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Nationwide B.S. (NAWI)

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Friday 22 May, 2015

Nationwide B.S.

Preliminary Results Announcement

RNS Number : 9914N
Nationwide Building Society
22 May 2015
 



 

 

 

 

Nationwide Building Society

 

 

 

 

Preliminary Results Announcement

For the year ended

4 April 2015

 

 

 

 

 

 

Underlying profit and pre provision underlying profit

Profit before tax shown on a statutory and underlying basis is set out on page 11. Statutory profit before tax of £1,044 million has been adjusted for a number of items, consistent with prior years, to derive an underlying profit before tax of £1,216 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 that potentially requires exclusion of non-recurring items even though they are closely related to (or even a direct consequence of) the Group's core business activities.

 

Pre provision underlying profit of £1,526 million relates to underlying profit before impairment losses and provisions for liabilities and charges. The purpose of this measure is to demonstrate net income generation capacity and the ability of the business to absorb losses in a challenging economic climate.

 

Forward looking statements

Statements in this document are forward lookingwith 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, we 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.

 

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

 

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

 

 

NATIONWIDE BUILDING SOCIETY

RESULTS FOR THE YEAR ENDED 4 APRIL 2015

 

 

Graham Beale, Nationwide's Chief Executive said:

"Today we have announced one of the strongest sets of results we have ever reported, demonstrating that, yet again, it is possible to be successful by doing the right thing.

 

"We have reached a level of profitability that will allow us to invest in the Society to improve our members' experience, encourage growth in our membership and at the same time comfortably meet prudential requirements.  We are embracing the impact of new technology and the digital changes and redefining the role of branches so that we meet our current and future members' needs. This makes Nationwide one of the most attractive and safest financial institutions on the high street.

 

"We will continue to do all that you would expect of the UK's largest mutual; leading the way in setting standards and being an exemplar organisation. In short, we will do the right thing for our members, standing out as the only truly national alternative to the established banks."

 

  

 

Graham Beale

Chief Executive 



 

 

KEY HIGHLIGHTS

 

 

Strong financial performance

·        32% increase in underlying profit to £1,216 million

·        54% increase in statutory profit to £1,044 million

·        Underlyingcost income ratio down to 51.6% (2014: 52.5%)

 

Increased capital strength, securing the future ofmutuality

·        Common Equity Tier 1 ratio 19.8% (4 April 2014: 14.5%)

·        Leverage ratio 4.1% (4 April 2014: 3.4%)

 

Focus on customer service and innovation

·        1st for customer service satisfaction for three and a half years

·        2.3 million digitally active members, 165 million uses of our Mobile Banking app

·        Provided real time account balances on Android Wear smartwatches

 

Support for the housing market

·        Regained number two position in mortgage market

·        Gross mortgage lending of £27.1 billion (2014: £28.1 billion), a market share of 13.4% (2014: 14.9%)

·        Net lending of £7.1 billion (2014: £9.9 billion), a market share of 31.2% (2014: 70.8%)

·        Helped support almost 46,000 first time buyers (2014: 58,100).

 

Growth in deposit balances

·      Loyalty Saver continuing to pay higher rates to reward length of membership

·      14.3% share of the market increase in ISA balances

·      £1.9 billion increase in member deposit balances, despite ongoing low rate environment

 

A current account range designed to support our members' needs

·        Market share of main standard and packaged accounts increased to 6.8%

·      Successful launch of youth current account FlexOne offering contactless and mobile app convenience and educational material on how to use a current account

 

A great place to work

·        Sixth best big company to work for (Sunday Times)

·        Top 50 Employer for Women

·        99% and five stars in the 2015 BITC Corporate Responsibility Index

·        Record employee engagement scores, exceeding industry norms

 

1 GfK NOP's Financial Research Survey (FRS), 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 Barclays, Halifax, HSBC, former Lloyds TSB Group (including Lloyds Bank, TSB and C&G), NatWest and Santander, 12 month rolling data between Sept 2012-March 2015, c60,000 adults interviewed per annum.

FINANCIAL SUMMARY

 


At

4 April

2015

At

4 April

2014 (note i)

Financial performance

£m

£m

Total underlying income

3,152

2,895

Pre provision underlying profit

1,526

1,376

Underlying profit before tax

1,216

924

Statutory profit before tax

1,044

677

Lending and product volumes

£bn

%

£bn

%

Group residential - gross/gross market share

27.1

13.4

28.1

14.9

Group residential - net/net market share

7.1

31.2

9.9

70.8

%

%

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

66

69

Member deposits (note ii)

£bn

%

£bn

%

Balance movement/market share

1.9

3.4

4.9

12.1

Net receipts

0.8

2.9

Key ratios

%

%

Cost income ratio - underlying basis

51.6

52.5

Cost income ratio - statutory basis

54.3

56.6

Net interest margin

1.46

1.25


At

4 April

2015

At

4 April

2014 (note i)

Balance sheet

£bn

£bn

Total assets

195.6

189.9

Loans and advances to customers

170.6

166.5

Member deposits (shares) (note ii)

132.4

130.5

Asset quality

%

%

Proportion of residential mortgage accounts 3 months+ in arrears

0.49

0.63

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

47

48

Total provision as % of impaired balances on commercial real estate lending

53


33


Key ratios

%

%

Capital - CRD IV

   Common Equity Tier 1 ratio

19.8

14.5

   Leverage ratio (note iii)

4.1

3.4

Other balance sheet ratios

   Wholesale funding ratio (note iv)

23.3

22.7

   Loan to deposit ratio (note v)

115.6

115.8

  Loan to deposit ratio (including long term wholesale funding)             (note vi)

 

103.4

104.5

 

Notes:

i.        Comparatives have been restated for the reclassification of certain amounts in relation to overdrawn current accounts as detailed in note 2 to the preliminary results announcement.

ii.       Member deposits include current account credit balances.

iii.      The leverage ratio comparative has been restated to reflect the revised BCBS definition.

iv.      The wholesale funding ratio shown in the table is calculated on an internal management basis which includes all sources of funding, including securitisations.

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

vi.      The loan to deposit ratio including long term wholesale funding represents loans and advances to customers divided by (shares + other deposits + amounts due to customers + wholesale funds with a maturity greater than one year).

 

  

 

NATIONWIDE BUILDING SOCIETY

RESULTS FOR THE YEAR ENDED 4 APRIL 2015

 

Chief Executive's Review

 

Succeeding by doing the right thing

 

Nationwide has demonstrated yet again that it is possible to offer a mutual alternative to the established banks, focusing on doing the right thing and operating with fairness, honesty and transparency.This is quite a contrast to some of the behaviours seen elsewhere in the industry as evidenced by the fines that have been reported. We are the UK's largest savings brand, the second largest savings and mortgage provider and have a relationship with one in four households. We have continued to support the mortgage market, provided good value products to our savers and seen increasing numbers of people taking advantage of our growing range of personal current accounts.

 

We have launched new products and services, including improved technologies to give our members greater choice in how they do business with us. All of this has been achieved by putting the interests of our members centre stage and an approach based on honesty, transparency and fairness.

 

This focus has contributed to an improvement in underlying profit for the year ended 4 April 2015 which increased by 32% to £1,216 million and statutory profit which rose 54% to £1,044 million. Our Common Equity Tier 1 (CET1) ratio now stands at 19.8% (2014: 14.5%) and our leverage ratio is 4.1% (2014: 3.4%), with our profit generation giving us confidence in meeting new regulatory capital requirements.

 

Delivering next generation banking

 

The last financial year has seen mobile technology cement digital banking as both an essential part of our members' daily lives and our customer proposition. We support over 2.3 million digitally active customers and our Mobile Banking app has been used over 165 million times in the year. Our digital credentials were endorsed by being named Best Online Banking Provider in the Your Money Direct Awards.

 

We have continued to provide new and innovative solutions with upgrades to our Mobile Banking app, app enhancements to support Android Wear and Apple smartwatches, the roll-out of contactless cards and the expansion of Nationwide Now. This innovative service connects members to mortgage, personal banking and financial consultants via a high definition video link; the service is already available in over 160 of our branches and by November will have been rolled out to 400, improving access to our services, providing additional capacity in our branches and creating 200 new jobs in the UK.

 

We see real value in our branch network as a gateway to next generation banking for our members.  We intend to invest £500 million over the next five years to transform and modernise our branches, giving them a new look and feel that creates an environment in which we will provide help and advice at key stages in members' lives.

 

Great service

 

We aim to stand out from the crowd through the ongoing quality of our service. We have been ranked number one for customer satisfaction for three and a half years, and our lead over our nearest competitor at the year end was 4.5% (2014: 4.2%). We continue to account for only a fraction of total industry complaints (2.5%) despite our size, and of all cases referred to the Financial Ombudsman Service 91% of our decisions are upheld, compared with the industry average of 48%, demonstrating our focus on doing the right thing.

 

GfK NOP's Financial Research Survey (FRS), 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 Barclays, Halifax, HSBC, former Lloyds TSB Group (including Lloyds Bank, TSB and C&G), NatWest and Santander 12 month rolling data between Sept 2012-March 2015, c60,000 adults interviewed per annum.

33 month ending data March 2015 vs March 2014 - difference in lead is not statistically significant, c15,000 adults interviewed per quarter.

 

It is not only our own members who have rated us so highly; during the past twelve months we have won a number of awards and been recognised for our approach to business, including being rated in the UK Customer Satisfaction Index as the top financial services provider on the high street.

 

Our approach to delivering the right outcomes can be seen through our recent change to our credit card proposition. Unlike the majority of our competitors we have amended our balance transfer offer, so that any customer who has transferred their existing balance to Nationwide will no longer be charged interest on any monthly spend, so long as that spend is paid off in full at the end of the month during the balance transfer promotional period.

 

Consistent support for the housing market

 

The past financial year saw a number of competing forces cause the near term outlook for the UK mortgage market to become less predictable and challenge consumer sentiment.

 

The Mortgage Market review went live in April 2014 with the greater requirements of affordability assessments lengthening processes and leading to some capacity constraints. First time buyers continued to benefit from the Government's Help to Buy schemes, while localised concerns of excessive house price inflation in London were addressed by the Financial Policy Committee imposing additional constraints on lenders. Sentiment was further affected by uncertainty over the Scottish Referendum and the UK general election, with the consequence being a marked slowing of activity during the second half of the financial year, despite a supportive macroeconomic background.

 

First time buyer activity in particular was subdued in the second half of our financial year, down around 13% compared with the first half. Alongside the market slowdown, competition amongst lenders has intensified in recent months, with new mortgage rates driven to record lows.

 

Through our continued support of the mortgage market we have again outperformed our par shares of lending, albeit at narrower levels than last year, accounting for gross and net market shares of 13.4% and 31.2% respectively (2014: 14.9% and 70.8%). Our average loan to value in the year was 66%, down on last year's 69%, as we align to a new "post crisis" risk appetite. This is reflected in a modest reduction in the growth of our gross and net lending for the year, with gross lending of £27.1 billion (2014: £28.1 billion) and net lending of £7.1 billion (2014: £9.9 billion). The net lending growth of £7.1 billion has resulted in us becoming the UK's second largest mortgage lender.

 

We rewarded our longstanding members with the launch of our Loyalty Rate Mortgage initiative in October.  In addition, we estimate that our Base Mortgage Rate (BMR), capped at 2% above the Bank of England Base Rate, provides an annual saving of around £1,100 for our average BMR borrower when compared to the standard variable rates charged by other major lenders.

 

We have continued to support first time buyers by helping almost 46,000 people take their first steps on the housing ladder (2014: 58,100). We have played an active role in the Government's Help to Buy Shared Equity Scheme, accounting for 32% of all cases over the past year, and our own Save to Buy product continues to offer access to mortgages up to 95% LTV.

 

We also play a significant role in supporting a balanced approach to housing tenure by the provision of high quality buy to let loans through our subsidiary, The Mortgage Works (TMW). Over the past year TMW gross advances accounted for £4.7 billion of our total mortgage lending, representing a 16% share of buy to let gross lending. Our total specialist mortgage book now stands at £28.3 billion, representing 19% of our total residential lending portfolio.

 

Supporting our savers in challenging markets

 

We are acutely aware that rates available to savers continued to be challenged by the low interest rate environment. Market rates have drifted down throughout the year, in part to stay in step with lower mortgage rates. We take our responsibility to our saving members very seriously but we are not immune from trading conditions in the savings and mortgage markets and the impact on prevailing rates.


We aim to pay interest rates which are competitive and offer long term good value, and we actively monitor the rates paid by our national competitors to ensure that this is the case. In the final quarter of our financial year we reluctantly reduced our rates to align with the changes that occurred in the market. Balance growth slowed due to the launch of National Savings and Investment Pensioner Bonds, which offer interest rates materially above market levels. Over the three months to March 2015 NS&I balances increased by £12 billion, equivalent to the entire growth of the market in the quarter and attracting funds that would otherwise have been deposited with traditional savings providers. Despite these changes, we have grown our member deposit balances in the year by £1.9 billion (2014: £4.9 billion).

 

There was some good news for savers in the early part of the year, with an equalisation of ISA rules meaning that up to £15,000 could be deposited in cash ISA accounts. This led to an extended ISA season and ISA balances in the twelve months to March 2015 increasing by £25 billion, over double that of the same period a year ago. Nationwide accounted for 14.3% of the increase in ISA balances, well above our natural share.

 

We have continued to reward loyalty: our Loyalty Saver balances increased over the year by £3.6 billion and now stand at £20.7 billion. We estimate that the member value from Loyalty Saver was in the region of £150 million. During the year we took the decision to improve the interest rates for existing members by imposing an interest rate floor on our historic accounts and by simplifying the terms and conditions to remove withdrawal restrictions and complicated bonus arrangements. Around 4.5 million members benefited from this unilateral action, which we undertook in the interests of fairness. In addition, all members who held savings accounts in one of our regional brands were migrated to Nationwide accounts at a rate equal to or better than they previously received, with over 150,000 members benefiting from higher rates as a result of the transfer.

 

We are open and transparent in encouraging members to register for details of new product launches and rate changes through our SavingsWatch service, with over one million members signed up. We have sent annual savings statements to over nine million members as part of our Savings Promises, providing details of their accounts, current interest rates and the top variable savings rates we have available.

 

Being a modern mutual

 

Nationwide is committed to mutuality on a broader scale than the traditional mortgage and savings focused model. As a modern mutual we have long recognised the importance of expanding our presence in the personal current account market to provide a full service, multi-channel offering to a growing number of loyal members.

 

Over the past year we have opened 469,000 new current accounts, a 9% increase in openings (2014: 430,000). This increase has been supported by the latest addition to our product range, FlexOne, an account designed for the youth market and which has proved popular, with around 69,000 accounts opened in the first five months since launch. Not only have we been pleased with the volume of these new accounts, but we have also seen the vast majority being opened in our branch network, supporting our view that branches have a critical role to play in our future.

 

We have continued to be a net beneficiary of the seven day current account switching service, accounting for an average of 8.4% of account switches in the year. We now have in excess of 5.7 million current accounts and our market share of main and standard packaged accounts as at February 2015 had risen to 6.8% (2014: 6.2%). Looking forward, we have set ourselves the strategic target of reaching a 10% share of the current account market by 2020.

 

Regulation

 

We support the aim of the Competition and Markets Authority to improve competition in the personal current account market, which continues to be dominated by the established banks. We have made significant investment in our current account product and the underlying systems and processes. We have expanded our presence in this market in a controlled manner, without resorting to short term marketing incentives, but by doing so our market share has reached only 6.8%. We would encourage the CMA to focus on three areas: transparency; simplicity; and comparability, thereby ensuring that customers are able to make informed decisions about their current account provider, the quality of service and the various products on offer.

 

Being a great employer

 

Our people are central to providing exceptional service to our members. We believe that being a great employer and employing great people offers us a genuine competitive advantage, and we are proud that Nationwide has been ranked as the sixth best big company to work for by the Sunday Times, up from eleventh in 2014. We have also been named as a Top 50 Employer for Women for the third successive year. This external recognition supports the results of our internal employee survey, which shows a record level of employee engagement over the past year.

 

We have taken a leading role in the campaign for fair pay for everyone. Having become accredited as a Living Wage employer, we subsequently became a Principal Partner of the Living Wage Foundation.

 

Playing our role in society

 

We take our broader responsibility to society seriously and aim to play a supportive part in the communities in which we operate. We have recently scored 99% in the 2015 Business in the Community Corporate Responsibility Index, giving us a five star rating and have been confirmed as a finalist in the BITC Responsible Business of the Year awards.

 

Our ongoing commitment to our citizenship agenda has been demonstrated over the past year through activities such as our support for Shelter, our recent launch of a service designed to help customers affected by cancer to manage their financial affairs and the award of the Carbon Trust Triple Standard. In addition, we have committed to plant one tree for every employee of the Society to create a number of woodlands throughout the country. This amounts to an initial 17,000 trees and about 3,000 more trees each year going forward. The first woodland, Ravens Retreat, has been planted near Brinkworth, a few miles from our head office in Swindon.

 

A good financial performance

 

Robust business volumes and an improved net interest margin have contributed to a 9% increase in total underlying income to £3,152 million (2014: £2,895 million). Our underlying profit for the year was £1,216 million (2014: £924 million), an increase of 32%, and statutory profit before tax was £1,044 million (2014: £677 million), an increase of 54%. Underlying costs have increased by 7% reflecting the growth of our business and continued significant investment in products and services. However, this has been more than offset by income growth, resulting in our underlying cost income ratio improving further to 51.6% (2014: 52.5%).

 

This level of profitability is approaching our strategic target of generating ongoing retained earnings of at least £1 billion per annum in order to support future growth, invest in the business and sustain strong capital ratios.

 

We have continued to adopt a prudent approach to mortgage lending, evident in our three month arrears ratio of only 0.49%, compared with the industry average of 1.30%. Significant progress has been made in reducing our exposure to legacy, non-core commercial real estate lending, reducing outstanding balances by 49% (£3.8 billion) during the year. Our total exposure now stands at £4.0 billion (2014: £7.8 billion), of which £1.8 billion is non-core (2014: £5.0 billion). We have seen a further improvement in the outlook for the commercial real estate sector and this, combined with deleveraging, has significantly reduced our commercial impairment charge to £52 million (2014: £309 million).

 

A strong Society

 

Our strong financial performance, combined with our commercial asset deleveraging, has resulted in our CET1 ratio increasing to 19.8% (2014: 14.5%), the best in our peer group by a significant margin. In addition, our leverage ratio has improved to 4.1% (2014: 3.4%). We are confident that our current and projected financial performance will in itself be sufficient to achieve our leverage ratio strategic target of 5% by 2020, thereby ensuring we meet all foreseeable future regulatory capital requirements.

 

We took part in the Bank of England's (BoE) concurrent stress testing exercise last year and were pleased that the BoE's findings confirmed that we would be able to withstand a severe economic downturn particularly designed to affect residential lenders such as ourselves.

 

In managing our business we have identified four key risk areas which capture the top and emerging risks which are closely tracked throughout our governance structure comprising: macroeconomic and market uncertainty, business resilience, innovation to support the digital transformation and conduct challenges. These themes and our response to them are considered further in the 'Top and emerging risks' section of the Business and Risk Report.

 

Outlook

 

We expect the UK recovery to continue with the Bank of England base rate starting to rise in the first half of 2016, although there remains uncertainty about the exact timing. We believe that future interest rate increases thereafter are likely to be gradual in nature. The housing market is expected to remain resilient with any dampening of activity from modest increases in interest rates offset by a strengthening labour market and an under-supply of housing stock.

 

The UK retail financial services sector will continue to be influenced by the regulatory agenda including the Basel Committee's revised approach to capital floors, the EBA's consultation on resolution requirements and the implementation of the EU mortgage credit directive. UK banks also have to prepare for the introduction of retail ring fencing, a change that is not applicable to Nationwide, although the Group meets the expected requirements today.

 

The Group has a consistent strategy against which it will continue to deliver. We are confident that we are in an excellent position to generate a sustainable level of performance allowing us to invest further across the business, albeit with growth at a more moderate pace compared with the past two years. We also expect to generate more value for members in the future as we optimise profits to provide better products and services, to support our communities more widely and to continue to stand out as the only truly national alternative to the established banks.

 

Planning for the future

 

It has been a privilege to serve as a Board director for over twelve years and as Chief Executive since 2007 but I recognise the need to plan for the future. Nationwide is in great shape and is demonstrating how a mutual building society can make a real and refreshing difference in the financial services sector. Succession of leadership is best dealt with from a position of strength and hence the time has come for the Society to identify and appoint its next Chief Executive. In the meantime, there is lots to do and there are exciting opportunities ahead, so it is very much business as usual.


Financial Review

 

Income statement overview

 

Profit after tax on a statutory basis is set out below. Results have been presented to reflect management's view of underlying profit performance consistent with previous financial years. Underlying profit equates to statutory profit before tax adjusted for charges in respect of the Financial Services Compensation Scheme (FSCS), bank levy, transformation costs and fair value gains or losses from derivatives and hedge accounting.

 

Statutory profit before tax for the year ended 4 April 2015 was £1,044 million, up 54% compared with the prior year (2014: £677 million). Underlying profit was £1,216 million, up 32% compared with the prior year (2014: £924 million). Increased statutory profit has been driven mainly by the continued improvement in net interest income, up 19% to £2,861 million, and reduced impairment losses, down 34% to £251 million. These improvements have been offset in part by increased administrative expenses, up 6% to £1,706 million, and lower other income, down 41% to £291 million. Other income in the prior period included a gain of £125 million relating to redemption of permanent interest bearing shares (PIBS).

 

Year to 4 April 2015

Statutory profit

FSCS and

bank

levy

Transformation

costs

Losses from

derivatives and hedge accounting

Underlying profit

£m

£m

£m

£m

£m

 

Net interest income

2,861

-

-

-

2,861

Other income

291

-

-

-

291

Losses from derivatives and hedge accounting

(9)

-

-

9

-

Total income

3,143

-

-

9

3,152

Administrative expenses

(1,706)

28

52

-

(1,626)

Pre provision underlying profit

1,437

28

52

9

1,526

Impairment losses

(251)

-

-

-

(251)

Provisions for liabilities and charges

(142)

83

-

-

(59)

Profit before tax

1,044

111

52

9

1,216

Tax

(205)

Profit after tax

839

 

 

Year to 4 April 2014

Statutory profit

FSCS and

bank

levy

Transformation

costs

Losses from

derivatives and hedge accounting

Underlying profit

£m

£m

£m

£m

£m 

Net interest income

2,403

-

-

-

2,403

Other income

492

-

-

-

492

Losses from derivatives and hedge accounting

(51)

-

-

51

-

Total income

2,844

-

-

51

2,895

Administrative expenses

(1,611)

17

75

-

(1,519)

Pre provision underlying

profit

1,233

17

75

51

1,376

Impairment losses

(383)

-

-

-

(383)

Provisions for liabilities and charges

(173)

104

-

-

(69)

Profit before tax

677

121

75

51

924

Tax

(128)

Profit after tax

549

 

 

Net interest income


Year to

4 April

2015

£m

Year to

4 April

2014

£m

Net interest income

2,861

2,403

Weighted average total assets

195,429

191,604

%

%

Net interest margin (NIM)

1.46

1.25

 

 

Net interest income for the year was £2,861 million, £458 million higher than the prior year as a result of lower retail funding costs and growth in retail assets. Weighted average total assets increased by 2.0% as growth in retail assets more than offset deleveraging of out of policy treasury assets and non-core commercial assets during the year. Net interest margin improved by 21 basis points on an annualised basis to 1.46% consistent with the trend achieved over the last two financial years.

 

Savings rates have continued to fall across the industry and this has led to lower retail funding costs, underpinning the continued improvement in the net interest margin. We continue to be competitively positioned relative to the market in order to demonstrate our commitment to our savings members in a low interest rate environment. We estimate that our average margin on savings balances, measured against relevant market indices (swaps or LIBOR), was c.80 bps over the year in comparison to c.110 bps during the year to 4 April 2014. We have also benefited modestly from reduced spreads in the wholesale markets with an average spread of 81 bps (2014: 87 bps). The downward trend in funding costs is not expected to continue and competition in the mortgage market has intensified during the last 12 months; in consequence we do not anticipate significant growth in our NIM during the next financial year.

 

Retail mortgage net interest income has remained broadly stable year on year, with lower pricing being offset by the lower cost of funding. Base Mortgage Rate (BMR) balances have reduced by £8 billion to £43 billion at 4 April 2015 due to a combination of normal monthly capital repayments and redemptions. This decline in balances does not materially impact margin.

 

Net interest income for the year includes £47 million of losses (2014: £52 million) arising from the sale of out of policy treasury assets and £23 million of losses (2014: £23 million) due to other strategic divestment activity, including the part disposal of our Equity Release assets and disposal of certain commercial lending assets. A further £23 million charge (2014: £30 million gain) has occurred due to movements in effective interest rate balances for our mortgage and savings products.

Other income

 

 

Year to

4 April

2015

£m

Year to

4 April

2014

£m

Current account and savings

83

111

General insurance

88

101

Protection and investments

75

82

Mortgage

20

30

Credit card

26

29

Commercial

15

17

Gain on redemption of subscribed capital

-

125

Other

(16)

(3)

Total underlying other income

291

492

Losses from derivatives and hedge accounting

(9)

(51)

Total statutory other income

282

441

 

Total underlying other income has reduced by £201 million to £291 million, primarily due to a one-off profit during the prior year of £125 million relating to the redemption of subscribed capital. In addition other fees charged to customers have fallen by £76 million, as a result of our decision to remove the monthly unauthorised overdraft charge to members from July 2014, coupled with reduced sales volumes in general insurance, protection and investments; the latter following the introduction of new sales practices as part of our implementation of the Retail Distribution Review. The £16 million cost in other income includes the full year cost of the £8.5 billion drawdown of FLS, amounting to approximately £21 million, the majority of which was drawn in the second half of the year ended 4 April 2014.

 

Details of fair value movements relating to derivatives and hedge accounting are provided in note 6. 

 

 

Administrative expenses


Year to

4 April

2015

Year to

4 April

2014

£m

£m

Employee costs

671

636

Other administrative expenses

661

601

Administrative expenses (underlying)

1,332

1,237

Depreciation, amortisation and impairment

294

282

Total underlying administrative expenses

1,626

1,519

Transformation costs

52

75

Bank levy

28

17

Total statutory administrative expenses

1,706

1,611

Cost income ratio - underlying basis (%)

51.6

52.5

Cost income ratio - statutory basis (%)

54.3

56.6

 

Underlying administrative expenses have increased by 7% to £1,626 million, reflecting ongoing investment in the business and increased employee costs. At a statutory level administrative expenses have increased by 6% to £1,706 million.

 

The year on year increase in employee costs reflects the impact of annual pay awards averaging 2.4% and 2.5% respectively in each of the last two years, and growth in bonus costs of £14 million driven by improving business performance and higher numbers of employees.  Employee numbers have increased by 1.9% in the year as we continue to strengthen Risk and Control functions in light of the evolving regulatory agenda and build business capability to support our developing digital strategy.

 

Other administrative expenses have increased by £60 million. This reflects continued enhancement of our digital capability, including Nationwide Now, mobile and tablet banking, together with investment in IT resilience, regulatory programmes and brand development. The reported year on year increase is net of cost savings realised from integration of the regional brands and a reduction in administration costs for activity in relation to customer complaints.

 

Transformation costs of £52 million relate to investment to enable IT support and development to be delivered in a more efficient and resilient manner which is now nearing completion, combined with the integration of the Dunfermline, Cheshire and Derbyshire brands. Transformation costs are expected to reduce significantly in future periods.

 

Across the year, underlying income growth has run ahead of cost growth, resulting in an improvement in both the statutory and underlying cost income ratios to 54.3% (2014: 56.6%) and 51.6% (2014: 52.5%) respectively.

 

Impairment losses


Year to
4 April

2015

£m

Year to
4 April

2014

£m

Residential lending

58

-

Consumer banking

89

60

Retail lending

147

60

Commercial lending

52

309

Other lending

34

11

Impairment losses on loans and advances to customers

233

380

Impairment losses on investment securities

18

3

Total

251

383

 

Impairment losses for the year of £251 million are 34% lower than in the year ended 4 April 2014 primarily as a result of a significant improvement in the level of impairment incurred on our commercial lending portfolio.

 

Residential mortgage impairments have continued to benefit from house price growth of 5.1% albeit at a lower rate compared to the last financial year (2014: 9.5%). With interest rates remaining low, improvement in earnings growth and with our prudent underwriting approach, we have seen a continued decline in arrears levels throughout the year. The impairment charge for the year includes £44 million from updates to our credit risk provision assumptions, which have been refined to reflect updated segmental analysis of losses across the book, whilst also taking into account the impact of the prolonged low interest rate environment.

 

Consumer banking impairments have increased by 48% to £89 million (2014: £60 million), primarily as a result of a one-off credit included in 2014 of £27 million relating to an update to model assumptions for late stage recoveries on defaulted balances. Excluding this adjustment, the underlying increase in consumer banking impairment is £2 million consistent with stable underlying portfolio performance.

 

Commercial lending impairments relate exclusively to commercial real estate (CRE) lending, with no arrears in our registered social landlords and Project Finance portfolios. The lower level of commercial lending impairments in the year of £52 million (2014: £309 million) reflects continued stabilisation of the commercial real estate market and the successful delivery of our deleveraging strategy which has seen impaired balances reduce by £2.5 billion to £0.6 billion (2014: £3.1 billion). The level of impaired balances as a proportion of our total CRE exposure has fallen from 39% to 15%, reflecting the deleveraging and resolution of impaired assets.

 

Other lending impairments of £34 million (2014: £11 million) and impairment losses on investment securities of £18 million (2014: £3 million) relate to the out of policy treasury asset deleveraging activity undertaken during the year.

 

 

Provisions for liabilities and charges

 

Year to

4 April

2015

£m

Year to

4 April

2014

£m

Underlying provisions for liabilities and charges - customer redress

59

69

FSCS levies

83

104

Total provisions for liabilities and charges

142

173

 

The charge for customer redress provisions of £59 million (2014: £69 million) relates to estimated 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 matters.

 

More information, including details of the decrease in the FSCS charge, is included in note 9.

 

Taxation

 

The statutory tax charge for the year of £205 million (2014: £128 million) represents an effective tax rate of 19.6% (2014: 18.9%), which is lower than the statutory rate in the UK of 21% (2014: 23%). The lower effective rate is due principally to net adjustments with respect to prior periods of £16 million (2014: £18 million) and a £7 million credit (2014: £15 million) relating to the effect of the change in the UK corporation tax rate on deferred tax balances. Further information is provided in note 10.

 

In addition to the corporation tax charge, we also incurred taxes of £273 million (2014: £251 million) including irrecoverable VAT, bank levy, employment and property taxes, all of which are charged to profit before tax as part of administrative expenses and depreciation. With the exception of the bank levy, all of these amounts are recognised in arriving at underlying profit.

 

Balance sheet

 

The year on year balance sheet growth of 3% reflects an increase in low risk residential mortgage assets, in line with our aim of maintaining a low risk balance sheet. This has been partly offset by continued deleveraging of non-core commercial lending assets and out of policy treasury assets which is now largely complete.

 

The increase in other financial assets relates to growth in liquid assets in line with our early adoption of emerging regulatory liquidity standards: our Liquidity Coverage Ratio (LCR) at 4 April 2015 was 119%.

 

Assets

4 April 2015

£m            %

4 April 2014

£m         %

 

Change

%

 

 

Residential mortgages

 

152,885

 

89

 

145,660

 

87

 

5

Commercial lending

14,594

9

18,164

11

(20)

Consumer banking and other lending*

3,820

2

4,005

2

(5)

171,299

100

167,829

100

2

Impairment provision

(652)

(1,288)

(49)

Loans and advances to customers

170,647

166,541

2

Other financial assets

22,721

21,285

7

Other non-financial assets

2,212

2,067

7

Total assets

195,580

189,893

3

Key ratios

%

%

    

%

Return on Assets

0.43

 0.29

0.14pp

Asset quality

Residential mortgages

  Proportion of residential mortgage accounts 3 months+ in arrears

 

 

0.49

 

 

0.63

  

 

 

(0.14)pp

  Average indexed loan to value of residential mortgage book

 

47

 

48

    

(1)pp

  Average loan to value of new residential lending

66

69

     (3)pp

Commercial property finance

  

  

  

  Total CRE gross balances (£m)

    4,043

7,764

      (48)

  Impaired balances (£m)

608

3,065

(80)

  Total provision as % of impaired balances

53

33

20pp

 

*Comparative balances have been restated for the reclassification of certain amounts in relation to overdrawn current accounts as detailed in note 2 to the preliminary results announcement.

 

Residential mortgages

 

Residential mortgages include prime and specialist loans, with the specialist portfolio primarily comprising buy to let (BTL) lending. Gross mortgage lending in the period was £27.1 billion (2014: £28.1 billion), representing a market share of 13.4% (2014: 14.9%). Despite lower absolute levels of mortgage lending our market share of new business of 13.4% is ahead of our market share of stock of 12.1% (2014: 11.6%).

 

Mortgage balances grew by £7.2 billion, of which £5.2 billion was prime lending and £2.0 billion related to BTL lending. The loan to value (LTV) profile of new lending, weighted by volume, reduced to 66% (2014: 69%). The rise in house prices has continued in the period, reducing the average LTV of the portfolio to 47% (2014: 48%). Our residential mortgage arrears have reduced to 0.49% (2014: 0.63%) and continue to be significantly lower than the Council of Mortgage Lenders (CML) industry average. The performance of our residential portfolios continues to be underpinned by the sustained low interest rate environment and is also now benefiting from broader market conditions, including low levels of unemployment and a return to growth in household incomes.

 

The level of impaired balances fell by £260 million to £895 million (2014: £1,155 million) reflecting lower arrears. However, impairment provisions have increased by £8 million to £110 million (2014: £102 million) due to refinements in credit risk modelling assumptions this year which reflect a segmental review of actual loss experience and take account of the impacts of the prolonged low interest rate environment which tends to suppress affordability pressure and has reduced the propensity for arrears cases to migrate to possession.

 

Commercial lending

 

Commercial lending includes Commercial Real Estate (CRE) loans of £4.0 billion (2014: £7.8 billion), a reduction of 48% during the year achieved through proactive deleveraging and repayment. Commercial lending balances also include loans to housing associations of £7.8 billion (2014: £8.1 billion) and a portfolio of loans made under the Government's Project Finance initiative amounting to £1.4 billion (2014: £1.4 billion). The balance sheet total for commercial lending quoted above includes £1.4 billion (2014: £0.9 billion) of fair value adjustments relating to loans where we have hedged associated financial risks, typically interest rate risk. This leaves £1.8 billion of remaining non-core CRE assets (2014: £5.0 billion).

 

We have undertaken minimal amounts of new lending during the year, with activity being concentrated on ongoing management of the existing portfolio with particular focus on the managed work out of weak CRE exposures, and the acceleration of deleverage plans where market conditions have allowed. During the year we have deleveraged over £1.6 billion of non-core CRE loans and have reduced other CRE exposures by a further £2.2 billion through repayment and managed workout of individual exposures.

 

The level of impaired balances as a proportion of our total CRE exposure has fallen from 39% to 15%, reflecting deleveraging and resolution of impaired asset positions. Total provision coverage against impaired balances has increased from 33% to 53%.

 

The planned deleveraging strategy which has been executed during the last two years has now largely been completed, reducing substantially the level of commercial credit risk on the balance sheet. Deleveraging of our remaining CRE exposures which are outside our risk appetite will continue but at a slower pace than has been evident over the last two financial years.

 

Consumer banking and other lending

 

Consumer banking comprises retail balances relating to personal loans of £1.8 billion (2014: £1.9 billion),

credit cards of £1.8 billion (2014: £1.7 billion) and current account overdrafts of £0.2 billion (2014: £0.3 billion). Unsecured lending through personal loans has been lower in the last year following a tightening of our lending criteria and increased competition in the market. Credit card lending continues to grow, reflecting increased growth in consumer borrowing over the period. Delinquency within our unsecured portfolios remains stable.

 

Further details of our lending and lending risks are provided in the Business and Risk Report.

 

Other financial assets

 

Other financial assets total £22.7 billion (2014: £21.3 billion) and comprise liquidity and investment assets

held by our Treasury division amounting to £18.8 billion (2014: £18.0 billion), derivatives with positive fair

values of £3.3 billion (2014: £3.0 billion) and fair value adjustments and other assets of £0.6 billion (2014: £0.3 billion).

 

Further details of our treasury portfolios are included in the Business and Risk Report.

 

Liabilities

4 April 2015

£m      

4 April 2014

£m

 

Change

%

 

Member deposits

132,373

130,468

            1

Debt securities in issue

  28,105

28,557

(2)

Other financial liabilities

  23,767

20,621

15

Other liabilities (note i)

    1,594

1,341

19

Total liabilities

185,839

180,987

3

Members' interests and equity

    9,741

8,906

9

Total members' interests, equity and liabilities

195,580

189,893

3

Key ratios

 

 

%

 

%

LCR

119.3

90.7

Wholesale funding ratio (note ii)

23.3

22.7

 

Notes:

i.     Comparative balances have been restated for the reclassification of certain amounts in relation to overdrawn current accounts as detailed in note 2 to the preliminary results announcement.

ii.      The wholesale funding ratio shown in the table is calculated on an internal management basis which includes all sources of funding, including securitisations.

 

Member deposits

 

Member deposits have increased by £1.9 billion to £132.4 billion (2014: £130.5 billion) driven by current account inflows and capitalised interest on member deposits. We estimate our share of the balance growth in the UK deposit market for the year to be 3.4% (2014: 12.1%), which reflects the launch of NS&I Pensioner Bonds which were priced at highly attractive rates and have caused wider impacts on market pricing. We continue to offer competitive savings and current account propositions which offer long term good value and seek to support members in the current low base rate environment.

 

Debt securities in issue

 

Debt securities in issue of £28.1 billion (2014: £28.6 billion) are used to raise funding in wholesale markets to finance core activities. The balance remains broadly in line with the year ended 4 April 2014, reflecting the replacement of contractual maturities during the year with new wholesale funding issuances, as we maintain a diverse funding mix and presence in the wholesale markets.

 

The wholesale funding ratio has increased to 23.3% (2014: 22.7%). Off-balance sheet Funding for Lending Scheme (FLS) drawings totalling £8.5 billion are unchanged from the 2014 year end and are excluded from the calculation of the wholesale funding ratio.

 

Further details on funding and liquidity are included in the Business and Risk Report.

 

Other financial liabilities

 

Other financial liabilities include commercial deposits, non-member savings and bank deposits of £17.2 billion (2014: £15.3 billion), PIBS of £0.4 billion (2014: £0.6 billion), subordinated debt of £2.1 billion (2014: £2.3 billion) and derivatives and fair value adjustments of £4.0 billion (2014: £2.4 billion). Derivatives and fair value adjustments largely comprise interest rate and other derivatives taken out to hedge our core lending and funding activities.

 

More details are included in the Business and Risk Report.


Capital structure


4 April

2015

(note i)

£m

4 April

2014

 

£m

Capital resources

  

Common Equity Tier 1 (CET1) capital

7,279

5,849

Total Tier 1 capital

8,271

6,841

Total regulatory capital

9,950

8,925

Risk weighted assets (RWAs)

36,804

 40,455

Leverage exposure

200,665

199,188

CRD IV capital ratios

%

%

CET1 ratio

Leverage ratio (note ii)

19.8

4.1

14.5

3.4

 

Notes:

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

ii.       The 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 comparative has been restated to align to the revised definition.

 

CET1 capital resources have increased over the period by approximately £1.4 billion. This increase is the result of a strong trading performance and a reduction in the excess of expected losses over impairment provisions, primarily as a result of continued deleveraging of the non-core commercial real estate portfolio and out of policy treasury assets.

 

Risk weighted assets reduced over the period by approximately £3.7 billion due to continued deleveraging. In addition, retail mortgage RWAs are lower than at 4 April 2014 as a result of house price inflation reducing effective risk weights by more than the impact of increases in retail mortgage balances due to new lending.

 

The movements described above have resulted in an increase in the CET1 ratio to 19.8% (2014: 14.5%). The leverage ratio has increased to 4.1% (2014: 3.4%) driven by the increase in CET1 capital resources described above outweighing the increase in leverage exposure driven by asset growth.

 

Under the FPC's proposed leverage ratio framework, announced in October 2014, leverage ratio requirements from 2019 could be up to 4.95%. This comprises a minimum requirement of 3% plus a supplementary leverage ratio buffer and a countercyclical leverage ratio buffer. The supplementary leverage ratio buffer is expected to be subject to FPC consultation later in 2015, in order to determine the size of this buffer that is to be applied to each individual institution, with the expectation that the buffer will be no higher than 1.05%. The countercyclical leverage ratio buffer will likely be based upon the risk-based countercyclical buffer at up to 0.9% for UK exposures, although it is currently set at 0%. The Group's strategic target of 5% reflects its desire to maintain strong levels of capital relative to regulatory expectations.

 

The Group considers that the proposals announced by the FPC form the basis of a sensible regulatory approach to leverage. The final calibration of the supplementary requirement represents an opportunity to ensure that the overall leverage requirement is both proportionate and sensitive to firms with low risk business models, such as building societies which provide diversity within the UK financial system and strong support for the housing market. The Group is confident that it will comfortably meet the requirements as they are introduced.

 

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

 

Business and Risk Report

 

Introduction

 

This Business and Risk Report explains in greater detail the Group's business, the risks it is exposed to and how it manages those risks.

 

The Group is organised into three business streams: Retail, Commercial and Head office functions. The Group is predominantly a retail focused operation which trades almost exclusively within the UK. Wholesale funding is accessed by the Group from both UK and overseas markets.

 

The chart below shows the Group's business model and how these activities are reflected in its risk measures. The regulatory risk weighted assets below indicate the relative risks each area carries as at 4 April 2015. Please see the 'Solvency risk' section of this report for further details regarding the Group's capital position.

 

                                                             

 



Nationwide Building Society

 


Operating segment

 

Retail

Commercial

Head Office Functions

Business activities

 

·  Prime residential lending

·  Specialist residential lending

·  Consumer banking

·  Savings products

·  Insurance

·  Investments

 

·  Commercial real estate lending

·  Social housing lending

·  Project Finance lending

 

·  Treasury including funding, liquidity and market risk management

·  Head office functions

·  Central support functions

 

Regulatory risk weighted assets as at

4 April 2015

 

                                 £m

Credit risk              21,395

Operational risk       4,124         

Market risk                      -        

 

                                 £m

Credit risk                7,646

Operational risk            54

Market risk                      -

 

                                     £m

Credit risk                 3,535

Operational risk             50

Market risk                       -

 

 

  

Principal risks

 

Whilst the Group accepts that all of its business activities involve risk, it seeks to protect its members by managing the risks that arise from its activities appropriately. The principal risks inherent within the business are described in the table below:

 

Risk category

Definition

Lending

The risk that a borrower or counterparty fails to pay interest or to repay principal on a loan or other financial instrument (such as a bond) on time. Lending risk also encompasses extension risk and concentration risk.

Financial

The risk of the Group having inadequate earnings, cash flow or capital to meet current or future requirements and expectations. It includes loss or damage to the earnings capacity, market value or liquidity of the Group, arising from mismatches between the Group's assets, funding and other commitments, which may be exposed by changes in market rates, market conditions or the Group's credit profile.

Operational

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

Compliance, conduct and customer experience

The risk that the Group exercises inappropriate judgement or makes errors in the execution of its business activities, leading to non-compliance with regulation or legislation, market integrity being undermined, an unfair outcome being created for customers, or customers having a less than positive experience.

Strategic

The risk of significant loss or damage arising from business decisions that impact the long-term interests of the membership, or from an inability to adapt to external developments.

 

Operational risk and Strategic risk are not covered in this preliminary results announcement; they will be available in the full Annual Report and Accounts.

 

In addition to these principal categories of risk, model risk, which the Group is exposed to, is managed under a separate framework across all risk categories and business areas where models are used.

 

Risk category

Definition

Model risk

The risk that an adverse outcome (incorrect or unintended decision, or financial loss) occurs as a direct result of weaknesses or failures in the design or use of a model. The adverse consequences include financial loss, poor business or strategic decision making, or damage to the Group's reputation.

 

The frameworks for the above risks (including associated risk appetite, limits, supporting policies and other documents) are reviewed annually or more frequently as appropriate. They are also subject to continuous monitoring by the relevant governance committees.

In addition to the above principal risks that are inherent in the Group's business, the Group identifies, monitors and manages the top and emerging risks that could affect delivery of the Corporate Plan as an integral element of its risk and management strategy.

  

Top and emerging risks

 

The Group sees four themes to its top and emerging risks: macroeconomic and market uncertainty, business resilience, innovation to support the digital proposition, and conduct challenges. These themes and the Group's response to these are considered further in the relevant risk sub-sections.

Macroeconomic and market uncertainty

The Group's financial position continues to strengthen, with increasing profitability and deleveraging of the highest risk lending assets. However, economic and political uncertainty in both the UK and the Eurozone present four main areas that could affect the Group's financial and lending risks:

·      Ongoing political uncertainty in the Eurozone and potential economic weakness could adversely impact the operating environment of the Group

Ongoing political tensions and persistent weak economic growth from the Eurozone may affect the UK's financial stability particularly if accompanied by a loss of confidence, potentially leading to an increase in funding costs.

·      Potential for change in the UK banking landscape

A shift in the political environment, a referendum on EU membership, or the output of the Competition and Markets Authority (CMA) review could fundamentally alter the landscape of UK financial services.

·      A reversal in the UK economy accompanied by deterioration in the housing market could increase credit losses significantly

Government policies, the low interest rate environment, and a significant flow of overseas buyers stimulate the housing market. There is a risk that these conditions may reverse, increasing credit losses in the Group's mortgage portfolios and depressing the wider economy, resulting in debt extension.

·      Rising competition could compress core margins below sustainable levels

The margin earned on the Group's core products may be compressed through increased competition in an already competitive market. Improvement in market conditions could lead to a loosening of credit policies or an increase in funding costs. Margin management may be constrained should interest rates remain lower for longer than expected.

Business resilience

The pace of technological development is creating a period of significant change in financial services. The Group must use new and existing technology to deliver a market leading proposition. In line with the wider financial services market, three key areas pose risks to achieving its goals:

·      Rising customer expectations could exceed the Group's ability to provide a highly reliable and widely available service

The Group's implementation of new systems, alongside the maintenance of legacy systems, introduces a level of operational complexity. In an increasingly digital world customer expectations for service availability are rising with a significantly lower tolerance of service disruption. The Group must ensure it manages service provision ahead of rising customer expectations to maintain its goal of being number one for customer service.

·      The ever-increasing sophistication of cyber criminals raises the likelihood and severity of cyber attacks and money laundering

Security controls need to keep pace to prevent, detect and respond to any threats or attacks. In recognition of the cyber risk facing both the Group and the financial sector in general, the Group continues to focus its efforts on investing in appropriate technology and processes.

·      Legacy systems

The pace of transformation may require enhancements to existing processes on legacy systems with potential impacts on service experience.

Innovation

The Group has delivered significant digital change over the past year, including updates to mobile and internet banking and new payment technology. Branch experience has also evolved with the introduction of digital technology such as 'Nationwide Now', whilst still offering more traditional products and services that are so important to many of the Group's members. The Group will continue to develop new and existing technology to deliver a market-leading proposition; however, two key areas pose risks to achievement of the Group's goals:

·      The scale and pace of required change may outstrip the Group's capacity to transform

The scale and pace of change could create delivery challenges and may lead to disruption of the Group's operating environment and distribution strategy or require process enhancements on legacy systems.

·      New ways of doing business

The development of new business models or technologies may disrupt the Group's operating environment or distribution strategy and in a fast-paced environment there is the potential for new technologies to become outdated before the end of their expected lives.

Conduct challenges

The member-focused nature of the Group's business model puts it in a good position to meet future conduct requirements. However, the following pose risks to achievement of the Group's goals:

·      The Group's digital strategy may lead to poor customer outcomes and/or experience

Management focus on delivery of new products and services may not give adequate consideration for customers that do not require or are unable to transact through digital channels. In addition the rapid pace of digital transformation presents the potential risk that the Group is exposed to retrospective conduct issues if regulation fails to keep up with the pace of change.

·      Known and unknown legacy conduct issues may increase in scale and severity

Regulation regarding the treatment of customers and good conduct more generally continues to be a focus for the industry. It is possible that in consideration of how past business was conducted the Group may be judged as not having complied fully with law and regulation or be regarded as not having been fair or reasonable in the treatment of customers. In addition, unforeseen conduct issues may arise in existing products or from new processes being supported by legacy systems.

·      The regulatory landscape is changing and may lead to increased risks

As a consumer focused business operating in highly regulated markets the Group is subject to complaints and threatened or actual legal proceedings in the ordinary course of business. In addition, at a sector level, the incidence of regulatory reviews, challenges and investigations is increasing. Regulatory expectations in respect of conduct standards increase the risk of future sanctions, fines or customer redress.

 

Lending risk

 

Lending risk is the risk that a borrower or counterparty fails to pay interest or to repay the principal on a loan or other financial instrument (such as a bond) on time. Lending risk also encompasses extension risk and concentration risk.

 

This section provides information on the Group's exposure to lending risk arising from loans and advances, together with details of the level of collateral held, and impairment charges raised against these loans during the period. It also provides information about the lead risk factors and key performance indicators for each of the Group's loan portfolios.

 

The Group manages lending risk for each of the following portfolios:

 

Portfolio

Definition

Residential mortgages

Residential mortgages including prime and specialist lending.

Consumer banking

Consumer banking including personal loans, credit card and banking portfolios.

Commercial lending

Commercial lending including the Group's commercial real estate lending, loans under the Project Finance initiative and social housing loans.

Other lending

Lending in respect of structured portfolios.

Treasury assets

Treasury liquidity and discretionary portfolios.

 

 

Maximum exposure to lending risk

 

Lending risk largely arises from the Group's exposure to loans and advances to customers, which account for 88.5% (2014: 88.9%) of the Group's total lending risk exposure. Within this, the Group's exposure relates primarily to residential mortgages which account for 89.5% (2014: 87.3%) of total loans and advances to customers and which are comprised of high quality assets with low occurrences of arrears and possessions. The increase in the proportion of residential mortgages reflects the Group's strategy of exiting non-core commercial lending.

 

In addition to loans and advances to customers, the Group is exposed to lending risk on all other financial assets. For financial assets recognised on the balance sheet, the maximum exposure to lending risk represents the balance sheet carrying value after allowance for impairment. For off-balance sheet guarantees, the maximum exposure is the maximum amount that the Group 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.

 

The Group's maximum exposure to lending risk has risen from £196 billion to £201 billion in line with the growth in residential mortgage loans, offset by a reduction in commercial lending, and the increase in liquidity assets held.

 

4 April 2015

Maximum exposure to lending risk

Gross balance

Less: Impairment provisions

 Carrying

value

 Commitments

(note i)

 Maximum lending risk exposure

 % of total lending risk exposure

£m

£m

£m

£m

£m

Cash

4,325

-

4,325

-

4,325

2

Loans and advances to banks

3,392

-

3,392

                     408

3,800

2

Investment securities - AFS

11,037

-

11,037

-

11,037

5

Derivative financial instruments

3,337

-

3,337

-

3,337

2

Fair value adjustment for portfolio hedged risk

592

-

592

-

592

-

Loans and advances to customers

171,299

(652)

170,647

7,162

177,809

89

Investment in equity shares

26

-

26

-

26

-

Total

194,008

(652)

193,356

7,570

200,926

100

 

 

4 April 2014

Maximum exposure to lending risk

Gross

balance

Less: Impairment provisions

 Carrying

value

 Commitments

(note i)

 Maximum lending risk exposure

% of total lending risk exposure

£m

£m

£m

£m

£m

Cash

5,342

-

5,342

-

5,342

3

Loans and advances to banks

2,110

-

2,110

408

2,518

1

Investment securities - AFS

10,563

-

10,563

-

10,563

5

Derivative financial instruments

3,020

-

3,020

-

3,020

2

Fair value adjustment for

portfolio hedged risk

221

-

221

-

221

-

Loans and advances to

customers (note ii)

167,829

(1,288)

166,541

7,415

173,956

89

Investment in equity shares

29

-

29

-

29

-

Total

189,114

(1,288)

 187,826

 7,823

195,649

100

 

 

Maximum exposure to lending risk from the Group's loan and advances to customers is further analysed as follows:

 


4 April 2015

Loans and advances to customers

Gross balance

Less: Impairment provisions

 Carrying

value

 Commitments

(note i )

 Maximum lending risk exposure

% of total lending risk exposure

£m

£m

£m

£m

£m

Residential mortgages

152,885

(110)

152,775

5,676

158,451

89

Consumer banking

3,791

(216)

3,575

32

3,607

2

Commercial lending

14,594

(322)

14,272

1,379

15,651

9

Other lending

29

(4)

25

75

100

-

Total

171,299

(652)

170,647

7,162

177,809

100

 

4 April 2014

Loans and advances to

customers

Gross

balance

Less: Impairment provisions

 Carrying

value

 Commitments

(note i)

 Maximum lending risk exposure

% of total lending risk exposure

£m

£m

£m

£m

£m

Residential mortgages

145,660

(102)

145,558

5,578

151,136

87

Consumer banking (note ii)

3,829

(173)

3,656

34

3,690

2

Commercial lending

18,164

(1,001)

17,163

1,728

18,891

11

Other lending

176

(12)

164

75

239

-

Total

167,829

(1,288)

166,541

7,415

173,956

100

 

Notes:

i.      In addition to the figures shown above the Group has, as part of its retail operations, revocable commitments of £8,081 million (2014: £7,662 million) in respect of credit card and overdraft facilities. These commitments represent agreements to lend in the future, subject to certain conditions. Such commitments are cancellable by the Group, subject to notice requirements, and given their nature are not expected to be drawn down to the full level of exposure

ii.      Comparatives have been restated for the reclassification of certain amounts in relation to overdrawn current accounts, as detailed in note 2 to the preliminary results announcement.

 

The Group's off balance sheet commitments relate largely to mortgage pipeline, undrawn overdraft facilities and undrawn credit card facilities, all of which are short term in nature. As a result, no further analysis of the maturity of the Group's off balance sheet commitments is provided.


Residential mortgages

 

Lending and new business

 

The Group's residential mortgages comprise prime and specialist loans. Prime residential mortgages are mainly Nationwide branded advances made through the Group's branch network and intermediary channels; all new specialist lending is limited to buy to let mortgages and originated through The Mortgage Works (UK) plc (TMW). The mix between prime and specialist lending has remained stable over the period; within specialist lending the proportion of buy to let has increased to 86% (2014: 83%) as all other types of specialist lending are closed to new business.

 

Residential mortgage balances

2015

2014

£m

%

£m

%

Prime

124,549

81

119,319

82

Specialist

28,336

19

26,341

18

Total residential mortgages

152,885

100

145,660

100






Buy to let

24,370

86

21,932

83

Self-certified

2,634

9

2,960

11

Near prime

952

4

1,037

4

Sub prime

380

1

412

2

Specialist

28,336

100

26,341

100

 

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

 

During the year, additional controls have been applied to ensure that the profile of new lending remains within the Group's risk appetite so that the Group continues to lend in a responsible, affordable and sustainable way.

 

From October 2014, the FPC has introduced a 15% limit to the proportion of new lending that may be written at income multiples of 4.5 and above. This limit applies to residential mortgages, excluding buy to let.  The Group's proportion of new lending at income multiples of 4.5 or higher has averaged 4% over the second half of the financial year, comfortably within the FPC limit and in line with the Group's overall approach to lending.

 

New business by borrower type is set out below.

 

New business by borrower type

 

2015

%

                    2014       %

Home movers

32

32

First time buyers

26

31

Remortgagers

23

22

Buy to let

18

14

Other

1

1

 Total

100

100

 

Note: All new business measures exclude further advances. Percentages are calculated on a value basis.

 

Lending to first time buyers during the year has reduced to 26% (2014: 31%). This is a result of changes in the Group's risk appetite relating to the average LTV of prime new lending. These changes allow the Group to mitigate the lending risk that it is exposed to from advances to first time buyers whilst still remaining committed to supporting schemes and initiatives that promote home ownership for this type of borrower. 

 

Lending risk

 

The Group's residential mortgage lending continues to have a low risk profile when compared to industry benchmarks. This reflects the Group's strategy of responsible lending which is supported by a robust affordability assessment and credit scoring process that ensures asset quality remains within the Group's risk appetite.

 

 

The composition of loans comprises a large number of relatively small loans which are broadly homogenous, have low volatility of lending risk outcomes and are intrinsically highly diversified. The Group monitors the following lead indicators and performance statistics for residential lending:

 

·      LTV and lending risk concentration

·      arrears (particularly arrears of more than three months)

·      impaired loans

·      possessions

·      interest only mortgages

·      negative equity loans

·      change in terms, forbearance and repair

 

LTV and lending risk concentration

 

The average LTV on the overall stock has improved by 1% to 47% (2014: 48%) on a volume basis, primarily due to the growth in house prices.

 

LTV of loan stock and new business

 

2015

                    %

2014

                 %

Average loan to value of stock (indexed) by volume

47

48

Average loan to value of new business by volume

66

69

Average loan to value of stock (indexed) by value

56

58

Average loan to value of new business by value

69

73

 

Note: The average value of new business above excludes further advances.

 

LTV is measured both on a volume basis (number of loans) and by value (based on mortgage balances at the balance sheet date for stock and at inception for new business). The details in the remainder of this section use value based calculations to enable better understanding of the balance sheet composition.

 

The Group calculates a value based approach by weighting the account level LTV by the individual loan balance to arrive at an average LTV. This approach most accurately reflects the exposure at risk to the Group. The Group notes that its banking peers adopt a variety of different approaches to calculating their LTVs. This includes approaches where LTV is calculated at a total portfolio level, comparing total balances to total collateral held, with no capping of collateral at an individual loan level.  

 

On a value basis, the average LTV on the overall stock has improved by 2% to 56% (2014: 58%).

 

The average LTV of new business during the period has improved by 4% to 69% (2014: 73%) on a value basis, reflecting the lower LTV profile on new lending.  The proportion of new business written at higher LTVs (above 80%) has reduced to 22% (2014: 33%), as shown in the table below.

 

New residential lending - distribution of loans by original LTV band

 

2015

                   %

2014

                  %

Loan to value analysis:



0% to 60%

26

19

60% to 75%

42

38

75% to 80%

10

10

80% to 85%

10

15

85% to 90%

11

16

90% to 95%

1

2

Total

100

100

  

 

The geographical concentration of the portfolio has remained broadly stable during the period, with gross lending in Greater London representing 33% of total loans (2014: 32%).

 

The analysis of the Group's residential mortgage portfolio split between performing and non-performing loans and by geographical segment, as set out below, shows that the Group's proportion of non-performing loans has decreased by 0.4% to 2.3% (2014: 2.7%). In addition, the value of partially collateralised non-performing loans has reduced to £135 million (2014: £198 million), an improvement of 32%, with the shortfall in collateral reduced to £26 million (2014: £36 million).

 

Residential mortgage balances by LTV and region

 

Greater London

Central England

Northern England

South East England (excluding London)

South West  England

Scotland

Wales & Northern Ireland

Total


4 April 2015

          £m

£m

£m

£m

£m

£m

£m

£m

%

Performing loans

Fully collateralised

LTV ratio:

Up to 50%

21,388

8,168

5,778

6,752

4,528

2,716

1,924

51,254

50% to 60%

11,785

4,345

3,164

3,479

2,283

1,481

900

27,437

60% to 70%

9,490

6,470

4,864

4,594

3,191

2,102

1,211

31,922

70% to 80%

4,582

5,535

6,079

2,788

2,592

2,688

1,595

25,859

80% to 90%

1,476

2,148

3,000

821

952

1,192

912

10,501

90% to 100%

42

228

860

41

76

249

323

1,819

48,763

26,894

23,745

18,475

13,622

10,428

6,865

148,792

97.3

Not fully collateralised

- LTV more than 100% (A)

9

13

105

3

5

36

389

560

0.4

- Collateral value on A

7

11

97

3

4

34

322

478

- Negative equity on A

2

2

8

-

1

2

67

82

Total performing loans

48,772

26,907

23,850

18,478

13,627

10,464

7,254

149,352

97.7

Non-performing loans

Fully collateralised

LTV ratio:

Up to 50%

441

156

111

115

68

44

52

987

50% to 60%

287

98

69

70

44

26

25

619

60% to 70%

210

141

115

90

66

43

33

698

70% to 80%

78

138

148

69

56

53

37

579

80% to 90%

12

93

116

24

35

32

35

347

90% to 100%

1

26

91

1

4

14

31

168

1,029

652

650

369

273

212

213

3,398

2.2

Not fully collateralised

- LTV more than 100% (B)

1

7

33

2

1

4

87

135

0.1

- Collateral value on B

1

6

29

2

1

3

67

109

- Negative equity on B

-

1

4

-

-

1

20

26

Total non-performing loans

 

1,030

659

683

371

274

216

300

3,533

2.3

Total residential mortgages

49,802

27,566

24,533

18,849

13,901

10,680

7,554

152,885

100

Geographical concentration

33%

18%

16%

12%

9%

7%

5%

100%

 

 

Residential mortgage

balances by LTV and region

 

 

Greater London

Central England

Northern England

South East England (excluding London)

South

West England

Scotland

Wales & Northern Ireland

Total

4 April 2014

         £m

£m

£m

£m

£m

£m

£m

£m

%


Performing loans

Fully collateralised

LTV ratio:

Up to 50%

16,771

7,405

5,587

5,916

4,165

2,664

1,899

44,407

50% to 60%

8,889

3,576

2,758

2,764

1,839

1,305

832

21,963

60% to 70%

10,703

5,097

4,240

3,712

2,615

1,915

1,155

29,437

70% to 80%

6,418

6,196

5,860

3,721

2,917

2,456

1,492

29,060

80% to 90%

1,972

3,213

3,401

1,488

1,359

1,352

915

13,700

90% to 100%

38

424

1,102

72

108

244

331

2,319

44,791

25,911

22,948

17,673

13,003

9,936

6,624

140,886

96.7

Not fully collateralised

- LTV more than 100% (A)

7

31

188

4

8

56

510

804

0.6

- Collateral value on A

5

29

177

3

6

53

414

687

- Negative equity on A

2

2

11

1

2

3

96

117

Total performing loans

44,798

25,942

23,136

17,677