Preliminary Results Announcement 2017/18

RNS Number : 7940O
Nationwide Building Society
22 May 2018
 

 

                                                                                     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nationwide Building Society

 

 

 

 

Preliminary Results Announcement

For the year ended

4 April 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CONTENTS

 

 

Page

Key highlights and quotes

3

Financial summary

5

CEO review

6

Financial review

11

Business and risk report

19

Consolidated financial statements

61

Notes to the consolidated financial statements

66

Responsibility statement

79

Other information

79

Contacts

79

 

 

 

Underlying profit

Profit before tax shown on a statutory and underlying basis is set out on page 11. Statutory profit before tax of £977 million has been adjusted for a number of items to derive an underlying profit before tax of £1,022 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 years. Underlying profit is not designed to measure sustainable levels of profitability as it 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.

 

Nationwide has developed a financial performance framework based on the fundamental principle of maintaining its capital at a prudent level in excess of regulatory requirements. The framework provides parameters which allow it to calibrate future performance and help ensure that it achieves the right balance between distributing value to members, investing in the business and maintaining financial strength. The most important of these parameters is underlying profit which is a key component of Nationwide's capital. We believe that a level of underlying profit of approximately £0.9 billion to £1.3 billion per annum over the cycle would meet the Board's objective for sustainable capital strength. This range will vary from time to time, and whether our profitability falls within or outside this range in any given financial year or period will depend on a number of external and internal factors, including conscious decisions to return value to members or to make investments in the business. It should not be construed as a forecast of the likely level of Nationwide's underlying profit for any financial year or period within a financial year.

 

Forward looking statements

Certain 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 Nationwide and will contain detailed information about Nationwide and management as well as financial statements.

 

 

 

SERVICE LEADERSHIP1, RECORD LENDING AND CURRENT ACCOUNT OPENINGS DRIVE STRONG PROFITS AND £560 MILLION IN MEMBER FINANCIAL BENEFIT2

 

Service - No 1 for service3, trust4 and main current account satisfaction5 against our high street peer group

Value - Rewarded members with £560m in member financial benefit

Strength - Financial strength enhanced by keeping costs flat and alltime high capital

 

Strong profitability, plus record capital ratios

·    Underlying profit of £1,022m (2017: £1,030m), within our financial performance framework

·    Statutory profit of £977m (2017: £1,054m)

·    Profits include a £116m cost of debt buyback (2017: £100m oneoff gain from Visa Europe disposal)

·    UK leverage ratio improved to 4.9% (2017: 4.4%) and CET1 to a record high of 30.5% (2017: 25.4%)

·    Efficiency programme kept costs flat at £1,979m (2017: £1,979m)

·    Total underlying provision charges of £131m (2017: £276m) driven by lower PPI charges

 

Our mutual pricing delivers member financial benefit of £560m (2017: £505m)

·    Protected depositors by holding rates on average more than 50% higher than the market average6

·    Rewarded 100,000 members through 'Recommend a Friend', driving 1 in 9 account openings

·    Ensured fairness and value for members and loyal borrowers with one of the industry's lowest SVRs

 

No 1 for service and trust

·    UK's most trusted financial organisation, with a lead of 3.8%4

·    No 1 for customer satisfaction for 6th year running; 4.6% ahead of our high street peer group7

·    Continued leadership of main current account satisfaction, more than 10 percentage points over our nearest high street peer group competitor8

 

Highest number of current account openings in the UK, making a real difference to current account market

·    UK's top choice for current accounts9, opening more than with any other brand10; 816,000 (2017: 795,000)

·    Record market share of 7.9% (2017: 7.6%) for main standard and packaged accounts, and 9.4% for all current accounts (2017: 8.9%)

 

Helping 400,000 borrowers onto or up the housing ladder

·    Record gross prime mortgage lending of £29.4bn (2017: £29.1bn)

·    Mortgage net lending of £5.8bn (2017: £8.8bn) reflecting high levels of competition

·    Helped around 1 in 5 UK first time buyers finance a home; a record 76,000 borrowers (2017: 75,000)

·    Championing home buyers by refusing to lend on new-builds with escalating ground rents

 

Rewarding the loyalty of our 11.6m saver members

·    Gave loyal members £435m in extra interest on their deposits compared with market average6

·    Increased member deposit balances by £3.5bn (2017: £5.8bn)

·    Maintained our deposit market share of 10% (2017: 10.1%) in a highly competitive market

 

Using our knowledge and experience to contribute to the UK housing market

·    Committed £50m to innovative housing project in Swindon

·    Started a five-year programme to invest £20m in member-directed community grants

·    Giving members a say about local housing issues through new Community Boards

 

Forecast subdued but steady UK growth

·    Resilient UK economy, though growth expected to be modest at 1% to 1.5% over next two years

·    Squeeze on household incomes likely to gradually fade as inflation falls back

·    Expect housing market to remain subdued with house price growth slowing to 1% over the next year

 

Joe Garner, Chief Executive, Nationwide Building Society, said:

 

"Nationwide's defining difference is that we're owned by our members. This informs how we operate and the decisions we make. So we continue to focus on delivering what members tell us matters most - outstanding service and great value, backed by record capital strength.

 

"Being member led means we're the UK's most trusted financial institution4, and we have led our high street peer group for customer satisfaction for the last six years7.

 

"As a mutual, without shareholders to reward, we were able to deliver £560 million in extra value to members during the year, as a result of the better rates, fees and incentives we can offer compared to the market average6.

 

"Leading service and value added up to an alltime membership high of 15.5 million. Our 'engaged' members - those who have a current account, a mortgage or a savings balance over £5,000 with us - also reached a record high of 8.1 million.

 

"In an industry notorious for customer inertia, Nationwide is making a real difference to the current account market. We had our best ever year for current accounts with more people opening an account with the Society than with any other brand10, a record 816,000 new accounts, and continue to perform well on switching. We also enjoy a greater than 10 percentage point lead on main current account satisfaction over our high street peer group5.

 

"We believe Nationwide could transform choice for the UK's small businesses in the way we have become top choice for personal current accounts9. So, if we are successful in our application for funding from the money the government has asked RBS to set aside, we intend to roll out a mutual business alternative to the big five banks, nationwide.

 

"In the meantime, we face the future from a platform of strength. Strength in our service, the value we offer and our finances means we can continue to support our members, and our mission of building society, nationwide."

 

 

Mark Rennison, Chief Financial Officer, Nationwide Building Society, said:

 

"Nationwide continues to trade strongly in spite of intense competition in our core markets, in a number of cases choosing to protect value for members through more competitive pricing rather than taking the opportunity to enhance margin.

 

"While growing our business, we delivered on our commitment to hold costs flat, thanks to our Societywide efficiency programme.

 

"This strong trading has translated into stronger than ever finances for the Society. Our core capital ratio is at an alltime high of 30.5%, and we improved our already conservative UK leverage ratio to 4.9%, well ahead of regulatory requirements.

 

"After investing in our business and in the value we offer to members, our pretax underlying profits were broadly flat at £1,022 million - and within our financial performance framework.

 

"We expect technology innovation to accelerate, driven by digital adoption, mobile service take-up and Open Banking. We are reviewing our operations and technology to ensure Nationwide can take the opportunities ahead and meet the challenges posed by increasing dependence on technology and growing cyber threats. We do so having achieved a position of financial strength, good trading performance and demonstrable cost discipline. We will update on these plans and the investment required later in the year." 

 

 

1  © GfK 2018, Financial Research Survey (FRS), 12 months ending 31 March 2018, 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 >4% (Barclays, Halifax, HSBC, Lloyds Bank (inc C&G), NatWest, Santander and TSB).

2  More information on member financial benefit is included on page 12 in the Financial review.

3  © GfK 2018, Financial Research Survey (FRS), 12 months ending 31 March 2018, 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 >4% (Barclays, Halifax, HSBC, Lloyds Bank (inc C&G), NatWest, Santander and TSB).

4  Source: Nationwide Brand and Advertising tracker - compiled by Independent Research Agency, based on all consumer responses, 3 months ending March 2018. Financial brands included Nationwide, Barclays, Co-operative Bank, First Direct, Halifax, HSBC, Lloyds, NatWest, TSB and Santander.

5  © GfK 2018, Financial Research Survey (FRS), 12 months ending 31 March 2018, proportion of extremely/very satisfied main current account customers minus proportion of extremely/very/fairly dissatisfied main current account customers. High street peer group defined as providers with main current account market share >4% (Barclays, Halifax, HSBC, Lloyds Bank, NatWest, Santander and TSB).

6  Market interest rates are based on Bank of England whole of market average interest rates over the period, adjusted to exclude Nationwide's balances.

7  © GfK 2018, Financial Research Survey (FRS), 6 year lead held over period 12 months ending 31 March 2013 to 12 months ending 31 March 2018.  Each monthly data point contains customer feedback referring to previous 12 months. 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 >4% (Barclays, Halifax, HSBC, Lloyds Bank (inc C&G), NatWest, Santander and TSB). Prior to April 2017, high street peer group defined as providers with main current account market share >6% (Barclays, Halifax, HSBC, Lloyds Bank inc C&G (Lloyds TSB prior to Apr 15), NatWest and Santander).

8  © GfK 2018, Financial Research Survey (FRS), 12 months ending 31 March 2018 vs 31 March 2017, proportion of extremely/very satisfied main current account customers minus proportion of extremely/very/fairly dissatisfied main current account customers. High street peer group defined as providers with main current account market share >4% (Barclays, Halifax, HSBC, Lloyds Bank, NatWest, Santander and TSB).

9  Source: Nationwide Brand and Advertising tracker - compiled by Independent Research Agency. Top Choice is considered ie 'first choice' or 'seriously considered' current account provider amongst non-customers, based on responses from non-customers of each brand, 3 months ending March 2018. Financial brands included Nationwide, Barclays, Co-operative Bank, First Direct, Halifax, HSBC, Lloyds, NatWest, TSB and Santander.

10  Source: eBenchmarkers April 2017 to March 2018, CACI April 2017 to March 2018, BACS Payments Schemes monthly CASS switching market data and internal sources.

 

FINANCIAL SUMMARY

 

 

Year to

4 April 2018

Year to

4 April 2017

Financial performance

£m

 

£m

 

Total underlying income

3,132

 

3,285

 

Underlying profit before tax

1,022

 

1,030

 

Statutory profit before tax

977

 

1,054

 

Mortgage lending

£bn

%

£bn

%

Group residential - gross/gross market share

33.0

12.8

33.7

14.0

Group residential - net/net market share

5.8

13.0

8.8

25.4

 

%

 

%

 

Average indexed loan to value of new residential mortgages business

71

 

71

 

Deposit balances

£bn

%

£bn

%

Member deposits balance movement/market share (note i)

3.5

7.5

5.8

8.2

Net receipts (note ii)

0.4

 

0.7

 

Key ratios

%

 

%

 

Cost income ratio - underlying basis

63.2

 

60.2

 

Cost income ratio - statutory basis

64.6

 

60.3

 

Net interest margin

1.31

 

1.33

 

 

 

 

4 April 2018

4 April 2017

Balance sheet

£bn

%

£bn

%

Total assets

229.1

 

221.7

 

Loans and advances to customers

191.7

 

187.4

 

Member deposits balance/market share (note i)

148.0

10.0

144.5

10.1

Asset quality

%

 

%

 

Residential mortgages

 

 

 

 

Proportion of residential mortgage accounts 3 months+ in arrears

0.43

 

0.45

 

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

56

 

55

 

Total provisions as % of non-performing balances

5.3

 

5.3

 

 

 

 

 

 

Consumer banking

 

 

 

 

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

4

 

4

 

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

89

 

86

 

Key ratios

%

 

%

 

Capital

 

 

 

 

Common Equity Tier 1 ratio (note iii)

30.5

 

25.4

 

UK leverage ratio (note iv)

4.9

 

4.4

 

CRR leverage ratio (note iii)

4.6

 

4.2

 

 

 

 

 

 

Other balance sheet ratios

 

 

 

 

Liquidity coverage ratio

130.3

 

124.0

 

Wholesale funding ratio (note v)

28.2

 

27.1

 

 

Notes:

i.       Member deposits include current account credit balances.

ii.     Net receipts include outflows of non-member deposits relating to the closure of off-shore operations in the Isle of Man and Republic of Ireland.

iii.    Reported under CRD IV on an end point basis. The CRR 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 UK leverage ratio is shown on the basis of measurement announced by the Prudential Regulation Authority and excludes eligible central bank reserves from the leverage exposure measure.

v.      The wholesale funding ratio includes all balance sheet sources of funding (including securitisations) but excludes Funding for Lending Scheme (FLS) drawings which, as asset swaps, are not included on Nationwide's balance sheet, reflecting the substance of the arrangement. Off-balance sheet FLS drawings totalled £nil (4 April 2017: £4.8 billion).

 

 

 

CEO REVIEW

 

 

Nationwide is a membership business. As a mutual without shareholders to reward, we are free to focus on our stated purpose - building society, nationwide. That means helping members to finance their goals and contributing to making society a better place. Our approach is simple by design - to concentrate on service, value, and financial strength.

 

We never forget that we manage members' life savings and are an economically important business so it's essential we have exceptionally strong finances. We finished the year with capital at an all-time high, and strong underlying profits of over £1 billion, within our financial performance framework.

 

On service, Nationwide is the UK's most trusted financial institution1 and we led our high street peer group on customer satisfaction for the 6th year2, ending the year with a lead of 4.6% over our nearest competitor. Satisfaction with our main current account was higher still, at more than 10 percentage points ahead of our nearest high street peer group competitor3, and we attracted a record number of new current accounts.

 

We also deliver extra value to members through fair and better pricing. This 'member financial benefit' added up to £560 million last year4, including around 100,000 members who earned 'Recommend a Friend' rewards.

 

We and our members thrive together thanks to the support of our 18,000 colleagues. I'd like to thank them for their enormous contribution and the care they show our members.

 

All this adds up to operating from a platform of strength. This gives us confidence that we can continue to deliver against our ambitions, underpinned by five strategic cornerstones.

 

Built to last

 

We finished the year financially stronger than ever, with an improved CET1 ratio of 30.5% and a more conservative UK leverage ratio of 4.9%, well in excess of regulatory requirements. This was supported by issuing a second tranche of CCDS, a form of Common Equity Tier 1 capital specific to building societies demonstrating capacity and liquidity in the CCDS market.

 

We also held our costs flat while significantly growing the business thanks to the success of the efficiency programme we put in place last year. Our 'Right First Time' programme helped to reduce errors. Simplifying our management structure gave people the space to lead. And the 'Arthur Webb Challenge Cup' saw many of our people suggest how to spend our members' money more wisely.

 

An important part of being built to last is investing in our business. This means building on earlier investments that have enabled our very rapid current account growth, increased mobile adoption by members, and underpinned our service distinction.

 

Looking ahead, it's clear that the pace of change is accelerating. Technology is changing how people live and work, and Nationwide will continue to respond to member expectations. Today's consumer lives in an 'always on' world and naturally expects the same from their financial provider. Service availability, in particular for internet and mobile banking, plus cash machines and payments, has become a key utility that members depend on. Meanwhile, no business is immune to growing cyber threats.

 

So, digital innovation and systems resilience are increasingly fundamental aspects of our member service experience and the trust consumers have in their financial providers. At the same time, recognising that all businesses have room to improve, we will ensure the Society has the capacity to meet the demands of its strong business growth. We are therefore reviewing our operations and technology to keep Nationwide well ahead of future needs. This will include the opportunities presented by integrated platforms, cloud technology and automation. We will refine our technology strategy accordingly, and the investment plan this might require. Importantly, we do so having achieved a position of considerable financial strength, good trading performance and demonstrable cost discipline. We will update members on our plans later in the year.

 

1  Source: Nationwide Brand and Advertising tracker - compiled by Independent research Agency, based on all consumer responses, 3 months ending March 2018. Financial brands included Nationwide, Barclays, Co-operative Bank, First Direct, Halifax, HSBC, Lloyds, Natwest, TSB and Santander.

2  © GfK 2018, Financial Research Survey (FRS), 6 year lead held over period 12 months ending 31 March 2013 to 12 months ending 31 March 2018.  Each monthly data point contains customer feedback referring to previous 12 months. 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 >4% (Barclays, Halifax, HSBC, Lloyds Bank (inc C&G), NatWest, Santander and TSB). Prior to April 2017, high street peer group defined as providers with main current account market share >6% (Barclays, Halifax, HSBC, Lloyds Bank inc C&G (Lloyds TSB prior to Apr 15), NatWest and Santander).

3  © GfK 2018, Financial Research Survey (FRS), 12 months ending 31 March 2018 vs 31 March 2017, proportion of extremely/very satisfied main current account customers minus proportion of extremely/very/fairly dissatisfied main current account customers. High street peer group defined as providers with main current account market share >4% (Barclays, Halifax, HSBC, Lloyds Bank, NatWest, Santander and TSB).

4  More information on member financial benefit is included on page 12 in the Financial review.

 

CEO review (continued)

 

Building thriving membership

 

We're proud to help members own a home, save for the future, and manage their everyday finances. The more members we serve and the more we do with them, the bigger our contribution. And we are thriving, with a new high of 15.5 million members. Engaged members - those who hold a main current account, or a balance of at least £5,000 in savings or a mortgage with us - grew by 330,000 to 8.1 million.

 

As a mutual, our goal is not to pursue profits but to serve our members and run a safe and sustainable Society. Unlike some institutions, we therefore aim to give members the fairest fees and the highest rates we can afford. So, for example, our deposit rates were on average more than 50% higher than the market average1 over the last year. Combined with better fees and incentives - such as Recommend a Friend - our member financial benefit for 2017/18 totalled £560 million (2017: £505 million).

 

A place to call home

 

We were true to our goal of supporting members into homes of their own, helping a record 76,000 first time buyers (2017: 75,000) and almost 400,000 (2017: 326,000) homeowners in all.

 

Overall, we had our strongest ever year for gross prime lending at £29.4 billion (2017: £29.1 billion). Net lending was down on the previous year, in line with our decision to reduce our buy to let lending through The Mortgage Works, along with increased prime mortgage redemptions as we managed margins in the long-term interests of the Society in a fiercely competitive market.

 

Member needs change in later life, so we expanded our mortgage range with a lifetime mortgage which will allow people to access equity in their home in later life. Next, we plan to launch a retirement interest only mortgage, giving members more choice in managing their finances as they get older.

 

Supporting savers

 

With interest rates still at historic lows, people are saving less. We've done our best to encourage a savings habit and protect depositors with highly competitive rates and by offering a range of loyalty rewards.

 

We launched a range of loyalty bonds and fixed rate ISAs for members with at least one year's membership; we doubled the maximum balance allowed in our Loyalty Saver account to £100,000; and in March, we launched a Single Access ISA paying 1.40%, which attracted £8.5 billion in deposits by the end of April 2018.

 

Rewarding loyalty helped grow our overall savings members to 11.6 million. Our deposit balances increased by £3.5 billion in the year, thanks mainly to higher current account balances and the success of our Single Access ISAs. In a highly competitive market, deposits grew more slowly than last year, but overall, Nationwide continues to provide a safe home for £1 in every £10 saved in the UK.

 

First choice for everyday finances

 

We attracted record new current accounts for the fourth year running, opening 816,000 accounts in all (2017: 795,000), more than any other brand in the last year2. Our share of main standard and packaged accounts grew to 7.9% (2017: 7.6%), a new high, and our share of all accounts to 9.4% (2017: 8.9%). We improved our student account, and doubled account openings to 21,000. Focusing on the features that members value most, we extended travel and mobile phone insurance on our FlexPlus account and reduced fees for transactions and unauthorised overdrafts on our FlexAccount. We also introduced text alerts for unauthorised overdrafts to help members manage their finances.

 

We also began to move our credit cards, personal loans and insurance products to a 'just for members' proposition. It meant we issued fewer credit cards, in line with our expectations, at 160,000 (2017: 206,000), but overall balances were higher, as were balances on our personal loans. We're making good progress with the transition of our existing home insurance policies to RSA and have successfully launched our new home insurance product in response to member feedback.

 

 

1  Market interest rates are based on Bank of England whole of market average interest rates over the period, adjusted to exclude Nationwide's balances

2 Source: eBenchmarkers April 2017 to March 2018, CACI April 2017 to March 2018, BACS Payments Schemes monthly CASS switching market data and internal sources.

 

CEO review (continued)

 

Transforming choice for UK small firms

 

Around a million of our members run their own business, and many have asked if we can provide a business account. The costs of market entry have been prohibitive in the past but thanks to the Alternative Remedies Fund, financed by RBS to boost competition in banking, we are applying for up to £50 million to launch a business current account. If successful, we'll launch an account targeted at small and micro-businesses, providing a mutual business alternative to the big five banks, who hold 85% of business accounts.

 

Building legendary service

 

Our service leadership

 

The quality of our service matters to us because it matters to our members. We believe it's a key part of why Nationwide remains the UK's most trusted financial institution1, and no. 1 for satisfaction for the 6th year running compared with our high street peer group competitors2.

 

We're in a strong position, but if we want to be truly legendary, we need to be among the best in the UK, not just in financial services. That's why we will start to measure our success with the all-sector UK Customer Satisfaction Index, published by The Institute of Customer Service. Today we're ranked no. 7, in a top 10 that includes Amazon and John Lewis3.

 

Digital convenience with a human touch

 

Members want to use traditional and digital channels seamlessly - to manage their finances on the move, while also being able to speak to us when they need to.

 

We've extended what members can do on our banking app, including instant registration, reporting lost and stolen cards, setting up new payees and viewing pending transactions. More improvements are in hand; including the ability to freeze or unfreeze your card if you have mislaid it; a MoneyWatch service to put members in control of their spending; and an auto-investment advice service.

 

As a result, more members are choosing digital as their first point of call - mobile active current account members grew 44% to 2 million. We launched a 'Discover Mobile' campaign to promote our mobile services.

 

Branches for the future

 

We appreciate that customers still value a personal service in our branches, and we invested £73 million in our branch network this year. Of course, the way members choose to use our branches is changing and we've designed a new concept '4C' branch which we'll use as the model to update our branch network over the next four years. These will cater for convenience, conversation, consultation and community.

 

PRIDE

 

PRIDE is about our people, culture and values. We want to be one of the country's best places to work because we care about our people, and by caring for them they care for our members.

 

In January, we were proud to live our values by taking on 297 Carillion contractors after the company collapsed, securing their jobs and the services our members rely on.

 

We measure employee engagement and enablement through an independent survey each year. Nationwide compares extremely well with most organisations, although we didn't hit our stretching global high performing benchmark target this year. That said, engagement remains extremely high, at 74%, and we are 9 percentage points above the financial services norm.

 

 

1  Source: Nationwide Brand and Advertising tracker - compiled by Independent Research Agency, based on all consumer responses, 3 months ending March 2018. Financial brands included Nationwide, Barclays, Co-operative Bank, First Direct, Halifax, HSBC, Lloyds, NatWest, TSB and Santander.

2  © GfK 2018, Financial Research Survey (FRS), 6 year lead held over period 12 months ending 31 March 2013 to 12 months ending 31 March 2018.  Each monthly data point contains customer feedback referring to previous 12 months. 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 >4% (Barclays, Halifax, HSBC, Lloyds Bank (inc C&G), NatWest, Santander and TSB). Prior to April 2017, high street peer group defined as providers with main current account market share >6% (Barclays, Halifax, HSBC, Lloyds Bank inc C&G (Lloyds TSB prior to Apr 15), NatWest and Santander).

3  UK Customer Satisfaction Index, January 2018.

 

CEO review (continued)

 

PRIDE is also about developing our people. We're investing in our leadership capabilities from a Leadership 200 group - including 20 'People's Choice' leaders chosen by an all-employee vote - to a business-wide 'Developing My Leadership' programme for all our people to expand their capabilities and leadership skills.

 

We issued our first gender pay gap report in March 2018. Our mean gender pay gap - the difference in average hourly pay between all men and women - is 29% and is on a par with the rest of the UK retail banking sector. This is very much a function of the nature of our business and our resulting employee profile. The gender pay gap for our senior population of approximately 300 managers is just 4%. This gap could be closed by moving only a handful of people. Our overall gender pay gap is therefore driven by having far fewer men in our junior roles - for example, only one in five of our junior branch roles is occupied by a man. To reduce our gender pay gap to zero would require us to change approximately 4,000 of these junior positions to be held by a man. Nevertheless, we remain committed to identifying opportunities to help women to progress to senior roles. We have already made good progress on our Board with 38% female representation.

 

 

Building a national treasure

 

Social purpose has been part of our founding DNA for over 130 years, and we would like to use our trusted status to become a driving force for good in society. Of course, this cornerstone ambition will not be judged by us, but by our members and the wider world.

 

We take our responsibilities seriously. The Society is the 11th highest UK business taxpayer in PwC's annual Total Tax Contribution survey of the 100 Group, we pay fair wages, treat suppliers with respect and work hard to improve our sustainability. We will continue to invest at least 1% of our pre-tax profits to support good causes, of which 0.25% is donated to The Nationwide Foundation.

 

But we want to do more. With decent homes to buy or rent increasingly out of reach for more and more people, we're using our knowledge and experience to make a contribution to Britain's housing market with a new, five-year community programme that will invest tens of millions of pounds in housing initiatives.

 

We will make some £20 million available in grants for housing-related charities and organisations over the next five years. Support for local projects will be driven by local needs and chosen by local members.

 

In Swindon, where we're headquartered, we're partnering with the borough council, and engaging local people, to turn a housing development into a living community.

 

With more people renting, and our members including both renters and small landlords, we wanted to help raise standards across the rental market. We've put together a cross-industry Partnership Board to stay close to tenant needs and help deliver high quality properties for rent.

 

CEO review (continued)

 

Outlook

 

The UK economy has proved considerably more resilient than some people feared immediately after the Brexit referendum, though the pace of growth is likely to remain relatively subdued, reflecting ongoing Brexit uncertainties.

 

With economic growth expected to be modest over the next two years, inflation is likely to moderate, gradually reducing the squeeze on household budgets. Subdued growth may mean a small rise in the unemployment rate from recent 43-year lows and only gradual, limited interest rate increases by the Bank of England.

 

Turning to the outlook for our own business, we anticipate modest growth in our core product markets, reflecting the outlook for the economy as a whole. With employment growth expected to slow and pressure on household budgets fading only gradually, mortgage lending is likely to rise at a fairly pedestrian pace. While demand in the housing market looks set to remain subdued, lack of supply will provide support for prices. We expect the mortgage market to remain extremely competitive.

 

Consumers have been saving less, but we expect household deposit growth to pick up a little, to around 4% a year. We will continue to focus on providing the attractive rates that have helped us maintain our deposit share at 10% in an extremely competitive market.

 

More generally, consumers continue to switch rapidly to digital services, and the new era of Open Banking presents both challenges to established providers, and opportunities for a trusted brand like Nationwide to bring the benefits of mutuality to a wider community.

 

We look to the future from a position of strength and will continue to seek to deliver the outstanding service, mutual value and financial security our members deserve from us. We will support our members at all life-stages, introducing new services to meet their developing needs. We'll reward our members by offering compelling value loyalty products to deepen our relationships with them. And we will look to invest to ensure the Society is financially strong and able to meet the future needs of our members.

 

Financial review

 

In summary

 

Our financial performance for the year demonstrates our continued focus on delivering long-term value to our members whilst ensuring we maintain capital strength. Statutory profit before tax was £977 million (2017: £1,054 million) and underlying profit before tax was £1,022 million (2017: £1,030 million). Our 2017/18 financial performance includes the impact of our debt buy-back exercise (£116 million charge within net income) which will deliver increased capital strength and reduced funding costs in the future, whilst the prior year included a one-off gain of £100 million from the sale of our investment in Visa Europe.  

 

Our focus on efficiency has resulted in a flat cost base year on year and we remain committed to maintaining a low trajectory of cost growth in the future. Provisions for liabilities and charges have reduced during the year reflecting the higher charge for PPI and Plevin customer redress in the prior year, following the confirmation of the FCA's time bar for complaints. 

 

Our robust financial performance and the successful issuance of Core Capital Deferred Shares (CCDS) have resulted in a further improvement of our capital ratios, which remain comfortably above regulatory requirements and demonstrate our financial strength. 

UK Leverage ratio: 4.9%

(2017: 4.4%)

 

Underlying profit: £1,022m  (2017: £1,030m)

 

Statutory profit: £977m (2017: £1,054m)

 

 

Income statement

 

Underlying and statutory results

Year to

4 April 2018

Year to

4 April 2017

 

Net interest margin: 1.31% (2017: 1.33%)

Underlying cost income ratio: 63.2% (2017: 60.2%)

Statutory Cost:Income Ratio 64.6% (2017: 60.3%)

 

£m

£m

Net interest income

3,011

2,960

Net other income

121

325

Total underlying income

3,132

3,285

Underlying administrative expenses

(1,979)

(1,979)

Impairment losses

(105)

(140)

Underlying provisions for liabilities and charges

(26)

(136)

Underlying profit before tax (note i)

1,022

1,030

Bank levy (note ii)

(45)

(42)

Financial Services Compensation Scheme (FSCS) (note ii)

1

-

(Losses) / Gains from derivatives and hedge accounting

(notes ii and iii)

(1)

66

Statutory profit before tax

977

1,054

Taxation

(232)

(297)

Profit after tax

745

757

 

Notes: 

i.     Underlying profit represents management's view of underlying performance and is presented to aid comparability across reporting periods.

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

a.     bank levy is included within administrative expenses

b.     FSCS costs are included within provisions for liabilities and charges

c.      gains from derivatives and hedge accounting are presented separately within total income.

iii.  Although we only use derivatives to hedge market risks, income statement volatility can still arise due to hedge accounting ineffectiveness or because hedge accounting is either not applied or is not achievable. This volatility is largely attributable to accounting rules which do not fully reflect the economic reality of the hedging strategy.

 

 

Total income and margin

 

Net interest income has increased marginally during the year to £3,011 million (2017: £2,960 million), with the benefit of lower funding costs being largely offset by a decrease in mortgage income, reflecting sustained competition in retail lending markets. Net interest margin (NIM) of 1.31% is therefore slightly lower than the prior year (2017: 1.33%).

 

The impact on mortgage pricing of competition in the retail lending markets, and our continued focus on delivering long-term value to our members, has meant that £24 billion of member balances have switched across all prime mortgages during the year. This includes the continued run-off of our legacy base mortgage rate (BMR) balances which reduced by £6.6 billion to £22.7 billion. We expect our reported margin to trend lower in the year ahead as market conditions remain highly competitive.

 

Financial review (continued)

 

The negative impact to NIM from the decline in mortgage margins has been partly offset by savings rates which remain low across the industry. In line with our mutual principles, we continue to resist lowering savings rates where possible and seek to offer long-term value to our members wherever possible. We were the first in the industry to pass on the full benefit of the recent base rate rise (in November 2017) to those members whose savings rates fell by 0.25% following the last base rate reduction in August 2016. During the year our member deposit balances increased and our market share of deposits was maintained at 10.0% (4 April 2017: 10.1%).

 

Other underlying income has decreased during the year to £121 million (2017: £325 million), predominantly due to a £116 million charge relating to our debt buy-back exercise during the year and the prior year impact of a one-off gain of £100 million from the sale of our investment in Visa Europe. The debt buy-back exercise involved the Society issuing circa £2.1 billion of new bonds, which we consider to be MREL eligible, and the repurchase of older bonds. This has resulted in an increase in our capital strength and a reduction in our future cost of wholesale funding.

 

Member financial benefit

 

As a building society, we seek to maintain our financial strength whilst returning value to our members through pricing, propositions and service. We measure the value provided to our members through the highly competitive mortgage, savings and banking products that we offer as our member financial benefit, which we quantify as:

 

Our interest rate differential + incentives and reduced fees

 

Interest rate differential

 

We measure how our average interest rates across our member balances in total compare against the market over the period.

 

For our two largest member segments, mortgages and retail deposits, we compare the average member interest rate for these portfolios against relevant industry benchmarks. A market benchmark based upon data from CACI is used for mortgages and a Bank of England benchmark is used for retail deposits, both adjusted to exclude Nationwide balances. The differentials derived in this way are then applied to member balances for mortgages and deposits.

 

For unsecured lending, a similar comparison is made. We calculate an interest rate differential based on available market data from the Bank of England and apply this to the total interest-bearing balances of credit cards and personal loans.

 

Member incentives and reduced fees

 

Our member financial benefit measure also includes amounts in relation to higher incentives and reduced fees to members, and includes annual amounts provided for the following:

· Mortgages: the differential on incentives for members compared to the market

· 'Recommend a friend': the amount paid to existing members, when they recommend a new current account member to the Society

· FlexPlus account: this current account is considered market leading against major banking competitors, with a high level of benefits for a relatively smaller fee. The difference between the monthly account fee, which was increased from £10 to £13 during the year, and the market average of £16 is included in the member financial benefit measure. 

For the year ended 4 April 2018, this measure shows we have provided our members with a financial benefit of £560 million (2017: £505 million). This reflects our ongoing commitment to delivering long-term value to our members despite strong levels of competition in our core markets.

 

Member financial benefit is derived with reference to available market or industry level data. No adjustment is made to take account of factors such as customer mix, risk appetite and product strategy, due to both limitations in availability of data and to avoid bias from segments in which Nationwide may be under or over-represented. Going forward, we will continue to develop our methodology to ensure it captures all the key elements of financial benefits where data is available.

 

Financial review (continued)

 

Administrative expenses

 

As a result of our significant focus on efficiency underlying administrative expenses have remained flat year on year at £1,979 million (2017: £1,979 million). During the year we have made good progress with our efficiency programme, successfully embedding £105 million of sustainable savings, meaning that we are on course to achieve our target of realising £300 million of sustainable savings by 2022. As the programme develops we will evolve our target of cost savings with a current expectation that this will increase; we will provide an update in this regard later in 2018/19. Sustainable savings have been achieved through process simplification, targeted reductions in third-party spend and organisational simplification, including the closure of operations that are not aligned to our core markets. Over the course of the year the number of permanent employees, on a full time equivalent basis, has decreased by 3% (2017: 2% increase).  

 

Savings achieved during the year have helped to mitigate the impact of increases in underlying costs which were primarily driven by:

•      higher pension costs (£36 million) largely as a result of market conditions impacting defined benefit costs

•      annual pay award and other inflationary increases (£37 million)

•      rising variable costs (£20 million) following further significant business growth, with mortgage balances increasing 4% over the year and with 12% more main current accounts than we had a year ago

•      spend on initiatives to support longer-term efficiency was £27 million higher than in the previous year, resulting in total efficiency investment of £70 million during 2017/18. Initiatives include the redesign of member processes, organisational simplification and improvements to the way we deliver change. 

 

We continue to invest to support the long-term interests of our members, including improvements to our branches, continued updates to our digital channels and preparations for Open Banking. During the year we have also continued investment in IT resilience to ensure that our systems remain safe and secure for our members, and to ensure compliance with UK and EU regulatory requirements.

 

Whilst we have made good progress towards achieving our sustainable savings targets, the reduction in total income has caused our underlying CIR to increase to 63.2% (2017: 60.2%).

 

Achieving more sustainable cost savings and embedding further efficiencies into our business remains a priority for the Society and we remain committed to maintaining a low trajectory of cost growth in the future.

 

Impairment losses

 

Year to

4 April 2018

£m

Year to

4 April 2017

£m

Residential lending

11

58

Consumer banking

97

78

Retail lending

108

136

Commercial lending and other lending

(1)

(5)

Impairment losses on loans and advances

107

131

Impairment (reversals)/losses on investment securities

(2)

9

Total

105

140

 

Impairment losses have decreased by £35 million to £105 million (2017: £140 million). This reduction reflects a prior year charge of £52 million in relation to enhancements to our provisioning methodology, primarily in relation to the credit risks associated with maturing interest only loans. This has been partially offset by the impact of updating provision assumptions to reflect current economic conditions. Delinquency levels have remained low across portfolios during the period, although there is some limited evidence of affordability pressures increasing after a period when inflation has exceeded wage growth.

 

Financial review (continued)

 

Underlying provisions for liabilities and charges

 

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 for the period primarily relates to customer redress provisions recognised in respect of PPI and Plevin, including the cost of administering these claims. More information on customer redress and FSCS provisions is included in note 12 to the financial statements.

 

Taxation

 

The tax charge for the year of £232 million (2017: £297 million) represents an effective tax rate of 24% (2017: 28%) which is higher than the statutory UK corporation tax rate of 19% (2017: 20%). The effective tax rate is higher due to the 8% banking surcharge, equivalent to £43 million (2017: £62 million), and due to the tax effect of disallowable bank levy and customer redress costs of £8 million and £nil (2017: £8 million and £19 million) respectively. Further information is provided in note 9 to the financial statements.

 

Balance sheet

 

Total assets have increased by £7 billion year on year to £229 billion (4 April 2017: £222 billion). This growth has been driven by a £6 billion increase in residential mortgage balances due to strong trading in prime mortgages during the period.

 

Despite sustained competition in the savings market, alongside slower market growth, we have maintained our market share of deposits at 10.0% (4 April 2017: 10.1%) reflecting the highly competitive products that we offer to our members. In addition, we have had significant success in growing the number of members who bank with us, opening 816,000 new current accounts during the year (2017: 795,000), with our market share of standard and packaged accounts now 7.9% (2017: 7.6%).

 

 

Assets

4 April 2018

4 April 2017

Return on Assets: 0.33% (2017: 0.34%)

Liquidity coverage ratio: 130.3% (2017: 124.0%)

£m

%

£m

%

Residential mortgages (note i)

177,299

92

171,263

91

Commercial and other lending

10,716

6

12,597

7

Consumer banking

4,107

2

3,949

2

 

192,122

100

187,809

100

Impairment provisions

(458)

 

(438)

 

Loans and advances to customers

191,664

 

187,371

 

Other financial assets

34,841

 

31,231

 

Other non-financial assets

2,593

 

3,068

 

Total assets

229,098

 

221,670

 

 

 

 

 

 

Asset quality

 

 

 

 

Residential mortgages (note i):

%

 

%

 

Proportion of residential mortgage accounts 3 months+ in arrears

0.43

 

0.45

 

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

56

 

55

 

Average indexed loan to value of new residential mortgages business

71

 

71

 

Impairment provisions as a percentage of non-performing balances

5.3

 

5.3

 

 

 

 

 

 

Consumer banking:

 

 

 

 

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

4

 

4

 

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

89

 

86

 

 

Notes:

i.     Residential mortgages include prime and specialist loans, with the specialist portfolio primarily comprising buy to let (BTL) lending.

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.

 

Financial review (continued)

 

Residential mortgages

 

This financial year was our strongest ever for gross prime mortgage lending at £29.4 billion (2017: £29.1 billion) reflecting the competitively priced products and good long-term value that we offer our members. Total gross mortgage lending was £33.0 billion (2017: £33.7 billion) and represented a market share of 12.8% (2017: 14.0%). Our total net mortgage lending reduced by £3.0 billion to £5.8 billion (2017: £8.8 billion) due to a reduction in gross buy to let (BTL) lending following the affordability criteria changes we made last year and increased prime mortgage redemptions from ongoing market competition driving highly competitive new business rates.

 

The impairment provision balance is broadly unchanged at £145 million (4 April 2017: £144 million). Arrears performance improved marginally during the year, with cases more than three months in arrears improving to 0.43% of the total portfolio (4 April 2017: 0.45%), despite some evidence of a greater strain on affordability given higher inflation and low wage growth.

 

Commercial and other lending

 

During the year, our commercial and other lending balances decreased by £1.9 billion to £10.7 billion following our strategic decision in 2016/17 to reduce our commercial real estate (CRE) portfolio through managed run-off. As a result, our overall commercial lending portfolio is increasingly weighted towards registered social landlords, with balances of £6.8 billion (4 April 2017: £7.5 billion). The registered social landlords' portfolio is fully performing, reflecting its low risk nature. The impairment provision held against CRE balances is £15 million (4 April 2017: £25 million).

 

Consumer banking

 

Consumer banking comprises personal loans of £2.0 billion (4 April 2017: £2.0 billion), credit cards of £1.8 billion (4 April 2017: £1.7 billion) and current account overdrafts of £0.3 billion (4 April 2017: £0.2 billion).

 

The asset quality of the portfolio remains strong. Impairment provisions have increased to £298 million (4 April 2017: £269 million), reflecting both book growth and the impact of updating provision assumptions to reflect current economic conditions.

 

Other financial assets

 

Other financial assets total £34.8 billion (4 April 2017: £31.2 billion), primarily comprising liquidity and investment assets held by our Treasury function of £30.8 billion (4 April 2017: £25.4 billion) and derivatives with positive fair values of £4.1 billion (4 April 2017: £5.0 billion). Derivatives relate primarily to interest rate and foreign exchange contracts which economically hedge financial risks inherent in our core lending and funding activities.

 

Growth in on-balance sheet liquid assets is predominantly due to the replacement of off-balance sheet Funding for Lending scheme (FLS) liquidity with on-balance sheet Term Funding Scheme (TFS) drawdowns. Our Liquidity Coverage Ratio (LCR) has increased to 130.3% (4 April 2017: 124.0%). At 4 April 2017, our LCR was impacted by an agreement to purchase £1.2 billion of residential mortgage backed securities (RMBS) under a programme to securitise Bradford & Bingley residential mortgages. Excluding this item our 2018 and 2017 LCR would have been broadly consistent.

 

Members' interests, equity and liabilities

4 April 2018

 

£m

4 April 2017

(note i)

£m

Wholesale funding ratio
(note ii)
28.2%
(2017: 27.1%)

Member deposits

148,003

144,542

Debt securities in issue

34,118

40,339

Other financial liabilities

33,173

23,978

Other liabilities

1,401

1,678

Total liabilities

216,695

210,537

Members' interests and equity

12,403

11,133

Total members' interests, equity and liabilities

229,098

221,670

 

Notes:

i.       Comparatives have been restated as detailed in note 2 of the financial statements.

ii.     The wholesale funding ratio includes all balance sheet sources of funding (including securitisations).

 

Financial review (continued)

 

Member deposits

 

Member deposits have increased reflecting both an increase in current account credit balances from £17.5 billion to £19.8 billion and a growth in savings balances due to the success of our competitively priced products; on average our member deposit rates are more than 50% higher than the market average1. In a highly competitive market, our market share of UK household deposits remained relatively stable at 10.0% (2017: 10.1%).

 

Debt securities in issue and other financial liabilities

 

Other financial liabilities have increased by £9.2 billion driven by an increase in bank deposits (which includes TFS drawdowns) and subordinated liabilities, which have been issued during the period to finance core activities and to fund the bond buy back exercise. Correspondingly, debt securities in issue have reduced by £6.2 billion primarily due to lower wholesale funding balances following the debt buy back exercise.

 

The growth in other financial liabilities has been partly offset by a decrease in Nationwide International balances which have now fully run off following our strategic decision in 2016/17 to exit the business. This outflow was managed in an orderly manner, with the funding replaced by additional member deposits and the use of wholesale funding where appropriate.

 

The wholesale funding ratio has increased to 28.2% (4 April 2017: 27.1%), predominantly due to TFS drawdowns during the period to support core activities and replace off-balance sheet Funding for Lending Scheme maturities.

 

Members' interests and equity

 

Movements in the year reflect the retained profit after tax and the issuance of CCDS, details of which are included in the Capital structure section below.

 

 

Statement of comprehensive income

(Movements shown net of related taxation)

Year to

4 April 2018

£m

Year to

4 April 2017

£m

Profit after tax

745

757

Net remeasurement of pension obligations

22

(255)

Net movement in cash flow hedge reserve

(191)

(247)

Net movement in available for sale reserve

31

52

Other items

1

2

Total comprehensive income

608

309

 

Further information on gross movements in the pension obligation is included in note 14 to the financial statements. Further information relating to movements in the cash flow hedge reserve is included in note 6 to the financial statements.

 

 

1  Market interest rates are based on Bank of England whole of market average interest rates over the period, adjusted to exclude Nationwide's balances.

 

Financial review (continued)

 

Capital structure

 

Our capital position has strengthened during the period with our CET1 and UK leverage ratios increasing to 30.5% and 4.9% respectively (4 April 2017: 25.4% and 4.4%), comfortably in excess of the regulatory capital requirements.

 

Capital structure

4 April 2018

4 April 2017

 (note i)

£m

£m

Capital resources

 

 

Common Equity Tier 1 (CET1) capital

9,925

8,555

Total Tier 1 capital

10,917

9,547

Total regulatory capital (note ii)

13,936

12,154

Risk weighted assets (RWAs)

32,509

33,641

UK leverage exposure

221,992

215,894

CRR leverage exposure

236,468

228,428

 

 

 

CRD IV capital ratios:

%

%

CET1 ratio

30.5

25.4

UK leverage ratio (note iii)

4.9

4.4

CRR leverage ratio (note iv)

4.6

4.2

 

Notes:

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

ii.   Total regulatory capital was restated as at 4 April 2017 to include accrued interest on subordinated liabilities and subordinated capital. Further information is provided in note 2 to the financial statements.

iii.  The UK leverage ratio is shown on the basis of measurement announced by the Prudential Regulation Authority (PRA) and excludes eligible central bank reserves from the leverage exposure measure.

iv.  The Capital Requirements Regulation (CRR) leverage ratio is calculated using the 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.

 

The maintenance of strong capital ratios is a core requirement of the Society's strategic objective to be 'Built to Last'. In September 2017, five million CCDS were issued raising £0.8 billion of CET1 capital. The issuance enhanced the liquidity and relevance of the CCDS instrument, while also helping to maintain broad access to capital markets. These CCDS form a single series together with those previously issued in December 2013. Further information can be found in note 15 to the financial statements.

 

CET1 capital resources have increased over the year by £1.4 billion, mainly due to the CCDS issuance (£0.8 billion), and profit after tax for the period of £0.7 billion. Risk weighted assets (RWAs) have reduced over the year by approximately £1.1 billion, primarily due to the continued run-off of the commercial book. These movements have resulted in an increase in the CET1 ratio, to 30.5%.

 

The UK leverage ratio increased to 4.9% at 4 April 2018, as a result of the CCDS issuance and profits for the period. The CRR leverage ratio also increased to 4.6%.

 

The Basel Committee published their final reforms to the Basel III framework in December 2017. The amendments include changes to the standardised approaches for credit and operational risks and the introduction of a new RWA output floor. The rules are subject to a lengthy transitional period from 2022 to 2027. In addition, the PRA's revised expectations for IRB models for residential mortgages will be effective from the end of 2020. These reforms will lead to a significant increase in our risk weights over time and we currently expect the consequential impact on our reported CET1 ratio to ultimately be a reduction of the order of 45-50% relative to our current methodology. We note however that organic earnings through the transition will mitigate this impact such that our reported CET1 ratio will in practice remain well in excess of the proforma levels implied by this change, and leverage requirements will remain our binding constraint based on latest projections. These reforms represent a re-calibration of regulatory requirements with no underlying change in the capital resources we hold or the risk profile of our assets. Final impacts are subject to uncertainty for future balance sheet size and mix, and because the final detail of some elements of the regulatory changes remain at the PRA's discretion.

 

Financial review (continued)

 

IFRS 9

 

IFRS 9 will be implemented in the financial statements for the year ending 4 April 2019. It is estimated that the new IFRS 9 expected credit loss (ECL) provisioning approach results in an increase in provisions of £172 million. The reclassification and measurement of financial assets results in a reduction in carrying value of £36 million. The resulting impact on members' interests and equity, net of deferred tax, is £162 million. The CET1 ratio impact of IFRS 9 is a reduction of 31 basis points before taking regulatory transitional relief into account, and a reduction of 10 basis points once this relief is included. The equivalent UK leverage ratio impact is estimated as a reduction of 3 basis points before regulatory transitional relief and no reduction once this relief is included. As a result, IFRS 9 is not expected to have a significant impact on the Group's capital position.

 

Financial performance framework (FPF)

 

As a mutual, we aim to optimise, rather than maximise, profit and retain sufficient earnings to support future growth, sustain a strong capital position and allow us to invest in the business to provide the products and services that our members demand. We have used the most recent guidance from regulators regarding the maximum expected capital requirement for Nationwide to develop our financial performance framework. This framework provides parameters which will allow us to calibrate future performance and help ensure that we achieve the right balance between distributing value to members, investing in our business and maintaining our financial strength.

 

The most important of these parameters is underlying profit which is a key component of Nationwide’s capital. We believe that a level of underlying profit of approximately £0.9 billion to £1.3 billion per annum over the cycle would meet the Board’s objective for sustainable capital strength. This range will vary from time to time, and whether our profitability falls within or outside this range in any given financial year or period will depend on a number of external and internal factors, including conscious decisions to return value to members or to make investments in the business.  It should not be construed as a forecast of the likely level of Nationwide’s underlying profit for any financial year or period within a financial year.

 

Business and risk report

 

Contents

 

 

Page

 

Principal risks

20

 

Managing risk

25

 

Top and emerging risks

27

 

Credit risk

29

 

Residential mortgages

32

 

Consumer banking

39

 

Commercial and other lending

42

 

Treasury assets

47

 

Liquidity and funding risk

50

 

Solvency risk

57

 

 

 

 

 

 

Principal risks

 

Effective risk management is fundamental to the success of Nationwide's business and has an important part to play in delivering our purpose of building society, nationwide by making sure we are safe and secure for the future. Whilst it is accepted that all business activities involve some degree of risk, Nationwide seeks to protect its members by appropriately managing the risks that arise from its activities. Nationwide's risk management processes ensure the Society is built to last by:

·      contributing to better decision making, ensuring we take the right risks, in a way that is considered and supports the strategy

·      ensuring the risks we do take are appropriately understood, controlled and managed

·      maintaining an appropriate balance between delivering member value and remaining a prudent and responsible lender.

 

Nationwide is exposed to the principal risks as set out below, which are managed through the Society's Enterprise Risk Management Framework as described on page 25. The Society's description of principal risks have been restructured to better align with how the risks are managed. However, the underlying risks to Nationwide remain the same.

 

 

Credit risk

 

The risk of loss as a result of a member, customer or counterparty failing to meet their financial obligations.

 

Why this risk is important for Nationwide

 

Borrowers may be unable to repay loans for a number of reasons, such as changes to the economic and market environment or in their individual circumstances. This may lead to:

·      Financial difficulty or other detriment to borrowers who are unable to afford repayments on existing products and services, either with Nationwide or other providers

·      Credit losses which adversely impact the Society's profitability, ability to generate sufficient capital and sustainability.

 

How Nationwide manages this risk on behalf of members

 

Nationwide seeks to minimise unaffordable lending and credit losses through:

·      Stringent affordability checks and controls, ensuring lending is responsible and will not cause financial difficulty for members and customers

·      Prudent lending policies, operated across specific market segments, which ensure lending remains within the Board's risk appetite

·      Continuous monitoring of credit portfolios to identify potential risks, through stress testing, modelling and ongoing reporting to senior management and the Board.  

 

 

Solvency risk

 

The risk that Nationwide fails to maintain sufficient capital to absorb losses throughout a full economic cycle and to maintain the confidence of current and prospective members, investors, the Board and regulators.

 

Why this risk is important for Nationwide

 

A sudden stress or series of unexpected losses may result in Nationwide's capital reserves being depleted. This may lead to:

·      Threats to the ongoing viability of the Society should capital resources be exhausted

·      An inability to offer new products to members as capital is not available to support these offerings

·      Reputational damage to the Society as members, regulators, investors and counterparties lose trust in Nationwide's ability to operate.

 

How Nationwide manages this risk on behalf of members

 

Nationwide ensures it maintains sufficient capital resources through:

·      Defining a minimum level of capital, including leverage, which the Society is willing to tolerate through Board risk appetite, which is maintained and monitored by the Board and other risk committees.

·      Structuring capital to meet key regulatory minimums, stakeholder expectations and the requirements of the strategy.

 

Principal risks (continued)

 

Market risk

 

The risk that the net value of, or net income arising from, the Society's assets and liabilities is impacted as a result of market price or rate changes. As Nationwide does not have a trading book, market risk only arises in the banking book.

 

Why this risk is important for Nationwide

 

Nationwide's income or the value of its assets may be altered by changes in interest rates, currency rates and equity prices. This may lead to:

·      Lower than expected income, adversely affecting the Society's profitability and ability to generate capital

·      Capital and liquidity resources which are worth less than expected, impacting the Society's ability to meet its financial commitments and its ongoing viability.

 

How Nationwide manages this risk on behalf of members

 

Nationwide seeks to minimise its exposure to fluctuations in market prices and rates through:

·      Fully hedging market risks where possible and appropriate and taking market risks only when these are essential to core business activities, or are designed to provide stability of earnings.

·      Continuous monitoring through a variety of techniques including sensitivity analysis, earnings sensitivity, Value at Risk and stress analysis.

 

 

Business risk

 

The risk that volumes decline or margins shrink relative to the cost base, affecting the sustainability of the business and the ability to deliver the strategy due to macro-economic, geopolitical, industry, regulatory or other external events.

 

Why this risk is important for Nationwide

 

Nationwide may fail to respond appropriately to changes in the external environment including new technology, consumer behaviour, regulation or market conditions. This may lead to:

·      Products and services which fail to meet members' needs, adversely affecting both the Society's relationship with members and the ability to generate income 

·      A weakening of our relationships with members as they increasingly conduct their business through third parties

·      Degradation of profitability through increased costs or decreased income.

 

How Nationwide manages this risk on behalf of members

 

Whilst changes in Nationwide's operating environment pose risks, they also present opportunities to provide new, innovative products and services to members. Nationwide ensures it is able to adapt to new conditions and continues to meet members' needs whilst remaining safe and secure for the future through:

·      Considering the potential for disruption to the market and operating environment from a range of factors, including technology and consumer trends, through regular Board and senior management reporting

·      Continuing to develop new products and services based on member engagement, emerging trends, and technological innovation

·      Identifying and monitoring potential risks to its business model through dedicated horizon scanning processes.

 

 

Principal risks (continued)

 

Liquidity and funding risk

 

Liquidity risk is the risk that Nationwide is unable to meet its liabilities as they fall due and maintain member and other stakeholder confidence.

 

Funding risk is the risk that Nationwide is unable to maintain diverse funding sources in wholesale and retail markets and manage retail funding risk that can arise from excessive concentrations of higher risk deposits.

 

Why this risk is important for Nationwide

 

In the event of a downturn in the macroeconomic environment, sudden withdrawals of member deposits or other potential shocks, Nationwide could have insufficient financial resources to meet its commitments. This may lead to:

·      Members being unable to access their money or other products and services

·      Disruption to other organisations or the market

·      Damage to the Society's reputation, decreased member and stakeholder confidence and increased funding costs.

 

How Nationwide manages this risk on behalf of members

 

Nationwide ensures it is able to meet its liabilities as they fall due and maintain appropriate funding through:

·      Operating a comprehensive suite of policies, limits, stress testing, monitoring and robust governance controls to ensure a stable and diverse funding base and sufficient holdings of high quality liquid assets

·      Continuously monitoring liabilities against internal and regulatory requirements, and management of liquidity resources to meet these as they fall due

·      Maintaining a contingency funding plan which details the actions available to the Society in a stress situation.

 

 

Pension risk

 

The risk that the value of the pension schemes' assets will be insufficient to meet the estimated liabilities, creating a pension deficit.

 

Why this risk is important for Nationwide

 

Nationwide has funding obligations to defined benefit pension schemes. The value of the schemes' assets could become insufficient to meet estimated liabilities as a result of volatility in the value of schemes' assets and liabilities, driven by market interest rates, inflation and longevity. This may lead to:

·      Insecurity of employee pension arrangements

·      A requirement to increase cash funding into these schemes

·      An adverse impact on Nationwide's capital position.

 

How Nationwide manages this risk on behalf of members

 

The assets of Nationwide's defined benefit schemes are held in legally separate trusts, each administered by a board of trustees, in accordance with UK legislation. Nationwide minimises the impact of pension risk on both the Society and pension scheme members through:

·      Maintaining effective engagement with the trustees to manage the long-term impact of pension risk on the Society's capital and financial position

·      Balancing risk, return and relevant employee considerations.

 

 

 

Principal risks (continued)

 

Model risk

 

The risk of weaknesses or failures in models used to support key decisions including in relation to the amount of capital and liquidity resources required, lending and pricing, resourcing and earnings.

 

Why this risk is important for Nationwide

 

Model outputs could be inaccurate as a result of inappropriate design or operation. This may affect decision making and lead to:

·      Members being inappropriately offered or refused access to products and services

·      Financial loss or insufficient financial resources

·      Regulatory censure.

 

How Nationwide manages this risk on behalf of members

 

Models play an ever more important part in supporting the strategy as decision making becomes more sophisticated. This risk is mitigated through:

·      A well governed model development process, operated by expert modelling teams and independently validated by specialists in the second line.

·      Regular monitoring of model performance and maintenance, supported by independent review.

 

 

Operational risk

 

The risk of loss resulting from failures of internal processes, people and systems, or from external events.

 

Why this risk is important for Nationwide

 

Process, people or system failures or external events could lead to:

·      Disruption either to the services provided to members or to internal processes

·      The loss of customer data, assets, or other form of detriment due to external parties (e.g. cyber attack, fraud) or poor internal controls

·      Financial loss, through a loss of income, increase in costs, or direct loss.

 

How Nationwide manages this risk on behalf of members

 

Nationwide seeks to minimise detriment and loss to members, customers and the Society through:

·      Regularly identifying and assessing the key operational risks to its strategy, ensuring appropriate controls are in place to mitigate these risks

·      Considering the extreme but plausible events which could affect the Society

·      Continuing to invest in enhanced controls in key areas including cyber, resilience and data.

 

 

Principal risks (continued)

 

Conduct and compliance risk

 

The risk that Nationwide 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.

 

Why this risk is important for Nationwide

 

In an evolving regulatory and consumer environment, Nationwide could provide products and services which are misaligned to the needs of customers or market conditions due to the pace of change in customer behaviour, regulation, or the external environment. This may lead to:

·      Unfair customer outcomes, with customers being sold products which are not wanted or needed

·      Non-compliance with the letter or spirit of legislation or regulation

·      Disruption to the market

·      Regulatory censure.

 

How Nationwide manages this risk on behalf of members

 

Nationwide seeks to minimise its conduct and compliance exposure through:

·      Rigorous testing of products and services both before and after providing them to members to ensure they are designed and performing appropriately

·      Continually assessing new and existing risks in the conduct and compliance environment (e.g. technology, cyber-crime, changes in consumer or market behaviour and regulatory changes), and ensuring that risk exposures are appropriately managed.

 

 

 

 

Managing risk

 

Effective risk management is at the heart of the business, ensuring that decisions are made having considered any associated risks to delivery of Nationwide's strategy and our goal to protect members' interests.

 

The Society manages its risk through an enterprise-wide risk management framework, which sets out the minimum standards, and associated processes, for successful risk management, connecting the Society's strategy with day-to-day risk management activities.

 

Enterprise risk management framework (ERMF)

 

Over the past year, Nationwide has evolved the ERMF in response to industry developments, best practice and the shifting risk landscape, to simplify the Society's processes and improve their effectiveness and efficiency. Whilst the visualisation below presents a simplified articulation of how Nationwide manages its risk, the approach to risk management remains fundamentally unchanged.

 

The diagram below outlines how Nationwide's ERMF is structured to manage the risks to which the Society is exposed.

 

Nationwide Strategy

 

ê

 

Risk appetite

 

Risk appetite articulates how much risk the Society is prepared to take in the pursuit of its objectives

 

ê

 

Risk strategy

 

Risk strategy sets out how the Society will manage its material risks within risk appetite over the five years of the Plan

 

ê

 

Control environment

 

Control environment encompasses all the policies and controls we operate on a day-to-day basis to control our material risks within risk appetite

 

ê

 

Risk and control management and governance

 

Risk and control management and governance defines the processes, tools, structures and systems we used to identify, assess and manage our risks on a day-to-day basis

 

ê

 

Risk, incident and control reporting

Risk, incident and control reporting ensures the appropriate monitoring, aggregation, and escalation of relevant risk and control information to the Board, risk committees, and management to enable effective risk decision making.

ê

 

Better Business Decisions

 

 

The ERMF ensures that risks are managed through robust and consistent processes, supported by appropriate tools and guidance, enabling better business decisions for delivery of Nationwide's strategy.

 

The Board monitors the Society's risk management and internal control systems and carries out an annual review of their effectiveness. During the year, the Society's risk management and internal control systems have been reviewed and, on the basis of this review, the Board is satisfied that Nationwide has an adequate system of risk management and internal control.

 

 

Managing risk (continued)

 

Risk appetite

 

Board risk appetite articulates how much risk the Board is willing to accept on behalf of its members in the delivery of the strategy. The following statements articulate Nationwide's approach to taking risk responsibly in the interests of our members. The Society's ambitions are to:

 

·      Lend in a responsible, affordable and sustainable way to ensure we safeguard members and the financial strength of the Society throughout the credit cycle

·      Maintain sufficient capital and liquidity resources to support current business activity and planned growth and to remain resilient to significant stress

·      Minimise customer disruption, financial loss, reputational damage and regulatory non-compliance, especially those caused by failures of people, processes and systems

·      Provide sustainable customer services over resilient systems

·      Treat customers fairly before, during and after the sales process

·      Offer products and services which meet customer needs and expectations, perform as represented and provide value for money

·      Operate a mutual business model which is sustainable and remains within the requirements of the Building Societies Act in a stress

·      Only incur market risks that are required for operational efficiency, stability of earnings or cost minimisation in supporting core business activities.

 

 

 

 

 

 

Top and emerging risks

 

Nationwide accepts that all business activities involve some degree of risk; therefore, steps are taken to protect members by ensuring that these activities are managed appropriately. The Built to Last strategic cornerstone focuses on Nationwide being sustainable, efficient and resilient for members.

 

Top and emerging risks are identified through the process outlined in the 'Managing Risk' section of this report and are closely tracked throughout the governance structure. They are specific instances of one or more of our principal risks which are particularly relevant in the current environment and which the Society will keep under close observation through risk reporting. The top and emerging risks to Nationwide's' strategy are detailed in the table below.

 

 Risk

Overview of Risk

Mitigating Actions

Cyber security

 

Nationwide and other organisations across financial and non-financial sectors continue to be targeted by increasingly sophisticated and frequent cyber attacks including ransomware, malware and Distributed Denial of Service (DDoS) attacks. These attacks can disrupt the provision of services to members or lead to a loss of member data.

The threat from cyber attacks is expected to remain high, with heightened geopolitical tensions, potentially increasing the threat to the UK, and the development of ever more sophisticated threats. This becomes more significant as services continue to be accessed online.

Nationwide is:

·  Continuing to invest in cyber security, focusing on the development of robust preventative controls, intrusion detection systems and response plans to protect services and member data

·  Collaborating with industry bodies and law enforcement agencies, to develop a better understanding of, and response to, evolving cyber threats.

Operational resilience

 

Over recent years there has been a dramatic increase in demand for digital services available at all times. Ever increasing volumes of data must be managed securely and reliably, to avoid disruption to member services.

The rate of increase in demand for digital services shows no signs of slowing down, and delivering technological change to match this demand, without impacting system security or stability, remains a challenge across the sector.

Nationwide is:

·  Ensuring focus on maintenance of service provision, with oversight through the dedicated Board IT and Resilience Committee

·  Continuing to invest in the resilience of its systems and implementing robust controls to minimise disruption.

Regulatory change

 

The regulatory environment continues to evolve, with several key pieces of regulation coming into force in 2018, including the General Data Protection Regulation (GDPR), the Payment Services Directive II (PSD II), Competition and Markets Authority (CMA) remedies and BCBS 239. Each of these requires complex changes to implement and the combined effect is resulting in significant industry-wide challenges for firms to demonstrate and maintain compliance.

Nationwide is well placed to respond to new requirements with work already underway to ensure compliance.

Nationwide is:

·  Managing implementation of regulatory changes through dedicated programmes which are closely monitored by the Board

·  Working closely with regulators to ensure compliance with both the letter and the spirit of regulation.

 

 

 

 

 

 

Top and emerging risks (continued)

 

Risk

Overview of Risk

Mitigating Actions

Competitive environment

 

Competition continues to evolve in Nationwide's core markets driven by changes to regulation, technological innovation, and increasing demand for digital products and services due to the convenience that they can bring. Whilst these provide opportunities to build new and deeper relationships with members, and better meet customer needs through new product offerings, they may also pose challenges to Nationwide's products, systems and pricing, and disrupt how financial services currently operate.

Changes in the competitive environment are expected to continue as existing or new competitors launch propositions utilising Open Banking technologies and enhance existing service offerings through artificial intelligence, machine learning and other product innovation.

Nationwide is:

·  Continuously monitoring the competitive environment and reviewing the ability of the Society's business model to respond to potential risks and opportunities

·  Continuing to identify and invest in new and innovative product offerings and technology to deliver on our commitment to provide legendary service to members.

Geopolitical and macro-economic environment

 

Nationwide is inherently exposed to a downturn in macro-economic conditions which can impact customer affordability, credit losses and the availability and cost of financial resources.

 

Numerous factors are expected to impact the geopolitical and macro-economic environment over the coming year. These include:

· Brexit - whilst the basis of a transition deal is in place, uncertainty remains over the terms of the UK's exit from the EU. Whilst Nationwide's business model means the Society has limited direct exposure to the EU, depending upon the shape of the deal, Nationwide may be exposed to secondary impacts

·  Economic conditions and policy - when adjusted for inflation, wages growth is negligible and productivity remains persistently low. When coupled with the withdrawal of some monetary stimulus, customer affordability could be affected

·  Geopolitical tensions - there remain significant tensions in the geopolitical environment which have the potential to create headwinds for the UK economy.

Nationwide is:

·  Monitoring key economic factors for signs of increasing risk or environmental developments

·  Undertaking regular assessments of how economic stresses may impact its business model

·  Continuing Board review of key developments including Brexit, geopolitical tensions, European and domestic political changes.

 

 

 

 

Credit risk

 

Credit risk is the risk of loss as a result of a member, customer or counterparty failing to meet their financial obligations. Credit risk also encompasses refinance risk and concentration risk. Refinance risk is the risk of loss arising when a repayment of a loan or other financial product occurs later than originally anticipated.

 

Nationwide manages credit risk for each of the following portfolios:

 

Portfolio

Definition

Residential mortgages

Loans secured on residential property

Consumer banking

Unsecured lending including current account overdrafts, personal loans and credit cards

Commercial and other lending

Loans to registered social landlords, loans made under the Private Finance Initiative and commercial real estate lending. Also includes deferred consideration and collateral balances to support repurchase transactions.

Treasury

Treasury liquidity, derivatives and discretionary portfolios

 

Maximum exposure to credit risk

 

Credit risk largely arises from exposure to loans and advances to customers, which account for 85.2% (2017: 85.9%) of Nationwide's total credit risk exposure. Within this, exposure relates primarily to residential mortgages, which account for 92.5% (2017: 91.4%) of total loans and advances to customers and which comprise high quality assets with low occurrences of arrears and possessions. Residential mortgage exposures have increased during the year, driven by Nationwide's continued support for first time buyers which has contributed to the £6 billion growth in prime mortgage balances in the year.

 

In addition to loans and advances to customers, Nationwide is exposed to credit risk on all other financial assets. For financial assets recognised on the balance sheet, the maximum exposure to credit risk represents the balance sheet carrying value after allowance for impairment. For off-balance sheet guarantees, the maximum exposure is the maximum amount that Nationwide would have to pay if the guarantees were to be called upon. For loan commitments and other credit related commitments that are irrevocable over the life of the respective facilities, the maximum exposure is the full amount of the committed facilities.

 

Nationwide's maximum exposure to credit risk has risen from £234 billion to £240 billion, reflecting the growth in residential mortgage loans.

 

Maximum exposure to credit risk

2018

Gross balances

Less: Impairment provisions

Carrying value

Commitments

(note i)

Maximum credit risk exposure

% of total credit risk exposure

(Audited)

£m

£m

£m

£m

£m

%

Cash

14,361

-

14,361

-

14,361

6

Loans and advances to banks

3,422

-

3,422

101

3,523

1

Investment securities - Available for sale

11,926

-

11,926

-

11,926

5

Investment securities - Held to maturity

1,120

-

1,120

700

1,820

1

Derivative financial instruments

4,121

-

4,121

-

4,121

2

Fair value adjustment for portfolio hedged risk (note ii)

(109)

-

(109)

-

(109)

-

 

34,841

-

34,841

801

35,642

15

 

 

 

 

 

 

 

Loans and advances to customers:

 

 

 

 

 

 

Residential mortgages

177,299

(145)

177,154

12,204

189,358

79

Consumer banking

4,107

(298)

3,809

42

3,851

1

Commercial and other lending

 (notes ii and iii)

10,716

(15)

10,701

842

11,543

5

 

192,122

(458)

191,664

13,088

204,752

85

 

 

 

 

 

 

 

Total

226,963

(458)

226,505

13,889

240,394

100

 

 

 

Credit risk (continued)

 

Maximum exposure to credit risk

2017

Gross balances

Less: Impairment provisions

Carrying value

Commitments

(note i)

Maximum credit risk exposure

% of total credit risk exposure

(Audited)

£m

£m

£m

£m

£m

%

Cash

13,017

-

13,017

-

13,017

6

Loans and advances to banks

2,587

-

2,587

115

2,702

1

Investment securities - Available for sale (note iv)

9,831

-

9,831

-

9,831

4

Investment securities - Held to maturity

-

-

-

1,774

1,774

1

Derivative financial instruments

5,043

-

5,043

-

5,043

2

Fair value adjustment for portfolio hedged risk (note ii)

746

-

746

-

746

-

 

31,224

-

31,224

1,889

33,113

14

 

 

 

 

 

 

 

Loans and advances to customers:

 

 

 

 

 

 

Residential mortgages

171,263

(144)

171,119

12,589

183,708

78

Consumer banking

3,949

(269)

3,680

26

3,706

2

Commercial and other lending

(notes ii and iii)

12,597

(25)

12,572

926

13,498

6

 

187,809

(438)

187,371

13,541

200,912

86

 

 

 

 

 

 

 

Total

219,033

(438)

218,595

15,430

234,025

100

 

Notes:

i.       In addition to the amounts shown above, Nationwide has, as part of its retail operations, revocable commitments of £9,517 million (2017: £9,202 million) in respect of credit card and overdraft facilities. These commitments represent agreements to lend in the future, subject to certain considerations. Such commitments are cancellable by Nationwide, subject to notice requirements, and given their nature are not expected to be drawn down to the full level of exposure.

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

iii.    Commercial and other lending includes deferred consideration relating to an investment in Visa Inc and collateral balances to support repurchase transactions.

iv.    Comparatives have been restated as detailed in note 2 of the financial statements.

 

 

Credit risk (continued)

 

Movements in impaired loans by credit risk segment

 

The table below shows the movements during the year of all loans classified as impaired. The balance shown represents the entire financial asset rather than just the overdue elements.

 

Movements in impaired loan balances

Prime

mortgages

Specialist mortgages

Consumer banking

Commercial and other lending

Total

(Audited)

£m

£m

£m

£m

£m

At 5 April 2017

372

401

233

45

1,051

Classified as impaired during the year

310

343

125

24

802

Transferred from impaired to unimpaired

(285)

(337)

(23)

(5)

(650)

Amounts written off

(17)

(38)

(78)

(22)

(155)

Repayments

(7)

-

(11)

(12)

(30)

At 4 April 2018

373

369

246

30

1,018

 

Movements in impaired loan balances

Prime

mortgages

Specialist mortgages

Consumer banking

Commercial and other lending

Total

(Audited)

£m

£m

£m

£m

£m

At 5 April 2016

366

412

260

176

1,214

Classified as impaired during the year

323

358

110

6

797

Transferred from impaired to unimpaired

(298)

(333)

(44)

(29)

(704)

Amounts written off

(14)

(37)

(92)

(105)

(248)

Repayments

(5)

1

(1)

(3)

(8)

At 4 April 2017

372

401

233

45

1,051

 

Note:

Loans that were classified as impaired and loans that have transferred into or out of the impaired classification are based on the relevant status at each month end, when compared to the previous month end.

 

 

 

 

Credit risk - Residential mortgages

 

Summary

 

Nationwide's residential mortgages include both prime and specialist loans. Prime residential mortgages are mainly Nationwide-branded advances made through the branch network and intermediary channels. Specialist lending consists of buy to let mortgages originated under The Mortgage Works (UK) plc (TMW) brand.

 

Nationwide is committed to helping people become homeowners and continues to actively support first time buyers. New lending in the prime portfolio has seen the residential mortgage exposure grow from £171 billion to £177 billion over the year, with new lending to first time buyers, at £11.8 billion, increasing to 38% (2017: 36%) of all new lending. Nationwide continues to operate with a commitment to responsible lending with a focus on championing good conduct and fair outcomes.

 

Whilst the average LTV of new lending has remained stable at 71%, increased new lending to first time buyers, at higher LTVs, has resulted in a rise in the proportion of the portfolio with an LTV above 80% to 11.2% (2017: 9.6%). The average indexed LTV across the combined residential mortgage portfolio has increased slightly from 55% to 56%.

 

The proportion of lending made to the buy to let segment reduced over the year to 11% (2017: 14%). TMW remains a top tier BTL lender and uses this presence and influence in the market to drive improving standards across the industry, providing expertise, opinion and innovation for the benefit of the private rental sector, supporting both landlords and tenants. Through TMW, Nationwide is supporting portfolio landlords, with four or more properties, has expanded into 80% LTV lending and is piloting lending to limited companies.

 

The proportion of loans in arrears has reduced slightly to 1.5% (2017: 1.6%) and arrears levels remain low across prime and specialist lending, reflecting the favourable economic conditions and low interest rate environment, supported by robust credit assessment and affordability controls at the point of lending, and proactive engagement with borrowers. The proportion of loans more than three months in arrears reduced slightly to 0.43% and is significantly below the UK Finance (UKF) average of 0.81%. Whilst there are no signs of deterioration in the portfolio, with the immediate outlook for the UK being less certain and the buy to let market facing increased costs and potentially less investor demand, the expectation is for a gradual rise in arrears from these low levels.

 

The provision balance for residential mortgages has remained broadly stable at £145 million (2017: £144 million) and provision coverage on non-performing balances is unchanged at 5.3%.

 

Lending and new business

 

The table below summarises the residential mortgages portfolios:

 

Residential mortgage lending

2018

2017

(Audited)

£m

%

£m

%

Prime

144,049

81

138,004

81

 

 

 

 

 

Specialist:

 

 

 

 

Buy to let

30,438

18

30,087

18

Self-certified

1,823

1

2,071

1

Near prime

705

-

784

-

Sub prime

284

-

317

-

 

33,250

19

33,259

19

 

 

 

 

 

Total residential mortgages

177,299

100

171,263

100

 

Note:

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

 

 

 

Credit risk - Residential mortgages (continued)

 

Distribution of new business by borrower type (by value)

2018

2017

 

%

%

Prime:

 

 

Home movers

29

30

First time buyers

38

36

Remortgagers

21

19

Other

1

1

Total prime

89

86

 

 

 

Specialist:

 

 

Buy to let new purchases

2

3

Buy to let remortgagers

9

11

Total specialist

11

14

 

 

 

Total new business

100

100

 

Note:

All new business measures exclude further advances and product switchers.

 

In October 2014, the Financial Policy Committee (FPC) introduced a 15% limit on the proportion of new lending for residential mortgages, excluding buy to let, that may be written at income multiples of 4.5 and above. The proportion of new lending at income multiples of 4.5 or higher was 8.3% in the year (2017: 10.6%). This is closely monitored and controlled to remain within risk appetite.

 

Credit risk

 

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

 

LTV and credit risk concentration

 

LTV is calculated by weighting the borrower level LTV by the individual loan balance to arrive at an average LTV. This approach is considered to most appropriately reflect the exposure at risk.

 

Average LTV of loan stock

2018

2017

%

%

Prime

55

54

Specialist

58

59

Group

56

55

 

Average LTV of new business

2018

2017

%

%

Prime

72

72

Specialist (buy to let)

61

62

Group

71

71

 

Note:

The LTV of new business excludes further advances and product switchers.

 

Credit risk - Residential mortgages (continued)

 

LTV distribution of new business

2018

2017

%

%

0% to 60%

26

26

60% to 75%

30

31

75% to 80%

9

9

80% to 85%

14

14

85% to 90%

18

17

90% to 95%

3

3

Over 95%

-

-

Total

100

100

 

The maximum LTV for new prime residential customers is 95%. The proportion of new lending greater than 80% LTV has increased to 35% (2017: 34%) in part as a result of the strategy to continue to support first time buyers.

 

 

Geographical concentration

 

Residential mortgage balances by LTV and region

(Audited)

Greater London

Central England

Northern England

South East England

South West England

Scotland

Wales

Northern Ireland

Total

 

2018

£m

£m

£m

£m

£m

£m

£m

£m

£m

%

 

 

 

 

 

 

 

 

 

 

 

Performing loans

 

 

 

 

 

 

 

 

 

 

Fully collateralised

 

 

 

 

 

 

 

 

 

 

LTV ratio:

 

 

 

 

 

 

 

 

 

 

Up to 50%

26,771

10,392

6,896

8,727

5,820

2,895

1,383

925

63,809

 

50% to 60%

11,496

5,932

4,101

4,502

3,240

1,612

799

389

32,071

 

60% to 70%

9,006

6,807

6,136

3,678

3,304

2,375

1,271

392

32,969

 

70% to 80%

6,441

4,944

5,568

2,809

2,414

2,495

1,098

403

26,172

 

80% to 90%

4,987

2,817

3,386

1,974

1,592

1,453

675

274

17,158

 

90% to 100%

506

319

452

306

172

283

63

83

2,184

 

 

59,207

31,211

26,539

21,996

16,542

11,113

5,289

2,466

174,363

98.4

 

 

 

 

 

 

 

 

 

 

 

Not fully collateralised

 

 

 

 

 

 

 

 

 

 

Over 100% LTV (A)

4

4

20

2

3

11

2

169

215

0.1

Collateral value on A

3

3

17

2

2

11

2

144

184

 

Negative equity on A

1

1

3

-

1

-

-

25

31

 

 

 

 

 

 

 

 

 

 

 

 

Total performing loans

59,211

31,215

26,559

21,998

16,545

11,124

5,291

2,635

174,578

98.5

 

 

 

 

 

 

 

 

 

 

 

Non-performing loans

 

 

 

 

 

 

 

 

 

 

Fully collateralised

 

 

 

 

 

 

 

 

 

 

LTV ratio:

 

 

 

 

 

 

 

 

 

 

Up to 50%

489

162

112

122

70

39

23

28

1,045

 

50% to 60%

199

100

82

70

44

31

15

11

552

 

60% to 70%

78

109

116

60

52

37

22

11

485

 

70% to 80%

30

79

100

26

31

39

19

10

334

 

80% to 90%

13

32

84

8

6

21

16

8

188

 

90% to 100%

4

3

36

3

1

9

7

8

71

 

 

813

485

530

289

204

176

102

76

2,675

1.5

 

 

 

 

 

 

 

 

 

 

 

Not fully collateralised

 

 

 

 

 

 

 

 

 

 

Over 100% LTV (B)

-

1

8

-

-

2

-

35

46

-

Collateral value on B

-

1

8

-

-

2

-

28

39

 

Negative equity on B

-

-

-

-

-

-

-

7

7

 

 

 

 

 

 

 

 

 

 

 

 

Total non-performing loans

813

486

538

289

204

178

102

111

2,721

1.5

 

 

 

 

 

 

 

 

 

 

 

Total residential mortgages

60,024

31,701

27,097

22,287

16,749

11,302

5,393

2,746

177,299

100.0

 

 

 

 

 

 

 

 

 

 

 

Geographical concentrations

34%

18%

15%

13%

9%

6%

3%

2%

100%

 

 

 

Credit risk - Residential mortgages (continued)

 

Residential mortgage balances by LTV and region

(Audited)

Greater London

Central England

Northern England

South East England

South West England

Scotland

Wales

Northern Ireland

Total

 

2017

£m

£m

£m

£m

£m

£m

£m

£m

£m

%

 

 

 

 

 

 

 

 

 

 

 

Performing loans

 

 

 

 

 

 

 

 

 

 

Fully collateralised

 

 

 

 

 

 

 

 

 

 

LTV ratio:

 

 

 

 

 

 

 

 

 

 

Up to 50%

28,493

9,737

6,361

8,783

5,630

2,915

1,208

833

63,960

 

50% to 60%

11,822

5,612

3,748

4,637

3,141

1,649

681

357

31,647

 

60% to 70%

8,659

6,888

5,737

3,852

3,426

2,366

972

395

32,295

 

70% to 80%

5,169

4,905

5,897

2,216

2,198

2,619

1,296

352

24,652

 

80% to 90%

3,084

2,483

3,304

1,314

1,207

1,285

707

324

13,708

 

90% to 100%

288

237

699

132

102

157

233

140

1,988

 

 

57,515

29,862

25,746

20,934

15,704

10,991

5,097

2,401

168,250

98.2

 

 

 

 

 

 

 

 

 

 

 

Not fully collateralised

 

 

 

 

 

 

 

 

 

 

LTV more than 100% (A)

5

6

40

2

3

16

8

239

319

0.2

Collateral value on A

4

5

35

1

2

15

8

199

269

 

Negative equity on A

1

1

5

 1

1

1

40

50

 

 

 

 

 

 

 

 

 

 

 

 

Total performing loans

57,520

29,868

25,786

20,936

15,707

11,007

5,105

2,640

168,569

98.4

 

 

 

 

 

 

 

 

 

 

 

Non-performing loans

 

 

 

 

 

 

 

 

 

 

Fully collateralised

 

 

 

 

 

 

 

 

 

 

LTV ratio:

 

 

 

 

 

 

 

 

 

 

Up to 50%

504

153

100

120

66

40

20

25

1,028

 

50% to 60%

192

98

69

69

41

28

12

11

520

 

60% to 70%

69

105

107

58

49

42

17

12

459

 

70% to 80%

17

94

105

21

32

36

24

10

339

 

80% to 90%

8

42

86

6

6

18

15

11

192

 

90% to 100%

1

7

53

-

1

7

14

7

90

 

 

791

499

520

274

195

171

102

76

2,628

1.6

 

 

 

 

 

 

 

 

 

 

 

Not fully collateralised

 

 

 

 

 

 

 

 

 

 

LTV more than 100% (B)

-

1

12

-

-

2

3

48

66

-

Collateral value on B

-

1

11

-

-

2

3

38

55

 

Negative equity on B

 -

1

-

-

-

-

10

11

 

 

 

 

 

 

 

 

 

 

 

 

Total non-performing loans

791

500

532

274

195

173

105

124

2,694

1.6

 

 

 

 

 

 

 

 

 

 

 

Total residential mortgages

58,311

30,368

26,318

21,210

15,902

11,180

5,210

2,764

171,263

100.0

 

 

 

 

 

 

 

 

 

 

 

Geographical concentrations

34%

18%

15%

12%

9%

7%

3%

2%

100%

 

 

Over the year, the geographical distribution across the UK has remained stable.

 

The value of partially collateralised non-performing loans has reduced to £46 million (2017: £66 million), primarily reflecting the growth in house prices.

 

During the year the proportion of loan balances with an LTV greater than 80% has increased to 11.2% (2017: 9.6%) reflecting the new lending and support for first time buyers.

 

 

 

Credit risk - Residential mortgages (continued)

 

Arrears

 

The methodology for calculating mortgage arrears is based on the UK Finance (UKF) definition of arrears, where months in arrears is determined by dividing the arrears balance outstanding by the latest contractual payment.

 

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

2018

2017

%

%

Prime

0.34

0.36

Specialist

0.83

0.89

Total

0.43

0.45

 

 

 

UKF industry average

0.81

0.91

 

Favourable economic conditions, including a continued low interest rate environment, have resulted in the arrears performance of both the prime and specialist mortgage portfolios reaching a level where any future changes are more likely to be gradual upward movements rather than further falls. The combined arrears rate of 0.43% was approximately half of the UKF industry average rate of 0.81%.

 

Impaired loans

 

Impaired and non-performing loans are identified primarily by arrears status. Impaired accounts are defined as those greater than three months in arrears and include accounts subject to possession. Non-performing accounts include:

 

·      all impaired loans;

·      loans which are past due but not impaired, including any loan where a payment due is received late or missed; and

·      past term interest only loans which have gone into litigation.

 

The non-performing loan amount represents the entire loan balance rather than just the payment overdue.

 

Impairment provisions are held in relation to both the performing and non-performing segments of the residential mortgage portfolio. Provisions reflect losses which have been incurred at the balance sheet date, based on objective evidence. Individual impairment provisions are assigned to accounts in possession and a collective provision is assigned to all other accounts. For currently performing loans, the provision reflects losses arising from impairment events that have occurred within the portfolio but are not identifiable at the reporting date.

 

 

 

Credit risk - Residential mortgages (continued)

 

Residential mortgages by payment status

2018

Prime

Specialist

Total

 

(Audited)

£m

£m

£m

%

Performing:

 

 

 

 

Neither past due nor impaired

142,382

32,196

174,578

98.5

 

 

 

 

 

Non-performing:

 

 

 

 

Past due up to 3 months

1,294

685

1,979

1.1

 

Impaired:

 

 

 

 

Past due 3 to 6 months

162

159

321

0.2

Past due 6 to 12 months

113

110

223

0.1

Past due over 12 months

89

76

165

0.1

Litigations (past term interest only)

1

1

2

-

Possessions

8

23

31

-

Total non-performing loans

1,667

1,054

2,721

1.5

 

 

 

 

 

Total residential mortgages

144,049

33,250

177,299

100

 

 

 

 

 

Non-performing loans as a % of total residential mortgages

1.2%

3.2%

1.5%

 

Impairment provisions (£m)

36

109

145

 

Impairment provisions as a % of non-performing balances

2.2%

10.3%

5.3%

 

Impairment provisions as a % of total residential mortgages

0.02%

0.33%

0.08%

 

 

Residential mortgages by payment status

2017

Prime

Specialist

Total

 

(Audited)

£m

£m

£m

%

Performing:

 

 

 

 

Neither past due nor impaired

136,374

32,195

168,569

98.4

 

 

 

 

 

Non-performing:

 

 

 

 

Past due up to 3 months

1,258

663

1,921

1.1

 

Impaired:

 

 

 

 

Past due 3 to 6 months

156

173

329

0.2

Past due 6 to 12 months

117

118

235

0.2

Past due over 12 months

91

91

182

0.1

Litigations (past term interest only)

-

1

1

-

Possessions

8

18

26

-

Total non-performing loans

1,630

1,064

2,694

1.6

 

 

 

 

 

Total residential mortgages

138,004

33,259

171,263

100.0

 

 

 

 

 

Non-performing loans as a % of total residential mortgages

1.2%

3.2%

1.6%

 

Impairment provisions (£m)

34

110

144

 

Impairment provisions as a % of non-performing balances

2.1%

10.3%

5.3%

 

Impairment provisions as a % of total residential mortgages

0.02%

0.33%

0.08%

 

 

Mortgage portfolios at 4 April 2018 included 1,634 mortgage accounts (2017: 1,674), including those in possession, where payments were more than 12 months in arrears. The total principal outstanding in these cases was £182 million (2017: £195 million). The total value of arrears in these cases was £22 million (2017: £20 million) or 0.01% (2017: 0.01%) of total mortgage balances.

 

 

 

 

 

 

Credit risk - Residential mortgages (continued)

 

Impairment losses for the year

2018

2017

(Audited)

£m

£m

Prime

3

11

Specialist

8

47

Total

11

58

 

Note:

Impairment losses represent the amount charged through the profit and loss account, rather than amounts written off during the year.

 

Possessions

 

Number of properties in possession as % of total book

2018

2017

Number of properties

%

Number of properties

%

Prime

108

0.01

89

0.01

Specialist

150

0.05

136

0.05

Total

258

0.02

225

0.01

 

 

 

 

 

UKF industry average

 

0.03

 

0.03

 

Repossessions as a percentage of the total book have remained stable.

 

Interest only mortgages

 

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

 

The majority of the specialist portfolio comprises buy to let loans, of which approximately 80% are advanced on an interest only basis.

 

Interest only mortgages - term to maturity                                              

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

2018

£m

£m

£m

£m

£m

£m

%

Prime

54

331

366

1,577

11,271

13,599

9.4

Specialist

126

173

213

1,305

27,795

29,612

89.1

Total

180

504

579

2,882

39,066

43,211

24.4

 

Interest only mortgages

- term to maturity                                              

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

2017

£m

£m

£m

£m

£m

£m

%

Prime

64

337

444

1,636

13,604

16,085

11.7

Specialist

104

202

216

1,173

28,037

29,732

89.4

Total

168

539

660

2,809

41,641

45,817

26.8

 

Interest only loans that are 'term expired (still open)' are, unless otherwise in arrears, considered to be performing for six months, pending renegotiation of the facility. After six months, if not in litigation, the loans are classified as forborne.
 

Credit risk - Consumer banking

 

Summary

 

The consumer banking portfolio comprises balances on unsecured retail banking products, specifically overdrawn current accounts, personal loans and credit cards. Total balances across these portfolios have grown by 4 % to £4,107 million during the period (2017: £3,949 million).

 

Nationwide is aware of the pressure that some of our members will be under, with increasing levels of household debt. We continue to operate with a commitment to responsible lending and a focus on championing good conduct and fair outcomes.

 

The quality of the unsecured portfolios has remained strong, benefiting from proactive risk management practices and continued low interest rates. Total non-performing balances (excluding charged off accounts) as a proportion of total balances have remained stable over the year at 4%.

 

Impairment provisions are held against both performing and non-performing segments of the consumer banking portfolio. Provision balances have increased in the year, largely due to updates to provision assumptions to reflect the current economic conditions. Across the consumer banking portfolios this has led to a 3% increase in provision coverage as a percentage of total non-performing balances from 86% to 89%.

 

Consumer banking balances

2018

2017

(Audited)

£m

%

£m

%

Overdrawn current accounts

277

7

261

7

Personal loans

2,031

49

1,957

49

Credit cards

1,799

44

1,731

44

Total consumer banking

4,107

100

3,949

100

 

 

Credit risk

 

Impaired accounts

 

Credit risk on the consumer banking portfolios is primarily monitored and reported based on arrears status. Impaired accounts are those greater than three months in arrears or which have individual provisions raised against them. Non-performing accounts comprise all impaired accounts as well as accounts where a payment due is received late or missed. This includes overdrawn accounts with balances in excess of the agreed limit. The non-performing loan amount represents the entire loan rather than just the payment overdue.

 

The performance of the portfolios is closely monitored, with impairment provisions held for both the performing and non-performing segments of the consumer banking portfolio. Impairment provisions reflect estimated losses which have been incurred at the balance sheet date, based on objective evidence. For performing loans, the impairment provision reflects the assessment of losses arising from events that have occurred but which have not been specifically identified at the reporting date.

 

Credit risk - Consumer banking (continued)

 

 

Consumer banking by payment due status

2018

Overdrawn current accounts

Personal

 loans

Credit

cards

Total

 

(Audited)

£m

£m

£m

£m

%

Performing:

 

 

 

 

 

Neither past due nor impaired

235

1,882

1,656

3,773

92

 

 

 

 

 

 

Non-performing:

 

 

 

 

 

Past due up to 3 months

12

43

33

88

 

Impaired:

 

 

 

 

 

Past due 3 to 6 months

4

13

11

28

 

Past due 6 to 12 months

3

12

2

17

 

Past due over 12 months

3

13

-

16

 

 

22

81

46

149

4

 

 

 

 

 

 

Charged off (note i)

20

68

97

185

4

Total non-performing

42

149

143

334

 

 

 

 

 

 

 

Total consumer banking lending

277

2,031

1,799

4,107

100

 

 

 

 

 

 

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

9%

4%

3%

4%

 

 

 

 

 

 

 

Impairment provisions excluding charged off balances (£m)

17

56

50

123

 

Impairment provisions on charged off balances (£m)

19

65

91

175

 

Total impairment provisions

36

121

141

298

 

 

 

 

 

 

 

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

86%

81%

99%

89%

 

Impairment provisions as % of total balances

13%

6%

8%

7%

 

 

 

 

Credit risk - Consumer banking (continued)

 

Consumer banking by payment due status

2017

 

Overdrawn current accounts

Personal loans

Credit

cards

Total

 

(Audited)

£m

£m

£m

£m

%

Performing:

 

 

 

 

 

Neither past due nor impaired

225

1,822

1,591

3,638

92

 

 

 

 

 

 

Non-performing:

 

 

 

 

 

Past due up to 3 months

12

38

28

78

 

Impaired:

 

 

 

 

 

Past due 3 to 6 months

4

10

12

26

 

Past due 6 to 12 months

3

11

2

16

 

Past due over 12 months

3

14

-

17

 

 

22

73

42

137

4

 

 

 

 

 

 

Charged off (note i)

14

62

98

174

4

Total non-performing

36

135

140

311

 

 

 

 

 

 

 

Total consumer banking lending

261

1,957

1,731

3,949

100

 

 

 

 

 

 

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

9%

4%

3%

4%

 

 

 

 

 

 

 

Impairment provisions excluding charged off balances

15

48

42

105

 

Impairment provisions on charged off balances

13

60

91

164

 

Total impairment provisions

28

108

133

269

 

 

 

 

 

 

 

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

78%

80%

95%

86%

 

Impairment provisions as % of total balances

11%

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.

 

Total non-performing balances (excluding charged off accounts) have increased by 9% to £149 million (2017: £137 million), driven by small increases in early arrears (past due up to three months) on the personal loan and credit card portfolios. However, as the portfolios have continued to grow over recent periods, the non-performing balances, as a percentage of the total consumer banking lending, have remained stable at 4%.

 

Impairment losses for the year

Overdrawn current accounts

Personal

 loans

Credit

cards

Total

(Audited)

£m

£m

£m

£m

Year to 4 April 2018

15

36

46

97

Year to 4 April 2017

12

28

38

78

 

Note:

Impairment losses represent the amount charged through the profit and loss account, rather than amounts written off during the year.

 

Impairment losses have increased in the year, driven by both growth in balances and updated provision assumptions to reflect the current economic climate.

 

 

 

 

Credit risk - Commercial and other lending

 

Summary

 

The commercial and other lending portfolio comprises the following:

 

Commercial and other lending balances

2018

2017

£m

%

£m

%

Registered social landlords (note i)

6,820

71

7,546

67

Commercial real estate (CRE)

1,868

20

2,568

23

Project Finance (note ii)

906

9

1,096

10

Total commercial lending

9,594

100

11,210

100

Fair value adjustment for micro hedged risk (note iii)

1,043

 

1,370

 

Other lending

79

 

17

 

Total

10,716

 

12,597

 

 

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.

iii.    Micro hedged risk relates to loans hedged on an individual basis.

 

The strategy for the commercial lending portfolio continues to be to hold and actively manage to maturity in line with contractual terms.

 

The registered social landlord and project finance portfolios now amount to 80% (4 April 2017: 77%) of the commercial lending portfolio. This increase is due to the run-off of the CRE portfolio, which is subject to shorter maturity dates. Notwithstanding the reduction in CRE lending balances, the exposure remains well spread across sectors and geographic regions. The registered social landlord and project finance assets are fully performing, reflecting their long-term, lower risk nature.

 

Other lending comprises £71 million of collateral to support repurchase transactions with a central counterparty and £8 million of deferred consideration relating to an investment in Visa Inc.

 

Credit risk

 

Credit risk in the commercial loan portfolio is linked to arrears, the level of collateral to cover any loan balances and the availability of credit to refinance loans at contractual maturity. Nationwide adopts robust credit management policies and processes designed to recognise and manage the risks arising, or likely to arise, from the portfolio.

 

Credit risk in the CRE portfolio continues to reduce as the managed exit of this business continues.

 

The registered social landlord portfolio is risk rated using internal rating models with the major drivers being financial strength, independent viability assessment ratings provided by Homes England, 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 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 one case, with a balance of £25 million, which has reverted to the construction phase.

 

 

 

Credit risk - Commercial and other lending (continued)

 

Loan to value

 

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

 

CRE lending balances by LTV and region

 

London

Rest of

UK

(note i)

Total

 

2018

£m

£m

£m

%

Performing loans

 

 

 

 

Fully collateralised

 

 

 

 

LTV ratio (note ii):

 

 

 

 

Less than 25%

257

54

311

 

25% to 50%

691

241

932

 

51% to 75%

297

222

519

 

76% to 90%

9

40

49

 

91% to 100%

-

4

4

 

 

1,254

561

1,815

97

 

 

 

 

 

Not fully collateralised:

 

 

 

 

Over 100% LTV (A)

-

1

1

-

Collateral value on A

-

-

-

 

Negative equity on A

-

1

1

 

 

 

 

 

 

Total performing loans

1,254

562

1,816

97

 

 

 

 

 

Non-performing loans

 

 

 

 

Fully collateralised (note iii)

 

 

 

 

LTV ratio:

 

 

 

 

Less than 25%

1

2

3

 

25% to 50%

14

1

15

 

51% to 75%

4

11

15

 

76% to 90%

-

6

6

 

91% to 100%

-

-

-

 

 

19

20

39

2

 

 

 

 

 

Not fully collateralised

 

 

 

 

Over 100% LTV (B)

-

13

13

1

Collateral value on B

-

7

7

 

Negative equity on B (note iv)

-

6

6

 

 

 

 

 

 

Total non-performing loans

19

33

52

3

 

 

 

 

 

Total CRE loans

1,273

595

1,868

100

 

 

 

 

 

Geographical concentration

68%

32%

100%

 

 

 

Credit risk - Commercial and other lending (continued)

 

CRE lending balances by LTV and region

 

London

Rest of

UK

(note i)

Total

 

2017

£m

£m

£m

%

Performing loans

 

 

 

 

Fully collateralised

 

 

 

 

LTV ratio (note ii)

 

 

 

 

Less than 25%

217

57

274

 

25% to 50%

702

537

1,239

 

51% to 75%

466

427

893

 

76% to 90%

8

63

71

 

91% to 100%

1

9

10

 

 

1,394

1,093

2,487

97

 

 

 

 

 

Not fully collateralised

 

 

 

 

Over 100% LTV (A)

2

5

7

-

Collateral value on A

-

4

4

 

Negative equity on A

2

1

3

 

 

 

 

 

 

Total performing loans

1,396

1,098

2,494

97

 

 

 

 

 

Non-performing loans (note iii)

 

 

 

 

Fully collateralised

 

 

 

 

LTV ratio:

 

 

 

 

Less than 25%

1

-

1

 

25% to 50%

9

5

14

 

51% to 75%

8

5

13

 

76% to 90%

-

3

3

 

91% to 100%

3

7

10

 

 

21

20

41

2

 

 

 

 

 

Not fully collateralised

 

 

 

 

Over 100% LTV (B)

1

32

33

1

Collateral value on B

-

20

20

 

Negative equity on B (note iv)

1

12

13

 

 

 

 

 

 

Total non-performing loans

22

52

74

3

 

 

 

 

 

Total CRE loans

1,418

1,150

2,568

100

 

 

 

 

 

Geographical concentration

55%

45%

100%

 

 

Notes:

i.       Includes lending against collateral based in the Channel Islands.      

ii.     The LTV ratio is calculated using the on-balance sheet 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.

iv.    All non-performing loans with negative equity are impaired.

 

Non-performing loans represent 3% of CRE balances (2017: 3%). The value of partially collateralised non-performing loans and the negative equity on collateral for non-performing loans have reduced, reflecting the improving book performance and managed exit activity.

 

 

Credit risk - Commercial and other lending (continued)

 

Credit risk concentrations

 

The geographic concentration for CRE lending balances is shown in the Loan to value tables above. The concentration to London has increased to 68% (2017 55%).

 

The CRE portfolio remains well spread across sectors as shown below:

 

CRE lending balances and impairment provisions by type (note i)

2018

2017

 

£m

£m

Retail

400

812

Office

376

472

Residential

837

986

Industrial and warehouse

115

157

Leisure and hotel

120

127

Other

20

14

Total CRE lending

1,868

2,568

 

 

 

Impairment provision:

 

 

Retail

2

7

Office

1

3

Residential

5

6

Industrial and warehouse

-

1

Leisure and hotel

-

6

Other

7

2

Total impairment provisions

15

25

 

Note:

i.       A CRE loan may be secured on assets crossing different sectors; the balances are therefore attributed to the sector where the majority of the exposure arises. This can lead to recategorisations occurring between periods if the asset mix changes.

 

Arrears and impairment

 

Impairment provisions are held in relation to both the performing and non-performing segments of commercial lending and other lending. Provisions reflect estimated losses which have been incurred at the balance sheet date, based on objective evidence. Individual impairment provisions are assigned to facilities exhibiting signs of financial difficulty and a collective provision is assigned to all other accounts. For currently performing loans, the collective provision reflects losses arising from impairment events that have occurred within the portfolio but are not identifiable at the reporting date.

 

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 required only against the CRE portfolio.

 

The table below sets out the payment due status and impairment provisions for the CRE portfolio and other lending.

 

 

 

 

 

 

 

 

 

 

 

Credit risk - Commercial and other lending (continued)

 

CRE balances by payment due status

 

2018

2017

£m

%

£m

%

Performing:

 

 

 

 

Neither past due nor impaired

1,816

97

2,494

97

 

 

 

 

 

Non-performing:

 

 

 

 

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

22

1

29

1

 

 

 

 

 

Impaired (note ii):

 

 

 

 

Past due up to 3 months

6

-

24

1

Past due 3 to 6 months

11

1

1

-

Past due 6 to 12 months

1

-

3

-

Past due over 12 months

12

1

17

1

Possessions (note iii)

-

-

-

-

Total non-performing balances

52

3

74

3

 

 

 

 

 

Total

1,868

100

2,568

100

 

 

 

 

 

Impairment provisions

 

 

 

 

Individual

11

73

20

80

Collective

4

27

5

20

Total impairment provisions

15

100

25

100

 

 

 

 

 

Provision coverage ratios

 

 

 

 

Individual provisions as % of impaired balances

 

37

 

44

Total provisions as % of non-performing balances

 

29

 

34

Total provisions as % of total gross balances

 

1

 

1

 

 

 

 

 

Estimated collateral:

 

 

 

 

Against loans past due but not impaired

22

100

29

100

Against impaired loans

23

77

32

71

Total collateral

45

87

61

82

 

Notes:

i.       The status 'past due up to 3 months but not impaired' includes any asset where a payment due under strict 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 an individual provision is held.

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

 

Impairment reversal for the year for commercial and other lending portfolio

 

2018

2017

£m

£m

Total

(1)

(5)

 

Note:

Impairment reversals represent the amount recognised through the profit and loss account, rather than amounts written off during the year.

 

 

 

 

 

 

 

 

 

Credit risk - Treasury assets

 

Summary

 

The treasury portfolio is held primarily for liquidity management and, in the case of derivatives, for market risk management. As at 4 April 2018 treasury assets represented 15.3% (2017: 13.7%) of total assets.

 

The net increase in the portfolio compared to the previous year is predominantly due to increased government bond holdings, and cash balances received under the Bank of England's Term Funding Scheme (TFS).

 

Treasury asset balances

2018

2017

(Audited)

£m

£m

Cash

14,361

13,017

Loans and advances to banks

3,422

2,587

Investment securities

13,046

9,831

Liquidity and investment portfolio

30,829

25,435

Derivative assets

4,121

5,043

Total treasury portfolio

34,950

30,478

 

Note:

Derivatives are classified as assets where their fair value is positive and liabilities where their fair value is negative. At 4 April 2018 derivative liabilities were £2,337 million (2017: £3,182 million).

 

In line with the Board's liquidity risk appetite, investment activity is restricted to high quality liquid securities comprising central bank reserves and highly rated debt securities issued by a limited range of governments, multilateral development banks ('supranationals') and government guaranteed agencies. In addition, cash is invested in highly rated liquid assets that are eligible for accessing central bank funding operations.

 

Liquidity portfolio assets are generally unsecured; however, reverse repos, asset-backed securities and similar instruments are secured by pools of financial assets. During the year, Nationwide disposed of its residual out of policy legacy assets (2017: £172 million). There are no exposures to emerging markets, hedge funds or credit default swaps.

 

Derivatives are used to reduce exposure to market risks but are not used for trading or speculative purposes.

 

Liquidity and investment portfolio

 

The liquidity and investment portfolio of £30,829 million (2017: £25,435 million) comprises liquid assets and other securities. The size of the portfolio reflects fluctuations in market prices, Nationwide's operational and strategic liquidity requirements and legacy asset disposals. An analysis of the 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

2018

(Audited)

£m

%

%

%

%

%

%

%

%

Liquid assets:

 

 

 

 

 

 

 

 

 

Cash and reserves at central banks

14,361

-

100

-

-

100

-

-

-

Government bonds

8,937

15

85

-

-

80

5

15

-

Supranational bonds

655

96

4

-

-

-

-

-

100

Covered bonds

1,007

100

-

-

-

51

-

27

22

Residential mortgage backed securities (RMBS) available for sale

738

100

-

-

-

64

-

36

-

Asset backed securities (other)

302

100

-

-

-

56

-

44

-

Liquid assets total

26,000

16

84

-

-

87

2

8

3

Other securities (note ii):

 

 

 

 

 

 

 

 

 

RMBS available for sale

188

21

19

60

-

100

-

-

-

RMBS held to maturity

1,120

85

5

7

3

100

-

-

-

Other investments

99

-

36

42

22

22

42

36

-

Other securities total

1,407

71

9

16

4

95

3

2

-

Loans and advances to banks (note iii)

3,422

-

47

50

3

84

6

8

2

Total

30,829

16

77

6

1

87

2

8

3

Credit risk - Treasury assets (continued)

 

 

Liquidity and investment portfolio by credit rating (note i)

2017

 

AAA

AA

A

Other

UK

US

Europe

Other

(Audited)

£m

%

%

%

%

%

%

%

%

Liquid assets:

 

 

 

 

 

 

 

 

 

Cash and reserves at central banks

13,017

-

90

-

10

90

-

10

-

Government bonds

6,438

10

90

-

-

78

9

13

-

Supranational bonds

459

88

12

-

-

-

-

-

100

Covered bonds

931

100

-

-

-

51

-

33

16

Residential mortgage backed securities (RMBS)

available for sale

922

100

-

-

-

61

-

39

-

Asset backed securities (other)

285

100

-

-

-

83

-

17

-

Liquid assets total

22,052

14

80

-

6

81

3

13

3

Other securities (note ii):

 

 

 

 

 

 

 

 

 

RMBS available for sale

288

27

3

70

-

98

-

2

-

Commercial mortgage backed securities (CMBS)

11

-

38

24

38

38

62

-

-

Collateralised loan obligations

226

86

14

-

-

88

12

-

-

Student loans

120

48

52

-

-

-

100

-

-

Other investments

151

-

32

28

40

44

24

32

-

Other securities total

796

42

19

31

8

69

24

7

-

Loans and advances to banks (note iii)

2,587

-

47

51

2

70

18

10

2

Total

25,435

14

74

6

6

80

5

12

3

 

Notes:

i.       Ratings used are obtained from Standard & Poor's (S&P), and from Moody's if no S&P rating is available. Internal ratings are used if neither is available.

ii.     Includes RMBS (UK Buy to Let and UK Non-Conforming) not eligible for the Liquidity Coverage Ratio (LCR).

iii.    Loans and advances to banks includes derivative collateral and reverse repo balances.

 

Of the total £30,829 million (2017: £25,435 million) liquidity and investment portfolio, £11,926 million (2017: £9,831 million) is classified as available for sale (AFS). This includes all assets except for 'Cash and reserves at central banks', 'Loans and advances to banks' and 'RMBS held to maturity'.

 

Country exposures

 

The following table summarises the exposure to institutions outside the UK. The exposures are shown at their balance sheet carrying values.

 

Country exposures

(Audited)

Cash

Government bonds

Mortgage backed securities

Covered bonds

Supra-national bonds

Loans to banks

Other corporate

Other assets

Total

2018

£m

£m

£m

£m

£m

£m

£m

£m

£m

Austria

-

66

-

-

-

-

-

-

66

Belgium

-

44

-

-

-

-

-

-

44

Finland

-

267

-

24

-

-

-

-

291

France

-

-

-

-

-

156

-

36

192

Germany

-

627

-

-

-

119

-

132

878

Ireland

-

-

-

-

-

1

-

-

1

Netherlands

-

335

263

-

-

-

-

-

598

Total Eurozone

-

1,339

263

24

-

276

-

168

2,070

USA

-

441

-

-

-

215

-

41

697

Rest of world (note i)

-

-

-

472

656

63

-

-

1,191

Total

-

1,780

263

496

656

554

-

209

3,958

 

 

Credit risk - Treasury assets (continued)

 

 

Country exposures

(Audited)

Cash

Government bonds

Mortgage backed securities

Covered bonds

Supra-national bonds

Loans

 to banks

Other corporate

Other assets

Total

2017

£m

£m

£m

£m

£m

£m

£m

£m

£m

Finland

-

218

-

24

-

-

-

-

242

France

-

-

-

31

-

-

1

54

86

Germany

-

484

-

-

-

44

-

43

571

Ireland

1,258

-

-

-

-

27

-

-

1,285

Italy

-

-

-

-

-

-

3

-

3

Netherlands

-

153

366

-

-

-

-

-

519

Total Eurozone

1,258

855

366

55

-

71

4

97

2,706

USA

16

600

7

-

-

474

-

182

1,279

Rest of world (note i)

-

-

-

400

459

232

-

-

1,091

Total

1,274

1,455

373

455

459

777

4

279

5,076

 

Note:

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

 

None of the exposures detailed in the table above were in default at 4 April 2018 (2017: £nil), and no impairment was incurred on these assets in the year (2017: £nil).

 

Derivative financial instruments

 

Derivatives are used to reduce exposure to market risks, although the application of accounting rules can create volatility in the income statement in a financial year. The fair value of derivative assets at 4 April 2018 was £4.1 billion (2017: £5.0 billion) and the fair value of derivative liabilities was £2.3 billion (2017: £3.2 billion).

 

The International Swaps and Derivatives Association (ISDA) Master Agreement is Nationwide's preferred agreement for documenting derivative transactions. A Credit Support Annex (CSA) is always executed in conjunction with the ISDA Master Agreement. Under the terms of a CSA, collateral is passed between parties to mitigate the market-contingent counterparty risk inherent in the outstanding positions. CSAs are two-way agreements where both parties post collateral dependent on the exposure of the derivative. Collateral is paid or received on a regular basis (typically daily) to mitigate the mark to market exposures.

 

Nationwide's CSA legal documentation for derivatives grants legal rights of set off for transactions with the same overall counterparty. Accordingly, the credit risk associated with such positions is reduced to the extent that negative mark to market values offset positive mark to market values in the calculation of credit risk within each netting agreement.

 

Under the terms of CSA netting arrangements, outstanding transactions with the same counterparty can be offset and settled net following a default, or another predetermined event. Under CSA arrangements, netting benefits of £2.0 billion (2017: £2.2 billion) were available and £2.2 billion of collateral (2017: £2.8 billion) was held. Only cash is held as collateral.

 

To comply with EU regulatory requirements, Nationwide has indirect clearing arrangements with a central counterparty (CCP) which it uses to clear standardised derivatives.

 

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

 

Derivative credit exposure

2018

2017

Counterparty credit quality

AA

A

BBB

Total

AA

A

BBB

Total

(Audited)

£m

£m

£m

£m

£m

£m

£m

£m

Gross positive fair value of contracts

1,584

2,266

271

4,121

2,077

2,576

390

5,043

Netting benefits

(532)

(1,156)

(271)

(1,959)

(797)

(1,030)

(389)

(2,216)

Net current credit exposure

1,052

1,110

-

2,162

1,280

1,546

1

2,827

Collateral (cash)

(1,051)

(1,106)

-

(2,157)

(1,261)

(1,537)

(1)

(2,799)

Net derivative credit exposure

1

4

-

5

19

9

-

28

 

 

Liquidity and funding risk

 

Summary

 

Liquidity risk is the risk that Nationwide is unable to meet its liabilities as they fall due and maintain member and other stakeholder confidence. Funding risk is the risk that Nationwide is unable to maintain diverse funding sources in wholesale and retail markets and manage retail funding risk that can arise from excessive concentrations of higher risk deposits.

 

Nationwide manages liquidity and funding risks within a comprehensive risk framework which includes its policy, strategy, limit setting and monitoring, stress testing and robust governance controls.

 

This framework ensures that Nationwide maintains stable and diverse funding sources and sufficient holdings of high quality liquid assets so that there is no significant risk that liabilities cannot be met as they fall due.

 

Liquidity and funding levels continued to be within Board risk appetite and regulatory requirements at all times during the year. This includes the LCR, which ensures that sufficient high quality liquid assets are held to survive a short term severe but plausible liquidity stress. Nationwide's LCR at 4 April 2018 increased to 130.3% (4 April 2017: 124.0%). At 4 April 2017, the LCR was impacted by an agreement to purchase £1.2 billion of residential mortgage backed securities (RMBS) under a programme to securitise Bradford & Bingley residential mortgages. Excluding this item our 2018 and 2017 LCR would have been broadly consistent.

 

Nationwide also monitors its position against the longer term funding metric, the Net Stable Funding Ratio (NSFR). Based on current interpretations of regulatory requirements and guidance, the NSFR at 4 April 2018 was 131.0% (4 April 2017: 132.6%) which exceeds the expected 100% minimum future requirement.

 

Funding risk

 

Funding strategy

 

Nationwide's funding strategy is to remain predominantly retail funded; retail customer loans and advances are largely funded by customer deposits. Non-retail lending, including treasury assets and commercial customer loans, are largely funded by wholesale debt, as set out below.

 

Funding profile

 

Assets

2018

£bn

2017

£bn

Liabilities

2018

£bn

2017

£bn

Retail mortgages

177.2

171.1

Retail funding

148.4

146.9

Treasury assets (including liquidity portfolio)

30.8

25.4

Wholesale funding

58.8

55.5

Other retail lending

3.8

3.7

Capital and reserves

18.2

14.3

Commercial/Other lending

10.7

12.6

Other liabilities

3.7

5.0

Other assets

6.6

8.9

 

 

 

 

229.1

221.7

 

229.1

221.7

 

Note:

The figures in the above table are stated net of impairment provisions where applicable.

 

Nationwide's loan to deposit ratio1 at 4 April 2018 was 125.5% (4 April 2017: 122.6%).

 

1  The loan to deposit ratio represents loans and advances to customers divided by shares + other deposits + amounts due to customers (excluding repurchase agreements and collateral received).
 

Liquidity and funding risk (continued)

 

Wholesale funding

 

The wholesale funding portfolio is made up of a range of secured and unsecured instruments to ensure Nationwide has a diversified funding base across a range of instruments, currencies, maturities and investor types. Nationwide's wholesale funding strategy is to remain active in core markets and currencies. A funding risk limit framework also ensures a prudent funding mix and maturity concentration profile is maintained, and limits levels of encumbrance to ensure sufficient contingent funding capacity is retained.

 

Wholesale funding has increased by £3.3 billion to £58.8 billion. This is due to £11.0 billion of drawings from the Bank of England's Term Funding Scheme (TFS) during the year, to support core activities, refinance maturing wholesale funding, and replace off-balance sheet Funding for Lending Scheme (FLS) maturities. This additional funding is reflected in Nationwide's wholesale funding ratio (on-balance sheet wholesale funding as a proportion of total funding liabilities) which was 28.2% at 4 April 2018 (4 April 2017: 27.1%).

 

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

 

Wholesale funding currency

2018

2017

GBP

EUR

USD

Other

Total

% of

GBP

EUR

USD

Other

Total

% of

 

£bn

£bn

£bn

£bn

£bn

total

£bn

£bn

£bn

£bn

£bn

total

Repos

0.7

0.2

-

-

0.9

2

-

-

-

-

-

-

Deposits (note i)

5.4

1.4

-

-

6.8

12

7.7

1.4

0.1

-

9.2

16

Certificates of deposit

4.0

0.1

0.2

-

4.3

7

5.3

-

-

-

5.3

10

Commercial paper

-

-

1.0

-

1.0

2

-

-

1.8

-

1.8

3

Covered bonds

2.5

12.6

-

0.2

15.3

26

3.3

11.4

-

0.2

14.9

27

Medium term notes

2.0

4.6

1.8

0.6

9.0

15

3.1

6.2

3.6

0.8

13.7

25

Securitisations

1.1

1.3

1.3

-

3.7

6

0.9

1.2

1.4

-

3.5

6

TFS

17.0

-

-

-

17.0

29

6.0

-

-

-

6.0

11

Other

0.2

0.6

-

-

0.8

1

0.3

0.8

-

-

1.1

2

Total

32.9

20.8

4.3

0.8

58.8

100

26.6

21.0

6.9

1.0

55.5

100

 

Note:

i.       2017 included £0.8 billion of protected equity balances (PEBs), all of which had matured by 4 April 2018.

 

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

2018

£bn

£bn

£bn

£bn

£bn

£bn

£bn

£bn

Repos

0.9

-

-

-

0.9

-

-

0.9

Deposits (note i)

4.5

0.5

1.4

0.4

6.8

-

-

6.8

Certificates of deposit

-

3.6

0.5

0.2

4.3

-

-

4.3

Commercial paper

0.1

0.9

-

-

1.0

-

-

1.0

Covered bonds

0.8

0.1

-

-

0.9

1.6

12.8

15.3

Medium term notes

0.1

0.1

0.1

1.4

1.7

1.8

5.5

9.0

Securitisations

0.1

-

0.3

0.4

0.8

0.9

2.0

3.7

TFS

-

-

-

-

-

-

17.0

17.0

Other

-

-

-

-

-

-

0.8

0.8

Total

6.5

5.2

2.3

2.4

16.4

4.3

38.1

58.8

Of which secured

1.8

0.1

0.3

0.4

2.6

2.5

32.6

37.7

Of which unsecured

4.7

5.1

2.0

2.0

13.8

1.8

5.5

21.1

% of total

11.1

8.8

3.9

4.1

27.9

7.3

64.8

100.0

 

 

 

 

 

 

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

2017

£bn

£bn

£bn

£bn

£bn

£bn

£bn

£bn

Repos

-

-

-

-

-

-

-

-

Deposits (note i)

5.3

1.3

2.0

0.6

9.2

-

-

9.2

Certificates of deposit

0.4

1.7

2.4

0.8

5.3

-

-

5.3

Commercial paper

0.5

0.6

0.6

0.1

1.8

-

-

1.8

Covered bonds

-

-

0.8

-

0.8

0.8

13.3

14.9

Medium term notes

-

-

0.1

1.2

1.3

1.8

10.6

13.7

Securitisations

0.3

-

0.3

0.1

0.7

0.6

2.2

3.5

TFS

-

-

-

-

-

-

6.0

6.0

Other

-

-

-

-

-

-

1.1

1.1

Total

6.5

3.6

6.2

2.8

19.1

3.2

33.2

55.5

Of which secured

0.3

-

1.1

0.1

1.5

1.4

22.4

25.3

Of which unsecured

6.2

3.6

5.1

2.7

17.6

1.8

10.8

30.2

% of total

11.7

6.5

11.2

5.0

34.4

5.8

59.8

100.0

 

Note:

i.       2017 included £0.8 billion of protected equity balances (PEBs), all of which had matured by 4 April 2018.

 

At 4 April 2018, cash, government bonds and supranational bonds included in the liquid asset buffer represented 142% (4 April 2017: 129%) of wholesale funding maturing in less than one year, assuming no rollovers.

 

 

Liquidity risk

 

Liquid assets

 

Nationwide ensures it has sufficient liquid assets, both in terms of amount and quality, to meet daily cash flow needs as well as simulated stressed requirements driven by the Society's risk appetite and regulatory assessments. This includes ensuring the currency composition of the liquid asset buffer is consistent with the currency profile of stressed outflows.

 

The table below sets out the sterling equivalent fair value of the liquidity portfolio, categorised by issuing currency. It includes off-balance sheet liquidity such as bonds received through reverse repurchase (repo) agreements and excludes bonds encumbered through repo agreements.

 

Liquid assets

2018

2017

 

GBP

EUR

USD

Total

GBP

EUR

USD

Total

 

£bn

£bn

£bn

£bn

£bn

£bn

£bn

£bn

Cash and reserves at central banks

14.4

-

-

14.4

11.8

1.2

-

13.0

Government bonds (note i)

6.8

0.8

0.6

8.2

10.0

0.5

0.7

11.2

Supranational bonds

0.4

-

0.3

0.7

0.2

-

0.3

0.5

Covered bonds

0.6

0.6

-

1.2

0.4

0.5

-

0.9

RMBS (note ii)

1.7

0.3

-

2.0

0.5

0.4

-

0.9

Asset-backed securities

0.2

0.1

-

0.3

0.3

-

-

0.3

Other securities

-

-

-

-

0.3

0.2

0.2

0.7

Total

24.1

1.8

0.9

26.8

23.5

2.8

1.2

27.5

 

Notes:

i.       2017 includes £4.8 billion of FLS, all of which had matured by 4 April 2018.

ii.     Balances include all RMBS held by the Society which can be monetised through sale or repo.

 

Nationwide's liquid assets are held and managed centrally by its Treasury function. Nationwide maintains a high quality liquidity portfolio, predominantly comprising:

·    reserves held at central banks

·    highly rated debt securities issued by a restricted range of governments, central banks and supranationals.

 

Liquidity and funding risk (continued)

 

The size and mix of the liquid asset buffer is defined by the Society's risk appetite as set by the Board, which is translated into a set of liquidity risk limits; it is also influenced by other relevant considerations such as stress testing and regulatory requirements.

 

The average combined month end balance of cash and reserves at central banks, and government and supranational bonds during the year was £27.2 billion (2017: £29.5 billion).

 

Nationwide also holds a portfolio of high quality, central bank eligible covered bonds, RMBS and asset-backed securities. Other securities are held that are not eligible for central bank operations but can be monetised through repurchase agreements with third parties or through sale.

 

Nationwide undertakes securities financing transactions in the form of repurchase agreements. This demonstrates the liquid nature of the assets held in its liquid asset buffer and also satisfies regulatory requirements. Cash is borrowed in return for pledging assets as collateral and because settlement is on a simultaneous 'delivery versus payment' basis, the main credit risk arises from intra-day changes in the value of the collateral. This is largely mitigated by Nationwide's collateral management processes.

 

Repo market capacity is assessed and tested regularly to ensure there is sufficient capacity to rapidly monetise the liquid asset buffer in a stress.

 

For contingent purposes, Nationwide pre-positions unencumbered mortgage assets at the Bank of England which can be used in the Bank of England's liquidity operations if market liquidity is severely disrupted.

 

Residual maturity of financial 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).

 

Residual maturity

(note i)

Due less than one month

(note ii)

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

2018

£m

£m

£m

£m

£m

£m

£m

£m

£m

Financial assets

 

 

 

 

 

 

 

 

 

Cash

14,361

-

-

-

-

-

-

-

14,361

Loans and advances to banks

3,078

-

-

-

-

-

-

344

3,422

Investment securities

76

64

17

141

89

387

2,498

9,774

13,046

Loans and advances to customers

3,041

1,318

1,925

1,886

1,908

7,564

22,961

151,061

191,664

Derivative financial instruments

12

17

6

231

52

381

1,966

1,456

4,121

Fair value adjustment for portfolio hedged risk

-

(16)

(30)

(19)

(30)

(90)

(53)

129

(109)

Total financial assets

20,568

1,383

1,918

2,239

2,019

8,242

27,372

162,764

226,505

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

Shares

120,617

2,892

4,403

4,430

3,248

6,593

4,499

1,321

148,003

Deposits from banks

2,343

9

47

5

-

-

17,000

-

19,404

Of which repo

266

-

-

-

-

-

-

-

266

Of which TFS

-

1

-

-

-

-

17,000

-

17,001

Other deposits

3,123

481

1,343

315

50

11

-

-

5,323

Of which repo

680

-

-

-

-

-

-

-

680

Due to customers

402

-

-

-

-

-

-

-

402

Secured funding - ABS and covered bonds

872

65

273

211

224

2,491

9,266

6,288

19,690

Senior unsecured funding

229

4,644

595

980

553

1,845

1,589

3,993

14,428

Derivative financial instruments

39

25

11

6

11

64

305

1,876

2,337

Fair value adjustment for portfolio hedged risk

-

(6)

(6)

(4)

(4)


(8)

(25)

-

(53)

Subordinated liabilities

17

-

49

-

-

-

690

4,741

5,497

Subscribed capital (note iii)

1

1

1

-

-

-

-

260

263

Total financial liabilities

127,643

8,111

6,716

5,943

4,082

10,996

33,324

18,479

215,294

Off-balance sheet commitments (note iv)

13,890

-

-

-

-

-

-

-

13,890

Net liquidity difference

(120,965)

(6,728)

(4,798)

(3,704)

(2,063)

(2,754)

(5,952)

144,285

(2,679)

Cumulative liquidity difference

(120,965)

(127,693)

(132,491)

(136,195)

(138,258)

(141,012)

(146,964)

(2,679)

-

 

 

Liquidity and funding risk (continued)

 

 Residual maturity

(note i)

Due less than one month

(note ii)

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

2017

£m

£m

£m

£m

£m

£m

£m

£m

£m

Financial assets

 

 

 

 

 

 

 

 

 

Cash

13,017

-

-

-

-

-

-

-

13,017

Loans and advances to banks

2,226

-

-

-

-

-

-

361

2,587

Investment securities (note v)

40

13

116

66

57

216

2,002

7,321

9,831

Loans and advances to customers

2,890

1,309

1,937

1,877

1,910

7,259

22,057

148,132

187,371

Derivative financial instruments

11

94

130

30

121

324

2,317

2,016

5,043

Other financial assets (note v and vi)

36

22

15

28

10

60

265

317

753

Total financial assets

18,220

1,438

2,198

2,001

2,098

7,859

26,641

158,147

218,602

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

Shares

112,403

1,666

6,169

4,905

4,513

9,842

3,870

1,174

144,542

Deposits from banks

2,499

123

20

48

16

28

6,000

-

8,734

Of which repo

-

-

-

-

-

-

-

-

-

Of which TFS

-

-

-

-

-

-

6,000

-

6,000

Other deposits

2,882

1,075

1,885

336

255

15

11

-

6,459

Of which repo

-

-

-

-

-

-

-

-

-

Due to customers

1,818

130

305

45

67

11

-

-

2,376

Secured funding - ABS and covered bonds

341

20

1,086

128

90

1,394

10,137

6,280

19,476

Senior unsecured funding

894

2,339

3,126

657

1,431

1,765

5,022

5,629

20,863

Derivative financial instruments

37

11

35

41

57

135

505

2,361

3,182

Fair value adjustment for portfolio hedge risk

-

-

(2)

-

1

8

1

-

8

Subordinated liabilities (note v)

-

35

-

-

103

-

700

2,102

2,940

Subscribed capital (notes iii and v)

3

-

-

-

-

-

-

276

279

Total financial liabilities (note v)

120,877

5,399

12,624

6,160

6,533

13,198

26,246

17,822

208,859

Off-balance sheet commitments (note iv)

15,784

-

-

-

-

-

-

-

15,784

Net liquidity difference

(118,441)

(3,961)

(10,426)

(4,159)

(4,435)

(5,339)

395

140,325

(6,041)

Cumulative liquidity difference

(118,441)

(122,402)

(132,828)

(136,987)

(141,422)

(146,761)

(146,366)

(6,041)

-

 

Notes:

i.       The analysis excludes certain non-financial assets (including property, plant and equipment, intangible assets, investment property, other assets, deferred tax assets and accrued income and expenses prepaid) and non-financial liabilities (including provisions for liabilities and charges, accruals and deferred income, current tax liabilities, other liabilities and retirement benefit obligations).

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

iii.    The principal amount for undated subscribed capital is included within the due after more than five years column.

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

v.      Comparatives have been restated as detailed in note 2 of the financial statements.

vi.    Other financial assets and liabilities include the fair value adjustments for portfolio hedged risk and the fair value of certain mortgage commitments.

 

In practice, customer behaviours mean that liabilities are often retained for longer than their contractual maturities and assets are repaid faster. This gives rise to funding mismatches on Nationwide's balance sheet. The balance sheet structure and risks are managed and monitored by ALCO. Nationwide uses judgement and past behavioural performance of each asset and liability class to forecast likely cash flow requirements.

 

The 2018 table above includes the impact of a debt buy-back exercise that involved the Society issuing £2.1 billion of new MREL compliant bonds to partly fund the repurchase of older bonds, resulting in an increase in our capital strength and a reduction in our future cost of wholesale funding. A total of £4.0 billion of senior unsecured funding was repurchased, with the impact of cancelling associated derivative financial instruments also reflected.

 

 

 

Liquidity and funding risk (continued)

 

Asset encumbrance

 

Encumbrance arises where assets are pledged as collateral against secured funding and other collateralised obligations and therefore cannot be used for other purposes. The majority of asset encumbrance arises from the use of prime mortgage pools to collateralise the Covered Bond and Silverstone secured funding programmes (note 10 to the financial statements) and from participation in the TFS and previously FLS.

 

Certain unencumbered assets are readily available to secure funding or meet collateral requirements. These include prime mortgages and cash and securities held in the liquidity buffer. Other unencumbered assets, such as non-prime mortgages, are capable of being encumbered with a degree of further management action. Assets which do not fall into either of these categories are classified as not being capable of being encumbered.

 

An analysis of Nationwide's encumbered and unencumbered on-balance sheet assets is set out below. This disclosure is not intended to identify assets that would be available in the event of a resolution or bankruptcy.

 

 

Asset encumbrance

(note i)

Assets encumbered as a result of transactions with counterparties other than central banks

 

Other assets (comprising assets

encumbered at the central bank

and unencumbered assets)

Total

As a result of

covered bonds

As a result of securitisations

Other

Total

 

Assets positioned

at the central bank

(i.e. prepositioned

plus encumbered)

Assets not positioned

at the central bank

Total

 

Readily available for encumbrance

Other assets that are capable of being encumbered

Cannot be encumbered

2018

£m

£m

£m

£m

 

£m

£m

£m

£m

£m

£m

Cash

381

376

-

757

 

-

13,389

-

 215

13,604

14,361

Loans and advances to banks

-

-

1,220

1,220

 

1,124

-

-

1,078

2,202

3,422

Investment securities

-

-

944

944

 

30

12,027

-

45

12,102

13,046

Loans and advances to customers

21,000

8,712

-

29,712

 

37,732

76,791

47,429

-

161,952

191,664

Derivative financial instruments

-

-

-

-

 

-

-

-

4,121

4,121

4,121

Other financial assets

-

-

-

-

 

-

-

-

(109)

(109)

(109)

Non-financial assets

-

-

-

-

 

-

-

-

2,593

2,593

2,593

Total

21,381

9,088

2,164

32,633

 

38,886

102,207

47,429

7,943

196,465

229,098

 

Asset encumbrance

 

Assets encumbered as a result of transactions with counterparties other than central banks

 

Other assets (comprising assets

encumbered at the central bank

and unencumbered assets)

Total

As a result of

covered bonds

As a result of securitisations

Other

Total

 

Assets positioned

at the central bank

(i.e. prepositioned

plus encumbered)

Assets not positioned

at the central bank

Total

 

Readily available for encumbrance

Other assets that are capable of being encumbered

Cannot be encumbered

2017

£m

£m

£m

£m

 

£m

£m

£m

£m

£m

£m

Cash

1,538

567

-

2,105

 

-

10,697

-

215

10,912

13,017

Loans and advances to banks

-

-

1,393

1,393

 

927

-

-

267

1,194

2,587

Investment securities (note i)

-

-

-

-

 

32

9,732

-

67

9,831

9,831

Loans and advances to customers

19,322

10,412

-

29,734

 

33,376

75,032

49,229

-

157,637

187,371

Derivative financial instruments

-

-

-

-

 

-

-

-

5,043

5,043

5,043

Other financial assets (note i)

-

-

-

-

 

-

-

-

753

753

753

Non-financial assets

-

-

-

-

 

-

-

-

3,068

3,068

3,068

Total (note i)

20,860

10,979

1,393

33,232

 

34,335

95,461

49,229

9,413

188,438

221,670

 

Note:

i.       Comparatives have been restated as detailed in note 2 of the financial statements.

 

 

Liquidity and funding risk (continued)

 

External credit ratings

 

The Group's long-term and short-term credit ratings are shown in the table below. The long-term rating for both Standard & Poor's and Moody's is the senior preferred rating. The long-term rating for Fitch is the senior non-preferred rating.

 

Credit ratings

Senior preferred

Short-term

Senior

non-preferred

Tier 2

Date of last rating

action / confirmation

Outlook

Standard & Poor's

A

A-1

BBB+

BBB

February 2018

Positive

Moody's

Aa3

P-1

Baa1

Baa1

March 2018

Stable

Fitch

A+

F1

A

A-

February 2018

Stable

 

In August 2017, Standard & Poor's affirmed Nationwide's A/A-1 long- and short-term ratings, with a negative outlook. This reflected their view on a negative trend for economic risk in the UK following the outcome of the EU referendum. In November 2017, Standard & Poor's revised the trend on economic risk for the UK banking sector to stable and revised Nationwide's outlook to stable. Nationwide's outlook was then revised to positive in February 2018 reflecting Standard & Poor's expectation that Nationwide's buffer of bail-in instruments could exceed their threshold for two notches of Additional Loss Absorbing Capacity (ALAC) uplift over their 18-24 month forecast horizon following Nationwide's inaugural issuance of senior non-preferred debt.

 

In addition, Moody's changed the outlook on Nationwide's deposits and senior unsecured debt to stable from negative in August 2017, reflecting its expectation of a moderate deterioration in the operating environment in the UK, to which Nationwide is now more resilient.

 

In February 2018 Fitch downgraded Nationwide's Long-Term Issuer Default Rating (IDR) to 'A' from 'A+' with a stable outlook. The senior preferred unsecured debt rating was unchanged at A+. The downgrade follows the Society's issue of senior non-preferred debt which, in accordance with Fitch's methodology, becomes the reference obligation for Nationwide's IDR.

 

The table below sets out the amount of additional collateral Nationwide would need to provide in the event of a one and two notch downgrade by external credit rating agencies.

 

 

Cumulative adjustment for a one notch downgrade

Cumulative adjustment for a two notch downgrade

 

£bn

£bn

2018

3.1

3.3

2017

3.3

3.7

 

The contractually required cash outflow would not necessarily match the actual cash outflow as a result of management actions that could be taken to reduce the impact of the downgrades.

 

 

 

Solvency risk

 

Solvency risk is the risk that Nationwide 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. Capital is held to protect members, cover inherent risks, provide a buffer for stress events and support the business strategy. In assessing the adequacy of capital resources, risk appetite is considered in the context of the material risks to which Nationwide is exposed and the appropriate strategies required to manage those risks.

 

Capital position

 

Capital ratios

2018

 

2017

 

Solvency

%

%

Common Equity Tier 1 (CET1) ratio

 30.5

25.4

Total Tier 1 ratio

 33.6

28.4

Total regulatory capital ratio

 42.9

 36.1

Leverage

£m

£m

UK leverage exposure (note i)

 221,992

215,894

CRR leverage exposure (note ii)

 236,468

228,428

Tier 1 capital

 10,917

9,547

 

%

%

UK leverage ratio

4.9

4.4

CRR leverage ratio

4.6

4.2

 

Notes:

i.     The UK leverage ratio is shown on the basis of measurement announced by the Prudential Regulation Authority (PRA) and excludes eligible central bank reserves from the leverage exposure measure.

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

 

The capital disclosures included in this report are on a Capital Requirements Directive IV (CRD IV) end point basis. 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 consolidated Group basis, including all subsidiary entities, unless otherwise stated.

 

Capital and leverage ratios have remained well in excess of regulatory requirements with a CET1 ratio of 30.5% (4 April 2017: 25.4%) and a UK leverage ratio of 4.9% (4 April 2017: 4.4%).

 

In September 2017, five million CCDS were issued raising £0.8 billion of CET1 capital. The issuance enhanced the liquidity and relevance of the CCDS instrument, while also helping to maintain broad access to capital markets and further strengthening Nationwide's capital position. These CCDS form a single series together with those previously issued in December 2013. Further information can be found in note 15 to the financial statements.

 

The CET1 ratio has improved following an increase in CET1 capital resources and a reduction in RWAs. CET1 capital resources have increased over the year by £1.4 billion mainly due to the CCDS issuance (£0.8 billion), and profit after tax for the year of £0.7 billion. Risk weighted assets (RWAs) have reduced over the period by approximately £1.1 billion, primarily due to the continued run-off of the commercial book. These movements have resulted in the CET1 ratio increasing to 30.5%.

 

Total regulatory capital ratio has increased to 42.9% (4 April 2017: 36.1%), due to the CET1 capital increases and the net issuance of £0.6 billion of qualifying Tier 2 subordinated debt, in line with plans to meet the pending Minimum Requirement for Own Funds and Eligible Liabilities (MREL).

 

CRD IV requires firms to calculate a non-risk-based leverage ratio, to supplement risk-based capital requirements. The current regulatory threshold is set at 3.25%. The risk of excessive leverage is managed through regular monitoring and reporting of the leverage ratio, which forms part of risk appetite.

 

Nationwide has been granted permission to report a UK leverage ratio on the basis of measurement announced by the PRA in August 2016. Minimum leverage requirements are monitored by the PRA on this basis. It 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, excluding eligible central bank reserves.

 

 

 

Solvency risk (continued)

 

The UK leverage ratio has increased to 4.9% at 4 April 2018 (4 April 2017: 4.4%), predominantly due to an increase in Tier 1 capital resources resulting from profits in the year and the issuance of CCDS. The CRR leverage ratio increased at a slower rate to 4.6% (4 April 2017: 4.2%), following an £8 billion increase in exposure during the year, primarily driven by a £5 billion increase in mortgage balances and a £4 billion increase in liquid assets. The difference in exposure measure is caused by the CRR leverage ratio using the Delegated Act definition.

 

Nationwide's latest Pillar 2A Individual Capital Guidance (ICG) was received in August 2017. It equates to circa £2.3 billion, of which at least circa £1.3 billion must be met by CET1 capital, and was broadly in line with the previous ICG. This amount is equivalent to 7.1% of RWAs as at 4 April 2018 (4 April 2017: 6.6%), reflecting the low average risk weight, given that approximately 78% (4 April 2017: 75%) of total assets are in the form of secured residential mortgages, of which 82% (4 April 2017: 81%) are prime mortgages, based on the regulatory exposure amounts.

 

The table below reconciles the general reserves to total regulatory capital on an end-point basis and so does not include non-qualifying instruments.

 

Total regulatory capital

 

2018

 

2017

(Audited)

£m

£m

General reserve

 9,951 

9,316

Core capital deferred shares (CCDS)

 1,325 

531

Revaluation reserve

 68 

67

Available for sale reserve

 75 

44

Regulatory adjustments and deductions:

 

 

Foreseeable distributions (note i)

(68)

(43)

Prudent valuation adjustment (note ii)

(32)

(23)

Own credit and debit valuation adjustments (note iii)

(1)

-

Intangible assets (note iv)

(1,286)

(1,174)

Goodwill (note iv)

(12)

(12)

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

(95)

(151)

Total regulatory adjustments and deductions

(1,494)

(1,403)

Common Equity Tier 1 capital

 9,925 

8,555

Additional Tier 1 capital securities (AT1)

 992 

992

Total Tier 1 capital

 10,917 

9,547

 

 

 

Dated subordinated debt (notes vi and vii)

 3,019 

2,580

Collectively assessed impairment allowances

 -  

27

Tier 2 capital (note vii)

 3,019 

2,607 

 

 

 

Total regulatory capital (note vii)

 13,936 

12,154

 

Notes:

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

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

iii.  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 Nationwide's own credit standing and risk, in accordance with CRD IV rules.

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

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

vi.  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.

vii.  Subordinated debt was restated as at 4 April 2017, due to a change in the presentation of accrued interest. Further information is provided in note 2 of the financial statements.

 

Solvency risk (continued)

 

As part of the Bank Recovery and Resolution Directive (BRRD), the Bank of England, in its capacity as the UK resolution authority, has published its policy for setting the MREL and provided firms with indicative MREL. From 1 January 2020, it is anticipated that Nationwide will be subject to a requirement to hold twice the minimum capital requirements (i.e. 6.5% of UK leverage exposure), plus the applicable buffers, which are subject to change but are currently expected to amount to 0.75% of leverage exposure from 1 January 2019. In order to meet this pending requirement, Tier 2 capital has increased by £0.4 billion, following issuance of £1.8 billion and redemption of £1.2 billion of qualifying Tier 2 subordinated debt during the year. In addition, Nationwide issued £2.1 billion of senior non-preferred notes in March 2018, which we consider to be MREL eligible.

 

At 4 April 2018 total MREL resources were equal to circa 7.5% (4 April 2017: 5.9%) of UK leverage ratio exposure. Nationwide has a strong foundation from which to meet MREL requirements by 2020 through further issuance of senior non-preferred debt.

 

Risk weighted assets

 

The table below shows the breakdown of risk weighted assets (RWAs) by risk type and business activity. Market risk has been set to zero as permitted by the CRR, as the exposure is below the threshold of 2% of own funds.

 

Risk weighted assets

Credit Risk

(note i)

Operational

Risk (note ii)

Total Risk Weighted Assets

2018

£m

£m

£m

Retail mortgages

13,764

3,564

17,328

Retail unsecured lending

5,805

725

6,530

Commercial loans

4,634

210

4,844

Treasury

540

87

627

Counterparty credit risk (note iii)

1,184

-

1,184

Other

1,681

315

1,996

Total

27,608

4,901

32,509

 

 

Credit Risk

(note i)

Operational

Risk (note ii)

Total Risk Weighted Assets

2017

£m

£m

£m

Retail mortgages

13,863

3,502

17,365

Retail unsecured lending

5,641

763

6,404

Commercial loans

5,636

100

5,736

Treasury

849

13

862

Counterparty credit risk (note iii)

1,221

-

1,221

Other

1,566

487

2,053

Total

28,776

4,865

33,641

 

Notes:

i.       This column includes credit risk exposures, counterparty credit risk exposures and exposures below the thresholds for deduction that are subject to a 250% risk weight.

ii.     RWAs have been allocated according to the business lines within the standardised approach to operational risk, as per article 317 of CRR.

iii.    Counterparty credit risk relates to derivative financial instruments and repurchase agreements.

 

 

RWAs have reduced by £1.1 billion to £32.5 billion. This was predominantly driven by a £1 billion reduction in commercial RWAs, due to continued run-off of the portfolio.

 

 

 

Solvency risk (continued)

 

Regulatory developments 

 

Highlighted below are a number of areas where regulatory requirements are yet to be finalised. Nationwide will remain engaged in the development of the regulatory approach to ensure it is prepared for any change.

 

Nationwide is currently required to maintain a minimum leverage ratio of 3.25% following the recalibration to adjust for the impact of excluding central bank holdings from the exposure measure. There is a supplementary leverage ratio buffer of 0.35% to be implemented in 2019. Following the Financial Policy Committee's (FPC) announcement on the countercyclical buffer (June 2018: 0.5%, November 2018: 1%), the equivalent countercyclical leverage ratio buffer will be 0.2% from June 2018, increasing to 0.4% from November 2018. Therefore, the minimum leverage ratio requirement is expected to be 4% by January 2019. Nationwide is confident it is in a strong position to meet the minimum requirements.

 

The Basel Committee published their final reforms to the Basel III framework in December 2017. The amendments include changes to the standardised approaches for credit and operational risks and the introduction of a new RWA output floor. The rules are subject to a lengthy transitional period from 2022 to 2027. In addition, the PRA's revised expectations for IRB models for residential mortgages will be effective from the end of 2020. These reforms will lead to a significant increase in our risk weights over time and we currently expect the consequential impact on our reported CET1 ratio to ultimately be a reduction of the order of 45-50% relative to our current methodology. We note however that organic earnings through the transition will mitigate this impact such that our reported CET1 ratio will in practice remain well in excess of the proforma levels implied by this change, and leverage requirements will remain our binding constraint based on latest projections. These reforms represent a re-calibration of regulatory requirements with no underlying change in the capital resources we hold or the risk profile of our assets. Final impacts are subject to uncertainty for future balance sheet size and mix, and because the final detail of some elements of the regulatory changes remain at the PRA's discretion.

 

 

 

 

 

Consolidated financial statements

 

Contents

 

Audited statutory information

 

 

Page

Consolidated income statement

62

Consolidated statement of comprehensive income

63

Consolidated balance sheet

64

Consolidated statement of movements in members' interests and equity

65

Notes to the consolidated financial statements

66

 

 

 

Consolidated income statement

For the year ended 4 April 2018

 

 

 

2018

2017

 

Notes

£m

£m

Interest receivable and similar income

3

4,818

5,050

Interest expense and similar charges

4

(1,807)

(2,090)

Net interest income

 

3,011

2,960

Fee and commission income

 

449

446

Fee and commission expense

 

(244)

(221)

Other operating (expense)/income

5

(84)

100

(Losses)/gains from derivatives and hedge accounting

6

(1)

66

Total income

 

3,131

3,351

Administrative expenses

7

(2,024)

(2,021)

Impairment losses on loans and advances to customers

8

(107)

(131)

Impairment recoveries/(losses) on investment securities

 

2

(9)

Provisions for liabilities and charges

12

(25)

(136)

Profit before tax

 

977

1,054

Taxation

9

(232)

(297)

Profit after tax

 

745

757

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated statement of comprehensive income

For the year ended 4 April 2018

 

 

 

 

2018

2017

 

 

£m

£m

Profit after tax

 

745

757

 

Other comprehensive (expense)/income

 

 

 

 

Items that will not be reclassified to the income statement

 

 

 

Remeasurements of retirement benefit obligations:

 

 

 

Retirement benefit remeasurements before tax

 

29

(347)

Taxation

 

(7)

92

 

 

22

(255)

Revaluation of property:

 

 

 

Revaluation before tax

 

2

1

Taxation

 

(1)

2

 

 

1

3

Effect of tax rate change on other items through the general reserve

 

-

(1)

 

 

 

 

 

 

23

(253)

Items that may subsequently be reclassified to the income statement

 

 

 

Cash flow hedge reserve:

 

 

 

Fair value movements taken to members' interests and equity

 

(2,316)

1,671

Amount transferred to income statement

Taxation

 

2,057

68

(2,019)

101

 

 

 

(191)

(247)

Available for sale reserve:

 

 

 

Fair value movements taken to members' interests and equity 

 

50

176

Amount transferred to income statement

 

(8)

(106)

Taxation

 

(11)

(18)

 

 

31

52

 

 

 

 

Other comprehensive (expense)/income

 

(137)

(448)

 

 

 

 

Total comprehensive income

 

608

309

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated balance sheet

At 4 April 2018

 

 

 

 

2018

2017*

 

Notes

£m

£m

Assets

 

 

 

Cash

 

 14,361

13,017

Loans and advances to banks

 

 3,422

2,587

Investment securities

 

 13,046

9,831

Derivative financial instruments

 

 4,121

5,043

Fair value adjustment for portfolio hedged risk

 

(109)

746

Loans and advances to customers

10

 191,664

187,371

Intangible assets

 

 1,342

1,230

Property, plant and equipment

 

 887

859

Accrued income and expenses prepaid

 

 164

191

Deferred tax

 

98

103

Other assets

 

 102

692

Total assets

 

 229,098

221,670

Liabilities

 

 

 

Shares

 

 148,003

144,542

Deposits from banks

 

 19,404

8,734

Other deposits

 

 5,323

6,459

Due to customers

 

 402

2,376

Fair value adjustment for portfolio hedged risk

 

(53)

8

Debt securities in issue

 

 34,118

40,339

Derivative financial instruments

 

 2,337

3,182

Other liabilities

 

 345

391

Provisions for liabilities and charges

12

 273

387

Accruals and deferred income

 

 336

295

Subordinated liabilities

11

 5,497

2,940

Subscribed capital

11

 263

279

Deferred tax

 

 49

100

Current tax liabilities

 

 53

82

Retirement benefit obligations

14

345

423

Total liabilities

 

 216,695

210,537

Members' interests and equity

 

 

 

Core capital deferred shares

15

 1,325

531

Other equity instruments

16

 992

992

General reserve

 

 9,951

9,316

Revaluation reserve

 

 68

67

Cash flow hedge reserve

 

(8)

183

Available for sale reserve

 

 75

44

Total members' interests and equity

 

 12,403

11,133

Total members' interests, equity and liabilities

229,098

221,670

         

 

*Comparatives have been restated as detailed in note 2.

 

 

 

 

 

 

 

 

Consolidated statement of movements in members' interests and equity

For the year ended 4 April 2018

 

 

 

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 2017

 

531

992

9,316

67

183

44

11,133

Profit for the year

 

-

-

745

-

-

-

745

Net remeasurements of retirement benefit obligations

 

-

-

22

-

-

-

22

Net revaluation of property

 

-

-

-

1

-

-

1

Effect of tax rate change on other items through the general reserve

 

-

-

-

-

-

-

-

Net movement in cash flow hedge reserve

 

-

-

-

-

(191)

-

(191)

Net movement in available for sale reserve

 

-

-

-

-

-

31

31

Total comprehensive income

 

-

-

767

1

(191)

31

608

Issue of core capital deferred shares

 

794

-

-

-

-

-

794

Distribution to the holders of core capital deferred shares

 

-

-

(82)

-

-

-

(82)

Distribution to the holders of Additional Tier 1 capital (note i)

 

-

-

(50)

-

-

-

(50)

At 4 April 2018

 

1,325

992

9,951

68

(8)

75

12,403

 

For the year ended 4 April 2017

 

 

 

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 year

 

-

-

757

-

-

-

757

Net remeasurements of retirement benefit obligations

 

-

-

(255)

-

-

-

(255)

Net revaluation of property

 

-

-

-

3

-

-

3

Effect of tax rate change on other items through the general reserve

 

-

-

(1)

-

-

-

(1)

Net movement in cash flow hedge reserve

 

-

-

-

-

(247)

-

(247)

Net movement in available for sale reserve

 

-

-

-

-

-

52

52

Total comprehensive income

 

-

-

501

3

(247)

52

309

Distribution to the holders of core capital deferred shares

 

-

-

(56)

-

-

-

(56)

Distribution to the holders of Additional Tier 1 capital (note i)

 

-

-

(50)

-

-

-

(50)

At 4 April 2017

 

531

992

9,316

67

183

44

11,133

 

Note:

i.       The distribution to the holders of Additional Tier 1 capital is shown net of an associated tax credit of £18 million (2017: £18 million).

 

 

 

 

 

 

 

 

 

 

 

 

Notes to the consolidated financial statements

 

1 Reporting period

 

These results have been prepared as at 4 April 2018 and show the financial performance for the year from, and including, 5 April 2017 to this date.

 

 

2 Basis of preparation

 

The 2018 preliminary results have been prepared in accordance with International Financial Reporting Standards (IFRS) as published by the International Accounting Standards Board (IASB), and interpretations issued by the IFRS Interpretations Committee of the IASB as adopted by the European Union. The accounting policies adopted for use in the preparation of this Preliminary Results Announcement and which will be used in preparing the Annual Report and Accounts for the year ended 4 April 2018 were included in the 'Annual Report and Accounts 2017' document except as detailed below. Copies of this document are available at

nationwide.co.uk/about_nationwide/results_and_accounts

 

Adoption of new and revised IFRSs

 

The Group has adopted the amendments to IAS 7 Statement of Cash Flows with effect from 5 April 2017, which has resulted in additional disclosures of changes in liabilities arising from financing activities.

 

Minor amendments to IAS 12 Income Taxes have also been adopted, together with amendments from the annual improvements to IFRS Standards 2014-2016 cycle. The adoption of these amendments and improvements had no significant impact for the Group.

 

Change to accounting policies

 

Following the Group's decision to wind down its commercial lending business, and the strategic review outlined in the Annual Report and Accounts 2017, the segmental reporting policy has been updated to better reflect the way in which the Executive Committee, as chief operating decision maker, now manages the business. As a result, no segmental disclosure is provided.

 

Adjustments to comparative information

 

Balance sheet presentation

 

Following the disposal of certain investments, the value of the Group's investments in equity shares is no longer material. As a result, this balance sheet line is no longer separately presented. Instead, the remaining balance has been combined with 'Investment securities'. At the same time, and also due to materiality considerations, the decision was taken to combine the Group's investment properties, valued at £9 million at 4 April 2018 (2017: £8 million), with 'Property, plant and equipment'. Accordingly, the 'Investment properties' balance sheet line item is no longer separately presented.

 

Accrued interest on subordinated liabilities and subscribed capital

 

The Group carries subordinated liabilities and subscribed capital at amortised cost. Accrued interest on these liabilities was previously included in 'Accruals and deferred income'. Accrued interest is now presented within 'Subordinated liabilities' and 'Subscribed capital' to provide a consistent presentation with other financial instruments held at amortised cost.

 

Comparatives have been restated as shown below:

 

 

Consolidated balance sheet extract

At 4 April 2017

 

Notes

 

Previously published

£m

Adjustment

 

£m

Restated

 

£m

Investment securities

 

9,764

67

9,831

Investments in equity shares

 

67

(67)

-

Property, plant and equipment

 

851

8

859

Investment properties

 

8

(8)

-

Accruals and deferred income

 

333

(38)

295

Subordinated liabilities

11

2,905

35

2,940

Subscribed capital

11

276

3

279

 

These restatements had no impact on the Group's net assets or members' interests and equity at 4 April 2017.

 

Notes to the consolidated financial statements (continued)

 

2 Basis of preparation (continued)

 

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 the accounts. 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 differ from those estimates.

 

Going concern

 

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 for the foreseeable future and that therefore, it is appropriate to adopt the going concern basis in preparing this preliminary financial information.

 

 

3 Interest receivable and similar income

 

 

2018

£m

2017

£m

On residential mortgages

4,532

4,843

On other loans

798

774

On investment securities

201

372

On other liquid assets

95

59

Net expense on financial instruments hedging assets

(808)

(998)

Total

4,818

5,050

 

Included within interest receivable and similar income is interest income on impaired financial assets of £30 million (2017: £33 million).

 

 

4 Interest expense and similar charges

 

 

2018

£m

2017

£m

On shares held by individuals

1,140

1,390

On subscribed capital

15

34

On deposits and other borrowings:

Subordinated liabilities

Other

 

175

320

 

128

450

On debt securities in issue

712

767

Net income on financial instruments hedging liabilities

(563)

(684)

Interest on net defined benefit pension liability (note 14)

8

5

Total

1,807

2,090

 

Interest on deposits and other borrowings includes an expense of £210 million (2017: £327 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, all of which had matured at 4 April 2018, were economically hedged using equity-linked derivatives. Net income on financial instruments hedging liabilities includes income of £206 million (2017: £308 million) in relation to the associated derivatives.

 

 

 

Notes to the consolidated financial statements (continued)

 

5 Other operating expense/income

 

 

 

 

2018

2017

 

£m

£m

Gains on disposal of investments

26

100

Other expense

(110)

-

Total

(84)

100

 

On 28 April 2017, the Group disposed of shares in VocaLink Holdings Limited, resulting in a gain on disposal of £26 million. 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 includes a £116 million loss from a debt buy-back exercise during the year, together with the net amount of 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.

 

 

6 Losses/gains from derivatives and hedge accounting

 

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

 

 

2018

2017

 

£m

£m

(Losses)/gains from fair value hedge accounting (note i)

(86)

61

Ineffectiveness from cash flow hedge accounting (note ii)

17

(4)

Net gain from mortgage pipeline (note iii)

50

8

Fair value gains/(losses) from other derivatives (note iv)

5

(19)

Foreign exchange differences (note v)

13

20

Total

(1)

66

 

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 (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 are recognised in the income statement. The ineffective portion of the fair value movement is recognised immediately in the income statement.

iii.    The mortgage pipeline in the above table includes interest rate swaps used to economically hedge expected new mortgage business, as well as some firm mortgage commitments which the Group has elected to fair value in order to reduce the accounting mismatch.

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 in place.

v.      Gains or losses arise from the retranslation of foreign currency monetary items not subject to effective hedge accounting.

Losses of £86 million (2017: gains of £61 million) from fair value hedge accounting include losses of £42 million (2017: gains of £47 million) from macro hedges, due to hedge ineffectiveness and the amortisation of existing balance sheet amounts, and losses of £44 million relating to micro hedges (2017: gains of £14 million) which arise due to a combination of hedge ineffectiveness, disposals and restructuring, and the amortisation of existing balance sheet amounts.

 

For the mortgage pipeline the income statement includes the full fair value movement of forward starting interest rate swaps economically hedging the pipeline. To alleviate an accounting mismatch, the Group only elects to fair value certain underlying mortgage business within the pipeline.

 

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.
 

Notes to the consolidated financial statements (continued)

 

7 Administrative expenses

 

 

2018

£m

2017

£m

Employee costs:

 

 

Wages and salaries

524

517

Bonuses

61

75

Social security costs

66

64

Pension costs

173

137

 

824

793

Other administrative expenses

758

790

Bank levy (note 12)

45

42

 

1,627

1,625

Depreciation, amortisation and impairment

397

396

Total

2,024

2,021

 

 

8 Impairment provisions on loans and advances to customers

 

The following provisions have been deducted from the appropriate asset values in the Group balance sheet:

 

 

2018

£m

2017

£m

Impairment charge for the year

 

 

Prime residential

3

11

Specialist residential

8

47

Consumer banking

97

78

Commercial and other lending

(1)

(5)

Total

107

131

Impairment provision at the end of the year

 

 

Prime residential

36

34

Specialist residential

109

110

Consumer banking

298

269

Commercial and other lending

15

25

At 4 April

458

438

 

The Group impairment provision of £458 million at 4 April 2018 (2017: £438 million) comprises individual provisions of £31 million (2017: £45 million) and collective provisions of £427 million (2017: £393 million).

 

 

 

Notes to the consolidated financial statements (continued)

 

9 Taxation

 

Tax charge in the income statement

2018

2017

 

£m

£m

Current tax:

UK corporation tax

Corporation tax - adjustments in respect of prior years

246

(12)

300

(3)

Total current tax

234

297

Deferred tax:

Current year credit

Adjustments in respect of prior years

Effect of corporation tax rate change

Effect of deferred tax provided at different tax rates

 

(7)

9

-

(4)

 

(1)

3

(2)

-

Total deferred taxation

(2)

-

Tax charge

232

297

 

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

2018

2017

 

£m

£m

Profit before tax

977

1,054

Tax calculated at a tax rate of 19% (2017: 20%)

186

211

Adjustments in respect of prior years

(3)

-

Banking surcharge

43

62

Expenses not deductible for tax purposes/(income not taxable):

Depreciation on non-qualifying assets

Bank levy

Customer redress

Other

1

8

-

1

-

8

19

(1)

Effect of corporation tax rate change

-

(2)

Effect of deferred tax provided at different tax rates

(4)

-

Tax charge

232

297

 

 

10 Loans and advances to customers

 

 

2018

2017

 

£m

£m

Prime residential mortgages

144,013

137,970

Specialist residential mortgages

33,141

33,149

Consumer banking

3,809

3,680

Commercial and other lending

9,658

11,202

 

190,621

186,001

Fair value adjustment for micro hedged risk

1,043

1,370

Total

191,664

187,371

 

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) and Term Funding Scheme (TFS). The programmes have enabled the Group to obtain secured funding or to create additional collateral which could be used to source additional funding.

 

 

Notes to the consolidated financial statements (continued)

 

10 Loans and advances to customers (continued)

 

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

 

Mortgages pledged to

asset backed funding

programmes

 

2018

Notes in issue

Mortgages pledged

 

 

 

Held by third parties

Held by the Group

 

Total notes in issue

 

Group

 

£m

 

£m

Drawn

£m

Undrawn

£m

 

£m

Covered bond programme

21,000

15,322

-

-

15,322

Securitisation programme

8,711

3,659

-

337

3,996

Whole mortgage loan pools

22,831

-

17,000

-

17,000

Total

18,981

17,000

337

36,318

             

 

Mortgages pledged to

asset backed funding

programmes

 

2017

Notes in issue

Mortgages pledged

    

 

 

Held by third parties

Held by the Group

 

Total notes in issue

 

Group

 

£m

 

£m

Drawn

£m

Undrawn

£m

 

£m

Covered bond programme

19,322

14,927

-

-

14,927

Securitisation programme

10,412

3,622

-

448

4,070

Whole mortgage loan pools

16,136

-

10,747

2,101

12,848

Total

45,870

18,549

10,747

2,549

31,845

             

 

Note:

The prior year values for notes in issue for whole mortgage loan pools have been restated to show the nominal amounts on a consistent basis with the current year presentation.

 

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

 

At 4 April 2018 the whole mortgage loan pools are pledged at the BoE under the TFS. In the prior year, whole mortgage loan pools were pledged at the BoE under the TFS and Funding for Lending Scheme (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. At 4 April 2018, £22.8 billion (2017: £16.1 billion) of pledged collateral provided a post-haircut drawdown capacity of £17.5 billion (2017: £12.8 billion), of which £17.0 billion (2017: £10.7 billion) of drawdowns were made. At 4 April 2018 there are no amounts undrawn following the closure of the BoE TFS and FLS.

 

Mortgages pledged include £8.7 billion (2017: £9.1 billion) in the 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 Group 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 within debt securities in issue. Notes in issue, held by the Group and drawn are whole mortgage loan pools securing amounts drawn under the TFS. At 4 April 2018 the Group had outstanding TFS drawings of £17.0 billion (2017: £6.0 billion).

 

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

 

In accordance with accounting standards, notes in issue and held by the Group are not recognised in the Group's 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 year ended 4 April 2018, €1.1 billion (£0.9 billion sterling equivalent) of notes were issued, and £0.8 billion sterling equivalent of notes matured.

 

Notes to the consolidated financial statements (continued)

 

10 Loans and advances to customers (continued)

 

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 £5.2 billion (2017: £7.0 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 year ended 4 April 2018 a total of £0.8 billion sterling equivalent of notes matured. During the year ended 4 April 2018 £0.9 billion sterling equivalent notes were issued across sterling and US dollars.

 

 

11 Subordinated liabilities and subscribed capital

 

 

 

2018

 

£m

2017

(note i)

£m

Subordinated liabilities

 

 

Subordinated notes

5,487

2,906

Fair value hedge accounting adjustments

42

45

Unamortised premiums and issue costs

(32)

(11)

Total

5,497

2,940

Subscribed capital

 

 

Permanent interest-bearing shares

225

225

Fair value hedge accounting adjustments

40

57

Unamortised premiums and issue costs

(2)

(3)

Total

263

279

 

Note:

i.       Comparatives have been restated to include accrued interest as detailed in note 2.

 

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

 

On 8 March 2018, to help meet forthcoming minimum requirements for own funds and eligible liabilities (MREL), the Group issued senior non-preferred notes, which are a class of subordinated liability that are senior to the existing Tier 2 eligible notes.

 

The senior non-preferred notes rank pari passu with each other and behind the claims against the Society of all depositors, creditors and investing members other than holders of Tier 2 subordinated notes, permanent interest-bearing shares (PIBS), Additional Tier 1 (AT1) capital and core capital deferred shares (CCDS) of the Society.

 

The Tier 2 subordinated notes rank pari passu with each other and behind the claims against the Society of all depositors, creditors and investing members other than holders of PIBS, AT1 capital and CCDS of the Society.

 

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

 

 

 

Notes to the consolidated financial statements (continued)

 

12 Provisions for liabilities and charges

 

 

Bank levy

FSCS

Customer

redress

Other

provisions

Total

 

£m

£m

£m

£m

£m

At 5 April 2017

16

42

305

24

387

Provisions utilised

(37)

(26)

(110)

(14)

(187)

Charge for the year

45

-

34

6

85

Release for the year

-

(1)

(8)

(3)

(12)

Net income statement charge

45

(1)

26

3

73

At 4 April 2018

24

15

221

13

273

 

 

 

 

 

 

At 5 April 2016

22

84

227

10

343

Provisions utilised

(48)

(42)

(58)

(5)

(153)

Charge for the year

42

15

152

21

230

Release for the year

-

(15)

(16)

(2)

(33)

Net income statement charge

42

-

136

19

197

At 4 April 2017

16

42

305

24

387

 

The income statement charge for provisions for liabilities and charges of £25 million (2017: £136 million) includes the customer redress net income statement charge of £26 million (2017: £136 million), and the FSCS release of £1 million (2017: £nil).

 

The income statement charge for bank levy of £45 million (2017: £42 million) and other provisions charge of £3 million
(2017: £19 million) are included within administrative expenses in the income statement.

 

Financial Services Compensation Scheme (FSCS)

 

The FSCS, the UK's independent statutory compensation fund for customers of authorised financial services firms, pays compensation if a firm is unable to pay claims against it.

 

Following the default of a number of deposit takers, the FSCS borrowed funds from HM Treasury, approximately £5 billion of which remains outstanding at 4 April 2018 (2017: £16 billion). This balance relates solely to the failure of Bradford & Bingley plc. The FSCS recovers the interest costs associated with this loan, together with ongoing management expenses, by way of annual levies on member firms.

 

UK Asset Resolution (UKAR) oversees the management of the closed books of Bradford & Bingley plc. In order to repay the funds borrowed from HM Treasury, on 25 April 2017 UKAR completed the first of two separate sales of Bradford & Bingley plc portfolios. It is anticipated that the second sale transaction will be completed by September 2018.

 

The balance sheet amount provided by the Group of £15 million (2017: £42 million) comprises £12 million of levies relating to the 2017/18 FSCS scheme year and £3 million relating to the 2018/19 scheme year.

 

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 £221 million (2017: £305 million) in respect of the potential costs of remediation and redress 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 net income statement charge for the year mainly reflects updated assumptions for provisions previously recognised. This includes a £28 million charge in relation to PPI, driven primarily by an increase in the anticipated total number of complaints expected to be received in light of the Financial Conduct Authority (FCA) media campaign and complaints deadline of August 2019.

 

 

 

Notes to the consolidated financial statements (continued)

 

12 Provisions for liabilities and charges (continued)

 

It is considered appropriate for the Group to provide for the estimated total amount required to deal with all ongoing and future PPI complaints. The amount provided at 4 April 2018 therefore reflects the compensation and administrative costs associated with cases that the Group expects to uphold and the cost of processing invalid claims which the Group expects to receive. This estimate will be re-assessed on an ongoing basis in the light of actual claims levels observed.

 

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.

 

 

13 Contingent liabilities

 

During the ordinary course of business, the Group receives complaints, is subject to threatened or actual legal proceedings, and manages regulatory enquiries, reviews, challenges and investigations. It also receives and reviews allegations of wrongdoing raised by employees and others and provides support and assistance, when it is appropriate to do so, to relevant Law Enforcement Agencies in connection with investigations they may undertake. 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. 

 

 

14 Retirement benefit obligations

 

 

Group

Retirement benefit obligations on the balance sheet

2018

2017

 

£m

£m

Present value of funded obligations

6,108

6,039

Present value of unfunded obligations

12

12

 

6,120

6,051

Fair value of fund assets

(5,775)

(5,628)

Deficit at 4 April

345

423

 

Defined contribution pension schemes

 

The Group operates two defined contribution pension schemes in the UK - the Nationwide Group Personal Pension Plan (GPP) and the Nationwide Temporary Workers Pension Scheme. New employees are automatically enrolled into one of these schemes, with both schemes being administered by Aviva.

 

Outside of the UK, there are defined contribution pension schemes for a small number of employees in the Isle of Man and Ireland.

 

Defined benefit pension schemes

 

The Group has funding obligations to several defined benefit pension schemes, which are administered by boards of trustees. Pension trustees are required by law to act in the interests of all relevant beneficiaries and are responsible for the investment policy of fund assets, as well as the day to day administration.

 

The Group's largest pension scheme is the Nationwide Pension Fund (the Fund). This is a contributory defined benefit pension scheme, with both final salary and career average revalued earnings (CARE) sections. The Fund was closed to new entrants in 2007 and since that date employees have been able to join the GPP.

 

Notes to the consolidated financial statements (continued)

 

14 Retirement benefit obligations (continued)

 

Most members of the Fund can draw their pension when they reach the Fund's retirement age of 65. Pension benefits accrued before 1 April 2011 vary in methodology; however most are based on 1/54th of final salary for each year of service. Pension benefits accrued after 1 April 2011 are usually based on 1/60th of average earnings, revalued to age of retirement, for each year of service (also called CARE).

 

In the event that a Fund member passes away, benefits may be payable in the form of a spouse/dependant's pension, lump sum (paid within 5 years of a Fund member beginning to take their pension), or as a refund of Fund member contributions. Fund members are also able to place redundancy severance into their pension.

 

Approximately 31% of the Fund's retirement benefit obligations have been accrued by current employees (active Fund members), 37% by former employees (deferred Fund members) and 32% by current pensioners and dependants. The average duration of the Fund's pension obligation is approximately 22 years reflecting the split of the obligation between current employees (27 years), deferred Fund members (25 years) and current pensioners (15 years).

 

The Group's retirement benefit obligations include £2 million (2017: £4 million) recognised in a subsidiary company, Nationwide (Isle of Man) Limited. This obligation relates to a defined benefit scheme providing benefits based on both final salary and CARE which was closed to new entrants in 2009.

 

The Group's retirement benefit obligations also include £12 million (2017: £12 million) in respect of unfunded legacy defined benefit arrangements.

 

The principal actuarial assumptions used are as follows:

 

 

 

Principal actuarial assumptions

2018

2017

 

%

%

Discount rate

2.45

2.40

Future salary increases

3.10

3.20

Future pension increases (maximum 5%)

2.90

2.95

Retail price index (RPI) inflation

3.10

3.20

Consumer price index (CPI) inflation

2.10

2.20

 

The assumptions for mortality rates are based on standard mortality tables which allow for future improvements in life expectancies. The assumptions made are illustrated in the table below:

 

Life expectancy assumptions

 

2018

 

years

2017

(note i)

years

Age 60 at 4 April 2018:

 

 

Males

28.0

27.9

Females

29.3

29.1

Age 60 at 4 April 2038:

 

 

Males

29.2

28.8

Females

30.8

29.9

 

Note:

i.     Comparatives have been restated to present life expectancy assumptions on a consistent basis with estimation methodology as at 4 April 2018. This does not impact the calculation of the defined benefit obligation.

 

 

 

Notes to the consolidated financial statements (continued)

 

14 Retirement benefit obligations (continued)

 

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

 

 

 

Movements in the net defined benefit liability

2018

2017

 

£m

£m

Deficit at 5 April

423

213

Current service cost

95

60

Past service cost

5

4

Curtailment gains

(9)

(4)

Interest on net defined benefit liability

8

5

Return on assets less/(greater) than discount rate

1

(951)

Contributions by employer

(152)

(206)

Administrative expenses

4

4

Actuarial (gains)/losses on defined benefit obligations

(30)

1,298

Deficit at 4 April

345

423

 

Current service cost represents the increase in liabilities resulting from employees accruing service over the year. This includes salary sacrifice employee contributions.

 

Past service cost represents the increase in liabilities of the Fund arising from Fund members choosing to pay additional contributions (AVC's, pension credits) to boost their pension benefits.

 

Curtailment gains are in respect of Fund members made redundant during the year. Liabilities reduce as deferred Fund member pension benefits are linked to the Consumer Price Index (CPI), rather than the Retail Prices Index (RPI) which is used for the pension benefits for active Fund members.

 

The interest on the net defined benefit liability represents the annual interest accruing on the liabilities over the year, offset by the interest income on assets.

 

The £1 million relating to the return on assets less than the discount rate (2017: £951 million return greater than the discount rate), is driven by a reduction in long-term expected inflation over the year, partially offset by positive equity returns.

 

The £152 million of employer contributions includes deficit contributions of £86 million (2017: £149 million), with the remainder relating to employer contributions in respect of future benefit accrual. The Group estimates that its contributions to the defined benefit pension schemes (including deficit contributions under the current deficit recovery plan) during the year ending 4 April 2019 will be £127 million.

 

The £30 million actuarial gain (2017: £1,298 million loss) on the liabilities shown above is driven by:

 

·      A £153 million gain (2017: £1,441 million loss) from changes in financial assumptions, including a 0.05% increase in the discount rate and a 0.10% decrease in assumed Retail Prices Index inflation, both of which decrease the value of the liabilities.

·      A £97 million loss (2017: £144 million gain) due to updating to the latest industry standard actuarial model for projecting future longevity improvements, updating the long-term longevity improvement assumption from 1.25% to 1.50% per annum, and a Trustee decision to amend specific actuarial factors of the Fund as of 1 April 2018. The specific factors allow Fund members to take tax free cash lump sums when they retire on more favourable terms than previously.

·      An experience loss on the assumptions of £26 million (2017: £1 million loss) reflecting the difference between the estimated long-term assumptions and the actual observed pension increases and deferred pension revaluations during the year ended 4 April 2018.

 

 

 

 

Notes to the consolidated financial statements (continued)

 

15 Core capital deferred shares (CCDS)

 

 

Number of shares

CCDS

Share premium

Total

 

 

£m

£m

£m

At 4 April 2017

5,500,000

6

525

531

Issuance

5,000,000

5

802

807

Issue costs

 

 

(13)

(13)

At 4 April 2018

10,500,000

11

1,314

1,325

 

In September 2017, the Group issued 5,000,000 of £1 core capital deferred shares (CCDS). These CCDS form a single series along with the CCDS previously issued in December 2013. The gross proceeds of the issuance were £807 million (£794 million net of issuance costs).

 

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 gradually 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 were 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 £129.24 per share.

 

There is a cap on the distributions that can be paid to holders of CCDS in any financial year. The cap is currently set at £16.06 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 2017 was paid on 20 June 2017 and an interim distribution of £54 million (£5.125 per share) in respect of the period to 30 September 2017 was paid on 20 December 2017. These distributions have been recognised in the statement of movements in members' interests and equity.

 

Since the balance sheet date the directors have declared a distribution of £5.125 per share in respect of the period to 4 April 2018, amounting in aggregate to £54 million. This has not been reflected in these financial statements as it is recognised in the year ending 4 April 2019, by reference to the date at which it was declared.

 

 

 

Notes to the consolidated financial statements (continued)

 

16 Other equity instruments

 

 

 

 

Total

 

 

 

£m

At 4 April 2018

 

 

992

At 4 April 2017

 

 

992

 

Other equity instruments are Additional Tier 1 (AT1) capital instruments. 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 2017, was paid on 20 June 2017 and a coupon of £34 million, covering the period to 19 December 2017, was paid on 20 December 2017. These payments have been recognised in the statement of movements in members' interests and equity.

 

A coupon payment of £34 million, covering the period to 19 June 2018, is expected to be paid on 20 June 2018 and will be recognised in the statement of movements in members' interests and equity in the financial year ending 4 April 2019.

 

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 end point 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.

 

 

 

RESPONSIBILITY STATEMENT

 

The Directors confirm that the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and income and expenditure of the Group as required by the Disclosure and Transparency rules (DTR 4.1.12). The Chief Executive's Review and the Financial Review together include a fair review of the development and performance of the business and the Group, and taken together with the primary financial statements, supporting notes and the Business and Risk Report provide a description of the principal risks and uncertainties faced.

 

A full list of the board of directors will be disclosed in the Annual Report and Accounts 2018.

 

 

Signed on behalf of the Board by

 

 

Mark Rennison

Chief Financial Officer

 

21 May 2018

 

 

OTHER INFORMATION

 

The financial information set out in this announcement which was approved by the Board on 21 May 2018 does not constitute accounts within the meaning of section 73 of the Building Societies Act 1986.

 

The Annual Report and Accounts 2017 have been filed with the Financial Conduct Authority and the Prudential Regulation Authority. The Annual Report and Accounts 2018 will be published on the website of Nationwide Building Society, nationwide.co.uk. The report of the auditor on those accounts is unqualified and did not draw attention to any matters by way of emphasis. The Annual Report and Accounts 2018 will be lodged with the Financial Conduct Authority and the Prudential Regulation Authority following publication.

 

A copy of this Preliminary report is placed on the website of Nationwide Building Society, nationwide.co.uk, from 22 May 2018. 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:

 

Tanya Joseph

Tel: 020 7261 6503

Mobile: 07826 922102

tanya.Josephjoseph@nationwide.co.uk

 

Sara Batchelor

Tel: 01793 657770

Mobile: 07785 344137

sara.batchelor@nationwide.co.uk

 

 

Investor queries:

 

Alex Wall

Tel: 020 7261 6568

Mobile: 07917 093632

alexander.wall@nationwide.co.uk

 

 

 

 

 

 

 

 

 

 

 

 


This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
 
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