Half-year Report

RNS Number : 5185P
Nationwide Building Society
18 November 2016
 

 

 

 

 

 

 

 

Nationwide Building Society

 

 

 

 

Interim Results

For the period ended

30 September 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contents

 

 

Page

 

 

Chief Executive and Finance Director quotes

3

 

 

Key highlights

4

 

 

Financial summary

5

 

 

Chief Executive's review

6

 

 

Financial review

10

 

 

Business and Risk Report

18

 

 

Consolidated interim financial statements

53

 

 

Notes to the consolidated interim financial statements

59

 

 

Responsibility statement

84

 

 

Independent review report

85

 

 

Other information

 

Contacts

87

 

87

 

 

Appendix - Additional capital disclosures

88

 

 

 

 

 

 

 

 

Underlying profit

Profit before tax shown on a statutory and underlying basis is set out on page 5. Statutory profit before tax of £696 million has been adjusted for a number of items, consistent with prior periods, to derive an underlying profit before tax of £615 million. The purpose of this measure is to reflect management's view of the Group's underlying performance and to assist with like for like comparisons of performance across periods. Underlying profit is not designed to measure sustainable levels of profitability as that potentially requires exclusion of non-recurring items even though they are closely related to (or even a direct consequence of) the Group's core business activities.

 

 

Forward looking statements

Statements in this document are forward looking with respect to plans, goals and expectations relating to the future financial position, business performance and results of Nationwide. Although Nationwide believes that the expectations reflected in these forward looking statements are reasonable, Nationwide can give no assurance that these expectations will prove to be an accurate reflection of actual results. By their nature, all forward looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond the control of Nationwide including, amongst other things, UK domestic and global economic and business conditions, market related risks such as fluctuation in interest rates and exchange rates, inflation/deflation, the impact of competition, changes in customer preferences, risks concerning borrower credit quality, delays in implementing proposals, the timing, impact and other uncertainties of future acquisitions or other combinations within relevant industries, the policies and actions of regulatory authorities, the impact of tax or other legislation and other regulations in the jurisdictions in which Nationwide operates. As a result, Nationwide's actual future financial condition, business performance and results may differ materially from the plans, goals and expectations expressed or implied in these forward looking statements. Due to such risks and uncertainties Nationwide cautions readers not to place undue reliance on such forward looking statements.

 

Nationwide undertakes no obligation to update any forward looking statements whether as a result of new information, future events or otherwise.

 

This document does not constitute or form part of an offer of securities for sale in the United States. Securities may not be offered or sold in the United States absent registration or an exemption from registration. Any public offering to be made in the United States will be made by means of a prospectus that may be obtained from the Society and will contain detailed information about the Society and management as well as financial statements.

 

 

RECORD CURRENT ACCOUNT AND LENDING GROWTH AND PROTECTION FOR SAVERS AS NATIONWIDE SUPPORTS MEMBERS DURING UNCERTAIN TIMES

 

 

Nationwide Chief Executive, Joe Garner, said:

"As a building society we are owned by our members and are answerable to them, which is why, for 170 years, we have made decisions focused on their best interests. The performance we are announcing today is a reflection of this. Despite economic uncertainty following the EU referendum, the Society has continued to lend to help our members get onto and move up the housing ladder, with record net lending in the half year. We have offered long term value for those who want to save for their future and more people than ever before have chosen to open a Nationwide current account. We have also continued to be ranked number one for customer service satisfaction amongst our high street peer group1.

 

"We have made a number of pledges to help our savers and borrowers. These include protecting selected savings rates to minimise the impact of the base rate change and helping our members with variable rate mortgages by passing on the base rate decrease in full. These conscious decisions and those taken over recent years have contributed to a reduction in profits in the first half of the year in line with expectations, demonstrating our commitment to putting members' interests at the heart of everything we do.

 

"Our investment in technology, is enabling us to test the viability of returning branches to communities which have been left without banking services, by opening a pilot branch in Glastonbury which will use the latest technology alongside the personal service so many value.

 

"Nationwide's strong capital position and commitment to continue to deliver the best service on the high street mean we are well placed to continue to support members whatever the prevailing economic conditions."

 

 

Nationwide Finance Director, Mark Rennison, said:

"Nationwide has traded strongly over the first six months of the year, increasing gross mortgage lending by 17% to £17.5 billion, a market share of 14.5%. Our focus on offering attractive products and rewarding loyal savers has resulted in member deposit balances increasing by £4.7 billion.

 

"Statutory profit for the period was £696 million and underlying profit was £615 million, both of which include a gain of £100 million on the disposal of our stake in Visa Europe. Our profit performance has reduced in line with our expectations and reflects continued margin pressure due to the prevailing low interest rate environment and the conscious decisions we have taken over recent years to support our members.

 

"We have also increased investment in our products and services for the long term benefit of our membership consistent with our position as the leader for customer service on the high street."

 

 

1 © GfK 2016, Financial Research Survey (FRS), 3 months ending 30 September 2016 vs. 31 March 2016, proportion of extremely/very satisfied customers minus proportion of extremely/very/fairly dissatisfied customers summed across current account, mortgage and savings; high street peer group defined as providers with main current account market share >6% (Barclays, Halifax, HSBC, Lloyds Bank (inc C&G), NatWest and Santander).

 

 

Key highlights

 

·      A strong Society, making decisions for the benefit of members over the long term

in line with expectations statutory profit reduced to £696 million (H1 2015/16: £802 million)

underlying profit £615 million (H1 2015/16: £801 million)

Common Equity Tier 1 ratio of 23.3% and leverage ratio of 4.0% (4 April 2016: 23.2% and 4.2% respectively)

 

·      Record prime gross mortgage lending

gross mortgage lending up 17% to £17.5 billion

best ever net mortgage lending, up 46% to £6 billion

record gross prime lending of £14.7 billion, up 23%

accounted for one-third of UK net mortgage lending over the past five years

helped a record number of first-time buyers, up 50% to 38,600

 

·      Strong growth in deposit balances

increased our member deposit balances by £4.7 billion (H1 2015/16: £2.6 billion)

average deposit rate of 1.07%, 25 basis points higher than the market average, equating to an annualised benefit for our members of £380 million

 

·      Record numbers of new current accounts

record 377,000 current accounts opened, an increase of 36%

75,500 accounts switched to Nationwide, up 61%, representing a 15.8% market share

continued investment with the launch of FlexStudent, our first student current account

'Best Rewards' - uSwitch Current Accounts Awards (2016); 'Best Online Current Account Provider 2016' - Your Money

 

·      No.1 for customer service

ranked number one for customer service satisfaction amongst our high street peer group with a lead of 8.0%2

No. 1 in Forrester UK 2016 Customer Experience Index

'Best Extra Large Call Centre' - Top 50 Companies for Customer Service

 

·      Building society, nationwide

testing the viability of returning branches to communities, with a pilot branch in Glastonbury

supported savers and borrowers after the base rate cut, protecting rates for those with Regular Saver and Help to Buy products, and making £10 billion a year available to first time buyers

Ministry of Defence Gold Award for our support of the military community

our Specialist Support Service has helped more than 700 members affected by life-limiting situations, unlocking almost £66,000 in financial support

 

·      Housing market outlook

demand and supply well matched with modest slowdown in activity since the EU referendum

less certain economic outlook may soften demand but prices will continue to be supported by low interest rates and limited supply of new homes

 

 

2 © GfK 2016, Financial Research Survey (FRS), 30 September 2016 vs. 31 March 2016, proportion of extremely/very satisfied customers minus proportion of extremely/very/fairly dissatisfied customers summed across current account, mortgage and savings; high street peer group defined as providers with main current account market share >6% (Barclays, Halifax, HSBC, Lloyds Bank (inc C&G), NatWest and Santander).

 

 

Financial summary

 

 

Half year to

30 September

2016

Half year to

30 September

2015

Financial performance

£m

 

£m

 

Total underlying income

1,642

 

1,683

 

Underlying profit before tax

615

 

801

 

Statutory profit before tax

696

 

802

 

Mortgage lending

£bn

%

£bn

%

Group residential - gross/gross market share

17.5

14.5

14.9

13.2

Group residential - net/net market share

6.0

33.9

4.1

21.2

 

 

 

 

 

 

%

 

%

 

Average loan to value of new residential lending (by value)

71

 

69

 

Member deposits (note i)

£bn

%

£bn

%

Balance movement/market share

4.7

10.3

2.6

8.5

Key ratios

%

 

%

 

Cost income ratio - underlying basis

57.1

 

51.0

 

Cost income ratio - statutory basis

54.6

 

51.0

 

Net interest margin

1.33

 

1.58

 

 

 

 

 

 

At

30 September

2016

At

4 April

2016

Balance sheet

£bn

 

£bn

 

Total assets

225.5

 

208.9

 

Loans and advances to customers

185.1

 

178.8

 

Member deposits (shares) (note i)

143.4

 

138.7

 

Asset quality

 

 

 

 

  Residential mortgages:

%

 

%

 

Proportion of residential mortgage accounts 3 months+ in arrears

0.45

 

0.45

 

Average indexed loan to value of residential mortgage book (by value)

54

 

55

 

Impairment provisions as a % of non-performing balances

3.2

 

3.2

 

 

 

 

 

 

  Consumer banking:

 

 

 

 

Non-performing loans as a percentage of total balances (excluding charged off balances) (note ii)

3

 

4

 

Impairment provisions as a percentage of non-performing balances (including charged off balances) (note ii)

83

 

81

 

 

 

 

 

 

Key ratios

%

 

%

 

Capital - CRD IV:

 

 

 

 

Common Equity Tier 1 ratio (note iii)

23.3

 

23.2

 

Leverage ratio (note iii)

4.0

 

4.2

 

 

 

 

 

 

Other balance sheet ratios:

 

 

 

 

Liquidity coverage ratio

140.6

 

142.6

 

Wholesale funding ratio

27.2

 

24.8

 

Loan to deposit ratio (note iv)

117.7

 

117.2

 

             

 

Notes:

i.     Member deposits include current account credit balances.

ii.    Charged off balances relate to accounts which are closed to future transactions and are held on the balance sheet for an extended period (up to 36 months, depending on the product) whilst recovery procedures take place.

iii.   Reported under CRD IV on an end point basis. The leverage ratio is calculated using the Capital Requirements Regulation (CRR) definition of Tier 1 for the capital amount and the Delegated Act definition of the exposure measure.

iv.   The loan to deposit ratio represents loans and advances to customers divided by (shares + other deposits + amounts due to customers).

 

 

Chief Executive's review

 

Making decisions for the benefit of members over the long term

 

As a building society, we were founded by ordinary people who came together to achieve things they could not achieve alone, like owning a home and saving for their future. To this day, we remain a member-owned mutual building society able to take a long term view and focus on providing excellent service, security and stability for our members, our owners. This has been particularly important over the first half of the year given the uncertainty and market volatility which followed the EU referendum.

 

We have taken the conscious decision to stand by our members, continuing to help them by reducing variable mortgage rates and offering long term value to savers, even in the current low interest rate environment. As expected these conscious decisions and those taken in recent years have had a knock-on impact on our profits. At the same time more people than ever before have chosen us for their everyday banking needs, attracted by the breadth, value and quality of our current account range. This has resulted in strong trading and a good financial performance over the first half of the year.

 

Underlying profit has reduced in the period to £615 million. This is due to three things. First, a reduction in net interest income due to the prevailing low interest rate environment, competition in the mortgage market and the active decisions we have taken to support savers and variable rate mortgage members. Second, a growth in underlying costs. And third, a modest increase in impairment provisions. These have been partially offset by a gain of £100 million from the disposal of the Society's stake in Visa Europe during the period. Our NIM in the period of 1.33% was lower than the same period last year (H1 2015/16: 1.58%), but has been broadly stable over the first half of the year, with closing spot NIM in September 2016 in line with that for the period.

 

Strategic investment into the Society is greater than ever before reflecting our financial strength and ability to make the right long term decisions for our members. We are investing in new products and investing to provide members with better service propositions such as our new banking app and further expansion of Nationwide Now (our video link advice service) which is proving so successful. We also continue to make investment in strengthening our resilience and control environment to keep our members' money safe, as well as supporting our people as a responsible employer through increases to our pension contributions. This investment, along with costs driven by our strong trading performance, has led to an increased underlying cost income ratio of 57.1% (H1 2015/16: 51.0%). Whilst sharpening our focus on efficiency, we will continue to invest where we believe it is in the long term interests of our members.

 

Nationwide remains safe and secure as evidenced by our strong capital position and balance sheet, with consolidated CET1 and leverage ratios of 23.3% and 4.0% respectively (4 April 2016: 23.2% and 4.2% respectively).

 

Building society, nationwide

 

As a mutual we do not aim to maximise profit, instead retaining sufficient earnings to support future growth and sustain a strong capital position. Being member-owned we are in an enviable position that allows us to take the right long term decisions and invest in making a tangible difference to our members' and employees' lives by tackling the issues that are important to them.

 

We believe that there is still a role for the branch on the high street, offering people the choice of managing their money using the latest technology in branch together with the personal service so many value in a digital age. Indeed, our branches are alive and well as evidenced by the fact that of all new current account openings during the first half of the year, over half were opened in a branch, and of these almost 20% were opened through Nationwide Now. We believe we can use this technology and digital investment to test the viability of opening a branch on high streets with limited access to a bank or building society. We will pilot this concept with a 'community contract' branch in Glastonbury, Somerset, where a consultation suggested that residents were willing to become a member of Nationwide to support the Society's investment. This branch will feature the latest technology, including the Nationwide Now service which gives members access to our financial consultants at a time that suits them.

 

 

 

Chief Executive's review (continued)

 

We were delighted to have been awarded the Employer Recognition Scheme's Gold award by the Ministry of Defence in recognition of our support for former and serving armed forces personnel.

 

Following the EU referendum, we have established a Brexit Consumer Support Panel which brings together leading consumer industry organisations to address the challenges facing consumers as the UK's relationship with the EU evolves. The panel, chaired by Nationwide Building Society, will provide insights to Government into consumer attitudes and behaviours in relation to Brexit and will help to promote positive outcomes for consumers as the renegotiation process is progressed. The organisations represented on this panel have millions of members, customers and employees across the UK, bringing a real insight into the levels of confidence around the country and we look forward to working with the Government over the coming months to better understand the challenges households face.

 

We are also committed to investing in our people. Not only have we championed fair pay as one of the first high street names to sign up to the Living Wage Foundation but we have also improved our pension scheme, increasing the amount we contribute to our employees' pensions. For employees in our defined contribution scheme who pay up to 7% of their salary into their pension, Nationwide will put in 16%, representing one of the most attractive pension schemes in the UK.

 

We continue to place a sharp focus on our core purpose of building society, nationwide and making decisions which are in the best interests of our membership. It is for this reason, following a strategic review of our commercial real estate (CRE) business, we have concluded our CRE lending is not key to the Society's vision for the future and that our resources would be better deployed elsewhere. Therefore, we will stop lending to new and existing CRE customers. We will maintain a dedicated service for each existing CRE customer throughout the remainder of their loan term. We will continue to provide funding to registered social landlords and existing Project Finance customers as well as continuing our Business Savings proposition.

 

Helping members buy homes and save for the future

 

Nationwide was founded to help people own their own homes and save for the future.

 

We have continued to help more members get onto or move up the housing ladder in the last six months. Gross mortgage lending increased by 17% to £17.5 billion (H1 2015/16: 14.9 billion) and net lending was up 46% to £6.0 billion (H1 2015/16: £4.1 billion), representing our best period ever. These equate to market shares of 14.5% and 33.9% respectively, well above our natural par share and strengthening our position as the UK's second largest mortgage lender. Within this, we delivered record prime gross mortgage lending of £14.7 billion, up 23%.

 

We arranged a record 38,600 mortgages for people buying their first home, an increase of 50%. This represents one in five of all first time buyers. We are committed to helping first time buyers by maintaining low deposit lending and minimising costs with schemes such as Help to Buy and Save to Buy.

 

We have taken a stand to help more people onto the housing ladder. As part of our five-point plan, launched to underline our commitment to our members, the Society will make at least £10 billion a year available to lend to first time buyers, where it is appropriate and responsible to do so. We have also protected the rates on Nationwide's Help to Buy ISA and Save to Buy products following the base rate decrease. This will help ensure the road to home ownership does not get longer for those saving to buy their first home.

 

At the same time, the Society passed on the base rate cut in full to Base Mortgage Rate (BMR), Standard Mortgage Rate (SMR) and tracker mortgage members, thereby lowering their monthly payments.  

 

 

 

Chief Executive's review (continued)

 

As the proportion of UK households living in rented accommodation continues to grow, we have maintained support for the private rented sector through our dedicated buy to let subsidiary, The Mortgage Works (TMW). Gross buy to let mortgage lending for the first six months of the year was £2.8 billion (H1 2015/16: £2.9 billion). The buy to let sector is going through a period of substantial change resulting from new rules on landlord taxation and a new regulatory regime which provides guidance on underwriting and affordability standards for lending to landlords. As a responsible lender we took the decision to lead the market in making changes to our affordability assessment criteria to ensure our borrowers do not overstretch themselves. This is expected to result in lower buy to let lending in the second half of the year.

 

While borrowers have benefited from lower interest rates, we have also offered a support package for savers, protecting rates where possible and offering competitive products.

 

We have protected our Help to Buy ISA and Save to Buy rates, as well as maintaining the rates on the Flexclusive Regular Saver and Regular Saver accounts. During the period our members have benefited from an average rate on their deposits of 1.07%, 25 basis points higher than the market average, equating to an annualised benefit for our members of £380 million. Our loyal savers3 have received an average rate of 1.13% over the last six months, 46 basis points higher than the equivalent market average, equating to an annualised benefit of almost £100 million.

 

In addition, over 185,000 Flexclusive Regular Saver accounts have been opened in the first half of the year, offering current account holders 5.00% on monthly payments of up to £500 for the first 12 months.

 

Thanks to our competitive savings range, we have seen an increase in member deposit balances of £4.7 billion, maintaining our position as the UK's second largest savings provider with a market share of over 10%.

 

More people than ever before choose Nationwide for everyday banking

 

As well as strong mortgage and savings growth, more people than ever before are choosing Nationwide for their everyday banking, attracted by the breadth, value and quality of our current account range. We opened a record 377,000 current accounts during the first half of the year, a 36% increase on last year (H1 2015/16: 277,000). Again, we have been a net beneficiary of customers switching via the Current Account Switch Service, driven by the popular 'Recommend a Friend' referral scheme. In total 75,500 accounts were switched to Nationwide, an increase of 61%, representing a market share of switchers of 15.8%.

 

Our continued investment in growing our current account base has contributed to the record account openings. During the half year we have extended our product range with the launch of FlexStudent, our first ever student account, and offered members innovative new ways to manage their money. This has led to an increase in our share of main standard and packaged current accounts to 7.3%4 (4 April 2016: 7.1%).

 

Number one for customer satisfaction amongst our high street peer group5

 

We strive to provide members with excellent service whether they choose the convenience of managing their money digitally or the personal touch in a branch. We continue to invest in technology to make life easier for members. As with Apple Pay, we were amongst the first in the UK to provide Android Pay and we have launched a new version of our mobile banking app, which allows customers to manage their accounts quicker and easier than ever before.

 

We know our members still value the face to face help and support they can receive in a branch so we are using the latest fibre optic technology to enhance and deliver great service in locations which our members find convenient.

 

We continue to be ranked number one for customer satisfaction amongst our high street peer group, with a lead of   8.0%5.

 

3 Nationwide rewards loyalty by giving members with a Loyalty Saver product a higher rate of interest depending on the length of their membership.

4 Based on market data as at August 2016.

5 © GfK 2016, Financial Research Survey (FRS), 3 months ending 30 September 2016 vs. 31 March 2016, proportion of extremely/very satisfied customers minus proportion of extremely/very/fairly dissatisfied customers summed across current account, mortgage and savings; high street peer group defined as providers with main current account market share >6% (Barclays, Halifax, HSBC, Lloyds Bank (inc C&G), NatWest and Santander).

 

 

Chief Executive's review (continued)

 

Our record on complaints continues to be very strong. Despite having a 12.8% market share of mortgages and a 10.1% market share of savings, we account for only 2% of total industry complaints, and we make every attempt to resolve complaints with the customer. If complaints are referred to the Financial Ombudsman, latest figures show that the Ombudsman upholds our decisions in 85% of cases, compared with an industry average of only 52%.

 

Supporting members in uncertain times

 

The UK economy grew at a respectable pace in the first nine months of 2016. However, uncertainty following the EU referendum is likely to adversely impact investment and hiring decisions which in turn is likely to result in slower growth in the quarters ahead. To date, market data points to a modest slowdown in the wider economy and our core markets. Policy stimulus measures aimed at lowering borrowing costs should help to provide support for economic activity and policymakers appear willing to further ease monetary and fiscal policy if required.

 

The longer term impacts of the EU referendum will depend on a range of factors, not least the time it takes to reach trading agreements with EU and non-EU economies and the nature of those agreements. Though the outlook is uncertain, our assumption is that economic growth will be maintained at a modest pace in the years ahead. Interest rates are expected to remain at historically low levels for a prolonged period in order to support economic activity, where further stimulus measures (including a base rate cut to close to, but above, zero) may still be required.

 

The recent decline in sterling should provide some support for UK exports, though in the short term it will also exert upward pressure on inflation which will act as a drag on real income growth. However, the impact on inflation is expected to prove transitory and is unlikely to prevent policymakers implementing further stimulus if required.

 

There are signs of a modest slowdown in activity in the housing market, especially in regard to the buy to let market, and this has made it difficult to assess the underlying strength of demand in recent quarters. The number of mortgages approved for house purchase has moderated, and new buyer enquiries remain subdued, though the supply of houses is also constrained. Indeed, demand and supply have remained fairly well matched and the annual pace of house price growth has remained in a narrow range of between 3% and 6% since early 2015.

 

Housing market trends will depend crucially on developments in the wider economy. This suggests activity may soften further in the months ahead, though the low level of interest rates will provide support for demand and the limited supply of homes on the market is likely to provide support for prices.

 

We will continue to act in the best interests of our members. Nationwide's strong capital position, high quality balance sheet and lead on customer satisfaction means we are well placed to continue to help our members whatever the prevailing economic conditions. We face the future with confidence and will continue to do the right thing for our members.

 

 

 

Financial review

 

Overall performance

 

Our financial results for the period ended 30 September 2016 show a statutory profit before tax of £696 million (H1 2015/16: £802 million) and underlying profit before tax of £615 million (H1 2015/16: £801 million). These results include a gain of £100 million on the disposal of our stake in Visa Europe.

 

Underlying profit has reduced 23% to £615 million, predominantly due to a reduction in net interest income, growth in underlying costs and an increase in impairment charges. As indicated when announcing our results for the 2015/16 financial year, our margins have trended lower as a result of ongoing competition in the mortgage market, combined with continued natural attrition of BMR balances and the impact of the prolonged low interest rate environment, including the cut in the base rate to 0.25% in August.

 

Profit for the period remains within the target range of our financial performance framework (£1 billion to £1.5 billion per annum), which we introduced in the Annual Report and Accounts 2016. This range represents the level of annual profit we believe is necessary for us to continue to invest and support members' needs while maintaining financial strength. The framework is based on the underlying principle of maintaining capital comfortably in excess of regulatory leverage ratio requirements. As a consequence of lowering our forecast balance sheet in light of the outcome of the EU referendum, we expect to update the target range at the end of the year.

 

The underlying cost income ratio has increased to 57.1% (H1 2015/16: 51.0%). The movement reflects the reduction in net interest income combined with incremental expenditure on strategic investment to enhance efficiency and service for our members, and increased employee costs, including our investment in a 'Living Pension' for our employees. Whilst sharpening our focus on efficiency, we will continue to invest where we believe it is right for our members.

 

Total assets have grown by £17 billion to £226 billion as at 30 September 2016. This increase is attributable to £6 billion growth in residential mortgage lending, reinforcing our position as the second largest mortgage lender in the UK and increasing our market share of prime mortgage balances to 12.7% (4 April 2016: 12.4%). In addition, there has been an increase in our high quality liquid assets primarily due to pre-funding of wholesale maturities and an increase in collateral relating to derivatives.

 

Our capital levels have remained strong during the period with CET1 and leverage ratios of 23.3% and 4.0% respectively (4 April 2016: 23.2% and 4.2%), comfortably in excess of current regulatory requirements, and well placed to meet foreseeable regulatory capital requirements.

 

Income statement

 

Underlying and statutory results

Half year to

30 September 2016

Half year to

30 September 2015

 

£m

£m

Net interest income

1,449

1,557

Net other income

193

126

Total underlying income

1,642

1,683

Underlying administrative expenses

(938)

(858)

Impairment losses

(37)

-

Underlying provisions for liabilities and charges

(52)

(24)

Underlying profit before tax (note i)

615

801

Transformation costs (note ii)

-

(8)

FSCS (note ii)

4

(5)

Gains from derivatives and hedge accounting (note ii)

77

14

Statutory profit before tax

696

802

Taxation

(194)

(166)

Profit after tax

502

636

 

Notes:

i.     Underlying profit represents management's view of underlying performance and is presented to aid comparability across reporting periods. It is not designed to measure sustainable levels of profitability.

ii.    Within the statutory results presented in the financial statements:

  - transformation costs are included within administrative expenses

  - FSCS costs are included within provisions for liabilities and charges

  - gains/losses from derivatives and hedge accounting are presented separately within total income.

 

Financial review (continued)

 

Net interest income and margin

 

Half year to

30 September 2016

Half year to

30 September 2015

 

£m

£m

Net interest income

1,449

1,557

Weighted average total assets

220,364

200,112

 

 

 

 

%

%

Net interest margin

1.33

1.58

 

As anticipated our net interest margin (NIM) in the period of 1.33% was lower than the same period last year (H1 2015/16: 1.58%). The reduction in NIM relative to the previous year is primarily due to ongoing competition in the mortgage market, combined with continued natural attrition of BMR balances and the impact of medium term interest rate expectations. The NIM position has stabilised, with closing spot NIM at 30 September 2016 in line with that for the period.

 

Our BMR balances have reduced by £7.1 billion over the past 12 months to £32.3 billion as at 30 September 2016 and we expect this trend to continue for the remainder of the financial year. This, together with the impact of competition on new business pricing, has resulted in a reduction of approximately 20 bps in the average margin on mortgage balances, measured against relevant market indices (swaps or Libor).

 

At a market level, the incentive to support overall margins through lower deposit rates in the face of competition for lending, combined with deposit growth in excess of demand for lending, has resulted in retail funding costs declining over the last 12 months. Against this backdrop we have sought to support our saving members as far as possible by deferring rate reductions and maintaining rates significantly in excess of those on offer from our major high street peers. Following the decision by the Bank of England to cut the base rate to 0.25% we committed to protecting members who save regularly, or are building a deposit to buy their own home, resulting in selected products being maintained at their existing rates. As a mutual we offer savings products which represent long term good value and over the last six months our depositors have benefited from an average rate of 1.07%, 25 bps higher than the market average rate, equating to an annualised benefit to savers of some £380 million.

 

Key factors influencing NIM in the second half of the year are likely to be interest rate expectations, sustained mortgage market competition, and our continued focus on delivering long term value to our savers. We currently expect that our NIM for the second half of the year will be only modestly lower than for the first half.

 

Net other income

 

Half year to

30 September 2016

Half year to

30 September 2015

 

£m

£m

Current account and savings

35

38

Protection and investments

36

37

General insurance

30

37

Mortgage

4

4

Credit card

(3)

8

Commercial

5

7

Other

86

(5)

Total underlying net other income

193

126

Gains from derivatives and hedge accounting

77

14

Total statutory net other income

270

140

 

Underlying net other income has increased by 53% to £193 million (H1 2015/16: £126 million) primarily due to a gain of £100 million from the disposal of our stake in Visa Europe during the period, which is included in 'Other' above. Excluding this gain, net underlying other income has reduced during the period primarily due to a decrease in interchange income from credit card and current account transactions, following the introduction of regulatory caps. In addition current account fee income has reduced following the introduction of our FlexBasic current account, which has no fees for certain transactions.

 

Our general insurance income has reduced by £7 million due to an increasingly challenging market environment, combined with our pricing proposition which is focused on delivering value to members.

 

Financial review (continued)

 

Gains or losses from derivatives and hedge accounting arise due to hedge accounting ineffectiveness or because hedge accounting is not achievable. This volatility is largely attributable to accounting rules which do not fully reflect the economic reality of the Group's hedging strategy. Details of fair value gains and losses relating to derivatives and hedge accounting are provided in note 6 to the consolidated interim financial statements.

 

Administrative expenses

Half year to

30 September 2016

Half year to

30 September 2015

 

£m

£m

Employee costs

388

349

Other administrative expenses

375

354

Depreciation and amortisation

175

155

Total underlying administrative expenses

938

858

Transformation costs

-

8

Total statutory administrative expenses

938

866

 

 

 

 

%

%

Cost income ratio - underlying basis

57.1

51.0

Cost income ratio - statutory basis

54.6

51.0

 

The strong trading performance in the period which has led to additional business volumes, coupled with increases to employee costs and strategic investment in propositions and service for members, has resulted in an increase in underlying administrative expenses of 9.3% (£80 million). At a statutory level administrative expenses have increased by 8.3% (£72 million). As a result, the cost income ratio (CIR), on an underlying basis, has increased to 57.1% (H1 2015/16: 51.0%).

 

Employee costs have increased, reflecting the impact of an annual pay award averaging 2.1% and higher costs resulting from enhancements to the Group's defined contribution pension scheme in line with our policy of providing a 'Living Pension' alongside being a Living Wage employer. In addition, average employee numbers have increased by 4% period on period as we continue to build greater capacity to meet additional business volumes and further strengthen risk and control functions.

 

Strategic investment has been greater than ever before, with the majority relating to initiatives that directly benefit members and reflecting our strategy of taking decisions to support the long term interests of our members. During the period, investment has focused on service and efficiency improvements, both in branch and through digital channels, such as payments through mobile phones, updating our savings point of sale systems and video links in branches which allow members to speak face to face with advisors in another location. Further investment has concentrated on IT resilience and ensuring compliance with UK and EU regulatory requirements.

 

Our cost trajectory reflects significant growth and investment over recent years. Mortgage balances have grown 12.8% over the last 2 years and we have 24% more main current account members today than in 2014. Investment in support of our member proposition will continue though we expect the impact on the cost base from this activity to be offset by the efficiencies it provides and efficiencies realised from previous investment. The continuing low rate environment will constrain income growth over the foreseeable future and we therefore intend to increase focus on driving our efficiency agenda, exploiting the benefits of past and ongoing investment to accelerate automation and digitise service delivery in line with the needs of our members. This will result in lower cost growth in future periods and we will provide further information in our full year results announcement.

 

 

 

Financial review (continued)

 

Impairment losses/(reversals)

Half year to

30 September 2016

£m

Half year to

30 September 2015

£m

Residential lending

5

(7)

Consumer banking

32

33

Retail lending

37

26

Commercial lending

(5)

(27)

Other lending

-

1

Impairment losses on loans and advances

32

-

Impairment losses on investment securities

5

-

Total

37

-

 

Impairment losses for the period of £37 million have increased compared to the same period last year (H1 2015/16: £nil) primarily due to a lower level of net recoveries in the commercial real estate (CRE) portfolio.

 

Residential lending impairment charges for the period of £5 million (H1 2015/16: £7 million reversal) reflect a lower benefit from house price improvement than seen in the previous period. Arrears performance and LTV profile have been stable with cases in excess of three months in arrears amounting to 0.45% (4 April 2016: 0.45%) and the indexed LTV of the portfolio now at 54% (4 April 2016: 55%).

 

Consumer banking impairment losses have remained broadly stable at £32 million (H1 2015/16: £33 million), with the overall performance and risk profile of the portfolio improving during the period.

 

Commercial lending impairments relate exclusively to commercial real estate (CRE) lending, with no arrears in our registered social landlords and Project Finance portfolios. A continuation of improved CRE market conditions in the early part of the period, including increased liquidity and capital values, has resulted in a net impairment reversal of £5 million. The higher reversal in the previous year reflected strongly improving market conditions impacting higher impaired balances, which have been reducing in line with the managed run-off of the book. Since the EU referendum expectations for commercial property values have moderated and most forecasts are predicting modest falls.

 

The impairment on investment securities of £5 million relates to the revaluation of a single available for sale asset which is held within our closed out of policy Treasury portfolio.

 

Provisions for liabilities and charges

Half year to

30 September 2016

£m

Half year to

30 September 2015

£m

Underlying provisions for liabilities and charges - Customer redress

52

24

FSCS levy

(4)

5

Total provisions for liabilities and charges

48

29

 

We hold provisions for customer redress to cover the costs of remediation and redress in relation to past sales of financial products and post sales administration, including compliance with consumer credit legislation and other regulatory requirements. The charge in the period predominantly relates to updated estimates for provisions previously recognised, including £30 million relating to Payment Protection Insurance (PPI) redress and £15 million for the related cost of administering PPI claims. When assessing the adequacy of our PPI provision we have considered the implications of the proposals published by the Financial Conduct Authority in its August 2016 consultation paper (CP16/20), including the estimated impact of the Plevin case.

 

The Financial Services Compensation Scheme (FSCS) release of £4 million (H1 2015/16: £5 million charge), reflects a small reduction in the balance sheet amount provided on 4 April 2016 for our anticipated share of interest costs in relation to the 2016/17 FSCS scheme year. More information on customer redress and FSCS is included in note 18 to the consolidated interim financial statements.

 

 

 

Financial review (continued)

 

Taxation

 

The statutory reported tax charge for the period of £194 million (H1 2015/16: £166 million) represents an effective tax rate of 27.9% (H1 2015/16: 20.7%), which is higher than the statutory rate in the UK of 20% (H1 2015/16: 20%). The higher effective rate is due principally to the banking surcharge of 8%, equivalent to £40 million (H1 2015/16: £nil), together with the tax effect of disallowable expenses. Further information is provided in note 9 to the consolidated interim financial statements.

 

Balance sheet

 

Total assets have increased 8% during the period to reach £226 billion at 30 September 2016 (4 April 2016: £209 billion). This increase is in part attributable to net mortgage lending of £6.0 billion resulting from our continued strong trading performance. The remainder of the growth in total assets predominantly reflects an increase of £8.4 billion in high quality liquid assets.

 

Mortgage lending has largely been supported by strong retail funding flows with member balances growing by £4.7 billion in the period, resulting in our market share of savings stock remaining broadly flat at 10.1% (4 April 2016: 10.2%). Of the growth in member balances, £1.8 billion is attributable to our current account proposition as we have continued to increase our market share of main current accounts from 7.1% at 4 April 2016 to 7.3%6. Debt securities in issue have increased by £7.6 billion to £43.7 billion reflecting additional issuance activity in the wholesale markets during the period to support the increase in liquidity.

 

The Group intends to participate in the Bank of England's Term Funding Scheme (TFS) which provides cash secured against eligible collateral and has a four year maturity.

 

Assets

30 September 2016

4 April

2016

 

£m

%

£m

%

Residential mortgages

168,356

91

162,164

91

Commercial lending

13,134

7

13,197

7

Consumer banking

3,909

2

3,869

2

Other lending

130

-

20

-

 

185,529

100

179,250

100

Impairment provisions

(403)

 

(443)

 

Loans and advances to customers

185,126

 

178,807

 

Other financial assets

37,835

 

27,782

 

Other non-financial assets

2,585

 

2,350

 

Total assets

225,546

 

208,939

 

 

 

 

 

 

Asset quality

%

 

%

 

Residential mortgages:

 

 

 

 

Proportion of residential mortgage accounts 3 months+ in arrears

0.45

 

0.45

 

Average indexed loan to value of residential mortgage book (by value)

54

 

55

 

Impairment provisions as a percentage of non-performing balances

3.2

 

3.2

 

Consumer banking:

 

 

 

 

Non-performing loans as a percentage of total balances (excluding charged off balances) (note i)

3

 

4

 

Impairment provisions as a percentage of non-performing balances (including charged off balances) (note i)

83

 

81

 

 

 

 

 

 

Other key ratios

%

 

%

 

Loan to deposit ratio (note ii)

117.7

 

117.2

 

Liquidity coverage ratio

140.6

 

142.6

 

 

Note:

i.     Charged off balances relate to accounts which are closed to future transactions and are held on the balance sheet for an extended period (up to 36 months, depending on the product) whilst recovery procedures take place.

ii.    The loan to deposit ratio represents loans and advances to customers divided by (shares + other deposits + amounts due to customers).

 

6 Based on market data as at August 2016.

 

Financial review (continued)

 

Residential mortgages

 

Residential mortgages include prime and specialist loans, with the specialist portfolio primarily comprising buy to let (BTL) lending. Gross mortgage lending in the period increased 17% to £17.5 billion (H1 2015/16: £14.9 billion), representing a market share of 14.5% (H1 2015/16: 13.2%).

 

Net mortgage lending was £6.0 billion (H1 2015/16: £4.1 billion), a market share of 33.9% (H1 2015/16: 21.2%), of which £5.0 billion was prime lending (H1 2015/16: £2.7 billion) and £1.0 billion related to BTL lending (H1 2015/16: £1.4 billion).

 

The flow of BTL advances has slowed following our decision to increase the minimum interest coverage ratio from 125% to 145%, with a particular decrease in the proportion of our new BTL lending that is secured on properties located in London.

 

The average loan to value (LTV) of new lending in the period, weighted by value, increased 2% to 71% (H1 2015/16: 69%) primarily due to our strategy to increase lending to the first time buyer market. House price growth has continued, albeit modestly, resulting in the average LTV of the Group's portfolio reducing slightly to 54% (4 April 2016: 55%). Our residential mortgage arrears have remained flat at 0.45% (4 April 2016: 0.45%) as we continue to benefit from low unemployment and growth in household income. Our arrears levels continue to be significantly lower than the Council of Mortgage Lenders industry average of 1.01%, demonstrating our low risk appetite and strong underwriting standards.

 

Non-performing balances have reduced by £147 million, with particular improvements in balances past due up to 3 months. Impairment provisions have fallen by £6 million to £96 million (4 April 2016: £102 million) reflecting this improvement and house price growth during the period.

 

Commercial lending

 

As a result of deleveraging activity undertaken in recent years, our overall commercial portfolio is increasingly weighted towards registered social landlords, with balances of £7.5 billion (4 April 2016: £7.6 billion), and a portfolio of loans made under the Government's Project Finance initiative amounting to £1.1 billion (4 April 2016: £1.2 billion). These portfolios are fully performing and remain stable, reflecting their low risk nature. The commercial portfolio also includes commercial real estate (CRE) loans of £2.8 billion (4 April 2016: £3.0 billion) and fair value adjustments of £1.7 billion (4 April 2016: £1.4 billion) relating to loans where we have hedged associated financial risks, typically interest rate risk.

 

We have undertaken £192 million of new CRE lending during the period which has been focused on low risk commercial loans with an average LTV of new business of 51%. The level of impaired balances as a proportion of our total CRE exposure has fallen from 6% at 4 April 2016 to 3%, reflecting resolution of impaired asset positions and improved asset quality.

 

In line with our managed run-off of the CRE book, it has been concluded that our CRE business is not key to the Society's vision for the future and therefore we have decided to cease new CRE lending. We will maintain a dedicated service for existing CRE customers throughout the remainder of their loan term. We will continue to provide funding to registered social landlords and existing Project Finance customers.

 

Consumer banking

 

Despite particularly intense competition in the consumer banking market in recent months, balances have grown modestly reflecting our attractive pricing propositions and loyalty offers. Consumer banking comprises personal loans of £1.9 billion (4 April 2016: £1.9 billion), credit cards of £1.8 billion (4 April 2016: £1.7 billion) and current account overdrafts of £0.2 billion (4 April 2016: £0.2 billion). Asset quality has benefited in the period from previous tightening of our credit risk policies reducing our early arrears rates, and more competitive pricing on personal loans attracting higher quality new business.

 

Further details of our lending and lending risks are provided in the 'Lending risk' section of the Business and Risk Report.

 

 

Financial review (continued)

 

Other financial assets

 

Other financial assets of £37.8 billion (4 April 2016: £27.8 billion) comprise cash of £17.2 billion (4 April 2016: £8.8 billion), other liquidity and investment assets held by our Treasury Division of £13.2 billion (4 April 2016: £14.3 billion), derivatives with positive fair values of £6.2 billion (4 April 2016: £3.9 billion), and fair value adjustments and other assets of £1.2 billion (4 April 2016: £0.8 billion).

 

Levels of liquidity have increased, reflecting both an element of pre-funding of wholesale maturities and an increase in collateral relating to derivatives following the EU referendum. The increased amount of high quality liquidity being held on the balance sheet is reflected in the Liquidity Coverage Ratio (LCR) remaining broadly consistent at 140.6% (4 April 2016: 142.6%), with higher liquidity balances being offset by increased LCR requirements relating to upcoming wholesale funding maturities and increased collateral holdings.

 

Further details of our treasury portfolios are included in the 'Treasury assets' section of the Business and Risk Report.

 

Liabilities

30 September 2016

£m

4 April 2016

£m

Member deposits

143,415

138,715

Debt securities in issue

43,650

36,085

Other financial liabilities

24,941

21,637

Other liabilities

2,265

1,572

Total liabilities

214,271

198,009

Members' interests and equity

11,275

10,930

Total members' interests, equity and liabilities

225,546

208,939

 

 

 

 

%

%

Wholesale funding ratio (note i)

27.2

24.8

 

Note:

i.     The wholesale funding ratio includes all balance sheet sources of funding (including securitisations) but excludes Funding for Lending Scheme (FLS) drawings which, as an asset swap, are not included on the Group's balance sheet, reflecting the substance of the arrangement. Off balance sheet FLS drawings have reduced from £8.5 billion at 4 April 2016 to £8.0 billion at 30 September 2016.

 

Member deposits

 

Member deposits have increased by £4.7 billion to £143.4 billion (4 April 2016: £138.7 billion) as we continue to offer competitive savings and current account propositions which provide long term good value and seek to support members in the current low base rate environment. Our market share of savings stock at 30 September 2016 was 10.1% (4 April 2016: 10.2%). Current account credit balances have increased to £16.6 billion (4 April 2016: £14.8 billion) which reflects the increase in our market share of main standard and packaged accounts stock to 7.3%7 (4 April 2016: 7.1%).

 

Debt securities in issue

 

Debt securities in issue of £43.7 billion (4 April 2016: £36.1 billion) are used to raise funding in wholesale markets in order to finance core activities. The increase in outstanding amounts reflects increased issuance activity in the wholesale markets during the period to support planned increased liquidity and pre-fund wholesale maturities in the second half of the year. The wholesale funding ratio has increased to 27.2% (4 April 2016: 24.8%).

 

Further details on the Group's wholesale funding mix and liquidity holdings are included in the 'Liquidity and funding risk' section of the Business and Risk Report.

 

7 Based on market data as at August 2016.

 

 

Financial review (continued)

 

Other financial liabilities

 

Other financial liabilities have increased from £21.6 billion as at 4 April 2016 to £24.9 billion primarily due to increases in customer and bank deposits of £1.7 billion and issuances of subordinated debt during the period of £1.1 billion.

 

Capital structure

 

30 September 2016

£m

4 April 2016

£m

Capital resources (note i)

 

 

Common Equity Tier 1 (CET1) capital

8,067

8,013

Total Tier 1 capital

9,059

9,005

Total regulatory capital

11,706

10,654

 

 

 

Risk weighted assets

34,636

34,475

Leverage exposure

227,886

213,181

 

 

 

CRD IV capital ratios

%

%

CET1 ratio

23.3

23.2

Leverage ratio (note ii)

4.0

4.2

 

Notes:

i.     Data in the table is reported under CRD IV on an end point basis.

ii.    The leverage ratio is calculated using the Capital Requirements Regulation definition of Tier 1 for the capital amount and the Delegated Act definition of the exposure measure.

 

CET1 capital resources have increased over the period by £54 million, with £502 million of profit after tax being largely offset by an increase in the pension deficit decreasing the general reserve by £405 million. The pension deficit has significantly increased over the period, driven by changes in the economic environment impacting long-term interest rates and causing the value of the Pension Fund's liabilities to increase significantly. Further details of the pension deficit are included within the 'Pension risk' section of the Business and Risk Report and note 20 of the consolidated interim financial statements.

 

Risk weighted assets (RWAs) have increased slightly over the period due to higher derivative market values driven by the fall in sterling following the EU referendum. This was partially offset by a reduction in residential mortgage RWAs due to improved book quality from rising house prices, which outweighed the increase in balances. As a result the CET1 ratio has remained broadly stable at 23.3% (4 April 2016: 23.2%).

 

The modest growth in capital resources, combined with an increase in leverage exposure of £14.7 billion, resulted in a leverage ratio at 30 September 2016 of 4.0% (4 April 2016: 4.2%). The increase in leverage exposure is mainly attributable to net lending in the period and increased liquidity balances.

 

The Group continues to monitor regulatory developments that could lead to an increased level of capital requirements. Whilst there are a number of areas where potential requirements are yet to be finalised, recent regulatory announcements mean that we have better visibility of expectations for future capital requirements. On 8 November, the Bank of England published its policy for the UK Minimum Requirement for own funds and Eligible Liabilities (MREL) framework. In line with our expectations, this confirmed that our MREL requirement from 2020 will be twice our minimum leverage capital requirements plus CRD IV capital buffers. We are confident in our ability to meet this new requirement over the transitional period based on our recent successful issuance of $1.25 billion of Tier 2 securities. We will remain engaged in the development of the regulatory capital framework to ensure we are prepared for any additional changes.

 

We expect to have a steady state leverage ratio requirement of 3.75% from 2019, which comprises a minimum requirement of 3%, a supplementary leverage ratio buffer of 0.35% and Countercyclical Leverage Ratio Buffer (CCyLB) of 0.4%. The Financial Policy Committee (FPC) could set a CCyLB of up to 0.9% (i.e. a total leverage requirement of 4.25%) if it deems risks to be elevated; however following recent guidance on the CCyLB, Nationwide's minimum leverage requirements are expected to remain at 3% until at least June 2017.

 

Further details of the capital position are included in the 'Solvency risk' section of the Business and Risk Report.

 

 

Business and Risk Report

 

Contents

 

 

Page

Introduction

19

Principal risks

19

Top and emerging risks

19

Lending risk

20

Residential mortgages

21

Consumer banking

29

Commercial lending

33

Treasury assets

38

Financial risk

42

Liquidity and funding risk

42

Solvency risk

Pension risk

Earnings risk

47

51

51

Operational risk

52

Conduct and compliance risk

52

 


 

 

 

Introduction

 

The Interim Business and Risk Report provides information on key developments during the period in relation to the Group's business, the risks it is exposed to and how it manages those risks. Where there has been no change to the Group's approach to managing its risks, or there has been no material change to the relevant risk environment from that disclosed at the year end, then this information has not been repeated in this report and can be found in the Business and Risk Report in the Annual Report and Accounts 2016.

 

As the risks of the organisation are managed on a Group basis, the disclosures in the Business and Risk Report are on a consolidated basis covering the activities of both the Society and its subsidiaries.

 

 

Principal risks

 

Whilst the Group accepts that all business activities involve risk, it seeks to protect members by managing the risks that arise appropriately. The Group adopts an enterprise-wide risk management framework to manage risk; further details of this and the risks managed can be found in the Business and Risk Report in the Annual Report and Accounts 2016. The principal categories of risk inherent within the business remain unchanged, namely:

 

·      Lending risk

·      Financial risk

·      Operational risk

·      Conduct and compliance risk

·      Strategic risk

 

 

Top and emerging risks

 

The Group's top and emerging risks are identified through the process outlined in the 'Managing risk' section of the Annual Report and Accounts 2016 and are closely tracked throughout the governance structure. The Group continues to keep these risks under close observation through risk reporting and governance.

 

The Group's top and emerging risks continue to relate to four key themes:

 

·      Macroeconomic environment

·      Cyber attack and business resilience

·      Changing face of financial services

·      Conduct and compliance challenges

 

The latest developments in relation to the Group's top and emerging risks are set out below:

 

Top and emerging risk

Developments in the period

Macroeconomic environment

 

Since the UK voted to leave the EU in June, this has created increased uncertainty and reduced confidence in the long-term economic outlook. In response, the Bank of England base rate reduced to 0.25%. In addition, UK growth projections have been downgraded following the referendum result

 

If the base rate remains at its current low level for a sustained period or reduces further, this will constrain margins. Furthermore, a move to zero or negative rates, although not expected, may reduce incentives for customers to save, potentially impacting the Group's business model.

 

The Group continues to regularly monitor economic factors, including undertaking regular assessments of how economic stresses may impact its business model. Factors including European and US political changes, a slowdown in China and the impact on earnings and lending risk performance from a domestic or global economic downturn are regularly discussed by the Board and continually evaluated against the Group's principal risks and strategy.

 

 

Top and emerging risks (continued)

 

Top and emerging risk

Developments in the period

Cyber attack and business resilience

The Group continues to make significant investment in transforming its products and delivery channels, and has recently launched a new Mobile Banking application to embrace advances in digital technology. The usage of digital channels continues to increase the risk of cyber security attacks and failures of technology infrastructures. The Group continues to invest in security and detection capabilities designed to ensure it can respond to such threats effectively and has recently announced the appointment of external experts to its IT Strategy and Resilience Committee.

 

During the period, the Group successfully implemented the first change of the base rate since 2009. The Group's plans for dealing with the operational impact of any future rate changes remain under regular review, to ensure that we have the capacity to respond to customer needs.

 

Changing face of financial services

The Group continues to monitor changes that could impact the structure of the market such as the challenge from new competition as a result of Open Banking (as discussed in the Competition and Markets Authority's (CMA) report 'Making the Banks work harder for you'), and the likely increase in competition that newly ring-fenced banking peers will bring to our core markets.

 

Conduct and compliance challenges

The EU referendum result has created uncertainties within our operating environment but, as a UK-focused building society, the direct regulatory, conduct and compliance impact of the vote to leave the EU on the Group should be limited. The potential impact of the vote is being considered on an ongoing basis.

 

 

 

Lending risk

 

Lending risk is the risk that a borrower or counterparty fails to pay interest or to repay the principal on a loan or other financial instrument (such as a bond) on time. Lending risk also encompasses extension risk and concentration risk. Further details on how the Group manages lending risk are available in the Annual Report and Accounts 2016.

 

The table below summarises the Group's assets subject to lending risk.

 

Balances subject to lending risk

30 September 2016

Gross balances

Less: Impairment provisions

Carrying value

% of total

 

£m

£m

£m

%

Cash

17,213

-

17,213

8

Loans and advances to banks

3,323

-

3,323

1

Investment securities - AFS

9,862

-

9,862

4

Derivative financial instruments

6,180

-

6,180

3

Fair value adjustment for portfolio hedged risk (note i)

1,197

-

1,197

1

Investments in equity shares

57

-

57

-

 

37,832

-

37,832

17

Loans and advances to customers:

 

 

 

 

Residential mortgages

168,356

(96)

168,260

75

Consumer banking

3,909

(262)

3,647

2

Commercial lending (note i)

13,134

(44)

13,090

6

Other lending (note ii)

130

(1)

129

-

 

185,529

(403)

185,126

83

 

 

 

 

 

Total

223,361

(403)

222,958

100

 

 

 

Lending risk (continued)

 

Balances subject to lending risk

4 April 2016

Gross balances

Less: Impairment provisions

Carrying

value

% of total

 

£m

£m

£m

%

Cash

8,797

-

8,797

4

Loans and advances to banks

3,591

-

3,591

2

Investment securities - AFS

10,612

-

10,612

5

Derivative financial instruments

3,898

-

3,898

2

Fair value adjustment for portfolio hedged risk (note i)

756

-

756

-

Investments in equity shares

126

-

126

-

 

27,780

-

27,780

13

Loans and advances to customers:

 

 

 

 

Residential mortgages

162,164

(102)

162,062

79

Consumer banking

3,869

(281)

3,588

2

Commercial lending (note i)

13,197

(59)

13,138

6

Other lending (note ii)

20

(1)

19

-

 

179,250

(443)

178,807

87

 

 

 

 

 

Total

207,030

(443)

206,587

100

 

Note:

i.     The fair value adjustment for portfolio hedged risk and the fair value adjustment for micro hedged risk (included within the carrying value of the commercial lending portfolio) represent hedge accounting adjustments. They are indirectly exposed to lending risk through the relationship with the underlying loans covered by the Group's hedging programmes.

ii.    The other lending portfolio includes collateral balances relating to repo transactions.

 

Further information on the residential mortgages, consumer banking, commercial lending and treasury portfolios is provided in the subsequent sections of this report.

 

 

Residential mortgages

 

The Group's residential mortgages comprise prime and specialist loans. Prime residential mortgages are mainly Nationwide branded advances made through the Group's branch network and intermediary channels; all new specialist lending is limited to buy to let mortgages originated under The Mortgage Works (UK) plc (TMW) brand.

 

The residential mortgage portfolio has increased to £168 billion (4 April 2016: £162 billion), predominantly driven by strong levels of prime lending, particularly in the first time buyer segment which has increased as a proportion of Group new lending to 35% (H1 2015/16: 27%). The increase in first time buyer lending is partly attributed to the widening of the availability of mortgages at 90% to 95% LTV since September 2015. Our support of this market has been reinforced by a commitment to make at least £10 billion a year available to first time buyers where it is appropriate, provided we are able to lend responsibly and within appetite. This is one of a number of commitments Nationwide has made to the Government, demonstrating our intention to stand by our customers and members as the economy enters a period of uncertainty following the result of the EU referendum.

 

The growth of the buy to let portfolio has slowed following the decision to increase the minimum interest coverage ratio (ICR) from 125% to 145% and lower the maximum LTV for buy to let borrowing from 80% to 75% in May 2016. These steps were taken in direct response to the new government policy for personal income tax relief for buy to let properties, due to be phased in between April 2017 and March 2021. The new policy for income tax relief will materially affect the cash flow of many investors, including existing investors, and these changes to our lending policy help ensure that buy to let borrowing remains sustainable and affordable.

 

The PRA published the Supervisory Statement 'Underwriting standards for buy to let contracts' in September 2016, outlining the minimum standards they expect firms to employ as part of their lending decision. Nationwide is reviewing the requirements and will respond accordingly.

 

 

Lending risk - Residential mortgages (continued)

 

The proportion of loans that are more than three months in arrears has remained stable at 0.45% (4 April 2016: 0.45%) and remains materially below the CML industry average of 1.01%.

 

Lending and new business

 

The table below summarises the Group's residential mortgages portfolio:

 

Residential mortgage lending

30 September 2016

4 April 2016

 

£m

%

£m

%

Prime

135,088

80

129,973

80

 

 

 

 

 

Specialist:

 

 

 

 

Buy to let

29,902

18

28,646

18

Self-certified

2,209

1

2,338

1

Near prime

825

1

859

1

Sub prime

332

-

348

-

 

33,268

20

32,191

20

 

 

 

 

 

Total residential mortgages

168,356

100

162,164

100

 

Note: Self-certified, near prime and sub prime lending were discontinued in 2009.

 

Over the coming months the Group's residential mortgage portfolio is expected to shift towards prime lending as the tightening of interest cover and LTV thresholds continue to slow the growth in the buy to let portfolio.

 

Distribution of new business by borrower type (by value)

Half year to

30 September 2016

Half year to

30 September 2015

 

%

%

Prime:

 

 

Home movers

30

32

First time buyers

35

27

Remortgagers

18

20

Other

1

1

Total prime

84

80

 

 

 

Specialist:

 

 

Buy to let new purchases

4

8

Buy to let remortgagers

12

12

Total specialist

16

20

 

 

 

Total new business

100

100

 

Note: All new business measures exclude existing customers who are only switching products, and further advances.

 

 

 

Lending risk - Residential mortgages (continued)

 

Lending risk

 

Residential mortgage lending in the Group continues to have a low risk profile as demonstrated by a low level of arrears compared to the industry average. The Group's residential mortgages portfolio comprises a large number of relatively small loans which are broadly homogenous, have low volatility of credit risk outcomes and are intrinsically highly diversified in terms of the UK market and geographic segments.

 

LTV and lending risk concentration

 

The Group calculates LTV by weighting the account level LTV by loan balance to arrive at an average LTV. This approach is considered to most accurately reflect the exposure at risk to the Group.

 

Average LTV of loan stock

30 September 2016

4 April 2016

 

%

%

Prime

53

54

Specialist

59

61

Group

54

55

 

Average LTV of new business

Half year to

30 September 2016

Half year to

30 September 2015

 

%

%

Prime

72

70

Specialist (buy to let)

63

65

Group

71

69

 

Note: The LTV of new business excludes further advances.

 

LTV distribution of new business

Half year to
30 September 2016

Half year to
30 September 2015

%

%

0% to 60%

25

26

60% to 75%

32

43

75% to 80%

9

9

80% to 85%

14

11

85% to 90%

16

10

90% to 95%

4

1

Over 95%

-

-

Total

100

100

 

Although the rate of growth has slowed in some areas, house prices continue to increase, reducing the average LTV of loan stock to 54% (4 April 2016: 55%).

 

The average LTV of new prime residential mortgages has increased to 72% (H1 2015/16: 70%) with the proportion greater than 80% increasing to 34% (H1 2015/16: 22%) as a direct result of the Group's strategy to extend its product offering at 95% LTV and support the first time buyer market. The growth in higher LTV lending, which reflects an increased commitment to lending to first time buyers, is monitored closely.  Underwriting standards have been maintained which contain tighter credit controls for higher LTV lending. Lending remains within the Group's appetite.

 

From May 2016 the maximum LTV for buy to let was lowered from 80% to 75%.

 

 

 

Lending risk - Residential mortgages (continued)

 

Geographical concentration

 

Residential mortgage balances by LTV and region

 

Greater London

Central England

Northern England

South East England (excluding London)

South West England

Scotland

Wales

Northern

Ireland

Total

 

30 September 2016

£m

£m

£m

£m

£m

£m

£m

£m

£m

%

 

 

 

 

 

 

 

 

 

 

 

Performing loans

 

 

 

 

 

 

 

 

 

 

Fully collateralised

 

 

 

 

 

 

 

 

 

 

LTV ratio:

 

 

 

 

 

 

 

 

 

 

Up to 50%

29,119

9,638

6,494

8,593

5,474

2,878

1,268

878

64,342

 

50% to 60%

11,940

5,597

3,830

4,691

3,047

1,644

719

376

31,844

 

60% to 70%

8,504

6,960

5,943

4,000

3,498

2,300

1,066

423

32,694

 

70% to 80%

4,369

4,804

5,743

2,056

2,147

2,658

1,237

342

23,356

 

80% to 90%

2,237

2,043

2,914

1,027

1,008

1,308

624

273

11,434

 

90% to 100%

126

194

453

110

82

157

104

113

1,339

 

 

56,295

29,236

25,377

20,477

15,256

10,945

5,018

2,405

165,009

98.0

 

 

 

 

 

 

 

 

 

 

 

Not fully collateralised

 

 

 

 

 

 

 

 

 

 

- Over 100% LTV (A)

7

5

37

1

3

21

5

236

315

0.2

- Collateral value on A

5

4

32

1

2

20

5

197

266

 

- Negative equity on A

2

1

5

-

1

1

-

39

49

 

 

 

 

 

 

 

 

 

 

 

 

Total performing loans

56,302

29,241

25,414

20,478

15,259

10,966

5,023

2,641

165,324

98.2

 

 

 

 

 

 

 

 

 

 

 

Non-performing loans (note i)

 

 

 

 

 

 

 

 

 

 

Fully collateralised

 

 

 

 

 

 

 

 

 

 

LTV ratio:

 

 

 

 

 

 

 

 

 

 

Up to 50%

553

170

111

129

73

43

26

28

1,133

 

50% to 60%

208

105

77

78

50

26

15

11

570

 

60% to 70%

83

120

123

70

61

46

20

13

536

 

70% to 80%

25

105

122

31

40

47

26

12

408

 

80% to 90%

11

52

99

7

11

25

17

10

232

 

90% to 100%

1

7

51

1

-

8

13

10

91

 

 

881

559

583

316

235

195

117

84

2,970

1.8

 

 

 

 

 

 

 

 

 

 

 

Not fully collateralised

 

 

 

 

 

 

 

 

 

 

- Over 100% LTV (B)

-

1

9

-

1

2

2

47

62

-

- Collateral value on B

-

1

8

-

1

2

2

37

51

 

- Negative equity on B

-

-

1

-

-

-

-

10

11

 

 

 

 

 

 

 

 

 

 

 

 

Total non-performing loans

881

560

592

316

236

197

119

131

3,032

1.8

 

 

 

 

 

 

 

 

 

 

 

Total residential mortgages

57,183

29,801

26,006

20,794

15,495

11,163

5,142

2,772

168,356

100.0

 

 

 

 

 

 

 

 

 

 

 

Geographical concentrations

34%

18%

15%

12%

9%

7%

3%

2%

100%

 

 

 

 

Lending risk - Residential mortgages (continued)

 

Residential mortgage

balances by LTV and region

 

Greater London

Central England

Northern England

South East England (excluding London)

South West England

Scotland

Wales

Northern Ireland

Total

 

4 April 2016

£m

£m

£m

£m

£m

£m

£m

£m

£m

%

 

 

 

 

 

 

 

 

 

 

 

Performing loans

 

 

 

 

 

 

 

 

 

 

Fully collateralised

 

 

 

 

 

 

 

 

 

 

LTV ratio:

 

 

 

 

 

 

 

 

 

 

Up to 50%

26,991

8,795

5,866

7,855

5,051

2,711

1,178

785

59,232

 

50% to 60%

12,350

4,971

3,402

4,262

2,733

1,547

637

346

30,248

 

60% to 70%

8,465

6,636

5,052

4,363

3,460

2,095

903

390

31,364

 

70% to 80%

4,062

5,454

6,282

2,211

2,359

2,776

1,273

371

24,788

 

80% to 90%

1,559

2,210

3,135

894

918

1,380

657

271

11,024

 

90% to 100%

85

177

901

66

60

232

212

151

1,884

 

 

53,512

28,243

24,638

19,651

14,581

10,741

4,860

2,314

158,540

97.7

 

 

 

 

 

 

 

 

 

 

 

Not fully collateralised

 

 

 

 

 

 

 

 

 

 

- Over 100% LTV (A)

7

8

80

1

4

31

13

301

445

0.3

- Collateral value on A

6

7

73

1

3

29

13

248

380

 

- Negative equity on A

1

1

7

 -

1

2

53

65

 

 

 

 

 

 

 

 

 

 

 

 

Total performing loans

53,519

28,251

24,718

19,652

14,585

10,772

4,873

2,615

158,985

98.0

 

 

 

 

 

 

 

 

 

 

 

Non-performing loans (note i)

 

 

 

 

 

 

 

 

 

 

Fully collateralised

 

 

 

 

 

 

 

 

 

 

LTV ratio:

 

 

 

 

 

 

 

 

 

 

Up to 50%

522

161

107

127

73

43

27

26

1,086

 

50% to 60%

245

100

68

74

52

28

13

12

592

 

60% to 70%

110

131

108

76

60

42

20

12

559

 

70% to 80%

29

114

139

42

48

46

24

12

454

 

80% to 90%

7

74

98

7

17

28

19

12

262

 

90% to 100%

1

14

73

1

2

13

16

7

127

 

 

914

594

593

327

252

200

119

81

3,080

1.9

 

 

 

 

 

 

 

 

 

 

 

Not fully collateralised

 

 

 

 

 

 

 

 

 

 

- Over 100% LTV (B)

-

3

25

2

1

3

5

60

99

0.1

- Collateral value on B

-

3

22

1

1

3

5

46

81

 

- Negative equity on B

 -

-

3

1

-

-

-

14

18

 

 

 

 

 

 

 

 

 

 

 

 

Total non-performing loans

914

597

618

329

253

203

124

141

3,179

2.0

 

 

 

 

 

 

 

 

 

 

 

Total residential mortgages

54,433

28,848

25,336

19,981

14,838

10,975

4,997

2,756

162,164

100.0

 

 

 

 

 

 

 

 

 

 

 

Geographical concentrations

33%

18%

16%

12%

9%

7%

3%

2%

100%

 

 

Note:

i.     Non-performing loans are all loans which are in arrears, including impaired loans with individually assessed impairment provisions.

 

The value of non-performing loans in negative equity has reduced to £62 million (4 April 2016: £99 million) due to a combination of increasing house prices and an overall reduction in non-performing loans.

 

House price growth in London is slowing as weaker investor demand, deteriorating affordability metrics and uncertainty caused by the vote to leave the EU have reduced demand at a time when supply has increased. Whilst there is currently no indication of a significant house price correction, the Group continues to monitor potential exposure to negative equity should house prices reverse. Stress tests have shown that even in the event of an extreme reduction in house prices this would not undermine the Group's strong capital position.

 

Arrears

 

Number of cases more than 3 months in arrears as percentage of total book

30 September 2016

4 April 2016

%

%

Prime

0.35

0.35

Specialist

0.93

0.90

Group

0.45

0.45

 

 

 

CML industry average

1.01

1.04

 

 

Lending risk - Residential mortgages (continued)

 

Impaired loans

 

Please refer to the Annual Report and Accounts 2016 for details of how the Group identifies impaired loans.

 

Residential mortgages by payment status

30 September 2016

Prime

lending

Specialist lending

Total

 

 

£m

£m

£m

%

Performing:

 

 

 

 

Neither past due nor impaired

133,186

32,138

165,324

98.2

 

 

 

 

 

Non-performing

 

 

 

 

Past due up to 3 months

1,529

708

2,237

1.3

 

 

 

 

 

Impaired:

 

 

 

 

Past due 3 to 6 months

166

191

357

0.2

Past due 6 to 12 months

119

127

246

0.2

Past due over 12 months

80

86

166

0.1

Possessions

8

18

26

-

Total non-performing loans

1,902

1,130

3,032

1.8

 

 

 

 

 

Total residential mortgages

135,088

33,268

168,356

100.0

 

 

 

 

 

Non-performing loans as a % of total residential mortgages

1.4%

3.4%

1.8%

 

Impairment provisions (£m)

25

71

96

 

Impairment provisions as a % of non-performing balances

1.3%

6.3%

3.2%

 

Impairment provisions as a % of total residential mortgages

0.02%

0.21%

0.06%

 

 

Residential mortgages by payment status

4 April 2016

Prime

lending

Specialist lending

Total

 

 

£m

£m

£m

%

Performing:

 

 

 

 

Neither past due nor impaired

127,986

30,999

158,985

98.0

 

 

 

 

 

Non-performing

 

 

 

 

Past due up to 3 months

1,621

780

2,401

1.5

 

 

 

 

 

Impaired:

 

 

 

 

Past due 3 to 6 months

170

188

358

0.2

Past due 6 to 12 months

115

115

230

0.2

Past due over 12 months

75

91

166

0.1

Possessions

6

18

24

-

Total non-performing loans

1,987

1,192

3,179

2.0

 

 

 

 

 

Total residential mortgages

129,973

32,191

162,164

100.0

 

 

 

 

 

Non-performing loans as a % of total residential mortgages

1.5%

3.7%

2.0%

 

Impairment provisions (£m)

25

77

102

 

Impairment provisions as a % of non-performing balances

1.3%

6.5%

3.2%

 

Impairment provisions as a % of total residential mortgages

0.02%

0.24%

0.06%

 

 

The provision balance has reduced to £96 million (4 April 2016: £102 million). This reflects a lower proportion of non-performing loans particularly in relation to balances which are past due up to 3 months, together with house price growth during the period.

 

 

 

Lending risk - Residential mortgages (continued)

 

Impairment loss/(reversal) for the period

Half year to

30 September 2016

Half year to

30 September 2015

 

£m

£m

Prime

1

(1)

Specialist

4

(6)

Total

5

(7)

 

The £5 million residential impairment loss for the period reflects the stable arrears performance and LTV profile, with house price improvements more modest than experienced in the prior year.

 

Interest only mortgages

 

The Group does not offer any new advances for prime residential mortgages on an interest only basis. However, the Group has historical balances which were originally advanced as interest only mortgages or where the Group agreed a change in terms to an interest only basis (this option was withdrawn in 2012). The Group manages maturities on interest only mortgages closely, engaging regularly with customers to ensure the loan is redeemed or to agree a strategy for repayment.

 

The majority of the specialist portfolio is made up of buy to let loans, of which approximately 90% are advanced on an interest only basis.

 

Interest only mortgages

Term expired (still open)

Due within one year

Due after one year and before two years

Due after two years and before five years

Due after more than five years

Total

% of total book

30 September 2016

£m

£m

£m

£m

£m

£m

%

Prime

66

364

466

1,666

14,846

17,408

12.9

Specialist

88

184

252

1,068

28,017

29,609

89.0

Total

154

548

718

2,734

42,863

47,017

28.0

 

Interest only mortgages

Term expired

(still open)

Due within one year

Due after one year and before two years

Due after two years and before five years

Due after more than five years

Total

% of total book

4 April

2016

£m

£m

£m

£m

£m

£m

%

Prime

58

396

475

1,731

16,178

18,838

14.5

Specialist

98

174

254

1,002

27,084

28,612

88.9

Total

156

570

729

2,733

43,262

47,450

29.3

 

The proportion of interest only mortgages included within the prime residential portfolio has continued to fall and now stands at 12.9% (4 April 2016: 14.5%).

 

Interest only loans which are 'term expired (still open)' are, to the extent they are not otherwise in arrears, reported as performing. They are included within the 'Repair: Term extensions' category in the renegotiated loans tables on the following pages.

 

 

 

Lending risk - Residential mortgages (continued)

 

Renegotiated loans

 

Where residential mortgage customers face financial difficulty the Group seeks to find a solution to mitigate losses and, where possible, to support customers through a change in terms, forbearance or repair. Collectively, these loans are classified as renegotiated. Please refer to the Annual Report and Accounts 2016 for details of the Group's policies for renegotiated loans.

 

The following table provides the loans still on the books at the period end which have been subject to renegotiation (change in terms, forbearance or repair) since 2008:

 

Residential mortgage balances subject to renegotiation since January 2008 (note i)

Greater London

Central England

Northern England

South East England (excluding London)

South West England

Scotland

Wales

Northern Ireland

Total

30 September 2016

£m

£m

£m

£m

£m

£m

£m

£m

£m

Change in terms:

 

 

 

 

 

 

 

 

 

Payment holidays

844

643

594

429

273

221

105

125

3,234

Term extensions (within term)

2,049

1,244

1,071

881

631

421

228

203

6,728

Payment concessions

300

183

194

112

79

43

40

29

980

Interest only conversions

613

302

297

211

157

80

60

82

1,802

 

3,806

2,372

2,156

1,633

1,140

765

433

439

12,744

Elimination of multiple events

(419)

(287)

(247)

(187)

(124)

(74)

(49)

(68)

(1,455)

Total change in terms

3,387

2,085

1,909

1,446

1,016

691

384

371

11,289

 

 

 

 

 

 

 

 

 

 

Forbearance:

 

 

 

 

 

 

 

 

 

Temporary interest only concessions

346

320

335

174

111

99

55

58

1,498

 

 

 

 

 

 

 

 

 

 

Repair:

 

 

 

 

 

 

 

 

 

Capitalisations

175

102

107

68

41

16

22

9

540

Term extensions

173

99

80

68

55

36

21

21

553

 

348

201

187

136

96

52

43

30

1,093

Elimination of multiple events

(3)

(1)

(1)

-

(1)

-

-

-

(6)

Total repairs

345

200

186

136

95

52

43

30

1,087

 

 

 

 

 

 

 

 

 

 

Elimination of multiple events

(286)

(229)

(226)

(128)

(87)

(55)

(42)

(45)

(1,098)

 

 

 

 

 

 

 

 

 

 

Total renegotiated loans

3,792

2,376

2,204

1,628

1,135

787

440

414

12,776

 

 

 

 

 

 

 

 

 

 

Of which prime/specialist lending:

 

 

 

 

 

 

 

 

 

Prime

3,129

2,022

1,829

1,390

956

724

369

352

10,771

Specialist

663

354

375

238

179

63

71

62

2,005

Total

3,792

2,376

2,204

1,628

1,135

787

440

414

12,776

 

 

 

 

 

 

 

 

 

 

Of which loans are still on special terms (note ii):

 

 

 

 

 

 

 

 

 

Prime

45

32

32

21

14

15

7

5

171

Specialist

6

3

3

1

4

1

2

-

20

Total

51

35

35

22

18

16

9

5

191

 

 

 

 

 

 

 

 

 

 

Impairment provisions on renegotiated loans:

 

 

 

 

 

 

 

 

 

Individually assessed

-

 -

1

 -

-

-

-

 -

1

Collectively assessed

 -

3

5

-

 1

1

1

4

15

Total impairment provisions

 -

3

6

-

 1

1

1

4

16

 

 

 

Lending risk - Residential mortgages (continued)

 

Residential mortgage balances

subject to renegotiation since

January 2008 (note i)

Greater London

Central England

Northern England

South East England (excluding London)

South West England

Scotland

Wales

Northern Ireland

Total

4 April 2016

£m

£m

£m

£m

£m

£m

£m

£m

£m

Change in terms:

 

 

 

 

 

 

 

 

 

Payment holidays

890

686

627

459

287

234

112

130

3,425

Term extensions (within term)

2,003

1,259

1,087

878

633

427

230

208

6,725

Payment concessions

292

179

190

111

75

41

39

27

954

Interest only conversions

625

311

292

219

163

81

61

79

1,831

 

3,810

2,435

2,196

1,667

1,158

783

442

444

12,935

Elimination of multiple events

(396)

(285)

(243)

(186)

(121)

(73)

(48)

(65)

(1,417)

Total change in terms

3,414

2,150

1,953

1,481

1,037

710

394

379

11,518

 

 

 

 

 

 

 

 

 

 

Forbearance:

 

 

 

 

 

 

 

 

 

Temporary interest only concessions

356

335

350

182

115

100

56

59

1,553

 

 

 

 

 

 

 

 

 

 

Repair:

 

 

 

 

 

 

 

 

 

Capitalisations

180

105

110

72

43

17

22

9

558

Term extensions (at term expiry)

175

95

78

67

53

35

19

19

541

 

355

200

188

139

96

52

41

28

1,099

Elimination of multiple events

(3)

(1)

(2)

(1)

(1)

-

-

-

(8)

Total repairs

352

199

186

138

95

52

41

28

1,091

 

 

 

 

 

 

 

 

 

 

Elimination of multiple events

(290)

(236)

(235)

(133)

(85)

(55)

(43)

(44)

(1,121)

 

 

 

 

 

 

 

 

 

 

Total renegotiated loans

3,832

2,448

2,254

1,668

1,162

807

448

422

13,041

 

 

 

 

 

 

 

 

 

 

Of which prime/specialist lending:

 

 

 

 

 

 

 

 

 

Prime

3,183

2,106

1,895

1,436

988

747

381

362

11,098

Specialist

649

342

359

232

174

60

67

60

1,943

Total

3,832

2,448

2,254

1,668

1,162

807

448

422

13,041

 

 

 

 

 

 

 

 

 

 

Of which loans are still on special terms: (note ii)

 

 

 

 

 

 

 

 

 

Prime

42

34

27

23

14

15

6

3

164

Specialist

5

5

7

3

1

1

1

1

24

Total

47

39

34

26

15

16

7

4

188

 

 

 

 

 

 

 

 

 

 

Impairment provisions on renegotiated loans:

 

 

 

 

 

 

 

 

 

Individually assessed

-

-

1

-

-

-

-

1

2

Collectively assessed

-

2

4

1

1

1

1

3

13

Total impairment provisions

-

2

5

1

1

1

1

4

15

 

Notes:

i.     Information on renegotiated balances is reported since January 2008, reflecting the point in time from which this data was captured for reporting purposes.

ii.    Special terms refer to loans which are actively subject to a payment holiday, a payment concession or a temporary interest only concession. They do not include term extensions, permanent interest only conversions or capitalisations.

 

For those cases that remain on special terms the average LTV is comparable with the overall stock position at 53% (4 April 2016: 55%).

 

 

Consumer banking

 

The Group's consumer banking portfolio comprises unsecured balances for overdrawn current accounts, credit cards and personal loans. During the period, total balances have increased by 1% to £3,909 million (4 April 2016: £3,869 million).

 

A number of new initiatives have been successfully launched during this period to meet more member needs. These include the introduction of a student account, which is expected to drive growth in both the number of accounts and balances. The credit risk of the portfolio, including any new segments, will be closely monitored and managed.

 

 

 

Lending risk - Consumer banking (continued)

 

The table below summarises the Group's consumer banking portfolio:

 

Consumer banking balances

30 September 2016

4 April 2016

 

£m

%

£m

%

Overdrawn current accounts

198

5

247

6

Personal loans

1,955

50

1,901

49

Credit cards

1,756

45

1,721

45

Total consumer banking

3,909

100

3,869

100

 

Despite particularly intense competition in the consumer banking market in recent months, balances have grown modestly reflecting our attractive pricing propositions and loyalty offers.

 

The difference in overdrawn current account balances between April 2016 and September 2016 is predominantly due to the position of the reporting date within the month.

 

Impaired loans

 

The Group monitors and reports lending risk on consumer banking portfolios primarily on delinquency status, since no security is held against the loans.

 

Please refer to the Annual Report and Accounts 2016 for details of the Group's processes for impaired loans.

 

 

Consumer banking by payment due status

30 September 2016

 

Overdrawn current accounts

Personal loans

Credit cards

Total

 

 

 

£m

£m

£m

£m

%

 

Performing:

 

 

 

 

 

 

Neither past due nor impaired

164

1,822

1,607

3,593

92

 

 

 

 

 

 

 

 

Non-performing:

 

 

 

 

 

Past due up to 3 months

13

38

28

79

 

Impaired:

 

 

 

 

 

Past due 3 to 6 months

3

10

11

24

 

Past due 6 to 12 months

2

11

2

15

 

Past due over 12 months

3

15

-

18

 

 

21

74

41

136

3

 

 

 

 

 

 

 

 

Charged off (note i)

13

59

108

180

5

 

Total non-performing

34

133

149

316

 

 

 

 

 

 

 

 

 

Total consumer banking lending

198

1,955

1,756

3,909

100

 

 

 

 

 

 

 

 

Non-performing loans as a % of total (excluding charged off balances)

11%

4%

2%

3%

 

 

 

 

 

 

 

 

 

Impairment provisions excluding charged off balances (£m)

12

44

38

94

 

 

Impairment provisions on charged off balances (£m)

12

55

101

168

 

 

Total impairment provisions (£m)

24

99

139

262

 

 

 

 

 

 

 

 

 

Impairment provisions as a % of non-performing loans (including charged off balances)

71%

74%

93%

83%

 

 

Impairment provisions as a % of total balances

12%

5%

8%

7%

 

             

 

 

 

Lending risk - Consumer banking (continued)

 

Consumer banking by payment due status

4 April 2016

Overdrawn current accounts

Personal loans

Credit

cards

Total

 

 

£m

£m

£m

£m

%

Performing:

 

 

 

 

 

Neither past due nor impaired

206

1,742

1,576

3,524

91

 

 

 

 

 

 

Non-performing:

 

 

 

 

 

Past due up to 3 months

16

42

27

85

 

Impaired:

 

 

 

 

 

Past due 3 to 6 months

4

11

11

26

 

Past due 6 to 12 months

3

11

3

17

 

Past due over 12 months

4

16

-

20

 

 

27

80

41

148

4

 

 

 

 

 

 

Charged off (note i)

14

79

104

197

5

Total non-performing

41

159

145

345

 

 

 

 

 

 

 

Total consumer banking lending

247

1,901

1,721

3,869

100

 

 

 

 

 

 

Non-performing loans as a % of total (excluding charged off balances)

11%

4%

2%

4%

 

 

 

 

 

 

 

Impairment provisions excluding charged off balances (£m)

13

46

38

97

 

Impairment provisions on charged off balances (£m)

12

75

97

184

 

Total impairment provisions (£m)

25

121

135

281

 

 

 

 

 

 

 

Impairment provisions as a % of non-performing balances (including charged off balances)

61%

76%

93%

81%

 

Impairment provisions as % of total balances

10%

6%

8%

7%

 

 

Note:

i.     Charged off balances relate to accounts which are closed to future transactions and are held on the balance sheet for an extended period (up to 36 months, depending on the product) whilst recovery procedures take place.

 

The performance and risk profile of the portfolio has improved during in the period. Provision balances have reduced primarily as a result of £17 million of expected write offs in relation to charged off balances within the personal loans portfolio. Non-performing balances (excluding charged off amounts) have decreased by £12 million to £136 million, driven by a reduction in early arrears in both the current account and personal loan portfolios.

 

Impairment losses

 

Impairment losses for the period

Overdrawn current accounts

Personal loans

Credit

cards

Total

 

£m

£m

£m

£m

Half year to 30 September 2016

4

11

17

32

Half year to 30 September 2015

5

12

16

33

 

 

 

Lending risk - Consumer banking (continued)

 

Renegotiated loans

 

The Group's approach is to reduce lending risk through good lending decisions. When customers do face financial difficulty the Group seeks to find a solution to support the customer and to mitigate losses, through either a proactive management of exposure, forbearance or arrears management. Collectively, loans subject to these actions are classified as renegotiated. Please refer to the Annual Report and Accounts 2016 for details of the Group's processes for renegotiating loans.

 

The balances at the balance sheet date which have been subject to a change in terms, forbearance or repair at any point since March 2010 are summarised in the table below. It is possible for borrowers to have more than one type of renegotiation and in this instance they are shown in both categories and multiple events are eliminated.

 

Balances subject to renegotiation since March 2010 (note i)

Overdrawn current accounts

Personal

loans

Credit

cards

Total

30 September 2016

£m

£m

£m

£m

Change in terms

27

117

7

151

Forbearance

15

28

22

65

Repair

22

1

17

40

Gross total

64

146

46

256

Elimination of multiple events

(32)

(17)

(6)

(55)

Total

32

129

40

201

 

 

 

 

 

Of which loans still on renegotiated terms

19

91

15

125

 

Balances subject to renegotiation since March 2010 (note i)

Overdrawn current

accounts

Personal

loans

Credit

cards

 

Total

4 April 2016

£m

£m

£m

£m

Change in terms

29

126

8

163

Forbearance

16

30

23

69

Repair

21

1

19

41

Gross total

66

157

50

273

Elimination of multiple events

(32)

(19)

(8)

(59)

Total

34

138

42

214

 

 

 

 

 

Of which loans still on renegotiated terms

21

95

17

133

 

Note:

i.     Renegotiated balances information for consumer banking is reported since March 2010, reflecting the point in time from which this data was captured for reporting purposes.

 

 

 

Lending risk (continued)

 

Commercial lending

 

The Group holds a reducing portfolio of commercial loans. The registered social landlord and Project Finance assets make up 76% of the portfolio, are fully performing and remain stable. The commercial real estate (CRE) balances have been in active run-off since 2012 as part of the Group's strategy to dispose of non-core CRE assets.

 

Following a strategic review of the CRE business, it has been concluded that this is no longer key to the Group's vision for the future and as such the decision has been made to cease any further lending to new and existing CRE customers. The Group's book of existing CRE loans will continue to run off in line with their contractual terms. We will continue to maintain a dedicated service for each existing CRE customer throughout the remainder of their loan term. This will ultimately culminate in the closure of our CRE business.

 

Nationwide will continue to provide funding to registered social landlords and existing Project Finance customers.

 

The Group's commercial loan portfolio comprises the following:

 

Commercial lending balances

30 September 2016

4 April 2016

 

£m

%

£m

%

Commercial real estate (CRE)

2,764

24

3,009

25

Registered social landlords (note i)

7,532

66

7,625

65

Project Finance (note ii)

1,158

10

1,197

10

Total commercial lending

11,454

100

11,831

100

Fair value adjustment for micro hedged risk

1,680

 

1,366

 

Total

13,134

 

13,197

 

 

Notes:

i.     Loans to registered social landlords are secured on residential property.

ii.    Loans advanced in relation to Project Finance are secured on cash flows from government or local authority backed contracts.

 

The registered social landlord portfolio, which represents 66% (4 April 2016: 65%) of total commercial lending balances, is long-term and low risk in nature. The portfolio is risk rated using the Group's internal rating models with the major drivers being financial strength, independent viability assessment ratings provided by the Homes and Communities Agency and the type and size of the registered social landlord. The distribution of exposures is weighted more towards the stronger risk ratings and, against a backdrop of a long history of zero defaults, the risk profile of the portfolio remains low.

 

The Project Finance portfolio is secured against contractual cash flows from projects procured under the UK Private Finance Initiative rather than physical assets. The majority of loans are secured on projects which are now operational and benefiting from secure long term cash flows, with only one case remaining in the construction phase.

 

There have been no losses incurred on either the registered social landlord or Project Finance portfolios, no amounts are in arrears and there are no instances of forbearance.

 

 

 

Lending risk - Commercial lending (continued)

 

Lending risk

 

Lending risk in the commercial loan portfolio is linked to delinquency and the availability of collateral to cover any loan balances. The Group adopts robust credit management policies and processes designed to recognise and manage the risks arising, or likely to arise, from the portfolio.

 

The following table shows the CRE portfolio split by LTV and region:

 

CRE lending balances by LTV and region

 

London

South East

Rest of UK

(note i)

Total

 

30 September 2016

£m

£m

£m

£m

%

Performing loans

 

 

 

 

 

Fully collateralised

 

 

 

 

 

LTV ratio (note ii):

 

 

 

 

 

Less than 25%

238

20

53

311

 

25% to 50%

746

183

340

1,269

 

51% to 75%

422

131

408

961

 

76% to 90%

3

4

77

84

 

91% to 100%

1

12

7

20

 

 

1,410

350

885

2,645

96

 

 

 

 

 

 

Not fully collateralised

 

 

 

 

 

- Over 100% LTV (A)

-

-

5

5

-

- Collateral value on A

-

-

4

4

 

- Negative equity on A

-

-

1

1

 

 

 

 

 

 

 

Total performing loans

1,410

350

890

2,650

96

 

 

 

 

 

 

Non-performing loans

 

 

 

 

 

Fully collateralised

 

 

 

 

 

LTV ratio (note iii):

 

 

 

 

 

Less than 25%

6

-

-

6

 

25% to 50%

5

5

7

17

 

51% to 75%

6

3

12

21

 

76% to 90%

-

1

15

16

 

91% to 100%

-

-

4

4

 

 

17

9

38

64

2

 

 

 

 

 

 

Not fully collateralised

 

 

 

 

 

- Over 100% LTV (B)

2

12

36

50

2

- Collateral value on B

-

2

20

22

 

- Negative equity on B

2

10

16

28

 

 

 

 

 

 

 

Total non-performing loans

19

21

74

114

4

 

 

 

 

 

 

Total CRE loans

1,429

371

964

2,764

100

 

 

 

 

 

 

Geographical concentration

52%

13%

35%

100%

 

 

 

 

Lending risk - Commercial lending (continued)

 

CRE lending balances by LTV and region

 

London

South East

Rest of UK

(note i)

Total

 

4 April 2016

£m

£m

£m

£m

%

Performing loans

 

 

 

 

 

Fully collateralised

 

 

 

 

 

LTV ratio (note ii):

 

 

 

 

 

Less than 25%

136

24

60

220

 

25% to 50%

1,021

219

419

1,659

 

51% to 75%

329

111

390

830

 

76% to 90%

3

13

46

62

 

91% to 100%

1

-

5

6

 

 

1,490

367

920

2,777

92

 

 

 

 

 

 

Not fully collateralised

 

 

 

 

 

- Over 100% LTV (A)

-

3

3

6

-

- Collateral value on A

-

2

2

4

 

- Negative equity on A

-

1

1

2

 

 

 

 

 

 

 

Total performing loans

1,490

370

923

2,783

92

 

 

 

 

 

 

Non-performing loans

 

 

 

 

 

Fully collateralised

 

 

 

 

 

LTV ratio (note iii):

 

 

 

 

 

Less than 25%

17

-

2

19

 

25% to 50%

10

9

5

24

 

51% to 75%

8

5

17

30

 

76% to 90%

3

-

18

21

 

91% to 100%

-

-

6

6

 

 

38

14

48

100

4

 

 

 

 

 

 

Not fully collateralised

 

 

 

 

 

- Over 100% LTV (B)

7

52

67

126

4

- Collateral value on B

5

36

47

88

 

- Negative equity on B

2

16

20

38

 

 

 

 

 

 

 

Total non-performing loans

45

66

115

226

8

 

 

 

 

 

 

Total CRE loans

1,535

436

1,038

3,009

100

 

 

 

 

 

 

Geographical concentration

51%

14%

35%

100%

 

 

Notes:

i      Includes lending to borrowers in the Channel Islands. 

ii.    The LTV ratio is calculated using the gross carrying amount of the loan divided by the indexed value of the most recent independent external collateral valuation. The Investment Property Databank (IPD) monthly index is used.

iii.   Non-performing loans include impaired loans and loans with arrears of less than three months which are not impaired.

 

There have been no significant changes to geographic concentrations in the book and overall credit quality has continued to improve.

 

Non-performing loans have reduced and now represent 4% of CRE balances (4 April 2016: 8%), whilst both the proportion of partially collateralised non-performing loans and the shortfall on collateral for non-performing loans have also reduced. These changes reflect the impact of improving book performance and managed exit activity to reduce exposure to assets that were outside of the Group's risk appetite or did not align to the Group's lending strategy.

 

 

 

Lending risk - Commercial lending (continued)

 

Credit risk concentrations

 

The following table provides details of the Group's sectoral and regional CRE concentrations together with an impairment analysis in respect of these concentrations:

 

CRE lending balances and impairment provisions by type and region

London

South East

Rest of UK (note i)

Total

30 September 2016

£m

£m

£m

£m

Retail

438

207

269

914

Office

198

61

215

474

Residential

706

46

266

1,018

Industrial and warehouse

29

32

130

191

Leisure and hotel

47

24

67

138

Other

11

1

17

29

Total CRE lending

1,429

371

964

2,764

 

 

 

 

 

Impairment provision:

 

 

 

 

Retail

1

8

3

12

Office

2

1

2

5

Residential

1

-

5

6

Industrial and warehouse

-

-

12

12

Leisure and hotel

-

1

6

7

Other

-

-

2

2

Total impairment provisions

4

10

30

44

 

CRE lending balances and impairment

provisions by type and region

London

South East

Rest of UK

(note i)

Total

4 April 2016

£m

£m

£m

£m

Retail

459

235

317

1,011

Office

201

69

208

478

Residential

666

71

256

993

Industrial and warehouse

29

36

158

223

Leisure and hotel

88

25

87

200

Other

92

-

12

104

Total CRE lending

1,535

436

1,038

3,009

 

 

 

 

 

Impairment provision:

 

 

 

 

Retail

2

12

8

22

Office

4

1

3

8

Residential

1

-

5

6

Industrial and warehouse

-

-

12

12

Leisure and hotel

1

-

7

8

Other

-

-

3

3

Total impairment provisions

8

13

38

59

 

Note:

i.     Includes lending to borrowers based in the Channel Islands.

 

 

 

Lending risk - Commercial lending (continued)

 

Arrears and impairment

 

No losses have been experienced on the registered social landlord or Project Finance portfolios and there is no non-performance within these portfolios. As a result, impairment provisions are only made against the CRE portfolio, as set out below.

 

CRE lending balances by payment due status

30 September 2016

4 April 2016

£m

%

£m

%

Performing:

 

 

 

 

Neither past due nor impaired

2,650

96

2,783

92

 

 

 

 

 

Non-performing:

 

 

 

 

Past due up to 3 months but not impaired (note i)

34

1

55

2

 

 

 

 

 

Impaired (note ii):

 

 

 

 

Past due up to 3 months

27

1

115

4

Past due 3 to 6 months

16

-

21

1

Past due 6 to 12 months

18

1

4

-

Past due over 12 months

19

1

28

1

Possessions (note iii)

-

-

3

-

Total non-performing balances

114

4

226

8

 

 

 

 

 

Total

2,764

100

3,009

100

 

 

 

 

 

Impairment provisions

 

 

 

 

Individual

39

89

54

92

Collective

5

11

5

8

Total impairment provisions

44

100

59

100

 

 

 

 

 

Individual provisions as % of impaired balances

 

49

 

32

Total provisions as % of non-performing balances

 

39

 

26

Total provisions as % of total gross balances

 

2

 

2

 

 

 

 

 

Estimated collateral:

 

 

 

 

Against loans past due but not impaired

34

100

55

100

Against impaired loans

52

65

133

78

Total collateral

86

75

188

83

 

Notes:

i.     The status 'past due up to 3 months but not impaired' includes any asset where a payment due under contractual terms is received late or missed. The amount included is the entire financial asset rather than just the payment overdue.

ii.    Impaired loans include those balances which are more than three months in arrears, or against which a provision is held.

iii.   Possession balances represent loans for which the Group has taken ownership of security pending sale. Assets in possession are realised to derive the maximum benefit for all interested parties. The Group does not occupy or otherwise use for any purposes the repossessed assets.

 

Total non-performing loans, before provisions, have reduced by £112 million to £114 million, with a corresponding reduction of £15 million in total impairment provisions, reflecting the managed exit activity, improving book performance and an improvement in market conditions in the early part of the period.

 

Impairment reversal

Half year to

30 September 2016

Half year to

30 September 2015

 

£m

£m

Impairment reversal for the period

(5)

(27)

 

 

 

Lending risk - Commercial lending (continued)

 

The improved CRE market conditions, including increased liquidity and capital values, have resulted in a net impairment reversal of £5 million. The higher reversal in the previous year reflects higher impaired balances impacted by improving market conditions.

 

Forbearance

 

The table below provides details of the CRE lending that is currently subject to forbearance, split by the concession events agreed. Please refer to the Annual Report and Accounts 2016 for details of the Group's policies for classifying lending in forbearance.

 

CRE lending subject to forbearance

30 September 2016

4 April 2016

£m

%

£m

%

Covenant breach

39

8

54

9

Extension at maturity

65

13

42

7

Multiple forbearance events

384

78

484

82

Other

6

1

8

2

Total

494

100

588

100

 

There are no instances of forbearance in either the registered social landlord or Project Finance portfolios.

 

CRE exposures currently subject to forbearance have decreased to £494 million, principally as a result of the controlled exit from non-core higher risk loans, and now represent 18% of CRE loan balances (4 April 2016: 20%).

 

 

Treasury assets

 

The Group's treasury portfolio is held primarily for liquidity management purposes and, in the case of derivatives, for market risk management.

 

Treasury asset balances

30 September

2016

4 April

2016

 

£m

£m

Cash

17,213

8,797

Loans and advances to banks

3,323

3,591

Investment securities

9,919

10,738

Treasury liquidity and investment portfolio

30,455

23,126

Derivative assets (note i)

6,180

3,898

Total treasury portfolio

 36,635

27,024

 

Note:

i.     Derivatives are classified as assets where their fair value is positive and liabilities where their fair value is negative. At 30 September 2016, the Group had derivative liabilities of £3,972 million (4 April 2016: £3,463 million).

 

Cash has increased to £17,213 million (4 April 2016: £8,797 million), reflecting the pre-funding of wholesale and Bank of England Funding for Lending Scheme (FLS) maturities. Legacy out of policy assets, included within investment securities, have reduced from £423 million to £371 million during the period through ongoing sales, maturities and amortisation. An impairment loss of £5 million (H1 2015/16: £nil) has been recognised in the income statement in respect of one asset held within the out of policy portfolio.

 

Managing treasury credit risk

 

Credit risk within the Treasury portfolio arises primarily from the instruments held for operational, liquidity and investment purposes. The Treasury Credit Risk function manages all aspects of credit risk in accordance with the Group's risk governance framework, details of which are provided in the Annual Report and Accounts 2016.

 

 

 

Lending risk - Treasury assets (continued)

 

Liquidity and investment portfolio

 

The Group's liquidity and investment portfolio held on the balance sheet at 30 September 2016 of £30,455 million (4 April 2016: £23,126 million) is held in two separate portfolios: liquid assets and other securities. The size of the portfolio fluctuates with movements reflecting legacy asset disposals, market prices and the Group's operational and strategic liquidity requirements. An analysis of the on-balance sheet portfolios by asset class, credit rating and geographical location of the issuers is set out below.

 

Liquidity and investment portfolio by credit rating (note i)

 

AAA

AA

A

Other

UK

US

Europe

Other

30 September 2016

£m

%

%

%

%

%

%

%

%

Liquid assets:

 

 

 

 

 

 

 

 

 

Cash and reserves at central banks

17,213

-

89

11

-

89

-

11

-

Government bonds

5,875

5

95

-

-

79

12

9

-

Supranational bonds

464

88

12

-

-

-

-

-

100

Covered bonds

1,018

100

-

-

-

53

-

34

13

Residential mortgage backed securities (RMBS)

1,026

100

-

-

-

60

-

40

-

Asset backed securities (other)

265

100

-

-

-

66

-

34

-

Liquid assets total

25,861

11

81

8

-

82

3

13

2

Other securities:

 

 

 

 

 

 

 

 

 

RMBS

422

25

13

52

10

74

-

23

3

Commercial mortgage backed securities (CMBS)

36

-

13

69

18

18

82

-

-

Collateralised loan obligations

494

84

16

-

-

85

15

-

-

Covered bonds

34

-

-

100

-

-

-

100

-

Student loans

132

20

50

30

-

-

100

-

-

Other Investments

153

-

33

26

41

39

28

33

-

Other securities total

1,271

43

20

28

9

63

22

14

1

Loans and advances to banks (note ii)

3,323

-

47

38

15

74

4

16

6

Total

30,455

12

75

12

1

80

4

13

3

 

Liquidity and investment portfolio by credit

rating (note i)

 

AAA

AA

A

Other

UK

US

Europe

Other

4 April 2016

£m

%

%

%

%

%

%

%

%

Liquid assets:

 

 

 

 

 

 

 

 

 

Cash and reserves at central banks

8,797

99

-

1

-

90

-

10

-

Government bonds

6,321

82

18

-

-

75

14

11

-

Supranational bonds

522

90

10

-

-

-

-

-

100

Covered bonds

980

100

-

-

-

52

-

36

12

Residential mortgage backed securities (RMBS)

1,068

100

-

-

-

65

-

35

-

Asset backed securities (other)

318

100

-

-

-

62

-

38

-

Liquid assets total

18,006

92

7

1

-

78

5

13

4

Other securities:

 

 

 

 

 

 

 

 

 

RMBS (note iii)

563

20

15

54

 11

72

-

25

3

Commercial mortgage backed securities (CMBS)

40

-

16

67

17

16

84

-

-

Collateralised loan obligations

528

84

13

3

-

78

22

-

-

Covered bonds

31

-

-

100

-

-

-

100

-

Student loans (note iii)

145

22

50

26

2

6

94

-

-

Other investments

222

-

28

50

22

28

50

22

-

Other securities total

1,529

39

19

34

8

58

26

15

1

Loans and advances to banks (note ii)

3,591

25

19

31

25

68

9

11

12

Total

23,126

79

10

7

4

75

7

13

5

 

Notes:

i.     Ratings used are obtained from Standard & Poor's (S&P) in the majority of cases, from Moody's if there is no S&P rating available, and internal ratings are used if neither is available.

ii.    Loans and advances to banks includes derivative collateral (CSA) and reverse repo balances.

iii.   Comparatives have been restated for the reclassification of certain amounts based on underlying assets.

 

The change in credit rating profile of the liquidity and investment portfolio primarily reflects Standard & Poor's (S&P) downgrade of the UK from AAA to AA in June 2016.

 

 

 

Lending risk - Treasury assets (continued)

 

Country exposures

 

The Group holds £125 million (4 April 2016: £162 million) of securities which are domiciled in the peripheral Eurozone countries; these are all out of policy legacy assets. This exposure has decreased by 23% in the period due primarily to the disposal of Italian and Spanish mortgage backed assets and scheduled amortisation. The Group continues to actively manage these exposures.

 

In advance of the maturity of euro-denominated debt during the second half of the year, the Group's holding of cash in Ireland has been increased from £871 million to £1,927 million.

 

The following table summarises the Group's exposure to issuers outside the UK. The exposures are shown at their balance sheet carrying values.

 

Country exposures

Cash

Government bonds

Mortgage backed securities

Covered bonds

Supra-national bonds

Loans to banks

Other corporate (note i)

Other assets

Total

30 September 2016

£m

£m

£m

£m

£m

£m

£m

£m

£m

Finland

-

246

-

25

-

-

-

-

271

France

-

-

-

58

-

-

2

62

122

Germany

-

236

-

-

-

264

-

77

577

Ireland

1,927

-

-

-

-

30

-

-

1,957

Italy

-

-

-

-

-

-

3

-

3

Netherlands

-

44

417

-

-

-

-

-

461

Portugal

-

-

23

-

-

-

-

-

23

Spain

-

-

65

34

-

-

-

-

99

Total Eurozone

1,927

526

505

117

-

294

5

139

3,513

USA

10

725

30

-

-

163

-

249

1,177

Rest of world (note ii)

-

-

13

399

464

398

-

-

1,274

Total

1,937

1,251

548

516

464

855

5

388

5,964

 

Country exposures

Cash

Government bonds

Mortgage backed securities

Covered bonds

Supra-national bonds

Loans

 to banks

Other corporate (note i)

Other assets

Total

4 April 2016

£m

£m

£m

£m

£m

£m

£m

£m

£m

Finland

-

242

-

23

-

-

-

-

265

France

-

-

-

52

-

60

4

66

182

Germany

-

365

-

-

-

107

3

102

577

Ireland

871

-

-

-

-

18

-

-

889

Italy

-

-

21

-

-

-

3

-

24

Netherlands

-

82

385

-

-

-

-

-

467

Portugal

-

-

22

-

-

-

-

-

22

Spain

-

-

85

31

-

-

-

-

116

Total Eurozone

871

689

513

106

-

185

10

168

2,542

USA

8

902

35

-

-

350

-

365

1,660

Rest of world (note ii)

-

-

17

383

522

627

-

-

1,549

Total

879

1,591

565

489

522

1,162

10

533

5,751

 

Notes:

i.     Other corporate exposures are held via a European commercial loan facility reported as part of loans and advances to customers.

ii.    Rest of world exposure is to Australia, Canada, Denmark, Norway, Sweden and Switzerland.

 

None of the Group's exposures to Eurozone countries detailed in the table above are in default, and the Group has not incurred any impairment on these assets in the period.

 

 

 

Lending risk - Treasury assets (continued)

 

Derivative financial instruments

 

The Group uses derivatives to reduce exposure to market risks, although the application of accounting rules can create volatility in the income statement. Details of the Group's market standard approach to derivative transactions are provided in the Annual Report and Accounts 2016.

 

The fair value of derivative assets at 30 September 2016 grew to £6,180 million (4 April 2016: £3,898 million). This is due to an increase in the value of derivatives held to hedge the Group's foreign currency liabilities, following the fall in the sterling exchange rate after the UK voted to leave the EU. The fair value of derivative liabilities was £3,972 million (4 April 2016: £3,463 million).

 

As a result of CSA netting arrangements, outstanding transactions with the same counterparty can be offset and settled net following a default or other predetermined event. Under CSA arrangements netting benefits of £2,858 million (4 April 2016: £2,020 million) are available and £3,226 million of collateral is held (4 April 2016: £1,804 million); cash is the only collateral held.

 

The following table shows the exposure to counterparty credit risk for derivative contracts after netting benefits and collateral:

 

Derivative credit exposure

30 September 2016

4 April 2016

Counterparty credit quality

AA

A

BBB

Total

AA

A

BBB

Total

 

£m

£m

£m

£m

£m

£m

£m

£m

Gross positive fair value of contracts

2,386

3,209

585

6,180

1,128

2,770

-

3,898

Netting benefits

(998)

(1,293)

(567)

(2,858)

(532)

(1,488)

-

(2,020)

Net current credit exposure

1,388

1,916

18

3,322

596

1,282

-

1,878

Collateral

(1,360)

(1,857)

(9)

(3,226)

(580)

(1,224)

-

(1,804)

Net derivative credit exposure

28

59

9

96

16

58

-

74

 

 

 

Financial risk

 

Financial risk is the risk of the Group having inadequate earnings, cash flow or capital to meet current or future requirements and expectations. Financial risk comprises:

 

·      Liquidity and funding risk

·      Solvency risk

·      Pension risk

·      Market risk

·      Earnings risk

 

Information on the Group's exposure to liquidity and funding risk, solvency risk, pension risk and earnings risk, including developments in the period, is provided in the subsequent sections of this report. The Group's exposure to market risk has not changed significantly since the financial year end; further information is available in the Annual Report and Accounts 2016.

 

 

Liquidity and funding risk

 

The Group's liquidity and funding levels continue to be within Board risk appetite and regulatory requirements.

 

The Group monitors its position relative to internal risk appetite and the regulatory short-term liquidity stress metric, the Liquidity Coverage Ratio (LCR). The Group's LCR at 30 September 2016 was 140.6% (4 April 2016: 142.6%), which reflects the Group's strategy of maintaining a LCR above 100% and represents a surplus to the UK regulatory minimum requirement of 80%, which will rise to 100% by January 2018.

 

The Group also monitors its position against the longer-term funding metric, the Net Stable Funding Ratio (NSFR), which is due to become a regulatory standard in January 2018. Based on interpretations of current regulatory requirements and guidance, the Group's NSFR at 30 September 2016 was 130.5% (4 April 2016: 127.9%) which exceeds the expected 100% minimum future requirement.

 

The Group monitors liquidity and funding risks on an ongoing basis. This includes consideration of the current geopolitical uncertainty, such as the impact of the UK's vote to leave the EU and the potential for a sustained global economic slowdown, which could have an impact on funding markets.

 

Overall, the Group's stable and diverse funding base and sufficient holdings of high-quality liquid assets combine to ensure that there is no significant risk that liabilities cannot be met as they fall due.

 

Further details of the Group's policies for the management of liquidity and funding risk are contained within the Annual Report and Accounts 2016.

 

Funding profile

 

Assets

30 September 2016

£bn

4 April

2016

£bn

Liabilities

30 September 2016

£bn

4 April

2016

£bn

Retail mortgages

168.3

162.1

Retail funding

149.4

144.9

Treasury assets (including liquidity portfolio)

30.5

23.1

Wholesale funding

55.3

45.8

Other retail lending

3.6

3.6

Capital and reserves

14.6

13.2

Commercial/Other lending

13.2

13.1

Other liabilities

6.2

5.0

Other assets

9.9

7.0

 

 

 

Total

225.5

208.9

Total

225.5

208.9

 

The Group's loan to deposit ratio at 30 September 2016 was 117.7% (4 April 2016: 117.2%).

 

 

 

Financial risk - Liquidity and funding risk (continued)

 

Funding risk

 

Wholesale funding

 

On-balance sheet wholesale funding has increased by £9.5 billion to £55.3 billion, as set out in the table below. This reflects the ongoing prudent management of the Group's liquidity and funding, including an element of pre-funding of wholesale and Bank of England Funding for Lending Scheme (FLS) maturities. The wholesale funding portfolio is made up of a range of secured and unsecured instruments to ensure the Group has a diversified funding base across a range of instruments, currencies, maturities and investor types.

 

The table below sets out an analysis by currency of the Group's wholesale funding.

 

Wholesale funding currency

30 September 2016

4 April 2016

 

GBP

EUR

USD

Other

Total

% of

GBP

EUR

USD

Other

Total

% of

 

£bn

£bn

£bn

£bn

£bn

total

£bn

£bn

£bn

£bn

£bn

total

Repo and other secured agreements

0.1

0.2

0.2

-

0.5

1

-

-

-

-

-

-

Deposits, including PEB balances

9.5

1.7

0.1

-

11.3

20

9.0

0.5

0.2

-

9.7

21

Certificates of deposit

4.2

0.3

0.3

-

4.8

9

4.7

-

0.4

-

5.1

11

Commercial paper

-

-

2.6

-

2.6

5

0.2

-

1.1

-

1.3

3

Covered bonds

3.3

12.1

-

0.2

15.6

28

2.5

11.1

-

0.2

13.8

30

Medium term notes

2.8

7.1

3.5

0.8

14.2

25

2.3

4.8

2.2

0.6

9.9

22

Securitisations

1.8

1.3

1.8

-

4.9

9

1.9

1.2

1.6

-

4.7

10

Other

0.3

0.7

0.1

0.3

1.4

3

0.2

1.0

0.1

-

1.3

3

Total

22.0

23.4

8.6

1.3

55.3

100

20.8

18.6

5.6

0.8

45.8

100

 

To mitigate cross-currency refinancing risk, the Group ensures it holds liquidity in each currency to cover at least the next ten business days of wholesale funding maturities.

 

The residual maturity of the wholesale funding book, on a contractual maturity basis, is set out below.

 

Wholesale funding - residual maturity

Not more than one month

Over one month but not more than three months

Over three months but not more than six months

Over six months but not more than one year

Subtotal less than one year

Over one year but not more than two years

Over two years

Total

30 September 2016

£bn

£bn

£bn

£bn

£bn

£bn

£bn

£bn

Repo and other secured agreements

0.5

-

-

-

0.5

-

-

0.5

Deposits, including PEB balances

6.0

1.6

1.8

1.7

11.1

0.2

-

11.3

Certificates of deposit

1.2

2.3

1.3

-

4.8

-

-

4.8

Commercial paper

0.4

2.2

-

-

2.6

-

-

2.6

Covered bonds

1.4

-

0.1

0.7

2.2

0.8

12.6

15.6

Medium term notes

-

-

-

1.1

1.1

1.1

12.0

14.2

Securitisations

1.0

-

0.3

0.7

2.0

0.5

2.4

4.9

Other

-

-

-

-

-

-

1.4

1.4

Total

10.5

6.1

3.5

4.2

24.3

2.6

28.4

55.3

Of which secured

2.9

-

0.4

1.4

4.7

1.3

16.1

22.1

Of which unsecured

7.6

6.1

3.1

2.8

19.6

1.3

12.3

33.2

% of total

19.0

11.0

6.3

7.6

43.9

4.7

51.4

100.0

 

 

 

Financial risk - Liquidity and funding risk (continued)

 

Wholesale funding

- residual maturity

 

Not more than one month

Over one month but not more than three months

Over three months but not more than six months

Over six months but not more than one year

Subtotal

less than one year

Over one year but not more than two years

Over two years

Total

4 April 2016

£bn

£bn

£bn

£bn

£bn

£bn

£bn

£bn

Repo and other secured agreements

-

-

-

-

-

-

-

-

Deposits, including PEB balances

4.1

1.2

1.6

1.9

8.8

0.9

-

 

9.7

Certificates of deposit

1.3

1.6

1.7

0.5

5.1

-

-

5.1

Commercial paper

0.3

0.9

0.1

-

1.3

-

-

1.3

Covered bonds

0.1

-

-

1.2

1.3

0.8

11.7

13.8

Medium term notes

-

-

-

0.9

0.9

0.6

8.4

9.9

Securitisations

-

-

-

1.4

1.4

0.7

2.6

4.7

Other

-

-

-

-

-

-

1.3

1.3

Total

5.8

3.7

3.4

5.9

18.8

3.0

24.0

45.8

Of which secured

0.1

-

-

2.6

2.7

1.5

15.3

19.5

Of which unsecured

5.7

3.7

3.4

3.3

16.1

1.5

8.7

26.3

% of total

12.6

8.1

7.4

12.9

41.0

6.6

52.4

100.0

 

The Group's wholesale funding ratio (wholesale funding as a proportion of total funding liabilities) was 27.2% at 30 September 2016 (4 April 2016: 24.8%). The wholesale funding ratio includes all balance sheet sources of funding (including securitisations) and therefore excludes off-balance sheet FLS drawings.

 

The proportion of on-balance sheet funding categorised as long-term (more than one year to maturity) is 56% (4 April 2016: 59%) which reflects an increase in shorter term deposits and commercial paper, with covered bond and securitisation maturities falling into the next 12 months also increasing.

 

Liquidity risk

 

Total liquidity

 

The Group ensures it has sufficient resources to meet day-to-day cash flow needs and to meet internal and regulatory liquidity requirements, which are calibrated to ensure the Group has sufficient liquidity, both in terms of amount and quality, in a range of stress scenarios and across multiple time horizons.

 

The table below sets out the sterling equivalent fair value of the liquidity portfolio, categorised by issuing currency. It includes off-balance sheet liquidity (£8 billion of off-balance sheet FLS treasury bills included in government bonds at 30 September) and excludes encumbered assets.

 

Liquid assets

30 September 2016

4 April 2016

 

GBP

EUR

USD

Total

GBP

EUR

USD

Total

 

£bn

£bn

£bn

£bn

£bn

£bn

£bn

£bn

Cash and reserves at central banks

15.5

1.9

-

17.4

7.9

0.9

-

8.8

Government bonds

12.7

0.1

0.5

13.3

13.4

0.5

0.9

14.8

Supranational bonds

0.3

-

0.2

0.5

0.4

-

0.1

0.5

Covered bonds

0.5

0.5

-

1.0

0.5

0.6

-

1.1

RMBS

0.6

0.4

-

1.0

0.7

0.3

0.1

1.1

Asset backed securities

0.2

0.1

-

0.3

0.2

0.1

-

0.3

Other securities

0.3

0.6

0.3

1.2

0.4

0.6

0.3

1.3

Total

30.1

3.6

1.0

34.7

23.5

3.0

1.4

27.9

 

The average combined month end balance of cash and reserves at central banks, government and supranational bonds during the period was £30.2 billion (4 April 2016: £22.8 billion).

 

At 30 September 2016, cash, government bonds (including FLS treasury bills) and supranational bonds included in the liquidity pool represented 128% (4 April 2016: 128%) of wholesale funding maturing in less than one year, assuming no rollovers.

 

 

 

Financial risk - Liquidity and funding risk (continued)

 

The Group intends to participate in the Bank of England's Term Funding Scheme (TFS) which provides cash secured against eligible collateral and has a flexible four year maturity.

 

Residual maturity of liquidity assets and liabilities

 

The table below segments the carrying value of financial assets and financial liabilities into relevant maturity groupings based on the final contractual maturity date (residual maturity). In practice, customer behaviours mean that liabilities are often retained for longer than their contractual maturities and assets are repaid faster.

 

The balance sheet structure and risks are managed and monitored by ALCO. For forecasting purposes, the Group uses judgement and past behavioural performance of each asset and liability class to anticipate likely cash flow requirements of the Group.

 

Residual maturity

Due less than one month (note i)

Due between one and three months

Due between three and six months

Due between six and nine months

Due between nine and twelve months

Due between one and two years

Due between two and five years

Due after

more than

five years

Total

30 September 2016

£m

£m

£m

£m

£m

£m

£m

£m

£m

Financial assets

 

 

 

 

 

 

 

 

 

Cash

17,213

-

-

-

-

-

-

-

17,213

Loans and advances to banks

2,979

-

-

-

-

-

-

344

3,323

Available for sale investment securities

2

14

190

36

107

158

2,582

6,773

9,862

Loans and advances to customers

2,936

1,260

1,905

1,878

1,858

7,199

21,173

146,917

185,126

Derivative financial instruments

85

106

38

111

114

236

1,855

3,635

6,180

Other financial assets (note ii)

4

30

58

49

54

183

396

483

1,257

Total financial assets

23,219

1,410

2,191

2,074

2,133

7,776

26,006

158,152

222,961

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

Shares

106,747

2,891

5,114

5,394

6,217

9,130

6,584

1,338

143,415

Deposits from banks

3,504

78

25

52

-

27

-

-

3,686

Of which repo

536

-

-

-

-

-

-

-

536

Other deposits

3,044

1,567

1,798

630

692

179

16

-

7,926

Due to customers

3,325

1,049

1,002

244

216

112

37

-

5,985

Secured funding - ABS and covered bonds

2,396

15

440

324

1,068

1,347

7,522

8,485

21,597

Senior unsecured funding

1,574

4,474

1,258

1,236

216

1,061

6,542

5,692

22,053

Derivative financial instruments

39

13

25

37

66

287

689

2,816

3,972

Other financial liabilities (note ii)

-

-

-

3

1

8

19

-

31

Subordinated liabilities

-

-

-

-

-

108

722

2,076

2,906

Subscribed capital (note iii)

-

-

-

-

-

-

-

435

435

Total financial liabilities

120,629

10,087

9,662

7,920

8,476

12,259

22,131

20,842

212,006

Off-balance sheet commitments (note iv)

14,520

-

-

-

-

-

-

-

14,520

Net liquidity difference

(111,930)

(8,677)

(7,471)

(5,846)

(6,343)

(4,483)

3,875

137,310

(3,565)

Cumulative liquidity difference

(111,930)

(120,607)

(128,078)

(133,924)

(140,267)

(144,750)

(140,875)

(3,565)

 

 

 

 

Financial risk - Liquidity and funding risk (continued)

 

Residual maturity

Due less than one month

(note i)

Due between one and three months

Due between three and six

months

Due between six and nine months

Due between nine and twelve months

Due between one and two years

Due between two and five years

Due after more than five years

Total

4 April 2016

£m

£m

£m

£m

£m

£m

£m

£m

£m

Financial assets

 

 

 

 

 

 

 

 

 

Cash

 8,797

 -

 -

 -

 -

 -

 -

 -

 8,797

Loans and advances to banks

 3,179

 87

 -

 -

 -

 -

 -

 325

 3,591

Available for sale investment securities

 6

 15

 14

 1

 178

 352

 3,680

 6,366

 10,612

Loans and advances to customers

 2,825

 1,256

 1,929

 1,810

 1,823

 7,124

 20,237

 141,803

 178,807

Derivative financial instruments

 25

 151

 128

 102

 30

 227

 994

 2,241

 3,898

Other financial assets (note ii)

 5

 15

 107

 17

 65

 142

 234

 299

 884

Total financial assets

 14,837

 1,524

 2,178

 1,930

 2,096

 7,845

 25,145

 151,034

 206,589

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

Shares

 103,296

 1,632

 5,875

 4,608

 5,122

 10,731

 6,251

 1,200

 138,715

Deposits from banks

 1,658

 184

 168

 41

 19

 -

 25

 -

 2,095

Of which repo

122

-

5

-

-

-

-

-

127

Other deposits

 2,549

 1,392

 1,843

 716

 391

 737

 7

 -

 7,635

Due to customers

 3,563

 543

 1,347

 345

 215

 126

 62

 -

 6,201

Secured funding - ABS and covered bonds

 65

 19

 43

 2,238

 323

 1,524

 7,002

 8,263

 19,477

Senior unsecured funding

 1,637

 2,478

 1,810

 315

 1,040

 632

 3,878

 4,818

 16,608

Derivative financial instruments

 31

 9

 23

 33

 84

 338

 647

 2,298

 3,463

Other financial liabilities (note ii)

 2

 2

 1

 1

 (1)

-

8

 -

 13

Subordinated liabilities

 -

 -

 -

 -

 -

 114

 669

 1,034

 1,817

Subscribed capital (note iii)

 -

 -

 -

 -

 -

 -

 -

 413

 413

Total financial liabilities

 112,801

 6,259

 11,110

 8,297

 7,193

 14,202

 18,549

 18,026

196,437

Off-balance sheet commitments (note iv)

 13,630

 - 

 - 

 - 

 - 

 - 

 - 

 - 

 13,630

Net liquidity difference

(111,594)

(4,735)

(8,932)

(6,367)

(5,097)

(6,357)

6,596

133,008

(3,478)

Cumulative liquidity difference

(111,594)

(116,329)

(125,261)

(131,628)

(136,725)

(143,082)

(136,486)

(3,478)

 

 

Notes:

i.     Due less than one month includes amounts repayable on demand.

ii.    Other financial assets and liabilities include the fair value adjustments for portfolio hedged risk and investments in equity shares.

iii.   The principal amount for undated subscribed capital is included within the due more than five years column. On 17 October 2016, the Group issued notice to call £140 million of subscribed capital in December 2016.

iv.   Off-balance sheet commitments include amounts payable on demand for unrecognised loan commitments and customer overpayments on residential mortgages, where the borrower is able to draw down the amount overpaid.

 

Asset encumbrance

 

Asset encumbrance arises from collateral pledged against secured funding and other collateralised obligations. The majority of asset encumbrance within the Group arises from the use of prime mortgage pools to collateralise the Covered Bond and Silverstone asset-backed funding programmes and from participation in the FLS. Encumbrance also results from repurchase transactions, voluntary excess collateral balances, participation in payment schemes and collateral posted for derivative margin requirements. Assets that have been used for any of these purposes cannot be utilised for other purposes and are classified as encumbered.

 

At 30 September 2016 the Group had £36,013 million (4 April 2016: £34,728 million) of externally encumbered assets with counterparties other than central banks. The Group also had £26,915 million (4 April 2016: £29,194 million) of pre-positioned and encumbered assets held at central banks and £151,255 million (4 April 2016: £136,349 million) of assets neither encumbered nor pre-positioned but capable of being encumbered.

 

Further details of the Group's policies for asset encumbrance are contained within the Annual Report and Accounts 2016.

 

 

 

Financial risk - Liquidity and funding risk (continued)

 

External credit ratings

 

During the period all of the major rating agencies reviewed the Society's credit ratings. The Society's short and long-term credit ratings at 18 November 2016 are as follows:

 

Credit ratings

Long-term

Short-term

Tier 2

Date of last rating

action / confirmation

Outlook

Standard & Poor's

A

A-1

BBB

June 2016

Negative

Moody's

Aa3

P-1

Baa1

June 2016

Negative

Fitch

A

F1

A-

May 2016

Positive

 

In May 2016, Fitch revised Nationwide's outlook to positive from stable reflecting the potential for increased subordinated debt issuance leading to lower than expected losses for the Society's deposits and senior unsecured debt.

 

In June 2016, Moody's upgraded Nationwide's deposit and senior unsecured ratings to Aa3 from A1. This reflected the benefit of the recent issuance of senior unsecured debt leading to improved loss absorbency.

 

Since the result of the EU referendum was announced, all three rating agencies have taken action on their UK sovereign rating. On 28 June 2016, Moody's placed Nationwide's long term rating on negative outlook. This was part of a sector-wide action involving all UK banks and building societies and Nationwide was not singled out. On 7 July 2016, Standard & Poor's placed Nationwide, along with various other UK financial institutions, on negative outlook as they now see a negative trend for UK banking economic risk.

 

 

Solvency risk

 

Solvency risk is the risk that the Group fails to maintain sufficient capital to absorb losses throughout a full economic cycle and sufficient to maintain the confidence of current and prospective investors, members, the Board and regulators. Further information on solvency risk and how it is managed by the Group can be found in the Annual Report and Accounts 2016.

 

Capital position

 

The capital disclosures included in this report are on a Capital Requirements Directive IV (CRD IV) end point basis unless otherwise stated. This assumes that all CRD IV requirements are in force during the period, with no transitional provisions permitted. In addition, the disclosures are on a Group (consolidated) basis, including all subsidiary entities.

 

The Group's capital and leverage ratios have remained well in excess of regulatory requirements with a Common Equity Tier 1 (CET1) ratio of 23.3% (4 April 2016: 23.2%) and a leverage ratio of 4.0% (4 April 2016: 4.2%). The CET1 ratio has remained broadly stable due to a good financial performance, with £502 million of profit after tax for the period being offset by an increase in the pension deficit which reduced the general reserve by £405 million. The table below reconciles the general reserves to total regulatory capital.

 

 

 

Financial risk - Solvency risk (continued)

 

Total regulatory capital 

30 September

4 April

 

2016

2016

 

£m

£m

General reserve (note i)

8,965

8,921

Core capital deferred shares (CCDS)

531

531

Revaluation reserve

67

64

Available for sale reserve

(20)

(8)

Regulatory adjustments and deductions:

 

 

   Foreseeable distributions (note ii)

(42)

(42)

   Prudent valuation adjustment (note iii)

(47)

(55)

   Own credit and debit valuation adjustments (note iv)

(1)

(2)

   Intangible assets (note v)

(1,165)

(1,120)

   Goodwill (note v)

(12)

(12)

   Excess of regulatory expected losses over impairment provisions (note vi)

(209)

(264)

Total regulatory adjustments and deductions

(1,476)

(1,495)

Common Equity Tier 1 capital

8,067

8,013

Additional Tier 1 capital securities (AT1)

992

992

Total Tier 1 capital

9,059

9,005

 

 

 

Dated subordinated debt (note vii)

2,628

1,628

Collectively assessed impairment allowances

19

21

Tier 2 capital

2,647

1,649

 

 

 

Total regulatory capital

11,706

10,654

 

 

 

Solvency ratios

%

%

Common Equity Tier 1 ratio

23.3

23.2

Total Tier 1 capital ratio

26.2

26.1

Total regulatory capital ratio

33.8

30.9

 

Notes:

i.     The general reserve includes independently verified profits for the period to 30 September 2016.

ii.    Foreseeable distributions in respect of CCDS and AT1 securities are deducted from CET1 capital under CRD IV.

iii.   A prudent valuation adjustment (PVA) is applied in respect of fair valued instruments as required under regulatory capital rules.

iv.   Own credit and debit valuation adjustments are applied to remove balance sheet gains or losses of fair valued liabilities and derivatives that result from changes in the Group's own credit standing and risk, in accordance with CRD IV rules.

v.   Intangible assets and goodwill do not qualify as capital for regulatory purposes.

vi.   The net regulatory capital expected loss in excess of accounting impairment provisions is deducted from CET1 capital, gross of tax.

vii.  Subordinated debt includes fair value adjustments related to changes in market interest rates, adjustments for unamortised premiums and discounts that are included in the consolidated balance sheet, and any amortisation of the capital value of Tier 2 instruments required by regulatory rules for instruments with fewer than five years to maturity.

 

The Group's CET1 ratio on a transitional basis is in line with end point at 23.3% (4 April 2016: 23.2%). The total Tier 1 capital ratio and total regulatory capital ratio are 27.4% (4 April 2016: 27.3%) and 35.1% (4 April 2016: 32.2%) respectively on a transitional basis, as PIBS and some additional subordinated debt instruments qualify under grandfathering provisions under CRD IV.

 

Tier 2 capital has increased following the issuance of $1.25 billion of qualifying Tier 2 subordinated debt with a coupon of 4% and a maturity of 10 years. Detailed information on the key features of the Group's other capital instruments can be found within the Group's annual Pillar 3 Disclosure 2016 at nationwide.co.uk

 

A breakdown of the movements in regulatory capital can be found in the Appendix.

 

RWAs have increased by £161 million since 4 April 2016, to £34,636 million. Counterparty credit risk and credit value adjustment RWAs have increased due to higher derivative market values. Residential mortgage RWAs have decreased as a result of improved book quality from rising house prices, which outweighed the increase in mortgage balances.

 

 

 

Financial risk - Solvency risk (continued)

 

A breakdown in the Group's RWAs is set out in the table below. Additional details, including minimum Pillar 1 capital requirements and a RWA flow table, are contained in the Appendix. Details on how RWAs are calculated can be found in the Group's annual Pillar 3 Disclosure 2016 at nationwide.co.uk

 

Breakdown of RWAs

RWAs at

30 September 2016

RWAs at

4 April

2016

 

£m

£m

Credit risk:

 

 

  Residential mortgages

13,853

14,086

  Unsecured lending

5,809

5,621

  Commercial

6,096

6,194

  Treasury

867

1,039

  Counterparty credit risk (note i)

773

598

  Credit valuation adjustment (note i)

883

698

  Other (note ii)

1,751

1,635

Total credit risk

30,032

29,871

Operational risk

4,604

4,604

Market risk (note iii)

-

-

Total

34,636

34,475

 

Notes:

i.     Counterparty credit risk and credit valuation adjustment credit risk relate to derivative financial instruments and repurchase agreements.

ii.    Other relates to fixed and other assets and equities held on the balance sheet.

iii.   The Group has elected to set this to zero, as permitted by the CRR, as exposure is below the threshold of 2% of own funds.

 

Nationwide's latest Pillar 2A Individual Capital Guidance (ICG) was received in August 2016 following an Individual Capital Adequacy Assessment Process (ICAAP). The ICG is a point in time estimate by the PRA (which may change over time) of the amount of capital required to be held to meet risks partly covered by Pillar 1, such as credit concentration and operational risk, and those risks not covered by Pillar 1, such as pensions and interest rate risk. It equates to circa £2.2 billion, of which at least circa £1.3 billion must be met by CET1 capital (previously circa £2.2 billion, of which at least circa £1.2 billion must be met by CET1 capital). This amount is equivalent to 6.5% of RWAs as at 30 September 2016, reflecting the Group's low average risk weight, given that approximately 75% of the Group's total assets are in the form of secured residential mortgages.

 

Leverage

 

CRD IV requires firms to calculate a non-risk based leverage ratio, to supplement risk-based capital requirements. Our leverage ratio is calculated using the Capital Requirements Regulation (CRR) definition of Tier 1 for the capital amount and the Delegated Act definition of the exposure measure and is reported on an end point basis. We manage the risk of excessive leverage through regular monitoring and reporting of the leverage ratio, which forms part of the Group's risk appetite framework. Further information can be found within the Group's annual Pillar 3 Disclosure 2016 at nationwide.co.uk 

 

The leverage ratio decreased to 4.0% (4 April 2016: 4.2%) due to a higher pension deficit as profits have broadly offset the increase in leverage exposure of £14,705 million. Balance sheet growth was driven by increased mortgage balances and liquid assets, in particular central bank reserves.

 

The table below provides further detail on the components of the exposures measure:

 

Leverage ratio

30 September

4 April

 

2016

2016

 

£m

£m

Tier 1 capital

9,059

9,005

Total exposures

227,886

213,181

Leverage ratio

4.0%

4.2%

 

A more detailed breakdown of the leverage exposure is contained in the Appendix.  

 

 

Financial risk - Solvency risk (continued)

 

In August, the PRA announced a modification to the calculation of leverage exposure for the purposes of the UK leverage ratio framework by excluding central bank reserves. Under the modified basis of measurement the Group's leverage ratio at 30 September 2016 is 4.3% (4 April 2016: 4.4%). The permission to modify the basis of measurement for the purposes of the UK regulatory regime does not affect the requirement to calculate and report leverage in accordance with the CRR as disclosed in the table above.

 

Regulatory developments

 

The Group continues to monitor regulatory developments that could lead to an increase in capital requirements and will remain engaged in the development of the regulatory approach to ensure it is prepared for any change.

 

We expect to have a steady state leverage ratio requirement of 3.75% based on the UK leverage ratio framework, which comprises a minimum requirement of 3%, a supplementary leverage ratio buffer of 0.35% and Countercyclical Leverage Ratio Buffer (CCyLB) of 0.4%. The Financial Policy Committee (FPC) could set a CCyLB of up to 0.9% (i.e. a total leverage requirement of 4.25%) if it deems risks to be elevated; however, following recent guidance on the CCyLB, Nationwide's minimum leverage requirements are expected to remain at 3% until at least June 2017.

 

Whilst we continue to calculate and disclose our leverage ratio based on the CRR methodology, we will also monitor our leverage requirements using the PRA's modified leverage exposure, as announced in August 2016. The Basel Committee on Banking Supervision (BCBS) and the European Banking Authority (EBA) are currently reviewing the leverage ratio requirement for banks and building societies, but it is expected that the UK leverage ratio framework will remain the Group's binding requirement. We expect our leverage ratio to remain above 4% in the medium term reflecting our desire to maintain capital levels above binding regulatory requirements given that this will also support our future Minimum Requirement for own funds and Eligible Liabilities (MREL) requirements, which are explained below.

 

As part of the European Bank Recovery and Resolution Directive (BRRD), the Bank of England (BoE), in its capacity as the UK resolution authority, has published a policy confirming the UK MREL framework. Whilst we await our formal individual requirement from the BoE, we expect to have a MREL requirement equal to double minimum capital requirements plus capital buffers from 2020. The Group is confident it has a strong foundation from which to meet the requirement, and has recently issued Tier 2 capital which will support this.

 

The BCBS is expected to finalise its revisions to the standardised approach for credit and operational risks in late 2016. We do not believe that these will lead to a material increase in capital requirements for the Group. Whilst the revised standardised approach is due to be used as a basis for a floor for minimum capital requirements, the calibration of this has not yet been published. In addition, a BCBS consultation proposing constraints on the use of IRB approaches for credit risk was published in March 2016 and a PRA consultation on residential risk weights, proposing revised expectations for IRB models, was published in July 2016. These proposals could lead to higher risk weights for certain portfolios in the medium term.

 

During the summer of 2016, the major UK banks and building societies, including Nationwide, took part in the third of the PRA's annual concurrent stress tests, which assessed the resilience to a severe slowdown in the UK and global economies. The results of the 2016 concurrent stress test are expected on 30 November 2016.

 

 

 

Financial risk (continued)

 

Pension risk

 

The Group has funding obligations to defined benefit pension schemes, the most significant being the Nationwide Pension Fund (the Fund). Further information, including key risk factors, is set out in the Annual Report and Accounts 2016.

 

There has been a significant increase in the Group's retirement benefit deficit, from £213 million to £723 million, since 4 April 2016. This has been driven by changes in the economic environment associated with the EU referendum, which have impacted key risk factors such as long-term interest rates and inflation, and caused the value of the Fund's liabilities to increase significantly. Assets performed strongly over the period, driven by increases in bond and equity valuations; however this was more than offset by the increase in the value of the liabilities.

 

The latest triennial valuation of the Fund, which has an effective date of 31 March 2016, is currently underway. Employer contributions in future years, including a new deficit recovery plan, are expected to be agreed by the Group and the Trustee by mid-2017.

 

The Group continues to actively engage with the Trustee to ensure broad alignment on investment objectives and implementation. This is supported by a joint investment working group which considers specific risk management initiatives. This includes, but is not limited to, investment strategy de-risking and diversification.

 

Over the period, approximately £350 million of equities were sold and reinvested into credit and liability matching assets to reduce risk and increase investment diversification. Furthermore, the Fund transacted approximately £250 million of long-dated inflation swaps to further reduce its exposure to inflation risk. These activities have partially offset the impact of the adverse economic environment on the Fund's deficit.

 

Further information on the pension deficit as at 30 September 2016 is included in note 20 of the consolidated interim financial statements.

 

 

Earnings risk

 

Earnings risk is defined as the risk that the Group's sources of income are unable to continue to add the expected value, due to changes in market, regulatory or other environmental factors. Further information on the Group's strategy for managing and how it seeks to mitigate earnings risk is available in the Business and Risk Report in the Annual Report and Accounts 2016.

 

Following the EU referendum and the subsequent reduction in the base rate to 0.25% there is an increased risk that interest rates will remain lower for longer. This is expected to have an adverse impact on earnings for the UK Retail Banking sector. Furthermore, the economic uncertainty since the referendum may reduce the expected growth in the mortgage market and increase the risk of credit losses in the medium term.

 

The Group will continue to monitor the external economic environment to identify and mitigate any threats to achieving its forecasted earnings.  

 

 

 

Operational risk

 

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. The Group's operational risk profile continues to be informed by risk assessments from the business and by review and challenge from internal teams and committees.

 

The Annual Report and Accounts 2016 details our risk profile, environment and outlook; developments during the period are outlined below.

 

Consistent with the position at the financial year end, the majority of the Group's operational risk events continue to be recorded against two of the Basel II categories: 'External Fraud' and 'Clients, Products and Business Practices' and are categorised as having minor impact. During the period, the Group had one significant operational incident which resulted in restricted access to the previous version of the Mobile Banking application over three days. Following a full investigation, remediation activities have been carried out to prevent a reoccurrence.

 

Over the last six months, the external operational risk environment has continued to see a number of high profile cyber-attacks and failures of technology infrastructures. The increased use of digital banking services means that the financial services sector is seeing increased expectations of an 'always on' 24/7 service and lower tolerance of system unavailability combined with heightened concerns over the security of banking systems. The Group is committed to protecting both itself and its members from the threat of fraudulent attacks by increasingly sophisticated cyber criminals and continues to invest in security and detection capabilities, designed to ensure it can respond to such threats effectively. As part of this ongoing commitment, the Group has also recently announced the appointment of a number of external experts to its IT Strategy and Resilience Committee.

 

During the period, the Group successfully implemented the first change of the base rate since 2009. The Group continues to keep plans for the operational impact of any future changes to the interest rate under regular review, to ensure that we have the capacity to respond to customer needs.

 

 

Conduct and compliance risk

 

Conduct and compliance risk is defined as the risk that the Group exercises inappropriate judgement or makes errors in the execution of its business activities, leading to non-compliance with regulation or legislation, market integrity being undermined, or an unfair outcome being created for customers. The associated risk management framework has not substantially changed from the position reported in the Annual Report and Accounts 2016. However, further activity is underway to ensure that the management and measurement of conduct risk is effectively embedded across the Group.

 

In line with the outlook provided in the Annual Report and Accounts 2016, the Group will continue to develop its service propositions to meet the changing demands and behaviours of customers.

 

During the period, the outcome of the EU referendum has given rise to a number of potential uncertainties but, as a UK-focused building society, the direct impact of the vote to leave the EU on the Group is likely to be limited. The potential impact of the vote in relation to the Group's business is, though, being considered on an ongoing basis, including potential changes to law and regulation that may occur when the UK leaves the EU.

 

 

 

Consolidated interim financial statements

 

Contents

 

 

 

 

Page

Consolidated income statement

54

Consolidated statement of comprehensive income

55

Consolidated balance sheet

56

Consolidated statement of movements in members' interests and equity

57

Consolidated cash flow statement

58

Notes to the consolidated interim financial statements

59

 

 

 

 

 

Consolidated income statement           

(Unaudited)

 

Notes

Half year to

30 September 2016

Half year to

30 September

2015

 

 

£m

£m

Interest receivable and similar income

3

2,576

2,613

Interest expense and similar charges

4

(1,127)

(1,056)

Net interest income

 

1,449

1,557

Fee and commission income

 

204

212

Fee and commission expense

 

(108)

(91)

Income from investments

 

-

2

Other operating income

5

97

3

Gains from derivatives and hedge accounting                                   

6

77

14

Total income

 

1,719

1,697

Administrative expenses

7

(938)

(866)

Impairment losses on loans and advances

8

(32)

-

Impairment losses on investment securities

 

(5)

-

Provisions for liabilities and charges

18

(48)

(29)

Profit before tax

696

802

Taxation                                                                                  9

(194)

(166)

Profit after tax

502

636

 

The notes on pages 59 to 83 form an integral part of these consolidated interim financial statements.

 

 

 

 

Consolidated statement of comprehensive income

(Unaudited)

Notes

Half year to

30 September

2016

Half year to

30 September

2015

 

 

£m

£m

Profit after tax

 

502

636

 

 

 

 

Other comprehensive (expense)/income:

 

 

 

 

Items that will not be reclassified to the income statement

 

 

 

 

 

 

 

Remeasurements of retirement benefit obligations:

 

 

 

Retirement benefit remeasurements before tax

 

(552)

46

Taxation

 

147

(9)

 

20

(405)

37

Revaluation of property:

 

 

 

Adjustments to taxation in respect of prior periods

 

3

-

 

 

 

 

 

 

(402)

37

Items that may subsequently be reclassified to the income statement

 

 

 

 

 

 

 

Cash flow hedge reserve:

 

 

 

Fair value movements taken to members' interests and equity

 

2,669

(54)

Amount transferred to income statement

 

(2,264)

(67)

Taxation

 

(95)

24

 

6

310

(97)

Available for sale reserve:

 

 

 

Fair value movements taken to members' interests and equity

 

95

(54)

Amount transferred to income statement

 

(112)

6

Taxation

 

5

14

 

 

(12)

(34)

 

 

 

 

Other comprehensive expense

 

(104)

(94)

 

 

 

 

Total comprehensive income

 

398

542

         

 

The notes on pages 59 to 83 form an integral part of these consolidated interim financial statements.

 

 

 

 

Consolidated balance sheet

(Unaudited)

 

 

Notes

 30 September 2016

£m

4 April

 2016

£m

Assets

 

 

 

 

Cash

 

 

17,213

8,797

Loans and advances to banks

 

 

3,323

3,591

Available for sale investment securities

 

 

9,862

10,612

Derivative financial instruments

 

 

6,180

3,898

Fair value adjustment for portfolio hedged risk

 

 

1,197

756

Loans and advances to customers

 

11

185,126

178,807

Investments in equity shares

 

 

57

126

Intangible assets

 

 

1,221

1,191

Property, plant and equipment

 

 

846

823

Investment properties

 

 

8

8

Accrued income and expenses prepaid

 

 

272

166

Deferred tax

 

 

168

35

Other assets

 

 

73

129

Total assets

 

 

225,546

208,939

Liabilities

 

 

 

 

Shares

 

 

143,415

138,715

Deposits from banks

 

 

3,686

2,095

Other deposits

 

 

7,926

7,635

Due to customers

 

12

5,985

6,201

Fair value adjustment for portfolio hedged risk

 

 

31

13

Debt securities in issue

 

 

43,650

36,085

Derivative financial instruments

 

 

3,972

3,463

Other liabilities

 

 

508

414

Provisions for liabilities and charges

 

18

298

343

Accruals and deferred income

 

 

297

288

Subordinated liabilities

 

13

2,906

1,817

Subscribed capital

 

13

435

413

Deferred tax

 

 

236

186

Current tax liabilities

 

 

203

128

Retirement benefit obligations

 

20

723

213

Total liabilities

 

 

214,271

198,009

Members' interests and equity

 

 

 

 

Core capital deferred shares

 

21

531

531

Other equity instruments

 

22

992

992

General reserve

 

 

8,965

8,921

Revaluation reserve

 

 

67

64

Cash flow hedge reserve

 

 

740

430

Available for sale reserve

 

 

(20)

(8)

Total members' interests and equity

 

 

11,275

10,930

Total members' interests, equity and liabilities

225,546

208,939

 

The notes on pages 59 to 83 form an integral part of these consolidated interim financial statements.

 

 

 

 

Consolidated statement of movements in members' interests and equity

For the period ended 30 September 2016

(Unaudited)

 

 

 

Core capital deferred shares

Other

equity instruments

General reserve

Revaluation reserve

Cash flow hedge reserve

Available for sale reserve

Total

 

 

£m

£m

£m

£m

£m

£m

£m

At 5 April 2016

 

531

992

8,921

64

430

(8)

10,930

Profit for the period

 

-

-

502

-

-

-

502

Net remeasurements of retirement benefit obligations

 

 

-

 

-

 

(405)

 

-

 

-

 

-

 

(405)

Net revaluation of property

 

-

-

-

3

 

-

3

Net movement in cash flow hedge reserve

 

-

-

-

-

310

-

310

Net movement in available for sale reserve

 

 

-

 

-

 

-

 

-

 

-

 

(12)

 

(12)

Total comprehensive income

 

 

-

 

-

 

97

 

3

 

310

 

(12)

 

398

Distribution to the holders of core capital deferred shares

 

 

-

 

-

 

(28)

 

-

 

-

 

-

 

(28)

Distribution to the holders of Additional Tier 1 capital*

 

 

-

 

-

 

(25)

 

-

 

-

 

-

 

(25)

At 30 September 2016

 

531

992

8,965

67

740

(20)

11,275

 

For the period ended 30 September 2015

(Unaudited)

 

 

 

Core capital deferred shares

Other

equity instruments

General reserve

Revaluation reserve

Cash flow hedge reserve

Available for sale reserve

Total

 

 

£m

£m

£m

£m

£m

£m

£m

At 5 April 2015

 

531

992

7,995

68

129

26

9,741

Profit for the period

 

-

-

636

-

-

-

636

Net remeasurements of retirement benefit obligations

 

 

-

 

-

 

37

 

-

 

-

 

-

 

37

Net movement in cash flow hedge reserve

 

-

-

-

-

(97)

-

(97)

Net movement in available for sale reserve

 

 

-

 

-

 

-

 

-

 

-

 

(34)

 

(34)

Total comprehensive income

 

 

-

 

-

 

673

 

-

 

(97)

 

(34)

 

542

Distribution to the holders of core capital deferred shares

 

 

-

 

-

 

(28)

 

-

 

-

 

-

 

(28)

Distribution to the holders of Additional Tier 1 capital*

 

 

-

 

-

 

(28)

 

-

 

-

 

-

 

(28)

At 30 September 2015

 

531

992

8,612

68

32

(8)

10,227

 

*The distribution to the holders of Additional Tier 1 capital is shown net of an associated tax credit of £9 million (H1 2015/16: £6 million).

 

The notes on pages 59 to 83 form an integral part of these consolidated interim financial statements.

 

 

 

 

 

Consolidated cash flow statement

(Unaudited)

 

Notes

Half year to

 30 September 2016

£m

Half year to

 30 September 2015

£m

Cash flows generated from/(used in) operating activities

 

 

 

Profit before tax

 

696

802

Adjustments for:

 

 

 

Non-cash items included in profit before tax

24

95

(86)

Changes in operating assets and liabilities

24

610

(733)

Interest paid on subordinated liabilities

 

(40)

(48)

Interest paid on subscribed capital

 

(11)

(11)

Taxation

 

(133)

(115)

Net cash flows generated from/(used in) operating activities

 

1,217

(191)

 

Cash flows generated from/(used in) investing activities

 

 

 

Purchase of investment securities

 

(2,336)

(2,443)

Sale and maturity of investment securities

 

3,713

1,893

Purchase of property, plant and equipment

 

(96)

(80)

Sale of property, plant and equipment

 

4

7

Purchase of intangible assets

 

(139)

(143)

Dividends received from non-Group entities

 

-

2

Net cash flows generated from/(used in) investing activities

 

1,146

(764)

 

 

 

 

Cash flows generated from financing activities

 

 

 

Distributions paid to the holders of core capital deferred shares

 

(28)

(28)

Distributions paid to the holders of additional tier 1 capital

 

(34)

(34)

Issue of debt securities

 

15,704

15,974

Redemption of debt securities in issue

 

(10,825)

(10,751)

Issue of subordinated liabilities

 

949

-

Redemption of subordinated liabilities

 

-

(256)

Net cash flows generated from financing activities

 

5,766

4,905

 

 

 

 

Net increase in cash and cash equivalents

 

8,129

3,950

Cash and cash equivalents at start of period

 

12,063

7,250

Cash and cash equivalents at end of period

24

20,192

11,200

 

The notes on pages 59 to 83 form an integral part of these consolidated interim financial statements.

 

 

 

Notes to the consolidated interim financial statements

 

1   General information and reporting period

 

Nationwide Building Society ('the Society') and its subsidiaries (together, 'the Group') provide financial services to retail and commercial customers within the United Kingdom.

 

Nationwide is a building society incorporated and domiciled in the United Kingdom. The address of its registered office is Nationwide Building Society, Nationwide House, Pipers Way, Swindon, Wiltshire SN38 1NW.

 

There were no material changes in the composition of the Group in the half year to 30 September 2016.

 

These condensed consolidated interim financial statements ('consolidated interim financial statements') have been prepared as at 30 September 2016 and show the financial performance for the period from, and including, 5 April 2016 to this date. They were approved for issue on 17 November 2016.

 

These consolidated interim financial statements have been reviewed, not audited.  

 

 

2   Basis of preparation

 

The consolidated interim financial statements of the Group for the half year ended 30 September 2016 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with International Accounting Standard (IAS) 34 'Interim Financial Reporting' as issued by the International Accounting Standards Board (IASB) and as endorsed by the European Union (EU). The consolidated interim financial statements should be read in conjunction with the Group's annual financial statements for the year ended 4 April 2016, which were prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU.

 

Terminology used in these consolidated interim financial statements is consistent with that used in the Annual Report and Accounts 2016, where a full glossary of terms can be found.

 

Copies of the Annual Report and Accounts 2016 are available on the Group's website at:

nationwide.co.uk/about_nationwide/results_and_accounts

 

Accounting policies

 

The accounting policies adopted by the Group in the preparation of these consolidated interim financial statements and those which the Group currently expects to adopt in the Annual Report and Accounts 2017 are consistent with those disclosed in the Annual Report and Accounts 2016, except for a minor change to the derivatives and hedge accounting policy in respect of the disclosure of cash collateral.

 

The policy includes additional wording to clarify the treatment of situations where collateral is received from or given to counterparties other than banks and now states:

 

Where cash collateral is received, to mitigate the risk inherent in amounts due to the Group, it is included as a liability within either deposits from banks or other deposits, depending on the counterparty. Similarly, where cash collateral is given, to mitigate the risk inherent in amounts due from the Group, it is included as an asset in either loans and advances to banks or loans and advances to customers.

 

There is no impact on prior period comparatives as a result of this change.

 

 

Notes to the consolidated interim financial statements (continued)

 

2   Basis of preparation (continued)

 

Standards and amendments applied during the half year to 30 September 2016

 

There were no new standards applied during the half year to 30 September 2016. Minor amendments to IAS 16 'Property, Plant and Equipment', IAS 38 'Intangible Assets' and IAS 1 'Presentation of Financial Statements', together with the annual improvements to the IFRSs 2012-2014 cycle, were effective for the first half of the financial year. These amendments and improvements were adopted with no significant impact for the Group.

 

Future accounting developments

 

An overview of pronouncements that will be relevant to the Group in future periods was provided in the Annual Report and Accounts 2016. Of these pronouncements the most significant is IFRS 9 'Financial Instruments' as detailed further below.

 

IFRS 9 'Financial Instruments'

 

IFRS 9 will be implemented in the financial statements for the year ending 4 April 2019 and will replace IAS 39 'Financial Instruments: Recognition and Measurement'.

 

The principal requirements of IFRS 9 are as follows:

 

Classification and measurement

 

The classification of financial assets will be based on the objectives of the Group's business model and the contractual cash flow characteristics of the instruments. Financial assets will then be classified as held at amortised cost, at fair value through other comprehensive income (FVOCI), or at fair value through profit or loss (FVTPL). The changes in classification from the accounting treatment under IAS 39 are not expected to be significant for the Group.

 

Impairment of financial assets

 

IFRS 9 changes the basis of recognition of impairment on financial assets from an incurred loss to an expected credit loss (ECL) approach for amortised cost and FVOCI financial assets. ECLs are based on an assessment of the probability of default, loss given default and exposure at default, discounted to give a net present value. The estimation of ECLs should be unbiased and probability-weighted, taking into account all reasonable and supportable information, including forward looking economic assumptions and a range of possible outcomes.

 

A key feature of IFRS 9 compared with existing approaches under IAS 39 is that where a loan has experienced a significant increase in credit risk since initial recognition, even though this may not lead to a conclusion that the loan is impaired, provisions will be made based on the likelihood of default over the full life of the loan.

 

 

 

Notes to the consolidated interim financial statements (continued)

 

2   Basis of preparation (continued)

 

Implementation strategy

 

The Group's implementation strategy for IFRS 9 is based on an integrated solution using common systems, tools and data to assess credit risk and account for ECLs. This is consistent with guidance issued by the Basel Committee on Banking Supervision which sets an expectation of a high quality implementation, and will entail changes to the governance, controls, models and business processes relating to credit loss provisioning. An extensive period of dual running of internal management information and processes is planned in advance of the implementation date. The design phase of the programme has been completed and build and test activities are progressing in line with implementation plans.

 

Judgements in applying accounting policies and critical accounting estimates

 

The Group has to make judgements in applying its accounting policies which affect the amounts recognised in these consolidated interim financial statements. In addition, estimates and assumptions are made that could affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates.

 

There have been no changes to the areas of significant judgement and estimate from those disclosed in the Annual Report and Accounts 2016 which comprised:

 

·      impairment provisions on loans and advances

·      provisions for customer redress

·      retirement benefit obligations (pensions).

 

Going concern

 

The Group's business activities and financial position, the factors likely to affect its future development and performance, its objectives and policies in managing the financial risks to which it is exposed, and its capital, funding and liquidity positions are discussed in the Business and Risk Report.

 

In the light of current and anticipated economic conditions, the directors have assessed the Group's ability to continue as a going concern. The directors confirm they are satisfied that the Group has adequate resources to continue in business and that it is therefore appropriate to adopt the going concern basis in preparing these consolidated interim financial statements.

 

 

3   Interest receivable and similar income

 

 

Half year to 30 September 2016

£m

Half year to

 30 September 2015

£m

On residential mortgages

2,454

2,462

On other loans

381

412

On investment securities

262

173

On other liquid assets

27

10

Net expense on financial instruments hedging assets

(548)

(444)

Total

2,576

2,613

 

Included within interest receivable and similar income is interest income on impaired financial assets of £17 million (H1 2015/16: £21 million).

 

 

 

Notes to the consolidated interim financial statements (continued)

 

4   Interest expense and similar charges

 

 

 

Half year to 30 September

2016

£m

Half year to 30 September

2015

£m

On shares held by individuals

755

762

On subscribed capital

24

13

On deposits and other borrowings:

Subordinated liabilities

Other

 

54

315

51

240

On debt securities in issue

385

335

Net income on financial instruments hedging liabilities

(409)

(349)

Interest on net defined benefit pension liability (note 20)

3

4

Total

1,127

1,056

 

Interest on deposits and other borrowings includes an expense of £247 million (H1 2015/16: £177 million) in relation to the redemption and maturity of Protected Equity Bond (PEB) deposits which have returns linked to the performance of specified stock market indices. The PEBs are economically hedged using equity-linked derivatives. Net income on financial instruments hedging liabilities includes income of £235 million (H1 2015/16: £136 million) in relation to the associated derivatives. Further details are included in note 15.

 

Interest on debt securities in issue has increased as a result of higher debt securities balances, reflecting the pre‑funding of wholesale maturities during the period.

 

 

5   Other operating income

 

 

Half year to   30 September

2016

£m

Half year to     30 September

2015

£m

Gain on disposal of investment in Visa Europe Limited

100

-

Other (expense)/income

(3)

3

Total

97

3

 

On 21 June 2016, the Group disposed of its share in Visa Europe Limited, resulting in a gain on disposal of £100 million.

 

Other (expense)/income includes rental income, profits or losses on the sale of property, plant and equipment and increases or decreases in the valuations of branches and non-specialised buildings which are not recognised in other comprehensive income.

 

 

 

Notes to the consolidated interim financial statements (continued)

 

6   Gains from derivatives and hedge accounting

 

 

Half year to

30 September

2016

£m

Half year to  30 September 2015

£m

Gains from fair value hedge accounting (note i)

58

40

Ineffectiveness from cash flow hedge accounting (note ii)

5

4

Net gain/(loss) from mortgage pipeline (note iii)

8

(29)

Fair value losses from other derivatives (note iv)

(17)

(26)

Foreign exchange differences

23

25

Total

77

14

 

Notes:

i.       Gains or losses from fair value hedges can arise where there is an IFRS hedge accounting relationship in place and either:

·     the relationship passed all the monthly effectiveness tests but the fair value movement of the derivative was not exactly offset by the change in fair value of the asset or liability being hedged (sometimes referred to as hedge ineffectiveness); or

·     the relationship failed a monthly effectiveness test which, for that month, disallows recognition of the change in fair value of the underlying asset or liability being hedged and in following months leads to the amortisation of existing balance sheet positions.

ii.     In cash flow hedge accounting the effective portion of the fair value movement of designated derivatives is deferred to the cash flow hedge reserve. The fair value movement is subsequently recycled to the income statement when amounts relating to the underlying hedged asset or liability is recognised in the income statement. The ineffective portion of the fair value movement is recognised immediately in the income statement.

iii.    The Group elects to fair value certain mortgage commitments in order to reduce the accounting mismatch caused when derivatives are used to hedge these commitments.

iv.    Other derivatives are those used for economic hedging but which are not in an IAS 39 hedge accounting relationship because hedge accounting is not currently achievable.

 

Although the Group only uses derivatives for the hedging of risks, income statement volatility can still arise due to hedge accounting ineffectiveness or because hedge accounting is either not currently applied or is not currently achievable. This volatility does not reflect the economic reality of the Group's hedging strategy.

 

Included within the gain of £77 million (H1 2015/16: £14 million) was the impact of the following:

 

·      Gains of £58 million (H1 2015/16: £40 million) from fair value hedge accounting ineffectiveness and the amortisation of existing balance sheet amounts.

·      A net gain of £8 million (H1 2015/16: £29 million loss) from the accounting impact of hedging the pipeline of new mortgage business. Losses of £26 million (H1 2015/16: £40 million) from changes in the fair value of forward starting derivatives economically hedging the mortgage pipeline have been offset by gains of £34 million (H1 2015/16: £11 million) from the movement in the fair value of mortgage commitments.

·      Losses of £17 million (H1 2015/16: £26 million) from valuation adjustments and volatility on other derivatives which are not currently in an IAS 39 hedge accounting relationship.

·      Gains of £23 million (H1 2015/16: £25 million) from the retranslation of foreign currency monetary items not subject to effective hedge accounting, against a backdrop of significant sterling depreciation. 

 

The deferral of fair value movements to the cash flow hedge reserve, and the transfer of amounts from the cash flow hedge reserve to the income statement, are shown in the consolidated statement of comprehensive income. The net deferral after taxation of £310 million (H1 2015/16: net transfer after taxation of £97 million) is driven by significant changes in derivative valuations caused by movements in foreign exchange rates.

 

The overall impact of derivatives will remain volatile from period to period as new derivative transactions replace those which mature to ensure that interest rate and other market risks are continually managed.

 

 

 

Notes to the consolidated interim financial statements (continued)

 

7   Administrative expenses

 

 

Half year to 30 September

2016

£m

Half year to

30 September 2015

£m

Employee costs:

 

 

Wages, salaries and bonuses

289

269

Social security costs

31

26

Pension costs

68

54

 

388

349

Other administrative expenses

375

362

 

763

711

Depreciation and amortisation

175

155

Total

938

866

 

 

8   Impairment losses on loans and advances to customers

 

The following tables set out impairment losses and reversals during the period and the closing provision balances which are deducted from the appropriate asset values in the balance sheet: 

 

 

Half year to 30 September

2016

£m

Half year to

30 September 2015

£m

Impairment losses/(reversals) for the period

 

 

Prime residential

1

(1)

Specialist residential

4

(6)

Consumer banking

32

33

Commercial lending

(5)

(27)

Other lending

-

1

Total

32

-

 

 

 

 

30 September

2016

£m

 

4 April

2016

£m

Impairment provision at the end of the period

 

 

Prime residential

25

25

Specialist residential

71

77

Consumer banking

262

281

Commercial lending

44

59

Other lending

1

1

Total

403

443

         

 

The Group impairment provision of £403 million at 30 September 2016 (4 April 2016: £443 million) comprises individual provisions of £60 million (4 April 2016: £75 million) and collective provisions of £343 million (4 April 2016: £368 million).

 

The decrease in the balance sheet provision on Prime and Specialist residential loans to £96 million (4 April 2016: £102 million) is driven largely by a reduction in the level of non-performing loans, combined with modest house price growth during the period.

 

The consumer banking impairment charge has remained broadly stable at £32 million (H1 2015/16: £33 million). The overall performance and risk profile of the portfolio has improved, driven by previous improvements to credit policies.

 

 

 

Notes to the consolidated interim financial statements (continued)

 

8   Impairment losses on loans and advances to customers (continued)

 

The commercial balance sheet provision has continued to fall to £44 million (4 April 2016: £59 million) reflecting improved conditions in the commercial real estate market. The higher reversal in the previous year reflected greater impaired balances impacted by improving market conditions.

 

Further credit risk information on loans and advances to customers is included in the 'Lending risk' section of the Business and Risk Report.

 

 

9   Taxation

 

Tax charge in the income statement

Half year to 30 September

2016

£m

Half year to

30 September 2015

£m

Current tax:

UK corporation tax

 

223

 

170

Total current tax

223

170

Deferred tax:

Current period credit

Adjustments in respect of prior periods

 

(30)

1

 

(4)

-

Total deferred tax

(29)

(4)

Tax charge

 194

 166

 

The actual tax charge differs from the theoretical amount that would arise using the standard rate of corporation tax in the UK as follows:

 

Reconciliation of tax charge

Half year to 30 September

2016

£m

Half year to

30 September 2015

£m

Profit before tax

696

802

Tax calculated at a tax rate of 20%

139

160

Banking surcharge

40

-

Expenses not deductible for tax purposes

14

6

Adjustments in respect of prior periods

1

-

Tax charge

194

166

 

The Finance (No. 2) Act 2015 introduced legislation to impose a surcharge of 8% on the profits of banking companies after 1 January 2016. As a result, a banking surcharge of £40 million (H1 2015/16: £nil) is included in the UK corporation tax charge shown above.

Notes to the consolidated interim financial statements (continued)

 

10   Operating segments

 

For management reporting purposes, the Group is organised into the following operating segments, determined according to similar economic characteristics and customer base:

 

·      Retail

·      Commercial

·      Head office functions

 

Details of the operating segments and the funds transfer pricing methodology are contained in note 11 of the Annual Report and Accounts 2016.

 

Half year to 30 September 2016

 

Retail

 

£m

Commercial

 

£m

Head office functions

£m

Total

 

£m

Net income/(expense) from external customers

1,805

202

(558)

1,449

(Charge)/revenue from other segments

(381)

(153)

534

-

Net interest income

1,424

49

(24)

1,449

Net other income (note i)

203

5

(15)

193

Total revenue

1,627

54

(39)

1,642

Administrative expenses

(883)

(20)

(35)

(938)

Impairment and other provisions (note ii)

(79)

(5)

(5)

(89)

Underlying profit/(loss) before tax  

665

29

(79)

615

FSCS levies

4

-

-

4

Gains from derivatives and hedge accounting

-

-

77

77

Profit/(loss) before tax

669

29

(2)

696

Taxation

 

 

 

(194)

Profit after tax

 

 

 

502

 

 

 

 

 

Total assets (note iii)

171,919

13,090

40,537

225,546

Total liabilities

149,183

3,032

62,056

214,271

 

Half year to 30 September 2015

 

Retail

 

£m

Commercial

 

£m

Head office functions

£m

Total

 

£m

Net income/(expense) from external customers

1,814

229

(486)

1,557

(Charge)/revenue from other segments

(296)

(174)

470

-

Net interest income

1,518

55

(16)

1,557

Net other income (note i)

126

7

(7)

126

Total revenue

1,644

62

(23)

1,683

Administrative expenses (note iv)

(807)

(19)

(32)

(858)

Impairment and other provisions (note ii)

(50)

28

(2)

(24)

Underlying profit/(loss) before tax  

787

71

(57)

801

FSCS levies

(5)

-

-

(5)

Transformation costs

(2)

-

(6)

(8)

Gains from derivatives and hedge accounting

-

-

14

14

Profit/(loss) before tax

780

71

(49)

802

Taxation

 

 

 

(166)

Profit after tax

 

 

 

636

 

 

 

 

 

Total assets (note iii)

160,540

13,503

29,068

203,111

Total liabilities

140,886

2,373

49,625

192,884

 

Notes:

i.       Other income excludes gains from derivatives and hedge accounting which are shown separately. The gain on disposal of the Group's investment in Visa Europe Limited in the half year to 30 September 2016 is included in the Retail segment.

ii.     Impairment and other provisions includes impairment losses on loans and advances, provisions for liabilities and charges (excluding FSCS) and impairment losses on investment securities.

iii.    Retail assets include goodwill arising on the acquisition of The Mortgage Works (UK) plc.

iv.    Administrative expenses exclude transformation costs which are shown separately.

 

 

 

Notes to the consolidated interim financial statements (continued)

 

11   Loans and advances to customers

 

 

30 September

2016

£m

4 April

2016

£m

Prime residential mortgages

135,063

129,948

Specialist residential mortgages

33,197

32,114

Consumer banking

3,647

3,588

Commercial lending

11,410

11,772

Other lending

129

19

 

183,446

177,441

Fair value adjustment for micro hedged risk

1,680

1,366

Total

185,126

178,807

 

Loans and advances to customers in the table above are shown net of impairment provisions held against them. The fair value adjustment for micro hedged risk relates to commercial lending.

 

Asset-backed funding

 

Certain prime residential mortgages have been pledged to the Group's asset-backed funding programmes or utilised as whole mortgage loan pools for the Bank of England's (BoE) Funding for Lending Scheme (FLS). The programmes have enabled the Group to obtain secured funding or to create additional collateral which could be used to source additional funding.

 

Mortgages pledged and the nominal values of the notes in issue are as follows:

 

Mortgages pledged to asset-backed funding programmes

 

  Mortgages

      pledged

Notes in issue

 

30 September 2016

 

Held by third parties

Held by the Group

 

Total notes in issue

 

 

£m

 

£m

Drawn

£m

Undrawn

£m

 

£m

Covered bond programme

20,372

15,488

-

 -

15,488

Securitisation programme

11,409

4,898

-

1,635

6,533

Whole mortgage loan pools

11,375

-

10,048

1,327

11,375

Total

43,156

20,386

10,048

2,962

33,396

             

 

Mortgages pledged to asset-backed funding programmes

 

 Mortgages

     pledged

Notes in issue

 

4 April 2016

 

Held by third parties

Held by the Group

 

Total notes in issue

 

 

£m

 

£m

Drawn

£m

Undrawn

£m

 

£m

Covered bond programme

18,996

13,709

-

-

13,709

Securitisation programme

12,368

4,705

-

1,635

6,340

Whole mortgage loan pools

12,344

-

10,749

1,595

12,344

Total

43,708

18,414

10,749

3,230

32,393

             

 

The securitisation programme notes are issued by Silverstone Master Issuer plc which is fully consolidated by the Group.

 

The whole mortgage loan pools are pledged at the BoE under the FLS. Notes are not issued when pledging the mortgage loan pools at the BoE. Instead, the whole loan pool is pledged to the BoE and drawings are made directly against the eligible collateral, subject to a haircut. Therefore, values shown under notes in issue are the whole mortgage loan pool notional balances.

 

Notes to the consolidated interim financial statements (continued)

 

11   Loans and advances to customers (continued)

 

Mortgages pledged include £10.3 billion (4 April 2016: £7.4 billion) in covered bond and securitisation programmes that are in excess of the amount contractually required to support notes in issue.

 

Mortgages pledged are not derecognised from the balance sheet as the Group has retained substantially all the risks and rewards of ownership. The Group continues to be exposed to the liquidity risk, interest rate risk and credit risk of the mortgages. No gain or loss has been recognised on pledging the mortgages to the programmes.

 

Notes in issue which are held by third parties are included in debt securities in issue.

 

Notes in issue, held by the Group and drawn are whole mortgage loan pools securing amounts drawn under the FLS. At 30 September 2016 the Group had outstanding FLS drawings of £8.0 billion (4 April 2016: £8.5 billion).

 

Notes in issue, held by the Group and undrawn, are debt securities issued by the programmes to the Society and mortgage loan pools that have been pledged to the BoE FLS but not utilised.

 

In accordance with accounting standards, notes in issue and held by the Group are not recognised by the Group in its balance sheet.

 

The Group established the Nationwide Covered Bond programme in November 2005. Mortgages pledged provide security for issues of covered bonds made by the Group. During the period ended 30 September 2016, £750 million and €85 million (£67 million sterling equivalent) of notes were issued, and no notes matured.

 

The Group established the Silverstone Master Trust securitisation programme in July 2008. Notes are issued under the programme and the issuance proceeds are used to purchase, for the benefit of note holders, a share of the beneficial interest in the mortgages pledged by the Group. The remaining beneficial interest in the pledged mortgages of £6.3 billion (4 April 2016: £6.3 billion) stays with the Group and includes its required minimum seller share in accordance with the rules of the programme. The Group is under no obligation to support losses incurred by the programme or holders of the notes and does not intend to provide such further support. The entitlement of note holders is restricted to payment of principal and interest to the extent that the resources of the programme are sufficient to support such payment and the holders of the notes have agreed not to seek recourse in any other form. During the period ended 30 September 2016 there were two scheduled repayments of principal totalling £68 million, no notes were redeemed early or matured and no new notes were issued.

 

 

12   Due to customers

 

On 22 September 2016 the Group announced the closure of its Isle of Man operations. Amounts due to customers include £4,588 million (4 April 2016: £4,813 million) in respect of balances deposited with the Group's Isle of Man branch.

 

 

Notes to the consolidated interim financial statements (continued)

 

13   Subordinated liabilities and subscribed capital

 

 

 

30 September

2016

£m

4 April

2016

£m

Subordinated liabilities

 

 

Subordinated notes

2,849

1,750

Fair value hedge accounting adjustments

69

77

Unamortised premiums and issue costs

(12)

(10)

Total

2,906

1,817

 

 

 

Subscribed capital

 

 

Permanent interest bearing shares

362

362

Fair value hedge accounting adjustments

78

68

Unamortised premiums and issue costs

(5)

(17)

Total

435

413

 

$1,250 million (£949 million) of subordinated notes were issued during the period.

 

All of the Group's subordinated notes and permanent interest bearing shares (PIBS) are unsecured. The Group may, with the prior consent of the Prudential Regulation Authority (PRA), redeem the subordinated notes and repay the PIBS early.

 

The subordinated notes rank pari passu with each other and behind claims against the Society of all depositors, creditors and investing members, other than the holders of PIBS, Additional Tier 1 (AT1) capital and core capital deferred shares (CCDS).

 

The PIBS rank pari passu with each other and the AT1 instruments, behind claims against the Society of the subordinated noteholders, depositors, creditors and investing members, but ahead of claims by the holders of CCDS.

 

 

14   Fair value hierarchy of financial assets and liabilities held at fair value

 

IFRS 13 requires an entity to classify assets and liabilities held at fair value and those not measured at fair value but for which the fair value is disclosed according to a hierarchy that reflects the significance of observable market inputs in calculating those fair values. The three levels of the fair value hierarchy are defined below:

 

Level 1 - Valuation using quoted market prices

 

Assets and liabilities are classified as Level 1 if their value is observable in an active market. Such instruments are valued by reference to unadjusted quoted prices for identical assets or liabilities in active markets where the quoted price is readily available, and the price reflects actual and regularly occurring market transactions on an arm's length basis. An active market is one in which transactions occur with sufficient volume and frequency to provide pricing information on an ongoing basis.

 

Level 2 - Valuation technique using observable inputs

 

Assets and liabilities classified as Level 2 have been valued using models whose inputs are observable in an active market. Valuations based on observable inputs include derivative financial instruments such as swaps and forwards which are valued using market standard pricing techniques, and options that are commonly traded in markets where all the inputs to the market standard pricing models are observable. They also include investment securities valued using consensus pricing or other observable market prices.

 

 

 

Notes to the consolidated interim financial statements (continued)

 

14   Fair value hierarchy of financial assets and liabilities held at fair value (continued)

 

Level 3 - Valuation technique using significant unobservable inputs

                  

Assets and liabilities are classified as Level 3 if their valuation incorporates significant inputs that are not based on observable market data ('unobservable inputs'). A valuation input is considered observable if it can be directly observed from transactions in an active market, or if there is compelling external evidence demonstrating an executable exit price. An input is deemed significant if it is shown to contribute more than 10% to the valuation of a financial instrument. Unobservable input values are generally determined based on observable inputs of a similar nature, historical observations or other analytical techniques.

 

The following tables show the Group's financial assets and liabilities that are held at fair value by fair value hierarchy, balance sheet classification and product type:

 

 

Fair values based on

 

 

Level 1

Level 2

Level 3

Total

30 September 2016

£m

£m

£m

£m

Financial assets

 

 

 

 

Government and supranational investments

6,340

-

-

6,340

Other debt investment securities

1,051

2,471

-

3,522

Available for sale investment securities

7,391

2,471

-

9,862

Investments in equity shares (note i)

-

-

56

56

Interest rate swaps

-

2,796

-

2,796

Cross currency interest rate swaps

-

3,031

-

3,031

Forward foreign exchange

-

78

-

78

Equity index swaps

-

-

267

267

Index linked swaps

-

8

-

8

Total derivative financial instruments

-

5,913

267

6,180

Other financial assets (note ii)

-

3

-

3

Total financial assets

7,391

8,387

323

16,101

 

Financial liabilities

 

 

 

 

Interest rate swaps

-

(3,908)

(4)

(3,912)

Cross currency interest rate swaps

-

(49)

-

(49)

Forward foreign exchange

-

(3)

-

(3)

Forward rate agreement

-

(1)

-

(1)

Swaptions

-

(6)

-

(6)

Equity index swaps

-

-

(1)

(1)

Total derivative financial instruments

-

(3,967)

(5)

(3,972)

Other deposits - PEBs (note iii)

-

-

(1,133)

(1,133)

Total financial liabilities

-

(3,967)

(1,138)

(5,105)

 

 

 

Notes to the consolidated interim financial statements (continued)

 

14   Fair value hierarchy of financial assets and liabilities held at fair value (continued)

 

 

Fair values based on

 

Level 1

Level 2

Level 3

Total

4 April 2016

£m

£m

£m

£m

Financial assets

 

 

 

 

Government and supranational investments

6,843

-

-

6,843

Other debt investment securities

1,011

2,758

-

3,769

Available for sale investment securities

7,854

2,758

-

10,612

Investments in equity shares (note i)

-

-

125

125

Interest rate swaps

-

2,180

-

2,180

Cross currency interest rate swaps

-

1,238

-

1,238

Forward foreign exchange

-

44

-

44

Equity index swaps

-

-

436

436

Total derivative financial instruments

-

3,462

436

3,898

Other financial assets (note ii)

-

2

-

2

Total financial assets

7,854

6,222

561

14,637

 

Financial liabilities

 

 

 

 

Interest rate swaps

-

(3,103)

(4)

(3,107)

Cross currency interest rate swaps

-

(338)

-

(338)

Forward foreign exchange

-

(4)

-

(4)

Swaptions

-

(8)

-

(8)

Equity index swaps

-

-

(1)

(1)

Index linked swaps

-

(5)

-

(5)

Total derivative financial instruments

-

(3,458)

(5)

(3,463)

Other deposits - PEBs (note iii)

-

-

(1,885)

(1,885)

Total financial liabilities

-

(3,458)

(1,890)

(5,348)

 

Notes:

i.       Investments in equity shares shown above are held at fair value and exclude £1 million of investments in equity shares which are held at cost.

ii.     Other financial assets represent the fair value of certain mortgage commitments included within other assets in the balance sheet.

iii.    Other deposits comprise PEBs which are held at fair value through the income statement. The remaining other deposits are held at amortised cost and are included in note 16.

 

The Group's Level 1 portfolio comprises highly rated government securities for which traded prices are readily available.

 

Asset valuations for Level 2 available for sale investment securities are sourced from consensus pricing or other observable market prices. None of the Level 2 available for sale assets are valued from models. Level 2 derivative assets and liabilities are valued from discounted cash flow models using yield curves based on observable market data.

 

Further detail on the Level 3 portfolio is provided in note 15.

 

Transfers between fair value hierarchies

 

Instruments move between fair value hierarchies primarily due to increases or decreases in market activity or changes to the significance of unobservable inputs to valuation. There were no significant transfers between Level 1 and Level 2 portfolios during the period.

 

 

Notes to the consolidated interim financial statements (continued)

 

15   Fair value of financial assets and liabilities held at fair value - Level 3 portfolio

 

The main constituents of the Level 3 portfolio are as follows:

 

Investments in equity shares

 

The Level 3 investments in equity shares include investments of £56 million (4 April 2016: £125 million) in industry wide banking and credit card service operations.

 

Derivative financial instruments

 

Level 3 assets and liabilities in this category are primarily equity linked derivatives with external counterparties which economically match the investment return payable by the Group to investors in Protected Equity Bonds (PEBs). The derivatives are linked to the performance of specified stock market indices and have been valued by an external third party. Fair value changes are recognised within gains/losses from derivatives and hedge accounting. Upon maturity the gain/loss is transferred to interest expense and similar charges.

 

Other deposits - PEBs                                                                                                                 

 

This category relates to deposit accounts with the potential for stock market correlated growth linked to the performance of specified stock market indices. The PEBs liability of £1,133 million (4 April 2016: £1,885 million) is valued at a discount to reflect the time value of money, overlaid by a fair value adjustment representing the expected return payable to the customer. The fair value adjustment has been constructed from the valuation of the associated derivatives as valued by an external third party. Fair value changes are recognised within losses/gains from derivatives and hedge accounting. Upon maturity the gain/loss is transferred to interest expense and similar charges.

 

The minimum amount on an undiscounted basis that the Group is contractually required to pay at maturity for the PEBs is £913 million (4 April 2016: £1,551 million). The maximum additional amount which would also be payable at maturity in respect of additional investment returns is £401 million (4 April 2016: £636 million). The payment of additional investment returns is dependent upon performance of certain specified stock indices during the period of the PEBs. As noted above, the Group has entered into equity linked derivatives with external counterparties which economically match the investment returns on the PEBs.

 

Notes to the consolidated interim financial statements (continued)

 

15   Fair value of financial assets and liabilities held at fair value - Level 3 portfolio (continued)

 

The tables below set out movements in the Level 3 portfolio, including transfers in and out of Level 3.

 

Movements in Level 3 portfolio

 

 

Investments
in equity shares

Net derivative
financial
instruments

Other
deposits   - PEBs

 

£m

£m

£m

At 5 April 2016

125

431

(1,885)

Gains/(losses) recognised in the income statement:

 

 

 

Net interest income/(expense)

-

235

(247)

(Losses)/gains from derivatives and hedge accounting

-

(171)

169

Other operating income

100

-

-

Losses recognised in other comprehensive income:

 

 

 

Fair value movement taken to members' interests and equity

(76)

-

-

Settlements

-

(233)

830

Acquisitions

25

-

-

Disposals

(118)

-

-

At 30 September 2016

56

262

(1,133)

 

Movements in Level 3 portfolio

 

Available for sale investment securities

Investments
in equity shares

Net derivative
 financial
instruments

Other
deposits

 - PEBs

 

£m

£m

£m

£m

At 5 April 2015

12

25

910

(3,332)

Gains/(losses) recognised in the income statement:

 

 

 

 

Net interest income/(expense)

-

-

136

(177)

(Losses)/gains from derivatives and hedge accounting

-

-

(319)

311

Settlements

-

-

(136)

548

Transfers out of Level 3 portfolio

(12)

-

-

-

At 30 September 2015

-

25

591

(2,650)

 

 

 

Notes to the consolidated interim financial statements (continued)

 

15   Fair value of financial assets and liabilities held at fair value - Level 3 portfolio (continued)

 

Level 3 portfolio sensitivity analysis of valuations using unobservable inputs

 

The fair value of financial instruments is, in certain circumstances, measured using valuation techniques based on market prices that are not observable in an active market or on significant unobservable market inputs.

 

Reasonable alternative assumptions can be applied for sensitivity analysis, taking account of the nature of valuation techniques used, as well as the availability and reliability of observable proxy and historic data. The following table shows the sensitivity of these fair values to reasonable alternative assumptions (as set out in the table of significant unobservable inputs below) and the resultant impact of such changes in fair value on the income statement or members' interests and equity:

 

Sensitivity of Level 3 fair values

 

 

Members' interests and equity

 

Fair value

 

Favourable changes

Unfavourable changes

At 30 September 2016

£m

 

£m

£m

Investments in equity shares

56

 

19

(25)

Net derivative financial instruments (note i)

262

 

-

-

Other deposits - PEBs (note i)

(1,133)

 

-

-

Total

(815)

 

19

(25)

 

Sensitivity of Level 3 fair values

 

 

Members' interests and equity

 

Fair value

 

Favourable changes

Unfavourable changes

At 4 April 2016

£m

 

£m

£m

Investments in equity shares

125

 

41

(32)

Net derivative financial instruments (note i)

431

 

-

-

Other deposits - PEBs (note i)

(1,885)

 

-

-

Total

(1,329)

 

41

(32)

 

Note:

i.       Changes in fair values of the equity index swaps included in net derivative financial instruments will be largely offset by the change in fair value of the PEBs deposits. Any resultant impact is deemed by the Group to be insignificant; therefore these sensitivities have been excluded from the table above.

 

The level 3 portfolio at 30 September 2016 did not include any impaired assets (4 April 2016: £nil). The sensitivity analysis on fair values in the tables above therefore does not impact on the income statement.

 

Alternative assumptions are considered for each product and varied according to the quality of the data and variability of the underlying market.

 

The following table discloses the significant unobservable inputs underlying the above alternative assumptions for assets and liabilities recognised at fair value and classified as Level 3 along with the range of values for those significant unobservable inputs. Where sensitivities are described the inverse relationship will also generally apply.

 

Significant unobservable inputs

 

 

 

 

 

 

At 30 September 2016

Total
assets

£m

Total
liabilities

£m

Valuation
technique

 

Significant
unobservable
inputs

Range

(note ii)

 

Weighted
average

(note iii)

Units

(note iv)

 

 

 

 

 

 

 

 

 

Investments in equity shares

56

 

Discounted cash flows

Discount rate

10.00

12.00

11.00

%

 

 

 

Share conversion

-

100.00

77.30

%

 

 

 

 

Execution risk

-

30.00

20.00

%

Net derivative financial instruments (note i)

262

 

 

 

 

 

 

 

Other deposits - PEBs (note i)

 

(1,133)

 

 

 

 

 

 

 

Notes to the consolidated interim financial statements (continued)

 

15   Fair value of financial assets and liabilities held at fair value - Level 3 portfolio (continued)

 

Significant unobservable inputs

 

 

 

 

 

 

At 4 April 2016

Total
assets

£m

Total
liabilities

£m

Valuation
technique

 

Significant
unobservable
inputs

Range

(note ii)

 

Weighted
average

(note iii)

Units

(note iv)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Price

93.30

107.00

98.00

Points

Investments in equity shares

18

Mark to market

 

107

 

Discounted

cash flows

Discount rate

10.00

12.00

11.00

%

 

 

 

Share conversion

-

100.00

77.30

%

 

 

 

Execution risk

-

30.00

12.41

%

 

125

 

 

 

 

 

 

 

Net derivative financial instruments (note i)

431

 

 

 

 

 

 

 

Other deposits - PEBs (note i)

 

(1,885)

 

 

 

 

 

 

 

Notes:

i.       Changes in fair values of the equity index swaps included in net derivative financial instruments will be largely offset by the change in fair value of the PEBs deposits. Any resultant impact is deemed by the Group to be insignificant; therefore these sensitivities have been excluded from the table above.

ii.     The range represents the values of the highest and lowest levels used in the calculation of favourable and unfavourable changes as presented in the previous table.

iii.    Weighted average represents the input values used in calculating the fair values for the above financial instruments.

iv.    Points are a percentage of par; for example 100 points equals 100% of par. One basis point (bps) equals 0.01%; for example, 125 basis points (bps) equals 1.25%.

 

Some of the significant unobservable inputs used in fair value measurement are interdependent. Where this is the case, a description of those interrelationships is included below.

 

Discount rate

 

The discount rate is used to determine the present value of future cash flows. The level of the discount rate takes into account the time value of money, but also the risk or uncertainty of future cash flows. Typically, the greater the uncertainty, the higher the discount rate. A higher discount rate leads to a lower valuation and vice versa.

 

Share conversion

 

Where the conversion of a security into an underlying instrument is subject to underlying security market pricing and contingent litigation risk, this is factored in to the fair value. The higher the share conversion factor, the higher the valuation and vice versa.

 

Execution risk

 

Where a security's value is dependent on a future transaction taking place, and the occurrence of this is not certain, execution risk is factored into the security's valuation. The greater the execution risk, the lower the valuation and vice versa.

 

Price

 

Prices for securities that are marked to market, where the market is illiquid, and supporting price information is scarce, are typically subject to significant uncertainty. An increase in the price will directly cause an increase in fair value and vice versa.

 

 

 

Notes to the consolidated interim financial statements (continued)

 

16   Fair value of financial assets and liabilities measured at amortised cost

 

The following table summarises the carrying value and fair value of financial assets and liabilities measured at amortised cost on the Group's balance sheet:

 

 

Carrying

value

Fair values based on

Total fair value

 

 

 

 

 

Level 1

Level 2

Level 3

30 September 2016

£m

£m

£m

£m

£m

Financial assets

 

 

 

 

 

Loans and advances to banks

3,323

-

3,323

-

3,323

Loans and advances to customers:

 

 

 

 

 

Residential mortgages

168,260

-

-

167,332

167,332

Consumer banking

3,647

-

-

3,511

3,511

Commercial lending

13,090

-

-

11,909

11,909

Other lending

129

-

116

13

129

Total

188,449

-

3,439

182,765

186,204

Financial liabilities

 

 

 

 

 

Shares

143,415

-

143,660

-

143,660

Deposits from banks

3,686

-

3,689

-

3,689

Other deposits (note i)

6,793

-

6,796

-

6,796

Due to customers

5,985

-

5,988

-

5,988

Debt securities in issue

43,650

15,954

29,352

-

45,306

Subordinated liabilities

2,906

-

3,081

-

3,081

Subscribed capital

435

-

387

-

387

Total

206,870

15,954

192,953

-

208,907

 

 

Carrying

value

£m

Fair values based on

 

 

 

Level 1

Level 2

Level 3

Total fair value

 

4 April 2016

£m

£m

£m

£m

 

Financial assets

 

 

 

 

 

Loans and advances to banks (note ii)

3,591

-

3,591

-

3,591

Loans and advances to customers:

 

 

 

 

 

Residential mortgages

162,062

-

-

161,766

161,766

Consumer banking

3,588

-

-

3,458

3,458

Commercial lending

13,138

-

-

13,077

13,077

Other lending (note iii)

19

-

5

14

19

Total

182,398

-

3,596

178,315

181,911

Financial liabilities

 

 

 

 

 

Shares

138,715

-

138,896

-

138,896

Deposits from banks

2,095

-

2,096

-

2,096

Other deposits (note i)

5,750

-

5,752

-

5,752

Due to customers (note ii)

6,201

-

6,204

-

6,204

Debt securities in issue

36,085

13,582

23,195

-

36,777

Subordinated liabilities

1,817

-

1,949

-

1,949

Subscribed capital

413

-

381

-

381

Total

191,076

13,582

178,473

-

192,055

                     

 

Notes:

i.     Other deposits exclude PEBs which are held at fair value through the income statement and which are included in note 14.

ii.    The comparative fair values for loans and advances to banks and due to customers have been moved to Level 2, to better reflect the valuation approach, consistent with the current period presentation.

iii.   Within other lending the comparative fair value for cash collateral posted with non-bank counterparties has been moved to Level 2 to better reflect the valuation approach, consistent with the current period presentation.

 

 

Notes to the consolidated interim financial statements (continued)

 

16   Fair value of financial assets and liabilities measured at amortised cost (continued)

 

Loans and advances to customers

 

The Group estimates the fair value of loans and advances to customers using consistent modelling techniques across the different loan books. The estimates take into account expected future cash flows and future lifetime expected losses, based on historic trends and discount rates appropriate to the loans, to reflect a hypothetical exit price value on an asset by asset basis. Variable rate loans are modelled on estimated future cash flows, discounted at current market interest rates. Variable rate retail mortgages are discounted at the currently available market standard variable interest rate (SVR) which, for example, in the case of the Group's residential base mortgage rate (BMR) mortgage book generates a fair value lower than the amortised cost value as those mortgages are priced below the SVR.

 

For fixed rate loans, discount rates have been based on the expected funding and capital cost applicable to the book. When calculating fair values on fixed rate loans, no adjustment has been made to reflect interest rate risk management through internal natural hedges or external hedging via derivatives.

 

Shares, deposits and borrowings

 

The estimated fair value of shares and deposits with no stated maturity, including non-interest bearing deposits, is the amount repayable on demand. The estimated fair value of fixed interest rate shares, deposits and other borrowings without quoted market prices represents the discounted amount of estimated future cash flows based on expectations of future interest rates, customer withdrawals and interest capitalisation. For variable interest rate deposits, estimated future cash flows are discounted using current market interest rates for new debt with similar remaining maturity. For fixed rate shares and deposits, the estimated future cash flows are discounted based on market offer rates currently available for equivalent deposits.

 

Debt securities in issue

 

The estimated fair values of longer dated liabilities are calculated based on quoted market prices where available or using similar instruments as a proxy for those liabilities that are not of sufficient size or liquidity to have an active market quote. For those notes for which quoted market prices are not available, a discounted cash flow model is used based on a current yield curve appropriate for the remaining term to maturity. 

 

 

17   Offsetting financial assets and financial liabilities

 

The Group has financial assets and liabilities for which there is a legally enforceable right to set off the recognised amounts, and which may be settled net. However the netting arrangements do not result in an offset of balance sheet assets and liabilities for accounting purposes as the right to set off is not unconditional in all circumstances. Therefore, in accordance with IAS 32 'Financial Instruments: Presentation', there are no financial assets or liabilities which are offset with the net amount presented on the balance sheet. All financial assets and liabilities are presented on a gross basis.

      

In accordance with IFRS 7 'Financial Instruments: Disclosures', the following table shows the impact on derivative financial instruments and total return swaps relating to transactions where:

      

·    there is an enforceable master netting arrangement or similar agreement in place but the offset criteria are otherwise not satisfied, and

·    financial collateral is paid and received.

 

Master netting arrangements consist of agreements such as an ISDA Master Agreement, global master repurchase agreements and global master securities lending agreements, whereby outstanding transactions with the same counterparty can be offset and settled net following a default or other predetermined event.

 

Financial collateral on derivative financial instruments consists of cash and securities settled, typically daily or weekly, to mitigate the mark to market exposures. Financial collateral on total return swaps typically comprises highly liquid securities which are legally transferred and can be liquidated in the event of counterparty default.

 

 

 

 

Notes to the consolidated interim financial statements (continued)

 

17   Offsetting financial assets and financial liabilities (continued)

 

The net amounts after offsetting under IFRS 7 presented below show the exposure to counterparty credit risk for derivative contracts after netting benefits and collateral, and are not intended to represent the Group's actual exposure to credit risk. This is due to a variety of credit mitigation strategies which are employed in addition to netting and collateral arrangements.

 

At 30 September 2016

 

Gross and net amounts reported on the balance sheet

Master netting arrangements

 

Financial collateral

Net amounts after offsetting under IFRS 7

 

£m

£m

£m

£m

Financial assets

 

 

 

 

Derivative financial instruments

6,180

(2,858)

(3,226)

96

Reverse repurchase agreements

200

 -

(200)

 -

Total financial assets

6,380

(2,858)

(3,426)

96

 

 

 

 

 

Financial liabilities

 

 

 

 

Derivative financial liabilities

3,972

(2,858)

(1,078)

36

Repurchase agreements

536

 -

(536)

 -

Total financial liabilities

4,508

(2,858)

(1,614)

36

 

At 4 April 2016

 

Gross and net amounts reported on the balance sheet

Master netting arrangements

Financial collateral

Net amounts after offsetting under IFRS 7

 

£m

£m

£m

£m

Financial assets

 

 

 

 

Derivative financial instruments

3,898

(2,020)

(1,804)

74

Total return swaps

87

-

(87)

-

Reverse repurchase agreements

450

                        -

(450)

-

Total financial assets

4,435

(2,020)

(2,341)

74

 

 

 

 

 

Financial liabilities

 

 

 

 

Derivative financial liabilities

3,463

(2,020)

(1,391)

52

Repurchase agreements

127

-

(127)

-

Total financial liabilities

3,590

(2,020)

(1,518)

52

 

The fair value of the financial collateral is the same as the values shown in the table above, except for the repurchase agreements collateral which has a fair value of £533 million (4 April 2016: £128 million) and the total return swaps collateral at 4 April 2016 which had a fair value of £127 million.

 

 

 

 

Notes to the consolidated interim financial statements (continued)

 

18   Provisions for liabilities and charges

 

 

Bank levy

FSCS

Customer redress

Other

provisions

Total

 

£m

£m

£m

£m

£m

At 5 April 2016

22

84

227

10

343

Provisions utilised

(22)

(42)

(35)

(2)

(101)

Charge for the period

-

-

58

9

67

Release for the period

-

(4)

(6)

(1)

(11)

Net income statement charge

-

(4)

52

8

56

At 30 September 2016

-

38

244

16

298

 

 

 

 

 

 

At 5 April 2015

13

126

140

16

295

Provisions utilised

(13)

(88)

(12)

(4)

(117)

Charge for the period

-

5

32

1

38

Release for the period

-

-

(8)

(1)

(9)

Net income statement charge

-

5

24

-

29

At 30 September 2015

-

43

152

12

207

                   

 

The income statement charge for provisions for liabilities and charges of £48 million (H1 2015/16: £29 million) includes the FSCS release of £4 million (H1 2015/16: charge of £5 million) and the customer redress net income statement charge of £52 million (H1 2015/16: £24 million). The net income statement charge for other provisions of £8 million (H1 2015/16: £nil) is included within administrative expenses in the income statement.

 

Financial Services Compensation Scheme (FSCS)

 

The FSCS provision of £38 million represents the Group's interest and management expense levy in respect of the 2016/17 scheme year (4 April 2016: £84 million in respect of the 2016/17 and 2015/16 scheme years).

 

During October 2016, HM Treasury confirmed that approval had been given to UK Asset Resolution (UKAR) to begin the process of a major sales programme of Bradford & Bingley plc. The Group will continue to monitor the progress of this and will assess the financial impact as more information becomes available.

 

Customer redress

 

During the course of its business, the Group receives complaints from customers in relation to past sales or conduct. The Group is also subject to enquiries from and discussions with its regulators, governmental and other public bodies, including the Financial Ombudsman Service (FOS), on a range of matters. Customer redress provisions are recognised where the Group considers it is probable that payments will be made as a result of such complaints and other matters.

 

The Group holds provisions of £244 million (4 April 2016: £227 million) in respect of potential redress and the costs of remediation in relation to historic sales of financial products and post sales administration. This includes amounts for past sales of PPI, non-compliance with consumer credit legislation and other regulatory matters.

 

The income statement charge for the year mainly reflects the Group's updated assumptions for provisions previously recognised. This includes a £45 million charge in relation to PPI, largely in response to the consultation paper CP16/20 issued by the Financial Conduct Authority (FCA) in August 2016. A further review will be undertaken when the policy statement is issued.

 

At 30 September 2016, the Group held a PPI provision of £146 million (4 April 2016: £117 million). This represents management's best estimate of future costs including the expected impact of Plevin v Paragon Personal Finance Limited. The principal uncertainty in this calculation is the impact of the proposed FCA media campaign on complaints volumes.

 

 

 

Notes to the consolidated interim financial statements (continued)

 

18   Provisions for liabilities and charges (continued)

 

The table below shows the sensitivity of the PPI provision to changes in complaints volumes, along with other significant assumptions used in calculating the provision.

 

 

Cumulative to

30 September

2016

Future expected

Sensitivity

Claims ('000s of policies) (note i)

296

92

10 = £11m

Average uphold rate (note ii)

33%

57%

5% = £5m

Average redress per claim (note iii)

£1,323

£871

£100 = £11m

         

 

Notes:

i.       Claims include responses to proactive mailing.

ii.     Future expected average uphold rate includes anticipated increase in uphold rate for Plevin related complaints.

iii.    Future expected average redress includes redress for future claims upheld for Plevin.

 

Other provisions

 

Other provisions include provisions for severance costs and a number of property related provisions. Provisions are made for the expected severance costs in relation to the Group's restructuring activities where there is a present obligation and it is probable that the expenditure will be made.

 

 

19   Contingent liabilities

 

During the ordinary course of business the Group is subject to complaints and threatened or actual legal proceedings, as well as regulatory reviews, challenges and investigations. All such material matters are periodically reassessed, with the assistance of external professional advisers where appropriate, to determine the likelihood of incurring a liability. Where it is concluded that it is more likely than not that a payment will be made a provision is recognised based on management's best estimate of the amount that will be payable. For other matters no provision is recognised but disclosure is made of items which are potentially material, either individually or in aggregate, except in cases where the likelihood of a liability crystallising is considered to be remote. Currently the Group does not expect the ultimate resolution of any such matters to have a material adverse impact on its financial position. 

 

 

20   Retirement benefit obligations

 

Retirement benefit obligations on the balance sheet

30 September 2016

4 April

2016

 

£m

£m

Present value of funded obligations

6,059

4,645

Present value of unfunded obligations

12

12

 

6,071

4,657

Fair value of fund assets

(5,348)

(4,444)

Net defined benefit liability

723

213

 

The Group continues to operate two defined contribution schemes and a number of defined benefit pension arrangements, the most significant being the Nationwide Pension Fund. These pension schemes are principally unchanged from the year ended 4 April 2016; further details are set out in note 31 of the Annual Report and Accounts 2016.

 

 

 

Notes to the consolidated interim financial statements (continued)

 

20   Retirement benefit obligations (continued)

 

The principal actuarial assumptions used are as follows:

 

 

 

 

 

30 September 2016

4 April

2016

Principal actuarial assumptions

%

%

Discount rate

2.30

3.45

Future salary increases

3.00

2.90

Future pension increases (maximum 5%)

2.85

2.75

Retail price index (RPI) inflation

3.00

2.90

Consumer price index (CPI) inflation

2.00

1.90

           

 

The assumptions for mortality rates are based on standard mortality tables which allow for future improvements in life expectancies.

 

Changes in the present value of the net defined benefit liability (including unfunded obligations) are as follows:

 

 

 

 

Movements in the net defined benefit liability

30 September 2016

30 September

2015

 

£m

£m

At 5 April

213

286

Current service cost

30

31

Past service cost

1

1

Curtailment gains

(1)

(1)

Interest on net defined benefit liability

3

4

Return on assets (greater)/less than discount rate

(807)

268

Contributions by employer

(77)

(78)

Administrative expenses

2

2

Actuarial losses/(gains) on defined benefit obligations

1,359

(314)

Net defined benefit liability

723

199

           

 

The increase in the net defined benefit liability is mainly due to an increase in the value of defined benefit obligations, partially offset by the return on assets and employer contributions.

 

The £1,359 million of actuarial losses (H1 2015/16: £314 million of actuarial gains) on defined benefit obligations is driven by a 1.15% decrease in the discount rate and a 0.10% increase in assumed long-term inflation since 4 April 2016, as a result of changes in market conditions. 

 

The £807 million from a return on assets which is greater than the discount rate (H1 2015/16: £268 million from a return less than the discount rate), is driven by changes in market conditions, including falling bond yields and strong equity returns.

 

The net impact of the actuarial losses and the return on assets is a reduction of £405 million (H1 2015/16: increase of £37 million) in general reserves.

 

The £77 million of employer contributions includes a deficit contribution of £49 million in July 2016 (H1 2015/16: £49 million), with the remainder relating to employer contributions in respect of the accrual of future benefits during the period.

 

 

21   Core capital deferred shares (CCDS)

 

 

 

Number of shares

CCDS

   Share premium

Total

 

 

 

 

£m

          £m

£m

 

At 30 September 2016

5,500,000

6

525

531

At 4 April 2016

5,500,000

6

525

531

                     

 

 

Notes to the consolidated interim financial statements (continued)

 

21   Core capital deferred shares (CCDS) (continued)

 

CCDS are a form of Common Equity Tier 1 (CET1) capital which have been developed to enable the Group to raise capital from the capital markets. Previously issued Tier 1 capital instruments, PIBS, no longer meet the regulatory capital requirements of CRD IV and are being phased out of the calculation of capital resources under transitional rules.

 

CCDS are perpetual instruments. They rank pari passu to each other and are junior to claims against the Society of all depositors, creditors and investing members. Each holder of CCDS has one vote, regardless of the number of CCDS held.

 

In the event of a winding up or dissolution of the Society and if there was surplus available, the amount that the investor would receive for each CCDS held is limited to the average principal amount in issue, which is currently £100 per share.

 

There is a cap placed on the amount of distributions that can be paid to holders of CCDS in any financial year. The cap is currently set at £15.32 per share and is adjusted annually in line with CPI.

 

A final distribution of £28 million (£5.125 per share) for the financial year ended 4 April 2016 was paid on 20 June 2016. This distribution has been recognised in the statement of movements in members' interests and equity.

 

The directors have declared a distribution of £5.125 per share in respect of the period to 30 September 2016, amounting in aggregate to £28 million. The distribution will be paid on 20 December 2016 and will be recognised through the consolidated statement of movements in members' interests and equity by reference to the date at which it was approved.

 

 

22   Other equity instruments

 

 

 

 

Total

 

 

 

£m

At 30 September 2016

 

 

992

At 4 April 2016

 

 

992

 

AT1 instruments rank pari passu to each other and to PIBS. They are junior to claims against the Society of all depositors, creditors and investing members, other than the holders of CCDS.

 

AT1 instruments pay a fully discretionary, non-cumulative fixed coupon at an initial rate of 6.875% per annum. The rate will reset on 20 June 2019 and every five years thereafter to the five year mid swap rate plus 4.88%. Coupons are paid semi-annually in June and December.

 

A coupon of £34 million, covering the period to 19 June 2016, was paid on 20 June 2016. This payment has been recognised in the statement of movements in members' interests and equity.

 

A coupon of £34 million in respect of the period to 19 December 2016 is expected to be paid on 20 December 2016 and will be recognised in the statement of movements in members' interests and equity by reference to the date at which it is paid.

 

The coupons paid and declared represent the maximum non-cumulative fixed coupon of 6.875%.

 

AT1 instruments have no maturity date. They are repayable at the option of the Society on 20 June 2019 and on every fifth anniversary thereafter. AT1 instruments are only repayable with the consent of the PRA.

 

If the fully-loaded CET1 ratio for the Society, on either a consolidated or unconsolidated basis, falls below 7% the AT1 instruments convert to CCDS instruments at the rate of one CCDS share for every £80 of AT1 holding.

 

 

 

 

Notes to the consolidated interim financial statements (continued)

 

23   Related party transactions

 

Related party transactions in the period ended 30 September 2016 are similar in nature to those included in the Annual Report and Accounts 2016. Loans to key management personnel at 30 September 2016, undertaken on normal commercial terms, were £1.2 million (4 April 2016: £1.4 million).

 

Full details of the Group's related party transactions for the year to 4 April 2016 can be found in note 36 of the Annual Report and Accounts 2016.

 

 

24   Notes to the cash flow statement

 

 

Half year to 30 September

2016

£m

Half year to

30 September 2015

£m

Non-cash items included in profit before tax

 

 

Net decrease in impairment provisions

(40)

(199)

Net decrease in provisions for liabilities and charges

(45)

(88)

Impairment losses on investment securities

5

-

Depreciation and amortisation

175

155

Profit from sale of property plant and equipment

(1)

(1)

Interest on subordinated liabilities

54

50

Interest on subscribed capital

24

11

Gains from derivatives and hedge accounting

(77)

(14)

Total

95

(86)

 

 

 

Changes in operating assets and liabilities

 

 

Loans and advances to banks

(19)

5

Net derivative financial instruments and fair value adjustment for portfolio hedged risk (note i)

(1,809)

(67)

Loans and advances to customers

(6,279)

(3,219)

Other operating assets

(625)

(20)

Shares

4,700

2,582

Deposits from banks, customers and others

1,666

(9)

Debt securities in issue

2,686

37

Deferred taxation (note i)

(83)

(20)

Retirement benefit obligations

510

(87)

Other operating liabilities

(137)

65

Total (note i)

610

(733)

 

Cash and cash equivalents

 

 

Cash

17,213

7,899

Loans and advances to banks repayable in 3 months or less (note ii)

2,979

3,301

Total

20,192

11,200

 

Notes:

i.       Amounts in relation to derivative financial instruments and fair value adjustment for portfolio hedged risk and deferred taxation are presented on a net basis; comparative information has been reclassified to conform to the current presentation.

ii.     Cash equivalents include £2,216 million (30 September 2015: £2,599 million) of cash collateral posted with bank counterparties.

 

The Group is required to maintain balances with the Bank of England and certain other central banks which, at 30 September 2016, amounted to £344 million (30 September 2015: £307 million). These balances are included within loans and advances to banks on the balance sheet but are not included in the cash and cash equivalents in the cash flow statement as they are not liquid in nature.

 

 

25   Post balance sheet event

 

On 4 November 2016 the Group announced that it will cease new lending to commercial real estate (CRE) customers. Existing CRE loans will continue to run off in line with their contractual terms.

 

 

Responsibility statement

 

The directors confirm that, to the best of their knowledge, the consolidated interim financial statements have been prepared in accordance with IAS 34, as adopted by the European Union. The Interim Results include a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R, namely:

 

·       an indication of important events that have occurred in the first six months of the financial year and their impact on the consolidated interim financial statements and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

·         material related party transactions in the first six months of the financial year and any material changes in the related party transactions described in the Annual Report and Accounts 2016.

 

A full list of the board of directors can be found in the Annual Report and Accounts 2016, with the following updates in respect of changes that have occurred during the period to 30 September 2016:

 

·       Roger Perkin retired from the Board on 21 July 2016 following the AGM.

·       Lynne Peacock was appointed as the Senior Independent Director on 21 July 2016.

·       Kevin Parry was appointed as the Chairman of the Audit Committee and a member of the Nomination and Governance Committee on 21 July 2016.

 

Signed on behalf of the Board by

 

 

 

 

 

Mark Rennison

Group Finance Director

 

17 November 2016

 

 
 

Independent review report to Nationwide Building Society ('the Society')

Report on the consolidated interim financial statements

Our conclusion

We have reviewed Nationwide Building Society's consolidated interim financial statements (the "interim financial statements") on pages 54 to 83 in the interim results of Nationwide Building Society for the six month period ended 30 September 2016. Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority.

What we have reviewed

The interim financial statements comprise:

·      the consolidated balance sheet as at 30 September 2016;

·      the consolidated income statement and consolidated statement of comprehensive income for the period then ended;

·      the consolidated cash flow statement for the period then ended;

·      the consolidated statement of movements in members' interests and equity for the period then ended; and

·      the explanatory notes to the interim financial statements.

The interim financial statements included in the interim results have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 2 to the interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

Responsibilities for the interim financial statements and the review

Our responsibilities and those of the directors

The interim results, including the interim financial statements, are the responsibility of, and have been approved by, the directors. The directors are responsible for preparing the interim results in accordance with the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Our responsibility is to express a conclusion on the interim financial statements in the interim results based on our review. This report, including the conclusion, has been prepared for and only for the Society for the purpose of complying with the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

 

 

What a review of interim financial statements involves

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

We have read the other information contained in the interim results and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.

PricewaterhouseCoopers LLP

Chartered Accountants

London

17 November 2016

Notes:

a)   The maintenance and integrity of the Nationwide Building Society website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the interim financial statements since they were initially presented on the website.

b)   Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

 

Other information

 

The interim results information set out in this announcement is unaudited and does not constitute accounts within the meaning of section 73 of the Building Societies Act 1986.

 

The financial information for the year ended 4 April 2016 has been extracted from the Annual Report and Accounts 2016. The Annual Report and Accounts 2016 has been filed with the Financial Conduct Authority and the Prudential Regulation Authority. The Independent Auditors' Report on the Annual Report and Accounts 2016 was unqualified.

 

Nationwide has adopted the British Bankers' Association Code on Financial Reporting Disclosure ('the BBA code') in its Annual Report and Accounts 2016. The code sets out five disclosure principles together with supporting guidance. Full details of the principles are included in the Annual Report and Accounts 2016. These principles have been applied, as appropriate, in the context of these interim results.

 

A copy of the Interim Results is placed on the website of Nationwide Building Society. The directors are responsible for the maintenance and integrity of information on the Society's website. Information published on the internet is accessible in many countries with different legal requirements. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

 

 

 

Contacts

 

Media queries:

 

Stuart Williamson

Tel: 01793 654 756

Mobile: 07545 740 195

stuart.williamson@nationwide.co.uk

 

Alan Oliver

Tel: 0207 261 6201

Mobile: 07850 810 745

alanm.oliver@nationwide.co.uk

 

 

 

Investor queries:

 

Sarah Gardiner

Tel: 0845 602 9053

Mobile: 07720 426 180

sarah.gardiner@nationwide.co.uk

 

 

 

 

 

 

 

 

 

Appendix - Additional capital disclosures

 

Following publication of 'EBA Guidelines on Materiality, Proprietary and Confidentiality and on Disclosure Frequency', additional disclosures on the capital position are required as part of the Group's interim reporting. These are included within this Appendix.

 

These additional disclosures have not been subject to review by PricewaterhouseCoopers LLP.

 

 

Table 1: EBA Own Funds disclosure template

Current Rules (note i)

Full Impact (note ii)

30 September 2016

4 April

2016

30 September 2016

4 April

2016

 

 

 £m

 £m

 £m

 £m

 

Common Equity Tier 1 (CET1) Capital: instruments and reserves

 

 

 

 

1

Capital Instruments and the related share premium accounts

                  531

531

  531

531

Retained earnings

               8,463

7,937

    8,463

7,937

3

Accumulated other comprehensive income (and other reserves)

                    47

56

          47

56

5a

Independently reviewed interim profits net of any foreseeable charge or dividend

                  460

942

     460

942

6

Common Equity Tier 1 (CET1) capital before regulatory adjustments

               9,501

9,466

   9,501

9,466

 

Common Equity Tier 1  (CET1) capital: regulatory adjustments

 

 

 

 

7

Additional value adjustments (negative amount)

        (47)

 (55)

 (47)

 (55)

8

Intangible assets (net of related tax liability) (negative amount)

  (1,177)

 (1,132)

 (1,177)

 (1,132)

12

Negative amounts resulting from the calculation of expected loss amounts

    (209)

 (264)

 (209)

 (264)

14

Gains or losses on liabilities valued at fair value resulting from changes in own credit standing

           (1)

 (2)

 (1)

 (2)

28

Total regulatory adjustments to Common Equity Tier 1 (CET1)

  (1,434)

 (1,453)

 (1,434)

 (1,453)

29

Common Equity Tier 1 (CET1) capital

               8,067

8,013

     8,067

8,013

 

Additional Tier 1 (AT1) capital: instruments

 

 

 

 

30

Capital instruments and the related share premium accounts

                  992

992

         992

992

31

of which: classified as equity under applicable accounting standards

                  992

992

         992

992

33

Amount of qualifying items referred to in Article 484 (4) and the related share premium accounts subject to phase out of AT1

                  426

404

            -

-

36

Additional Tier 1 (AT1) capital before regulatory adjustments

               1,418

1,396

         992

992

44

Additional Tier 1 (AT1) capital

               1,418

1,396

         992

992

45

Tier 1 capital (T1 = CET1 +AT1)

               9,485

9,409

      9,059

9,005

 

 

 

Appendix - Additional capital disclosures (continued)

 

 

 

 

Current Rules (note i)

Full Impact (note ii)

 

 

30 September 2016

4 April

2016

30 September 2016

4 April

2016

 

 

 £m

 £m

 £m

 £m

 

Tier 2 (T2) capital: instruments and provisions

 

 

 

 

46

T2 Capital instruments and the related share premium accounts

               2,628

1,628

  2,628

1,628

47

Amount of qualifying items referred to in Article 484 (5) and the related share premium accounts subject to phase out from T2

                    30

29

     -

-

50

Credit risk adjustments

                    19

21

     19

21

51

Tier 2 (T2) capital before regulatory adjustments

               2,677

1,678

2,647

1,649

58

Tier 2 (T2) capital

               2,677

1,678

 2,647

1,649

59

Total capital (TC = T1 + T2)

12,162

11,087

 11,706

10,654

60

Total risk weighted assets

34,636

34,475

34,636

34,475

Capital ratio and buffers

 

 

 

 

61

Common Equity Tier 1 (as a percentage of total risk exposure amount)

23.3%

23.2%

23.3%

23.2%

62

Tier 1 (as a percentage of total risk exposure amount)

27.4%

27.3%

26.2%

26.1%

63

Total capital (as a percentage of total risk exposure amount)

35.1%

32.2%

33.8%

30.9%

68

Common Equity Tier 1 available to meet buffers (as a percentage of risk exposure amount)

23.3%

23.2%

23.3%

23.2%

 

Applicable caps on the inclusion of provisions in Tier 2

 

 

 

 

76

Credit risk adjustment included in T2 in respect of exposures subject to standardised approach (prior to the application of the cap)

                    19

21

   19

21

77

Cap on inclusion of credit risk adjustments in T2 under standardised approach

                    34

38

     34

38

79

Cap for inclusion of credit risk adjustments in T2 under internal ratings-based approach

                  153

154

   153

154

82

Current cap on AT1 instruments subject to phase out arrangements

                  633

633

        -

-

84

Current cap on T2 instruments subject to phase out arrangements

                  237

237

      -

-

 

Notes:

i.     Also referred to as 'transitional' basis.

ii.    Also referred to as 'end point' basis (i.e. assuming all CRD IV requirements were in force in full with no transitional provisions permitted).

 

 

 

Appendix - Additional capital disclosures (continued)

 

Table 2: Movements in regulatory capital

£m

Common Equity Tier 1 capital at 5 April 2016

8,013

  Profit for the period

502

  Other movement in general reserves (note i)

(458)

  Movement in foreseeable distributions

 -

  Available for sale reserve

(12)

  Revaluation reserves

3

  Decrease/(increase) in:

 

    Prudent valuation adjustment

8

    Own credit risk adjustment

1

    Intangible assets and goodwill

(45)

    Excess of regulatory expected loss over impairment provisions

55

Common Equity Tier 1 capital at 30 September 2016

8,067

Additional Tier 1 capital at 4 April 2016 and 30 September 2016

992

Total Tier 1 capital at 30 September 2016

9,059

Tier 2 capital at 5 April 2016

1,649

  Subordinated debt instrument issuance

964

  Amortisation on dated subordinated debt

(88)

  Fair value adjustments on dated subordinated debt

124

  Increase/(decrease) in:

 

    Collectively assessed impairment allowances

(2)

    Excess of impairment provisions over regulatory expected loss

-

Tier 2 capital at 30 September 2016

2,647

Total regulatory capital at 5 April 2016

10,654

Total regulatory capital at 30 September 2016

11,706

 

Note:

i.     Includes all movements in general reserves, other than profit for the period.

 

CET1 capital resources have increased over the period by £54 million, mainly as a result of a good financial performance, with £502 million of profit after tax for the period, being offset by an increase in other movements in general reserves, mainly as a result of a higher pension deficit. Tier 2 capital has increased following the issuance of $1.25 billion of qualifying Tier 2 subordinated debt with a coupon of 4% and a maturity of 10 years.

 

 

Appendix - Additional capital disclosures (continued)

 

The movements in credit risk RWAs over the period are set out in the table below:

 

RWA flow statement 

RWAs at 4 April 2016

Growth/ (reduction) in book size

(Improvement)/ deterioration in book quality

Model changes

RWAs at 30 September 2016

 

£m

£m

£m

£m

£m

Credit risk:

 

 

 

 

 

  Residential mortgages

14,086

186

(419)

-

13,853

  Unsecured lending

5,621

131

131

(74)

5,809

  Commercial

6,194

(170)

72

-

6,096

  Treasury (note i)

1,039

(186)

14

-

867

Counterparty credit risk and credit valuation adjustment (note ii)

1,296

489

(129)

-

1,656

  Other (note iii)

1,635

116

-

-

1,751

Total credit risk

29,871

566

(331)

(74)

30,032

Operational risk

4,604

-

-

-

4,604

Market risk (note iv)

-

-

-

-

-

Total

34,475

566

(331)

(74)

34,636

               

 

Notes:

i.     Treasury excludes RWA movements in prime liquidity assets, as these are zero risk weighted.

ii.    Counterparty credit risk includes the credit valuation adjustment and relates to derivative financial instruments and repurchase agreements.

iii.   Other relates to fixed and other assets and equity holdings held on the balance sheet.

iv.   The Group has elected to set this to zero, as permitted by the CRR, as exposure was below the threshold of 2% of own funds.

 

Regulatory capital for credit risk

 

The Pillar 1 credit risk capital requirements (risk weights) are calculated using:

·      The retail Internal Ratings Based (IRB) approach for prime, buy to let and self-certified mortgages (other than those originated by the Derbyshire, Cheshire and Dunfermline building societies) and unsecured lending

·      The foundation IRB and specialised lending 'slotting' methodology for treasury and commercial portfolios respectively (other than sovereign exposures)

·      The standardised approach for all other credit risk exposures, including some treasury (including sovereign) and commercial exposures which are exempt from the IRB approach.

 

Pillar 1 capital requirements are calculated at 8% of the risk weighted assets, so the Group's credit RWAs of £30,032 million generate a Pillar 1 capital requirement of £2,403 million. The following table shows how the capital requirements for Pillar 1 credit risk are attributed to exposure classes (as defined by the Capital Requirements Regulation) and by risk calculation approach at 30 September 2016.

 

 

 

Appendix - Additional capital disclosures (continued)

 

Table 4: Minimum Pillar 1 capital requirements for credit risk 

30 September 2016

4 April 2016

 

£m

£m

Internal Ratings Based (IRB) exposure classes:

 

 

  Institutions

26

38

  Corporates (commercial lending)

483

480

  Retail mortgages (secured against residential lending)

911

917

  Qualifying revolving retail

342

325

  Other retail (unsecured loans)

123

125

  Securitisation positions

25

27

  Equity (note i)

9

24

  Non-credit obligation assets (fixed assets and other)

90

90

  Counterparty credit risk

133

104

Total IRB exposure classes

2,142

2,130

Standardised exposure classes:

 

 

  Central government and central banks (note ii)

-

-

  Regional governments and local authorities

1

1

  Multilateral development banks (note ii)

-

-

  Corporates (non-commercial)

8

7

  Retail mortgages (secured against residential property)

177

190

  Other Retail (note iii)

-

-

  Commercial lending (secured against property)

3

5

  Commercial lending (other)

1

7

  Past due

20

22

  Other (note iv)

51

28

Total standardised exposure classes

261

260

Total capital requirements for credit risk

2,403

2,390

Notes:

i.     The reduction in equity capital requirements relates to the disposal of the Group's investment in Visa Europe Limited.

ii.    Exposures to central banks and governments and multilateral development banks are all zero risk weighted, so there is no Pillar 1 capital requirement.

iii.   Other Retail contains personal loan exposures with a capital requirement of £0.1 million.

iv.   The items included in the 'Other' exposure class that attract a capital charge include items in the course of collection, cash in hand and deferred tax assets that rely on future profitability.

 

Table 5: Internal Ratings Based (IRB) exposures and average risk-weights

30 September 2016

4 April

2016

30 September 2016

4 April

2016

Exposure

Exposure

Average RWA

Average RWA

 

 £m

 £m

 %

 %

IRB exposure classes:

 

 

 

 

Foundation IRB

 

 

 

 

Institutions

2,277

2,961

14.5

              16.0

Corporates (commercial lending)

   14,175

14,046

42.6

              42.7

Securitisation positions

2,398

2,686

13.0

              12.5

Equity

         30

81

370.0

            370.0

Non-credit obligation assets (fixed assets and other)

     1,128

1,126

100.0

            100.0

Counterparty credit risk

   5,531

3,693

14.0

              16.2

Advanced IRB

 

 

 

 

Retail Mortgages (secured against residential lending)

176,757

168,998

6.4

               6.8

Qualifying revolving retail

   8,595

8,420

49.8

              48.2

Other retail (unsecured loans)

      2,022

1,962

75.7

              79.5

Total IRB exposure classes

 212,913

203,973

12.2

              12.7

 

There has been a small improvement in average IRB risk-weights from 12.7% to 12.2%, mainly due to an improvement in the book quality of the retail mortgages portfolio as a result of rising house prices.

Appendix - Additional capital disclosures (continued)

 

The following three tables provide details on the components of the exposure measure used to calculate the Group's leverage ratio, disclosed in templates prescribed by the EBA. The exposure measure has increased by £14.7 billion from £213.2 billion to £227.9 billion. This is due to growth in on balance sheet exposures driven by increases in residential mortgage balances and central bank reserves.

 

 

Table 7a: (LRSum) Summary reconciliation of accounting assets and leverage ratio exposures

30 September 2016

4 April

2016

 

 

£m

£m

1

Total assets as per published financial statements

225,546

208,939

4

Adjustments for derivative financial instruments

 (5,528)

 (3,974)

5

Adjustments for Securities Financing Transactions (SFTs)

3,484

4,004

6

Adjustment for off-balance sheet items (ie conversion to credit equivalent amounts of off-balance sheet exposures)

5,817

5,663

7

Other adjustments

 (1,433)

 (1,451)

8

Leverage ratio exposure

227,886

213,181

 

 

Table 7b: (LRSpl) Split of on-balance sheet exposures (excluding derivatives and securities financing transactions)

 

CRR Leverage Ratio Exposure

30 September 2016

4 April

2016

 

 

 £m

 £m 

EU-1

Total on-balance sheet exposures (excluding derivatives and SFTs), of which:

           219,366

  205,041

EU-3

Banking book exposures, of which:

           219,366

  205,041

EU-4

Covered bonds

              1,053

      1,012

EU-5

Exposures treated as sovereigns

            24,213

    15,838

EU-6

Exposures to regional governments, MDB, international organisations and public sector entities not treated as sovereigns

                 472

        530

EU-7

Institutions

              1,224

      1,949

EU-8

Secured by mortgages of immovable properties

           168,017

  162,000

EU-9

Retail exposures

              3,746

      4,300

EU-10

Corporate

            13,891

    13,329

EU-11

Exposures in default (standardised)

                 243

        273

EU-12

Other exposures (eg equity, securitisations, and other non-credit obligation assets)

              6,507

      5,810

 

 

 

Appendix - Additional capital disclosures (continued)

 

Table 7c: (LRCom) Leverage ratio common disclosure

CRR leverage ratio exposures

30 September 2016

4 April

2016

 

 

 £m

 £m

 

On-balance sheet exposures (excluding derivatives and SFTs)

 

 

1

On-balance sheet items (excluding derivatives and SFTs, but including collateral)

219,366

205,041

2

Asset amounts deducted in determining Tier 1 capital (note i)

 (1,433)

 (1,451)

3

Total on-balance sheet exposures (excluding derivatives and SFTs)

217,933

203,590

 

Derivative exposures

 

 

4

Replacement cost associated with derivatives transactions

3,326

1,883

5

Add-on amounts for Potential Future Exposure (PFE) associated with derivatives transactions

1,516

1,236

7

Cash variation margin (as per Delegated Act)

 (4,190)

 (3,195)

11

Total derivative exposures

        652

 (76)

 

Securities Financing Transaction (SFT) exposures

 

 

14

SFT Adjustment

3,484

4,004

16

Total securities financing transaction exposures

3,484

4,004

 

Off-balance sheet exposures

 

 

17

Off-balance sheet exposures at gross notional amount

23,345

22,143

18

Adjustments for conversion to credit equivalent amounts

 (17,528)

 (16,480)

19

Total off-balance sheet exposures (note ii)

5,817

5,663

 

Capital and total exposures

 

 

20

Tier 1 capital

9,059

9,005

21

Total Exposures

227,886

213,181

 

Leverage ratio

 

 

22

Leverage ratio

4.0%

4.2%

 

Choice on transitional arrangements and amount of

derecognised fiduciary items

 

EU-23

Choice on transitional arrangements for the definition of the capital measure

Full Impact

 

 

Notes:

i.     Representing intangible assets (including goodwill), expected loss deductions and prudent valuation adjustment.

ii.    This is the total credit equivalent amount of off-balance sheet exposures as required by the Capital Requirements Regulation (CRR).

 

 


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