The credit crunch has wiped £726 million from the market value of Nationwide Building Society’s treasury assets, it revealed yesterday – enough to have wiped out an entire year’s profits had the losses been crystallised.

Accounting rules forced Nationwide to post the mark-to-market losses on its £25.5 billion portfolio of treasury assets, which it emphasised were paper losses only. By holding the investments to maturity, the society is confident that the losses, which did not have to be booked through the profit and loss account, would be made good.

Graham Beale, the chief executive, said that the assets, typically mort-gage-backed securities, had dropped in value because of the liquidity shortage, not because of any material deterioration in their underlying quality. However, Nationwide booked actual losses of £102 million after the failure of six structured investment vehicles (SIVs) in which it had invested.

Esoteric and highly geared SIVs were thrown into turmoil last year after they were unable to borrow to cover their funding costs and were forced into asset firesales or restructurings. Nationwide chose to take £1.16 billion of SIV assets in settlement as the funds it invested in, including one run by HSBC, were broken up.

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Those losses, together with £59 million of one-off costs associated with the merger with Portman Building Society last year, left pretax profits up only 5 per cent at £686 million. Britain’s biggest building society halved its mortgage lending last year as it halted an aggressive expansion drive and turned to retail savers to fund growth in the face of the credit crunch.

The society said that net residential mortgage lending totalled £6.7 billion over the 12 months to the beginning of April. In the previous year, it lent its customers a total of £11.2 billion.

Nationwide said that it had chosen to take a “conservative and sustainable approach to lending”. The move meant that its market share fell from 11 per cent to 7.1 per cent. It said it would continue to moderate its lending until it was confident normality had returned to the funding market.

Raising wholesale finance is still difficult, although HBOS this week succeeded in finding buyers for a £500 million securitised mortgage offering. Mr Beale said he was encouraged by the recovery in sentiment. He welcomed moves by the Bank of England to inject £50 billion of liquidity into the London interbank lending markets and said that Nationwide would participate.

Bad debts on conventional mortgages and unsecured lending were down 21 per cent to £106 million. Arrears crept up from 0.31 per cent of the residential mortgage book to 0.36 per cent as the book of the less conservative Portman was absorbed.

The society said it had retail deposits of £9.1 billion – a market share of 19 per cent. It expects to save £90 million a year from the Portman merger.

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