Nationwide Building Society warned yesterday that market conditions would remain difficult for the whole of this year and that it could take months before inter-bank lending rates moved significantly closer to base rate.
Britain's biggest mutual lender said it expected further falls in house prices, though the decline would be limited to "single digits".
Underlying pre-tax profits for the year ended 4 April rose 17 per cent to £781m as the society cut back its mortgage lending, but grabbed market share in retail savings.
Mark Rennison, Nationwide's finance director, said: "We think 2008 throughout will be a difficult year. Things may slightly improve but... 2009 will be when we would really expect to see improvements gather pace."
Mortgage costs have been on the rise even though the Bank of England has cut interest rates three times since December because inter-bank lending rates have become decoupled from the benchmark rate. The Bank of England has offered to swap illiquid assets for Government bills to free the markets, but the special liquidity facility has yet to have an effect, though Mr Rennison said that markets had stabilised.
"The key for the consumer's perspective is to see some fall in the inter-bank market interest rate ... We are talking weeks and months rather than days or weeks," Mr Rennison said. There should be some easing "across the summer and into the autumn, though "it will depend on the performance of the banking sector generally and economic conditions", he added.
Nationwide's net residential lending fell 40 per cent to £6.7bn and commercial property lending dropped 29 per cent to £2.4bn. Total net lending of £8.9bn was fully covered by net retail savings inflows of £9.1bn.
The society increased its share of the savings market to 19 per cent last year from 7 per cent in 2006 as depositors headed for trusted names after the run on Northern Rock, Mr Rennison said.
The society cut its share of the mortgage market to 7 per cent last year from 11 per cent, and Mr Rennison said Nationwide would target a similar share in 2008.
Nationwide highlighted the extent of housing market softening last month when it announced a 1.1 per cent fall in property prices, the first annual decline for 12 years. "We think there are more falls to come," but they will be in single digits for the year, Mr Rennison said.
The Financial Services Authority has warned that some building societies need major overhauls of their processes and governance to withstand the economic slowdown, and some analysts have questioned the viability of smaller societies.
Nationwide merged with Portman Building Society in August. Mr Rennison said the society would consider absorbing other societies if deals would make strategic sense and add value for Nationwide's members.
But he said the building society sector was in good health, with high levels of retail funding, liquidity and capital, and that Nationwide was not actively seeking tie-ups with other societies.Reuse content