TIDMNBS TIDMNAWI
RNS Number : 7694W
Nationwide Building Society
17 November 2017
Nationwide Building Society
Interim Results
For the period ended 30 September 2017
Contents
Page
Key highlights and quotes 3
Financial summary 5
Chief Executive's review 6
Financial review 10
Business and risk report 17
Consolidated interim financial statements 46
Notes to the consolidated interim financial statements 52
Responsibility statement 72
Independent review report 73
Other information 75
Contacts 75
Introduction
Unless otherwise stated, the income statement analysis compares
the period from 5 April 2017 to 30 September 2017 to the
corresponding six months of 2016 and balance sheet analysis at 30
September 2017 with comparatives at 4 April 2017.
Underlying profit
Profit before tax shown on a statutory and underlying basis is
set out on page 5. Statutory profit before tax of GBP628 million
has been adjusted for a number of items to derive an underlying
profit before tax of GBP588 million. The purpose of this measure is
to reflect management's view of the Group's underlying performance
and to assist with like for like comparisons of performance across
periods. Underlying profit is not designed to measure sustainable
levels of profitability as 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. In this context, Nationwide currently
believes that generating underlying profit of approximately GBP0.9
billion to GBP1.3 billion per annum over the medium term is an
appropriate target for capital planning purposes. This range is
based on our current assumptions as to the size of the mortgage
market, and maintaining a UK leverage ratio in excess of 4%. This
range, which will vary from time to time, 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.
NATIONWIDE DELIVERS GBP245M OF MEMBER FINANCIAL BENEFIT AND
GAINS MORE CURRENT ACCOUNT SWITCHERS THAN THE MAJOR BANKS
COMBINED(1)
First choice for switchers, gaining more than three times as
many switchers as nearest rival(1)
Helped a record 39,500 first time buyers into homes
Highest customer satisfaction in high street peer group(2)
Delivering strong profits and enhancing financial strength
o Statutory profit of GBP628m (H1 2016/17: GBP696m); underlying
profit(3) of GBP588m (H1 2016/17: GBP615m)
o Profits include GBP26m one-off gain from VocaLink disposal (H1
2016/17: GBP100m one-off gain from Visa disposal)
o Capital strength at all-time high: CET1 ratio of 29.6% and UK
leverage ratio of 4.9%, strengthened by issuance of GBP0.8bn of
core capital deferred shares (4 April 2017: 25.4% and 4.4%
respectively)
o Underlying cost income ratio of 59.0% (H1 2016/17: 57.1%),
down from 60.2% for the full year 2016/17; on track for broadly
flat costs for the full year
Demonstrating mutual value, rewarding members with GBP245m
financial benefit
o Supported savings members, paying them GBP180m in extra
interest (H1 2016/17: GBP185m) by keeping average rates around 50%
higher than the market average(4)
o Rewarded members holding other products with better than
average rates(4) , incentives and fees
Helping a record 39,500 first time buyers onto the housing
ladder
o Prime mortgage gross lending increased to GBP15.0bn (H1
2016/17: GBP14.7bn)
o Helped a record 39,500 first time buyers into homes, 1 in 5 of
total (H1 2016/17: 38,600)
o Buy to let gross lending reduced to GBP1.7bn reflecting
changes in the market (H1 2016/17: GBP2.8bn)
o Grew member deposit balances by GBP1.8bn in a challenging
market (H1 2016/17: GBP4.7bn)
Leading current account attracts over three times as many net
switchers as nearest competitor(1)
o Remained UK's top choice for current accounts(5)
o Added more current account switchers than the major banks
combined(1)
o Continued record current account growth, opening 427,000
accounts in the period, up 13%
o Grew stock share of youth accounts to 10.3% from 8.2%
Remained top for customer satisfaction in our high street peer
group(2)
o Remaining at top for most trusted financial brand(6) ,
offering digital convenience with a human touch
o Grew active mobile users by 15.5%
o Investing in new branch formats in 20 locations nationwide
Well placed to support members in uncertain times
o Household incomes being squeezed by slowing growth and
inflation, but borrowing costs will stay low
o Modest growth outlook expected to limit further rate rises and
constrain housing market
o Mortgage demand has been strong, but intensifying competition
may lead to a moderation in our volumes
o Nationwide's financial strength means we can support our
members in uncertain times
Nationwide Chief Executive, Joe Garner, said:
"Nationwide is delivering strong profits through growing our
membership and providing the best customer satisfaction in our high
street peer group(2) . As a building society we are able to manage
our profits in our members' interests, investing in current and
future services to improve the lives of our members.
"People are attracted to Nationwide because we care, we deliver
fair and good value products and services, and because of our
mutual philosophy. Nationwide gained more than three times as many
current account switchers as our nearest rival(1) .
"Our customer satisfaction remains the best in our high street
peer group(2) . We aspire to become as well known for our service
outside our industry, and were delighted to make the Which?
all-industry customer service top 10 this year.
"We've demonstrated the value of mutuality in the period by
returning GBP245 million to members in the form of better than
average interest rates(4) , lower fees and higher incentives (H1
2016/17: GBP250 million). We know that exceptionally low interest
rates have placed a strain on savers, so we've chosen to protect
them by directing most of this financial benefit into higher
savings rates: our average savings rates in the period were
approximately 50% higher than the average market rate(4) . We were
the first in the industry to respond to the recent base rate rise,
passing on the full benefit to those members whose savings rates
fell by 0.25% following the last base rate reduction in August
2016.
"Building societies were founded to help people into their own
homes and, with consumers increasingly struggling to get on the
housing ladder today, we're proud to continue to support
homebuyers. In the last six months, we helped a record 39,500 first
time buyers into their first home (H1 2016/17: 38,600), and a
further 47,700 homeowners to move or re-mortgage (H1 2016/17:
48,500). We are extending choice for older members too, with the
launch today of our new Lifetime Mortgage, which will allow people
to access equity in their home in later life.
"Looking ahead, the UK economy should continue to grow, albeit
at a slower rate due to the uncertainties around Brexit. Despite
the recent base rate rise, borrowing costs overall remain low.
However, we know that low wage growth and inflation are putting
pressure on household budgets and we remain alert to signs of
financial strains on consumers.
"Nationwide is in very good shape after another strong set of
results. The second half may bring tougher trading conditions, but
we remain well placed to stand by our members in these uncertain
times. Nationwide is financially secure and will continue to
promote the long-term interests of both the Society and our
members."
Nationwide Chief Financial Officer, Mark Rennison, said:
"Nationwide has traded strongly in a highly competitive market
in the first six months of the year. Our statutory profit before
tax was GBP628 million for the period (H1 2016/17: GBP696 million),
and our underlying profit was GBP588 million (H1 2016/17: GBP615
million). After excluding one-off gains(7) , profits increased year
on year.
"This strong performance was underpinned by business growth and
lower cost growth. We grew our current account base substantially,
exceeding 7 million accounts for the first time, we increased prime
mortgage gross lending, and maintained our share of retail
deposits. Cost growth was contained to 3%, and is on track to be
broadly flat for the full year.
"Our capital strength reached an all-time high, with a CET1
ratio of 29.6% (4 April 2017: 25.4%) and a UK leverage ratio of
4.9% (4 April 2017: 4.4%), well above 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. Our offer was more than
two times over-subscribed, reflecting the Society's financial
strength, and raised GBP0.8 billion of capital. We remain on course
to meet our Minimum Requirement for Own Funds and Eligible
Liabilities in advance of the regulatory January 2020 target
date."
1 Source: Current Account Switch Service Dashboard, Issue 16
quarterly participant data, 3 months to March 2017.
2 (c) GfK 2017, Financial Research Survey (FRS), 12 months
ending 30 September 2017 vs 31 March 2017, 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).
3 Underlying profit represents management's view of underlying
performance and excludes bank levy charges, FSCS costs and
gains/losses from derivatives and hedge accounting.
4 Market average interest rates are based on Bank of England
whole of market average interest rates adjusted to exclude
Nationwide's balances.
5 Source: Nationwide Brand and Advertising tracker - compiled by
Independent Research Agency. 'Top choice' is most 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 September 2017. Financial brands
included Nationwide, Barclays, Cooperative Bank, First Direct,
Halifax, HSBC, Lloyds, NatWest, TSB and Santander.
6 Source: Nationwide Brand and Advertising tracker - compiled by
Independent Research Agency, based on all consumer responses, 3
months ending September 2017. Financial brands included Nationwide,
Barclays, Co-operative Bank, First Direct, Halifax, HSBC, Lloyds,
NatWest, TSB and Santander. Nationwide's lead on trust is not
statistically significant and therefore positioned as joint top
with Halifax.
7 H1 2017/18: GBP26m one-off gain from sale of investment in
VocaLink (H1 2016/17: GBP100m one-off gain from the sale of
investment in Visa Europe).
Financial summary
Half year Half year
to 30 September to 30 September
2017 2016
------------------------------------------------- ------------------ ------------------
Financial performance GBPm GBPm
Total underlying income 1,639 1,642
Underlying profit before tax 588 615
Statutory profit before tax 628 696
------------------------------------------------- --------- ------- --------- -------
Mortgage lending GBPbn % GBPbn%
Group residential - gross/gross market share 16.7 12.9 17.5 14.5
Group residential - net/net market share 3.9 16.5 6.0 33.9
% %
Average loan to value of new residential lending
(by value) 71 71
------------------------------------------------- --------- ------- --------- -------
Deposit balances GBPbn % GBPbn%
Member deposits balance movement/market share
(note i) 1.8 7.8 4.7 10.3
Net receipts (note ii) (0.5) 3.7
------------------------------------------------- --------- ------- --------- -------
Key ratios % %
Cost income ratio - underlying basis 59.0 57.1
Cost income ratio - statutory basis 57.7 54.6
Net interest margin 1.34 1.33
------------------------------------------------- --------- ------- --------- -------
30 September 4 April
2017 2017
--------------------------------------------------- -------------- -----------
Balance sheet GBPbn % GBPbn %
Total assets 227.5 221.7
Loans and advances to customers 190.7 187.4
Member deposits/market share (note i) 146.4 10.0 144.5 10.1
--------------------------------------------------- ------- ----- ----- ----
Asset quality % %
Residential mortgages
Proportion of residential mortgage accounts 3
months+ in arrears 0.44 0.45
Average indexed loan to value of residential
mortgage book (by value) 55 55
Total provisions as % of non-performing balances 5.5 5.3
Consumer banking
Non-performing loans as % of total (excluding
charged off balances) 3.8 3.6
Total provisions as a % of non-performing loans
(including charged off balances) 88.4 86.5
--------------------------------------------------- ------- ----- ----- ----
Key ratios % %
Capital
Common Equity Tier 1 ratio (note iii) 29.6 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 125.2 124.0
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 GBP3.0
billion (4 April 2017: GBP4.8 billion).
Chief Executive's review
A strong and growing Society, well placed to support members in
the challenging environment ahead
As a mutual, owned by our members, Nationwide is driven by a
strong sense of social purpose, based on our history and founding
principles. As we exist primarily for the benefit of our members,
we organise ourselves around their needs, as we set out in our
refreshed strategy at the start of the financial year. Building
society, nationwide describes our aspirations to grow the Society
in a sustainable way that benefits our members, customers,
colleagues, and society more generally.
Underpinning our strategy are our five strategic cornerstones.
These set out what we aim to do and how we will do it. First, we
must be built to last: financially strong, profitable, prudent and
efficient, so that we are here for our members in the long term. A
healthy society is a growing society, which is reflected in our
second cornerstone, building thriving membership; this is about
growing our relationship with existing members, and attracting new
ones. Building legendary service is our commitment to becoming
known for industry-leading service within our industry but also
outside it. PRIDE describes our culture and deeply-held mutual
values, and guides our people to do the right thing in the right
way. Finally, we aspire to be a 'national treasure', one of the
UK's most trusted and respected organisations, known for
championing the interests of our members and society more
generally.
We can only achieve all these aspirations by running a
successful business, and I'm pleased to say our first half results
demonstrated the strength of the Society.
Our underlying profit for the period was GBP588 million (H1
2016/17: GBP615 million). After excluding one-off gains from the
sale of our interests in Visa and VocaLink([1]) , profits increased
year on year. This reflected good trading in our core businesses as
we maintain our low risk balance sheet.
This strong performance allowed us to reward members, putting
GBP245 million in their pockets in member financial benefit (H1
2016/17: GBP250 million). Offering our members better rates,
incentives and fees than the market([2]) as a whole is one of the
ways we deliver better value to members, which is what makes
Nationwide, and our mutuality, distinctive.
We believe that mutuality, driven by social purpose as well as
commercial needs, resonates today. In an era of declining trust in
business, Nationwide remains at the top for most trusted financial
brand([3]) and first for customer satisfaction in our high street
peer group with a lead of 2.7%([4]) .
This unique combination of leading value, trust and service is a
compelling proposition and helped us attract 159,000 new members,
leading to a record total membership of 15.4 million people. Our
engaged members - those who do most business with us - also grew to
a new high of 8.0 million, putting us well on track to reach our
strategic target of 10 million engaged members by 2022.
Built to last: robust profits and enhanced financial
strength
As a mutual, profit matters to us because it allows us to grow
and invest in our business and deliver value to our members. Our
statutory profit for the period was GBP628 million (H1 2016/17:
GBP696 million) and on an underlying basis, profit was GBP588
million (H1 2016/17: GBP615 million) benefiting from a GBP26
million one-off gain from the VocaLink disposal (H1 2016/17: GBP100
million one-off gain from the Visa disposal). This strong profit
performance is comfortably within our strategic target range of
GBP0.9 to GBP1.3 billion annually.
We improved our capital strength, with our CET1 ratio increasing
to 29.6% (4 April 2017: 25.4%), and improved our UK leverage ratio
to 4.9% (4 April 2017: 4.4%), both well in excess of regulatory
requirements. We are on course to meet our Minimum Requirements for
Own Funds and Eligible Liabilities (MREL) in advance of the January
2020 target date. We enhanced our capital strength by issuing a
second tranche of core capital deferred shares (CCDS), a form of
CET1 capital specific to building societies. Our issuance both
supported capacity and liquidity in the CCDS market, and raised
GBP0.8 billion of capital.
Our net interest margin improved modestly to 1.34% (H1 2017/18:
1.33%) due to lower funding costs, which were partially offset by
lower mortgage margins in a highly competitive market.
Our strong performance allowed us to continue to deliver
incremental value to members, maintaining our member financial
benefit of GBP245 million in the period (H1 2016/17: GBP250
million).
1 H1 2017/18: GBP26m one-off gain from sale of investment in
VocaLink (H1 2016/17: GBP100m one-off gain from the sale of
investment in Visa Europe).
2 Market average interest rates are based on Bank of England
whole of market average interest rates adjusted to exclude
Nationwide's balances.
3 Source: Nationwide Brand and Advertising tracker - compiled by
Independent Research Agency, based on all consumer responses, 3
months ending September 2017. Financial brands included Nationwide,
Barclays, Co-operative Bank, First Direct, Halifax, HSBC, Lloyds,
NatWest, TSB and Santander. Nationwide's lead on trust is not
statistically significant and therefore positioned as joint top
with Halifax.
4 (c) GfK 2017, Financial Research Survey (FRS), 12 months
ending 30 September 2017 vs 31 March 2017, 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).
Chief Executive's review (continued)
While costs have risen in recent years as we have made strategic
investments in the Society, invested in our people and grown our
business, we've worked hard to contain them. Our underlying cost
income ratio of 59.0% (H1 2016/17: 57.1%) reduced from 60.2% for
the year ended 4 April 2017. Our ongoing efficiency programme is
delivering sustainable savings, and we're on track to deliver
broadly flat costs for the full year, as we promised.
Building thriving membership: helping members into homes, to
save and to manage their finances
Attracting a new generation of members while retaining the
loyalty of our existing members is important for the long-term
sustainability of the Society.
Mortgages: helping members onto or up the housing ladder
Our founding purpose - helping people into homes - is still the
heart of our business. Although housing market activity remained
subdued and competition intensified, prime mortgage gross lending
of GBP15.0 billion was up 2% over the same period last year. At a
time when many have difficulty getting on the property ladder,
first time buyers remain a priority for us, and we helped a record
39,500 homebuyers into their first homes, 1 in 5 of all first time
buyers (H1 2016/17: 38,600). Following our decision in 2016 to
extend our borrowing in retirement options, we are launching a new
Lifetime Mortgage that does not require repayments during the
customer's lifetime. This is Nationwide's response to today's
reality - that many older people have considerable wealth tied up
in their property, which they can't - or can't afford to - access
without moving home. Our Lifetime Mortgage will give members access
to their capital in a flexible and affordable way.
We also want to remain the provider of choice for our existing
members. 7 out of 10 members chose to renew their mortgage with
Nationwide. In a more challenging environment for landlords, buy to
let mortgages remain less attractive to borrowers. Buy to let
lending in the period was in line with expectations, reflecting the
highly competitive market and our decision to tighten our lending
criteria in 2016, ahead of regulation and our competitors.
As 1 in 5 people now live in private rented accommodation, we
want to help both tenants and landlords by using our influence to
improve the standards of privately rented homes. We've introduced
improved standards that landlords must meet in order to secure a
mortgage with us. We've also launched the Nationwide Partnership
Board, a cross-industry alliance, to monitor the health of the
rental market, recommend solutions, and take action which delivers
decent, affordable homes.
Savings: supporting savings members with above average rates
We've heard strongly from savings members about the strain of a
decade of low interest rates and, despite market pressures, we're
committed to helping savers make the most of their money. We've
maintained our average rates approximately 50% higher than the
market average([5]) , putting a financial benefit in members'
pockets of over GBP180 million in the period (H1 2016/17: GBP185
million). And while our deposit balances grew more slowly than last
year, we maintained our market share at 10% largely through growth
in current accounts.
With low rates a disincentive for people to save, over the first
half of the year we continued to encourage our loyal members to
keep saving by offering exclusive products with higher rates, such
as Flexclusive Regular Saver, our Loyalty Bonds and FRISAs.
We were the first in the industry to respond to the recent base
rate rise, passing on the full benefit to those members whose
savings rates fell by 0.25% following the last base rate reduction
in August 2016. This includes popular products such as our Loyalty
Saver, Flexclusive ISA and children's products like Smart Junior
ISA.
Leading current account attracts more net switchers than the
major banks combined([6])
We offer very attractive current accounts, which drew in record
new accounts for the seventh half year running. We opened 427,000
accounts, a 13% increase year on year, bringing our market share of
main standard and packaged accounts to 7.7% (4 April 2017 7.5%). We
were delighted to be the UK's top choice([7]) for current accounts
again and to be first choice for switchers once more, attracting
more than three times as many net switchers as our nearest
competitor through the Current Account Switching Service
(CASS)([6]) .
Our stock share of youth and student accounts increased to 10.3%
in the period (4 April 2017: 8.2%), with 76,300 FlexOne (H1
2016/17: 70,300) and 17,700 FlexStudent (H1 2016/17: 9,400) account
openings.
We also extended our 'recommend a friend' scheme to allow
mortgage and savings members to benefit from loyalty incentives
from recommending our current account.
In the last two years, our total stock of current accounts has
increased by 19%, to a record 7.1 million.
5 Market average interest rates are based on Bank of England
whole of market average interest rates adjusted to exclude
Nationwide's balances.
6 Source: Current Account Switch Service Dashboard, Issue 16
quarterly participant data, 3 months to March 2017.
7 Source: Nationwide Brand and Advertising tracker - compiled by
Independent Research Agency. 'Top choice' is most 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 September 2017. Financial brands
included Nationwide, Barclays, Cooperative Bank, First Direct,
Halifax, HSBC, Lloyds, NatWest, TSB and Santander.
Chief Executive's review (continued)
Building legendary service: digital convenience with a human
touch
High quality service has been a hallmark of the Society for many
years. We are pleased to still have the highest customer
satisfaction in our high street peer group with an overall lead of
2.7% over our nearest competitor and 7.5% over the peer group
average([8]) . This is despite extending the group we measure
ourselves against this year. Importantly we also have a lead of
9.7% on current account customer satisfaction([9]) . Longer term,
our aim is to be among the best for service outside our industry,
as well as within it.
We continue to work hard to deserve our reputation for service
by investing in delivering excellent service across all our
channels - branch, digital, mobile and telephony.
Through our Member Connect panel we know members want a balance
of convenient technology and human interaction. With active mobile
users up 15.5% since 4 April 2017, we're continuing to rethink and
reconfigure our branch network by rolling out a new design, with
branches organised in four separate zones: Convenience, where we
offer speedy service; Conversation, for help and advice;
Consultation, with private space for discussions; and a Community
space where members can have a coffee and a chat. The new design
has already been rolled out to seven locations, with a further 30
planned before the middle of next year.
We have started to prepare for the advent of Open Banking in
2018. This will give customers the opportunity to ask their banking
provider, including Nationwide, to share their current account
balance, transaction history and payment data with other financial
institutions, in a secure manner so that they can see their
accounts across different organisations. The result should be
greater visibility for the consumer, and more control of their
finances. Nationwide has taken a leading role in developing the
industry standards that will protect consumers, and we're exploring
how we can use Open Banking to provide a better sales and service
experience for members. IT resilience is one of our highest
priorities and we continue to focus on protecting customer services
and data, balancing understandable customer expectations for
'always on' digital services with the need for resilient and secure
systems.
PRIDE: investing in our employees and values
Our 18,000 employees provide the high-quality service and care
ethic that underpin our performance, which is why we place a high
emphasis on being one of the best places to work in the UK. You can
see this in our high employee engagement and enablement levels.
Nationwide was named as a UK top three Outstanding Employer in Korn
Ferry's 2017 employee engagement awards.
Our culture, which is summed up in our PRIDE values, has
consistently driven an intense focus on our members, and the
conduct we aspire to. Recently, 150 colleagues volunteered as PRIDE
champions, to ensure we live our values and culture every day. In
addition, a number of colleagues were chosen in a 'People's Choice'
vote to join our leadership community and will take part in our
Leading for Mutual Good programme for the Society's existing and
future leaders.
Building a national treasure: building society, nationwide
We want to earn people's trust, help them understand our mutual
difference and see that Nationwide makes a positive impact on
people's lives. Among consumers, we remain at the top for trust and
fair financial brands([10]) .
As a business with a social purpose at its heart, sharing the
rewards of our success with society more generally is an important
part of what we do. We have launched a new five-year social
investment programme aimed at helping people find a place fit to
call home. We expect to invest some GBP20 million over five years
to help local communities solve their housing issues, with local
members voting to choose which projects we will support. The
programme is being piloted in the second half of 2017, before going
nationwide in 2018.
Outlook: financial strength and strong trading allows us to
support members in challenging times
Turning to the outlook. A number of financial factors are
weighing on the economy and our members. On the one hand,
employment is at or close to historic highs. On the other,
uncertainty appears to be holding back investment, wages are
shrinking in real terms, and inflation has ticked up to its highest
level in five years. Annual house price growth has moderated to
2-4% in recent months. And of course, uncertainty about Brexit
continues.
8 (c) GfK 2017, Financial Research Survey (FRS), 12 month
rolling data from April 2012 to September 2017, 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), NatWest and Santander).
Prior to April 2015, Lloyds Bank and TSB combined as Lloyds TSB
Group (including Lloyds Bank, TSB and C&G).
9 (c) GfK 2017, Financial Research Survey (FRS), 12 months
ending 30 September 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
(inc C&G), NatWest, Santander and TSB).
10 Source: Nationwide Brand and Advertising tracker - compiled
by Independent Research Agency, based on all consumer responses, 3
months ending September 2017. Financial brands included Nationwide,
Barclays, Co-operative Bank, First Direct, Halifax, HSBC, Lloyds,
NatWest, TSB and Santander. Nationwide's lead on trust is not
statistically significant and therefore positioned as joint top
with Halifax.
Chief Executive's review (continued)
Overall, however, we expect the economy to grow in the quarters
ahead. While the pace of expansion is likely to remain sluggish in
the near term, our central expectation is that it will accelerate
in the years ahead, once Brexit uncertainties recede and the
squeeze on incomes reduces. We expect the housing market to mirror
trends in the wider economy.
This mixed economic picture means that it is vital we continue
to support our members, providing them with the appropriate
products and services to manage their financial lives.
In the housing market, with interest rates still at historic
lows, November's rate rise should only have a modest impact on most
households. Further interest rate rises are likely to be gradual
and, providing employment remains buoyant, mortgages will remain
affordable. There are, however, some signs of a squeeze on
household finances from low wage growth and above-target inflation.
Our member panel tells us people are beginning to cut back,
particularly on savings and discretionary expenditure, which is not
surprising when real incomes are falling.
Competition in the mortgage market remains intense, and shows no
sign of abating. Although mortgage volumes remain strong, we're
prepared for the possibility that intense competition combined with
declining consumer confidence may lead to a moderation in gross
lending and market share in the second half of the year.
The launch of Open Banking in 2018 will also bring new
competitive challenges and opportunities for a growing Society like
Nationwide. We will meet any pressures by being more efficient -
we're already on track to deliver broadly flat costs for the full
year - and by continuing to attract new members with our
distinctive combination of excellent value, leading service, and
social purpose.
Nationwide is in very good shape after another strong set of
results. The second half may bring tougher trading conditions, but
we remain well placed to stand by our members in these uncertain
times. Nationwide is financially secure and will continue to
promote the long-term interests of both the Society and our
members.
Financial review
Overall performance
Our financial performance for the period ended 30 September 2017
was in line with expectations. Statutory profit before tax was
GBP628 million (H1 2016/17: GBP696 million) and includes GBP36
million (H1 2016/17: GBP77 million) of derivative and hedge
accounting gains. Underlying profit before tax was GBP588 million
(H1 2016/17: GBP615 million). Profits in the prior period benefited
from a one-off gain of GBP100 million from the sale of our
investment in Visa Europe; the current period profits included a
gain of GBP26 million from the sale of our investment in
VocaLink.
Our underlying cost income ratio was 59.0% (H1 2016/17: 57.1%),
reflecting increased costs and broadly unchanged total income. The
rise in costs is primarily due to higher defined benefit pension
costs and an increase in depreciation. We remain committed to a
lower trajectory of cost growth in the future and, compared to the
same period last year, cost growth has slowed to 3% (H1 2016/17: 9%
growth). We anticipate full year costs will be broadly flat year on
year, in line with the expectations communicated in our 2016/17
financial results.
Impairment losses on loans and advances to customers have
increased by GBP27 million to GBP59 million (H1 2016/17: GBP32
million), reflecting a rate of incurred losses which is in line
with the full year performance for 2016/17. The increase in
impairments is driven by updates to our provision assumptions to
reflect the current economic environment. Delinquency levels remain
low across all our portfolios.
A GBP6 billion growth in total assets to GBP228 billion has been
driven mainly by a GBP4 billion growth in residential mortgage
balances to GBP175 billion, reflecting strong trading in the
period. The remaining asset growth reflects an increase in high
quality liquid assets from on-balance sheet Term Funding Scheme
(TFS) drawdowns (replacing off-balance sheet Funding for Lending
Scheme (FLS) liquidity) and from cash received in relation to the
Society's recent core capital deferred shares (CCDS) issuance.
Our capital levels have improved during the period with CET1 and
UK leverage ratios of 29.6% and 4.9% respectively (4 April 2017:
25.4% and 4.4%) comfortably in excess of current regulatory
requirements. The recent CCDS issuance improved our CET1 and UK
leverage ratios by 2.4 percentage points and 0.4 percentage points
respectively.
During the period, competition in the mortgage market has
intensified and the savings market has experienced increased
competition from challenger banks, alongside slower market growth.
We anticipate these conditions will continue, resulting in the
moderation of trading volumes during the remainder of the current
financial year. Notwithstanding this, our financial strength and
high quality balance sheet mean that we are well placed to deliver
long term value to our members.
Income statement
Underlying and statutory results Half year to Half year to
30 September 30 September
2017 2016
GBPm GBPm
-------------------------------------------- ------------- -------------
Net interest income 1,514 1,449
Net other income 125 193
-------------------------------------------- ------------- -------------
Total underlying income 1,639 1,642
Underlying administrative expenses (967) (938)
Impairment losses (59) (37)
Underlying provisions for liabilities
and charges (25) (52)
-------------------------------------------- ------------- -------------
Underlying profit before tax (note i) 588 615
Bank levy (note ii) 1 -
Financial Services Compensation Scheme
(FSCS) (note ii) 3 4
Gains from derivatives and hedge accounting
(notes ii and iii) 36 77
-------------------------------------------- ------------- -------------
Statutory profit before tax 628 696
-------------------------------------------- ------------- -------------
Taxation (157) (194)
-------------------------------------------- ------------- -------------
Profit after tax 471 502
-------------------------------------------- ------------- -------------
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 currently
applied or is not currently achievable. This volatility is largely
attributable to accounting rules which do not fully reflect the
economic reality of the hedging strategy.
Financial review (continued)
Total income and margin Half year to Half year to
30 September 30 September
2017 2016
GBPm GBPm
-------------------------------------------- ------------- -------------
Net interest income 1,514 1,449
Net other income 125 193
-------------------------------------------- ------------- -------------
Total underlying income 1,639 1,642
Gains from derivatives and hedge accounting 36 77
-------------------------------------------- ------------- -------------
Total statutory income 1,675 1,719
-------------------------------------------- ------------- -------------
Weighted average total assets 228,263 220,364
Net interest margin (NIM) % 1.34 1.33
-------------------------------------------- ------------- -------------
Net interest income has increased 4% during the period to
GBP1,514 million (H1 2016/17: GBP1,449 million), benefiting from
lower funding costs. NIM of 1.34% is largely consistent with the
same period last year (H1 2016/17: 1.33%).
Savings rates across the industry continued to fall during the
first half of the year. Whilst we reduced the rates paid to our
members on some of our savings products, our savings range remained
competitively positioned in the market and continues to reflect our
mutual principle of providing products that represent good long
term value to our members. Over the last six months our depositors
have benefited from average rates approximately 50% higher than the
average market rate([1]) . In anticipation of the base rate
increase in November, we committed to increase rates on products
impacted by the previous reductions.
The benefit to NIM from lower funding costs has been offset by a
decrease in mortgage margins. Competition in retail lending markets
remains intense and has resulted in more borrowers switching to
competitively priced products. Our legacy base mortgage rate (BMR)
balances, at GBP26.3 billion, have progressively declined period on
period (4 April 2017: GBP29.1 billion) in line with both recent
experience and our expectations. We are planning for market
conditions to remain highly competitive, and the run-off of BMR
balances to continue, and consequently we expect our reported
margin to trend lower during the second half of the year and into
2018/19.
Other income has decreased during the period to GBP125 million
(H1 2016/17: GBP193 million) predominantly due to the prior period
impact of a one-off gain of GBP100 million from the sale of our
investment in Visa Europe. This is offset in part by a current
period gain of GBP26 million from the sale of our investment in
VocaLink.
Administrative expenses Half year to Half year to
30 September 30 September
2017 2016
GBPm GBPm
------------------------------------------ ------------- -------------
Employee costs 407 388
Other administrative expenses 368 375
Depreciation, amortisation and impairment 192 175
------------------------------------------ ------------- -------------
Total underlying administrative expenses 967 938
Bank Levy expense/(reversal) (1)-
Total statutory administrative expenses 966 938
%%
Cost income ratio - underlying basis 59.0 57.1
Cost income ratio - statutory basis 57.7 54.6
------------------------------------------ ------------- -------------
Underlying administrative expenses increased by 3%, driven by
higher defined benefit pension costs as a result of market
conditions, and the depreciation impact of previous investment in
our infrastructure to enhance products and services. The remainder
of our cost base was essentially unchanged compared with a year ago
despite volume growth and the impact of inflation. The underlying
cost income ratio of 59.0% (H1 2016/17: 57.1%) is down from 60.2%
for the full year 2016/17.
To support the long-term interests of our members, we continue
to invest in our products, service and resilience. During the
period, investment spend has focused on improvements to our
branches, continued updates to our digital channels and preparation
for Open Banking. We have also invested in IT resilience and
ensuring compliance with UK and EU regulatory requirements.
1 Market average interest rates are based on Bank of England
whole of market average interest rates adjusted to exclude
Nationwide's balances.
Financial review (continued)
We have continued our focus on operational efficiency, whilst
ensuring the needs of our members are prioritised. We have made
good progress with our efficiency programme, which targets GBP300
million of sustainable cost savings by 2022. Cost growth in the
first half of the year slowed to 3% compared with 9% in the same
period last year, and we have invested GBP15 million in the period
in improving longer-term efficiency. This has included redesign of
member processes, organisational simplification and improvements to
the way we deliver change. Our efficiency programme is a key
priority and we remain committed to a lower trajectory of cost
growth in the future and a broadly flat cost position for the
current year compared with 2016/17.
Impairment losses Half year to Half year to
30 September 30 September
2017 2016
GBPm GBPm
------------------------------------------- ------------- -------------
Residential lending 12 5
Consumer banking 52 32
------------------------------------------- ------------- -------------
Retail lending 64 37
Commercial lending (5) (5)
Impairment losses on loans and advances
to customers 59 32
Impairment losses on investment securities - 5
------------------------------------------- ------------- -------------
Total 59 37
------------------------------------------- ------------- -------------
Impairment losses have increased by GBP22 million to GBP59
million (H1 2016/17: GBP37 million) but reflect a rate of incurred
losses in line with the full year performance for 2016/17. The
increase is driven mainly by additional consumer banking
impairments from updating provision assumptions to reflect current
economic conditions. Although loans continue to perform and
delinquency levels have remained low across all portfolios during
the period, there are emerging indications that affordability is
under more pressure from the impact of inflation.
Further details on asset quality are included in the Business
and risk report.
Provisions for liabilities and charges Half year to Half year to
30 September 30 September
2017 2016
GBPm GBPm
------------------------------------------- ------------- -------------
Underlying provisions for liabilities
and charges - Customer redress 25 52
FSCS levy (release) (3) (4)
------------------------------------------- ------------- -------------
Total statutory provisions for liabilities
and charges 22 48
------------------------------------------- ------------- -------------
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.
The income statement charge for the half year mainly reflects
updated assumptions for provisions previously recognised. This
includes a GBP28 million charge in relation to PPI, driven by an
increase in the anticipated number of future complaints we expect
to receive ahead of the Financial Conduct Authority's August 2019
deadline.
More information on customer redress and FSCS provisions is
included in note 16.
Taxation
The tax charge for the period of GBP157 million (H1 2016/17:
GBP194 million) represents an effective tax rate of 25% (H1
2016/17: 27.9%) which is higher than the statutory UK corporation
tax rate of 19% (H1 2016/17: 20%). The effective tax rate is higher
due to the 8% banking surcharge, equivalent to GBP33 million (H1
2016/17: GBP40 million), and the tax effect of disallowable
customer redress costs and other disallowable expenses of GBP1
million and GBP4 million (H1 2016/17: GBP7 million and GBP7
million) respectively. Further information is provided in note
9.
Financial review (continued)
Member financial benefit
As a building society, we seek to maintain our financial
strength whilst returning value to our members through pricing and
service. We provide value to our members through the highly
competitive mortgage, savings and banking products we can offer as
a direct result of being a member-owned business. The calculation
method used to quantify our member financial benefit is described
in full in the Financial review section of the Annual Report and
Accounts 2017. In summary, we quantify the financial benefit of
being a member by comparing the following to industry
benchmarks:
-- our interest rate pricing on prime mortgages, unsecured lending and retail deposits; and
-- the lower fees we charge and higher incentives we provide to our members.
For the period ended 30 September 2017, this measure shows we
have provided our members with a financial benefit of GBP245
million (H1 2016/17: GBP250 million). This reflects our ongoing
commitment to delivering long-term value to our members despite
strong levels of competition in our core markets.
Balance sheet
Total assets have increased to GBP228 billion at 30 September
2017 (4 April 2017: GBP222 billion) with a strong trading
performance driving GBP4.1 billion of net prime mortgage lending
(H1 2016/17: GBP5.0 billion). The remainder of the balance sheet
growth largely reflects an increase in high quality liquid
assets.
Mortgage lending has been partially funded by growth in retail
deposits, with member deposits increasing by GBP1.8 billion to
GBP146.4 billion (4 April 2017 GBP144.5 billion). The growth in
member balances is primarily attributable to increased current
account balances as we focus on growing our base of engaged
members. This includes growth from existing account holders, as
well as 427,000 new current accounts opened during the period (H1
2016/17: 377,000). In a highly competitive market, our market share
of UK household deposits remained stable at 10.0% at 30 September
2017 (4 April 2017: 10.1%).
Assets 30 September 4 April 2017
2017
-----------------------------------------------
GBPm % GBPm %
----------------------------------------------- --------- --- --------- ---
Residential mortgages 175,262 92 171,263 91
Commercial lending 11,772 6 12,580 7
Consumer banking 4,011 2 3,949 2
Other lending 76 - 17 -
----------------------------------------------- --------- --- --------- ---
191,121 100 187,809 100
Impairment provisions (455) (438)
----------------------------------------------- --------- --- --------- ---
Loans and advances to customers 190,666 187,371
Other financial assets 34,397 31,231
Other non-financial assets 2,465 3,068
----------------------------------------------- --------- --- --------- ---
Total assets 227,528 221,670
----------------------------------------------- --------- --- --------- ---
Asset quality
Residential mortgages: % %
Proportion of residential mortgage accounts
3 months+ in arrears 0.44 0.45
Average indexed loan to value of residential
mortgage book (by value) 55 55
Impairment provisions as a percentage
of non-performing balances 5.5 5.3
Consumer banking:
Non-performing loans as percentage of
total balances (excluding charged off
balances) (note i) 3.8 3.6
Impairment provisions as a percentage
of non-performing balances (including
charged off balances) (note i) 88.4 86.5
Liquidity coverage ratio 125.2 124.0
----------------------------------------------- --------- --- --------- ---
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.
Financial review (continued)
Residential mortgages
Residential mortgages include prime and specialist loans, with
the specialist portfolio primarily comprising buy to let (BTL)
lending. Gross mortgage lending in the period reduced by GBP0.8
billion to GBP16.7 billion (H1 2016/17: GBP17.5 billion),
representing a market share of 12.9% for the period (H1 2016/17:
14.5%). Gross prime mortgage lending remained strong at GBP15.0
billion (H1 2016/17: GBP14.7 billion). Following the affordability
criteria changes we made last year, and the impacts of the stamp
duty increase on the BTL market, gross BTL mortgage lending for the
period reduced to GBP1.7 billion (H1 2016/17: GBP2.8 billion).
Net mortgage lending has decreased during the period by GBP2.1
billion to GBP3.9 billion (H1 2016/17: GBP6.0 billion), reflecting
the reduction in BTL advances and increased prime mortgage
redemptions due to ongoing market competition. Net lending for the
period includes GBP4.1 billion of prime lending (H1 2016/17: GBP5.0
billion). Given the sustained levels of competition in the prime
mortgage market, and the slowdown in BTL volumes, we expect net
lending to moderate in the period ahead.
The average loan to value (LTV) of our portfolio, weighted by
value, was unchanged at 55% (4 April 2017: 55%). The average LTV of
new lending in the period also remained unchanged at 71% (4 April
2017: 71%), reflecting our continued support of the first time
buyer market as we recognise the importance of helping people take
their initial steps onto the housing ladder.
The impairment provision balance has increased to GBP150 million
(4 April 2017: GBP144 million) due to updated provision assumptions
to reflect current economic conditions. The impact of these
conditions has not yet been evident in arrears performance, which
improved marginally, with cases more than three months in arrears
improving slightly to 0.44% (4 April 2017: 0.45%).
Commercial lending
Total commercial lending balances were GBP11.8 billion (4 April
2017: GBP12.6 billion) and, given deleveraging activity undertaken
in recent years, our overall portfolio is increasingly weighted
towards registered social landlords, with balances of GBP7.4
billion (4 April 2017: GBP7.5 billion). The registered social
landlords' portfolio is fully performing, reflecting its low risk
nature.
The strategy for the commercial lending portfolio continues to
be to hold and actively manage to maturity in line with contractual
terms. During the period the commercial real estate (CRE) balances
decreased by GBP0.4 billion to GBP2.2 billion (4 April 2017:
GBP2.6 billion).
Consumer banking
Consumer banking comprises personal loans of GBP2.0 billion (4
April 2017: GBP2.0 billion), credit cards of GBP1.8 billion (4
April 2017: GBP1.7 billion) and current account overdrafts of
GBP0.2 billion (4 April 2017: GBP0.2 billion). Delinquency levels
in the portfolio remain low, benefiting from prudent lending
criteria, proactive risk management practices and continued low
interest rates.
Impairment provisions have increased to GBP282 million (4 April
2017: GBP269 million), primarily due to updated provision
assumptions to reflect current economic conditions.
Further details of our lending are provided in the 'Lending
risk' section of the Business and risk report.
Other financial assets
Other financial assets of GBP34.4 billion (4 April 2017: GBP31.2
billion) comprise liquidity and investment assets held by our
Treasury function of GBP29.1 billion (4 April 2017: GBP25.4
billion), derivatives with positive fair values of GBP5.1 billion
(4 April 2017: GBP5.0 billion) and fair value adjustments and other
assets of GBP0.2 billion (4 April 2017: GBP0.8 billion).
Derivatives are primarily interest rate and foreign exchange
derivatives which economically hedge financial risks inherent in
our core lending and funding activities.
Growth in the levels of on-balance sheet liquid assets is
predominantly due to the replacement of off-balance sheet FLS
liquidity with on-balance sheet TFS drawdowns, additional cash from
the recent issuance of CCDS and an increase in held to maturity
investment securities. Although total on-balance sheet liquidity
has increased, our Liquidity Coverage Ratio (LCR) has remained
broadly stable at 125.2% (4 April 2017: 124.0%) due to certain
assets not being eligible for the LCR calculation, and changes to
LCR requirements.
Financial review (continued)
Members' interests, equity and liabilities 30 September 4 April 2017
2017 GBPm
GBPm
------------------------------------------- ------------ ------------
Member deposits 146,384 144,542
Debt securities in issue 40,491 40,339
Other financial liabilities 26,562 23,940
Other liabilities 1,804 1,716
------------------------------------------- ------------ ------------
Total liabilities 215,241 210,537
Members' interests and equity 12,287 11,133
------------------------------------------- ------------ ------------
Total members' interests, equity and
liabilities 227,528 221,670
------------------------------------------- ------------ ------------
%%
Wholesale funding ratio (note i) 28.2 27.1
------------------------------------------- ------------ ------------
Note:
i. The wholesale funding ratio includes all balance sheet
sources of funding (including securitisations) but excludes Funding
for Lending Scheme (FLS) drawings which, as an asset swap, are not
included on Nationwide's balance sheet, reflecting the substance of
the arrangement. Off-balance sheet FLS drawings have reduced during
the period to GBP3.0 billion (4 April 2017: GBP4.8 billion).
Member deposits
Member deposits have increased by GBP1.8 billion to GBP146.4
billion (4 April 2017: GBP144.5 billion). This includes current
account credit balances, which have increased to GBP19.8 billion (4
April 2017: GBP17.5 billion).
Our market share of all UK household deposits at 30 September
2017 was 10.0% (4 April 2017: 10.1%).
Debt securities in issue
Debt securities in issue of GBP40.5 billion (4 April 2017:
GBP40.3 billion) are used to raise funding in wholesale markets to
finance our core activities. The wholesale funding ratio has
increased to 28.2% (4 April 2017: 27.1%), reflecting wholesale
issuance activity, as well as the drawdown of TFS.
Other financial liabilities
Other financial liabilities have increased during the period to
GBP26.6 billion (4 April 2017: GBP23.9 billion) driven by an
increase in bank deposits (which includes TFS drawdowns). This
growth has been partly offset by a decrease in Nationwide
International balances which have now fully run off. Following our
strategic decision to exit the business, the outflow of Nationwide
International balances was managed in an orderly manner, with the
funding replaced by additional member deposits and the use of
wholesale funding where appropriate.
Members' interests and equity
Movements in the period reflect the retained profit after tax
and the issuance of CCDS during the period, details of which are
included in the Capital structure section on the next page.
Statement of comprehensive income Half year to Half year to
30 September 30 September
2017 2016
GBPm GBPm
Profit after tax 471 502
Net remeasurement of pension obligations 71 (405)
Net movement in cash flow hedge reserve (114) 310
Net movement in available for sale reserve (15) (12)
Other items - 3
------------------------------------------- ------------- -------------
Total comprehensive income 413 398
------------------------------------------- ------------- -------------
Movements in the table above are shown net of related
taxation.
The net remeasurement of pension obligations of GBP71 million
income (H1 2016/17: GBP405 million expense) mainly reflects GBP226
million of actuarial gains (H1 2016/17: GBP1,359 million actuarial
losses). This is partly offset by a GBP129 million loss resulting
from pension asset returns being lower than the rate used to
discount future cashflows in calculating the pension obligation (H1
2016/17: GBP807 million gain). Further information on gross
movements in the pension obligation is included in note 18.
The net movement in cash flow hedge reserve of GBP114 million
expense (H1 2016/17: GBP310 million income) is driven by changes in
derivative valuations from movements in foreign exchange rates and
interest rates. Further information is included in note 6.
Financial review (continued)
Capital structure
Capital structure 30 September
2017 4 April 2017
GBPm GBPm
------------------------------------- ------------- -------------
Capital resources (note i)
Common Equity Tier 1 (CET1) capital 9,758 8,555
Total Tier 1 capital 10,750 9,547
Total regulatory capital 14,104 12,129
Risk weighted assets (RWAs) 32,999 33,641
UK leverage exposure 220,614 215,894
CRR leverage exposure 236,002 228,428
CRD IV capital ratios: % %
CET1 ratio 29.6 25.4
UK leverage ratio (note ii) 4.9 4.4
CRR leverage ratio (note iii) 4.6 4.2
------------------------------------- ------------- -------------
Notes:
i. Data in the table is reported under CRD IV on an end point basis.
ii. 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.
iii. 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.
In September 2017, the Society issued an additional five million
of GBP1 CCDS, as part of our strategy to maintain broad access to
capital markets. This issuance supports the continued relevance of
this instrument in the context of our strategic capital management
and enhances its liquidity. Issuing from a position of strength, we
remain well in excess of regulatory capital requirements. These
CCDS form a single series together with the CCDS previously issued
in December 2013. Further information on CCDS can be found in note
19. Detailed information on the key features of CCDS and other
capital instruments can be found within the Interim Pillar 3
Disclosure 2017 at nationwide.co.uk
CET1 capital resources have increased over the period by GBP1.2
billion mainly due to the CCDS issuance, which raised GBP0.8
billion of CET1 capital, and profit after tax for the period of
GBP471 million. Risk weighted assets (RWAs) reduced over the period
by GBP0.6 billion primarily due to the continued run-off of the
commercial book.
The movements described above have resulted in an increase in
the CET1 ratio to 29.6% (4 April 2017: 25.4%).
The UK leverage ratio was 4.9% at 30 September 2017 (4 April
2017: 4.4%). The increase was a result of the CCDS issuance and
profits for the period. The CRR leverage ratio also increased to
4.6% (4 April 2017: 4.2%).
We continue to monitor regulatory developments that could lead
to an increased level of capital requirements. Whilst there are a
number of areas where potential requirements are yet to be
finalised, regulatory announcements on the UK leverage ratio mean
that we have a clearer understanding of the expected impact on our
capital requirement. However, we will remain engaged in the
development of the regulatory approach to ensure we are prepared
for any changes. Whilst further amendments may result in
significant increases to RWAs, we do not believe these will lead to
a material increase in our overall capital requirements.
Further details of the capital position are included in the
'Solvency risk' section of the Business and risk report.
Business and risk report
Contents
Page
Introduction 18
Principal risks 18
Top and emerging risks 18
Lending risk 19
Residential mortgages 20
Consumer banking 26
Commercial lending 28
Treasury assets 33
Financial risk 36
Liquidity and funding risk 36
Solvency risk 41
Pension risk 44
Earnings risk 44
Operational risk 45
Conduct and compliance risk 45
Introduction
The Interim Business and risk report provides information on
developments during the period in relation to the Group's business,
the risks it is exposed to and how it manages those risks. Where
there has been no change to the Group's approach to managing its
risks, or there has been no material change to the relevant risk
environment from that disclosed at year end, then this information
has not been repeated in the 2017/18 Interim Results and can be
found in the Business and risk report in the Annual Report and
Accounts 2017.
Principal risks
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.
The principal types of risk inherent within the business remain
unchanged from those set out in the Business and risk report in the
Annual Report and Accounts 2017, namely:
-- Lending risk
-- Financial risk
-- Operational risk
-- Conduct and compliance risk
-- Strategic risk.
Top and emerging risks
Nationwide's top and emerging risks to the delivery of the
strategy are identified through the process outlined in the
Business and risk report section of the Annual Report and Accounts
2017. These risks are kept under close observation through the risk
reporting and governance structure.
Nationwide's top and emerging risks continue to relate to three
key themes:
-- Macroeconomic and competitive environment
-- Cyber security, data protection and operational resilience
-- The pace of change in the digital and regulatory environment.
The latest developments in relation to the Group's top and
emerging risks are set out below.
Macroeconomic and competitive environment
Nationwide continues to regularly monitor economic factors,
including undertaking regular assessments of how economic stresses
may impact its business model. Factors including the UK vote to
leave the EU, geopolitical tensions, and European and domestic
political changes are regularly discussed. While Nationwide's
business model means it has limited direct exposure to the EU,
should the UK leave the EU without a transitional deal in place,
Nationwide could be exposed to secondary impacts.
Whilst the Bank of England has raised the base rate, interest
rates remain at a historically low level. The Board continues to
monitor closely and discuss the impact of any change in interest
rates, competitor activity, and associated risks to economic growth
and our margin.
In addition, the Board continues to balance carefully
affordability with credit supply to support members, and actively
monitors key indicators for any effect on credit losses or customer
outcomes driven by the growth in the levels of UK household debt,
or customer affordability resulting from wages not keeping pace
with inflation.
Cyber security, data protection and operational resilience
Nationwide continues to focus on protecting customer services
and data, balancing customer expectations for "always on" digital
services with the need to provide compliant, resilient and secure
systems.
Recent high profile attacks, such as WannaCry and NotPetya
ransomware attacks, have not directly affected Nationwide, but
emphasise the need for continued vigilance to ensure systems remain
resilient and customers are protected from any future attacks.
Top and emerging risks (continued)
The pace of change in the digital and regulatory environment
Nationwide recognises both the risks and opportunities
associated with changes that could impact the structure of the
market, such as challenges from new competition as a result of Open
Banking, artificial intelligence and automation, as well as broader
changes to the external environment including climate change and
the UK's aging population. Nationwide's stress testing activities
consider a number of these to ensure the associated risks are
understood and potential management responses have been
identified.
Lending risk
Lending risk is the risk that a borrower or counterparty fails
to pay interest or to repay the principal on a loan or other
financial instrument (such as a bond) on time. Lending risk also
encompasses extension risk and concentration risk. Further details
on how Nationwide manages lending risk are available in the Annual
Report and Accounts 2017. The table below summarises the Group's
assets subject to lending risk.
Balances subject to lending risk 30 September 2017
Gross balances Less: impairment Carrying % of total
provisions value
GBPm GBPm GBPm %
------------------------------------ -------------- ---------------- -------- ----------
Cash 15,302 - 15,302 7
Loans and advances to banks 3,009 - 3,009 1
Investment securities 10,788 - 10,788 5
Derivative financial instruments 5,066 - 5,066 2
Fair value adjustment for portfolio
hedged risk (note i) 191 - 191 -
Investments in equity shares 41 - 41 -
-------------- ---------------- -------- ----------
34,397 - 34,397 15
Loans and advances to customers:
Residential mortgages 175,262 (150) 175,112 78
Consumer banking 4,011 (282) 3,729 2
Commercial lending (note i) 11,772 (23) 11,749 5
Other lending (note ii) 76 - 76 -
-------------- ---------------- -------- ----------
191,121 (455) 190,666 85
Total 225,518 (455) 225,063 100
------------------------------------ -------------- ---------------- -------- ----------
Balances subject to lending risk 4 April 2017
Gross balances Less: impairment Carrying % of total
provisions value
GBPm GBPm GBPm %
------------------------------------ -------------- ---------------- -------- ----------
Cash 13,017 - 13,017 6
Loans and advances to banks 2,587 - 2,587 1
Investment securities 9,764 - 9,764 5
Derivative financial instruments 5,043 - 5,043 2
Fair value adjustment for portfolio
hedged risk (note i) 746 - 746 -
Investments in equity shares 67 - 67 -
-------------- ---------------- -------- ----------
31,224 - 31,224 14
Loans and advances to customers:
Residential mortgages 171,263 (144) 171,119 78
Consumer banking 3,949 (269) 3,680 2
Commercial lending (note i) 12,580 (25) 12,555 6
Other lending (note ii) 17 - 17 -
-------------- ---------------- -------- ----------
187,809 (438) 187,371 86
Total 219,033 (438) 218,595 100
------------------------------------ -------------- ---------------- -------- ----------
Notes:
i. The fair value adjustment for portfolio hedged risk and the
fair value adjustment for micro hedged risk (included within the
carrying value of the commercial lending portfolio) represent hedge
accounting adjustments. They are indirectly exposed to lending risk
through the relationship with the underlying loans covered by
Nationwide's hedging programmes.
ii. The other lending portfolio includes deferred consideration
relating an investment in Visa Inc and collateral balances to
support repo transactions.
Lending risk - Residential mortgages
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 primarily consists of buy to let
mortgages originated under The Mortgage Works (UK) plc (TMW) brand,
but also includes other specialist lending which is now closed to
new business.
New lending in the prime portfolio has seen the residential
mortgage exposure grow from GBP171 billion to GBP175 billion over
the period. This has mainly been driven by continued support for
first time buyers and reflects Nationwide's commitment to help
people become homeowners.
Over the period the geographical distribution across the UK has
remained stable and the average LTV, weighted by value, has
remained at 55%. Support for first time buyers has seen the
proportion of new lending made to this segment increase to 37%
(H1 2016/17: 35%). Average LTV of new lending is unchanged at
71% and the proportion of the portfolio with an LTV above 80% fell
to 9.5% (4 April 2017: 9.6%).
The proportion of lending made to the buy to let segment has
reduced over the period to 10% (H1 2016/17: 16%). In May 2017
Nationwide reintroduced a 125% Interest Cover Ratio (ICR) mortgage
for basic rate taxpayers to recognise the lower impact the phased
changes to income tax relief for buy to let investors will have on
these borrowers.
Arrears levels remain low across prime and specialist lending,
reflecting the favourable economic conditions, the low interest
rate environment and robust lending controls. The proportion of
loans more than three months in arrears reduced to 0.44%
(4 April 2017: 0.45%), significantly below the Council of
Mortgage Lenders (CML) average of 0.86%. With the immediate outlook
for the UK less certain and the buy to let market facing increased
costs, the expectation is for a very gradual rise in arrears from
these low levels.
The proportion of non-performing loans reduced to 1.5% of the
total mortgage portfolio. Provisions for impairment remain broadly
stable.
Lending and new business
The table below summarises the residential mortgage
portfolios:
Residential mortgage lending 30 September 4 April 2017
2017
GBPm % GBPm %
----------------------------- --------- --- --------- ---
Prime 142,138 81 138,004 81
Specialist:
Buy to let 30,139 18 30,087 18
Self-certified 1,942 1 2,071 1
Near prime 742 - 784 -
Sub prime 301 - 317 -
----------------------------- --------- --- --------- ---
33,124 19 33,259 19
Total residential mortgages 175,262 100 171,263 100
----------------------------- --------- --- --------- ---
Note:
Self-certified, near prime and sub prime lending were
discontinued in 2009.
Lending risk - Residential mortgages (continued)
Distribution of new business by borrower Half year to Half year to
type (by value) 30 September 30 September
2017 2016
% %
----------------------------------------- ------------- -------------
Prime:
First time buyers 37 35
Home movers 31 30
Remortgagers 21 18
Other 1 1
------------- -------------
Total prime 90 84
Specialist:
Buy to let new purchases 2 4
Buy to let remortgagers 8 12
Total specialist 10 16
Total new business 100 100
----------------------------------------- ------------- -------------
Note:
All new business measures exclude existing customers who are
only switching products and/or taking further advances.
The proportion of prime remortgage lending increased during the
period reflecting an increased customer appetite for
remortgaging.
The proportion of lending to buy to let investors reduced during
the period. Influencing factors include a contraction in the buy to
let market following the introduction of further stamp duty charges
for additional property purchases, and Nationwide taking a lead in
the market by increasing its minimum interest cover ratio
requirement in anticipation of the effect phased tax rises will
have on affordability for some property investors.
Lending 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 lending risk concentration
Average LTV shown below is calculated by weighting by value as
this is considered to reflect most appropriately the exposure at
risk.
Average LTV of loan stock (by value) 30 September 4 April 2017
2017
-------------------------------------
% %
------------------------------------- ------------ ------------
Prime 54 54
Specialist 58 59
------------------------------------- ------------ ------------
Total 55 55
------------------------------------- ------------ ------------
Average LTV of new business (by value) Half year to Half year to
30 September 30 September
2017 2016
---------------------------------------
% %
--------------------------------------- ------------- -------------
Prime 72 72
Specialist (buy to let) 61 63
--------------------------------------- ------------- -------------
Total 71 71
--------------------------------------- ------------- -------------
Note:
The LTV of new business excludes further advances and product
switchers.
The average LTV of buy to let new lending reduced by two
percentage points in the period. This is due in part to the
introduction of a reduced maximum LTV of 75% in May 2016
(previously 80%).
Lending risk - Residential mortgages (continued)
LTV distribution of new business (by Half year to Half year to
value) 30 September 30 September
2017 2016
------------------------------------
% %
------------------------------------ ------------- -------------
0% to 60% 27 25
60% to 75% 31 32
75% to 80% 8 9
80% to 85% 13 14
85% to 90% 17 16
90% to 95% 4 4
Total 100 100
------------------------------------ ------------- -------------
The maximum LTV for new prime residential customers is 95%. The
proportion of new lending below 60% increased, in part as a
consequence of an increased customer appetite for remortgaging.
Geographical concentration
Residential Greater Central Northern South South Scotland Wales Northern Total
mortgage balances London England England East West Ireland
by LTV and region England England
30 September GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm %
2017
------------------------ ------- -------- -------- -------- -------- -------- ----- -------- ------- -----
Performing loans
Fully collateralised
LTV ratio:
Up to 50% 27,812 10,511 6,818 9,051 5,980 3,019 1,360 893 65,444
50% to 60% 11,771 6,106 4,040 4,683 3,355 1,694 767 381 32,797
60% to 70% 8,916 6,882 6,098 3,671 3,335 2,516 1,222 398 33,038
70% to 80% 5,877 4,734 5,513 2,511 2,226 2,472 1,137 380 24,850
80% to 90% 3,952 2,230 3,246 1,556 1,212 1,259 652 302 14,409
90% to 100% 465 200 492 173 95 133 71 105 1,734
------- -------- -------- -------- -------- -------- ----- -------- -------
58,793 30,663 26,207 21,645 16,203 11,093 5,209 2,459 172,272 98.4
Not fully collateralised
Over 100% LTV
(A) 4 4 25 2 2 12 2 199 250 0.1
Collateral value
on A 3 4 21 2 2 11 2 167 212
Negative equity
on A 1 - 4 - - 1 - 32 38
------- -------- -------- -------- -------- -------- ----- -------- -------
Total performing
loans 58,797 30,667 26,232 21,647 16,205 11,105 5,211 2,658 172,522 98.5
------------------------ ------- -------- -------- -------- -------- -------- ----- -------- ------- -----
Non-performing
loans
Fully collateralised
LTV ratio:
Up to 50% 494 165 110 127 69 39 21 27 1,052
50% to 60% 200 107 78 69 47 30 16 11 558
60% to 70% 75 111 120 59 56 42 23 11 497
70% to 80% 24 86 104 21 26 37 21 10 329
80% to 90% 12 34 82 7 5 19 15 8 182
90% to 100% 3 2 41 1 1 7 10 8 73
808 505 535 284 204 174 106 75 2,691 1.5
Not fully collateralised
Over 100% LTV
(B) - 1 7 - - 1 1 39 49 -
Collateral value
on B - 1 6 - - 1 1 31 40
Negative equity
on B - - 1 - - - - 8 9
------- -------- -------- -------- -------- -------- ----- -------- -------
Total non-performing
loans 808 506 542 284 204 175 107 114 2,740 1.5
------------------------ ------- -------- -------- -------- -------- -------- ----- -------- ------- -----
Total residential
mortgages 59,605 31,173 26,774 21,931 16,409 11,280 5,318 2,772 175,262 100.0
------------------------ ------- -------- -------- -------- -------- -------- ----- -------- ------- -----
Geographical
concentrations 34% 18% 15% 13% 9% 6% 3% 2% 100%
------------------------ ------- -------- -------- -------- -------- -------- ----- -------- ------- -----
Lending risk - Residential mortgages (continued)
Residential Greater Central Northern South South Scotland Wales Northern Total
mortgage balances London England England East West Ireland
by LTV and region England England
4 April 2017 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm %
------------------------ ------- -------- -------- -------- -------- -------- ------ -------- -------- -----
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
Over 100% LTV
(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
Over 100% LTV
(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%
------------------------ ------- -------- -------- -------- -------- -------- ------ -------- -------- -----
The value of partially collateralised non-performing loans has
reduced to GBP49 million (4 April 2017: GBP66 million), primarily
reflecting the growth in house prices.
During the period the proportion of loan balances with an LTV
greater than 80% has reduced to 9.5% (4 April 2017: 9.6%).
Arrears
Number of cases more than 3 months in 30 September 4 April 2017
arrears as % of total book 2017
--------------------------------------
% %
-------------------------------------- ------------ ------------
Prime 0.35 0.36
Specialist 0.86 0.89
-------------------------------------- ------------ ------------
Total 0.44 0.45
-------------------------------------- ------------ ------------
CML industry average 0.86 0.91
-------------------------------------- ------------ ------------
Favourable economic conditions and a continued low interest
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 increases rather than
further falls. The combined arrears rate of 0.44% is approximately
half of the Council of Mortgage Lenders' (CML) industry average
rate of 0.86%.
Lending risk - Residential mortgages (continued)
Impaired loans
Impaired and non-performing loans are identified primarily by
arrears status, as shown in the table below.
Residential mortgages by payment status 30 September 2017
Prime Specialist Total
GBPm GBPm GBPm %
----------------------------------------------- ------- ---------- ------- -----
Performing:
Neither past due nor impaired 140,460 32,062 172,522 98.5
Non-performing:
Past due up to 3 months 1,303 678 1,981 1.1
Impaired:
Past due 3 to 6 months 155 165 320 0.2
Past due 6 to 12 months 112 110 222 0.1
Past due over 12 months 99 84 183 0.1
Litigations (past term interest only) 1 1 2 -
Possessions 8 24 32 -
----------------------------------------------- -----
Total non-performing loans 1,678 1,062 2,740 1.5
----------------------------------------------- ------- ---------- ------- -----
Total residential mortgages 142,138 33,124 175,262 100.0
----------------------------------------------- ------- ---------- ------- -----
Non-performing loans as a % of total
residential mortgages 1.2% 3.2% 1.6%
Impairment provisions (GBPm) 37 113 150
Impairment provisions as a % of non-performing
balances 2.2% 10.6% 5.5%
Impairment provisions as a % of total
residential mortgages 0.03% 0.34% 0.09%
----------------------------------------------- ------- ---------- ------- -----
Residential mortgages by payment status 4 April 2017
Prime Specialist Total
GBPm GBPm GBPm %
----------------------------------------------- ------- ---------- ------- -----
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 (GBPm) 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%
----------------------------------------------- ------- ---------- ------- -----
Impairment provisions increased to GBP150 million (4 April 2017:
GBP144 million) due to updates to assumptions to reflect current
economic conditions.
Impairment losses for the period Half year to Half year to
30 September 30 September
2017 2016
GBPm GBPm
--------------------------------- ------------- -------------
Prime 4 1
Specialist 8 4
Total 12 5
--------------------------------- ------------- -------------
Lending risk - Residential mortgages (continued)
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 of interest only
mortgages are managed closely, engaging regularly with customers to
ensure the loan can be redeemed or to agree a strategy for
repayment.
The majority of the specialist portfolio comprises buy to let
loans, of which approximately 82% continue to be advanced on an
interest only basis.
Interest only Term Due within Due after Due after Due after Total % of
mortgages expired one year one year two years more than total book
(still and before and before five years
open) two years five years
30 September GBPm GBPm GBPm GBPm GBPm GBPm %
2017
-------------- -------- ---------- ----------- ----------- ----------- ------ -----------
Prime 66 323 408 1,612 12,381 14,790 10.4
Specialist 105 203 213 1,231 27,835 29,587 89.3
-------------- -------- ---------- ----------- ----------- ----------- ------ -----------
Total 171 526 621 2,843 40,216 44,377 25.3
-------------- -------- ---------- ----------- ----------- ----------- ------ -----------
4 April 2017
-------------- -------- ---------- ----------- ----------- ----------- ------ -----------
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, to
the extent that they are not otherwise in arrears, considered
performing for six months, pending renegotiation of the facility.
After six months, the loans are, if not in litigation, classified
as forborne.
Forbearance
Nationwide is committed to supporting customers facing financial
difficulty by working with them to find a solution through
proactive arrears management and forbearance.
The table below provides details of residential mortgages
subject to forbearance. The Annual Report and Accounts 2017 sets
out details of concession events included within forbearance.
Balance subject to forbearance 30 September 2017 4 April 2017
Prime Specialist Total Prime Specialist Total
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------- ----- ---------- ----- ----- ---------- -----
Past term interest only
concessions 151 147 298 154 141 295
Interest only concessions 506 70 576 501 70 571
Capitalisation 54 64 118 59 72 131
Term extension (within
term) 35 14 49 42 16 58
Permanent interest only
conversions 5 27 32 6 33 39
------------------------------- ----- ---------- ----- ----- ---------- -----
Total forbearance 751 322 1,073 762 332 1,094
------------------------------- ----- ---------- ----- ----- ---------- -----
Impairment provision
on forborne loans 8 10 18 7 11 18
------------------------------- ----- ---------- ----- ----- ---------- -----
Note:
Loans where more than one concession event has occurred are
reported under the latest event.
Lending risk - (continued)
Consumer banking
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 2% to GBP4,011 million during the
period
(4 April 2017: GBP3,949 million).
Nationwide continues to monitor carefully the composition and
performance of the unsecured portfolios, in light of the growth in
consumer credit balances observed across the industry. A number of
proactive steps have been taken in order to enhance monitoring and
controls, ensuring all lending continues to be undertaken
responsibly.
Impairment provisions are held against both performing and
non-performing segments of the consumer banking portfolio.
Provision balances have increased in the period, largely due to
updates to provision assumptions to reflect the current economic
conditions. Although loans continue to perform, there are emerging
indications that borrowers are under more pressure from levels of
debt relative to income. Across the consumer banking portfolios
this has led to increased provision coverage as a percentage of
total non-performing balances by 2%.
Consumer banking balances 30 September 4 April 2017
2017
GBPm % GBPm %
--------------------------- -------- ---- -------- ----
Overdrawn current accounts 210 5 261 7
Personal loans 2,006 50 1,957 49
Credit cards 1,795 45 1,731 44
--------------------------- -------- ---- -------- ----
Total consumer banking 4,011 100 3,949 100
--------------------------- -------- ---- -------- ----
Impaired loans
Lending risk on the consumer banking portfolios is primarily
monitored and reported based on delinquency status, since no
security is held against the loans. The Annual Report and Accounts
2017 sets out how impaired loans are defined.
Consumer banking by payment due 30 September 2017
status
Overdrawn Personal Credit Total
current loans cards
accounts
GBPm GBPm GBPm GBPm %
------------------------------------ --------- -------- ------ ----- ---
Performing:
Neither past due nor impaired 171 1,864 1,657 3,692 92
Non-performing:
Past due up to 3 months 13 41 33 87
Impaired:
Past due 3 to 6 months 4 11 11 26
Past due 6 to 12 months 3 11 2 16
Past due over 12 months 3 14 - 17
------------------------------------ --------- -------- ------ -----
23 77 46 146 4
Charged off (note i) 16 65 92 173 4
------------------------------------ --------- -------- ------ -----
Total non-performing 39 142 138 319
Total consumer banking lending 210 2,006 1,795 4,011 100
------------------------------------ --------- -------- ------ ----- ---
Non-performing loans as % of
total (excluding charged off
balances) 12% 4% 3% 4%
Impairment provisions excluding
charged off balances 17 53 50 120
Impairment provisions on charged
off balances 15 62 85 162
------------------------------------ --------- -------- ------ -----
Total impairment provisions 32 115 135 282
Impairment provisions as a %
of non-performing loans (including
charged off balances) 82% 81% 98% 88%
Impairment provisions as % of
total balances 15% 6% 8% 7%
------------------------------------ --------- -------- ------ ----- ---
Lending risk - Consumer banking (continued)
Consumer banking by payment due 4 April 2017
status
Overdrawn Personal Credit Total
current loans cards
accounts
GBPm GBPm GBPm GBPm %
------------------------------------ --------- -------- ------ ----- ---
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 to GBP146 million (4 April 2017: GBP137 million),
but represent a stable proportion of the overall balances as
consumer banking portfolios have continued to grow modestly over
recent periods.
Impairment losses for the period Overdrawn Personal Credit Total
current loans cards
accounts
GBPm GBPm GBPm GBPm
--------------------------------- --------- -------- ------ -----
Half year to 30 September 2017 7 19 26 52
Half year to 30 September 2016 4 11 17 32
--------------------------------- --------- -------- ------ -----
Impairment losses have increased compared with the same period
last year, reflecting a rate of incurred losses which is in line
with the full year performance for 2016/17. The charge in the
period includes the impact of updated provision assumptions to
reflect current economic conditions, including affordability
trends.
Lending risk - Consumer banking (continued)
Forbearance
The table below provides details of consumer banking balances
that are currently subject to forbearance, split by the concession
events agreed. The Annual Report and Accounts 2017 sets out details
of concession events included within forbearance.
Balances subject to forbearance Overdrawn Personal Credit Total
current loans cards
accounts
30 September 2017 GBPm GBPm GBPm GBPm
--------------------------------------- --------- -------- ------ -----
Payment concession 18 - 2 20
Interest suppressed payment concession 5 30 18 53
Balances re-aged/re-written - - 4 4
--------------------------------------- --------- -------- ------ -----
Total forbearance 23 30 24 77
--------------------------------------- --------- -------- ------ -----
Impairment provision on forborne
loans 3 25 15 43
--------------------------------------- --------- -------- ------ -----
4 April 2017
--------------------------------------- --------- -------- ------ -----
Payment concession 17 - 2 19
Interest suppressed payment concession 5 29 18 52
Balances re-aged/re-written - - 5 5
--------------------------------------- --------- -------- ------ -----
Total forbearance 22 29 25 76
--------------------------------------- --------- -------- ------ -----
Impairment provision on forborne
loans 3 24 16 43
--------------------------------------- --------- -------- ------ -----
Note:
Where more than one concession event has occurred, exposures are
reported under the latest event.
Commercial lending
The commercial loan portfolio comprises the following:
Commercial lending balances 30 September 4 April 2017
2017
---------------------------------------
GBPm % GBPm %
--------------------------------------- -------- ---- -------- ----
Commercial real estate (CRE) 2,231 21 2,568 23
Registered social landlords (note i) 7,356 69 7,546 67
Project finance (note ii) 1,013 10 1,096 10
--------------------------------------- -------- ---- -------- ----
Total commercial lending 10,600 100 11,210 100
Fair value adjustment for micro hedged
risk (note iii) 1,172 1,370
--------------------------------------- -------- ---- -------- ----
Total 11,772 12,580
--------------------------------------- -------- ---- -------- ----
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 79% (4 April 2017: 77%) of the commercial lending
portfolio. This increase is due to the quicker run-off of the CRE
portfolio, which is subject to shorter maturity dates.
Notwithstanding the reduction in CRE lending, the exposure remains
well spread across sectors and geographic regions. The registered
social landlord and project finance assets are fully performing and
remain stable, reflecting their long term, lower risk nature with a
long history of zero defaults. The detailed disclosures below
therefore relate only to the CRE portfolio.
Lending risk - Commercial lending (continued)
Lending risk
Lending risk in the commercial loan portfolio is linked to
delinquency and the availability of collateral to cover any loan
balances. Nationwide adopts robust credit management policies and
processes designed to recognise and manage the risks arising, or
likely to arise, from the portfolio.
The lending risk in the CRE portfolio continues to reduce as the
portfolio of loans contracts, the volume of non-performing loans
reduces and real estate market conditions remain stable.
Loan to value
The following tables show the CRE portfolio by LTV and
region:
CRE lending balances by LTV London South East Rest of Total
and region UK
(note i)
30 September 2017 GBPm GBPm GBPm GBPm %
-------------------------------- ------ ---------- --------- ----- ---
Performing loans
Fully collateralised
LTV ratio (note ii):
Less than 25% 221 22 50 293
25% to 50% 667 140 281 1,088
51% to 75% 376 42 302 720
76% to 90% 1 8 42 51
91% to 100% - - 1 1
------ ---------- --------- -----
1,265 212 676 2,153 97
Not fully collateralised:
Over 100% LTV (A) - - 2 2 -
------ ---------- --------- -----
Collateral value on A - - 1 1
Negative equity on A - - 1 1
------ ---------- --------- -----
Total performing loans 1,265 212 678 2,155 97
-------------------------------- ------ ---------- --------- ----- ---
Non-performing loans (note iii)
Fully collateralised
LTV ratio:
Less than 25% 1 - 1 2
25% to 50% 12 1 6 19
51% to 75% 4 1 5 10
76% to 90% 4 7 3 14
91% to 100% - - 2 2
------ ---------- --------- -----
21 9 17 47 2
Not fully collateralised
Over 100% LTV (B) - - 29 29 1
------ ---------- --------- -----
Collateral value on B - - 17 17
Negative equity on B (note iv) - - 12 12
------ ---------- --------- -----
Total non-performing loans 21 9 46 76 3
-------------------------------- ------ ---------- --------- ----- ---
Total CRE loans 1,286 221 724 2,231 100
-------------------------------- ------ ---------- --------- ----- ---
Geographical concentration 58% 10% 32% 100%
-------------------------------- ------ ---------- --------- ----- ---
Lending risk - Commercial lending (continued)
CRE lending balances by LTV London South East Rest of Total
and region UK
(note i)
4 April 2017 GBPm GBPm GBPm GBPm %
-------------------------------- ------ ---------- --------- ----- ---
Performing loans
Fully collateralised
LTV ratio (note ii)
Less than 25% 217 19 38 274
25% to 50% 702 178 359 1,239
51% to 75% 466 66 361 893
76% to 90% 8 4 59 71
91% to 100% 1 8 1 10
------ ---------- --------- -----
1,394 275 818 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 1,396 275 823 2,494 97
-------------------------------- ------ ---------- --------- ----- ---
Non-performing loans (note iii)
Fully collateralised
LTV ratio:
Less than 25% 1 - - 1
25% to 50% 9 3 2 14
51% to 75% 8 1 4 13
76% to 90% - - 3 3
91% to 100% 3 4 3 10
------ ---------- --------- -----
21 8 12 41 2
Not fully collateralised
Over 100% LTV (B) 1 3 29 33 1
------ ---------- --------- -----
Collateral value on B - - 20 20
Negative equity on B (note iv) 1 3 9 13
------ ---------- --------- -----
Total non-performing loans 22 11 41 74 3
-------------------------------- ------ ---------- --------- ----- ---
Total CRE loans 1,418 286 864 2,568 100
-------------------------------- ------ ---------- --------- ----- ---
Geographical concentration 55% 11% 34% 100%
-------------------------------- ------ ---------- --------- ----- ---
Notes:
i. Includes lending to borrowers 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 (4 April 2017:
3%). Both the amount of partially collateralised non-performing
loans and the shortfall on collateral for non-performing loans have
marginally reduced, reflecting the improving book performance and
managed exit activity.
Lending risk - Commercial lending (continued)
Credit risk concentrations
The CRE exposure remains well spread across sectors, and
geographic regions as shown below:
CRE lending balances and impairment London South East Rest of UK Total
provisions by type and region (note ii)
(note i)
30 September 2017 GBPm GBPm GBPm GBPm
------------------------------------ ------ ---------- ---------- -----
Retail 271 118 138 527
Office 232 19 200 451
Residential 692 35 218 945
Industrial and warehouse 26 26 82 134
Leisure and hotel 65 23 65 153
Other - - 21 21
------------------------------------ ------ ---------- ---------- -----
Total CRE lending 1,286 221 724 2,231
------------------------------------ ------ ---------- ---------- -----
Impairment provision:
Retail 1 1 2 4
Office - - 2 2
Residential 2 - 3 5
Industrial and warehouse - - - -
Leisure and hotel - - 5 5
Other - - 7 7
------------------------------------ ------ ---------- ---------- -----
Total impairment provisions 3 1 19 23
------------------------------------ ------ ---------- ---------- -----
CRE lending balances and impairment London South East Rest of UK Total
provisions by type and region (note ii)
(note i)
4 April 2017 GBPm GBPm GBPm GBPm
------------------------------------ ------ ---------- ---------- -----
Retail 433 170 209 812
Office 222 28 222 472
Residential 686 37 263 986
Industrial and warehouse 29 29 99 157
Leisure and hotel 48 22 57 127
Other - - 14 14
------------------------------------ ------ ---------- ---------- -----
Total CRE lending 1,418 286 864 2,568
------------------------------------ ------ ---------- ---------- -----
Impairment provision:
Retail 1 4 2 7
Office 1 - 2 3
Residential 1 - 5 6
Industrial and warehouse - - 1 1
Leisure and hotel - - 6 6
Other - - 2 2
------------------------------------ ------ ---------- ---------- -----
Total impairment provisions 3 4 18 25
------------------------------------ ------ ---------- ---------- -----
Notes:
i. A CRE loan may be secured on assets crossing different types
and regions; the balances are therefore attributed to the sector
and region where the majority of the exposure arises. This can lead
to recategorisations occurring between periods if the asset mix
changes.
ii. Includes lending to borrowers based in the Channel Islands.
Lending risk - Commercial lending (continued)
Arrears and impairment
No losses have been experienced on the registered social
landlord or project finance portfolios and there is no
non-performance within these portfolios. As a result, impairment
provisions are only required against the CRE portfolio.
The table below sets out the payment due status and impairment
provisions for the CRE portfolio:
CRE lending balances by payment due status 30 September 4 April 2017
2017
-------------------------------------------
GBPm % GBPm %
------------------------------------------- -------- ---- -------- ----
Performing:
Neither past due nor impaired 2,155 97 2,494 97
Non-performing:
Past due up to 3 months but not impaired
(note i) 35 2 29 1
Impaired (note ii):
Past due up to 3 months 12 - 24 1
Past due 3 to 6 months 4 - 1 -
Past due 6 to 12 months 7 - 3 -
Past due over 12 months 18 1 17 1
Possessions (note iii) - - - -
-------- ---- -------- ----
Total non-performing balances 76 3 74 3
Total 2,231 100 2,568 100
------------------------------------------- -------- ---- -------- ----
Impairment provisions
Individual 18 78 20 80
Collective 5 22 5 20
------------------------------------------- -------- ---- -------- ----
Total impairment provisions 23 100 25 100
------------------------------------------- -------- ---- -------- ----
Provision coverage ratios
Individual provisions as % of impaired
balances 44 44
Total provisions as % of non-performing
balances 30 34
Total provisions as % of total balances 1 1
Estimated collateral:
Against loans past due but not impaired 35 100 29 100
Against impaired loans 29 71 32 71
------------------------------------------- -------- ---- -------- ----
Total collateral against non-performing
balances 64 84 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.
Total non-performing loans, before provisions, have increased by
GBP2 million to GBP76 million. This increase is due to loans, which
are past their maturity date, being held whilst exit strategies are
agreed and executed with the borrower. There has been a reduction
of GBP2 million in total impairment provisions, reflecting the
managed exit activity and improving book performance.
Impairment reversal for the period Half year to Half year to
30 September 30 September
2017 2016
-----------------------------------
GBPm GBPm
----------------------------------- ------------- -------------
Total 5 5
----------------------------------- ------------- -------------
Improved CRE market conditions, including increased liquidity
and capital values, have resulted in a net impairment reversal of
GBP5 million (H1 2016/17: GBP5 million), including recoveries.
Lending risk - Commercial lending (continued)
Forbearance
The table below provides details of CRE balances that are
currently subject to forbearance, split by the concession events
agreed. The Annual Report and Accounts 2017 sets out further
details of concession events included within forbearance.
Balances subject to forbearance 30 September 4 April 2017
2017
GBPm GBPm
--------------------------------------- ------------ ------------
Refinance 83 34
Modifications:
Interest concession - 1
Capital concession 51 50
Security amendment 19 56
Extension at maturity 77 126
Breach of covenant 41 80
--------------------------------------- ------------ ------------
Total forbearance 271 347
--------------------------------------- ------------ ------------
Impairment provision on forborne loans 14 17
--------------------------------------- ------------ ------------
Note:
Where more than one concession event has occurred, exposures are
reported under the latest event.
Overall, the level of forbearance has reduced, reflecting the
managed exit activity and improving book performance. The increase
in forbearance, as a result of refinance, reflects short term
support provided to borrowers in the execution of the portfolio
exit strategy.
Treasury assets
The Treasury portfolio is held primarily for liquidity
management and, in the case of derivatives, for market risk
management.
The net increase in the portfolio is predominantly due to an
increase in cash balances. This follows further drawdowns in the
Term Funding Scheme (TFS).
Treasury asset balances 30 September 4 April 2017
2017
GBPm GBPm
-------------------------------------------- ------------ ------------
Cash 15,302 13,017
Loans and advances to banks 3,009 2,587
Investment securities 10,829 9,831
-------------------------------------------- ------------ ------------
Treasury liquidity and investment portfolio 29,140 25,435
Derivative assets 5,066 5,043
Total treasury portfolio 34,206 30,478
-------------------------------------------- ------------ ------------
Note:
Derivatives are classified as assets where their fair value is
positive and liabilities where their fair value is negative. At 30
September 2017, derivative liabilities were GBP2,549 million (4
April 2017: GBP3,182 million).
In line with the Board's risk appetite, investment activity is
restricted to high quality liquid securities. In addition, cash is
invested in highly rated liquid assets that are eligible for
accessing central bank funding operations.
The balance of out of policy legacy assets has reduced from
GBP172 million to GBP73 million during the period through ongoing
sales. Opportunities to exit positions continue to be assessed
against prevailing market conditions and financial
implications.
Managing treasury credit risk
Credit risk within the Treasury portfolio arises primarily from
the instruments held for operational, liquidity and investment
purposes. The Treasury Credit Risk function manages all aspects of
credit risk in accordance with Nationwide's risk governance
framework, details of which are provided in the Annual Report and
Accounts 2017.
Lending risk - Treasury assets (continued)
Liquidity and investment portfolios
The liquidity and investment portfolio of GBP29,140 million (4
April 2017: GBP25,435 million) comprises liquid assets and other
securities. The size of the portfolio reflects operational and
strategic liquidity requirements. An analysis of the on-balance
sheet portfolios by asset class, credit rating and geographical
location of the issuers is set out below.
Liquidity and investment portfolio AAA AA A Other UK US Europe Other
by credit rating (note i)
30 September 2017 GBPm % % % % % % % %
----------------------------------- ------ --- --- ----- --- --- ------ -----
Liquid assets:
Cash and reserves at central
banks 15,302 - 100 - - 100 - - -
Government bonds 6,538 10 90 - - 78 6 16 -
Supranational bonds 547 95 5 - - - - - 100
Covered bonds 982 100 - - - 46 - 34 20
Residential mortgage backed
securities (RMBS) 802 100 - - - 62 - 38 -
Asset-backed securities (other) 300 100 - - - 74 - 26 -
Liquid assets total 24,471 13 87 - - 88 2 7 3
----------------------------------- ------ --- --- ----- --- --- ------ -----
Other securities:
RMBS 1,403 75 7 16 2 100 - - -
Collateralised loan obligations 80 83 17 - - 100 - - -
Student loans 68 24 76 - - - 100 - -
Other investments 109 - 39 37 24 28 34 38 -
----------------------------------- ------ --- --- ----- --- --- ------ -----
Other securities total 1,660 68 12 16 4 92 6 2 -
----------------------------------- ------ --- --- ----- --- --- ------ -----
Loans and advances to banks
(note ii) 3,009 - 57 42 1 86 6 7 1
Total 29,140 15 80 5 - 88 2 7 3
----------------------------------- ------ --- --- ----- --- --- ------ -----
Liquidity and investment portfolio AAA AA A Other UK US Europe Other
by credit rating (note i)
4 April 2017 GBPm % % % % % % % %
----------------------------------- ------ --- ----- --- ------ -----
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) 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:
RMBS 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 ii) 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. Loans and advances to banks include derivative collateral and reverse repo balances.
Country exposures
The following table summarises the exposure (shown at their
balance sheet carrying values) to institutions outside the UK; none
of these exposures are in default, and Nationwide has not incurred
any impairment on these assets in the period.
Lending risk - Treasury assets (continued)
Country exposures Cash Government Mortgage Covered Supra-national Loans Other Other Total
bonds backed bonds bonds to banks corporate assets
securities
30 September GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
2017
------------------ ---- ---------- ----------- ------- -------------- --------- ---------- ------- -----
Austria - 67 - - - - - - 67
Belgium - 45 - - - - - - 45
Finland - 270 - 25 - - - - 295
France - - - 32 - - - 45 77
Germany - 395 - - - 61 - 76 532
Ireland - - - - - 7 - - 7
Netherlands - 250 308 - - - - - 558
Total Eurozone - 1,027 308 57 - 68 - 121 1,581
------------------ ---- ---------- ----------- ------- -------------- --------- ---------- ------- -----
USA - 408 - - - 182 - 106 696
Rest of world
(note i) - - - 479 547 201 - - 1,227
------------------ ---- ---------- ----------- ------- -------------- --------- ---------- ------- -----
Total - 1,435 308 536 547 451 - 227 3,504
------------------ ---- ---------- ----------- ------- -------------- --------- ---------- ------- -----
Country exposures Cash Government Mortgage Covered Supra-national Loans Other Other Total
bonds backed bonds bonds to banks corporate assets
securities (note
ii)
4 April 2017 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ----- ---------- ----------- ------- -------------- ---------- ---------- ------- -----
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
------------------ ----- ---------- ----------- ------- -------------- ---------- ---------- ------- -----
Notes:
i. Rest of world exposure is to Australia, Canada, Denmark, Norway, Sweden and Switzerland.
ii. Other corporate exposures were held via a European
commercial loan facility reported as part of loans and advances to
customers, which has now been sold.
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. The fair value of derivative assets at 30
September 2017 was GBP5.1 billion (4 April 2017: GBP5.0
billion).
To comply with EU regulatory requirements, Nationwide has
indirect clearing arrangements with a central counterparty (CCP)
which it uses to clear standardised derivatives. Details of the
market standard approach adopted for derivative transactions are
provided in the Annual Report and Accounts 2017.
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.
Netting arrangements can be applied to outstanding transactions
with the same counterparty and settled net following a default or
any other predetermined event. Under CSA arrangements, netting
benefits of GBP1.9 billion (4 April 2017: GBP2.2 billion) were
available and GBP3.0 billion of collateral (4 April 2017: GBP2.8
billion) was held. Only cash is held as collateral. The following
table shows the exposure to counterparty credit risk for derivative
contracts after netting benefits and collateral.
Derivative credit exposure 30 September 2017 4 April 2017
Counterparty credit quality AA A BBB Total AA A BBB Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- ------- ------- ---- ------- ------- ------- ----- -------
Gross positive fair value
of contracts 2,041 3,125 - 5,166 2,077 2,600 390 5,067
Amounts offset - (100) - (100) - (24) - (24)
---------------------------- ------- ------- ---- ------- ------- ------- ----- -------
Net amounts reported
on the balance sheet 2,041 3,025 - 5,066 2,077 2,576 390 5,043
Netting benefits (583) (1,286) - (1,869) (797) (1,030) (389) (2,216)
---------------------------- ------- ------- ---- ------- ------- ------- ----- -------
Net current credit exposure 1,458 1,739 - 3,197 1,280 1,546 1 2,827
Collateral (1,385) (1,662) - (3,047) (1,261) (1,537) (1) (2,799)
---------------------------- ------- ------- ---- ------- ------- ------- ----- -------
Net derivative credit
exposure 73 77 - 150 19 9 - 28
---------------------------- ------- ------- ---- ------- ------- ------- ----- -------
Financial risk
Financial risk is the risk of Nationwide having inadequate
earnings, cash flow or capital to meet current or future
requirements and expectations. Financial risk comprises:
-- Liquidity and funding risk
-- Solvency risk
-- Pension risk
-- Market risk
-- Earnings risk.
Information on Nationwide's exposure to liquidity and funding
risk, solvency risk, pension risk and earnings risk, including
developments in the period, is provided in the subsequent sections
of this report. Nationwide's exposure to market risk has not
changed significantly since the financial year end; further
information is available in the Annual Report and Accounts
2017.
Liquidity and funding risk
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 a stable and
diverse funding base 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
period.
Nationwide monitors its position relative to internal risk
appetite and the regulatory short term liquidity stress metric, the
Liquidity Coverage Ratio (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 30 September 2017 was 125.2% (4 April 2017:
124.0%), which reflects its strategy of maintaining a LCR above
100%.
Nationwide also monitors its position against the future longer
term regulatory funding metric, the Net Stable Funding Ratio
(NSFR). Based on current interpretations of regulatory requirements
and guidance, the NSFR at 30 September 2017 was 131.5%
(4 April 2017: 132.6%) which exceeds the expected 100% minimum
future requirement.
Further details of Nationwide's policies for the management of
liquidity and funding risk are contained within the Annual Report
and Accounts 2017.
Funding profile
Assets 30 September 4 April Liabilities 30 September 4 April
2017 2017 2017 2017
GBPbn GBPbn GBPbn GBPbn
--------------------------- ------------ ------- -------------------- ------------ -------
Retail mortgages 175.1 171.1 Retail funding 146.9 146.9
Treasury assets (including
liquidity portfolio) 29.1 25.4 Wholesale funding 60.0 55.5
Other retail lending 3.7 3.7 Capital and reserves 16.3 14.3
Commercial/Other
lending 11.8 12.6 Other liabilities 4.3 5.0
Other assets 7.8 8.9
--------------------------- ------------ ------- -------------------- ------------ -------
Total 227.5 221.7 Total 227.5 221.7
--------------------------- ------------ ------- -------------------- ------------ -------
Nationwide's loan to deposit ratio(1) at 30 September 2017 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).
Financial risk - 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.
Wholesale funding has increased by GBP4.5 billion to GBP60.0
billion. This is due to GBP3.5 billion of drawings from the Bank of
England's Term Funding Scheme (TFS) during the period, to support
core activities 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 30 September 2017 (4 April 2017: 27.1%).
The table below sets out an analysis by currency of Nationwide's
wholesale funding.
Wholesale funding 30 September 2017 4 April 2017
by currency
GBP EUR USD Other Total % of GBP EUR USD Other Total % of
GBPbn GBPbn GBPbn GBPbn GBPbn total GBPbn GBPbn GBPbn GBPbn GBPbn total
------------------------ ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Repos 1.1 0.2 0.3 - 1.6 3 - - - - - -
Deposits (note i) 6.6 1.4 0.3 - 8.3 14 7.7 1.4 0.1 - 9.2 16
Certificates of deposit 5.1 - 0.1 - 5.2 9 5.3 - - - 5.3 10
Commercial paper - - 1.5 - 1.5 2 - - 1.8 - 1.8 3
Covered bonds 2.5 12.7 - 0.2 15.4 26 3.3 11.4 - 0.2 14.9 27
Medium term notes 3.4 7.1 3.3 0.7 14.5 24 3.1 6.2 3.6 0.8 13.7 25
Securitisations 0.8 1.3 1.0 - 3.1 5 0.9 1.2 1.4 - 3.5 6
TFS 9.5 - - - 9.5 16 6.0 - - - 6.0 11
Other - 0.9 - - 0.9 1 0.3 0.8 - - 1.1 2
------------------------ ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total 29.0 23.6 6.5 0.9 60.0 100 26.6 21.0 6.9 1.0 55.5 100
------------------------ ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Note:
i. Includes protected equity bond (PEB) balances of GBP0.2
billion (4 April 2017: GBP0.8 billion).
To mitigate cross-currency refinancing risk, Nationwide ensures
it holds liquidity in each currency to cover at least the next ten
business days of wholesale funding maturities.
The residual maturity of the wholesale funding book, on a
contractual maturity basis, is set out below.
Wholesale Not more Over one Over three Over six Subtotal Over one Over two Total
funding than one month months months less than year but years
- residual month but not but not but not one year not more
maturity more than more than more than than two
three six months one year years
months
30 September GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
2017
---------------- ------------ ------------ ------------ ------------- ------------- ------------ ------------ --------------
Repos 1.6 - - - 1.6 - - 1.6
Deposits (note
i) 5.5 0.9 1.4 0.5 8.3 - - 8.3
Certificates
of deposit 0.9 1.7 1.8 0.8 5.2 - - 5.2
Commercial
paper 0.6 0.3 0.6 - 1.5 - - 1.5
Covered bonds 0.1 - - 0.8 0.9 1.6 12.9 15.4
Medium term
notes - - 1.2 0.2 1.4 3.0 10.1 14.5
Securitisations 0.1 - 0.2 0.4 0.7 0.7 1.7 3.1
TFS - - - - - - 9.5 9.5
Other - - - - - - 0.9 0.9
---------------- ------------ ------------ ------------ ------------- ------------- ------------ ------------ --------------
Total 8.8 2.9 5.2 2.7 19.6 5.3 35.1 60.0
---------------- ------------ ------------ ------------ ------------- ------------- ------------ ------------ --------------
Of which secured 1.8 - 0.2 1.2 3.2 2.3 24.9 30.4
Of which
unsecured 7.0 2.9 5.0 1.5 16.4 3.0 10.2 29.6
---------------- ------------ ------------ ------------ ------------- ------------- ------------ ------------ --------------
% of total 14.7% 4.8% 8.7% 4.5% 32.7% 8.8% 58.5% 100.0%
---------------- ------------ ------------ ------------ ------------- ------------- ------------ ------------ --------------
Financial risk - Liquidity and funding risk (continued)
Wholesale funding Not more Over one Over three Over six Subtotal Over one Over two Total
- residual than one month months months less than year but years
maturity month but not but not but not one year not more
more than more than more than than two
three six months one years
months year
4 April 2017 GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
------------------- --------- ---------- ----------- ---------- ---------- --------- -------- --------
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. Includes protected equity bond (PEB) balances of GBP0.2
billion (4 April 2017: GBP0.8 billion).
At 30 September 2017 cash, government bonds and supranational
bonds included in the liquid asset buffer, including FLS treasury
bills, represented 121% (4 April 2017: 129%) of wholesale funding
maturing in less than one year, assuming no rollovers.
Total liquidity
Nationwide ensures it has sufficient liquid assets, both in
terms of amount and quality, to meet daily cash flow needs as well
as stressed requirements driven by internal and regulatory
liquidity assessments.
The table below sets out the sterling equivalent fair value of
the liquidity portfolio, categorised by issuing currency. It
includes off-balance sheet liquidity (FLS treasury bills) and
excludes encumbered assets.
Liquid assets 30 September 2017 4 April 2017
GBP EUR USD Total GBP EUR USD Total
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
----------------------------- ----- ----- ----- ----- ----- ----- ----- -----
Cash and reserves at central
banks 15.3 - - 15.3 11.8 1.2 - 13.0
Government bonds 7.1 0.6 0.2 7.9 10.0 0.5 0.7 11.2
Supranational bonds 0.3 - 0.3 0.6 0.2 - 0.3 0.5
Covered bonds 0.3 0.6 - 0.9 0.4 0.5 - 0.9
RMBS 1.9 0.3 - 2.2 0.5 0.4 - 0.9
Asset-backed securities - 0.1 0.1 0.2 0.3 - - 0.3
Other securities 0.3 0.1 - 0.4 0.3 0.2 0.2 0.7
Total 25.2 1.7 0.6 27.5 23.5 2.8 1.2 27.5
----------------------------- ----- ----- ----- ----- ----- ----- ----- -----
Government bonds in the table above include GBP3.0 billion of
off-balance sheet FLS treasury bills. The average combined month
end balance of cash and reserves at central banks, government and
supranational bonds during the period was GBP26.6 billion
(4 April 2017: GBP29.5 billion).
Financial risk - Liquidity and funding risk (continued)
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 Due less Due Due Due Due Due between Due between Due Total
maturity than between between between between one and two and after
(note i) one month one and three six and nine two five more
(note three and six nine and twelve years years than
ii) months months months months five
years
30 September GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
2017
------------- ---------- ---------- ---------- ---------- ---------- ----------- ----------- ------- --------
Financial
assets
Cash 15,302 - - - - - - - 15,302
Loans and
advances
to banks 2,663 2 - - - - - 344 3,009
Investment
securities 2 80 68 124 - 326 2,490 7,698 10,788
Loans and
advances
to customers 2,935 1,341 1,957 1,920 1,887 7,471 22,640 150,515 190,666
Derivative
financial
instruments 6 31 195 31 4 629 2,348 1,822 5,066
Other
financial
assets
(note iii) 1 - - (4) (5) (21) 23 238 232
Total
financial
assets 20,909 1,454 2,220 2,071 1,886 8,405 27,501 160,617 225,063
------------- ---------- ---------- ---------- ---------- ---------- ----------- ----------- ------- --------
Financial
liabilities
Shares 114,761 2,722 4,483 4,642 4,213 10,368 3,898 1,297 146,384
Deposits from
banks 3,209 49 19 2 32 - 9,455 - 12,766
------------- ---------- ---------- ---------- ---------- ---------- ----------- ----------- ------- --------
Of which repo 467 - - - - - - - 467
Of which TFS - - - - - - 9,455 - 9,455
------------- ---------- ---------- ---------- ---------- ---------- ----------- ----------- ------- --------
Other
deposits 3,982 882 1,403 152 288 19 - - 6,726
------------- ---------- ---------- ---------- ---------- ---------- ----------- ----------- ------- --------
Of which repo 1,177 - - - - - - - 1,177
------------- ---------- ---------- ---------- ---------- ---------- ----------- ----------- ------- --------
Due to
customers 548 - - - - - - - 548
Secured
funding -
ABS and
covered
bonds 147 9 190 912 269 2,344 8,156 7,280 19,307
Senior
unsecured
funding 1,548 2,038 3,564 702 280 2,991 5,330 4,731 21,184
Derivative
financial
instruments 108 20 27 33 23 61 304 1,973 2,549
Other
financial
liabilities
(note iii) - - - (1) - (2) (22) - (25)
Subordinated
liabilities - - 111 - - - 713 2,909 3,733
Subscribed
capital
(note iv) - - - - - - - 265 265
------------- ---------- ---------- ---------- ---------- ---------- ----------- ----------- ------- --------
Total
financial
liabilities 124,303 5,720 9,797 6,442 5,105 15,781 27,834 18,455 213,437
------------- ---------- ---------- ---------- ---------- ---------- ----------- ----------- ------- --------
Off-balance
sheet
commitments
(note
v) 13,117 - - - - - - - 13,117
------------- ---------- ---------- ---------- ---------- ---------- ----------- ----------- ------- --------
Net liquidity
difference (116,511) (4,266) (7,577) (4,371) (3,219) (7,376) (333) 142,162 (1,491)
------------- ---------- ---------- ---------- ---------- ---------- ----------- ----------- ------- --------
Cumulative
liquidity
difference (116,511) (120,777) (128,354) (132,725) (135,944) (143,320) (143,653) (1,491) -
------------- ---------- ---------- ---------- ---------- ---------- ----------- ----------- ------- --------
Financial risk - Liquidity and funding risk (continued)
Residual Due less Due Due Due Due between Due between Due between Due Total
maturity than between between between nine one and two and after
(note i) one month one and three six and and twelve two five more
(note three and six nine months years years than
ii) months months months five
years
4 April 2017 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------- -------
Financial
assets
Cash 13,017 - - - - - - - 13,017
Loans and
advances
to banks 2,226 - - - - - - 361 2,587
Investment
securities 40 13 116 66 57 216 2,002 7,254 9,764
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 iii) 36 22 15 28 10 60 265 384 820
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
Other
financial
liabilities
(note iii) - - (2) - 1 8 1 - 8
Subordinated
liabilities - - - - 103 - 700 2,102 2,905
Subscribed
capital
(note iv) - - - - - - - 276 276
------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------- -------
Total
financial
liabilities 120,874 5,364 12,624 6,160 6,533 13,198 26,246 17,822 208,821
------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------- -------
Off-balance
sheet
commitments
(note
v) 15,784 - - - - - - - 15,784
------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------- -------
Net liquidity
difference (118,438) (3,926) (10,426) (4,159) (4,435) (5,339) 395 140,325 (6,003)
------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------- -------
Cumulative
liquidity
difference (118,438) (122,364) (132,790) (136,949) (141,384) (146,723) (146,328) (6,003) -
------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------- -------
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. Other financial assets and liabilities include the fair
value adjustments for portfolio hedged risk and investments in
equity shares.
iv. The principal amount for undated subscribed capital is
included within the due more than five years column.
v. 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.
Asset encumbrance
Asset encumbrance arises from collateral pledged against secured
funding and other collateralised obligations. The majority of asset
encumbrance within Nationwide arises from the use of prime mortgage
pools to collateralise the Covered Bond and Silverstone
asset-backed funding programmes and from participation in the TFS
and FLS. Encumbrance also results from repurchase transactions,
voluntary excess collateral balances, participation in payment
schemes and collateral posted for derivative margin requirements.
Assets that have been used for any of these purposes cannot be
utilised for other purposes and are therefore classified as
encumbered.
At 30 September 2017, Nationwide had GBP34,142 million (4 April
2017: GBP33,232 million) of externally encumbered assets with
counterparties other than central banks. Nationwide also had
GBP35,465 million (4 April 2017: GBP34,335 million) of
pre-positioned and encumbered assets held at central banks and
GBP149,268 million (4 April 2017: GBP144,690 million) of assets
neither encumbered nor pre-positioned but capable of being
encumbered. Further details of Nationwide's policies for asset
encumbrance are contained within the Annual Report and Accounts
2017.
Financial risk - Liquidity and funding risk (continued)
External credit ratings
The Group's long term and short term credit ratings are shown in
the table below.
Credit ratings Long term Short term Tier 2 Date of last rating Outlook
action / confirmation
----------------- --------- ---------- ------ ---------------------- -------
Standard & Poor's A A-1 BBB November 2017 Stable
Moody's Aa3 P-1 Baa1 August 2017 Stable
Fitch A+ F1 A- February 2017 Stable
----------------- --------- ---------- ------ ---------------------- -------
In August 2017, Standard and Poor's affirmed Nationwide's A/A-1
long and short term ratings, with a negative outlook reflecting its
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. 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.
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. Further
information on solvency risk and how it is managed can be found in
the Annual Report and Accounts 2017 and the Annual Pillar 3
Disclosure 2017 at nationwide.co.uk
Capital position
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.
Key capital ratios 30 September 4 April 2017
2017
----------------------------------- ------------- -------------
Solvency % %
Common Equity Tier 1 (CET1) ratio 29.6 25.4
Total Tier 1 ratio 32.6 28.4
Total regulatory capital ratio 42.7 36.1
----------------------------------- ------------- -------------
Leverage GBPm GBPm
UK leverage exposure (note i) 220,614 215,894
CRR leverage exposure (note ii) 236,002 228,428
Tier 1 capital 10,750 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.
Capital and leverage ratios have remained well in excess of
regulatory requirements with a Common Equity Tier 1 (CET1) ratio of
29.6% (4 April 2017: 25.4%) and a UK leverage ratio of 4.9% (4
April 2017: 4.4%).
In September 2017, the Society issued an additional five million
of GBP1 core capital deferred shares (CCDS), as part of our
strategy to maintain broad access to capital markets. This issuance
supports the continued relevance of this instrument in the context
of our strategic capital management and enhances its liquidity.
Issuing from a position of strength, we remain well in excess of
regulatory capital requirements. These CCDS form a single series
together with the CCDS previously issued in December 2013. Further
information on CCDS can be found in note 19. Detailed information
on the key features of CCDS and other capital instruments can be
found within the Interim Pillar 3 Disclosure 2017 at
nationwide.co.uk
The CET1 ratio has improved following an increase in CET1
capital resources and a reduction in RWAs. CET1 capital resources
increased by GBP1.2 billion as a result of the issuance of CCDS,
with net proceeds of GBP0.8 billion, and profit after tax for the
period of GBP0.5 billion. This was offset by a small increase in
regulatory deductions. RWAs reduced by GBP0.6 billion primarily due
to the continued run-off of the commercial book.
Financial risk - Solvency risk (continued)
The total regulatory capital ratio has increased to 42.7% (4
April 2017: 36.1%), due to the CET1 capital increases and the
issuance of EUR1 billion of qualifying Tier 2 subordinated debt in
line with plans to meet the pending Minimum Requirement for Own
Funds and Eligible Liabilities (MREL).
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.
The UK leverage ratio of 4.9% at 30 September 2017 (4 April
2017: 4.4%) has increased due to profits in the period and an
increase in Tier 1 capital resources, following the issuance of
CCDS.
The CRR leverage ratio is calculated using the same definition
of Tier 1 for the capital amount and the Delegated Act definition
of the exposure measure. The CRR leverage ratio also increased to
4.6% (4 April 2017: 4.2%).
Further details on the leverage exposure can be found in the
Group's Interim Pillar 3 Disclosure 2017 at nationwide.co.uk
Nationwide's latest Pillar 2A Individual Capital Guidance (ICG)
was received in August 2017. It equates to circa GBP2.3 billion, of
which at least circa GBP1.3 billion must be met by CET1 capital,
and was broadly in line with the previous ICG. This amount is
equivalent to 7.0% of RWAs as at 30 September 2017 (4 April 2017:
6.6%), reflecting the low average risk weight, given that
approximately 74% (4 April 2017: 75%) of total assets are in the
form of secured residential mortgages, of which 81% (4 April 2017:
81%) are prime.
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 30 September
2017 4 April 2017
GBPm GBPm
---------------------------------------------- ------------- -------------
General reserve 9,805 9,316
Core capital deferred shares (CCDS) 1,325 531
Revaluation reserve 67 67
Available for sale reserve 29 44
Regulatory adjustments and deductions:
------------- -------------
Foreseeable distributions (note i) (68) (43)
Prudent valuation adjustment (note ii) (27) (23)
Own credit and debit valuation adjustments (1) -
(note iii)
Intangible assets (note iv) (1,250) (1,174)
Goodwill (note iv) (12) (12)
Excess of regulatory expected losses
over impairment provisions (note v) (110) (151)
------------- -------------
Total regulatory adjustments and deductions (1,468) (1,403)
Common Equity Tier 1 capital 9,758 8,555
---------------------------------------------- ------------- -------------
Additional Tier 1 capital securities
(AT1) 992 992
Total Tier 1 capital 10,750 9,547
---------------------------------------------- ------------- -------------
Dated subordinated debt (note vi) 3,330 2,555
Collectively assessed impairment allowances 24 27
Tier 2 capital 3,354 2,582
---------------------------------------------- ------------- -------------
Total regulatory capital 14,104 12,129
---------------------------------------------- ------------- -------------
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.
Financial risk - Solvency risk (continued)
Tier 2 capital has increased, in line with plans to meet pending
MREL requirements, following the issuance of EUR1 billion of
qualifying Tier 2 subordinated debt in July 2017. 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. 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, from
January 2020. At 30 September 2017 total MREL resources are equal
to circa 6.6% of UK leverage ratio exposure (4 April 2017: 5.9% of
UK leverage ratio exposure). Nationwide has a strong foundation
from which to meet MREL requirements by 2020 through issuance of
Tier 2 capital, or, when it becomes available through legislative
changes, a senior non-preferred debt instrument.
Detailed information on the key features of the Group's other
capital instruments can be found within the Group's Interim Pillar
3 Disclosure at nationwide.co.uk
Risk weighted assets
The table below shows the breakdown of risk weighted assets
(RWAs) by risk type:
Risk Weighted Assets 30 September 4 April 2017
2017
GBPm GBPm
------------------------------------ ------------- -------------
Credit risk:
Retail mortgages 13,743 13,863
Retail unsecured lending 5,740 5,641
Commercial loans 5,028 5,636
Treasury 639 849
Counterparty credit risk (note i) 1,515 1,221
Other (note ii) 1,469 1,566
------------------------------------ ------------- -------------
Total credit risk 28,134 28,776
Operational risk (note iii) 4,865 4,865
Market risk (note iv) - -
------------------------------------ ------------- -------------
Total risk weighted assets 32,999 33,641
------------------------------------ ------------- -------------
Notes:
i. Relates to derivative financial instruments and repurchase agreements.
ii. Relates to fixed and other assets, including investments in equity shares.
iii. Operational risk RWAs have remained the same as the
calculation is carried out annually as at 4 April.
iv. Market risk has been set to zero as permitted by the CRR, as
the exposure is below the threshold of 2% of own funds.
RWAs have reduced by GBP642 million since 4 April 2017 to
GBP32,999 million. Commercial RWAs continue to decrease, driven by
the run-off of the commercial book. Treasury RWAs are lower due to
a reduction in securitisation exposures. These decreases were
offset by higher RWAs for counterparty credit risk due to an
increase in exposures through balance sheet hedging activities.
Details on how RWAs are calculated can be found in the Group's
annual Pillar 3 Disclosure 2017 at nationwide.co.uk
Regulatory developments
Whilst there are a number of areas where potential 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 will be 4% by January 2019. Nationwide
is confident it is in a strong position to meet the minimum
requirements.
The Basel Committee continues to reaffirm its commitment to
finalising reforms to the Basel III framework, including the risk
weighted assets framework, the leverage ratio framework and the
introduction of an output floor (which will prevent IRB risk
weights falling below a certain level). The PRA's revised
expectations for IRB models for residential mortgages will be
effective in 2020. Whilst these amendments are expected to result
in an increase in RWAs and therefore a reduction in the CET1 ratio,
they are not expected to result in a material increase in
Nationwide's overall capital requirements.
During the summer of 2017, the major UK banks and building
societies, including Nationwide, took part in the third of the
PRA's annual concurrent stress tests; the results are expected on
28 November 2017.
Financial risk (continued)
Pension risk
Nationwide has funding obligations to defined benefit pension
schemes, the most significant being the Nationwide Pension Fund
(the Fund). Further information is set out in the Annual Report and
Accounts 2017.
The retirement benefit obligations which appear within
liabilities on the balance sheet, have decreased from GBP423
million to
GBP262 million. For further information, refer to note 18.
The Fund's accounting deficit has reduced since 4 April 2017,
largely due to employer contributions and rises in long-term
interest rates. However, the income statement charge for the Fund's
current service cost increased to GBP48m (H1 2016/17: GBP30m) due
to falling corporate bond yields between April 2016 and April 2017
which are used in the calculation of the charge for the year.
Nationwide has undertaken activities which are expected to have
a positive long-term impact on the volatility of the Fund's
deficit. During the period, the Fund progressed its liability
hedging strategy and transacted approximately GBP140 million of
interest rate swaps, along with an additional GBP130 million
investment in index-linked and conventional gilts, to further
reduce its exposure to inflation and interest rate risk.
2016 triennial valuation
During the period, the 31 March 2016 triennial valuation of the
Fund was finalised, revealing an increased funding deficit of
GBP605 million (31 March 2013: GBP580 million). The increase in
the funding deficit was mainly driven by an increase in liabilities
due to falling bond yields over the three-year period to 31 March
2016, partially offset by employer contributions, positive asset
performance and the updating of mortality assumptions to reflect
recent data. The methods for deriving the main financial
assumptions (for example, the discount rate and long term
inflation) remain unchanged from the 2013 triennial valuation.
As a result, Nationwide has agreed a deficit recovery plan with
the Trustee of the Fund, consisting of GBP86 million paid during
the period (H1 2016/17: GBP49 million), with annual deficit
recovery plan payments of GBP61 million for each of the next four
years, although in certain circumstances the GBP61 million payments
may not be payable.
Deficit recovery contributions are in addition to ongoing
contributions to meeting the costs of future benefit accrual. The
next triennial valuation has an effective date of 31 March 2019 and
is expected to be completed in 2020/21.
Earnings risk
Nationwide ensures that it can generate sustainable profits by
focusing on recurrent sources of income that provide value which is
commensurate with the risks taken. Earnings risk is defined as the
risk that sources of income are unable to continue to add the
expected value due to changes in market, regulatory or other
environmental factors. This risk is managed and monitored as part
of ongoing business performance reporting to senior management and
the Board. Further information on the measures used to manage and
mitigate earnings risk is available in the Annual Report and
Accounts 2017.
Given the ongoing ambiguity surrounding what an orderly exit
from the European Union will look like, and wider global political
uncertainty, there is an increased risk of volatility in the
economic markets in which we operate. In addition, there has been
an increase in the level of competition in core mortgage and
savings markets. This economic and market context is expected to
maintain pressure on Nationwide's ability to generate both trading
volumes and margin.
To mitigate against threats to forecast earnings, Nationwide
will continue to regularly monitor and review its financial results
against forecast in order to understand any deviations from
expected performance, and identify any corrective actions required.
This will be combined with continuous monitoring of the external
environment, to add further context to whether Nationwide is likely
to achieve earnings.
Operational risk
Nationwide defines operational risk as the risk of loss
resulting from inadequate or failed internal processes, people and
systems, or from external events. Nationwide's operational risk
profile is informed by risk assessments from across the business,
and by review and challenge by both management and the oversight
functions. Details of the risk profile, environment and outlook are
included in the Annual Report and Accounts 2017.
Ensuring that the increasing expectations of an "always on"
digital operation are met is a key area of focus for Nationwide.
The Society is also committed to make it easier for members to
transact through a range of channels. The scale and pace of change
required to achieve these aims, with the implementation of new
systems and upgrading of infrastructures and processes, alongside
the maintenance of legacy systems, can create delivery challenges.
Such challenges introduce an additional level of operational
complexity and is viewed as a key operational risk.
These challenges have the potential to disrupt Nationwide's
operating environment and negatively impact the service experienced
by customers. Nationwide manages the operational risks of this
through a strong focus on service management, transformation
governance and programme management disciplines. Nationwide
continues to invest in a dedicated Operational Resilience Function
that strives to ensure it meets customer expectations for service
levels associated with both internal and externally sourced IT and
operations.
Cyber threats also continue to evolve in maturity and
sophistication. We actively monitor cyber threats and work closely
with partners to ensure systems continue to be resilient and
customers remain protected from the impact of any attacks. In the
last six months there have been several global, high profile
attacks. Whilst the WannaCry and NotPetya ransomware attacks did
not directly affect Nationwide, they reinforce the need for
continued vigilance. Nationwide's security controls have needed to
keep pace to prevent, detect and respond to any threats or attacks
like these.
The threat posed by cyber-attacks directly impacts the existing
risks associated with external fraud, data loss, data integrity and
availability. Nationwide recognises the negative impact a
successful cyber-attack could have on these and ultimately its
customers. As a result, Nationwide continues to focus significant
effort on discharging its cyber-risk management responsibilities
with ongoing investment in appropriate technology and ensuring that
it's cyber-security framework is designed to manage
cyber-risk effectively.
Conduct and compliance risk
Nationwide defines conduct and compliance risk as the risk of
exercising inappropriate judgements or making 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 members and customers.
There have been no significant changes in the way Nationwide
manages and monitors its conduct and compliance risks nor are any
expected for the remaining six months of the financial year.
Further detail on these risks and how they are managed is available
in the Annual Report and Accounts 2017.
During the period, Nationwide continued to focus on delivering
fair customer outcomes to its members, embedding conduct risk
management, improving frameworks and guidance to support
potentially vulnerable customers, and interpreting and implementing
regulatory obligations.
During the period, the FCA commenced its new Payment Protection
Insurance (PPI) awareness campaign, urging policy holders to make a
decision on whether to make a PPI complaint before the deadline of
29 August 2019. Nationwide continues its programme of activity to
respond to an expected increase in complaints arising from the
campaign, and to address the specific new requirements implemented
by the FCA in response to the Supreme Court ruling on 'Plevin v
Paragon Personal Finance Ltd' ('Plevin'). These requirements apply
to PPI cases where there were high levels of commission that were
not disclosed at the point of sale. Details of PPI redress are
provided in note 16.
The FCA has announced a strategic review of business models in
the retail banking sector. It aims to identify any potential
conduct or competition issues, understand how free-if-in-credit
banking is paid for, understand the impact of changes such as
increased use of digital channels and reduced branch usage on
business models and consider potential consequences for its
consumer protection and competition objectives. An update is
expected in H1 2018/19 explaining the preliminary analysis and
conclusions. Nationwide will continue to engage with the regulator
to better understand the impact, if any, this review will have for
the Society.
Consolidated interim financial statements
Contents
Page
Consolidated income statement 47
Consolidated statement of comprehensive income 48
Consolidated balance sheet 49
Consolidated statement of movements in members' interests
and equity 50
Consolidated cash flow statement 51
Notes to the consolidated interim financial statements 52
Consolidated income statement
(Unaudited)
Notes Half year Half year
to 30 September to 30 September
2017 2016
GBPm GBPm
--------------------------------------------- ----- ---------------- ----------------
Interest receivable and similar income 3 2,347 2,576
Interest expense and similar charges 4 (833) (1,127)
--------------------------------------------- ----- ---------------- ----------------
Net interest income 1,514 1,449
Fee and commission income 214 204
Fee and commission expense (120) (108)
Other operating income 5 31 97
Gains from derivatives and hedge accounting 6 36 77
Total income 1,675 1,719
Administrative expenses 7 (966) (938)
Impairment losses on loans and advances
to customers 8 (59) (32)
Impairment losses on investment securities - (5)
Provisions for liabilities and charges 16 (22) (48)
Profit before tax 628 696
Taxation 9 (157) (194)
--------------------------------------------- ----- ---------------- ----------------
Profit after tax 471 502
--------------------------------------------- ----- ---------------- ----------------
The notes on pages 52 to 71 form an integral part of these
consolidated interim financial statements.
Consolidated statement of comprehensive income
(Unaudited)
Notes Half year Half year
to 30 September to 30 September
2017 2016
GBPm GBPm
----------------------------------------------- ------ ----------------- -----------------
Profit after tax 471 502
Other comprehensive income/(expense):
Items that will not be reclassified
to the income statement
Remeasurements of retirement benefit
obligations:
----------------- -----------------
Retirement benefit remeasurements
before tax 18 97 (552)
Taxation (26) 147
----------------- -----------------
71 (405)
Revaluation of property:
Adjustments to taxation in respect
of prior periods - 3
71 (402)
Items that may subsequently be reclassified
to the income statement
Cash flow hedge reserve:
Fair value movements taken to members'
interests and equity (373) 2,669
Amount transferred to income statement 219 (2,264)
Taxation 40 (95)
----------------- -----------------
6 (114) 310
Available for sale reserve:
----------------- -----------------
Fair value movements taken to members'
interests and equity 27 95
Amount transferred to income statement (47) (112)
Taxation 5 5
----------------- -----------------
(15) (12)
Other comprehensive expense (58) (104)
Total comprehensive income 413 398
----------------------------------------------- ------ ----------------- -----------------
The notes on pages 52 to 71 form an integral part of these
consolidated interim financial statements.
Consolidated balance sheet
(Unaudited)
Notes 30 September 4 April
2017 2017
GBPm GBPm
Assets
Cash 15,302 13,017
Loans and advances to banks 3,009 2,587
Investment securities 10,788 9,764
Derivative financial instruments 5,066 5,043
Fair value adjustment for portfolio hedged
risk 191 746
Loans and advances to customers 10 190,666 187,371
Investments in equity shares 41 67
Intangible assets 1,300 1,230
Property, plant and equipment 841 851
Investment properties 8 8
Accrued income and expenses prepaid 173 191
Deferred tax 67 103
Other assets 76 692
------------------------------------------------ --- ------------- --------
Total assets 227,528 221,670
------------------------------------------------ --- ------------- --------
Liabilities
Shares 146,384 144,542
Deposits from banks 12,766 8,734
Other deposits 6,726 6,459
Due to customers 548 2,376
Fair value adjustment for portfolio hedged
risk (25) 8
Debt securities in issue 40,491 40,339
Derivative financial instruments 2,549 3,182
Other liabilities 728 391
Provisions for liabilities and charges 16 313 387
Accruals and deferred income 311 333
Subordinated liabilities 11 3,733 2,905
Subscribed capital 11 265 276
Deferred tax 66 100
Current tax liabilities 124 82
Retirement benefit obligations 18 262 423
------------------------------------------------ --- ------------- --------
Total liabilities 215,241 210,537
------------------------------------------------ --- ------------- --------
Members' interests and equity
Core capital deferred shares 19 1,325 531
Other equity instruments 20 992 992
General reserve 9,805 9,316
Revaluation reserve 67 67
Cash flow hedge reserve 69 183
Available for sale reserve 29 44
------------------------------------------------ --- ------------- --------
Total members' interests and equity 12,287 11,133
------------------------------------------------ --- ------------- --------
Total members' interests, equity and liabilities 227,528 221,670
----------------------------------------------------- ------------- --------
The notes on pages 52 to 71 form an integral part of these
consolidated interim financial statements.
Consolidated statement of movements in members' interests and
equity
For the period ended 30 September 2017
(Unaudited)
Core capital Other General Revaluation Cash flow Available Total
deferred equity reserve reserve hedge for sale
shares instruments reserve reserve
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ ------------- ------------- --------- ------------ ---------- ---------- -------
At 5 April 2017 531 992 9,316 67 183 44 11,133
------------- ------------- --------- ------------ ---------- ---------- -------
Profit for the
period - - 471 - - - 471
Net remeasurements
of retirement benefit
obligations - - 71 - - - 71
Net movement in
cash flow hedge
reserve - - - - (114) - (114)
Net movement in
available for sale
reserve - - - - - (15) (15)
Total comprehensive
income - - 542 - (114) (15) 413
Issue of core capital
deferred shares 794 - - - - - 794
Distribution to
the holders of
core capital deferred
shares - - (28) - - - (28)
Distribution to
the holders of
Additional Tier
1 capital (note
i) - - (25) - - - (25)
At 30 September
2017 1,325 992 9,805 67 69 29 12,287
------------------------ ------------- ------------- --------- ------------ ---------- ---------- -------
For the period ended 30 September 2016
(Unaudited)
Core capital Other General Revaluation Cash flow Available Total
deferred equity reserve reserve hedge for sale
shares instruments reserve reserve
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ ------------- ------------- --------- ------------ ---------- ---------- -------
At 5 April 2016 531 992 8,921 64 430 (8) 10,930
------------- ------------- --------- ------------ ---------- ---------- -------
Profit for the
period - - 502 - - - 502
Net remeasurements
of retirement benefit
obligations - - (405) - - - (405)
Net revaluation
of property - - - 3 - - 3
Net movement in
cash flow hedge
reserve - - - - 310 - 310
Net movement in
available for sale
reserve - - - - - (12) (12)
Total comprehensive
income - - 97 3 310 (12) 398
Distribution to
the holders of
core capital deferred
shares - - (28) - - - (28)
Distribution to
the holders of
Additional Tier
1 capital (note
i) - - (25) - - - (25)
------------------------ ------------- ------------- --------- ------------ ---------- ---------- -------
At 30 September
2016 531 992 8,965 67 740 (20) 11,275
------------------------ ------------- ------------- --------- ------------ ---------- ---------- -------
Note:
i. The distribution to the holders of Additional Tier 1 capital
is shown net of an associated tax credit of GBP9 million (H1
2016/17: GBP9 million).
The notes on pages 52 to 71 form an integral part of these
consolidated interim financial statements.
Consolidated cash flow statement
(Unaudited)
Notes Half year Half year
to to
30 September 30 September
2017 2016
GBPm GBPm
Cash flows generated from/(used in) operating
activities
Profit before tax 628 696
Adjustments for:
Non-cash items included in profit before
tax 22 179 95
Changes in operating assets and liabilities 22 1,816 610
Interest paid on subordinated liabilities (64) (40)
Interest paid on subscribed capital (7) (11)
Taxation (86) (133)
----------------------------------------------- ------ -------------- --------------
Net cash flows generated from operating
activities 2,466 1,217
Cash flows (used in)/generated from investing
activities
Purchase of investment securities (3,818) (2,336)
Sale and maturity of investment securities 2,633 3,713
Purchase of property, plant and equipment (59) (96)
Sale of property, plant and equipment 5 4
Purchase of intangible assets (184) (139)
Net cash flows (used in)/generated from
investing activities (1,423) 1,146
Cash flows generated from/(used in) financing
activities
Issue of core capital deferred shares 794 -
Distributions paid to the holders of
core capital deferred shares (28) (28)
Distributions paid to the holders of
Additional Tier 1 capital (34) (34)
Issue of debt securities 11,158 15,704
Redemption of debt securities in issue (11,077) (10,825)
Issue of subordinated liabilities 868 949
Net cash flows generated from financing
activities 1,681 5,766
Net increase in cash and cash equivalents 2,724 8,129
Cash and cash equivalents at start of
period 15,243 12,063
----------------------------------------------- ------ -------------- --------------
Cash and cash equivalents at end of period 22 17,967 20,192
----------------------------------------------- ------ -------------- --------------
The notes on pages 52 to 71 form an integral part of these
consolidated interim financial statements.
Notes to the consolidated interim financial statements
1 General information and reporting period
Nationwide Building Society ('the Society') and its subsidiaries
(together, 'the Group') provide financial services to retail and
commercial customers within the United Kingdom.
Nationwide is a building society incorporated and domiciled in
the United Kingdom. The address of its registered office is
Nationwide Building Society, Nationwide House, Pipers Way, Swindon,
Wiltshire SN38 1NW.
There were no material changes in the composition of the Group
in the half year to 30 September 2017.
These condensed consolidated interim financial statements
('consolidated interim financial statements') have been prepared as
at 30 September 2017 and show the financial performance for the
period from, and including, 5 April 2017 to this date. They were
approved for issue on 16 November 2017.
These consolidated interim financial statements have been
reviewed, not audited.
2 Basis of preparation
The consolidated interim financial statements of the Group for
the half year ended 30 September 2017 have been prepared in
accordance with the Disclosure and Transparency Rules of the
Financial Conduct Authority and with International Accounting
Standard (IAS) 34 'Interim Financial Reporting'. The consolidated
interim financial statements should be read in conjunction with the
Group's annual financial statements for the year ended 4 April
2017, which were prepared in accordance with International
Financial Reporting Standards (IFRSs) as adopted by the EU.
Terminology used in these consolidated interim financial
statements is consistent with that used in the Annual Report and
Accounts 2017, where a full glossary of terms can be found.
Copies of the Annual Report and Accounts 2017 are available on
the Group's website at nationwide.co.uk
Accounting policies
The accounting policies adopted by the Group in the preparation
of these consolidated interim financial statements and those which
the Group currently expects to adopt in the Annual Report and
Accounts 2018 are consistent with those disclosed in the Annual
Report and Accounts 2017, except for an update to the segmental
reporting policy.
In line with 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 chief operating
decision maker now manages the business. The updated policy
states:
-- The Group's Executive Committee is responsible for allocating
resources and assessing the performance of the business and is
therefore identified as the chief operating decision maker.
-- The Group has determined that it has one reportable segment
as the Executive Committee reviews performance and makes decisions
based on the Group as whole. No segmental analysis is required on
geographical lines as substantially all of the Group's activities
are in the United Kingdom. As a result, no additional segmental
disclosure is provided.
Standards and amendments applied during the half year to 30
September 2017
There were no new standards applied during the half year to 30
September 2017.
A number of amendments and improvements to accounting standards
have been issued by the IASB with an effective date of 1 January
2017. Those relevant to these consolidated interim financial
statements, being minor amendments to IAS 12 'Income Taxes',
together with certain of the annual improvements to the IFRSs
2014-2016 cycle, were adopted with no significant impact for the
Group.
Future accounting developments
An overview of pronouncements that will be relevant to the Group
in future periods was provided in the Annual Report and Accounts
2017. Of these pronouncements the most significant is IFRS 9
'Financial Instruments', an update on which is included below.
Notes to the consolidated interim financial statements
(continued)
2 Basis of preparation (continued)
IFRS 9 'Financial Instruments'
IFRS 9 will be implemented in the financial statements for year
ending 4 April 2019 and will replace IAS 39 'Financial Instruments:
Recognition and Measurement'. The requirements are outlined in the
Annual Report and Accounts 2017.
Implementation update
In the first half of the year, we have completed the development
of our core models and systems, and commenced a period of dual
running of our IFRS 9 processes in advance of implementation. In
the second half of the year we will continue to refine our models
and conclude our work in respect of the sensitivity of models to
different economic conditions.
Responsibilities and accountabilities
The Group has an established IFRS 9 implementation programme
with formal governance reporting to the Chief Financial Officer and
Chief Risk Officer. Progress is reported regularly to the Audit
Committee. This includes formal oversight of the new IFRS 9 ECL
calculations ahead of the application of the new accounting policy
from 5 April 2018.
Impact of IFRS 9
It is currently estimated that the CET1 ratio impact of IFRS 9
on transition at 5 April 2018 will be a reduction of between 10 and
40 basis points. The equivalent UK leverage ratio impact is
estimated as a reduction of between 0 and 4 basis points. As a
result, IFRS 9 is not expected to have a significant impact on the
Group's capital position. The impact results primarily from
increased impairment provisions, but also includes the estimated
impact of the classification and measurement requirements of IFRS
9. It includes an offset against regulatory expected losses, and
excludes any transitional arrangements for capital purposes. The
actual impact on transition could be different as a result of
changes in the balance sheet, economic conditions and
forward-looking economic assumptions, as well as ongoing refinement
of models.
The Group does not expect to restate comparatives on the initial
adoption of IFRS 9 but will provide detailed transitional
disclosures.
Judgements in applying accounting policies and critical
accounting estimates
The Group has to make judgements in applying its accounting
policies which affect the amounts recognised in these consolidated
interim financial statements. In addition, estimates and
assumptions are made that could affect the reported amounts of
assets, liabilities, income and expenses. Due to the inherent
uncertainty in making estimates, actual results reported in future
periods may be based upon amounts which differ from those
estimates.
There have been no changes to the areas of significant judgement
and estimate from those disclosed in the Annual Report and Accounts
2017 which comprised:
-- impairment provisions on loans and advances
-- provisions for customer redress
-- retirement benefit obligations (pensions).
Going concern
The Group's business activities and financial position, the
factors likely to affect its future development and performance,
its objectives and policies in managing the financial risks to
which it is exposed, and its capital, funding and liquidity
positions are discussed in the Business and risk report.
In the light of current and anticipated economic conditions, the
directors have assessed the Group's ability to continue as a going
concern. The directors confirm they are satisfied that the Group
has adequate resources to continue in business and that it is
therefore appropriate to adopt the going concern basis in preparing
these consolidated interim financial statements.
Notes to the consolidated interim financial statements
(continued)
3 Interest receivable and similar income
Half year Half year
to to
30 September 30 September
2017 2016
GBPm GBPm
---------------------------------------------- ------------- -------------
On residential mortgages 2,258 2,454
On other loans 361 381
On investment securities 101 262
On other liquid assets 33 27
Net expense on financial instruments hedging
assets (406) (548)
Total 2,347 2,576
---------------------------------------------- ------------- -------------
Included within interest receivable and similar income is
interest income on impaired financial assets of
GBP14 million (H1 2016/17: GBP17 million).
4 Interest expense and similar charges
Half year Half year
to to
30 September 30 September
2017 2016
GBPm GBPm
--------------------------------------------------- ------------- -------------
On shares held by individuals 538 755
On subscribed capital 7 24
On deposits and other borrowings:
Subordinated liabilities
Other 74 54
227 315
On debt securities in issue 354 385
Net income on financial instruments hedging
liabilities (371) (409)
Interest on net defined benefit pension liability
(note 18) 4 3
--------------------------------------------------- ------------- -------------
Total 833 1,127
--------------------------------------------------- ------------- -------------
Interest on deposits and other borrowings includes an expense of
GBP184 million (H1 2016/17: GBP247 million) in relation to the
redemption and maturity of Protected Equity Bond (PEB) deposits
which have returns linked to the performance of specified stock
market indices. The PEBs are economically hedged using
equity-linked derivatives. Net income on financial instruments
hedging liabilities includes income of GBP180 million (H1 2016/17:
GBP235 million) in relation to the associated derivatives. Further
details are included in note 13.
5 Other operating income
Half year Half year
to to
30 September 30 September
2017 2016
GBPm GBPm
---------------------------------- ------------- -------------
Gains on disposal of investments 26 100
Other income/(expense) 5 (3)
Total 31 97
---------------------------------- ------------- -------------
On 28 April 2017, the Group disposed of shares in VocaLink
Holdings Limited, resulting in a gain on disposal of GBP26 million.
On 21 June 2016, the Group disposed of its share in Visa Europe
Limited, resulting in a gain on disposal of GBP100 million.
Other income/(expense) includes rental income, profits or losses
on the sale of property, plant and equipment and increases or
decreases in the valuations of branches and non-specialised
buildings which are not recognised in other comprehensive
income.
Notes to the consolidated interim financial statements
(continued)
6 Gains from derivatives and hedge accounting
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 currently applied or is not currently 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.
Half year Half year
to to
30 September 30 September
2017 2016
Gains from derivatives and hedge accounting GBPm GBPm
-------------------------------------------------- -------------- --------------
Ineffectiveness from fair value hedge accounting
(note i) (32) 58
Ineffectiveness from cash flow hedge accounting
(note ii) 58 5
Net gain from mortgage pipeline (note iii) 22 8
Fair value losses from other derivatives (note
iv) (3) (17)
Foreign exchange retranslation (note v) (9) 23
-------------------------------------------------- -------------- --------------
Total 36 77
-------------------------------------------------- -------------- --------------
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.
The deferral of fair value movements to the cash flow hedge
reserve, and the transfer of amounts from the cash flow hedge
reserve to the income statement, are shown in the consolidated
statement of comprehensive income. The net transfer after taxation
of GBP114 million (H1 2016/17: net deferral after taxation of
GBP310 million) is driven by changes in derivative valuations
caused by movements in interest rates and foreign exchange
rates.
7 Administrative expenses
Half year Half year
to 30 September to 30 September
2017 2016
GBPm GBPm
Employee costs:
Wages, salaries and bonuses 290 289
Social security costs 31 31
Pension costs 86 68
------------------------------------------- ---------------- ----------------
407 388
Other administrative expenses 367 375
774 763
Depreciation, amortisation and impairment 192 175
------------------------------------------- ---------------- ----------------
Total 966 938
------------------------------------------- ---------------- ----------------
Notes to the consolidated interim financial statements
(continued)
8 Impairment losses on loans and advances to customers
The following tables set out impairment losses and reversals
during the period and the closing provision balances which are
deducted from the appropriate asset values in the balance
sheet:
Half year Half year to
to 30 September
30 September 2016
2017 GBPm
GBPm
--------------------------------------------------------------- -------------
Impairment losses/(reversals) for the period
Prime residential 4 1
Specialist residential 8 4
Consumer banking 52 32
Commercial lending (5) (5)
Total 59 32
------------------------------------------------ -------------- -------------
30 September 4 April
2017 2017
GBPm GBPm
------------------------------------------------ -------------- -------------
Impairment provision at the end of the period
Prime residential 37 34
Specialist residential 113 110
Consumer banking 282 269
Commercial lending 23 25
Total 455 438
------------------------------------------------ -------------- -------------
The Group impairment provision of GBP455 million at 30 September
2017 (4 April 2017: GBP438 million) comprises individual provisions
of GBP42 million (4 April 2017: GBP45 million) and collective
provisions of GBP413 million (4 April 2017: GBP393 million).
Further credit risk information on loans and advances to customers
is included in the 'Lending risk' section of the Business and risk
report.
9 Taxation
Half year Half year
to to
30 September 30 September
2017 2016
Tax charge in the income statement GBPm GBPm
------------------------------------------ -------------- --------------
Current tax:
UK corporation tax 150 223
------------------------------------------ -------------- --------------
Total current tax 150 223
Deferred tax:
Current period charge/(credit) 7 (30)
Adjustments in respect of prior periods - 1
Total deferred tax 7 (29)
------------------------------------------ -------------- --------------
Tax charge 157 194
------------------------------------------ -------------- --------------
The actual tax charge differs from the theoretical amount that
would arise using the standard rate of corporation tax in the UK as
follows:
Half year Half year
to to
30 September 30 September
2017 2016
Reconciliation of tax charge GBPm GBPm
------------------------------------------- -------------- --------------
Profit before tax 628 696
------------------------------------------- -------------- --------------
Tax calculated at a tax rate of 19% (2016
20%) 119 139
Banking surcharge 33 40
Expenses not deductible for tax purposes 5 14
Adjustments in respect of prior periods - 1
Tax charge 157 194
------------------------------------------- -------------- --------------
The Finance (No. 2) Act 2015 introduced a surcharge of 8% on
banking profits from 1 January 2016 and reduced the corporation tax
rate from 20% to 19% with effect from 1 April 2017. The Finance Act
2016 was enacted on 15 September 2016 and reduces the corporation
tax rate from 19% to 17% from 1 April 2020.
Notes to the consolidated interim financial statements
(continued)
10 Loans and advances to customers
30 September 4 April
2017 2017
GBPm GBPm
Prime residential mortgages 142,101 137,970
Specialist residential mortgages 33,011 33,149
Consumer banking 3,729 3,680
Commercial lending 10,577 11,185
Other lending 76 17
189,494 186,001
Fair value adjustment for micro hedged risk 1,172 1,370
Total 190,666 187,371
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.
Mortgages pledged and the nominal values of the notes in issue
are as follows:
Mortgages pledged to asset backed
funding programmes
Mortgages
pledged Notes in issue
Held by Held by the Group Total notes
third parties in
issue
Drawn Undrawn
30 September 2017 GBPm GBPm GBPm GBPm GBPm
Covered bond programme 19,494 15,372 - - 15,372
Securitisation programme 9,577 2,938 - 337 3,275
Whole mortgage loan pools 18,932 - 16,246 2,686 18,932
Total 48,003 18,310 16,246 3,023 37,579
4 April 2017
Covered bond programme 19,322 14,927 - - 14,927
Securitisation programme 10,412 3,622 - 448 4,070
Whole mortgage loan pools 16,136 - 13,505 2,631 16,136
Total 45,870 18,549 13,505 3,079 35,133
The securitisation programme notes are issued by Silverstone
Master Issuer plc which is fully consolidated by the Group.
The whole mortgage loan pools are pledged at the BoE under the
FLS and TFS. Notes are not issued when pledging the mortgage loan
pools at the BoE. Instead, the whole loan pool is pledged to the
BoE and drawings are made directly against the eligible collateral,
subject to a haircut. Therefore, values shown under notes in issue
are the whole mortgage loan pool notional balances.
Mortgages pledged include GBP8.7 billion (4 April 2017: GBP9.1
billion) in the covered bond and securitisation programmes that are
in excess of the amount contractually required to support notes in
issue.
Notes to the consolidated interim financial statements
(continued)
10 Loans and advances to customers (continued)
Mortgages pledged are not derecognised from the balance sheet as
the Group has retained substantially all the risks and rewards of
ownership. The Group continues to be exposed to the liquidity risk,
interest rate risk and credit risk of the mortgages. No gain or
loss has been recognised on pledging the mortgages to the
programmes.
Notes in issue which are held by third parties are included
within debt securities in issue.
Notes in issue, held by the Group and drawn are whole mortgage
loan pools securing amounts drawn under the FLS and TFS. At 30
September 2017 the Group had outstanding FLS drawings of GBP3.0
billion (4 April 2017: GBP4.8 billion) and TFS drawings of GBP9.5
billion (4 April 2017: GBP6.0 billion).
Notes in issue, held by the Group and undrawn, are debt
securities issued by the programmes to the Society and mortgage
loan pools that have been pledged to the BoE but not utilised.
In accordance with accounting standards, notes in issue and held
by the Group are not recognised by the Group in its balance
sheet.
The Group established the Nationwide Covered Bond programme in
November 2005. Mortgages pledged provide security for issues of
covered bonds made by the Group. During the period ended 30
September 2017, EUR1.0 billion (GBP0.9 billion sterling equivalent)
of notes were issued, and GBP0.8 billion of notes matured.
The Group established the Silverstone Master Trust
securitisation programme in July 2008. Notes are issued under the
programme and the issuance proceeds are used to purchase, for the
benefit of note holders, a share of the beneficial interest in the
mortgages pledged by the Group. The remaining beneficial interest
in the pledged mortgages of GBP6.7 billion (4 April 2017: GBP7.0
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 period ended 30 September 2017, GBP0.3
billion and $0.5 billion (total GBP0.7 billion sterling equivalent)
of notes matured and no notes were issued.
11 Subordinated liabilities and subscribed capital
30 September 4 April 2017
2017 GBPm
GBPm
Subordinated liabilities
Subordinated notes 3,708 2,871
Fair value hedge accounting adjustments 42 45
Unamortised premiums and issue costs (17) (11)
Total 3,733 2,905
Subscribed capital
Permanent interest bearing shares 222 222
Fair value hedge accounting adjustments 46 57
Unamortised premiums and issue costs (3) (3)
Total 265 276
On 25 July 2017 the Group issued EUR1.0 billion of subordinated
notes and on 1 September 2017 the Group redeemed GBP30 million of
subordinated notes at par.
All of the Group's subordinated notes and permanent interest
bearing shares (PIBS) are unsecured. The Group may, with the prior
consent of the Prudential Regulation Authority (PRA), repay the
PIBS and redeem the subordinated notes early.
The subordinated notes rank pari passu with each other and
behind claims against the Society of all depositors, creditors and
investing members, other than the holders of PIBS, Additional Tier
1 (AT1) capital and core capital deferred shares (CCDS).
The PIBS rank pari passu with each other and the AT1
instruments, behind claims against the Society of the subordinated
noteholders, depositors, creditors and investing members but ahead
of claims by the holders of CCDS.
Notes to the consolidated interim financial statements
(continued)
12 Fair value hierarchy of financial assets and liabilities held
at fair value
IFRS 13 requires an entity to classify assets and liabilities
held at fair value, and those not measured at fair value but for
which the fair value is disclosed, according to a hierarchy that
reflects the significance of observable market inputs in
calculating those fair values. The three levels of the fair value
hierarchy are defined in note 1 of the Annual Report and Accounts
2017.
Further details of those financial assets and liabilities not
measured at fair value are included in note 14.
The following tables show the Group's financial assets and
liabilities that are held at fair value by fair value hierarchy,
balance sheet classification and product type:
Fair values based on
Level 1 Level 2 Level 3 Total
30 September 2017 GBPm GBPm GBPm GBPm
Financial assets
Government and supranational
investments 7,085 - - 7,085
Other debt investment securities 983 1,545 - 2,528
Investment securities (note
i) 8,068 1,545 - 9,613
Investments in equity shares
(note ii) - - 40 40
Interest rate swaps - 1,796 - 1,796
Cross currency interest rate
swaps - 3,182 - 3,182
Forward foreign exchange - 6 - 6
Equity index swaps - - 59 59
Index linked swaps - 23 - 23
Total derivative financial
instruments - 5,007 59 5,066
Financial assets 8,068 6,552 99 14,719
Financial liabilities
Interest rate swaps - (2,353) (5) (2,358)
Cross currency interest rate
swaps - (106) - (106)
Forward foreign exchange - (80) - (80)
Swaptions - (5) - (5)
Total derivative financial
instruments - (2,544) (5) (2,549)
Other deposits - PEBs (note
iii) - - (192) (192)
Other financial liabilities
(note iv) - (9) - (9)
Total financial liabilities - (2,553) (197) (2,750)
Notes to the consolidated interim financial statements
(continued)
12 Fair value hierarchy of financial assets and liabilities held
at fair value (continued)
Fair values based on
Level 1 Level 2 Level 3 Total
4 April 2017 GBPm GBPm GBPm GBPm
Financial assets
Government and supranational
investments 6,897 - - 6,897
Other debt investment securities 931 1,936 - 2,867
Investment securities (note
i) 7,828 1,936 - 9,764
Investments in equity shares
(note ii) - - 66 66
Interest rate swaps - 1,859 - 1,859
Cross currency interest rate
swaps - 2,915 - 2,915
Forward foreign exchange - 16 - 16
Equity index swaps - - 233 233
Index linked swaps - 20 - 20
Total derivative financial
instruments - 4,810 233 5,043
Other financial assets (note
iv) - 7 - 7
Total financial assets 7,828 6,753 299 14,880
Financial liabilities
Interest rate swaps - (3,096) (5) (3,101)
Cross currency interest rate
swaps - (71) - (71)
Forward foreign exchange - (4) - (4)
Forward rate agreements - (1) - (1)
Swaptions - (5) - (5)
Total derivative financial
instruments - (3,177) (5) (3,182)
Other deposits - PEBs (note
iii) - - (810) (810)
Total financial liabilities - (3,177) (815) (3,992)
Notes:
i. Investment securities held at fair value exclude GBP1,175
million (4 April 2017: GBPnil) of held to maturity investment
securities. Further details are included in note 14.
ii. Investments in equity shares exclude GBP1 million (4 April
2017: GBP1 million) of investments in equity shares which are held
at cost.
iii. Other deposits comprise PEBs which are held at fair value
through the income statement. The remaining other deposits are held
at amortised cost and are included in note 14.
iv. Other financial assets and other financial liabilities
represent the fair value of certain mortgage commitments.
The Group's Level 1 portfolio comprises highly rated government
securities for which traded prices are readily available.
Asset valuations for Level 2 investment securities are sourced
from consensus pricing or other observable market prices. None of
the Level 2 assets are valued from models. Level 2 derivative
assets and liabilities are valued from discounted cash flow models
using yield curves based on observable market data.
Further detail on the Level 3 portfolio is provided in note
13.
Transfers between fair value hierarchies
Instruments move between fair value hierarchies primarily due to
increases or decreases in market activity or changes to the
significance of unobservable inputs to their valuation. There were
no significant transfers between the Level 1, Level 2 and Level 3
portfolios during the period.
Notes to the consolidated interim financial statements
(continued)
13 Fair value of financial assets and liabilities held at fair
value - Level 3 portfolio
The main constituents of the Level 3 portfolio are as
follows:
Investments in equity shares
The Level 3 investments in equity shares include investments of
GBP40 million (4 April 2017: GBP66 million) in industry-wide
banking and credit card service operations.
Derivative financial instruments
Level 3 assets and liabilities in this category are primarily
equity linked derivatives with external counterparties which
economically match the investment return payable by the Group to
investors in Protected Equity Bonds (PEBs). The derivatives are
linked to the performance of specified stock market indices and
have been valued by an external third party. Fair value changes are
recognised within gains/losses from derivatives and hedge
accounting. Upon maturity the gain/loss is transferred to interest
expense and similar charges.
Other deposits - PEBs
This category relates to deposit accounts with the potential for
stock market correlated growth linked to the performance of
specified stock market indices. The PEBs liability of GBP192
million (4 April 2017: GBP810 million) is valued at a discount to
reflect the time value of money, overlaid by a fair value
adjustment representing the expected return payable to the
customer. The fair value adjustment has been constructed from the
valuation of the associated derivatives as valued by an external
third party. Fair value changes are recognised within gains/losses
from derivatives and hedge accounting. Upon maturity the gain/loss
is transferred to interest expense and similar charges.
The minimum amount on an undiscounted basis that the Group is
contractually required to pay at maturity for the PEBs is GBP133
million (4 April 2017: GBP621 million). The maximum additional
amount which would also be payable at maturity in respect of
additional investment returns is GBP71 million (4 April 2017:
GBP250 million). The payment of additional investment returns is
dependent upon performance of certain specified stock indices
during the period of the PEBs. As noted above, the Group has
entered into equity linked derivatives with external counterparties
which economically match the investment returns on the PEBs.
Notes to the consolidated interim financial statements
(continued)
13 Fair value of financial assets and liabilities held at fair
value - Level 3 portfolio (continued)
The tables below set out movements in the Level 3 portfolio:
Investments Net derivative Other
in equity financial deposits
Movements in Level 3 portfolio shares instruments PEBs
GBPm GBPm GBPm
At 5 April 2017 66 228 (810)
Gains/(losses) recognised in the income
statement:
Net interest income/(expense) - 180 (184)
(Losses)/gains from derivatives and
hedge accounting - (175) 174
Other operating income 26 - -
Losses recognised in other comprehensive
income:
Fair value movement taken to members'
interests and equity (22) - -
Settlements - (179) 628
Disposals (30) - -
At 30 September 2017 40 54 (192)
At 5 April 2016 125 431 (1,885)
Gains/(losses) recognised in the income
statement:
Net interest income/(expense) - 235 (247)
(Losses)/gains from derivatives and
hedge accounting - (171) 169
Other operating income 100 - -
Losses recognised in other comprehensive
income:
Fair value movement taken to members'
interests and equity (76) - -
Settlements - (233) 830
Acquisitions 25 - -
Disposals (118) - -
At 30 September 2016 56 262 (1,133)
Level 3 portfolio sensitivity analysis of valuations using
unobservable inputs
The fair value of financial instruments is, in certain
circumstances, measured using valuation techniques based on market
prices that are not observable in an active market or on
significant unobservable market inputs.
Reasonable alternative assumptions can be applied for
sensitivity analysis, taking account of the nature of valuation
techniques used, as well as the availability and reliability of
observable proxy and historic data. The following table shows the
sensitivity of the Level 3 fair values to reasonable alternative
assumptions (as set out in the table of significant unobservable
inputs below) and the resultant impact of such changes in fair
value on the income statement or members' interests and equity:
Members' interests
Sensitivity of Level 3 fair values and equity
Fair value Favourable Unfavourable
changes changes
30 September 2017 GBPm GBPm GBPm
Investments in equity shares 40 12 (27)
Net derivative financial instruments
(note i) 54 - -
Other deposits - PEBs (note i) (192) - -
Total (98) 12 (27)
4 April 2017
Investments in equity shares 66 12 (24)
Net derivative financial instruments
(note i) 228 - -
Other deposits - PEBs (note i) (810) - -
Total (516) 12 (24)
Note:
i. Changes in fair values of the equity index swaps included in
net derivative financial instruments will be largely offset by the
change in fair value of the PEBs deposits. Any resultant impact is
deemed by the Group to be insignificant; therefore these
sensitivities have been excluded from the table above.
Notes to the consolidated interim financial statements
(continued)
13 Fair value of financial assets and liabilities held at fair
value - Level 3 portfolio (continued)
Investments in equity shares of GBP40 million (4 April 2017:
GBP66 million) are accounted for as available for sale assets. The
Level 3 portfolio at 30 September 2017 did not include any impaired
assets (4 April 2017: GBPnil) and as such the sensitivity analysis
in the table above does not impact the income statement.
Alternative assumptions are considered for each product and
varied according to the quality of the data and variability of the
underlying market.
The following table discloses the significant unobservable
inputs underlying the above alternative assumptions for assets and
liabilities recognised at fair value and classified as Level 3,
along with the range of values for those significant unobservable
inputs. Where sensitivities are described the inverse relationship
will also generally apply:
Significant unobservable inputs
Weighted
Total Total Significant average
assets liabilities Valuation unobservable Range (note
30 September 2017 GBPm GBPm technique inputs (note ii) iii) Units
In
Investments in Discount
equity shares 40 - rate 10.00 12.00 11.00%
Discounted
cash
flows Share conversion - 100.00 77.76%
Net derivative
financial instruments
(note i) 54 -
Other deposits
- PEBs (note i) - (192)
4 April 2017
Investments in Discount
equity shares 66 - Discounted rate 6.41 7.75 7.08%
cash
flows Share conversion - 100.00 77.76%
Net derivative
financial instruments
(note i) 228 -
Other deposits
- PEBs (note i) - (810)
Notes:
i. Changes in fair values of the equity index swaps included in
net derivative financial instruments will be largely offset by the
change in fair value of the PEBs deposits. Any resultant impact is
deemed by the Group to be insignificant; therefore these
sensitivities have been excluded from the table above.
ii. The range represents the values of the highest and lowest
levels used in the calculation of favourable and unfavourable
changes as presented in the previous table.
iii. Weighted average represents the input values used in
calculating the fair values for the above financial
instruments.
Some of the significant unobservable inputs used in fair value
measurement are interdependent. Where this is the case, a
description of those interrelationships is included below.
Discount rate
The discount rate is used to determine the present value of
future cash flows. The level of the discount rate takes into
account the time value of money, but also the risk or uncertainty
of future cash flows. Typically, the greater the uncertainty, the
higher the discount rate. A higher discount rate leads to a lower
valuation and vice versa.
Share conversion
Where the conversion of a security into an underlying instrument
is subject to underlying security market pricing and contingent
litigation risk, share conversion is factored into the fair value.
The higher the share conversion, the higher the valuation and vice
versa.
Notes to the consolidated interim financial statements
(continued)
14 Fair value of financial assets and liabilities measured at
amortised cost
The following table summarises the carrying value and fair value
of financial assets and liabilities measured at amortised cost on
the Group's balance sheet:
Fair values based on
Carrying Level Level Total fair
value 1 Level 2 3 value
30 September 2017 GBPm GBPm GBPm GBPm GBPm
Financial assets
Loans and advances to banks 3,009 - 3,009 - 3,009
Held to maturity investment
securities (note i) 1,175 - 1,180 - 1,180
Loans and advances to customers:
Residential mortgages 175,112 - - 173,892 173,892
Consumer banking 3,729 - - 3,600 3,600
Commercial lending 11,749 - - 10,362 10,362
Other lending 76 - 68 8 76
Total 194,850 - 4,257 187,862 192,119
Financial liabilities
Shares 146,384 - 146,368 - 146,368
Deposits from banks 12,766 - 12,766 - 12,766
Other deposits (note ii) 6,534 - 6,534 - 6,534
Due to customers 548 - 548 - 548
Debt securities in issue 40,491 15,857 25,520 - 41,377
Subordinated liabilities 3,733 - 3,901 - 3,901
Subscribed capital 265 - 257 - 257
Total 210,721 15,857 195,894 - 211,751
4 April 2017
Financial assets
Loans and advances to
banks 2,587 - 2,587 - 2,587
Loans and advances to
customers:
Residential mortgages 171,119 - - 170,542 170,542
Consumer banking 3,680 - - 3,546 3,546
Commercial lending 12,555 - - 11,284 11,284
Other lending 17 - 5 12 17
Total 189,958 - 2,592 185,384 187,976
Financial liabilities
Shares 144,542 - 144,664 - 144,664
Deposits from banks 8,734 - 8,736 - 8,736
Other deposits (note ii) 5,649 - 5,651 - 5,651
Due to customers 2,376 - 2,377 - 2,377
Debt securities in issue 40,339 15,399 25,837 - 41,236
Subordinated liabilities 2,905 - 3,053 - 3,053
Subscribed capital 276 - 244 - 244
Total 204,821 15,399 190,562 - 205,961
Notes:
i. On 25 April 2017, the Group purchased residential mortgage
backed securities under a programme to securitise Bradford &
Bingley plc residential mortgage assets. These financial assets
have been classified as held to maturity investment securities and
are held at amortised cost.
ii. Other deposits exclude PEBs which are held at fair value
through the income statement and which are included in note 12.
Notes to the consolidated interim financial statements
(continued)
14 Fair value of financial assets and liabilities measured at
amortised cost (continued)
Loans and advances to banks
The fair value of loans and advances to banks is estimated by
discounting expected cashflows at a market discount rate. The
carrying amount is considered a reasonable approximation of fair
value.
Held to maturity investment securities
The fair value of held to maturity investment securities is
sourced from consensus pricing or other observable market
prices.
Loans and advances to customers
The fair value of loans and advances to customers is estimated
by discounting expected cash flows to reflect current rates for
similar lending.
Consistent modelling techniques are used across the different
loan books. The estimates take into account expected future cash
flows and future lifetime expected losses, based on historic trends
and discount rates appropriate to the loans, to reflect a
hypothetical exit price value on an asset by asset basis. Variable
rate loans are modelled on estimated future cash flows, discounted
at current market interest rates. Variable rate retail mortgages
are discounted at the currently available market standard variable
interest rate (SVR) which, for example, in the case of the Group's
residential base mortgage rate (BMR) mortgage book, generates a
fair value lower than the amortised cost value as those mortgages
are priced below the SVR.
For fixed rate loans, discount rates have been based on the
expected funding and capital cost applicable to the book. When
calculating fair values on fixed rate loans, no adjustment has been
made to reflect interest rate risk management through internal
natural hedges or external hedging via derivatives.
Shares, deposits and amounts due to customers
The estimated fair value of shares, deposits and amounts due to
customers with no stated maturity, including non-interest bearing
deposits, is the amount repayable on demand. For items without
quoted market prices the estimated fair value represents the
discounted amount of estimated future cash flows based on
expectations of future interest rates, customer withdrawals and
interest capitalisation. For variable interest rate items,
estimated future cash flows are discounted using current market
interest rates for new debt with similar remaining maturity. For
fixed rate items, the estimated future cash flows are discounted
based on market offer rates currently available for equivalent
deposits.
Debt securities in issue
The estimated fair values of longer dated liabilities are
calculated based on quoted market prices where available or using
similar instruments as a proxy for those liabilities that are not
of sufficient size or liquidity to have an active market quote. For
those notes for which quoted market prices are not available, a
discounted cash flow model is used based on a current yield curve
appropriate for the remaining term to maturity.
Subordinated liabilities and subscribed capital
The fair value of subordinated liabilities and subscribed
capital is determined by reference to quoted market prices of
similar instruments
Notes to the consolidated interim financial statements
(continued)
15 Offsetting financial assets and financial liabilities
The Group has financial assets and financial liabilities for
which there is a legally enforceable right to set off the
recognised amounts, and there is an intention to settle on a net
basis, or realise the asset and liability simultaneously. In
accordance with IAS 32 Financial Instruments: Presentation, where
the right to set off is not unconditional in all circumstances this
does not result in an offset of balance sheet assets and
liabilities.
In accordance with IFRS 7 Financial Instruments: Disclosures,
the following table shows the impact of offsetting on financial
assets and financial liabilities, where:
-- there is an enforceable master netting arrangement or similar
agreement in place and an unconditional right to offset is in place
('amounts offset'),
-- there is an enforceable master netting arrangement or similar
agreement in place but the offset criteria are otherwise not
satisfied ('master netting arrangements'), and
-- financial collateral is paid and received ('financial collateral').
Gross Amounts Net amounts Master Financial Net amounts
amounts offset reported netting collateral after offsetting
recognised (note on the arrangements (note under IFRS
i) balance ii) 7
sheet
30 September GBPm GBPm GBPm GBPm GBPm GBPm
2017
Financial assets
Derivative financial
instruments 5,166 (100) 5,066 (1,869) (3,047) 150
Total financial
assets 5,166 (100) 5,066 (1,869) (3,047) 150
Financial liabilities
Derivative financial
liabilities 2,580 (31) 2,549 (1,869) (615) 65
Repurchase agreements 1,644 - 1,644 - (1,644) -
Total financial
liabilities 4,224 (31) 4,193 (1,869) (2,259) 65
4 April 2017
Financial assets
Derivative financial
instruments 5,067 (24) 5,043 (2,216) (2,799) 28
Total financial
assets 5,067 (24) 5,043 (2,216) (2,799) 28
Financial liabilities
Derivative financial
liabilities 3,210 (28) 3,182 (2,216) (921) 45
Total financial
liabilities 3,210 (28) 3,182 (2,216) (921) 45
Notes:
i. Amounts offset for derivative financial assets of GBP100
million (4 April 2017: GBP24 million) include cash collateral
netted of GBP80 million (4 April 2017: GBP3 million). Amounts
offset for derivative financial liabilities of GBP31 million (4
April 2017: GBP28 million) include cash collateral netted of GBP11
million (4 April 2017: GBP7 million). Excluding the cash collateral
netted, the remaining amounts represent GBP20 million (4 April
2017: GBP21 million) of derivative financial assets and derivative
financial liabilities which are offset.
ii. The financial collateral is presented at fair value.
Master netting arrangements consist of agreements such as an
ISDA Master Agreement, global master repurchase agreements and
global master securities lending agreements, whereby outstanding
transactions with the same counterparty can be offset and settled
net, either unconditionally or following a default or other
predetermined event.
Financial collateral on derivative financial instruments
consists of cash posted, typically daily or weekly, to mitigate the
mark to market exposures. Financial collateral on repurchase
agreements typically comprises highly liquid securities which are
legally transferred and can be liquidated in the event of
counterparty default.
The net amounts after offsetting under IFRS 7 presented below
show the exposure to counterparty credit risk for derivative
contracts after netting benefits and collateral, and are not
intended to represent the Group's actual exposure to credit risk.
This is due to a variety of credit mitigation strategies which are
employed in addition to netting and collateral arrangements.
Notes to the consolidated interim financial statements
(continued)
16 Provisions for liabilities and charges
Bank levy FSCS Customer Other Total
redress provisions
GBPm GBPm GBPm GBPm GBPm
At 5 April 2017 16 42 305 24 387
Provisions utilised (15) (25) (48) (4) (92)
Charge for the period - - 31 - 31
Release for the period (1) (3) (6) (3) (13)
Net income statement
charge (1) (3) 25 (3) 18
At 30 September 2017 - 14 282 17 313
At 5 April 2016 22 84 227 10 343
Provisions utilised (22) (42) (35) (2) (101)
Charge for the period - - 58 9 67
Release for the period - (4) (6) (1) (11)
Net income statement
charge - (4) 52 8 56
At 30 September 2016 - 38 244 16 298
The income statement charge for provisions for liabilities and
charges of GBP22 million (H1 2016/17: GBP48 million) includes the
customer redress net income statement charge of GBP25 million (H1
2016/17: GBP52 million), and the FSCS release of GBP3 million (H1
2016/17: GBP4 million). The income statement release for bank levy
of GBP1 million (H1 2016/17: GBPnil), and the income statement
release for other provisions of GBP3 million (H1 2016/17: charge of
GBP8 million) are included within administrative expenses in the
income statement.
Financial Services Compensation Scheme (FSCS)
The FSCS provision of GBP14 million represents the Group's
interest and management expense levy in respect of the 2017/18
scheme year (4 April 2017: GBP42 million in respect of the 2017/18
and 2016/17 scheme years).
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 GBP282 million (4 April 2017:
GBP305 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 GBP28 million charge in relation to PPI, driven
primarily by an increase in the anticipated total number of
complaints expected to be received before the Financial Conduct
Authority (FCA) complaints deadline of August 2019.
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 30 September 2017 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.
The table below shows the sensitivity of the PPI provision to
changes in complaints volumes, along with other significant
assumptions used in calculating the provision:
Cumulative Future expected Sensitivity
to
30 September
2017
Claims ('000s of policies)
(note i) 345 157 10 = GBP9m
Average uphold rate (note ii) 31% 48% 5% = GBP10m
Average redress per claim (note GBP100 =
iii) GBP1,355 GBP701 GBP15m
Notes:
i. Claims include responses to proactive mailing.
ii. Future expected average uphold rate includes an anticipated
increase in the overall uphold rate driven by complaints related to
the Supreme Courts' decision in the case of Plevin vs Paragon
Personal Finance Limited ('Plevin').
iii. Future expected average redress reflects the expected mix
of future claims upheld, including Plevin.
Notes to the consolidated interim financial statements
(continued)
16 Provisions for liabilities and charges (continued)
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.
17 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.
18 Retirement benefit obligations
30 September 4 April
2017 2017
Retirement benefit obligations on the balance GBPm GBPm
sheet
Present value of funded obligations 5,866 6,039
Present value of unfunded obligations 12 12
5,878 6,051
Fair value of fund assets (5,616) (5,628)
Net defined benefit liability 262 423
The Group continues to operate two defined contribution schemes
and a number of defined benefit pension arrangements, the most
significant being the Nationwide Pension Fund. These pension
schemes are principally unchanged from the year ended 4 April 2017;
further details are set out in note 33 of the Annual Report and
Accounts 2017.
The principal actuarial assumptions used are as follows:
30 September 4 April
2017 2017
Principal actuarial assumptions % %
Discount rate 2.55 2.40
Future salary increases 3.15 3.20
Future pension increases 2.95 2.95
Retail price index (RPI) inflation 3.15 3.20
Consumer price index (CPI) inflation 2.15 2.20
The assumptions for mortality rates are based on up to date
industry standard mortality tables, which allow for future
improvements in life expectancies.
Notes to the consolidated interim financial statements
(continued)
18 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 30 September 30 September
2017 2016
GBPm GBPm
Net defined benefit liability at 5 April 423 213
Current service cost 48 30
Past service cost 3 1
Curtailment gains (5) (1)
Interest on net defined benefit liability 4 3
Return on assets less/(greater) than discount
rate 129 (807)
Contributions by employer (116) (77)
Administrative expenses 2 2
Actuarial (gains)/losses on defined benefit
obligations (226) 1,359
Net defined benefit liability 262 723
The reduction in the net defined benefit liability is mainly due
to a decrease in the value of defined benefit obligations combined
with employer contributions, partially offset by return on assets
less than the discount rate.
The GBP226 million of actuarial gains (H1 2016/17: GBP1,359
million of actuarial losses) on defined benefit obligations is
driven by a 0.15% increase in the discount rate and a 0.05%
decrease in assumed long term inflation since 4 April 2017, as a
result of changes in market conditions.
The GBP129 million from a return on assets, which is less than
the discount rate (H1 2016/17: GBP807 million from a return greater
than the discount rate), is driven by changes in market conditions,
including rising bond yields partially offset by strong equity
returns.
The net impact of actuarial gains and return on assets is an
increase of GBP97 million in other comprehensive income over the
period (H1 2016/17: reduction of GBP552 million).
The GBP116 million of employer contributions includes a deficit
contribution of GBP49 million in July 2017 (H1 2016/17: GBP49
million), along with an additional deficit contribution of GBP37
million in August 2017 following completion of the triennial
valuation. The remainder relates to employer contributions in
respect of future benefit accrual.
19 Core capital deferred shares (CCDS)
Number of CCDS Share premium Total
shares
GBPm GBPm GBPm
At 4 April 2017 5,500,000 6 525 531
Issuance 5,000,000 5 802 807
Issue costs (13) (13)
At 30 September 2017 10,500,000 11 1,314 1,325
In September 2017, the Society issued 5,000,000 of GBP1 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 GBP807 million (GBP794 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 was surplus available, the amount that the investor would
receive for each CCDS held is limited to the average principal
amount in issue, which is currently GBP129.24 per share.
There is a cap placed on the amount of distributions that can be
paid to holders of CCDS in any financial year. The cap is currently
set at GBP15.67 per share and is adjusted annually in line with
CPI.
Notes to the consolidated interim financial statements
(continued)
19 Core capital deferred shares (CCDS) (continued)
A final distribution of GBP28 million (GBP5.125 per share) for
the financial year ended 4 April 2017 was paid on 20 June 2017.
This distribution has been recognised in the consolidated statement
of movements in members' interests and equity.
Since the balance sheet date the directors have declared a
distribution of GBP5.125 per share in respect of the period to 30
September 2017, amounting in aggregate to GBP54 million. This has
not been reflected in these interim financial statements as it is
recognised by reference to the date at which it was declared. The
distribution will be paid on 20 December 2017.
20 Other equity instruments
Total
GBPm
At 30 September 2017 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 GBP34 million, covering the period to 19 June 2017,
was paid on 20 June 2017. This payment has been recognised in the
consolidated statement of movements in members' interests and
equity.
A coupon payment of GBP34 million, covering the period to 19
December 2017, is expected to be paid on 20 December 2017. This is
not reflected in these interim financial statements as it is
recognised by reference to the date at which it is paid.
The coupons paid and declared represent the maximum
non-cumulative fixed coupon of 6.875%.
AT1 instruments have no maturity date. They are repayable at the
option of the Society on 20 June 2019 and on every fifth
anniversary thereafter. AT1 instruments are only repayable with the
consent of the PRA.
If the fully loaded CET1 ratio for the Society, on either a
consolidated or unconsolidated basis, falls below 7% the AT1
instruments convert to CCDS instruments at the rate of one CCDS
share for every GBP80 of AT1 holding.
21 Related party transactions
There were no related party transactions during the period ended
30 September 2017 which were significant to the Group's financial
position or performance.
Full details of the Group's related party transactions for the
year to 4 April 2017 can be found in note 38 of the Annual Report
and Accounts 2017.
Notes to the consolidated interim financial statements
(continued)
22 Notes to the consolidated cash flow statement
Half year Half year
to to
30 September 30 September
2017 2016
Non-cash items included in profit before tax GBPm GBPm
Net increase/(decrease) in impairment
provisions 17 (40)
Net decrease in provisions for
liabilities and charges (74) (45)
Impairment losses on investment
securities - 5
Depreciation, amortisation and
impairment 192 175
Profit on sale of property,
plant and equipment (1) (1)
Interest on subordinated liabilities 74 54
Interest on subscribed capital 7 24
Gains from derivatives and hedge
accounting (36) (77)
Total 179 95
Changes in operating assets
and liabilities
Loans and advances to banks 17 (19)
Net derivative financial instruments and fair
value adjustment for portfolio hedged risk (212) (1,809)
Loans and advances to customers (3,312) (6,279)
Other operating assets 806 (625)
Shares 1,842 4,700
Deposits from banks, customers
and others 2,471 1,666
Debt securities in issue 71 2,686
Deferred taxation 2 (83)
Retirement benefit obligations (161) 510
Other operating liabilities 292 (137)
Total 1,816 610
Cash and cash equivalents
Cash 15,302 17,213
Loans and advances to banks repayable in 3
months or less (note i) 2,665 2,979
Total 17,967 20,192
Note:
i. Cash equivalents include GBP1,924 million (30 September 2016:
GBP2,216 million) of cash collateral posted with bank
counterparties.
The Group is required to maintain balances with the Bank of
England and certain other central banks which, at 30 September
2017, amounted to GBP344 million (30 September 2016: GBP344
million). These balances are included within loans and advances to
banks on the balance sheet and are not included in the cash and
cash equivalents in the cash flow statement as they are not liquid
in nature.
Responsibility statement
The directors confirm that, to the best of their knowledge, the
consolidated interim financial statements have been prepared in
accordance with IAS 34, as adopted by the European Union. The
Interim Results include a fair review of the information required
by DTR 4.2.7R and DTR 4.2.8R, namely:
-- an indication of important events that have occurred in the
first six months of the financial year and their impact on the
consolidated interim financial statements and a description of the
principal risks and uncertainties for the remaining six months of
the financial year; and
-- material related party transactions in the first six months
of the financial year and any material changes in the related party
transactions described in the Annual Report and Accounts 2017.
A full list of the board of directors can be found in the Annual
Report and Accounts 2017, subject to the following update in
respect of a change that has occurred during the period to 30
September 2017:
-- Gunn Waersted was appointed to the Board on 1 June 2017 and
is a member of the IT Strategy and Resilience Committee.
Signed on behalf of the Board by
Mark Rennison
Chief Financial Officer
16 November 2017
Independent review report to Nationwide Building Society
Report on the consolidated interim financial statements
Our conclusion
We have reviewed the consolidated interim financial statements
(the "interim financial statements") for Nationwide Building
Society and its subsidiaries ("the Group") on pages 46 to 71 in the
interim results for the six month period ended 30 September 2017.
Based on our review, nothing has come to our attention that causes
us to believe that the interim financial statements are not
prepared, in all material respects, in accordance with
International Accounting Standard 34, 'Interim Financial
Reporting', as adopted by the European Union and the Disclosure
Guidance and Transparency Rules sourcebook of the United Kingdom's
Financial Conduct Authority.
What we have reviewed
The interim financial statements comprise:
-- the consolidated balance sheet as at 30 September 2017;
-- the consolidated income statement and consolidated statement
of comprehensive income for the period then ended;
-- the consolidated cash flow statement for the period then ended;
-- the consolidated statement of movements in members' interests
and equity for the period then ended; and
-- the explanatory notes to the interim financial statements.
The interim financial statements included in the interim results
for the period ended 30 September 2017 have been prepared in
accordance with International Accounting Standard 34, 'Interim
Financial Reporting', as adopted by the European Union and the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority.
As disclosed in note 2 to the interim financial statements, the
financial reporting framework that has been applied in the
preparation of the full annual financial statements of the Group is
applicable law and International Financial Reporting Standards
(IFRSs) as adopted by the European Union.
Responsibilities for the interim financial statements and the
review
Our responsibilities and those of the directors
The interim results for the period ended 30 September 2017,
including the interim financial statements, are the responsibility
of, and have been approved by, the directors. The directors are
responsible for preparing the interim results for the period ended
30 September 2017 in accordance with the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom's Financial
Conduct Authority.
Our responsibility is to express a conclusion on the interim
financial statements in the interim results for the period ended 30
September 2017 based on our review. This report, including the
conclusion, has been prepared for and only for the Group for the
purpose of complying with the Disclosure Guidance and Transparency
Rules sourcebook of the United Kingdom's Financial Conduct
Authority and for no other purpose. We do not, in giving this
conclusion, accept or assume responsibility for any other purpose
or to any other person to whom this report is shown or into whose
hands it may come save where expressly agreed by our prior consent
in writing.
What a review of interim financial statements involves
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410, 'Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity' issued by the Auditing Practices Board for use in
the United Kingdom. A review of interim financial information
consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and,
consequently, does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
Independent review report to Nationwide Building Society
(continued)
Report on the consolidated interim financial statements
(continued)
We have read the other information contained in the interim
results for the period ended 30 September 2017 and considered
whether it contains any apparent misstatements or material
inconsistencies with the information in the interim financial
statements.
PricewaterhouseCoopers LLP
Chartered Accountants
London
16 November 2017
Notes:
a) The maintenance and integrity of the Nationwide Building
Society website is the responsibility of the directors; the work
carried out by the auditors does not involve consideration of these
matters and, accordingly, the auditors accept no responsibility for
any changes that may have occurred to the interim financial
statements since they were initially presented on the website.
b) Legislation in the United Kingdom governing the preparation
and dissemination of financial statements may differ from
legislation in other jurisdictions.
Other information
The interim results information set out in this announcement is
unaudited and does not constitute accounts within the meaning of
section 73 of the Building Societies Act 1986.
The financial information for the year ended 4 April 2017 has
been extracted from the Annual Report and Accounts 2017. The Annual
Report and Accounts 2017 has been filed with the Financial Conduct
Authority and the Prudential Regulation Authority. The Independent
Auditors' Report on the Annual Report and Accounts 2017 was
unqualified.
Nationwide adopted the British Bankers' Association Code for
Financial Reporting Disclosure ('the BBA code') in its Annual
Report and Accounts 2017. The code sets out five disclosure
principles together with supporting guidance. Full details of the
principles are included in the Annual Report and Accounts 2017.
These principles have been applied, as appropriate, in the context
of these interim results.
A copy of the Interim Results is placed on the website of
Nationwide Building Society. The directors are responsible for the
maintenance and integrity of information on the Society's website.
Information published on the internet is accessible in many
countries with different legal requirements. Legislation in the
United Kingdom governing the preparation and dissemination of
financial statements may differ from legislation in other
jurisdictions.
Contacts
Media queries: Investor queries:
Sara Batchelor Alex Wall
Tel: 01793 657770 Tel: 020 7261 6568
Mobile: 07785 344137 Mobile: 07917 093632
sara.batchelor@nationwide.co.uk alexander.wall@nationwide.co.uk
This information is provided by RNS
The company news service from the London Stock Exchange
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