hefty bill under the British government's savings protection scheme.
Nationwide's pre-tax profits for the year to April 4 were down 69% at £212m as provisions for bad debts rose sharply to £394m. Margins have also been affected by record low interest rates.
The building society also took a £241m hit from its levy paid into the Treasury's Financial Services Compensation Scheme (FSCS).
Nationwide said this system was 'illogical and unfair' because it was being punished with a bigger bill to reflect its larger share of the savings market despite being a lower risk business.
The society recently entered the savings market in the Republic.
Nationwide has not needed support from the UK taxpayer and instead shored up weaker rivals, taking over Derbyshire and Cheshire building societies and buying the savings assets of the ailing Dunfermline in March.
Nationwide said it had 'remained strong in the midst of all this turbulence' because it gains more than 70% of its funding through savings deposits, making it less reliant on wholesale funding.
But the building society warns of a tough year ahead and said it expects the UK economy to remain in recession until 'at least the end of 2009'. It also predicts any recovery next year will be 'sluggish' as consumers pay down debts and the British government either hikes taxes or cuts spending to control a spiralling deficit.
Nationwide said its underlying loan book remained strong, but the lion's share of its sharp rise in bad debt provisions came from a £91m loss on mortgages and a £189m hit on commercial lending, due to a combination of falling values and increased arrears.
