TIDMNBS TIDMNAWI
RNS Number : 3874E
Nationwide Building Society
09 February 2018
Nationwide Building Society
Interim Management Statement
Q3 2017/18
9 February 2018
Nationwide Building Society today publishes its Interim
Management Statement covering the period from 5 April 2017 to 31
December 2017 ('Q3 2017/18').
Key highlights
-- Underlying profit increased to GBP883m (Q3 2016/17: GBP866m);
Statutory profit was GBP886m (Q3 2016/17: GBP946m)
-- Profits include GBP26m one-off gain from VocaLink disposal
(Q3 2016/17: GBP100m one-off gain from Visa Europe disposal)
-- Capital strength improved with CET1 ratio of 30.5% (4 April
2017: 25.4%) and UK leverage ratio of 4.9% (4 April 2017: 4.4%)
-- No. 1 for customer satisfaction amongst our high street peer group with a lead of 2.9%(1)
-- UK's top choice for current accounts(2) , with more people
opening with Nationwide than with any other provider(3) . Openings
up 8% in the period to 617,000 accounts
-- Gross mortgage lending of GBP24.1bn (Q3 2016/17: GBP26.2bn);
total market share of 12.2% (Q3 2016/17: 14.3%) in competitive
market conditions
-- Member deposit balances(4) increased by GBP2.3bn (Q3 2016/17:
GBP6.4bn); market share of balances broadly flat at 10.0% at 31
December 2017 (4 April 2017: 10.1%) in a subdued market
Nationwide Building Society Chief Executive, Joe Garner,
said:
"The Society continued to trade strongly in the period. Our
mutual commitment to member value and leading service shapes our
decision making. It means we continue to support loyal savings
members with rates on average 50% higher than the market average(5)
. We are also proud to maintain our position as no. 1 for customer
satisfaction amongst our high street peer group, with an overall
lead of 2.9% over our nearest competitor and 7.6% over the peer
group average(1) .
"Nationwide is top choice(2) for current accounts on the high
street and more people are switching to us than any other
provider(6) . As we anticipated, a subdued buy to let mortgage
market, plus sustained competition, slowed the pace of growth in
our mortgage book. With third quarter mortgage reservations
significantly stronger than for the same period last year, we
expect a strong final quarter for our gross lending.
"By choosing Nationwide, our members have helped the Society
generate a substantial surplus, and our underlying profit for the
year to date increased to GBP883 million. Members understandably
expect their Society to remain safe and secure, so we've further
enhanced our already strong financial position. Our capital and
leverage ratios strengthened over the period, and are well ahead of
regulatory requirements at 30.5% and 4.9% respectively.
"Supporting the financial lives of our members is a founding
purpose of our building society. We also aim to play our part in
helping to solve Britain's housing shortage, in line with our
founding principles and our expertise. We've launched a range of
initiatives to support both renters and buyers, including most
recently a commitment to build around 250 homes as part of an
innovative, sustainable housing development in Swindon, just three
miles from our head office.
"Looking ahead, we expect the economy to continue to grow but
only modestly. Consumer spending, which has been a key driver of
growth, has slowed noticeably, and almost three quarters of those
surveyed in our Brexit Consumer Panel expressed concern about the
rising cost of goods and services. Modest economic growth is also
likely to hold back the housing market and house price growth.
Overall, we expect house prices to be broadly flat in 2018 with
perhaps a marginal gain of around 1%. We expect competition in the
mortgage market to continue and we will prioritise quality over
volumes in the long-term interests of our members."
1 (c) GfK 2017, Financial Research Survey (FRS), 12 months
ending 31 December 2017 (comparatives reference 12 months to 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).
2 Source: Nationwide Brand and Advertising tracker - compiled by
Independent Research Agency. 'Top choice' is most considered i.e.
'first choice' or 'seriously considered' current account provider
amongst non-customers, based on responses from non-customers of
each brand, 3 months ending December 2017. Financial brands
included Nationwide, Barclays, Co-operative Bank, First Direct,
Halifax, HSBC, Lloyds, NatWest, TSB and Santander.
3 Source: eBenchmarkers April 2017 to November 2017, CACI April
2017 to November 2017 and internal sources.
4 Member deposits include current account credit balances.
5 Market average interest rates are based on Bank of England
whole of market average interest rates for retail deposits adjusted
to exclude Nationwide's balances.
6 BACS Payments Schemes CASS switching market data (latest
participant movement data for switches completing in the 3 months
to June 2017).
Trading performance
9 months ended 9 months ended
31 December 2017 31 December 2016
GBPbn % GBPbn %
---------------------------------------------------------------- ------------- ------- ------------ ------
Gross residential mortgage lending/market share 24.1 12.2 26.2 14.3
Net residential mortgage lending/market share 3.9 11.2 8.2 29.3
Member deposits balance movement(4) /market share 2.3 5.9 6.4 10.2
------------- -------
Number of new current accounts opened 617,000 570,000
---------------------------------------------------------------- ------------- ------- ------------ ------
At 31 December 2017 At 4 April 2017
GBPbn % GBPbn %
------------- -------
Residential lending balances(7) 175.3 171.1
Member deposit balances(4) /market share 146.8 10.0 144.5 10.1
Market share of main standard and packaged current accounts(8) 7.8 7.5
---------------------------------------------------------------- ------------- ------- ------------ ------
Residential mortgages include prime and specialist loans, with
the specialist portfolio largely comprising buy to let (BTL)
lending. Gross mortgage lending period on period has grown at a
slower pace as a result of sustained competition and a reduction in
BTL mortgage advances. In the period, gross mortgage lending
reduced to GBP24.1 billion (Q3 2016/17: GBP26.2 billion) with
approximately 90% (Q3 2016/17: 86%) of advances in the prime
portfolio: GBP21.6 billion (Q3 2016/17: GBP22.5 billion). Following
the affordability criteria changes we made last year, and the
impacts of the stamp duty increase and regulation on the BTL
market, gross BTL mortgage lending for the period reduced to GBP2.5
billion (Q3 2016/17: GBP3.7 billion).
Net mortgage lending has decreased during the period reflecting
lower gross mortgage advances and increased prime mortgage
redemptions due to ongoing market competition. Net lending for
prime mortgages was GBP4.3 billion (Q3 2016/17: GBP7.3 billion),
and for specialist mortgages was a net redemption of GBP0.4 billion
(Q3 2016/17: net lending GBP0.9 billion).
Mortgage lending has been substantially funded by growth in
retail deposits, with member deposits increasing by GBP2.3 billion
to GBP146.8 billion (4 April 2017 GBP144.5 billion). The growth is
primarily attributable to a GBP2.7 billion increase in current
account balances as we continue to grow our base of engaged
members. This includes growth in balances from existing account
holders, as well as 617,000 new current accounts opened during the
period (Q3 2016/17: 570,000). We continued to benefit from high
switching rates through the Current Account Switch Service,
attracting 19.5 % of all switchers in the period. In total, our
market share of main standard and packaged current accounts has
increased to 7.8% at November 2017 (February 2017: 7.5%).
Our savings range remains competitively positioned in the market
and continues to reflect our mutual principle of providing products
that represent good long-term value to our members. In a highly
competitive market, driven in large part by providers making
short-term offers, Nationwide's market share of UK household
deposits remained broadly stable at 10.0% (4 April 2017:
10.1%).
7 Residential lending balances are stated net of impairment
provisions.
8 Based on market data as at November 2017 (comparative based on
market data as at February 2017).
Financial performance
9 months ended 9 months ended
31 December 2017 31 December 2016
GBPm % GBPm %
-------------------------------------- ----------- ----------- --------- ---------
Underlying profit before tax 883 866
Statutory profit before tax 886 946
Statutory profit after tax 664 684
-------------------------------------- ----------- ----------- --------- ---------
Net interest margin 1.33 1.33
Underlying cost income ratio 59.6 57.6
Statutory cost income ratio 59.7 56.1
-------------------------------------- ----------- ----------- --------- ---------
At 31 December 2017 At 4 April 2017
GBPbn % GBPbn %
----------- -----------
Total assets 232.8 221.7
Loans and advances to customers 190.4 187.4
----------- -----------
Common Equity Tier 1 (CET1) ratio(9) 30.5 25.4
UK leverage ratio(10) 4.9 4.4
CRR leverage ratio(11) 4.5 4.2
Liquidity coverage ratio 146.7 124.0
Wholesale funding ratio 29.3 27.1
-------------------------------------- ----------- ----------- --------- ---------
Underlying profit represents management's view of underlying
performance and is presented to aid comparability across reporting
periods, as explained on page 5.
Underlying profit before tax was GBP883 million (Q3 2016/17:
GBP866 million), including a gain of GBP26 million from the sale of
our investment in VocaLink (Q3 2016/17: GBP100 million one-off gain
from the sale of our investment in Visa Europe). Statutory profit
before tax of GBP886 million (Q3 2016/17: GBP946 million) includes
GBP1 million (Q3 2016/17: GBP68 million) of derivative and hedge
accounting gains(12) which are excluded from underlying profit.
Net interest income was higher than for the same period last
year, with net interest margin remaining consistent at 133bps. Net
interest margin benefited from lower funding costs period on
period, partially offset by a decrease in average mortgage margins.
Sustained competition in retail lending markets has resulted in
more borrowers switching to competitively priced products. Our
legacy base mortgage rate (BMR) balances have progressively
declined period on period in line with both recent experience and
our expectations. We are anticipating 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 remainder of the year and into 2018/19.
Our underlying cost income ratio was 59.6% (Q3 2016/17: 57.6%)
as a result of 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% (Q3
2016/17: 5% 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.
We continue to review compliance with ongoing and emerging
regulatory matters, including consumer credit legislation, and have
recognised a net provision charge of GBP25 million in the nine
month period in respect of potential customer redress, in line with
the position reported in our half-year results. This reflects
updated assumptions for provisions previously recognised and
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.
9 Common Equity Tier 1 (CET1) ratio has been calculated under
CRD IV on an end point basis.
10 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.
11 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.
12 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.
Asset quality remains strong, with an average loan to value
(LTV) of loan stock for total residential lending of 55% at the end
of the period, consistent with that reported at the year end. The
average LTV of new lending in the period was 71%, unchanged from
the same period last year.
The number of cases more than three months in arrears as a
percentage of the total book improved marginally to 0.34% (4 April
2017: 0.36%) for prime lending and 0.83% (4 April 2017: 0.89%) for
specialist lending.
Impairment losses on loans and advances have decreased to GBP79
million (Q3 2016/17: GBP111 million). The charge in the period is
primarily driven by updates to provisions on consumer banking to
reflect current economic conditions.
Capital and leverage ratios have remained comfortably in excess
of regulatory requirements with a CET1 ratio of 30.5% (4 April
2017: 25.4%) and a UK leverage ratio of 4.9% (4 April 2017: 4.4%).
The improvement in both our CET1 and UK leverage ratios was mainly
due to profits after tax in the period and the issuance of CCDS
which raised GBP0.8 billion in September 2017. The CRR leverage
ratio also increased to 4.5% (4 April 2017: 4.2%). Further
information on our capital position can be found in Appendix 1.
In December 2017, the Basel Committee published the final
reforms to the Basel III framework, including revisions to the
standardised approach for credit and operational risks, and the
introduction of a risk-weighted asset (RWA) output floor (effective
on a transitional basis from 2022 and fully implemented in 2027).
The PRA's revised expectations for IRB models for residential
mortgages will be effective in 2020. Whilst both of these
amendments are expected to result in an increase in RWAs and
therefore a reduction in the CET1 ratio, we do not believe these
will lead to a material increase in our overall regulatory capital
requirements as the UK leverage ratio framework is expected to
remain our binding requirement.
Outlook
While UK activity remained resilient in the immediate aftermath
of the Brexit vote, there were signs of slowdown in 2017. Household
spending, a key driver of growth, lost some momentum. Retail sales
and car registrations have slowed and consumer confidence has also
softened. Economic activity is being supported to some degree by
strong global growth. We continue to expect the UK economy to grow
at a modest pace, with annual growth of 1% to 1.5% in 2018 and
2019. Subdued economic activity and the ongoing squeeze on
household budgets is likely to exert a modest drag on housing
market activity and house price growth.
The sustained low interest rate environment and competition in
core markets will maintain pressure on margins. Our mutual model,
combined with our financial strength, means we are able to focus on
taking a long-term view for the benefit of members, rather than
pursuing actions to drive short-term profitability. We will
continue to focus on supporting members and investing in new
propositions, service enhancements and efficiency, whilst
maintaining our capital strength.
Additional information
The financial information on which this Interim Management
Statement is based is unaudited and has been prepared in accordance
with Nationwide Building Society's previously stated accounting
policies described in the Annual Report and Accounts 2017.
For further information please contact:
Investor queries: Alex Wall, 0207 2616568 or 07917 093632,
alexander.wall@nationwide.co.uk
Media contact: Sara Batchelor, 01793 657770 or 07785 344137, sara.batchelor@nationwide.co.uk
Underlying profit
Profit before tax shown on a statutory and underlying basis is
set out on page 3. Statutory profit before tax of GBP886 million
has been adjusted for a number of items to derive an underlying
profit before tax of GBP883 million. The purpose of this measure is
to reflect management's view of the Group's underlying performance
and to assist with like for like comparisons of performance across
periods. Underlying profit is not designed to measure sustainable
levels of profitability as that would potentially require 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.
Appendix 1 - Capital position
Capital structure and ratios
Common Equity Tier 1 (CET1) capital resources have increased by
approximately GBP1.4 billion as a result of the issuance of CCDS in
September 2017, which raised GBP0.8 billion, profit after tax for
the period of GBP0.7 billion, offset by an increased deduction for
intangible assets of GBP0.1 billion. Risk weighted assets (RWAs)
decreased over the period by approximately GBP1.1 billion primarily
due to the continued run-off of the commercial portfolio. These
movements have strengthened our CET1 ratio to 30.5% (4 April 2017:
25.4%).
Tier 2 capital has increased by GBP1.6 billion, in line with
plans to meet pending Minimum Requirement for Own Funds and
Eligible Liabilities (MREL) requirements, following the issuance of
qualifying Tier 2 subordinated debt in July 2017 and October 2017,
of EUR1 billion and $1.25 billion respectively (GBP1.8 billion
equivalent in aggregate). The residual offsetting movement was
primarily due to regulatory amortisation.
31 December 4 April
2017 2017
GBPm GBPm
------------------------------------------------ ------------ --------
Common Equity Tier 1 capital before regulatory
adjustments 11,336 9,915
Total regulatory adjustments to Common
Equity Tier 1 (1,429) (1,360)
------------------------------------------------ ------------ --------
Common Equity Tier 1 capital 9,907 8,555
Additional Tier 1 capital before regulatory
adjustments 992 992
Total regulatory adjustments to Additional
Tier 1 capital - -
------------------------------------------------ ------------ --------
Additional Tier 1 capital 992 992
------------------------------------------------ ------------ --------
Total Tier 1 capital 10,899 9,547
------------------------------------------------ ------------ --------
Tier 2 capital before regulatory adjustments 4,225 2,582
Total regulatory adjustments to Tier
2 capital - -
------------------------------------------------ ------------ --------
Tier 2 capital 4,225 2,582
------------------------------------------------ ------------ --------
Total capital 15,124 12,129
------------------------------------------------ ------------ --------
Ratios: % %
------------------------------------------------ ------------ --------
Common Equity Tier 1 30.5 25.4
Tier 1 33.5 28.4
Total capital 46.5 36.1
------------------------------------------------ ------------ --------
Note: Data in the table is reported under CRD IV on an end point
basis, being full implementation with no transitional provisions.
Overview of RWAs (EU OV1)
RWAs Minimum capital
requirements(13)
31 December 4 April 31 December 4 April
2017 2017 2017 2017
---------------------------------------------
GBPm GBPm GBPm GBPm
--- ---------------------------------------- ------------ -------- ------------ --------
1 Credit risk 25,801 26,802 2,064 2,144
2 Of which standardised approach 2,341 2,548 187 204
Of which the foundation IRB
3 approach 5,940 6,969 475 557
4 Of which the advanced IRB approach 17,349 17,163 1,388 1,373
Of which Equity IRB under the
simple risk-weight or the internal
5 models approach 171 122 14 10
6 Counterparty credit risk 1,329 1,221 106 98
7 Of which marked to market 584 546 47 44
Of which standardised approach
9 for counterparty credit risk 27 19 2 2
Of which risk exposure for
contributions to the default
11 fund of a CCP 4 6 - -
12 Of which CVA 714 650 57 52
13 Settlement risk - - - -
Securitisation exposures in
14 banking book (after cap) 303 434 24 35
Of which IRB ratings-based
15 approach 303 434 24 35
19 Market risk(14) - - - -
23 Operational risk 4,865 4,865 389 389
25 Of which Standardised approach 4,865 4,865 389 389
Amounts below the thresholds
for deduction (subject to 250%
27 risk weight) 194 319 16 25
--- ---------------------------------------- ------------ -------- ------------ --------
29 Total 32,492 33,641 2,599 2,691
--- ---------------------------------------- ------------ -------- ------------ --------
RWA flow statements of credit risk exposures (EU CR8)
IRB credit risk Standardised Counterparty
credit risk credit risk
RWA amounts Capital RWA amounts Capital RWA amounts Capital
requirements requirements requirements
GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ------------ -------------- ------------ -------------- ------------ --------------
RWA as at 4 April
1 2017 24,254 1,940 2,548 204 1,221 98
------------------ ------------ -------------- ------------ -------------- ------------ --------------
2 Asset size (606) (48) (206) (17) 133 10
3 Asset quality (188) (15) (1) - (25) (2)
RWA as at 31
9 December 2017 23,460 1,877 2,341 187 1,329 106
------------------ ------------ -------------- ------------ -------------- ------------ --------------
IRB credit risk RWAs have reduced by GBP0.8 billion during the
period. A reduction in book size accounted for GBP0.6 billion of
this movement, driven by the continued run-off of the commercial
portfolio. The remaining GBP0.2 billion movement resulted from a
marginal improvement in the credit quality of the outstanding
commercial exposures.
Leverage ratio
The UK leverage ratio(10) of 4.9% at 31 December 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. Minimum leverage requirements are monitored by the PRA on
this basis, with the current regulatory threshold set at 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.
We remain confident in the strength of our capital position to meet
the increased minimum requirements.
13 Capital is also held to meet Pillar 2 and capital buffer
requirements. Further details on Pillar 2 requirements can be found
in the Pillar 3 Disclosure 2017 at nationwide.co.uk
14 Market risk has been set to zero as permitted by the CRR as
exposure is below the threshold of 2% of own funds.
The average UK leverage ratio for the three months to 31
December 2017 is 4.9%, with an average exposure measure of
GBP221,422 million(15) .
The CRR leverage ratio increased to 4.5% (4 April 2017: 4.2%).
The improvement was driven by the same movements described for the
UK leverage ratio, but was partially offset by increased central
bank exposures, which are ineligible for deduction under the CRR
methodology.
31 December 4 April
2017 2017
GBPm GBPm
------------------------ ------------ --------
Tier 1 capital 10,899 9,547
UK leverage exposure 222,573 215,894
CRR leverage exposure 242,398 228,428
% %
------------------------ ------------ --------
UK leverage ratio(10) 4.9 4.4
------------------------ ------------ --------
CRR leverage ratio(11) 4.5 4.2
------------------------ ------------ --------
15 The average leverage ratio is calculated using the averages
of Tier 1 capital and UK leverage exposure, based on the last day
of each month in the quarter.
This information is provided by RNS
The company news service from the London Stock Exchange
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