UK's Britannia says bad debts hit H1 profit

LONDON, Aug 13 (Reuters) - Britain's second-largest mutual Britannia posted an almost 40 percent drop in half-year pretax profit on Wednesday as the cost of bad debts rose and reported a jump in arrears, driven by its specialist mortgage book.

Britannia said the percentage of its home loans three months or more in arrears rose to just over 1.7 percent in the first six months of this year, above the industry average of around 1.3 percent, and up from 1.25 percent a year ago.

That was driven by arrears on some specialist lending -- including loans for new city centre housing, a sector badly damaged by the credit crunch -- and acquired mortgage books, which have felt the impact of falling property prices and a drop in consumer confidence.

"The bulk of those arrears are arising on 8 percent of our book. It is a small percentage of our total book that is incurring the arrears -- it is contained and it is manageable," Neville Richardson, Britannia's chief executive, told Reuters.

Richardson said the group did not expect significant losses from the arrears, as the average loan-to-value on its book is 42 percent. The loan-to-value on new lending this year dropped to 54 percent from 61 percent a year ago.

"We never loaned above 100 percent loan-to-value and very little above 95 percent, and a time when competitors were lending 100 percent," Richardson said. "The bulk of our book is performing very strongly even in the current circumstances. We have changed our criteria in some of the riskier areas, limiting loan-to-value, types of lending and quantity of lending."

Gross mortgage lending for the group fell to 1.9 billion pounds from 3.7 billion a year ago as the group tightened its criteria in the face of a worsening economic backdrop.

But Richardson said net lending to existing customers remained stable around 400 million pounds, and said the group did not expect the mutual's market share to differ significantly from its historical level around 2 percent, as its drop in new lending is reflected by most players in the market.

Britannia's pretax profit for the first six months fell to 50.5 million pounds from 81.7 million a year ago. Profit before impairment provisions rose 12 percent.

(Reporting by Clara Ferreira-Marques; Editing by Erica Billingham)