Nationwide Building Society unveiled a 47% fall in lending and a 60% fall in profit as chief executive Graham Beale warned of a gloomy economic outlook in to 2011. “The growth in house prices over recent months appears to be driven by lack of supply, and growth in unemployment throughout 2010 will inevitably exert downward pressure on house prices,” Beale said.

The UK’s third-biggest lender and second-biggest deposit taker said it had followed a “responsible approach” to lending in the six months to September 30, which saw under-lying profits tumble to £117 million from £332m in the pre-crash half year of 2008.

The pre-tax profit of £143m, compared with £374m a year earlier, included a £40m gain on the acquisition of Dunfermline’s social housing loan portfolio. The £400m portfolio was acquired three months after the rescue acquisition of Scottish mutual’s saleable assets in March.

Nationwide saw its retail deposit balances fall by £5.6bn to £122.7bn, and Beale said: “We have elected not to chase market share in a retail savings market which is subject to serious competitive distortion and uneconomic pricing, often by institutions which benefit from actual or perceived unlimited government guarantees.”

He attacked the proposed tightening of capital requirements for banks. “We remain concerned that some of the changes could undermine the future of the building society sector, which the government has said it wants to protect,” Beale said. “We would encourage the FSA in particular not to back the sector into a corner by an overly rigid or super-equivalent interpretation of the EU Capital Requirements Directive. Such a policy would be, in execution if not by intention, anti-mutual.”

Beale said a £258m provision had been made last year for a Financial Services Compensation Scheme levy to cover the costs of failed institutions, and more could follow.

He said: “It is highly regrettable that the cost of failure of banks who took on substantially greater levels of risk that we are prepared to should continue to be borne by Nationwide’s members. We have continued to lobby the tripartite authorities to review the way in which FSCS levies are allocated across the industry to ensure that low-risk organisations such as Nationwide are not unfairly disadvantaged.”

Nationwide revealed the proportion of its capital raised in wholesale markets has risen from 28% to 30%, and that losses on its commercial property loans have jumped from £25m to £180m.

But it said that the cost of adopting its new “base mortgage rate” to give borrowers a default rate typically 1.5% lower than from other lenders was around £450m, and it would waive the floor on its tracker products from a contractual 2.75% to 2%.

The society said: “As a mutual we will continue to manage the business with a clear focus on the needs of our members.”

In common with the banks, however, it achieved a big increase in sales of guaranteed equity bonds to savers fleeing low deposit rates. Sales soared from £65m

to £580m. The impairment charge for bad loans leapt to £317m, although Nationwide stressed that the arrears levels of 0.66% were stable at just over a quarter of the industry average of 2.4%.

UK gross lending was down 47% at £70bn and residential lending down from £10.9bn to £5.8bn, a market share of 8.3%.

Nationwide is facing a legal challenge on bank overdraft charges, where a court judgment is due next week.