TIDMNAWI
RNS Number : 1718I
Nationwide Building Society
28 May 2014
Nationwide Building Society
Preliminary Results Announcement
For the year ended
4 April 2014
Underlying Profit and Pre Provision Underlying Profit
Profit before tax shown on a statutory and underlying basis is
set out on page 11. Statutory profit before tax of GBP677 million
has been adjusted for a number of items, consistent with prior
years, to derive an underlying profit before tax of GBP924 million.
The purpose of this measure is to reflect management's view of the
Group's underlying performance and to assist with like for like
comparisons of performance across years. Underlying profit is not
designed to measure sustainable levels of profitability as that
potentially requires exclusion of non-recurring items even though
they are closely related to (or even a direct consequence of) the
Group's core business activities.
Pre provision underlying profit of GBP1,376 million relates to
underlying profit before impairment losses and provisions for
liabilities and charges. The purpose of this measure is to
demonstrate net income generation capacity and the ability of the
business to absorb losses in a challenging economic climate.
Comparatives have been restated in accordance with IAS 19
Employee Benefits (Revised).
Forward Looking Statements
Statements in this document are forward lookingwith respect to
plans, goals and expectations relating to the future financial
position, business performance and results of Nationwide. Although
Nationwide believes that the expectations reflected in these
forward looking statements are reasonable, we can give no assurance
that these expectations will prove to be an accurate reflection of
actual results. By their nature, all forward looking statements
involve risk and uncertainty because they relate to future events
and circumstances that are beyond the control of Nationwide
including, amongst other things, UK domestic and global economic
and business conditions, market related risks such as fluctuation
in interest rates and exchange rates, inflation/deflation, the
impact of competition, changes in customer preferences, risks
concerning borrower credit quality, delays in implementing
proposals, the timing, impact and other uncertainties of future
acquisitions or other combinations within relevant industries, the
policies and actions of regulatory authorities, the impact of tax
or other legislation and other regulations in the jurisdictions in
which Nationwide operates. As a result, Nationwide's actual future
financial condition, business performance and results may differ
materially from the plans, goals and expectations expressed or
implied in these forward looking statements. Due to such risks and
uncertainties Nationwide cautions readers not to place undue
reliance on such forward looking statements.
We undertake no obligation to update any forward looking
statements whether as a result of new information, future events or
otherwise.
This document does not constitute or form part of an offer of
securities for sale in the United States. Securities may not be
offered or sold in the United States absent registration or an
exemption from registration. Any public offering to be made in the
United States will be made by means of a prospectus that may be
obtained from the Society and will contain detailed information
about the Society and management as well as financial
statements.
NATIONWIDE BUILDING SOCIETY
RESULTS FOR THE YEAR ENDED 4 APRIL 2014
Graham Beale, Nationwide's Chief Executive said:
"Over the past year Nationwide has lived up to the building
society tradition of looking after both savers and borrowers. As a
modern mutual we also recognise the need to offer a broader set of
financial services and products. In particular, we have had another
successful year in developing our personal current account
proposition.
"We played a leading role in the housing market; during the year
our gross mortgage lending was GBP28.1 billion, an increase of 31%
on 2012/13, whilst our net lending was up 52% at GBP9.9 billion.
Our market shares of gross and net lending were 14.9% and 70.8%
respectively. We actively supported first time buyers and accounted
for over one in five such mortgages.
"Our savings products have been competitive throughout the year
and, as a result, we have increased our member deposit balances by
GBP4.9 billion, a market share of 12.1%. We have sought to reward
our existing members by offering our Loyalty Saver account, which
now has balances of GBP17.1 billion and delivered value to our
members of around GBP130 million during the year.
"Recognising the broader financial needs of our membership, we
have expanded our presence in the current account market in order
to diversify our business and share the benefits of mutuality with
more members. Our expansion has accelerated and over the past year
we opened over 430,000 new current accounts, up 18% on last year.
In addition, over 98,000 existing current account members upgraded
to our new FlexPlus packaged account, which has attracted a number
of industry awards.
"Over the past year there has been significant debate around the
standards and reputation of the financial services sector. I am
therefore delighted that we have been recognised as the strongest
financial brand in the UK across a number of metrics. We have been
voted the most reputable bank or building society(1) ; the best
bank or building society to work for(2) ; first for customer
satisfaction, trust and fairness in financial services(3) and one
of the top ten most 'Human Brands'(4) in the UK.
"Our successes highlighted above have resulted in our excellent
financial performance, which has seen underlying profits increase
by 113% to GBP924 million and statutory profit increase by 303% to
GBP677 million. Our financial performance, coupled with our
landmark issuance of 'mutual friendly' core capital, has further
strengthened our balance sheet. Our Common Equity Tier 1 ratio has
risen to 14.5%, the strongest ratio amongst our peer group of UK
banking competitors(5) , and we have achieved the PRA target
leverage ratio of 3%.
"Taken together with our continued focus on providing
exceptional service, our performance demonstrates yet again that
Nationwide has remained true to its core purpose and heritage.
Looking ahead, we will maintain the strength of our business while
investing to support growth and changing customer behaviours in an
increasingly digital age. We will continue to provide our members
with innovative and market leading products and services, which
together will reinforce Nationwide's position as a clear and
compelling alternative to the established banks."
Graham Beale
Chief Executive
[1] Reputation Institute's RepTrak survey 2014
[2] Sunday Times Top 25 Best Big Companies to Work For 2014
[3] GFK NOP and Nationwide Brand and Advertising tracker
[4] Human Era Index 2013
[5] Peer group consists of Santander UK, HSBC, Lloyds Banking
Group, Barclays and Royal Bank of Scotland.
KEY HIGHLIGHTS
Support for the housing market
-- Gross mortgage lending up 31% to GBP28.1 billion, a market share of 14.9%
-- Net lending up 52% at GBP9.9 billion, a market share of 70.8%
-- Helped support 58,100 first time buyers, a market share of 20.3%
Delivering value to our savers
-- GBP4.9 billion increase in member deposit balances, a market share of 12.1%
-- Balances in our Loyalty Saver account, which pays higher
rates according to length of membership, have increased by GBP9.2
billion to GBP17.1 billion, benefiting over 810,000 members
Providing a meaningful alternative to the established banks
-- Over 430,000 new current accounts opened, up 18% on previous year
-- Market share of main standard and packaged accounts increased to 6.2%
Focus on customer service
-- Independently ranked number 1 for customer satisfaction
amongst our high street peer group(1)
-- Despite our significant and growing market shares, Nationwide
accounts for only 3.55% of all industry complaints
Our people
-- Record employee engagement and enablement scores, exceeding industry norms(3)
Strong financial performance
-- Total underlying income up 16% at GBP2.9 billion
-- Underlying cost income ratio down to 52.5% (2013: 55.9%)
-- 113% increase in underlying profit to GBP924 million
-- 303% increase in statutory profit to GBP677 million
Safe and secure balance sheet
-- Primary liquidity ratio 11.9% (4 April 2013: 11.1%)
-- Wholesale funding ratio 19.6% (4 April 2013: 22.5%)
-- Loan to deposit ratio 115.8% (4 April 2013: 115.4%)
-- Residential mortgage arrears, at 0.63%, well below CML(2) industry of 1.59%
-- 24% reduction in commercial real estate (CRE) balances, from
GBP10.2 billion to GBP7.8 billion
Increased capital strength, securing the future of mutuality
-- Successful issuance of GBP550 million 'mutual friendly' core
capital deferred shares (CCDS) in December 2013 and GBP1 billion of
Additional Tier 1 capital in March 2014
-- Common Equity Tier 1 ratio 14.5% (4 April 2013: proforma CRD
IV of 9.1%), reflecting increased capital and reduction in risk
weighted assets, primarily through deleveraging of CRE
portfolio
-- Leverage ratio 3.3% (4 April 2013: 2.2%),
-- PRA adjusted CET1 and leverage ratio targets met.
[1] For the financial year 2013/14. Source: GfK NOP's Financial
Research Survey (FRS), 12 months of interviews conducted between
April 2013 and March 2014, proportion of extremely/very satisfied
customers minus proportion of extremely/very/fairly dissatisfied
customers summed across current account, mortgage and savings. Our
high street peer group is defined as Barclays, Halifax, HSBC,
Lloyds TSB, NatWest and Santander.
([2]) Council of Mortgage Lending (CML) average as at March
2014
[3] The Hay Group Financial Services industry benchmark is based
on data collected from approximately 55 companies around the world
within the financial services industry. It includes data from over
850,000 employees who work in these companies and is updated
annually.
FINANCIAL SUMMARY
2014 2013*
---------------------------------------------- ---------------- ------------------
Financial Performance GBPm GBPm
Total underlying income 2,895 2,485
Pre provision underlying profit 1,376 1,097
Underlying profit before tax 924 433
Statutory profit before tax 677 168
---------------------------------------------- -------- ------ --------- -------
Lending and Product Volumes GBPbn GBPbn
Group residential - gross/gross market
share 28.1 14.9% 21.5 15.1%
Group residential - net/net market share 9.9 70.8% 6.5 108.3%
Personal banking product sales (000) 826 848
Member deposits (1) GBPbn GBPbn
Member deposit balance movement/market
share 4.9 12.1% - -
Net receipts/(outflows) 2.9 (2.2)
---------------------------------------------- -------- ------ --------- -------
Key Ratios % %
Cost income ratio - underlying basis 52.5 55.9
Cost income ratio - statutory basis 56.6 61.2
Net interest margin 1.25 1.02
---------------------------------------------- -------- ------ --------- -------
Balance Sheet GBPm GBPm
Total assets 189,926 190,718
Loans and advances to customers 166,574 159,587
Member deposits (shares) 130,468 125,574
Total shares and deposit liabilities (SDLs) 174,352 174,940
Asset Quality % %
Proportion of residential mortgage accounts
3 months+ in arrears 0.63 0.72
Average indexed loan to value of residential
mortgage book 48 51
Average loan to value of new residential
lending 69 67
Total provision as % of impaired balances
on commercial real estate lending 33 35
---------------------------------------------- -------- ------ --------- -------
Key Ratios % % %
-------- ------ ---------
CRD IV Basel
CRD IV II
Capital - CRD IV (end point) unadjusted Proforma
(2)
Common Equity Tier 1 ratio 14.5 9.1 12.3
Leverage ratio (3) 3.3 2.2
-------- ------ ---------
PRA adjusted ratios
PRA adjusted CET1 ratio 11.2
PRA adjusted leverage ratio 3.2
Other balance sheet ratios
Primary liquidity ratio 11.9 11.1
Wholesale funding ratio 19.6 22.5
Loan to deposit ratio (4) 115.8 115.4
Loan to deposit ratio (including long
term wholesale funding) (5) 104.5 99.1
---------------------------------------------- -------- ------ --------- -------
* Comparatives have been restated in accordance with IAS 19
Employee Benefits (Revised).
(1) Member deposits include current account credit balances.
(2) Basel III was implemented through the Capital Requirements
Regulation and Directive, ('CRD IV'), and became effective on 1
January 2014. The table above includes prior year amounts on the
previously reported Basel II basis and under CRD IV on a pro-forma
basis to aid comparability. The concept of leverage was not
captured under Basel II and so was not reported in the prior year.
PRA adjusted measures, which are explained further in the Capital
Management Report, were not established until 20 June 2013, and so
are also not relevant to prior reporting periods.
(3) Comparative restated for change in treatment of certain
securitisations to be risk weighted as opposed to capital deducted.
See the Capital Management Report for further Information.
(4) The loan to deposit ratio represents loans and advances to
customers divided by (shares + other deposits + amounts due to
customers).
(5) The loan to deposit ratio including long term wholesale
funding represents loans and advances to customers divided by
(shares + other deposits + amounts due to customers + wholesale
funds with a maturity greater than 1 year).
CHIEF EXECUTIVE'S REVIEW
Staying true to our mutual heritage
Our performance over the past year is in line with our strategy
of being a modern mutual: looking after the needs of savers, home
owners and providing a whole range of financial services and
products. Our mortgage lending was up 31% on last year, we have
increased our member deposit balances by GBP4.9 billion and we have
opened over 430,000 new current accounts. We have achieved this
level of performance by concentrating on the needs of our existing
and new members, aiming to provide ongoing good value and
exceptional service at all times. Our financial results reflect
this success, with an increase in underlying profit of 113% to
GBP924 million. Statutory profit has increased by 303% to GBP677
million. In addition to stronger retained earnings, we have
strengthened our balance sheet further with a new form of capital:
core capital deferred shares (CCDS), and disposed of a number of
non-core assets. As a result, we have a top of peer group Common
Equity Tier 1 (CET1) ratio of 14.5% and a leverage ratio of
3.3%.
Supporting our members in the housing market
Over the past twelve months we have played a major role in
providing finance to the UK housing market, with gross and net
lending both increased year on year and in excess of our par market
share. Total gross mortgage lending was up 31% at GBP28.1 billion
(2013: GBP21.5 billion), accounting for 14.9% of all mortgage
lending, whilst our net lending for the year was GBP9.9 billion, up
52% year on year (2013: GBP6.5 billion) and representing a market
share of 70.8%. We have 1.5 million mortgage accounts and our
residential lending portfolio now stands at GBP145.7 billion (2013:
GBP135.6 billion).
Consistent with our mutual heritage we have continued to support
first time buyers; during the year we have helped 58,100 people
take their first steps into home ownership, an increase of 37% on
last year (2013: 42,500), and representing over one in five of all
first time buyer mortgages in the UK. Throughout the year we have
supported the Government's Help to Buy shared equity scheme,
accounting for over 31% of all cases advanced, and our Save to
Buy(1) proposition offers access to 95% LTV mortgages, our
equivalent of the Government's second phase of Help to Buy. Our
lending at above 90% LTV remains low, representing only 2.4% of the
total value of our lending during the year.
In addition to our support for first time buyers, we have
continued with our policy of rewarding our members by providing a
loyalty discount to our mortgage rates to existing mortgage
customers wishing to move, switch product or take a further
advance. We have also maintained our Base Mortgage Rate (BMR) at 2%
above the Bank of England (BoE) base rate. We estimate that this
has delivered member benefit in the region of GBP800 million per
annum when compared with the standard variable rate charged by
other major lenders, equivalent to a saving of around GBP1,100 for
our average BMR borrower.
As patterns of housing tenure continue to evolve, with greater
numbers of people choosing to rent rather than buy, our subsidiary,
The Mortgage Works (TMW), has continued to be a leading provider of
high quality loans to the buy to let sector. Over the past year TMW
gross advances accounted for GBP3.7 billion (2013: GBP3.3 billion)
of our total mortgage lending, representing a market share of 16%,
with net lending of GBP1.7 billion. Our total specialist mortgage
book now stands at GBP26.3 billion (2013: GBP24.9 billion),
representing 18.1% of our total residential lending portfolio
(2013: 18.4%).
Delivering value to our savers
We have offered a choice of competitive savings products
throughout the year and we have seen our member deposit balances
grow by GBP4.9 billion to GBP130.5 billion. In line with our core
purpose of looking after our members we have focused our efforts on
rewarding the loyalty of our existing members. Our Loyalty Saver
product, which pays higher rates of interest according to length of
membership, has been particularly popular and has attracted
balances of GBP9.2 billion during the year, taking the total
balances held in this account to GBP17.1 billion. We estimate that
the member value from Loyalty Saver was in the region of GBP130
million during the year.
[1] Through Nationwide's Save to Buy scheme customers have
access to a dedicated savings account to help save for a deposit
towards their home and a competitive interest rate on their
mortgage when ready to buy. The Save To Buy mortgage is only
available for a loan to value of 85% to 95%.
For many years we have campaigned for changes to the structure
of tax-free savings in the UK. We are delighted that in the recent
Budget the Chancellor reacted to our calls by increasing both the
amount that can be saved into an ISA and allowing people to switch
freely between stocks and shares and cash ISAs. In a market where
interest rates paid on retail savings have declined, this will
provide a timely boost for savers and remove structural
anomalies.
We believe that savers should be presented with simple,
transparent products. To that end, we have continued our policy of
simplifying our savings range for both existing and new accounts,
removing notice and complicated bonus arrangements, while making
all accounts accessible online. To date over 1.5 million customers
have benefited from this change and we have done this without
reducing interest rates as a consequence. During the year we also
launched our "2 clicks" service, which allows our online bank
members to open most of our savings accounts with only two clicks
of a mouse. Our overall approach and the quality of our products
and service were recently recognised with Nationwide being named as
the Moneyfacts High Street Savings Provider of the year.
A meaningful alternative to the established banks
The past year has seen an acceleration in our drive to diversify
our business through the provision of personal banking services to
new and existing members. We have opened over 430,000 new current
accounts, an 18% increase on last year (2013: 365,000), with the
latest additions to our product range, FlexDirect and FlexPlus,
proving popular. In addition, over 98,000 existing current account
members upgraded their account to FlexPlus, thereby gaining access
to a comprehensive range of benefits including interest on credit
balances, worldwide travel insurance, breakdown cover and extended
appliance warranties. The quality of our current account offering
is demonstrated by the number of awards we have won:
-- each of our full service current accounts was rated as 5 star by Defaqto;
-- Nationwide was named as the Consumer Moneyfacts 'Current
Account Provider of the Year'; and
-- FlexPlus has been rated as the number one packaged account by
Which? Magazine and as the Best Packaged Current Account in the
Moneynet Personal Finance Awards.
We now have 5.5 million current accounts, and our market share
of main standard and packaged accounts as at February 2014 had
risen over the year to 6.2% (2013: 5.7%).
As a challenger to the established banks, we welcome the drive
to facilitate easier current account switching for customers. The
industry-wide seven day account switcher initiative launched in
September, and Payments Council data indicates that our monthly
share of switching had reached 10.8% in March.
Our total gross lending of personal loans was GBP1.2 billion
(2013: GBP1.2 billion), representing a market share for the year of
4.8%. Our total outstanding balances have reached GBP1.9 billion
(2013: GBP1.8 billion), taking our market share to 3.8% (2013:
3.6%).
The credit card market over the past year was very competitive,
with aggressive pricing and increasingly long interest free periods
being used to attract customers. Against this backdrop, we have
grown our credit card business more slowly than in previous years,
with 272,000 new accounts opened over the past twelve months (2013:
350,000). Our credit card outstanding balances have increased by
12.9% to GBP1.7 billion. Moneynet named our Select card as the Best
All Round Credit Card, and we were named as the organisation with
the Most Responsible Credit Card Lending Practices in the Card and
Payment Awards for the seventh successive year.
This was the first year following the implementation of the
Retail Distribution Review (RDR) and also the introduction of a new
reward structure for regulated sales advisers. We have experienced
a reduction in the volume of our protection and investment sales,
which were down 40% at 104,000 (2013: 174,000). We have refined our
processes as we have adapted to RDR, and by the year end investment
sales per adviser had recovered back towards pre RDR levels.
Continued focus on member service
The provision of excellent member service is central to our
values. Getting the basics right is critical to ensuring that our
members trust us with their money, and our success in this area is
evidenced by the fact that despite accounting for over 10% of the
mortgages and savings market and 6% of the current account market,
we accounted for only 3.6% of total industry complaints. Of all
complaints about Nationwide referred to the Financial Ombudsman
Service 10% are upheld, compared with the industry as a whole where
51% are upheld.
True success in delighting customers means having a culture that
is focused entirely on delivering the right customer outcomes every
time. This requires a mindset that puts our members, who are also
our owners, at the centre of our thinking at all times. A number of
recent surveys have suggested that we are leading the way in this
area:
-- the Reputation Institute's annual RepTrak survey ranked us as
having the best reputation of UK banks and building societies;
-- the Human Era Index ranked us as the top financial services
provider and in the top ten brands in the UK.
These findings are backed up by Nationwide being ranked number
one for customer satisfaction amongst our high street peer group
for two and a half years(2) ,and our internal surveys show a
continued improvement in satisfaction for our branch and telephone
channels. We publish our track record on member service on our
website on a quarterly basis; your.nationwide.co.uk/stats.
People
At Nationwide we are proud of our people and the manner in which
they bring our brand to life for our members. It is vital that our
people are fully engaged in the aims of the Society and are
provided with the tools to allow them to provide exceptional
customer service. I am therefore delighted that Nationwide has been
recognised as the eleventh best big company to work for by the
Sunday Times, ahead of all other banks and building societies, and
has been ranked as one of the top 50 places for women to work in
the UK. This external recognition reinforces what our own people
are telling us through our internal "ViewPoint" survey, which shows
levels of employee engagement and enablement that are well above
the benchmarks set for high performing companies.
Strong financial performance
Our business continues to be supported by the strength of our
balance sheet. In line with our mutual status and focus on the
provision of mortgages and savings to our members, over 90% of our
lending is secured on UK residential property and approximately 80%
of our funding is raised from retail sources.
Our financial performance builds on our success in growing the
Society and delivering great service. Strong business volumes,
combined with a strengthening in our net interest margin, have
contributed to a 16% increase in income to GBP2,895 million (2013:
GBP2,485 million). Our underlying profit for the year was GBP924
million (2013: GBP433 million), an increase of 113%, and statutory
profit before tax was GBP677 million (2013: GBP168 million), an
increase of 303%. Costs have increased by 9% reflecting the
significant growth of our business and continued investment.
However, this has been more than offset by the growth in our
income, resulting in our underlying cost income ratio falling to a
record low of 52.5% (2013: 55.9%).
This level of financial performance underpins our promise to be
safe and secure. As a mutual we aim to optimise, rather than
maximise, profit, retaining sufficient earnings to support future
growth, sustain strong capital ratios and to allow us to invest in
the business to provide the services that our members demand. Our
performance this year is in line with this aim and helps us to
deliver a long term, sustainable business that operates purely in
the interests of our members.
Our prudent approach to mortgage lending is evident in our three
month mortgage arrears ratio of 0.63%, which compares favourably
with the industry average of 1.59%. We have made significant
progress in reducing our exposure to non-core commercial real
estate by reducing our balances by 24% over the past year; our
total exposure now stands at GBP7.8 billion (2013: GBP10.2 billion)
and since the year end we have reduced our exposure by a further
GBP0.7 billion through the sale of non UK CRE assets. Alongside
this deleveraging, we have seen a modest improvement in the outlook
for the commercial real estate sector and, as a consequence, our
commercial impairment charge has reduced to GBP309 million (2013:
GBP493 million). Total provision charges for all impairments have
fallen by 35% to GBP383 million (2013: GBP591 million).
[2] Source: GfK NOP's Financial Research Survey (FRS), 30 months
of interviews conducted between October 2011 and March 2014,
proportion of extremely/very satisfied customers minus proportion
of extremely/very/fairly dissatisfied customers summed across
current account, mortgage and savings. Our high street peer group
is defined as Barclays, Halifax, HSBC, Lloyds TSB, NatWest and
Santander.
Capital strength, securing the future of mutuality
We have continued to place emphasis on preserving the strength
of our balance sheet through our conservative approach to lending
and prudent management of our business. Since the financial crisis
of 2008 banks and building societies have been required to increase
both the quality and quantity of capital to support their
businesses, and over the past twelve months we have made great
strides in both these areas.
In December we issued GBP550 million of core capital deferred
shares (CCDS), a new capital instrument that qualifies as Common
Equity, the highest quality of capital, and which does not
compromise our mutual business model and contains "mutual friendly"
features, namely: one member one vote, capped distributions and
capped participation in residual assets. Our successful launch of
CCDS supports our mutual status, demonstrating our ability to
access capital in the market and providing greater flexibility over
the long term management of our business. In addition, this
instrument may be suitable for other building societies, thereby
supporting the long term health of the mutual sector in the UK and
across Europe. In March we made a further improvement to our
capital position through an inaugural GBP1 billion issue of
Additional Tier 1 capital, the first Sterling issue of this form of
capital by any institution. Both issues were oversubscribed,
demonstrating widespread investor support for Nationwide and the
strength of our mutual business model.
As a result of our strong financial performance and capital
issuance, our Common Equity Tier 1 ratio has grown by 5.4
percentage points to 14.5% (2013 proforma: 9.1%), the strongest
ratio amongst our peer group of UK banking competitors(9) . As a
result of the reduction in our non UK CRE exposures since the year
end, this figure will improve by a further 0.5%. Our leverage ratio
has now exceeded 3% on both unadjusted and PRA adjusted bases (3.3%
and 3.2% respectively), meaning we have achieved our agreed PRA
target ratio.
Whilst our progress in strengthening our capital ratios through
business performance and capital issuances provides evidence of our
ability to manage our capital resources, we remain alert to the
ongoing regulatory debate on leverage ratios which may result in
higher leverage ratio requirements in future, even for low risk
institutions such as Nationwide. In this context it will be
important that we monitor developments and plan our business in
order to be able to accommodate any new requirements that may
emerge.
Progress of our strategy and future plans
We remain committed to mutuality, providing outstanding retail
financial services to a growing member base and expanding our
presence in the personal current account market to establish a
market share in proportion to our shares in mortgages and
savings.
Member behaviours and expectations are changing, with an
increasing use of internet and mobile channels, and we will ensure
that we respond accordingly. We have already seen a significant
uptake of our digital services: we have over 2.6 million active
users of our digital services, with over 620,000 log-ons each day
to our internet bank, almost half of which are made through our
mobile banking app, and products bought through our internet bank
are up 60% year on year. In November 2013 we became, in conjunction
with Visa, the first organisation in the UK to offer V.me, a new
digital wallet designed to make online shopping more convenient and
secure. We are developing a number of future enhancements to our
digital payment services, including a mobile person to business
payments service in partnership with Zapp and a person to person
payments facility through Paym. These new services are due to
become available during the course of 2015.
([9]) Peer group consists of Santander UK, HSBC, Lloyds Banking
Group, Barclays and Royal Bank of Scotland.
Even in an increasingly digital world our branches will be a key
element of our service, although their role is likely to develop
with more time spent on the provision of advice and sales support
and less on transactional activity. We have recently taken an
important step with the launch of Nationwide Now, a service which
will boost our branch capacity by delivering help and advice to our
customers via a real time video link to an adviser based at a
central location. Early indications are that this is breathing new
life into some of our more marginal branches.
Over the past five years we have renewed our infrastructure
through the delivery of a new banking platform, new data centre,
new payments platform, new website and a mobile banking service.
Whilst these programmes have improved customer service and
increased technical resilience, it is likely that over the next few
years the pace of change will speed up, with an increasing number
of smaller initiatives to enable Nationwide to operate in an
evolving digital society.
At the same time we will not lose sight of the fact that some
members prefer branches and telephone channels to digital services,
and we will continue to operate and maintain these channels to
ensure that we meet the needs of all of our members.
Outlook
We expect the UK economy to continue to improve over the coming
year. Despite this improvement, we do not expect the Bank of
England base rate to rise imminently given the low rate of
inflation, and future rises when they occur will be gradual in
nature. The health of the UK housing market has been the subject of
much commentary in recent months, with the annual growth of house
prices now above 10% and at its highest since 2007. All regions are
now experiencing some growth, but the big increases are mainly
centred on London and the South East and there are few signs of
affordability being stretched in other UK regions.
In the recent Budget the Chancellor made substantial revisions
to ISAs and announced proposals for National Savings and
Investments (NS&I) to issue pensioner bonds in 2015. We believe
that the changes to ISAs will result in more savings into cash
ISAs, but that we may see some deposit outflows to NS&I if
rates on the pension bonds are above the normal market range and we
are therefore unable to compete.
Our business performance is strong, and we believe it will
improve further over the coming year, with a further increase in
margins and a continued growth in our banking products. The future
is not without challenges; the whole industry needs to evolve its
approach to delivering compliant solutions in a fast moving digital
world, and the demand for further increases in capital requirements
cannot be ruled out. However, we are very confident that we are in
an excellent position to deliver more value to more members in the
coming years, sharing the benefits of mutuality more widely and
presenting the only truly national alternative to the established
banks.
Graham Beale
Chief Executive
27 May 2014
FINANCIAL REVIEW
INCOME STATEMENT OVERVIEW
Profit after tax on a statutory basis is set out below. In
addition, certain aspects of the results are presented to reflect
management's view of our underlying profit performance.
Underlying profit equates to statutory profit before tax
adjusted for charges in respect of the Financial Services
Compensation Scheme (FSCS), bank levy, transformation costs and
fair value losses from derivatives and hedge accounting as set out
below.
Year to 4 April 2014 Statutory FSCS Transformation Losses from Underlying
profit and costs derivatives profit
bank and hedge
levy accounting
GBPm GBPm GBPm GBPm GBPm
---------------------------- ---------- ------ --------------- ------------- -----------
Net interest income 2,403 - - - 2,403
Other income 492 - - - 492
Movements on derivatives
and hedge accounting (51) - - 51 -
---------------------------- ---------- ------ --------------- ------------- -----------
Total income 2,844 - - 51 2,895
Administrative expenses (1,611) 17 75 - (1,519)
Pre provision underlying
profit 1,233 17 75 51 1,376
Impairment losses (383) - - - (383)
Provisions for liabilities
and charges (173) 104 - - (69)
---------------------------- ---------- ------ --------------- ------------- -----------
Profit before tax 677 121 75 51 924
Tax (128)
---------------------------- ---------- ------ --------------- ------------- -----------
Profit after tax 549
---------------------------- ---------- ------ --------------- ------------- -----------
Year to 4 April 2013* Statutory FSCS Transformation Losses from Underlying
profit and costs derivatives profit
bank and hedge
levy accounting
GBPm GBPm GBPm GBPm GBPm
---------------------------- ---------- ------ --------------- ------------- -----------
Net interest income 1,981 - - - 1,981
Other income 504 - - - 504
Movements on derivatives
and hedge accounting (165) - - 165 -
---------------------------- ---------- ------ --------------- ------------- -----------
Total income 2,320 - - 165 2,485
Administrative expenses (1,420) 16 16 - (1,388)
Pre provision underlying
profit 900 16 16 165 1,097
Impairment losses (591) - - - (591)
Provisions for liabilities
and charges (141) 68 - - (73)
---------------------------- ---------- ------ --------------- ------------- -----------
Profit before tax 168 84 16 165 433
Tax 10
---------------------------- ---------- ------ --------------- ------------- -----------
Profit after tax 178
---------------------------- ---------- ------ --------------- ------------- -----------
*Comparatives have been restated in accordance with IAS 19
Employee Benefits (Revised). Refer to note 2 for further
details.
Statutory profit before tax for the year ended 4 April 2014 was
GBP677 million, up 303% compared with the prior year (2013: GBP168
million). Underlying profit, which reflects management's view of
performance on a like for like basis across years, was GBP924
million, up 113% compared with the prior year (2013: GBP433
million). Increased profitability was driven mainly by the
continued improvement in net interest income and reduced impairment
charges, offset in part by increased administrative expenses.
Net interest income
Year to Year to
4 April 4 April
2014 2013*
GBPm GBPm
------------------------------- --------- ---------
Net interest income 2,403 1,981
Weighted average total assets 191,604 193,832
------------------------------- --------- ---------
% %
------------------------------- --------- ---------
Net interest margin (NIM) 1.25 1.02
------------------------------- --------- ---------
*Comparatives have been restated in accordance with IAS 19
Employee Benefits (Revised). Refer to note 2 for further
details.
Net interest income for the year was GBP2,403 million, GBP422
million higher than the prior year, driven largely by retail asset
growth and reduced costs of retail funding. Weighted average total
assets are 1.1% lower, as planned reductions of non-core treasury
and commercial assets have more than offset the growth in retail
lending balances. Net interest margin improved by 23 basis points
on an annualised basis to 1.25%. Margin recovery has continued
throughout the year and our point-in-time NIM at the end of 2013/14
was approximately 1.40%.
Mortgage balances have grown by around GBP10 billion during the
year and the margin performance has continued to benefit from
re-pricing of maturing longer term fixed rate balances onto higher
current market rates. Base Mortgage Rate balances (BMR) peaked in
May 2013 and now constitute a decreasing proportion of our mortgage
book, whilst continuing to represent a significant distribution of
value to members with a headline pay rate of 2.5%. Total BMR
balances at 4 April 2014 amounted to GBP52 billion (2013: GBP54
billion).
The most significant drivers of our higher margin were maturing
fixed mortgage deals re-pricing onto higher margin products and
lower retail funding costs which reflect reduced demand across the
market for retail savings, in part as a consequence of the
availability of the Funding for Lending Scheme (FLS), and growth in
our personal current account credit balances by approximately
GBP1.5 billion over the course of the year. The section of the FLS
which provides funding linked to net residential mortgage lending
has now been withdrawn and we do not expect to make any further
drawings under FLS; our total drawings to date are GBP8.5 billion
and we estimate our utilisation of the scheme contributed
approximately 2 basis points (2013: less than 1 basis point) to our
net interest margin for the year. We estimate that the marginal
cost of retail funding has fallen by around 80 basis points since
FLS was launched.
Net interest income for the year includes GBP45 million of
losses (2013: GBP139 million gain) primarily arising from the sale
of around GBP1.1 billion of treasury assets in line with our
ongoing strategy to reduce non-core exposures, a charge for fair
value adjustments of GBP23 million (2013: GBP48 million gain), and
a GBP30 million gain (2013: GBP44 million) from updated effective
interest rate assumptions relating to recognition of mortgage and
savings interest.
During the year we raised approximately GBP1.5 billion through
issuance of CET1 (CCDS - core capital deferred shares) and AT1
capital securities. The returns paid to investors on these
securities will be treated as an appropriation of profit after tax,
reflecting their categorisation as capital instruments, and hence
are not reflected in our interest margin. The first distributions
for CCDS, in respect of 2013/14, and AT1 capital securities in
respect of the period from issue to the payment date, totalling
GBP49 million, will become payable in June 2014 and will be
reflected in the 2014/15 financial statements.
Other income Year to Year to
4 April 4 April
2014 2013
GBPm GBPm
---------------------------------------------- --------- ---------
Current account and savings 111 114
Protection and investments 82 122
General insurance 101 126
Mortgage 30 41
Credit card 29 28
Commercial 17 18
Gain on redemption of subscribed capital 125 43
Other (3) 12
---------------------------------------------- --------- ---------
Total underlying other income 492 504
Losses from derivatives and hedge accounting (51) (165)
Total statutory other income 441 339
---------------------------------------------- --------- ---------
Total underlying other income of GBP492 million is 2% down
overall year on year and includes gains from the redemption of
subscribed capital of GBP125 million (2013: GBP43 million).
Excluding this non-recurring item, other income has reduced by
GBP94 million, including a GBP40 million reduction in net
protection and investment income as a result of a change to
customer pricing on protection policies and the impact of the
Retail Distribution Review which came into force on 1 January 2013.
The GBP25 million reduction in general insurance is driven by a
one-off commission benefit of around GBP20 million relating to
general insurance which was taken in the prior year. The 'Other'
category for 2013 includes a GBP7 million profit on the sale of
equity investments relating to participation in an industry wide
credit card service operation.
Administrative expenses
Year to Year to
4 April 4 April
2014 2013*
GBPm GBPm
Employee costs 636 604
Other administrative expenses 601 568
Administrative expenses (underlying) 1,237 1,172
Depreciation, amortisation and impairment 282 216
------------------------------------------- --------- ---------
Total underlying administrative expenses 1,519 1,388
Transformation costs 75 16
Bank levy 17 16
------------------------------------------- --------- ---------
Total statutory administrative expenses 1,611 1,420
------------------------------------------- --------- ---------
Cost income ratio - underlying basis 52.5 55.9
Cost income ratio - statutory basis 56.6 61.2
------------------------------------------- --------- ---------
*Comparatives have been restated in accordance with IAS 19
Employee Benefits (Revised). Refer to note 2 for further
details
Underlying administrative expenses have increased by 9% to
GBP1,519 million, largely driven by ongoing investment in the
business, general inflation and increased levels of business
activity. At a statutory level administrative expenses have
increased by 13% to GBP1,611 million.
Investment spend during the year has included revenue costs of
GBP23 million associated with the implementation of the Mortgage
Market Review and the Current Account Switching Service. In
addition, depreciation and amortisation for the year includes the
first full year's charge of GBP50 million (2013: GBP11 million)
relating to our new banking platform which became operational in
October 2012.
The year on year increase in employee costs reflects the impact
of annual pay awards averaging 2.4% and 2.5% respectively in each
of the last two years, combined with a 1.5% increase in employee
numbers year on year.
Increased levels of business activity are evident across many
aspects of our operations, including financial transactions (up
14%), mortgage lending (up 31%) and current account sales (up
18%).
Transformation costs include GBP39 million relating to our
ongoing programme to integrate distribution and account
administration relating to our Dunfermline, Derbyshire and Cheshire
brands. Under the programme the branch network will be rationalised
and re-branded "Nationwide" to eliminate unnecessary duplication
whilst preserving levels of physical access for members as a whole.
Account administration will be migrated onto Nationwide core
systems. Costs relate to asset write downs, provision for ongoing
onerous lease contracts and headcount reductions. The programme is
expected to deliver annualised cost savings in excess of GBP25
million and additional income of GBP10 million on completion.
The other significant transformation programme is the execution
of our strategic programme to source IT application and support
activities through strategic delivery partners and to transform the
way these activities are performed. Costs charged in the year for
this programme were GBP30 million and relate to the commercial
processes, transition activity, provision of technical
infrastructure and headcount reductions. The programme is expected
to deliver annualised cost savings in the region of GBP50
million.
Underlying income growth of 16% continues to run well ahead of
cost growth, resulting in a reduction in both our statutory and
underlying cost income ratios to 56.6% (2013: 61.2%) and 52.5%
(2013: 55.9%) respectively. Cost growth is expected to moderate in
2014/15.
Impairment losses
Year to Year to
4 April 4 April
2014 2013
GBPm GBPm
-------------------------------------------- --------- ---------
Residential lending - 16
Consumer banking 60 79
-------------------------------------------- --------- ---------
Retail lending 60 95
Commercial lending 309 493
Other lending 11 1
-------------------------------------------- --------- ---------
Impairment losses on loans and advances to
customers 380 589
Impairment losses on investment securities 3 2
-------------------------------------------- --------- ---------
Total 383 591
-------------------------------------------- --------- ---------
Impairment losses for the year of GBP383 million are GBP208
million (35%) lower than 2013 primarily as a result of a
significant improvement in the level of impairment suffered on our
commercial lending portfolio.
Residential mortgage impairments have benefited from house price
growth of 9.5% over the course of the financial year and continuing
low levels of arrears reflecting relatively benign, and now
improving, levels of unemployment and our prudent underwriting
approach. In addition the continuation of the low interest rate
environment is supporting stability of repayment obligations at
unusually low levels by historic standards. These factors have
contributed to a zero charge for residential impairments (2013:
GBP16 million). In calculating mortgage loss provisions house price
inflation based on movements in the Nationwide House Price Index
(HPI) to the balance sheet date are factored in, but no recognition
for anticipated future house price inflation is included.
Nationwide has maintained a consistent philosophy to retail
lending over many years with a focus on prudent underwriting
criteria. We place a heavy emphasis on managing the LTV profile of
new secured lending, including restricting the volume of higher LTV
lending and ensuring such loans are only advanced to customers with
a high credit score and strong affordability assessments. As a
result of our approach, our mortgage arrears have outperformed
industry averages by a significant margin and this continues to be
the case.
Consumer banking impairments are down 24% at GBP60 million
(2013: GBP79 million) including a credit of GBP27 million (2013:
GBPnil) relating to an update to model assumptions for late stage
recoveries on defaulted balances to reflect recent experience.
Excluding this adjustment, the implied underlying increase in
consumer banking impairment of around 10% is attributable to
balance growth with no significant change in portfolio
performance.
Commercial lending impairments relate exclusively to commercial
real estate (CRE) lending, with no arrears in our social housing
and Project Finance portfolios. The decrease in the impairment
charge to GBP309 million reflects a GBP2.4 billion reduction in CRE
exposures and stabilisation of CRE market conditions with a
consequent improvement in investor sentiment towards the sector,
allowing a wider range of exit options at improved valuations on
all but the most severely distressed exposures.
Other lending relates to loans historically originated by our
Treasury Division and includes a portfolio of GBP176 million (2013:
GBP219 million) which primarily comprises secured lending relating
to a European commercial loan portfolio and a revolving loan
facility secured by a portfolio of asset backed securities. The
charge of GBP11 million (2013: GBP1 million) relates to the
impairment of individual under-performing exposures.
Provisions for liabilities and charges Year to Year to
4 April 4 April
2014 2013
GBPm GBPm
--------------------------------------------------- --------- ---------
Underlying provisions for liabilities and charges
- customer redress 69 73
FSCS levies 104 68
--------------------------------------------------- --------- ---------
Total provisions for liabilities and charges 173 141
--------------------------------------------------- --------- ---------
The charge for customer redress provisions of GBP69 million
(2013: GBP73 million) relates to estimated costs of remediation and
redress in relation to past sales of financial products and post
sales administration, including compliance with consumer credit
legislation and other regulatory matters.
More information, including details of the increase in the FSCS
charge, is included in note 9.
Taxation
The statutory reported tax charge for the year of GBP128 million
(2013: GBP10 million credit) represents an effective tax rate of
18.9%, which is lower than the statutory rate in the UK of 23%. The
lower rate is due principally to adjustments with respect to prior
periods and the effect of the change in the UK corporation tax
rate. Further information is provided in note 10.
During the year our income statement bore taxes of GBP345
million (2013: GBP258 million) including irrecoverable VAT, bank
levy, employment and property taxes, all of which are charged to
profit before tax as part of administrative expenses and
depreciation. With the exception of the bank levy, all of these
amounts are recognised in arriving at underlying profit.
BALANCE SHEET
ASSETS 4 April 2014 4 April 2013 Change
GBPm % GBPm % %
------------------------------------------- --------------- --------------- -----------
Residential mortgages 145,660 87 135,558 85 7
Commercial lending 18,164 11 21,329 13 (15)
Consumer banking and other lending 4,038 2 3,924 2 3
----
167,862 100 160,811 100 4
Impairment provision (1,288) (1,224) 5
Loans and advances to customers 166,574 159,587 4
Other financial assets 21,285 28,941 (26)
Other non-financial assets 2,067 2,190 (5)
Total assets 189,926 190,718 -
--------- --------- -----------
Key ratios % %
Asset quality
Residential Mortgages
Proportion of residential mortgage
accounts 3 months+ in arrears 0.63 0.72 (0.09)pp
Average indexed loan to value
(LTV) of residential mortgage book 48 51 (3)pp
Average loan to value of new residential
lending 69 67 2pp
Commercial Property Finance
Total CRE gross balances (GBPm) 7,764 10,192 (24)
Impaired balances (GBPm) 3,065 2,715 13
Total provision as % of impaired
balances 33 35 (2)pp
Residential mortgages
Residential mortgages include prime and specialist loans, with
the specialist portfolio primarily comprising buy to let (BTL)
lending. We delivered gross mortgage lending during the year of
GBP28.1 billion (2013: GBP21.5 billion), representing a market
share of 14.9% (2013: 15.1%). Mortgage balances grew by GBP10.1
billion of which GBP8.7 billion (86%) was prime lending and GBP1.4
billion (14%) related to BTL. This mix of lending is consistent
with prior years and maintains our stock of residential lending at
82% prime, 18% specialist (2013: 82% prime, 18% specialist). The
loan to value (LTV) profile of new lending, weighted by a volume
basis, was broadly consistent with the prior year at 69% (2013:
67%), and the average LTV of the portfolio at 4 April 2014 was 48%
(2013: 51%). Our residential mortgage arrears fell from 0.72% at
the end of last year to 0.63% at 4 April 2014 and continue to be
significantly lower than the Council of Mortgage Lenders (CML)
industry averages. Full details of our lending risks are provided
in the Business and Risk Report.
Commercial lending
Commercial lending includes commercial real estate (CRE) loans
of GBP7.8 billion (2013: GBP10.2 billion), loans to housing
associations of GBP8.1 billion (2013: GBP8.2 billion) and a
portfolio of loans made under the Government's Project Finance
initiative amounting to GBP1.4 billion (2013: GBP1.5 billion). The
balance sheet total for commercial lending quoted above includes
GBP0.9 billion (2013: GBP1.4 billion) of fair value adjustments
relating to loans where the Group has hedged associated financial
risks, typically interest rate risk.
We have undertaken limited amounts of new lending with total
gross advances during the year of GBP65 million. Activity has been
concentrated on ongoing management of the existing portfolio with
particular focus on managed work out of weak and distressed CRE
exposures. This has resulted in a reduction of GBP2.4 billion of
CRE balances during the year, bringing our gross exposure down from
GBP10.2 billion at the end of last year to GBP7.8 billion at 4
April 2014. In addition, since the year end, we have sold over 90%
of our non-UK CRE portfolio representing gross loans of GBP694
million as at 4 April 2014, with net sales proceeds in line with
their carrying value; the sale will be recognised in the first
quarter of 2014/15 and will increase our CET 1 ratio by an
estimated 0.5%.
The level of impaired balances as a proportion of our total CRE
exposure has risen from 26% to 39%, reflecting a reduction in the
portfolio size and new impairment cases. Whilst we are seeing
continued credit risk migration, the rate of deterioration within
the portfolio, including the volume of new problem cases emerging,
has slowed, reflecting stabilisation in market conditions and the
increased proportion of the book which has now been subjected to
detailed scrutiny and challenge. Whilst provision coverage is lower
at 33% (2013: 35%), the aggregate coverage across the impaired
portfolio including collateral valuations has improved from 94% at
the end of last year to 102% at 4 April 2014.
Consumer banking and other lending
This comprises retail balances relating to personal loans of
GBP1.9 billion (2013: GBP1.8 billion), credit cards of GBP1.7
billion (2013: GBP1.5 billion) and current account overdrafts of
GBP0.3 billion (2013: GBP0.2 billion), together with GBP0.2 billion
relating to two portfolios of European business loans originated
and managed by our Treasury Division (2013: GBP0.4 billion
including GBP0.2 billion of student loan exposure sold on 24 April
2013). We have seen steady growth in unsecured retail lending
across all three products reflecting our strategy to increase
current account market share and serve members across a full range
of retail financial services. Delinquency within unsecured
portfolios remains stable with full details provided in the
Business and Risk Report.
Other financial assets
Other financial assets total GBP21.3 billion (2013: GBP28.9
billion) and comprise liquidity and investment assets held by our
Treasury Division amounting to GBP18.0 billion (2013: GBP23.8
billion), derivatives with positive fair values of GBP3.0 billion
(2013: GBP4.2 billion) and fair value adjustments and other assets
of GBP0.3 billion (2013: GBP0.9 billion).
Treasury assets include our on balance sheet primary liquidity
amounting to GBP12.3 billion (2013: GBP16.9 billion), substantially
comprising UK gilts and cash held at the Bank of England, which is
held to meet regulatory requirements, and other investment
securities and loans to banks of GBP5.7 billion (2013: GBP6.9
billion), some of which are eligible as security with central banks
to support our broader ongoing management of liquidity. The
reduction in treasury liquidity and investment assets totalling
GBP5.8 billion reflects the replacement of on balance sheet primary
liquidity with equivalent off balance sheet liquidity in the form
of FLS, together with divestment of approximately GBP1.1 billion of
legacy investment assets in line with our ongoing strategy of
deleverage of assets which no longer meet risk appetite or
regulatory benchmarks. During the financial year an additional GBP6
billion was drawn down from the FLS scheme and this underpinned our
primary liquidity ratio which was 11.9% at 4 April 2014 (2013:
11.1%). Full details of our treasury portfolios are included in the
sections of the Business and Risk Report which discuss treasury
assets, liquidity and financial risks.
Derivative instruments relate to interest rate and other swaps
we use to hedge financial risks inherent in our core business. The
fall in value is driven by a combination of interest rate movements
and an overall reduction of derivatives with an outstanding
maturity of less than one year.
LIABILITIES 4 April 4 April Change
2014 2013 %
GBPm GBPm
---------------------------------- -------- -------- --------
Member deposits 130,468 125,574 4
Debt securities in issue 28,557 33,429 (15)
Other financial liabilities 20,621 23,816 (13)
Other liabilities 1,374 1,319 4
-------- -------- --------
Total liabilities 181,020 184,138 (2)
Members' interests and equity 8,906 6,580 35
-------- -------- --------
Total members' interests, equity
and liabilities 189,926 190,718 -
-------- -------- --------
Key ratios % %
Primary liquidity ratio 11.9 11.1 0.8pp
Wholesale funding ratio 19.6 22.5 (2.9)pp
---------------------------------- -------- -------- --------
Member deposits
Member deposits increased by GBP4.9 billion to GBP130.5 billion
(2013: GBP125.6 billion) due to retail inflows and capitalised
interest on members' accounts of GBP1.7 billion (2013: GBP2.3
billion). We attracted total retail inflows, including non-member
balances (categorised within other financial liabilities above), of
GBP2.9 billion (2013: GBP2.2 billion - outflow). We estimate our
share of the balance growth in the UK savings market for the year
to be 12.1%.
Debt securities in issue
Debt securities in issue of GBP28.6 billion (2013: GBP33.4
billion) are used to raise funding in wholesale markets to finance
our core activities. The reduction in outstanding amounts at 4
April 2014 reflects re-financing of natural maturities with
drawings under FLS in preference to funding with market
counterparties. In the context of our overall funding position, we
have made moderate use of FLS, drawing a total of GBP8.5 billion to
date, and the benefits of this cheaper form of funding have been
passed on to members through lower mortgage rates in line with the
purpose of the scheme. FLS drawings have a contractual maturity of
four years but are fully flexible, allowing early repayment without
penalty at any time.
The reduction in our wholesale funding ratio to 19.6% (2013:
22.5%) reflects this re-financing of wholesale maturities with off
balance sheet FLS drawings which are excluded from the calculation
but which we view as flexible wholesale term funding.
Other financial liabilities
Other financial liabilities include customer and bank deposits
of GBP15.3 billion (2013: GBP16.0 billion), permanent interest
bearing shares (PIBS) of GBP0.6 billion (2013: GBP1.3 billion),
subordinated debt of GBP2.3 billion (2013 GBP2.5 billion) and
derivatives and fair value adjustments of GBP2.4 billion (2013:
GBP4.0 billion).
The reduction in PIBS reflects the repurchase in September and
October 2013 of GBP506 million of these capital securities which
will become ineligible for regulatory capital purposes on a phased
basis under CRD IV, generating a gain of GBP125 million which is
included in other income. This transaction was undertaken as part
of the ongoing management of our capital position as we transition
to new regulatory capital requirements. We also redeemed $225
million (GBP138 million sterling equivalent) of subordinated notes
in January 2014 at contractual maturity which accounts for the
majority of the movement in outstanding subordinated debt during
the year. The reported values of PIBS and subordinated debt include
adjustments to fair value these liabilities as prevailing interest
rates change and these valuation adjustments, which are disclosed
in the relevant notes, have also contributed to overall movements
in our financial liabilities.
Derivatives and fair value adjustments of GBP2.4 billion (2013:
GBP4.0 billion) included in financial liabilities largely comprise
interest rate and other derivatives taken out to hedge our core
lending and funding activities. The negative value of these
positions has reduced significantly over the course of the year as
the upward trend in market interest rates has improved valuations
of derivatives used to hedge fixed rate assets.
CAPITAL STRUCTURE
4 April 2014 4 April 2013 4 April 2013
GBPm / % GBPm / % GBPm / %
CRD IV(1) CRD IV Basel II
Proforma
----------------------------------------- ------------- ------------- -------------
Capital resources
Common Equity Tier 1 capital 5,849 4,551 5,454
Total Tier 1 capital (transitional) 7,433 5,488 6,894
Total regulatory capital (transitional) 9,704 7,746 8,496
Risk weighted assets (RWAs) 40,455 50,285 44,440
CRD IV capital ratios (unadjusted)
Common Equity Tier 1 (CET1) ratio 14.5% 9.1% 12.3%
Leverage ratio 3.3% 2.2%
-------------
PRA adjusted ratios
PRA adjusted CET1 ratio 11.2%
PRA adjusted leverage ratio 3.2%
1. Capital resources, RWAs and ratios above are reported under
CRD IV on an 'end point' basis with the exception of total Tier 1
capital and total regulatory capital, which include grandfathered
legacy Tier 1 and 2 instruments under transitional rules.
We reported our capital position under the Basel II framework
last year. Basel III was implemented through the Capital
Requirements Regulation and Directive, together "CRD IV", and
became effective on 1 January 2014. The table above includes prior
year amounts on the previously reported Basel II basis and under
CRD IV on a proforma basis to aid comparability. The concept of
leverage was not captured under Basel II and so was not reported in
the prior year. PRA adjusted measures, which are explained further
in the Capital Management Report, were not established until 20
June 2013, and so are also not relevant to prior reporting
periods.
The impact of CRD IV is complex but in summary tends to reduce
capital resources by imposing risk based deductions which were not
recognised under Basel II and restricting eligibility of non-core
capital instruments either entirely or on a phased basis under
transitional rules which extend to 31 December 2021. CRD IV also
increases risk weighted assets through a variety of adjustments
designed to capture risks associated with the valuation or ultimate
realisation of assets which were deemed not to be recognised
sufficiently under Basel II. Given these differences in the basis
of measurement of our capital position, and the fact that only
Basel III is relevant to the regulatory assessment today, the
analysis below focuses on the movement in CRD IV measures only.
Our CET1 capital resources have increased over the financial
year by approximately GBP1.3 billion. This increase includes GBP531
million of net proceeds from our inaugural issue of CCDS in
December 2013 and retained earnings of GBP549 million. The
remainder of the increase relates primarily to a GBP201 million
reduction in the adjustment for unrealised fair value deficits on
our "available for sale" portfolio held in Treasury, as a
proportion of the assets have been sold during the year, and the
fair value of the remainder has increased as market prices have
improved.
Our total capital resources have increased over the financial
year by approximately GBP2.2 billion. The balance of the increase
in capital resources relates to our issue of GBP1 billion of
Additional Tier 1 capital securities in March 2014 net of other
more minor adjustments, including a reduced level of outstanding
permanent interest bearing shares (PIBS) following our redemption
of PIBS in September and October 2013.
The issue of CCDS represented a strategically important landmark
for Nationwide and is discussed in the Chief Executive's Report.
CCDS are fully qualifying common equity capital instruments under
Basel III, but importantly incorporate features which are
consistent with a mutual ownership structure. In particular, CCDS
holders are members of the Society and the Board acknowledges a
fiduciary responsibility towards them; they are subject to the "one
member, one vote" principle in line with other membership interests
(although for other reasons in practice their votes are unlikely
ever to be exercised in general meetings); the investment returns
available to CCDS holders are subject to an inflation linked cap
thus mitigating the risk of over distribution; and finally the
distribution available to CCDS investors in the event the Society
is wound up is restricted to their original investment thus
avoiding any incentive to lobby for demutualisation.
Risk weighted assets reduced significantly over the year due to
the deleverage of legacy treasury and CRE assets; the total
deleverage across these two asset classes during the year amounted
to approximately GBP3.5 billion in gross terms and GBP5.2 billion
in risk weighted terms. In addition ongoing credit risk migration
within the CRE portfolio tends to reduce RWAs as exposures are
treated as deductions from capital, and hence carry a zero risk
weight, when they are classified as in default.
The movements described above have resulted in an increase in
our CET1 ratio from 9.1% to 14.5%, and in our leverage ratio from
2.2% to 3.3%, on a like for like basis over the course of the year.
On a PRA adjusted basis our CET1 and leverage ratios were 11.2% and
3.2% compared with regulatory targets of 7% and 3% respectively.
The regulatory adjustment to our leverage ratio is modest and
relates to an asset valuation adjustment of GBP127 million. The
adjustment to our CET1 ratio is more significant due to the fact
that for this measure the regulator also introduces a risk weight
floor of 15% for residential mortgages, leading to an increase in
our RWAs of GBP10.6 billion (26%).
More details of the capital position are included in the Capital
Management Report.
BUSINESS AND RISK REPORT
Introduction and key risks
Overview
This Business and Risk Report explains in greater detail the
Group's business, the risks it is exposed to and how it manages
those risks.
The Group is organised into three business streams: Retail,
Commercial and Head Office functions. The Group is predominantly a
retail focused operation which trades almost exclusively within the
UK, with the exception of wholesale funding and liquidity
management activities. Wholesale funding is accessed by the Group
from both UK and overseas markets. The Group's liquidity position
is actively managed from the UK.
The Group's operations incorporate a commercial property lending
business and a treasury portfolio which includes loans to banks,
cash, investment securities and derivatives.
The chart below shows the Group's business model and how these
activities are reflected in its risk measures. The regulatory
capital risk weightings below indicate the relative risks each area
carries as at 4 April 2014. Please see the Capital Management
section of this report for further details regarding the Group's
capital position.
Nationwide Group
--------------------------------------------------------------------------------------------------------------------------
Operating Retail Commercial Head office (including
Segment Treasury)
----------- ------------------------------------- ---------------------------------- ----------------------------------
Activities
* Prime residential lending * Commercial lending business * Treasury including funding,
liquidity and market risk
management
* Specialist residential lending * Commercial real estate
* Head office functions
* Consumer banking * Social housing
* Central support functions
* Savings products Project Finance
* Insurance
* Investments
----------- ------------------------------------- ---------------------------------- ----------------------------------
Regulatory GBPm GBPm GBPm
Risk Credit risk 22,004 Credit risk 9,061 Credit risk 5,599
Weighted Operational risk Operational risk Operational risk
Assets 3,542 111 109 Market risk
as at 4 Market risk - Market risk - 29
April 2014
----------- ------------------------------------- ---------------------------------- ----------------------------------
Principal risks
Whilst the Group accepts that all of its business activities
involve risk, it seeks to protect its members by managing the risks
that arise from its activities appropriately. The principal risks
inherent within the business aredescribed in the table below:
Risk category Definition
================ ==================================================================
Lending The risk that a borrower or counterparty fails to pay interest
or to repay principal on a loan or other financial instrument
(e.g. a bond) on time. Lending risk also encompasses extension
risk and concentration risk.
================ ==================================================================
Financial The risk of the Group having inadequate earnings, cash
flow or capital to meet current or future requirements
and expectations. It includes loss or damage to the earnings
capacity, market value or liquidity of the Group, arising
from mismatches between the Group's assets, funding and
other commitments, which may be exposed by changes in market
rates, market conditions or the Group's own credit profile.
================ ==================================================================
Operational The risk of loss resulting from inadequate or failed internal
processes, people and systems or from external events.
================ ==================================================================
Customer The risk that the organisation fails to design and implement
and compliance operational arrangements, systems and controls such that
it can maintain legal and regulatory compliance, deliver
fair customer outcomes and achieve a positive experience
for customers.
================ ==================================================================
Strategic The risk of significant loss or damage arising from business
decisions that impact the long-term interests of the membership,
or from an inability to adapt to external developments.
================ ==================================================================
In addition to these principal categories of risk, model risk,
which the Group is exposed to, is managed under a separate
framework across all risk categories and business areas where risk
models are used.
Risk category Definition
============== ================================================================
Model risk The risk that an adverse outcome occurs as a direct result
of weaknesses or failures in the design or use of a model.
The adverse consequences include financial loss, poor business
or strategic decision making, or damage to the Group's
reputation.
============== ================================================================
The frameworks for the above risks (including associated risk
appetite, limits, supporting policies and other documents) are
reviewed annually or more frequently as appropriate. They are also
subject to continuous monitoring by the relevant governance
committees and by the Chief Risk Officer.
In addition to these principal risks that are inherent in the
Group's business it identifies, monitors and manages the top and
emerging risks that could affect delivery of the Corporate Plan as
an integral element of its risk and management strategy.
Top and emerging risks
The Group's top and emerging risks are identified through the
process outlined in the Risk Governance section, and are closely
tracked throughout the governance structure. The Group continues to
keep these risks under close observation through risk reporting and
metrics where appropriate.
The Group sees three themes to its top and emerging risks:
continuing to contain financial and lending risks, evolving with
the new regulatory environment and managing the operational risks
driven by digital transformation.
Continuing to contain financial and lending risks
Managing financial and lending risks is a fundamental part of
what Nationwide does. Over the past few years, the Group's exposure
to financial risk has decreased as its profitability has improved.
The Group has successfully issued new capital and has been
deleveraging its highest risk lending books. The current economic
environment poses three main risks to the Group's continuing
ability to manage financial and lending risks:
-- The housing price bubble bursting, accompanied by a reversal
in the UK economy, could increase credit losses significantly
Government policies, the low interest rate environment, and a
significant flow of overseas buyers stimulate the housing market.
There is a risk that these conditions may reverse, increasing
credit losses in the Group's mortgage portfolios and depressing the
wider economy.
-- Resurgent competition could squeeze core margins below sustainable levels
The margin earned on the Group's core products may be squeezed
through increased competition. Several of the Group's competitors
have announced strategic changes, reducing their international and
investment banking activities to refocus on the UK retail banking
market where they have set ambitious growth objectives.
-- Wider global financial developments, for example the
re-emergence of tensions within the Eurozone, might increase the
Group's funding costs
The global economy has strengthened in the past 12 months.
However, uncertainties remain over the sustainability of this
recovery. The risk of Eurozone break up has broadly receded.
However, it remains a possibility. Whilst the Eurozone has emerged
from recession, risks to economic growth persist and could affect
the outlook. In addition, the political issues arising on the edge
of Europe pose risks to the wider economic outlook and investor
sentiment.
Evolving with the new regulatory environment
Dealing with regulation is an unavoidable part of running a
modern financial institution. Nationwide's business model and
member focus puts it in a good position to meet the regulator's
expectations of conduct and the Group has seen proportionately less
enforcement action and customer redress than its competitors. There
are two key areas in the regulatory environment that pose a risk to
achievement of the Group's goals:
-- Increasing standards for conduct could restrict the Group's
channels, services or proposition
The FCA is still evolving its approach to conduct risk but is
already significantly more assertive than its predecessor. The
digitisation of the Group's proposition provides further challenges
where legislation and processes are carried forward into the
digital age. The Group will design and implement appropriate
controls and process in order to continue to provide the services
that its members value against the changing regulatory
backdrop.
-- Regulatory standards, for example the minimum leverage ratio, could increase
The regulatory expectations and requirements set for financial
services providers are still undergoing change as national and
international regulatory initiatives develop. There is a risk that
further increases in capital and leverage requirements have the
potential to adversely impact the building society model,
constraining growth or forcing retrenchment.
Managing the operational risks driven by digital
transformation
The pace of technological development is creating a period of
significant change in financial services. The Group's aim is to
make the most of new technology to achieve its goal of being number
one for customer service. The Group has already successfully
delivered a new banking system, mortgage system and mobile banking
alongside a number of other technology changes. As the Group
continues to invest in new technology there are three areas that
pose a risk to achieving its goals:
-- Rising customer expectations could exceed the Group's ability
to provide highly reliable, widely available services
The rise of digital banking is changing customer expectations of
the availability of banking services. As digital changes make
transactions easier and more convenient the Group expects customers
to transact more, and in many different ways. The Group needs to
ensure it manages service provision ahead of rising customer
expectations to maintain its goal of being number 1 for customer
service. The Group has a programme in place to ensure that while
developing its digital proposition it also increases IT resilience
and round-the-clock service availability.
-- Executing changes to business processes to adapt to the new
environment could disrupt the Group's business or its customers
The Group will make significant investment in transforming its
products and delivery channels to meet evolving consumer and
regulatory expectations. The complexity of these transformation
activities may increase the inherent risk of system failures or
errors and the Group will need to ensure controls to manage this
remain effective in order to underpin its services to members.
-- Building a new digital proposition that appeals to new
members could compromise the services that are valued by longer
established members
The Group faces a challenge to strengthen its appeal to
customers who have affinity to new, digital technologies whilst
still providing market leading service to those members who value
traditional services, such as its branch network and contact
centres.
The Group's business and managing risks in it
The following sections contain detailed analysis of the Group's
business, principally its balance sheet, and provide further
analysis in the context of the principal risks and top and emerging
risks identified above. Information is given regarding management
and mitigation of risks. This review covers:
-- Loans and advances and lending risks
-- Treasury assets and treasury credit risks
-- Financial risk management
-- Operational risks
-- Customer and compliance risks
-- Strategic risks
Details relating to market risk management, pension obligation
risks and the Group's risk governance framework are provided in the
Group's Annual Report and Accounts 2014.
Loans and advances and lending risks
Loans and advances to customers
Loans and advances to customers account for 87.7% (2013: 87.0%)
of the Group's total assets. Lending remains concentrated on high
quality secured products with residential mortgages accounting for
87.3% of the Group's gross loans and advances to customers. This is
an increase from 2013 (85.0%) reflecting the Group's strategy of
exiting non-core commercial lending.
Loans and advances to customers 4 April 2014 4 April 2013
GBPm % GBPm %
---------------------------------- -------- ------ -------- ------
Prime residential mortgages 119,319 71.5 110,619 69.4
Specialist residential mortgages 26,341 15.8 24,939 15.6
-------- ------ -------- ------
Total residential mortgages 145,660 87.3 135,558 85.0
Commercial lending 17,284 10.3 19,916 12.5
Other lending 176 0.1 436 0.3
Consumer banking 3,862 2.3 3,488 2.2
-------- ------ -------- ------
Gross balances 166,982 100.0 159,398 100.0
-------- ------ -------- ------
Impairment provisions (1,288) (1,224)
Fair value adjustment for micro
hedged risk 880 1,413
-------- ------ -------- ------
Total 166,574 159,587
---------------------------------- -------- ------ -------- ------
Lending risk
Lending risk is considered by reference to the four main types
of lending the Group provides and relates to the risk that a
borrower or counterparty fails to pay interest or to repay
principal on a loan or other financial instrument. Lending risk
includes all aspects of credit risk including concentration risk
and extension risk.
Risk category Portfolio
=================== ===================================================
Retail (secured) Residential mortgages including prime mortgage and
specialist lending.
=================== ===================================================
Retail (unsecured) Consumer banking including personal loans, credit
card and banking portfolios.
=================== ===================================================
Commercial Commercial lending portfolio.
=================== ===================================================
Treasury Treasury liquidity and discretionary portfolios.
=================== ===================================================
Comprehensive credit risk management methods and processes are
established as part of the Group's overall governance framework to
measure, mitigate and manage credit risk within its risk appetite.
As a mutual, the Group maintains a conservative approach to risk as
shown by the quality of its balance sheet. Lending risk portfolios
are managed within concentration limits and are subjected to stress
testing and scenario analysis to simulate potential outcomes and
calculate their associated impact.
Each of the above portfolios is considered in turn below.
Residential mortgage lending and credit risks
Overview
The makeup of prime and specialist mortgage lending is as
follows:
2014 2013
GBPm % GBPm %
Buy to let 21,932 83 20,081 80
Self-certified 2,960 11 3,297 13
Near prime 1,037 4 1,162 5
Sub prime 412 2 399 2
------- ----- ------- ---
Specialist lending 26,341 100 24,939 100
Prime lending 119,319 110,619
------- ----- ------- ---
Total residential mortgages 145,660 135,558
----------------------------- ------- ----- ------- ---
The Group's residential mortgages include both prime and
specialist loans. Prime residential mortgages are mainly Nationwide
branded advances made through the Group's branch network and
intermediary channels.
All new specialist lending is originated through The Mortgage
Works (UK) plc (TMW), exclusively in the buy to let market.
Self-certified lending was originated historically by TMW, UCB Home
Loans Corporation Limited (UCB) and Derbyshire Home Loans Limited,
but this type of lending was discontinued in 2009. The majority of
near prime and subprime balances were acquired from the Derbyshire
and Cheshire building societies.
Prime mortgage assets purchased from the Bank of Ireland in
December 2011, although acquired by TMW, are categorised as prime
business. New specialist lending is restricted to buy to let.
The major risk on retail mortgages is credit risk. The Group's
prudent approach to new business means that impairments are low and
rising house prices have further improved the position. The
impairment position is summarised below:
2014 2013
GBPm % GBPm %
Prime book:
Impaired balances / % of book 504 0.42 564 0.51
Impairment provisions / coverage 18 3.6 32 5.7
Impairment credit for the year - (6)
Specialist lending:
Impaired balances / % of book 651 2.47 726 2.91
Impairment provisions / coverage 84 12.9 133 18.3
Impairment charge for the year - 22
---------------------------------- ----- ----- ----- -----
Impairment charges and provisions have reduced in both prime and
specialist lending books reflecting increases in the House Prices
Index (HPI), the Group's prudent underwriting discipline and its
approach to managing cases individually. The sections below provide
greater detail on credit concentrations and performance on the
book.
Significant events/environment
Over the past year UK house prices have increased by 9.5% with
growth in most geographical areas albeit that biggest rises have
been in London and the South East. This growth has eased credit
risk pressures to date but is being kept under close review.
The Group is committed to supporting the housing market and
first time buyers in particular. As a result, the average loan to
value (LTV) of new residential mortgage lending has increased to
69% (2013: 67%) calculated on a volume basis. The Group's strategy
is supported by a robust affordability assessment and credit
scoring process that ensures that asset quality remains within the
Group's risk appetite. The success of these controls is
demonstrated by the continuing low arrears and impairment
performance of the secured portfolios.
The Group has supported government initiatives in the housing
market, accepting applications under the Help to Buy shared equity
scheme. In doing so, the proportion of the Group's new lending
which is on new build property has increased. The Group is closely
monitoring the volume of lending within both the Help to Buy scheme
and on new build properties to ensure unreasonable concentrations
of lending are not introduced into the portfolio.
Initiatives to support the first time buyer market continue to
include the Save to Buy product, which enables customers to access
products up to 95% LTV where they have demonstrated a track record
of saving prior to applying for the mortgage. The availability of
the deposit and being able to demonstrate that the mortgage is
affordable are critical factors in the mortgage application.
TMW has strategically adjusted its product range in order to
attract larger loans. This has resulted in the average specialist
loan size increasing by approximately GBP15,000 in the last 12
months and an increased proportion of lending in the South East
where property prices are higher. Industry leading controls to
reduce the potential misuse of buy to let mortgages for residential
lending have proven to be effective. Despite increased competition
TMW has maintained a strong market presence with around 17% market
share in 2013/14.
Geographical concentration
Residential mortgages are only secured against UK properties.
The geographical split of the book for the year ended 4 April 2014
is shown below:
2014 2013
Analysis calculated on a value basis % %
--------------------------------------- -------------- -----
Greater London 32 22
Central England 19 22
Northern England 16 20
South East England (excluding London) 12 11
South West England 9 9
Scotland 7 9
Wales and Northern Ireland 5 7
Total 100 100
--------------------------------------- -------------- -----
Loan to value (LTV)
All borrowing applications are subject to appropriate credit
risk underwriting processes, including an affordability assessment.
For secured loans, pricing will typically vary by LTV. Higher LTV
products are typically subject to higher interest rates
commensurate with the associated risk.
2014 2013
LTV of loan stock and new business % %
Average loan to value of stock (indexed) by volume 48 51
Average loan to value of new business by volume 69 67
Average loan to value of stock (indexed) by value 58 62
Average loan to value of new business by value 73 71
---------------------------------------------------- ----- -----
Note: The average value of new business above excludes further
advances.
LTV is measured both on a volume basis (i.e. number of loans)
and by value (based on mortgage balance at balance sheet date for
stock and at inception for new business). The average LTV on the
overall stock (indexed) has reduced by 3% to 48% (2013: 51%), and
average LTV of new business has increased by 2% to 69% (2013: 67%)
on a volume basis with similar movements in value based LTV.
The details in the remainder of this section use value based
calculations to allow analysis of the balance sheet.
2014 2013
New business by borrower type % %
Home movers 32 36
First time buyers 31 26
Remortgagers 22 22
Other 1 0
Buy to let 14 16
----- -----
100 100
------------------------------- ----- -----
Note: The new business profile of new business above excludes
further advances.
The proportion of first time buyers has increased over the year,
as the Group has actively supported this segment of the market as
part of the wider Nationwide Citizenship agenda. Competitive
pricing to this segment, predominantly within a higher LTV range
(80%-90%) has been used in conjunction with other initiatives such
as the running of first time buyer clinics to support first time
buyers through their journey of buying their first home. This focus
on first time buyers at higher LTVs has driven the increase in LTV
on new lending.
The table below sets out the LTV profile for new business:
New residential lending - distribution of loans
by original LTV band 2014 2013
% %
------------------------------------------------ ----- -----
Loan to value analysis:
0% - 60% 19 21
60% - 75% 38 38
75% - 80% 10 12
80% - 85% 15 18
85% - 90% 16 9
90% - 95% 2 2
>95% - -
----- -----
100 100
------------------------------------------------ ----- -----
The table below shows LTVs for the Group's residential mortgage
portfolio split between performing and non-performing loans and by
geographical segment. Average LTVs are calculated on a weighted
value basis. Non-performing accounts include all impaired loans and
also loans which are past due but not yet impaired; performing
loans are neither past due nor impaired.
Residential mortgage Greater Central Northern South South Scotland Wales Total
balances by LTV and London England England East West & Northern
region England England Ireland
(excluding
London)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm %
--------------------------- ---------- ------- -------- ----------- ------- ---------- ---------- ------- ---
At 4 April 2014
Performing loans
Fully collateralised
LTV ratio:
<50% 16,771 7,405 5,587 5,916 4,165 2,664 1,899 44,407
50-60% 8,889 3,576 2,758 2,764 1,839 1,305 832 21,963
60-70% 10,703 5,097 4,240 3,712 2,615 1,915 1,155 29,437
70-80% 6,418 6,196 5,860 3,721 2,917 2,456 1,492 29,060
80-90% 1,972 3,213 3,401 1,488 1,359 1,352 915 13,700
90-100% 38 424 1,102 72 108 244 331 2,319
44,791 25,911 22,948 17,673 13,003 9,936 6,624 140,886 96
Partially collateralised
* >100% LTV (A) 7 31 188 4 8 56 510 804 1
---------- ------- -------- ----------- ------- ---------- ---------- -------
* collateral value on A 5 29 177 3 6 53 414 687
---------- ------- -------- ----------- ------- ---------- ---------- -------
Total performing
loans 44,798 25,942 23,136 17,677 13,011 9,992 7,134 141,690 97
---------- ------- -------- ----------- ------- ---------- ---------- ------- ---
Non-performing loans
Fully collateralised
LTV ratio:
<50% 366 149 110 104 62 50 50 891
50-60% 229 85 69 59 34 26 25 527
60-70% 292 139 114 87 58 40 37 767
70-80% 187 162 157 95 70 61 42 774
80-90% 55 134 146 63 53 38 37 526
90-100% 5 67 127 14 16 20 38 287
---------- ------- -------- ----------- ------- ---------- ---------- -------
1,134 736 723 422 293 235 229 3,772 2
Partially collateralised
- >100% LTV (B) 2 14 52 3 3 10 114 198 1
---------- ------- -------- ----------- ------- ---------- ---------- -------
- collateral value
on B 2 13 47 2 2 10 86 162
---------- ------- -------- ----------- ------- ---------- ---------- -------
Total non-performing
loans 1,136 750 775 425 296 245 343 3,970 3
---------- ------- -------- ----------- ------- ---------- ---------- ------- ---
Total residential
mortgages 45,934 26,692 23,911 18,102 13,307 10,237 7,477 145,660 100
--------------------------- ---------- ------- -------- ----------- ------- ---------- ---------- ------- ---
Greater Central Northern South South Scotland Wales Total
London England England East West & Northern
Residential mortgage England England Ireland
balances by LTV and (excluding
region London)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm %
--------------------------- ---------- -------- -------- ----------- -------- ---------- ---------- ---------- ---
At 4 April 2013
Performing loans
Fully collateralised
LTV ratio:
<50% 13,083 6,609 5,034 5,121 3,756 2,348 1,738 37,689
50-60% 5,593 2,778 2,177 1,992 1,447 1,028 701 15,716
60-70% 8,002 3,929 3,103 2,787 2,005 1,353 927 22,106
70-80% 8,627 5,118 4,535 3,308 2,496 1,802 1,160 27,046
80-90% 4,399 4,140 4,151 2,506 1,853 1,908 1,064 20,021
90-100% 448 1,587 2,110 674 550 688 524 6,581
---------- -------- -------- ----------- -------- ---------- ---------- ----------
40,152 24,161 21,110 16,388 12,107 9,127 6,114 129,159 95
Partially collateralised
* >100% LTV (A) 19 222 823 47 52 225 733 2,121 2
---------- -------- -------- ----------- -------- ---------- ---------- ----------
* collateral value on A 17 213 782 45 50 212 594 1,913
---------- -------- -------- ----------- -------- ---------- ---------- ----------
Total performing
loans 40,171 24,383 21,933 16,435 12,159 9,352 6,847 131,280 97
---------- -------- -------- ----------- -------- ---------- ---------- ---------- ---
Non-performing loans
Fully collateralised
LTV ratio:
<50% 290 140 105 90 60 43 47 775
50-60% 157 70 57 46 29 20 23 402
60-70% 239 105 86 66 45 29 28 598
70-80% 303 147 126 76 64 46 40 802
80-90% 195 162 151 92 62 52 42 756
90-100% 53 133 160 55 49 32 38 520
---------- -------- -------- ----------- -------- ---------- ---------- ----------
1,237 757 685 425 309 222 218 3,853 2
Partially collateralised
* >100% LTV (B) 10 58 143 16 11 33 154 425 1
---------- -------- -------- ----------- -------- ---------- ---------- ----------
* collateral value on B 9 54 133 14 10 31 114 365
---------- -------- -------- ----------- -------- ---------- ---------- ----------
Total non-performing
loans 1,247 815 828 441 320 255 372 4,278 3
---------- -------- -------- ----------- -------- ---------- ---------- ---------- ---
Total residential
mortgages 41,418 25,198 22,761 16,876 12,479 9,607 7,219 135,558 100
--------------------------- ---------- -------- -------- ----------- -------- ---------- ---------- ---------- ---
The Group's proportion of non-performing loans has decreased by
0.5% to 2.7% during the year. In addition, the proportion of all
partially collateralised loans has reduced 1.1% to 0.7% with the
shortfall in collateral on non-performing loans reduced to GBP36m
(2013: GBP60 million).
Lending risk
Retail credit risk profile
Residential mortgage lending in the Group continues to have a
low risk profile when compared to industry benchmarks helped by a
composition which has remained broadly consistent over the years
and comprises a large number of smaller loans which are broadly
homogenous, have low volatility of credit risk outcomes and are
intrinsically highly diversified. When assessing the credit risk
profile the Group has regard to lead indicators such as
concentration risk and LTV as noted above and also performance
statistics on particular groups of loans including:
-- arrears (particularly arrears of 3 months or over)
-- impaired loans
-- possession balances
-- interest only mortgages
-- negative equity loans.
Arrears
Reflecting the Group's low risk profile, performance of the
mortgage books has remained strong with the number of residential
mortgages more than three months in arrears reducing in both the
specialist and prime mortgage books. The Group's overall arrears
percentage of 0.63% compares favourably with the Council of
Mortgage Lenders (CML) industry average of 1.59% (2013: 1.89%
restated by CML).
Number of cases more than 3 months in
arrears as % of total book 4 April 2014 4 April 2013
% %
--------------------------------------- ------------- -------------
Prime 0.46 0.53
Specialist 1.53 1.75
------------- -------------
Group 0.63 0.72
------------- -------------
CML industry average 1.59 1.89
------------- -------------
Impaired loans
Impaired and non-performing loans are identified primarily by
arrears status. Impaired accounts are those defined as greater than
or equal to three months in arrears, and include accounts subject
to possession, litigation and bankruptcy where arrears are greater
than or equal to one month.
Non-performing accounts include all impaired loans and also
loans which are past due but not impaired, including any asset
where a payment due is received late or missed. The non-performing
loan amount represents the entire financial asset rather than just
the payment overdue. Loans on interest only or payment holiday
concessions are initially categorised according to their payment
status as at the date of concession, with subsequent revisions to
this category assessed against the terms of the concession.
The table below provides information on residential mortgages by
payment due status:
4 April 2014 4 April 2013
Prime Specialist Total Prime Specialist Total
lending lending lending lending
GBPm GBPm GBPm % GBPm GBPm GBPm %
------------------------------- --------- ----------- -------- ------ --------- ----------- -------- ------
Performing:
Neither past due nor impaired 116,998 24,692 141,690 97.3 108,223 23,059 131,280 96.8
Non-performing:
Past due up to 3 months
but not impaired 1,817 998 2,815 1.9 1,832 1,154 2,988 2.2
Impaired 504 651 1,155 0.8 564 726 1,290 1.0
--------- ----------- -------- ------ --------- ----------- -------- ------
Total 119,319 26,341 145,660 100.0 110,619 24,939 135,558 100.0
--------- ----------- -------- ------ --------- ----------- -------- ------
Impairment (credit)/charge
for the year - - - (6) 22 16
------------------------------- --------- ----------- -------- ------ --------- ----------- -------- ------
The Group has maintained the strong overall quality of its
retail mortgage portfolio. Total residential impairments have
reduced from GBP16 million in 2013 to GBPnil in 2014, benefiting
from the rise in house prices over the year and the Group's
continued focus on prudent underwriting criteria.
Individual impairment provisions are assigned to accounts in
possession and a collective provision is assigned to all other
accounts to estimate incurred but not identified losses. Impaired
residential mortgages are further analysed as follows:
Impaired residential mortgage 2014
balances by payment due
dates
Prime lending Specialist Total
lending
GBPm GBPm GBPm %
------------------------------- -------------- ----------- ------ ----
Impaired status:
Past due 3 to 6 months 225 269 494 43
Past due 6 to 12 months 164 183 347 30
Past due over 12 months 100 138 238 21
Possessions 15 61 76 6
504 651 1,155 100
------------------------------- -------------- ----------- ------ ----
2013
Prime lending Specialist Total
lending
GBPm GBPm GBPm %
------------------------- -------------- ----------- ------ ----
Impaired status:
Past due 3 to 6 months 260 297 557 43
Past due 6 to 12 months 190 208 398 31
Past due over 12 months 96 134 230 18
Possessions 18 87 105 8
564 726 1,290 100
------------------------- -------------- ----------- ------ ----
Possession balances
Possession balances represent loans against which the Group has
taken ownership of properties pending their sale. The Group's
approach to dealing with customers in financial difficulty,
combined with its historically cautious approach to lending, means
that the Group only takes possession of properties as a last
resort. This is illustrated by the number of properties that are
taken into possession compared to industry becnhmarks. The number
of properties in possession has fallen over the year to 522 (2013:
600) due to strong property sales and reduced new possessions. This
represents 0.03% of the Group's book compared to the industry
average of 0.08%, as shown below:
Possessions as a percentage of 4 April
total book (number of properties) 4 April 2014 2013
Number of
properties % %
------------------------------------ ------------ ----- --------
Prime 174 0.01 0.02
Specialist 348 0.14 0.18
------------ ----- --------
Group 522 0.03 0.04
------------ ----- --------
CML industry average 0.08 0.10
----- --------
Interest only mortgages
The Group does not offer any new advances for prime residential
mortgages on an interest only basis. However, the Group does still
have historical balances which were originally advanced as interest
only mortgages or where the Group agreed a change in terms to an
interest only basis (this option was withdrawn in 2012). Temporary
interest only terms can be available to prime mortgage customers
who are in forbearance. The majority of new specialist buy to let
loans are advanced on an interest only basis.
The tables below provide details of the prime and specialist
balances at year end which are on an interest only basis, analysed
by maturity:
Term expired Due within Due after Due after Total % of
(still open) one year one year more than total
and before two years
two years
At 4 April 2014 GBPm GBPm GBPm GBPm GBPm %
-------------------- ------------- ---------- ----------- ---------- --------- ------
Prime interest only
mortgages 57 364 507 24,650 25,578 21.4
Specialist interest
only mortgages 62 85 157 22,691 22,995 87.3
Total interest only
mortgages 119 449 664 47,341 48,573 33.3
-------------------- ------------- ---------- ----------- ---------- --------- ------
Term expired Due within Due after Due after Total % of
(still open) one year one year more than total
and before two years
two years
At 4 April 2013 GBPm GBPm GBPm GBPm GBPm %
-------------------- ------------- ---------- ----------- ---------- ---------- ------
Prime interest only
mortgages 58 423 496 28,122 29,099 26.3
Specialist interest
only mortgages 30 66 105 20,734 20,935 83.9
Total interest only
mortgages 88 489 601 48,856 50,034 36.9
-------------------- ------------- ---------- ----------- ---------- ---------- ------
Note: The tables above include the full amount of residential
mortgage balances even when only part of the loan is on interest
only terms.
The proportion of the Group's total interest only loan balances,
as a proportion of total residential mortgages during the year is
33.3% (2013: 36.9%), with the interest only proportion of prime
mortgages falling to 21.4% of the total prime mortgage book (2013:
26.3%) offset by the increase in proportion of interest only
specialist lending reflecting growth in the buy to let market.
Negative equity loans
Collateral held against residential mortgages is the Group's
principal method of mitigating credit risk on residential
mortgages.
Negative equity, being the excess of loan balances over
collateral held, on non-performing residential mortgages is shown
below. The value of negative equity has reduced significantly due
to the growth in house prices over the year.
2014 2013
Negative equity of residential Prime lending Specialist Prime Specialist
mortgages lending lending lending
GBPm GBPm GBPm GBPm
-------------------------------- ------------- ---------- -------- ----------
Past due but not impaired 4 6 5 13
Impaired 3 16 5 21
Possessions - 7 1 15
7 29 11 49
-------------------------------- ------------- ---------- -------- ----------
Note: Collateral held is capped at the amount outstanding on an
individual loan basis.
Managing credit risk
The Group's approach is to reduce credit risk through sound
underwriting. However, at times, despite this customers do face
financial difficulty and in these cases the Group seeks to find a
solution to mitigate losses to the Group and to support residential
mortgage customers. The options offered to customers are classified
into three categories:
-- change in terms
-- forbearance
-- repair
It should be noted that the methodology for calculating the
number of renegotiated loans (covering all three categories above)
has been updated during the period to reflect the PRA's guidance of
what constitutes a renegotiated loan. As a result, the 2013
disclosures have been updated to reflect the new methodology. A
loan is defined as having been renegotiated if the event has
occurred at any point since January 2008 and it is still on the
books at 4 April 2014, although the loan may have since returned to
a normal status.
Change in terms
Changes in terms relate to a concession or permanent change,
which results in an amended monthly cash flow; these are not
offered as a means of forbearance. The options available
include:
-- payment holidays
-- term extensions
-- payment concessions
-- permanent interest only conversions (withdrawn March 2012).
This table provides further details of the current balances on
all loans which have been subject to changes in terms at any point
since January 2008, by region. These figures include balances that
have reverted to normal risk levels, e.g. loans where payment
holidays have ended and payments have recommenced. It is possible
to have had more than one type of change in term and in this
instance they are shown in both categories.
Residential mortgage balances Greater Central Northern South South Scotland Wales Total
subject to change in terms London England England East England West & Northern
since January 2008 (excluding England Ireland
London)
At 4 April 2014 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Payment holidays 1,140 877 796 585 370 295 297 4,360
Term extensions 2,123 1,425 1,205 990 698 475 487 7,403
Payment concessions 272 174 166 105 71 41 61 890
Interest only conversions 769 361 328 286 204 100 161 2,209
4,304 2,837 2,495 1,966 1,343 911 1,006 14,862
Elimination of multiple
events (471) (332) (283) (229) (149) (86) (124) (1,674)
Total 3,833 2,505 2,212 1,737 1,194 825 882 13,188
Greater Central Northern South South Scotland Wales Total
London England England East England West & Northern
(excluding England Ireland
London)
At 4 April 2013* GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Payment holidays 1,259 974 881 662 407 328 323 4,834
Term extensions 1,863 1,317 1,117 896 633 436 452 6,714
Payment concessions 261 172 159 103 67 42 58 862
Interest only conversions 850 394 350 315 226 108 169 2,412
4,235 2,857 2,507 1,976 1,333 914 1,002 14,824
Elimination of multiple
events (470) (338) (282) (234) (148) (84) (121) (1,677)
Total 3,765 2,519 2,225 1,742 1,185 830 881 13,147
*restated to reflect revised PRA guidance
Payment holidays
Performing customers with loans on standard terms and conditions
effective before March 2010, who are not experiencing financial
difficulty and meet required criteria (including credit score), are
permitted to apply for a payment holiday and make reduced or nil
payments for an agreed period of time of up to 12 months (depending
on reason). As at 4 April 2014, GBP4,360 million (2013: GBP4,834
million) of loans have been subject to payment holidays at any
point since January 2008 and are still on the books at 4 April
2014. Only GBP98 million of loans (2013: GBP163 million) remain on
a payment holiday as at 4 April 2014.
Term extensions
The Group allows performing customers to apply to extend the
term of their mortgage. As at 4 April 2014, GBP7,403 million (2013:
GBP6,714 million) of loans have been subject to term extensions at
any point since January 2008 and are still on the books at 4 April
2014. During the year, GBP2,861 million of loans (2013: GBP2,844
million) were subject to a term extension. Performance of term
extensions is in line with that of the wider portfolio and
therefore no adjustment is made to the Group's provisioning
methodology for these loans.
Payment concessions
Customers in arrears may be offered a temporary payment
concession allowing them to make reduced or nil payments for an
agreed period of time. During this period the arrears amounts are
accrued and therefore no additional provision is required. As at 4
April 2014, GBP890 million (2013: GBP862 million) of loans have
been subject to payment concessions at any point since January 2008
and are still on the books at 4 April 2014. Only GBP21 million of
loans (2013: GBP29 million) remain subject to payment concessions
as at 4 April 2014.
Interest only conversions
Interest only conversions allowed performing customers who met
certain criteria to apply for an interest only conversion, normally
reducing their monthly commitment. Following tightening of the
Group's policy, the facility was completely withdrawn in March
2012, although a temporary interest only arrangement may be
available under forbearance. As at 4 April 2014, GBP2,209 million
(2013: GBP2,412 million) of loans have been subject to interest
only conversions at any point since January 2008 and are still on
the books at 4 April 2014. The option to permanently convert to an
interest only loan was withdrawn in March 2012. The performance of
interest only conversions is in line with that of the wider
portfolio and therefore no adjustment is made to the Group's
provisioning methodology for these loans.
Forbearance
Forbearance takes place when a concession is made on the
contractual terms of a loan to a customer as a result of financial
difficulties.
The only forbearance option which the Group offers customers in
financial distress is a temporary interest only concession.
Interest only concessions are offered to customers on a temporary
basis with formal periodic review subject to an affordability
assessment. The concession allows the customer to reduce monthly
payments to cover interest only, typically for six months, and if
made, the arrears status of the account will not increase, and will
remain as at the beginning of the concession.
As at 4 April 2014, GBP171 million of balances (2013: GBP265
million) representing 0.1% (2013: 0.2%) of total mortgage balances
were on this concession. The Group's provisioning methodology
reflects the latest performance on these accounts.
The table below provides details of the current balances of
loans that have been subject to forbearance arrangements at any
point since January 2008, by region. These balances are not
included in the interest only balances in the change of terms table
above.
Residential mortgage Greater Central Northern South South Scotland Wales Total
balances subject to London England England East England West & Northern
forbearance (excluding England Ireland
since January 2008 London)
At 4 April 2014 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Temporary interest only
concessions 379 364 363 202 128 107 124 1,667
At 4 April 2013
Temporary interest only
concessions* 382 362 365 204 131 107 121 1,672
*restated to reflect revised PRA guidance
Repair
The Group offers two forms of repair, capitalisation and term
extension (at term expiry), as set out below.
Capitalisation
When a customer emerges from financial difficulty, the Group
offers the ability to capitalise arrears, resulting in the account
being repaired. Customers are only permitted to capitalise arrears
where they have demonstrated their ability to meet a repayment
schedule on normal commercial terms for a continuous six month
period, or if they are able to overpay such that six months'
payments are made in a four month period. As at 4 April 2014,
GBP420 million (2013: GBP442 million) of loans had an arrears
capitalisation at any point since January 2008 and are still on the
books at 4 April 2014. GBP7 million of loans (2013: GBP22 million)
were capitalised during the year ended 4 April 2014. Once
capitalised the loans are categorised as not impaired as long as
contractual repayments are maintained.
Term extension (at term expiry)
Customers on interest only mortgages who are unable to repay
their capital at term expiry may be offered a term extension. These
extensions are typically on a capital and interest basis over a
relatively short term, normally less than five years, and aim to
recover the outstanding balance as quickly as possible whilst
ensuring the monthly payment remains manageable to the customer. As
at 4 April 2014, GBP1,142 million (2013: GBP1,028 million) of loans
had an extension at term expiry at any point since January 2008 and
are still on the books at 4 April 2014; of these GBP318 million of
loans (2013: GBP164 million) had an extension at term expiry during
the year ended 4 April 2014. No provisioning methodology adjustment
is made for these accounts as a result of the low balance and LTV
profile.
The table below provides details of the current balances of
loans which have been repaired at any point since January 2008, by
region. It is possible for a loan to have more than one category of
repair and in the table below both are shown. Capitalisation
amounts shown reflect the full amount of the loan.
Residential Greater Central Northern South South Scotland Wales Total
mortgage London England England East England West & Northern
balances subject (excluding England Ireland
to London)
term extensions
since
January 2008
At 4 April 2014 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Capitalisations 144 76 76 56 32 13 23 420
Term extensions 399 211 131 157 145 54 45 1,142
543 287 207 213 177 67 68 1,562
Elimination of
multiple
events (3) (1) - (2) - - (1) (7)
Total 540 286 207 211 177 67 67 1,555
Greater Central Northern South South Scotland Wales Total
London England England East England West & Northern
(excluding England Ireland
London)
At 4 April 2013 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Capitalisations 152 80 79 58 35 14 24 442
Term extension 363 197 102 151 146 31 38 1,028
515 277 181 209 181 45 62 1,470
Elimination of
multiple
events (4) (2) (1) (1) (1) - - (9)
Total 511 275 180 208 180 45 62 1,461
Total renegotiated loans
The table below shows the stock of loans still on the books as
at 4 April 2014 that have been renegotiated at any point since
January 2008:
2014 2013*
% of total % of total
residential residential
GBPm mortgages GBPm mortgages
Change in terms 13,188 9 13,147 10
Forbearance 1,667 1 1,672 1
Repair 1,555 1 1,461 1
-------
Gross total 16,410 11 16,280 12
Elimination of multiple events (1,266) (1,244)
-------
Total 15,144 10 15,036 11
*restated to reflect 2014 PRA guidance.
The table below splits by type, and region, the current balances
ofloans which have been renegotiated at any point since January
2008, together with the impairment provisions held on these
renegotiated loans. Loans which are still on special terms at the
balance sheet date are also disclosed. These comprise loans where
the terms have been changed temporarily and which, as at balance
sheet date, are still subject to payment holidays or concessions
and forborne loans which are still on temporary interest only
terms.
Residential mortgage Greater Central Northern South East South Scotland Wales Total
balances subject London England England England West & Northern
to renegotiation (excluding England Ireland
since January 2008 London)
At 4 April 2014 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Prime 3,849 2,613 2,260 1,782 1,233 868 871 13,476
Specialist 556 278 287 210 151 73 113 1,668
Total 4,405 2,891 2,547 1,992 1,384 941 984 15,144
Of which loans are
still on special
terms:
Prime 72 50 46 33 22 15 17 256
Specialist 9 7 7 4 2 1 4 34
Total 81 57 53 37 24 16 21 290
Total impairmets
on renegotiated
loans:
Individually assessed - 1 1 - - 1 2 5
Collectively assessed 1 4 5 2 1 1 6 20
Total 1 5 6 2 1 2 8 25
Note: Multiple events have been eliminated.
Greater Central Northern South East South Scotland Wales Total
London England England England West & Northern
(excluding England Ireland
London)
At 4 April 2013 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Prime 3,835 2,652 2,303 1,811 1,247 876 875 13,599
Specialist 485 238 239 185 136 49 105 1,437
4,320 2,890 2,542 1,996 1,383 925 980 15,036
Of which loans are
still on special
terms:
Prime 100 70 67 47 30 24 22 360
Specialist 30 17 16 10 10 4 10 97
130 87 83 57 40 28 32 457
Total impairments
on renegotiated
loans:
Individually assessed 1 1 2 - - - 2 6
Collectively assessed 5 8 9 4 2 3 8 39
Total 6 9 11 4 2 3 10 45
Note: Multiple events have been eliminated.
Outlook for residential mortgage credit risk
The Mortgage Market Review (MMR) published by the Financial
Conduct Authority required all mortgage lenders to enhance
responsible lending controls for mortgages by 26 April 2014, to
ensure that the mortgages are affordable and thus minimise the risk
of detrimental outcomes for customers. While responsible lending is
already central to the Group's lending policy, the Group has made
changes to its systems and processes ahead of the regulatory
deadline. These include the introduction of a more comprehensive
and customer specific affordability assessment for both new
mortgages and for significant changes to existing mortgage
contracts. The current non-advised sales process will also be
withdrawn and all mediated sales, i.e. face to face and telephone,
will be subject to regulation as it constitutes an advisory
sale.
The housing market has gathered pace, particularly in the second
half of the year, both in activity and growth in house prices. This
growth is particularly evident in London and is expanding into
surrounding areas, with many other regions seeing more subdued
growth. The Group has a limited exposure to the areas of London
which have shown the most volatile movements, and analysis of new
lending within these areas shows that key risk metrics (such as LTV
and income multiples) have remained relatively stable during this
growth period. At this stage the Group does not see signs of
affordability being stretched but will keep the matter under close
review. However, the Group is conscious that Government policies,
the low interest rate environment and a significant flow of
overseas buyers currently stimulate the housing market. The Group
therefore actively monitors the risk that these conditions may
reverse, increasing credit losses in its mortgages book and
depressing the wider economy.
The Help to Buy shared equity scheme has resulted in a
significant increase in the new build sector during the last 6
months, in which the Group has a significant share. The impact of
this scheme is an issue which concerns valuers as they experience
house values and purchase prices in this sector accelerating at
rates which are outpacing adjacent second hand markets. The Group
already has robust LTV and affordability controls in place for this
sector and will be monitoring the volume of lending and purchase
prices closely to ensure concentrations of lending or increased
levels of credit risk are not introduced into the portfolio.
Consumer banking and credit risks
Overview
Consumer banking includes balances relating to the unsecured
portfolios for current accounts, credit cards and personal loans.
All books have increased in size year on year, as set out below.
However total consumer banking as a share of total loans and
advances to customers has remained stable at 2%.
Consumer banking balances 2014 2013
GBPm % GBPm %
FlexAccount 300 8 238 7
Personal loans 1,907 49 1,784 51
Credit cards 1,655 43 1,466 42
Total consumer banking 3,862 100 3,488 100
Credit risk
Credit risk on these books is linked to delinquency since no
security is held against the loans. The Group monitors arrears
status closely on these portfolios. The tables below provide
further information on unsecured loans and advances by payment due
status:
2014
Personal Credit Total
Flex Account loans card
GBPm GBPm GBPm GBPm %
Performing:
Neither past due nor impaired 255 1,809 1,565 3,629 94
Non-performing:
Past due up to 3 months 16 16 24 56
Impaired:
Past due 3 to 6 months 5 17 20 42
Past due 6 to 12 months 2 28 - 30
23 61 44 128 3
Charged off 22 37 46 105 3
Total Non-performing 45 98 90 233
Total 300 1,907 1,655 3,862 100
Pre charge off non-performing balances
proportion* 8% 3% 3% 3%
Impairment provisions excluding charged
off balances 16 42 34 92
Impairment provisions on charged
off balances 15 30 36 81
Total impairment provisions 31 72 70 173
Provision coverage ratio on non-performing
loans 69% 73% 78% 74%
Impairment losses for year 14 26 20 60
*represents the non-performing balances as a percentage of total
balances, excluding charged off balances from both the
non-performing and total figures. This is included to allow
comparison with 2013 data.
2013
Flex Personal Credit Total
Account loans card
GBPm GBPm GBPm GBPm %
Performing:
Neither past due nor impaired 214 1,731 1,418 3,363 96
Non-performing:
Past due up to 3 months 17 15 28 60
Impaired:
Past due 3 to 6 months 5 14 20 39
Past due 6 to 12 months 2 24 - 26
24 53 48 125 4
Charged off - - - - -
Total Non-performing 24 53 48 125
Total 238 1,784 1,466 3,488 100
Pre charge off non-performing balances
proportion 10% 3% 3% 4%
Impairment provisions excluding charged
off balances 14 37 36 87
Impairment provisions on charged
off balances - - - -
Total impairment provisions 14 37 36 87
Provision coverage ratio on non-performing
loans 58% 70% 75% 70%
Impairment losses for year 15 26 38 79
The Group has maintained the overall quality of its unsecured
lending. The lower impairment losses for the year of GBP60 million
(2013: GBP79 million) includes a reduction in impairments of GBP27
million, reflecting updated recovery assumptions in respect of
previously charged off balances, in line with recent experience. As
a result, in 2014 the Group has amended the accounting treatment of
charged off accounts (accounts which have been closed to future
transactions and are unable to re-establish their terms). These had
previously been written off in full with subsequent recoveries
taken to profit when received. For 2014 these amounts are included
within non-performing consumer banking balances to the extent that
the Group expects at least a partial recovery.
Impairment provisions on consumer banking are GBP173 million, up
GBP86 million on 2013. This increase is driven by the change in
treatment of charged off accounts. Impairment provisions excluding
accounts charged off are GBP92 million, up GBP5 million on 2013,
resulting in a like for like coverage ratio of 72% (2013: 70%), and
reflecting the Group's continuing overall quality of its unsecured
lending.
Non-performing loans (excluding charged off amounts) as a
percentage of total balances (excluding charged off amounts) are 3%
(2013: 4%), a 1% improvement on 2013 on a like for like basis.
Managing credit risks on consumer banking
The Group's approach is to reduce credit risk through good
lending decisions. However, when customers do face financial
difficulty the Group seeks to find a solution to mitigate losses to
the Group and to support the customer through either a change in
terms, forbearance or arrears management, as set out below.
Change in terms
Account performance is monitored on an ongoing basis using a
range of factors including credit scores and information held by
the credit reference agencies. For credit card and current account
customers, this may result in proactive reduction of credit limits
or other changes in terms. In addition to this, unsecured customers
may be contacted by a specialist team to discuss their financial
commitments and consider available options to improve their
financial position in a sustainable manner.
Forbearance
Limited forbearance options, which vary by product, are
available to unsecured customers following a detailed review of
their current circumstances. For credit card customers experiencing
financial distress the Group may agree a repayment plan, which is
typically less than the minimum contractual payment. For current
account customers the Group may agree a reducing overdraft limit to
lower their exposure over a manageable period. For personal loan
customers with financial difficulties the Group may agree temporary
reduced payments, or on completion of consecutive sustainable
payments, a change in loan term may be available.
Arrears management
When a customer has, or expects to have, difficulty in meeting
payments due, the Group will work with them to try to find a
manageable solution. This will involve a full review of the
customer's individual circumstances, including establishing the
root cause behind the arrears, likely duration of this situation
and monthly income and expenditure, before a plan to reduce arrears
is agreed.
The Group will explore the range of options to alleviate payment
difficulty and bring the account back into a sustainable position.
These will include:
-- agreeing appropriate repayment plans
-- temporary agreement for reduced payments, or
-- terminating the agreement to avoid ongoing member detriment
such as unsustainable fees and charges.
Outlook for consumer credit risk
From 1 April 2014 supervision of unsecured lending moved from
the Office of Fair Trading to the Financial Conduct Authority. New
rules have been published outlining responsible lending
requirements. While responsible lending is already central to the
Group's lending policy, further changes are planned to strengthen
the affordability assessment across all unsecured lending products.
It is acknowledged that this will reduce acceptance rates on
applications but this minimises the risk of detrimental outcomes
for customers, particularly in an environment with an increased
likelihood of future interest rate rises.
The Group is also reviewing the impact of changes proposed in
respect of the fees that can be charged when customers use 'chip
and pin' services. These proposals have the potential to put the
margins that the Group can charge in respect of its unsecured
products under pressure and therefore the Group continues to
monitor these proposals as they develop.
Commercial lending and credit risks
Overview
The Group's commercial loan portfolio represents 10.3% (2013:
12.5%) of the total loans and advances to customers and, on a gross
basis, comprises the following:
Commercial lending balances 2014 2013
GBPm % GBPm %
Commercial real estate (CRE) 7,764 45 10,192 51
Registered social landlords 8,063 47 8,217 41
Project finance 1,457 8 1,507 8
------
Total commercial lending 17,284 100 19,916 100
Fair value adjustment for micro
hedged risk 880 1,413
------
Total 18,164 21,329
The Group's CRE portfolio is diversified by industry type,
location and by borrower. The Group's exposure to CRE loans has
reduced by GBP2,428 million (23.8%) to GBP7,764 million (2013:
GBP10,192 million) over the year in line with its strategy of
disposing of non-core assets.
Loans to registered social landlords are secured on residential
property and loans advanced in relation to project finance are
secured on cash flows from government backed contracts.
Since the year end the Group has concluded a sale of CRE loans,
with a gross value at 4 April 2014 of GBP694 million (EUR841
million), representing over 90% of its exposure to the German real
estate market. The sale price was in line with the carrying value
of the assets. The disposal will be recognised in the first quarter
of 2014/15 and improves the Common Equity Tier 1 (CET1) and
leverage ratios by 0.5% and 0.1% respectively.
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 needed against the CRE portfolio, for which
impairment provisions and impairment losses are set out in the
table below:
4 April 2014 4 April 2013
GBPm GBPm
Gross balances 7,764 10,192
Impaired balances 3,065 2,715
Impaired balances as % of gross balances 39% 26%
Impairment provisions
Individual 921 810
Collective 80 148
Total impairment provisions 1,001 958
Provision coverage ratios
Individual provisions as % of impaired
balances 30% 30%
Total provisions as % of impaired balances 33% 35%
Total provisions as % of total gross balances 13% 9%
Estimated collateral against impaired
balances
Estimated collateral on impaired loans 2,216 1,743
Estimated collateral as a % of impaired
balances 72% 64%
Impairment losses for the year 309 493
Impairment losses on the Group's CRE portfolio have decreased by
approximately 37% to GBP309 million. The reduction in impairments
is due to several factors, including the UK commercial property
market showing tentative signs of improvement in certain sectors
and the progress made in resolving non-performing loans. Recovery
prospects are case specific although the general trend of the
London and prime property markets faring significantly better than
regional locations and secondary properties is being
maintained.
Impairment provisions at the year end reflect updated valuations
and recovery assumptions and include new provisions on maturing
facilities, typically originated in the 2005 - 2008 period.
Estimated (indexed) collateral cover as a percentage of impaired
balances has risen to 72% (2013: 64%) which together with
individual provisions coverage gives total credit protection of
102% of impaired balances (2013: 94%).
Significant events/environment
On the back of continued economic improvement, the commercial
property sector is showing tentative signs of increasing investor
confidence. However, despite a recent recovery in prime asset
values, particularly in the London area, the broader commercial
property market remains subdued, with capital values still around
33% below their pre-crisis peaks.
Recovery to date has been focused on prime assets with investor
demand for secondary assets, outside the South East and off the
major arterial connections, remaining weaker and being more
dependent on micro economic factors.
Traditional lenders show limited appetite to fund new investment
in secondary markets. Alternative funding sources of sufficient
scale to fuel a significant recovery in this segment are lacking
and therefore secondary asset recovery is expected to be more
gradual than for prime sites.
Credit risk
Credit risk is linked to delinquency and availability of
collateral to cover any loan balances. LTV's are monitored, along
with loan concentrations and arrears.
Loan to value
The following table details the CRE loans and advances by level
of collateral. 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.
Non-performing loans include impaired loans and loans with
arrears of less than three months which are not impaired. The
reduction in total CRE loans reflects the ongoing planned reduction
of non-core elements of the CRE portfolio. The decrease in
performing loans reflects the reclassification of loans which have
become impaired. Non-performing loans have remained stable at
GBP3,130 million (2013: GBP3,122 million) reflecting reductions in
exposures and stabilisation of impaired loans, which broadly
offsets new instances of impairment.
CRE lending balances by LTV and region
Rest of
4 April 2014 London South East UK Non UK* Total %
GBPm GBPm GBPm GBPm GBPm
Performing loans
Fully collateralised
LTV ratio:
* less than 25% 168 46 43 - 257
* 25% to 50% 590 171 361 - 1,122
* 51% to 75% 1,034 391 502 87 2,014
* 76% to 90% 201 87 307 62 657
* 91% to 100% 18 14 106 3 141
2,011 709 1,319 152 4,191 54
Partially collateralised
* more than 100% (A) 159 73 119 92 443 6
* collateral value on A 147 56 84 86 373
Total performing loans 2,170 782 1,438 244 4,634 60
Non-performing loans
Fully collateralised
LTV ratio:
* less than 25% 39 1 2 - 42
* 25% to 50% 4 5 16 - 25
* 51% to 75% 24 38 65 83 210
* 76% to 90% 6 44 70 24 144
* 91% to 100% 8 8 92 61 169
81 96 245 168 590 8
Partially collateralised
* more than 100% (A) 179 358 1,656 347 2,540 32
* collateral value on A 88 271 1,060 271 1,690
Total non-performing
loans 260 454 1,901 515 3,130 40
Total CRE loans 2,430 1,236 3,339 759 7,764 100
*Since the year end the Group sold CRE loans, with a gross value
at 4 April 2014 of GBP694 million, representing over 90% of its
remaining exposure to the German real estate market, at a price in
line with the carrying value of the assets.
CRE lending balances by LTV and region
Rest of
At 4 April 2013 London South East UK Non UK Total %
GBPm GBPm GBPm GBPm GBPm
Performing loans
Fully collateralised
LTV ratio:
* less than 25% 215 46 67 31 359
* 25% to 50% 697 187 317 - 1,201
* 51% to 75% 1,082 315 877 167 2,441
* 76% to 90% 237 134 335 23 729
* 91% to 100% 269 111 186 157 723
2,500 793 1,782 378 5,453 54.5
Partially collateralised
* more than 100% (A) 132 376 809 300 1,617 16.9
* collateral value on A 126 320 588 248 1,282
Total performing loans 2,632 1,169 2,591 678 7,070 70
Non-performing loans
Fully collateralised
LTV ratio:
* less than 25% - 1 12 1 14
* 25% to 50% 7 3 17 - 27
* 51% to 75% 24 5 60 58 147
* 76% to 90% 11 62 38 16 127
* 91% to 100% 22 5 189 18 234
64 76 316 93 549 5
Partially collateralised
* more than 100% (A) 512 246 1,560 255 2,573 25
* collateral value on A 301 147 964 168 X1 1,580
Total non-performing
loans 576 322 1,876 348 3,122 30
Total CRE loans 3,208 1,491 4,467 1,026 6 10,192 100
As a result of performing loans being reclassified as impaired,
the overall proportion of partially collateralised non-performing
loans has increased to 32% (2013: 25%). However, the shortfall on
collateral for non-performing CRE loans has reduced by GBP143
million during the year to GBP850 million (2013: GBP993
million).
The following table provides detail of the Group's sectoral and
regional CRE concentrations together with an impairment analysis in
respect of these concentrations.
CRE lending balances and impairment by type and
region
Rest of
At 4 April 2014 London South East UK Non UK* Total
GBPm GBPm GBPm GBPm GBPm
Retail 884 450 1,215 277 2,826
Office 475 242 653 149 1,519
Residential 390 198 536 122 1,246
Industrial & warehouse 405 206 557 127 1,295
Leisure & hotel 248 126 341 78 793
Other 28 14 37 6 85
Total CRE lending 2,430 1,236 3,339 759 7,764
Impairment provision
Retail 32 42 186 113 373
Office 48 24 146 14 232
Residential 9 5 36 8 58
Industrial & warehouse 4 10 159 26 199
Leisure & hotel 42 21 73 3 139
Other - - - - -
Total impairment provision 135 102 600 164 1,001
Provision coverage ratios 5.6% 8.3% 18.0% 21.6% 12.9%
Rest of
At 4 April 2013 London South East UK Non UK Total
GBPm GBPm GBPm GBPm GBPm
Retail 992 461 1,381 317 3,151
Office 731 340 1,017 234 2,322
Residential 537 250 748 172 1,707
Industrial & warehouse 530 246 738 169 1,683
Leisure & hotel 366 170 509 117 1,162
Other 52 24 74 17 167
Total CRE lending 3,208 1,491 4,467 1,026 10,192
Impairment provision
Retail 27 27 143 83 280
Office 71 27 192 12 302
Residential 10 8 20 9 47
Industrial & warehouse 4 7 153 21 185
Leisure & hotel 65 27 49 3 144
Other - - - - -
Total impairment provision 177 96 557 128 958
Provision coverage ratio 5.5% 6.4% 12.5% 12.6% 9.4%
*Since the year end the Group has sold CRE loans, with a gross
value at 4 April 2014 of GBP694 million, representing over 90% of
its remaining exposure to the German real estate market, at a price
in line with the carrying value of the assets.
The largest single commercial customer, including undrawn
commitments, represents only 1.7% (2013: 1.5%) of the total
book.
Over the year, funding liquidity in the lending market has
improved with a number of new entrants and traditional lenders
returning to the market. There are tentative signs of improvement
in CRE both in London and the surrounding regions, albeit this
recovery has not been seen in most of the depressed secondary and
tertiary assets. As a result, provision coverage ratios in London
have remained stable whilst the highest increase in coverage ratios
has been seen in other regions.
Credit performance
Arrears
The table below provides information on the commercial real
estate lending by payment due status:
CRE lending balances by payment
status 4 April 2014 4 April 2013
GBPm % GBPm %
Performing:
Neither past due nor impaired 4,634 60 7,070 69
Non-performing:
Past due up to 3 months but not
impaired 65 1 407 4
Impaired 3,065 39 2,715 27
Total Non-performing 3,130 3,122
Total 7,764 100 10,192 100
The status past due up to three 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.
Loans in the analysis above which are not impaired have
collective impairment provisions set aside to cover credit
losses.
Impairment
Impaired commercial assets are further analysed as follows:
4 April 2014 4 April 2013
GBPm % GBPm %
Impaired:
Past due 0 to 3 months 2,125 69 1,581 58
Past due 3 to 6 months 152 5 218 8
Past due 6 to 12 months 334 11 295 11
Past due over 12 months 442 15 620 23
Possessions 12 - 1 -
3,065 100 2,715 100
Impaired loans include those balances which are more than 3
months in arrears, or have a provision against them. Of these
balances, commercial assets totalling GBP2,988 million (2013:
GBP2,629 million) have individual provisions against them.
Possession balances represent loans for which the Group has
taken ownership of security pending sale. Assets in possession are
realised in an orderly manner via open market or auction sales to
derive the maximum benefit for all interested parties, and any
surplus proceeds distributed in accordance with the relevant
insolvency regulations. The Group does not occupy or otherwise use
for any purposes any repossessed assets.
Managing commercial credit risk
The strategy for managing CRE credit risk reflects the
challenging environment. The Group adopts robust credit management
policies and processes designed to recognise and manage the risks
arising, or likely to arise from the portfolio. All commercial
credit facilities are reviewed annually as a minimum and the Group
has detailed processes to identify customers exhibiting, or who may
be vulnerable to, financial difficulties which prompt more frequent
review, where appropriate.
Loans in financial difficulties are typically those which
exhibit high loan to value, low interest cover or early stage
arrears.
Where such customers are identified they are typically
transferred, at an early stage, to specialist business and risk
teams focused on re-structuring troubled facilities, exiting
distressed loans and minimising credit losses. In this respect,
resources have been expanded and targeted to maintain a regime of
close and continuous scrutiny over all high value assets with
particular emphasis on those considered to exhibit higher risk
characteristics.
As part of this control, there is great focus on assessing loans
as they approach maturity in order to manage any refinance risk.
Refinance risk is the risk that a borrower is unable to meet the
scheduled repayment of a loan, due to the lack of availability of
refinance or the absence of an active market for the underlying
security.
To monitor and control this risk, aLoan Maturity Control
Framework has been established to ensure that all loans within 12
months of their maturity date are assessed, in order to highlight
potential issues as early as possible and initiate appropriate
management activity in advance of the maturity date. In addition to
the Loan Maturity Framework, 12 months prior to maturity, all loans
are re-assessed against impairment loss event triggers to establish
whether the loan is impaired.
In managing the portfolio the Group seeks to reduce higher risk
exposures whilst avoiding excessive losses which would be caused by
making early disposals in a depressed market. The reduction in both
CRE exposures and year on year impairment charges demonstrates the
success of this strategy.
The Group will seek to support customers and restructure
non-performing or impaired loans, but only where the Group's
assessment of future cash flows provides sufficient evidence to
suggest that such an approach will serve to enhance prospects for
full debt recovery.
The Group will, when necessary, refinance existing facilities at
maturity but will classify loans according to its risk profile:
-- restructures: these loans will be extended on current market terms, or
-- distressed restructures: the terms for these loans may not
fully meet current market terms and as a result will typically be
classed as forborne.
Collateral
Although collateral can be an important mitigant of credit risk,
it is the Group's practice to lend on the basis of the customer's
ability to meet their obligations out of cash flow resources rather
than rely on the value of the security offered. In the event of
default the Group may use the collateral as a source of
repayment.
Primary collateral is a fixed charge over freehold or long
leasehold properties but may be supported by other liens, floating
charges over company assets, and occasionally unsupported
guarantees. The collateral will have a significant effect in
mitigating the Group's exposure to credit risk.
Loans to registered social landlords are secured on residential
property and loans advanced in relation to project finance are
secured on cash flows from government backed contracts and
therefore no collateral is held on these loans.
The table below quantifies the estimated value of indexed
collateral held against non-performing or impaired assets:
Collateral held against past due or
impaired commercial lending 2014 2013
GBPm % GBPm %
Past due but not impaired 65 100 407 100
Impaired 2,216 72 1,743 64
2,281 73 2,150 69
Note: Collateral held is capped at the amount outstanding on an
individual loan basis.
The percentage, in the table above, is the cover over the asset.
The indexed collateral value is based on the most recent valuation
indexed using the IPD monthly index for the relevant property
sector.
During the year a revised valuation policy has been implemented
which stipulates the maximum period between formal valuations,
relative to the risk profile of the lending. Particular attention
is paid to the status of the facilities, for instance whether it
is, or is likely to require an impairment review where the Group's
assessment of potential loss would benefit from updated valuations,
or there are factors affecting the property that might alter the
case assessment and the most appropriate action to take.
The level of negative equity based upon indexed property values
for the non-performing and impaired assets is detailed below:
2014 2013
Negative equity on commercial lending GBPm GBPm
Past due but not impaired 1 21
Impaired 840 971
Possessions 9 1
850 993
Forbearance
Forbearance occurs when a concession is made on the contractual
terms of a loan outside of the Group's normal prudent pricing
parameters. In practice, the latter is defined as cases with a loan
to value ratio greater than 80%.
The forbearance requests the Group receives are principally
attributable to:
-- customers suffering temporary cash flow problems that impact
the ability to service payments under existing terms. Such problems
may be due to loss of tenants, void costs or the costs of securing
new tenants such as refurbishments or the provision of rent free
incentives.
-- breaches of documented loan to value, interest cover ratio or
debt service cover ratio covenants caused by a fall in property
values, the loss of income or increased repayments due to interest
rate rises or scheduled increases in capital repayments.
-- inability to fulfil the obligation to fully repay at contractual maturity.
The Group's policy and approach to considering forbearance
requests is documented in its Forbearance and Arrears Management
policies. Implementation is controlled through the governance and
control framework, which includes early warning and watchlist
procedures for managing and monitoring the performance of these
customers.
All forbearance requests are assessed and approved by the
independent credit team in the Risk Management Division.
Forbearance to address short term cash flow difficulties will
typically be through the provision of a temporary amendment to the
payment profile to align repayments with the available income
stream. In such cases there would be no element of debt or interest
forgiveness and the Group would have to be satisfied with the
ability to maintain payments and fully repay over time.
Forbearance to address covenant breaches would normally entail
either a temporary or permanent waiver or amendment of the affected
covenant. Each case would be considered on its own merits and the
Group's response will depend upon the risk profile of the
transaction.
The provision of extended facilities on maturity does not always
represent forbearance. Despite the exit position faced often
looking far less attractive than that originally envisaged, the
Group will still seek to support customers by providing refinancing
over extended terms where the customer's ability to continue to
service the debt and improve the risk profile over time can be
evidenced.
Loans restructured at maturity and subject to forbearance will
typically include a contractual capital amortisation profile or a
full cash sweep of surplus rental income to pay down the debt after
permitted deductions for asset management fees and irrecoverable
property costs. As long as the new contractual terms are
maintained, these cases are, if applicable, no longer impaired and
will not retain a forbearance classification.
The table below provides details of lending that has been
subject to forbearance at any point since January 2008:
Lending subject to forbearance 2014 2013
GBPm % GBPm %
Covenant breach 402 15 292 15
Extension at maturity 90 3 332 17
Revised repayment profile - - 48 3
Multiple forbearance events 1,985 73 800 41
Other 257 9 463 24
2,734 100 1,935 100
The increase in lending subject to forbearance is driven
primarily by cases which reached loan maturity in the year to 4
April 2014 where the borrower has been unable to secure refinancing
or repay the facility due principally to the lack of available
refinancing in the market or under performance against business
plans. In those circumstances the Group may have allowed a further
period of time to try and reach a mutually acceptable outcome.
In many cases up to date valuations obtained as part of an
extension will have resulted in a breach of the underlying LTV
covenant and hence these cases are now be reported as showing
multiple forbearance events. The maturity pipeline remains
significant and the Group therefore expects a further increase in
lending subject to forbearance which will only abate once refinance
becomes more readily available for the CRE sector.
Outlook for commercial credit risks
The outlook for commercial credit risks is stable as a result of
recent tentative improvements in market conditions, albeit that a
number of challenges remain.
With the CRE sector continuing to absorb capital from the
industry as a consequence of the performance of the market and
changes to regulatory capital requirements, there are limited funds
available to act as a stimulus to drive asset values up,
particularly for secondary assets. As a result the spread between
prime and secondary markets is likely to remain at current levels
for some time.
In the year ahead GBP1.4 billion of CRE facilities are due to
mature. Of this, GBP0.9 billion is under watch and has been
assessed with individual provisions held against these loans of
GBP0.5 billion. Of the remaining GBP0.5 billion almost all have an
interest cover ratio of greater than 130%. The Group will continue
its strategy of reducing exposures which are outside of its current
risk appetite or do not align to its existing lending strategy.
Other lending risks
Overview
The total other lending portfolio of GBP176 million (2013:
GBP219 million) represents 0.1% (2013: 0.3%) of the Group's loans
and advances to customers. Included within this portfolio are
secured loans relating to a European commercial loan facility which
is held by one of the Group's subsidiaries, Cromarty CLO Ltd
(Cromarty), and a revolving loan facility secured by a portfolio of
asset backed securities.
The Group's unsecured lending in relation to a student loan
portfolio (2013: GBP217 million) was sold on 24 April 2013.
The table below provides further information on other lending
balances by payment due status:
2014 2013
GBPm % GBPm %
Performing:
Neither past due nor impaired 69 40 397 91
Non-performing:
Past due up to 3 months but not
impaired - - 6 1
Impaired 107 60 33 8
Total Non-performing 107 60 39 9
176 100 436 100
Impairment provisions/coverage
ratio 12 11 10 30
Impairment losses for the year 11 1
The status past due up to three 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.
The other lending impairment charge of GBP11 million (2013: GBP1
million) includes GBP8 million arising on the European commercial
loan portfolio and GBP3 million in relation to a first loss
exposure on the portfolio of asset backed securities securing the
revolving loan facility.
The GBP107 million (2013: GBP33 million) of impaired balances in
other lending includes GBP25 million (2013: GBP27 million) relating
to the European commercial loan portfolio and GBP82 million (2013:
GBPnil) relating to a first loss exposure on the portfolio of asset
backed securities securing the revolving loan facility. The lower
provision coverage ratio in 2014 is as a result of the inclusion of
the entire revolving loan facility balance due to the impairment
charge taken on the first loss exposure on the portfolio. 2013
impaired balances included GBP6 million relating to the unsecured
student loan portfolio which was sold in April 2013.
Impaired other lending assets are further analysed as
follows:
2014 2013
GBPm % GBPm %
Impaired:
Past due 0 to 3 months 82 77 - -
Past due 3 to 6 months - - 1 3
Past due 6 to 12 months 8 7 2 6
Past due over 12 months 17 16 30 91
Possessions - - - -
107 100 33 100
Managing other lending risk
The Group adopts robust credit management policies and processes
designed to recognise and manage the risks arising, or likely to
arise, from its other lending portfolio. As with other categories
of loans, the Group will work with the customer to try to resolve
any issues and to restore the loan to a financially viable
position.
Forbearance
Cromarty holds a portfolio of loans to companies and although
the terms of the interest payments of the Society's loan to
Cromarty are aggregated so that it does not have a forbearance
position, Cromarty does agree repayment terms for its borrowers
that are within the definition of forbearance.
Forbearance in relation to Cromarty's borrowers that cannot
demonstrate they have robust business models, material market
shares and adequate cash flows tend to take the form of balance
sheet restructures. Balance sheet restructures are often led by
lenders and the terms attempt to balance the need to relieve
companies of unsustainable debt burdens and to maximise returns for
lenders. Restructures often result in principal reductions in debt
outstanding, reduced margins on cash paying debt or the amendment
of cash-paying debt to payment in kind (PIK) debt.
As of 4 April 2014 12 borrowers (2013: 14 borrowers) in the
Cromarty loan portfolio would be classed as in forbearance. Of the
GBP38 million (2013: GBP43 million) of loans to these borrowers
GBP31 million (2013: GBP28 million) has gone through a balance
sheet restructure and GBP7 million (2013: GBP9 million) has
completed an Amend and Extend request.
In addition, other lending includes a revolving loan facility of
GBP82 million (2013: GBP83 million) which was re-categorised as
under forbearance following management review and the decision to
extend the loan facility. An impairment charge of GBP3 million
(2013: GBPnil) has been recognised for the year ended 4 April 2014
against this facility.
Movements in all impaired loans by credit risk segment
The table below shows the movements throughout the year of all
loans classified as impaired. The balance shown represents the
entire financial asset rather than just the overdue elements.
Prime Specialist Consumer Commercial Other Total
mortgages mortgages banking lending lending
GBPm GBPm GBPm GBPm GBPm GBPm
At 5 April 2013 564 726 65 2,715 33 4,103
Classified as
impaired during
the year 464 598 134 825 92 2,113
Charged off balances* - - 105 - - 105
Transferred from
impaired to unimpaired (476) (558) (24) (21) (11) (1,090)
Amounts written
off (40) (114) (92) (362) - (608)
Repayments (8) (1) (11) (92) (7) (119)
At 4 April 2014 504 651 177 3,065 107 4,504
*Further details regarding charged off balances are provided in
the 'Consumer banking and credit risks' section.
Loans that were classified as impaired at any point during the
year and loans that have transferred into or out of impaired are
based on the relevant status at each month end, when compared to
the previous month end. Amounts written off reflect cases where the
loan has been removed from the books, for example a residential
property repossessed and sold. Repayments reflect payments made by
the customer, reducing the outstanding balance.
Consumer banking balances are written off when all avenues for
recovering debt using internal resource have been exhausted or when
accounts have reached a significant time in arrears. Write-offs
have decreased from last year as the ultimate point of write-off
has been deferred to reflect the longer period during which
recoveries continue to be made, based on past experience.
Maximum exposure to credit risk
In addition to loans and advances to customers, the Group is
exposed to credit risk on all other financial assets. For financial
assets recognised on the balance sheet, the maximum exposure to
credit risk represents the balance sheet carrying value after
allowance for impairment. For off-balance sheet guarantees, the
maximum exposure is the maximum amount that the Group would have to
pay if the guarantees were to be called upon. For loan commitments
and other credit related commitments that are irrevocable over the
life of the respective facilities, the maximum exposure is the full
amount of the committed facilities.
The following table presents the Group's maximum exposure to
credit risk, reflecting the financial effects of collateral, credit
enhancements and other actions taken to mitigate the Group's
exposure.
4 April 2014
Carrying Commitments Maximum
value credit risk
exposure
GBPm GBPm GBPm
Cash 5,342 - 5,342
Loans and advances to banks 2,110 408 2,518
Investment securities - AFS 10,563 - 10,563
Derivative financial instruments 3,020 - 3,020
Fair value adjustment for portfolio
hedged risk 221 - 221
Loans and advances to customers 166,574 7,415 173,989
Investment in equity shares 29 - 29
187,859 7,823 195,682
4 April 2013
Carrying Commitments Maximum
value credit risk
exposure
GBPm GBPm GBPm
Cash 7,886 - 7,886
Loans and advances to banks 2,522 423 2,945
Investment securities - AFS 13,421 - 13,421
Derivative financial instruments 4,212 - 4,212
Fair value adjustment for portfolio
hedged risk 872 - 872
Loans and advances to customers 159,587 6,736 166,323
Investment in equity shares 28 - 28
188,528 7,159 195,687
In addition to the figures shown above, the Group has, as part
of its retail operations, revocable commitments of GBP7,662 million
(2013: GBP7,169 million) in respect of credit card and overdraft
facilities. These commitments represent agreements to lend in the
future, subject to certain conditions. Such commitments are
cancellable by the Group, subject to notice requirements, and given
their nature are not expected to be drawn down to the full level of
exposure.
The next section deals with Treasury assets which are also
related to credit risks. Treasury assets account for the bulk of
the Group's assets included above, after loans and advances to
customers.
Treasury assets and treasury credit risks
Overview
The following assets are included within the Group's treasury
portfolio for liquidity management and, in the case of derivatives,
market risk management. Total treasury assets represent 11.1%
(2013: 14.7%) of Group assets.
Treasury asset balances 2014 2013
GBPbn GBPbn
Cash 5.3 7.9
Loans and advances to banks 2.1 2.5
Investment securities 10.6 13.4
Treasury liquidity and investment portfolio 18.0 23.8
Derivative assets 3.0 4.2
Total treasury portfolio 21.0 28.0
Treasury assets include cash, loans and advances to banks and
investment securities available for sale. In addition treasury
assets include derivative assets; derivatives are classified as
assets where their fair value is positive and liabilities where
their fair value is negative.As at 4 April 2014 the Group had
derivative liabilities of GBP2.4 billion (2013: GBP3.9
billion).
During the year, significant deleveraging of legacy treasury
assets that are outside of current credit policy was undertaken.
The total balance of out of policy assets reduced from GBP2.9
billion to GBP1.8 billion, through targeted sales, maturities and
amortisation.
The Group considers 'out of policy' assets to be legacy assets
(bought prior to the financial crisis) that are no longer approved
in the Group's Treasury Credit Policy. These assets are still
actively managed, with natural maturities reducing the balance of
the assets over time. In addition, the Group assesses any
opportunities for exit positions, whether via a sale or a tender
offer, whilst being mindful of the financial implications of those
potential exits on the Group.
Significant events/environment
Credit risk in the treasury asset portfolio has reduced
significantly over the past financial year as economic and market
conditions have improved and the risk of a Eurozone break---up has
receded. Asset disposals have also removed some of the more
vulnerable assets from the portfolio. Impairments have been within
management expectations and the available for sale reserve deficit
reduced over the year.
Treasury liquidity and investment portfolio
Group treasury assets held on the balance sheet at 4 April 2014
were GBP18.0 billion (2013: GBP23.8 billion) and are held in three
separate portfolios: primary liquidity, other central bank eligible
assets and other securities to better reflect the management of the
portfolios and bring the analysis in line with PRA definitions in
BIPRU 12 (for further details regarding the definitions of BIPRU 12
please see the 'Liquidity & funding' section).
Primary liquidity comprises cash and highly rated debt
securities issued by governments or multi-lateral development
banks. The remaining two portfolios comprise available for sale
assets held for investment purposes and loans and advances to
banks.
Analysis of each of these portfolios by credit rating and
geographical location of the issuers is set out in the tables
below. The tables show those assets held on the balance sheet only.
The decrease in the primary liquidity portfolio is a consequence of
liquidity management planning following the additional Funding for
Lending Scheme (FLS) drawdowns during the year, which allowed the
Group to reduce the volume of liquidity held on the balance
sheet.
2014GBPbn AAA AA A Other% UK% US% Europe% Other%
% % %
Primary liquidity portfolio:
Cash 5.3 100 - - - 100 - - -
Gilts 4.5 100 - - - 100 - - -
Non-domestic government
bonds 1.8 35 65 - - - 22 78 -
Supranational bonds 0.7 100 - - - - - - 100
Domestic government bonds - - - - - - - - -
Primary liquidity portfolio
total 12.3 91 9 - - 80 4 11 5
Other Central Bank eligible
portfolio:
Residential mortgage backed
securities (RMBS) 0.8 42 29 17 12 12 88 -
Covered bonds 0.5 29 17 34 20 29 5 66 -
Other 0.1 54 - - 46 - - 100 -
Other Central Bank eligible
portfolio total 1.4 38 22 23 17 18 2 80 -
Other portfolio:
Loans and advances to banks 2.1 15 10 75 - 53 17 23 7
Residential mortgage backed
securities (RMBS) 0.7 28 4 57 11 70 8 16 6
Commercial mortgage backed
securities (CMBS) 0.2 - 24 38 38 40 29 31 -
Collateralised loan obligations 0.6 50 44 - 6 52 48 - -
Financial institution bonds 0.1 - - 100 - - - - 100
Student loans 0.4 29 51 17 3 3 97 - -
Other 0.2 - 29 6 65 26 48 26 -
Other portfolio total 4.3 23 19 51 7 49 29 17 5
Total 18.0 71 12 14 3 68 9 18 5
2013 AAA AA A Other UK US Europe Other
GBPbn % % % % % % % %
Primary liquidity portfolio:
Cash 7.9 100 - - - 100 - - -
Gilts 5.6 100 - - - 100 - - -
Non-domestic government
bonds 2.3 71 29 - - - 29 71 -
Supranational bonds 1.0 100 - - - - 5 93 2
Domestic government bonds 0.1 100 - - - 100 - - -
Primary liquidity portfolio
total 16.9 96 4 - - 81 4 15 -
Other Central Bank eligible
portfolio:
Residential mortgage backed
securities (RMBS) 0.8 34 35 20 11 8 - 92 -
Covered bonds 0.6 11 28 34 27 - 5 92 3
Financial institution bonds 0.1 - - 79 21 24 29 47 -
Other 0.1 95 5 - - - - 100 -
Other Central Bank eligible
portfolio
total 1.6 23 28 31 18 7 5 87 1
Other portfolio:
Loans and advances to banks 2.5 13 23 64 - 46 18 22 14
Residential mortgage backed
securities (RMBS) 0.8 18 13 40 29 60 9 23 8
Commercial mortgage backed
securities (CMBS) 0.4 - 25 42 33 44 20 36 -
Collateralised loan obligations 0.7 17 79 4 - 31 69 - -
Financial institution bonds 0.2 - - 31 69 37 - 37 26
Student loans 0.5 22 52 14 12 - 100 - -
Other 0.2 - 26 18 56 30 40 25 5
Other portfolio total 5.3 13 29 45 13 41 31 19 9
Total 23.8 73 12 12 3 66 11 21 2
The above analysis does not include off balance sheet funding,
including GBP8.5 billion of primary liquidity representing short
dated UK Treasury bills held as a result of FLS drawings. These are
included in the analysis of funding in the Financial risk
management section.
The quality and liquidity of treasury assets has been maintained
with over 68% of the total portfolio held in primary liquidity
exposures (2013: 71%). 97% of the total portfolio is rated A or
above, with 83% rated AA or above (2013: 97% rated A or above, 85%
rated AA or above). Ratings used above are obtained from Standard
& Poor's in the majority of cases, from Moody's if there is no
Standard & Poor's rating available, and internal ratings are
used if neither is available.
In assessing impairment the Group evaluates, among other
factors, normal volatility in valuation, evidence of deterioration
in the financial health of the investee, industry and sector
performance, and operational and financing cash flows. An
impairment loss of GBP3 million (2013: GBP2 million) net of write
backs has been recognised in the income statement in respect of the
'other' portfolios described above.
Collateral held as security for treasury assets is determined by
the nature of the instrument. Treasury liquidity portfolio assets
are generally unsecured with the exception of reverse repos, asset
backed securities and similar instruments, which are secured by
pools of financial assets. Within loans and advances to banks is a
reverse repo of GBP0.1 billion (2013: GBP0.1 billion) which is
secured by gilts.
Available for sale reserve
Out of a total of GBP18.0 billion (2013: GBP23.8 billion) on
balance sheet treasury liquidity and investment portfolio, GBP10.6
billion (2013: GBP13.4 billion) are held as available for sale
(AFS). Under IFRS these items are marked to market through other
comprehensive income and fair value movements are accumulated in
reserves. Of the GBP10.6 billion of AFS assets, only GBP71 million
(2013: GBP60 million) are classified as Level 3 (valuation not
based on observable market data) for the purposes of IFRS 13.
Details of fair value movements can be found in the notes.
The table below shows the AFS reserve compared to the carrying
value for the treasury liquidity portfolio.
4 April 2014 4 April 2013
Fair value Cumulative
on balance AFS Fair value Cumulative
sheet reserve on balance AFS reserve
GBPbn GBPbn sheet GBPbn GBPbn
Cash 5.3 Note (i) 7.9 Note (i)
Gilts 4.5 (0.2) 5.6 (0.7)
Non-domestic government bonds 1.8 (0.1) 2.3 (0.1)
Supranational bonds 0.7 - 1.0 (0.1)
US Medium term notes - - 0.1 -
------------- -----------
Primary liquidity portfolio total 12.3 (0.3) 16.9 (0.9)
------------- -----------
Residential mortgage backed securities
(RMBS) 0.8 - 0.8 -
Covered bonds 0.5 - 0.6 -
Financial institutions bonds - - 0.1 -
Other investments 0.1 - 0.1 -
------------- -----------
Other central bank eligible liquidity
portfolio total Note (ii) 1.4 - 1.6 -
------------- -----------
Loans and advances to banks 2.1 Note (i) 2.5 Note (i)
RMBS 0.7 0.1 0.8 0.3
Commercial mortgage backed securities
(CMBS) 0.2 - 0.4 0.1
Covered bonds - - - -
Collateralised loan obligations
(CLO) 0.6 - 0.7 -
Financial institutions bonds 0.1 - 0.2 -
Student loans 0.4 - 0.5 -
Other investments 0.2 - 0.2 -
------------- -----------
Other portfolio total Note (ii) 4.3 0.1 5.3 0.4
------------- -----------
Total treasury liquidity portfolio 18.0 23.8
------------- -----------
Positive AFS reserve before hedge
accounting and taxation (0.2) (0.5)
Hedge accounting adjustment for
interest rate risk 0.3 0.9
Taxation - (0.1)
------------- -----------
Total value of negative AFS reserve
(net) 0.1 0.3
Notes:
i. Not applicable
ii. Including out of policy assets totalling GBP1.6 billion (2013: GBP2.7 billion)
As at 4 April 2014, the balance on the AFS reserve had improved
to GBP51 million negative, net of tax (2013: GBP252 million
negative). The improvement in the AFS reserve reflects general
market movements and the disposal of assets in the non-primary
liquidity portfolios.
The fair value movement of AFS assets that are not impaired has
no effect on the Group's profit.
Country exposures
The Group holds GBP782 million (2013: GBP1,099 million) of
securities which are domiciled in the "peripheral" Eurozone
countries; these are held outside of primary liquidity. Of the
GBP782 million, 72% is rated A or above and 39% is rated AA or
above (2013: 58% rated A or above, 30% rated AA or above). This
exposure has reduced by 29% in the year to 4 April 2014 resulting
from disposals of Irish and Spanish investments, maturities and
fair value and exchange rate movements.
The following tables summarise the Group's direct exposure to
institutions, corporates and other issued securities domiciled in
the peripheral Eurozone countries. The Group has no direct
sovereign exposure to these countries. The exposures are shown at
their balance sheet carrying values.
Ireland Italy Portugal Spain Total
4 April 2014 GBPm GBPm GBPm GBPm GBPm
Mortgage backed securities 14 75 49 299 437
Covered bonds 39 - 22 281 342
Senior debt - - - - -
Other assets - - - - -
Other corporate - 3 - - 3
Total 53 78 71 580 782
Ireland Italy Portugal Spain Total
4 April 2013 GBPm GBPm GBPm GBPm GBPm
Mortgage backed securities 144 90 50 335 619
Covered bonds 71 - 22 326 419
Senior debt - 25 - 17 42
Other assets - 3 - 2 5
Other corporate 11 3 - - 14
Total 226 121 72 680 1,099
Note: Since the year end the Irish mortgage backed securities
have been sold realising a loss of GBP1 million.
During the year the Group disposed of GBP130 million of Irish
assets and GBP25 million of Spanish assets as part of an ongoing
exercise to deleverage the balance sheet. There has been no new
investment in the year.
None of the Group's exposures to the peripheral Eurozone
countries detailed in the table above are in default, and the Group
has not incurred any impairment on these assets in the year. The
Group continues to monitor closely the exposures to these
countries.
Country exposure in respect of other balance sheet items
The Group has further indirect exposure to peripheral Eurozone
countries as a result of a EUR100 million loan to a Luxembourg SPV
(2013: EUR100 million) included in loans and advances to customers
- other lending, which has first loss exposure to a EUR1.5 billion
portfolio (2013: EUR2 billion) of senior ranking European ABS
assets. The sterling equivalent of the loan is GBP82 million (2013:
GBP85 million). The geographical breakdown of this portfolio is as
follows: UK 56%, Spain 14%, Germany 10%, Italy 7%, Netherlands 7%,
Greece 4% and Portugal 2% (4 April 2013: UK 53%, Spain 13%, Germany
16%, Italy 7%, Netherlands 6%, Greece 3% and Portugal 2%). During
the year the Group incurred a GBP3 million impairment charge on the
loan in relation to the UK element of the portfolio.
In addition to exposure to peripheral Eurozone countries, the
Group's total exposures in respect of the other Eurozone, and rest
of the world countries, are shown below at their balance sheet
carrying value.
4 April 2014 Finland France Germany Netherlands Other Total USA Rest of Total
Eurozone Eurozone the world
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Government
bonds 170 - 438 778 - 1,386 388 - 1,774
Mortgage
backed
securities - 12 41 334 - 387 109 57 553
Covered
bonds - - - - - - 27 - 27
Senior
debt - - - - - - - 39 39
Loans to
banks - 103 151 - - 254 364 385 1,003
Other
assets - 99 42 - - 141 793 666 1,600
Other
corporate 10 24 567 36 - 637 - 3 640
Total 180 238 1,239 1,148 - 2,805 1,681 1,150 5,636
4 April 2013 Finland France Germany Netherlands Other Total USA Rest of Total
Eurozone Eurozone the world
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Government
bonds 133 - 505 1,039 - 1,677 672 - 2,349
Mortgage
backed
securities - 28 116 273 - 417 147 86 650
Covered
bonds 21 - 89 18 - 128 29 21 178
Senior
debt 21 33 - 50 9 113 57 42 212
Loans to
banks - 164 130 - - 294 460 620 1,374
Other
assets - 109 - - - 109 1,085 1,001 2,195
Other
corporate 10 44 840 16 - 910 - - 910
Total 185 378 1,680 1,396 9 3,648 2,450 1,770 7,868
The movement in the balances in respect of Finland and the
Netherlands reflects that these are still active markets for the
Group, along with Germany and the USA. In addition, the above
balances will be affected by movements such as pay downs of the
assets and fair value and exchange rate adjustments.
Derivative financial instruments
The Group uses derivatives to reduce exposure to market risks,
although the application of accounting rules can create volatility
in the income statement in a particular financial year. The fair
value of derivative assets at 4 April 2014 was GBP3.0 billion
(2013: GBP4.2 billion) and the fair value of derivative liabilities
was GBP2.4 billion (2013: GBP3.9 billion). The International Swaps
and Derivatives Association (ISDA) Master Agreement is the Group's
preferred agreement for documenting derivative activity. It is
common for a Credit Support Annex (CSA) to be executed in
conjunction with the ISDA Master Agreement. Under a CSA, cash and
securities collateral is passed between parties to mitigate the
market contingent counterparty risk inherent in the outstanding
positions. Collateral is paid or received on a regular basis
(typically daily) to mitigate the mark to market exposures on
derivatives.
The Group's CSAs are two-way agreements where both parties post
collateral dependent on the exposure of the derivative. The only
exception is within the Nationwide Covered Bond LLP where one way
agreements have been entered into in favour of the Nationwide
Covered Bond LLP. These CSAs are also subject to contingent rating
triggers.
As a result of CSA netting agreements, outstanding transactions
with the same counterparty can be offset and settled net following
a default or other predetermined event. Additionally, the Group has
entered into Global Master Repurchase Agreements and Global Master
Securities Lending Agreements which provide for two way exchange of
financial collateral. Under CSA arrangements netting benefits of
GBP1.4 billion (2013: GBP2.2 billion) are available and under
Global Master Repurchase and Securities Lending arrangements
financial collateral held of GBP1.4 billion (2013: GBP1.6 billion)
is available.
Netting arrangements do not generally result in an offset of
balance sheet assets and liabilities, as transactions are usually
settled on a gross basis. The Group's legal documentation for
derivative transactions grants legal rights of set off for those
transactions. Accordingly, the credit risk associated with such
contracts is reduced to the extent that negative mark to market
values on derivatives will offset positive mark to market values on
derivatives in the calculation of credit risk.
The following table shows the exposure to counterparty credit
risk for derivative contracts after netting benefits and
collateral:
4 April 2014 4 April 2013
AA A Total AA A Total
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
Gross positive fair value
of contracts 0.2 2.8 3.0 0.5 3.7 4.2
Netting benefits (0.2) (1.2) (1.4) (0.3) (1.9) (2.2)
Net current credit exposure - 1.6 1.6 0.2 1.8 2.0
Collateral held - (1.4) (1.4) (0.1) (1.5) (1.6)
------ ------
Net derivative credit exposure - 0.2 0.2 0.1 0.3 0.4
Cash is the only collateral currently held. Collateral on
certain derivative assets with a fair value of GBP0.2 billion
(2013: GBP0.4 billion) is only triggered when the counterparty
rating falls to a specified rating level. At 4 April 2014 the
trigger event had not occurred and these assets are
uncollateralised as a consequence. The Group's exposure to such
counterparties is to A rated or better banks.
Managing treasury credit risks
Credit risk within the Treasury Division arises primarily from
the instruments held by Treasury for liquidity and investment
purposes. For example, credit risk could arise due to global
financial developments such as the re-emergence of tensions within
the Eurozone, which could in turn increase the Group's funding
costs.
This aspect of credit risk is managed by the Treasury Credit
Risk function which underwrites all new facilities and monitors
existing exposures. It also sets and monitors compliance with
policy and limits, reporting to the Lending Committee.
In addition, counterparty credit risk arises from the use of
derivatives where market values are positive. Derivatives are only
traded with highly-rated organisations and the vast majority
include collateral agreements which are either active or have
contingent rating triggers.
A monthly review is undertaken of the current and expected
future performance of all treasury assets. A governance structure
exists to identify and review under-performing assets and highlight
the likelihood of future losses. In accordance with accounting
standards, assets are impaired where there is objective evidence
that current events and/or performance will result in a loss.
Credit risk in respect of derivatives is managed largely through
the use of the Group's CSA and posting of collateral. Credit and
debit valuation adjustments are applied to derivative exposures
where they are not collateralised. Netting and collateral benefits
result in the adjustment not being required for collateralised
positions. With the exception of a small number of legacy
positions, all derivative counterparty positions are subject to CSA
agreements.
The Treasury Credit Risk function also monitors exposure
concentrations against a variety of criteria including industry
sector, asset class, individual counterparty and country of risk.
The Group has no exposure to emerging markets, hedge funds or
credit default swaps and the majority of exposure has an investment
grade rating. The Group's exposure to investments from Eurozone
countries is outlined in the country exposures section.
Outlook for treasury credit risks
An improving market environment continues to support the stable
risk profile of the treasury asset portfolios. Assets showing signs
of credit deterioration remain low and are reducing, with ongoing
performance monitoring underpinned by robust risk governance
processes. New investment activity remains limited to a small
number of asset classes with the aim of supporting liquidity
holdings, predominantly at senior AAA levels.
Financial risk management
The Group is exposed to the financial risks as follows:
Risk category Definition
Liquidity and Liquidity risk is the risk that the Group is unable
funding to:
* meet or settle its financial obligations as they fall
due
* maintain public and stakeholder confidence.
Funding risk is the risk that the Group is unable
to realise assets or otherwise raise funds on
reasonable terms and / or within reasonable timescales.
Solvency (capital) The risk that the Group fails to maintain sufficient
capital to absorb losses throughout a full economic
cycle and to maintain the confidence of current
and prospective investors, members, the Board
and regulators.
Market The risk that the value of, or net income arising
from, the Group's assets and liabilities are impacted
as a result of balance sheet or market rate changes.
Pension The risk that the Group's funding obligations
for a number of defined benefit pension schemes
expose the Group to longevity risk and various
market risks including interest rate risk, inflation
risk and equity risk within those schemes.
Financial risk is managed within a framework of approved assets,
currencies and capital instruments supported by detailed limits set
by either the Board or ALCO under its delegated mandate. The Board
retains responsibility for approval of derivative classes that may
be used for market risk management purposes, restrictions over the
use of such derivative classes (within the limitations imposed
under the Building Societies Act, Section 9A) and for asset classes
that may be classified as liquidity.
Solvency risks are covered in the Capital Management Report.
In addition to credit risk (dealt with in the loans and advances
and lending risk section) the Group is exposed to liquidity risk,
interest rate risk, foreign exchange (FX) risk and equity risk. The
following table lists the Group's financial assets and liabilities
and indicates its exposure to these risks, with the primary risk
highlighted red.
Non-traded risk sensitivity
Financial Market risk Lending
risk risk
2014 Liquidity Interest FX Equity Credit
GBPbn risk rate risk risk* risk
risk
Assets
Cash 5.3
Loans and advances to banks 2.1
Investment securities -
available for sale 10.6
Derivative financial instruments 3.0
Loans and advances to customers 166.6
Liabilities
Shares (customer deposits) 130.5
Deposits from banks 2.0
Other deposits (including
PEB deposits) 7.1
Due to customers (including
offshore deposits) 6.2
Debt securities in issue 28.6
Derivative financial instruments
(liabilities) 2.4
Subordinated liabilities 2.3
Subscribed capital (PIBS) 0.6
Retirement benefit obligations 0.2
* Equity risk is the risk to the Group of movement in share
prices.
Funding strategy
The Group has a strong and well diversified funding base, which
continues to be predominantly funded by retail deposits. Over the
course of the financial year, the Group has continued to actively
manage its balance sheet in response to conditions in both the
retail and wholesale markets.
The Group aims to align its sources and uses of funding. As
such, retail customer loans and advances are largely funded by
customer deposits. Other assets including commercial customer
loans, primary liquidity and other treasury assets are largely
funded by wholesale debt and equity.
These funding relationships are summarised below as at the
balance sheet date:
Assets 2014 2013 2012
GBPbn GBPbn GBPbn
Retail mortgages 145.6 135.6 129.6
Other lending 21.0 22.8 24.0
Primary liquidity 12.3 16.9 24.8
Other treasury liquidity portfolio 5.7 6.9 9.5
Other assets 5.3 8.5 8.3
189.9 190.7 196.2
Liabilities & equity 2014 2013 2012
GBPbn GBPbn GBPbn
Retail funding 135.9 131.7 131.5
Wholesale funding 37.7 43.4 49.1
Capital and reserves 11.5 10.1 9.5
Other liabilities 4.8 5.5 6.1
189.9 190.7 196.2
The Group loan to deposit ratio as at 4 April 2014 was 115.8%
(2013: 115.4%).
The Group continues to maintain a high quality liquid asset
portfolio consisting primarily of deposits at central banks and
government bonds.
In April 2013 the Bank of England extended availability of the
Funding for Lending Scheme (FLS) until January 2015 to boost
lending to the UK economy. The Group continued to participate in
the FLS in line with its support of the UK housing market, drawing
a further GBP2.0 billion in the three months to 31 December 2013
and a further GBP4.0 billion ahead of the closure of the
residential mortgage element of the scheme on 31 January 2014. This
brought the total amount of the FLS facility used to GBP8.5
billion.
Liquidity
The Group ensures it has sufficient resources to meet day-to-day
cash flow needs and to meet internal and regulatory liquidity
requirements. These requirements are calibrated to ensure the Group
has sufficient liquidity, both as to amount and quality, to meet
financial obligations as they fall due during a range of stress
scenarios across multiple risk drivers and time horizons.
In August 2013 the PRA notified firms meeting the minimum 7%
core equity capital ratio of an increased relaxation to their
stance on the definition of assets that count towards the Liquid
Asset Buffer (LAB), which now allows an increased proportion of a
firm's regulatory requirements to be met by collateral pledged with
the Bank of England.
Liquid assets are held and managed centrally by the Group's
Treasury Division to meet cash outflows in any entity across the
Group with the exception of a small portfolio of assets held in its
Irish branch, Nationwide (UK) Ireland (NUKI). These assets (GBP128
million sterling equivalent, 2013: GBP131 million) are held by NUKI
to comply with Irish liquidity regulations.
The stock of liquid assets managed by the Group's Treasury
Division falls into the five categories below. The amount is net of
any liquidity holdings that are encumbered (through repurchase
arrangements or other transactions) including assets held under
reverse repurchase arrangements and collateral swaps.
The table below sets out the fair value of each of the five
liquidity types as at 4 April 2014. The table is not a
representation of the accounting balance sheet position as it
includes off balance sheet liquidity (including self-issued RMBS,
covered bonds and FLS treasury bills) and excludes any encumbered
assets. The carrying value of the liquidity portfolio as per the
accounting balance sheet is shown in the 'Treasury assets and
treasury credit risks' section above.
4 April 4 April
2014 2013
GBPbn GBPbn
--------
Primary liquidity* 20.8 19.2
Other Central Bank eligible assets 1.4 1.4
Other securities 3.0 2.7
Self-issued RMBS and covered bonds 14.0 14.0
Whole mortgage loan pools pre-positioned at
the Bank of England (BoE) 2.1 1.4
--------
Total 41.3 38.7
*Primary liquidity includes off balance sheet items, primarily
treasury bills held through FLS participation.
The average month end balance for primary liquidity during the
year was GBP19.9 billion (2013: GBP21.0 billion).
Primary liquidity
The Group maintains a high quality primary liquidity portfolio
through continued investment in highly liquid securities in line
with the Liquid Asset Buffer (LAB) as defined by the PRA in BIPRU
12.7, comprising:
-- reserves held at central banks, and
-- highly rated debt securities issued by a restricted range of
governments, central banks and multilateral development banks.
The Group's primary liquidity ratio measures primary liquidity
as a proportion of shares and borrowings, including offshore
deposits, held by the Group. The primary liquidity ratio is 11.9%
as at 4 April 2014 (2013: 11.1%).
Central Bank eligible assets
The Group holds a portfolio of other securities that are
eligible for use in the funding operations of those central banks
that it has access to which has remained stable in 2014. In terms
of their relative liquidity characteristics, these assets may be
viewed as the next liquidity tier below the primary liquidity
portfolio.
Other securities
The Group holds other third party assets (such as RMBS) that are
not eligible for central bank operations but can be monetised
through repurchase agreements with third parties or through
sale.
Self-issued RMBS and covered bonds
The Group holds undrawn AAA notes issued under the Group's
asset-backed funding programmes. These self-issued securities
represent eligible collateral for use in repurchase agreements with
third parties or in central bank operations.
Whole mortgage loan pools pre-positioned at the Bank of
England
The Group holds a stock of unencumbered whole mortgage loan
pools at the Bank of England for use as collateral for contingency
funding purposes.
The tables below set out the sterling equivalent of the
liquidity portfolio categorised by issuing currency.
2014 2013
GBP EUR USD Total GBP EUR USD Total
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
Primary liquidity* 19.0 1.3 0.5 20.8 16.8 1.6 0.8 19.2
Other central bank eligible
assets 0.2 1.2 - 1.4 0.1 1.3 - 1.4
Other securities 1.3 0.8 0.9 3.0 0.6 0.6 1.5 2.7
Self-issued RMBS and covered
bonds 14.0 - - 14.0 14.0 - - 14.0
Whole mortgage loan pools
pre-positioned at the BoE 2.1 - - 2.1 1.4 - - 1.4
Total 36.6 3.3 1.4 41.3 32.9 3.5 2.3 38.7
*Primary liquidity includes off balance sheet items, primarily
treasury bills held through FLS participation.
The average month end balance for primary liquidity during the
year was GBP19.9 billion (2013: GBP21.0 billion).
Wholesale funding
The Group maintains a strong franchise in retail and wholesale
funding. The wholesale market is accessible using a range of
unsecured and secured instruments enabling maintenance of a
diversified funding base across a range of maturities. Together
with a strong market share of retail funding, the Group has
flexibility to access stable funding from the most cost-effective
sources. Through the wholesale markets, the Group has direct active
relationships with counterparties across a range of sectors,
including banks, other financial institutions, corporates and
investment funds.
An analysis of the Group's wholesale funding (made up of
deposits from banks, other deposits and debt securities in issue as
disclosed on the balance sheet) is set out in the table below:
4 April 2014 4 April 2013
GBPbn % GBPbn %
Repo and other secured arrangements - - 1.2 2.8
Deposits, including PEB balances 9.2 24.4 8.7 20.0
Certificates of deposit 2.6 6.9 3.8 8.8
Commercial paper 3.5 9.3 4.0 9.2
Covered bonds 9.5 25.2 11.4 26.3
Medium term notes 5.1 13.5 4.7 10.8
Securitisations 6.9 18.3 7.6 17.5
Other 0.9 2.4 2.0 4.6
Total 37.7 100.0 43.4 100.0
During the period a combination of strong retail performance,
low long term wholesale maturities and FLS access has contributed
to a reduced long term wholesale funding appetite. New capital
raised via CCDS and AT1 has also provided funding to the
business.
The Group tendered GBP715 million of permanent interest bearing
shares (PIBS) in September 2013 as part of its capital optimisation
strategy reflected in the reduction of wholesale funding above.
This resulted in the Group redeeming GBP506 million of PIBS with
the consent of the PRA. The 68% participation rate contributed
GBP125 million to profit in the year.
The table below sets out an analysis of the currency composition
of the Group's wholesale funding:
USD EUR GBP Other Total
GBPbn GBPbn GBPbn GBPbn GBPbn
Repo and other secured arrangements - - - - -
Deposits (including PEB balances) 0.2 0.9 8.1 - 9.2
Certificate of deposit 0.2 - 2.4 - 2.6
Commercial paper 2.9 0.6 - - 3.5
Covered bonds - 7.6 1.7 0.2 9.5
Medium term notes 0.9 2.6 1.4 0.2 5.1
Securitisations 3.4 0.9 2.6 - 6.9
Other - 0.8 0.1 - 0.9
Total at 4 April 2014 7.6 13.4 16.3 0.4 37.7
Total at 4 April 2013 9.0 15.5 18.4 0.5 43.4
To mitigate against cross-currency refinancing risk, the Group
ensures it holds a surplus in each respective currency over its
requirements in those currencies for at least 10 business days.
Maturity profiles - Wholesale funding
Managing maturity profile is key to maintaining the Group's
liquidity period on period. The table below sets out a breakdown of
the residual maturity of the contractual cash flows for the
wholesale funding book held on the balance sheet.
4 April 2014
Not more Over Over Over Sub-total Over Over Total
than one month three six months less one year two
one month but not months but not than but not years
more but not more one year more
than more than than
three than one year two years
months six months
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
Repo and other
secured arrangements - - - - - - - -
Deposits, including
PEB balances 3.4 1.4 0.6 0.7 6.1 1.3 1.8 9.2
Certificates
of deposit 0.9 1.0 0.3 0.4 2.6 - - 2.6
Commercial paper 1.2 1.8 0.5 - 3.5 - - 3.5
Covered bonds - 0.1 - 0.7 0.8 2.7 6.0 9.5
Medium term notes - - 0.1 1.5 1.6 0.2 3.3 5.1
Securitisations - - - 3.3 3.3 1.7 1.9 6.9
Other - - - - - 0.1 0.8 0.9
Total at 4 April
2014 5.5 4.3 1.5 6.6 17.9 6.0 13.8 37.7
Of which secured - 0.1 - 4.0 4.1 4.4 7.9 16.4
Of which unsecured 5.5 4.2 1.5 2.6 13.8 1.6 5.9 21.3
% of total 14.6 11.4 4.0 17.5 47.5 15.9 36.6 100.0
4 April 2013
Not more Over Over Over Sub-total Over Over Total
than one month three six months less one year two
one month but not months but not than but not years
more but not more one year more
than more than than
three than one year two years
months six months
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
----------- ------------ ------------ -----------
Repo and other
secured arrangements - - 0.2 - 0.2 1.0 - 1.2
Deposits, including
PEB balances 3.1 1.3 0.9 0.5 5.8 0.1 2.8 8.7
Certificates
of deposit 0.8 1.0 1.6 0.4 3.8 - - 3.8
Commercial paper 1.0 2.0 1.0 - 4.0 - - 4.0
Covered bonds - - - 1.7 1.7 0.8 8.9 11.4
Medium term notes - 0.1 - 0.2 0.3 1.6 2.8 4.7
Securitisations - - - 0.4 0.4 3.4 3.8 7.6
Other 0.2 - - - 0.2 0.4 1.4 2.0
----------- ------------ ------------ -----------
Total at 4 April
2013 5.1 4.4 3.7 3.2 16.4 7.3 19.7 43.4
Of which secured 0.2 - - 2.1 2.3 5.5 14.1 21.9
Of which unsecured 4.9 4.4 3.7 1.1 14.1 1.8 5.6 21.5
----------- ------------ ------------ -----------
% of total 11.8 10.1 8.5 7.4 37.8 16.8 45.4 100.0
As shown in the table above, the proportion of on balance sheet
funding categorised as long term (>1 year to maturity), which
excludes the FLS drawings is 52.5% (2013: 62.2%).
After including FLS drawings held off balance sheet, which have
a flexible and maximum maturity of four years, the residual
maturity profile of the Group's wholesale funding portfolio has
decreased slightly to 34 months (2013: 36 months) and the
proportion of funding that is categorised as long term has
decreased to 61.3% (2013: 64.3%). As at 4 April 2014 the primary
liquidity pool including FLS represented 116% (2013: 117%) of
wholesale funding maturing in less than one year, assuming no
rollovers.
Maturity of liquidity assets and liabilities
The table below segments the carrying value of financial assets
and financial liabilities into relevant maturity groupings based on
the remaining period to the contractual maturity date (residual
maturity). In practice, customers are often repaid later than on
the earliest date on which repayment can be required. Likewise, in
practice, customer assets may be repaid ahead of their contractual
maturity. Therefore, for forecasting purposes, the Group uses
judgement and past performance of each asset and liability class to
anticipate likely cash flow requirements of the Group.
At 4 April Due Due Due Due Due between Due between Due between Due Total
2014 less between between between 9-12 1-2 years 2-5 years over
Residual than 1-3 months 3-6 months 6-9 months months 5 years
maturity 1 month*
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Assets
Cash 5,342 - - - - - - - 5,342
Loans and
advances
to banks 1,647 - - - - 61 87 315 2,110
Investment
securities
- available
for sale 4 15 37 152 103 284 1,037 8,931 10,563
Loans and
advances
to customers 3,007 1,305 2,056 1,933 1,715 7,069 19,795 129,694 166,574
Derivative
financial
instruments 7 22 25 34 79 802 663 1,388 3,020
Other
financial
assets - 1 3 2 3 25 68 148 250
Total
financial
assets 10,007 1,343 2,121 2,121 1,900 8,241 21,650 140,476 187,859
Liabilities
Shares 90,633 3,076 6,409 5,118 8,025 10,903 3,035 3,269 130,468
Deposits
from banks 1,579 310 35 31 8 21 - - 1,984
Of which
repo - - - - - - - - -
Other
deposits 1,777 1,067 537 304 357 1,293 1,801 - 7,135
Due to
customers 3,865 504 1,308 291 204 22 14 - 6,208
Secured
funding
- ABS and
covered
bonds 6 106 60 3,302 672 4,471 3,067 5,705 17,389
Senior
unsecured 2,107 2,811 915 191 1,729 196 1,493 1,726 11,168
Derivative
financial
instruments 34 27 40 55 43 120 543 1,529 2,391
Other
financial
liabilities - 2 5 7 8 11 - - 33
Subordinated
liabilities - - 125 - - 411 1,053 680 2,269
Subscribed
capital 3 - - 199 8 128 11 252 601
Total
financial
liabilities 100,004 7,903 9,434 9,498 11,054 17,576 11,017 13,161 179,646
(89,997) (6,560) (7,313) (7,377) (9,154) (9,335) 10,633 127,315 8,213
*Due less than one month includes amounts repayable on
demand.
At 4 April Due Due Due Due Due between Due between Due between Due Total
2013 less between between between 9-12 1-2 years 2-5 years over
Residual than 1-3 months 3-6 months 6-9 months months 5 years
maturity 1 month*
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Assets
Cash 7,886 - - - - - - - 7,886
Loans and
advances
to banks 2,189 - - - - 148 - 185 2,522
Investment
securities
- available
for sale 4 59 253 50 119 608 1,925 10,403 13,421
Loans and
advances
to customers 3,105 926 1,918 1,948 1,855 7,159 19,512 123,164 159,587
Derivative
financial
instruments 65 104 40 434 17 323 1,262 1,967 4,212
Other
financial
assets - 20 33 20 6 30 507 292 908
Total
financial
assets 13,249 1,109 2,244 2,452 1,997 8,268 23,206 136,011 188,536
Liabilities
Shares 81,135 4,733 9,030 4,736 6,480 14,970 2,907 1,583 125,574
Deposits
from banks 1,756 180 202 40 8 1,001 - 43 3,230
Of which
repo - 12 190 - - 1,000 - - 1,202
Other
deposits 1,334 1,078 867 222 257 856 2,133 - 6,747
Due to
customers 3,812 846 864 207 112 105 14 - 5,960
Secured
funding
- ABS and
covered
bonds 6 45 22 2,156 42 8,394 4,030 6,177 20,872
Senior
unsecured 1,825 3,100 2,649 272 314 1,850 872 1,675 12,557
Derivative
financial
instruments 11 46 73 51 20 103 1,021 2,560 3,885
Other
financial
liabilities - 4 5 8 8 99 26 - 150
Subordinated
liabilities - 130 - - 169 - 1,536 705 2,540
Subscribed
capital 3 - - - - 220 132 949 1,304
Total
financial
liabilities 89,882 10,162 13,712 7,692 7,410 27,598 12,671 13,692 182,819
(76,633) (9,053) (11,468) (5,240) (5,413) (19,330) (10,534) 122,319 5,717
*Due less than one month includes amounts repayable on
demand.
Liquidity has increased as a result of retained profits and the
proceeds of capital issuances thus increasing the net surplus of
assets over liabilities. Liquid assets include cash, loans and
advances to banks and available for sale investment securities.
Other financial assets and liabilities include the fair value
adjustments for portfolio hedged risk and investments in equity
shares.
The analysis above excludes certain other assets, including
property, plant and equipment, intangible assets, investment
property, other assets, deferred tax assets and accrued income and
expenses prepaid, and certain other liabilities including
provisions for liabilities and charges, accruals and deferred
income, current tax liabilities, other liabilities and retirement
benefit obligations.
The following is an analysis of gross undiscounted contractual
cash flows payable under financial liabilities. The analysis of
gross contractual cash flows differs from the analysis of residual
maturity due to the inclusion of interest accrued at current rates
for the average period until maturity, on the amounts outstanding
at the balance sheet date.
Gross contractual Due less 1 - 3 - 6 - 9 - 1 - 2 - More Total
cash flows than 1 3 6 9 12 2 5 than
month* months months months months years years 5 years
2014
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Shares 90,633 3,213 6,529 5,217 8,101 11,071 3,240 3,386 131,390
Deposits
from banks 1,579 311 35 31 8 21 - - 1,985
Other deposits 1,777 1,086 553 318 370 1,332 1,844 - 7,280
Due to customers 3,865 512 1,313 293 205 22 14 - 6,224
Secured funding
- ABS and
covered bonds 55 69 777 2,758 1,255 4,407 3,783 6,085 19,189
Senior unsecured 2,108 2,813 980 188 1,769 357 1,789 1,786 11,790
Derivative
financial
instruments 58 135 251 154 201 494 795 753 2,841
Other financial
liabilities - 2 5 7 8 11 - - 33
Subordinated
liabilities 16 4 49 4 60 502 1,422 703 2,760
Subscribed
capital 1 5 12 7 212 22 201 327 787
Total financial
liabilities 100,092 8,150 10,504 8,977 12,189 18,239 13,088 13,040 184,279
Gross contractual Due less 1 - 3 - 6 - 9 - 1 - 2 - More Total
cash flows than 1 3 6 9 12 2 5 than
month* months months months months years years 5 years
2013
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Shares 81,135 4,946 9,209 4,880 6,595 15,213 3,092 1,663 126,733
Deposits
from banks 1,756 187 208 45 13 1,012 3 45 3,269
Other deposits 1,334 1,102 886 239 273 907 2,198 - 6,939
Due to customers 3,812 855 868 209 113 106 14 - 5,977
Secured funding
- ABS and
covered bonds 58 4 80 2,295 256 4,913 8,388 6,745 22,739
Senior unsecured 1,813 3,116 2,698 277 433 1,807 1,431 1,949 13,524
Derivative
financial
instruments 75 187 311 183 212 738 1,445 960 4,111
Other financial
liabilities - 5 6 9 9 101 26 - 156
Subordinated
liabilities - 4 54 4 215 136 1,939 764 3,116
Subscribed
capital 4 6 25 10 25 270 293 1,106 1,739
Total financial
liabilities 89,987 10,412 14,345 8,151 8,144 25,203 18,829 13,232 188,303
*Due less than one month includes amounts repayable on
demand.
Asset encumbrance
From time to time the Group encumbers assets to support funding
initiatives or serve as collateral. Secured funding, central bank
operations and third party repurchase transactions are the three
principal forms of encumbrance. Assets that have been utilised for
such purposes are classified as encumbered and pledged assets which
cannot be utilised for other purposes.
Group assets can be used to support funding or collateral
requirements for secured funding, central bank operations or third
party repurchase transactions. Assets that have been utilised for
such purposes are classified as encumbered and pledged assets which
cannot be utilised for other purposes. This includes excess
collateral and collateral held in respect of undrawn self-issued
notes in secured funding vehicles and cash collateral posted.
Other encumbered assets are those which cannot be utilised for
secured funding due to legal or other reasons.
All other assets are defined as unencumbered assets. These
comprise assets that are readily available to secure funding or
meet collateral requirements and assets that are not subject to any
restrictions but are not readily available for use.
Loans and advances to customers are only classified as available
as collateral if they are already in such form that they can be
used to raise funding without further management actions. All other
loans and advances are conservatively classified as 'unencumbered -
other', although, with management action, a proportion would be
suitable for use in asset-backed funding transactions.
An analysis of the Group's encumbered and unencumbered on
balance sheet assets as at 4 April 2014 is set out below:
Encumbered Unencumbered Total
At 4 April 2014 Pledged as collateral Other Available as collateral Other
GBPm GBPm GBPm GBPm GBPm
Cash - 4,615 539 188 5,342
Loans and advances to banks 887 325 - 898 2,110
Investment securities - available for sale 231 - 10,200 132 10,563
Loans and advances to customers 58,276 - 60,620 47,678 166,574
Derivative financial instruments - - - 3,020 3,020
Other financial assets - - - 250 250
Non-financial assets - - - 2,067 2,067
59,394 4,940 71,359 54,233 189,926
Encumbered Unencumbered Total
At 4 April 2013 Pledged as collateral Other Available as collateral Other
GBPm GBPm GBPm GBPm GBPm
Cash - 3,788 3,848 250 7,886
Loans and advances to banks (Note) 1,588 201 - 733 2,522
Investment securities - available for sale
(Note) 347 - 12,960 114 13,421
Loans and advances to customers 51,741 - 54,323 53,523 159,587
Derivative financial instruments - - - 4,212 4,212
Other financial assets - - - 900 900
Non-financial assets - - - 2,190 2,190
53,560 3,989 71,247 61,922 190,718
Note: This has been restated to include as encumbered GBP201
million of balances held with Central Banks for regulatory purposes
within 'loans and advances to banks' and GBP116 million pledged as
collateral under UK payment schemes within 'investment securities -
available for sale'.
In addition to the above, the Group holds other third party
liquid assets and self-issued notes off balance sheet that may be
capable of financing through third party sale and repurchase
agreements.
Repurchase agreements
The Group undertakes securities financing transactions in the
form of repurchase agreements (repo) to demonstrate liquidity of
the securities held in the Group's Liquid Asset Buffer (LAB). Cash
is borrowed in return for pledging securities as collateral and
because settlement is on a 'delivery versus payment' basis, the
main credit risk arises from intraday changes in the value of the
collateral. This is largely mitigated by the Group's collateral
management processes.
From a liquidity perspective the main risk is that during a
stress, the Group has insufficient repo market capacity to rapidly
monetise the LAB. To mitigate this risk, repo market capacity is
assessed via a quarterly review process. This is supplemented by
the frequent execution of bilateral repos to maintain credit lines
and anonymous transactions via a central counterparty clearing
house, such as the London Clearing House, using an electronic
trading platform.
All LAB repo activity is secured against highly liquid assets
and generally transacted for an overnight term. The weighted
average duration of repo trades maturing in the period is 2.2 days
(2013: 1.7 days).
LAB securities funding transactions currently have no impact on
either funding or encumbered asset reporting due to the short term
nature of the transactions, meaning they do not impact the income
statement. Repo transactions convert UK government bonds (highly
liquid securities) into cash, so there is a marginal movement in
the liquidity position.
The Group also had a number of non-LAB repo transactions
outstanding during the period which all matured before the
reporting date.
Managing liquidity and funding risks
The Group's management of liquidity and funding risk aims to
ensure that at all times there are sufficient liquid resources,
both as to amount and quality, to cover cash flow mismatches and
fluctuations in funding, to retain public confidence and to enable
it to meet financial obligations as they fall due, even during
episodes of stress. This is achieved through management and stress
testing of business cash flows, and the setting of appropriate risk
limits (which are outlined in further details below), to maintain a
prudent funding mix, maturity profile and level of high quality
liquid assets. The Group's approach to liquidity and funding risk
is managed by the Group's Assets and Liabilities Committee (ALCO)
and by the Board as part of the annual review of the Individual
Liquidity Adequacy Assessment (ILAA) document.
The Board is responsible for setting risk appetite with respect
to levels of liquidity and funding risks. This is articulated
through the Board's risk appetite statements. The Board translates
this into limits which define the minimum level of liquid resources
and the funding mix of the balance sheet. ALCO is responsible for
setting more detailed limits within Board limits, including the
level and maturity profile of funding, and for monitoring the
composition of the Group's balance sheet. Wholesale and retail
funding maturities are monitored to ensure there are no excessive
concentrations in future maturities. This enhances the ability of
the Group to refinance maturing liabilities. The Balance Sheet Risk
Committee (BSRC) sets further granular limits and is responsible
for monitoring liquidity and funding risks. A consolidated cash
flow forecast is maintained on an ongoing basis and reviewed by the
Weekly Trading Committee (WTC) which has responsibility for
monitoring liquidity metrics.
A Contingency Funding Plan (CFP) has been approved by ALCO and
describes metrics which would indicate an emerging market-wide
and/or Nationwide-specific stress. It also details procedures and a
range of available actions that the Group could take in the event
of a liquidity or funding stress, thereby allowing adequate
liquidity resources to be maintained. The CFP is reviewed every six
months and tested at least annually. The Group also has a Recovery
Plan which describes potential actions that could be utilised in a
more extreme stress.
Liquidity stress testing
To mitigate liquidity and funding risk generated by its business
activities, the Group holds a portfolio of liquid assets as
detailed in the 'Treasury assets' section above. A series of
liquidity stress tests are performed daily against a number of
scenarios, including those prescribed by the Regulator. The
internal stress tests are run alongside the calculation of the
regulatory individual liquidity requirement (ILG) and they
represent the Group's view of liquidity risks and therefore
determine the required levels of liquidity to be held.
The Group aims to maintain liquidity resources of at least 100%
of the anticipated outflows seen under each of the internal and
regulatory-prescribed stress tests. The scenarios include an
idiosyncratic stress which incorporates the impact of potential
rating agency downgrades, a market-wide stress and a combination of
the two. The stress scenarios consider a range of factors and the
consequent impact on the Group's cash flows over multiple time
horizons. The stress is assumed to be most severe in the first 10
business days. Assumptions used in internal liquidity stress tests
are reviewed regularly with changes proposed to ALCO for approval
and approved annually by the Board as part of the ILAA process.
The primary period over which internal liquidity stress testing
is performed is 30 business days (circa six weeks). Beyond this, it
is assumed that additional actions detailed in the CFP would be
utilised if required.
As at 4 April 2014, potential outflows under the most severe
stress test (the combined idiosyncratic and market-wide stress
scenario) were modelled at GBP22.8 billion (2013: GBP22.3 billion).
The risk drivers detailed below are linked to the outflow
assumptions. The liquidity assessed as eligible in the stress
testing, which includes liquidity and mortgage inflows, as a
percentage of stressed outflows equated to 128% (2013: 119%).
The table below details the key assumptions used in modelling
the liquidity stress scenarios.
Liquidity risk Modelling assumptions used
driver
Retail funding Significant unexpected outflows are experienced with
no new deposits received.
Wholesale funding Substantial outflows are seen at contractual maturity
as the Group is assumed to become a greater credit
risk. This behaviour is driven by credit rating downgrade
assumptions.
Off balance Contractual outflows in relation to asset-backed
sheet funding programmes as a result of credit rating downgrades.
Outflows are experienced as a result of other off-balance
sheet commitments such as the mortgage pipeline.
Inflows from mortgages or retail and commercial loans
are assessed on a behavioural basis and therefore
take into account expected overpayments and customers
in arrears.
Intra-group We continue to provide funding to subsidiaries.
Marketable Asset values are reduced in recognition of the stressed
assets conditions assumed.
Significant events in regulatory environment
In December 2010, the Basel Committee on Banking Supervision
(BCBS) announced proposals to introduce two new liquidity metrics
as part of the implementation of Basel III. These are a short term
liquidity stress metric, the Liquidity Coverage Ratio (LCR), and a
longer term funding metric, the Net Stable Funding Ratio (NSFR).
The LCR is designed to promote short-term resilience of a bank's
liquidity risk profile by ensuring it has sufficient high quality
liquid assets to survive a significant stress scenario lasting for
one month. The NSFR is designed to promote a sustainable funding
maturity structure over at least 12 months.
In January 2013, the BCBS announced revised guidelines in
respect of the LCR. In June 2013, the CRD IV package (CRR and CRD
IV), which includes requirements for the LCR, was published in the
Official Journal of the European Union. The LCR will become a
European standard from January 2015 with firms required to have a
ratio in excess of 60% increasing to 100% by January 2018. In the
UK the Financial Policy Committee recommended that the LCR is
implemented at 80% from January 2015 rising thereafter to reach
100% from January 2018.
The BCBS also published a consultation paper in January 2014
announcing further refinements to the NSFR which are expected to be
broadly positive for the Group. The NSFR is expected to be
implemented at a minimum of 100% from January 2018.
Until these measures are translated into UK regulation, some
uncertainty will remain over how the UK Individual Liquidity
Adequacy Standard regime will transition to the LCR standard. The
Group continues to monitor its position relative to the anticipated
requirement of both the LCR and NSFR.
Based on current interpretations of regulatory requirements, and
guidance including European CRR, as at 4 April 2014 the Group had
an LCR ratio of 90.7% and a NSFR ratio of 112.4%. The LCR position
represents a surplus to both European and anticipated UK regulatory
requirements as at 1 January 2015. The NSFR ratio already exceeds
the 100% ratio requirement due for implementation in January
2018.
Significant events in market environment
Central bank liquidity support continues to remain available to
solvent financial institutions within the UK banking system. This
was reiterated in October 2013 when the Bank of England published
developments to their Sterling Monetary Framework with the aim of
increasing the availability and flexibility of liquidity insurance
provided to solvent financial institutions. This included
confirmation that liquidity would be provided at longer maturities,
against a wider range of collateral, at lower cost, and with
greater predictability of access.
External credit ratings
The Group received a one-notch long-term credit rating downgrade
from Standard and Poor's (S&P) in August 2013 and Fitch in
September 2013. These changes aligned the Group's long-term ratings
with industry peers and thus did not have a material impact on the
Group's funding franchise.
In March 2014 Fitch announced that, in light of evolving bank
resolution frameworks, downward revisions of Support Rating Floors
would be likely within a standard outlook horizon due to weakening
of sovereign support assumptions. The Group's current credit rating
is not dependent on the Support Rating Floor; therefore it is
unlikely that there will be any significant impact on the Group's
long-term credit rating. In April 2014, S&P placed a number of
European banks' ratings, including the Group's ratings, on negative
outlook to reflect the possible removal of government support by
the end of 2015.
The Group's short and long term credit ratings from the major
rating agencies as at 27 May 2014 are as follows:
Long Term Short Term Subordinated Date of last rating action/confirmation*
Standard & Poor's A A-1 BBB August 2013
Moody's A2 P-1 Baa1 October 2013
Fitch A F1 A- September 2013
* The outlook for all Moody's and Fitch is Stable; the outlook
for S&P is Negative.
The table below sets out the amount of additional collateral the
Group would need to provide in the event of a one and two notch
downgrade by external credit rating agencies.
Cumulative adjustment for a one notch downgrade Cumulative adjustment for a two notch downgrade
GBPbn GBPbn
4 April 2014 9.0 9.0
4 April 2013 4.8 8.1
The contractually required cash outflow would not necessarily
match the actual cash outflow as a result of management actions
that could be taken to reduce the impact of the downgrades.
Outlook for financial risk management
The more accommodating stance from the Bank of England,
contained within the Sterling Monetary Framework, suggests that the
funding environment for solvent UK banks and building societies is
likely to endure. Within this framework, the Bank of England made
changes designed to increase the availability and flexibility of
liquidity insurance provided to solvent financial institutions; for
example, by providing liquidity at longer maturities, against a
wider range of collateral, at lower cost and with greater
predictability of access.
While uncertainties remain over the definition and
implementation of the new Basel III liquidity measures, greater
clarity is expected over the coming months with it being
anticipated that the European Commission will adopt the delegated
LCR Act by 30 June 2014. The Group will continue to monitor
unfolding events and the implementation of these metrics in the
UK.
As regulators implement new resolution tools with the aim of
avoiding bail-outs, rating agencies have announced they are
reviewing the implications for financial institutions of reduced
extraordinary government support. The Group also continues to
monitor regulatory initiatives at the European and UK level which
aim to introduce a requirement for firms to hold a minimum level of
liabilities which can be 'bailed in' to enable recapitalisation of
the Group. This may have an impact on the cost of term wholesale
funding.
As several of the Group's competitors have announced strategic
changes to refocus on the UK retail banking market, the margin
earned on the Group's core products may be squeezed through
increased competition. The Group therefore continues to monitor
this situation and will adapt its strategies accordingly.
Operational risks
Overview
The Group defines operational risk as the risk of loss resulting
from inadequate or failed internal processes, people and systems,
or from external events. Operational risk encompasses
transformation risk.
This definition is further refined into 7 key risk and control
policy areas:
Risk category Definition
Financial reporting The risk of material error in the external financial
and tax reports, non-compliance with tax laws or codes
or failure to maintain the integrity of the
general ledger.
Fraud The risk of loss or failure caused by an act
of dishonesty, false representation, the failure
to disclose information, or by abuse of position.
Group security The risk of loss of data or damage to assets,
including physical and cyber-based attacks,
and unauthorised disclosure of information.
Information and The risk of loss or failure arising from inaccurate,
financial management unavailable, incomplete or undefined data; errors
in regulatory and / or internal and external
critical reporting; ungoverned assumptions and
errors in financial planning and or financial
information provided to support material decision
making.
Infrastructure The risk of failure to provide a robust technological
and resilience and/or physical infrastructure to support operational
activities and the achievement of business objectives.
People The risk of loss or failure due to the inability
to recruit, develop, reward and retain the required
people resources.
Transformation The risk of loss or failure arising from formally
managed project activities that seek to deliver
change in the Group's capabilities.
Operational risk profile
The Group's operational risk function collects and reports on
the operational risk events that have occurred, by count and by
value, in order to better understand those exposures that require
management attention. For the purposes of reporting, the Group
defines an operational risk event or loss as a "financial loss,
cost or gain arising from an operational risk incident". There is a
regulatory requirement for the Group to collect and report on these
operational risk events.
The Group reports operational risk events against both internal
risk categories as well as by Basel II categories. The use of Basel
II categories allows the Group to compare operational risk event
experience with the broader industry. Consistent with the Group's
historical and industry experience, within this reporting period
96.7% by count, and 97.2% by value, of the Group's operational risk
event experience has been recorded against two of the Basel II
categories: 'External Fraud' and 'Clients, Products & Business
Practices'.
The 'External Fraud' category has been driven by debit and
credit card low value, high volume, fraud events whilst the
'Clients, Products & Business Practices' category also reflects
PPI claims. As a percentage of total events by count and by value
'External Fraud' events have increased by 9.3% and 5.1% to 73.9%
and 30.0% respectively. In comparison, 'Clients, Products &
Business Practices' events, by count, have reduced by 3.3%, whilst
by value, the Group's experience for this category has increased by
7.8%. Across both of these categories, operational risk event
experience remains in line with the industry.
Significant events/environment
The Group continues to invest in new products and services for a
growing customer base. The Group's operations are well-controlled,
which has resulted in a market leading level of customer service
delivery.
Following the successful launch of its new core banking platform
in December 2012, the Group is close to completing the migration of
5.2 million accounts from the legacy banking platform onto the new
SAP banking platform. This delivery will improve operational risk
management and IT running costs for the Group and enhance customer
experience through the product propositioning now made available to
all customers.
The Group continues to make significant investment in
transforming its products and delivery channels through the
implementation of new systems and organisational structures and
meet consumer expectations of digital banking. The operational
complexity of these activities may however increase the inherent
risk of system failures or process errors, and the Group works
diligently to ensure controls are in place to manage this.
In December 2011, the Government endorsed a recommendation made
by the Independent Commission on Banking (ICB) to increase
competition in the Personal Current Account (PCA) market, by
improving the PCA switching service. The 7 Day Accounting Switching
(7DAS) Programme reduced end-to-end switching from 18 to 7 days
resulting in a net gain of over 37,000 accounts switched to the
Group during 2013/14 and implemented a redirection service to
ensure direct debits and payments from old accounts will be
automatically redirected to new accounts for a 13 month period.
Acknowledging the scale of regulatory change, including
increased reporting and stress testing and the current
macro-economic environment, management of operational risk remains
a priority and continued improvement in controls is a key focus for
management. The Group actively seeks to ensure that it mitigates
operational risk through analysis using past experience, and its
approach to lessons learnt, where the concepts of continuous
improvement and learning from its and others' mistakes are key
components to driving operational risk improvement.
Outlook for operational risk
The Group's operational risk profile is informed by risk
assessments from the business and by review and challenge by both
the second line Operational Risk team and the Operational Risk
Committee.
In recognition of the cyber risk facing both the Group and the
financial sector in general, the Group continues to focus its
efforts on discharging its cyber risk management responsibilities
effectively. This ensures that the Group continues to safeguard the
organisation and, importantly, its customers.
As the rise of digital banking changes customers' expectations
around the availability of banking services, the Group will seek to
make digital transactions easier and more available to its
customers. With this in mind, the Group will also seek to invest in
transforming its products and delivery channels to meet evolving
customer and regulatory expectations in this area.
The Operational Risk Framework is subject to regular review, and
for 2014/15 some changes to the key risk categories detailed above
are being introduced to better align the categories to
organisational, governance, and reporting structures.
Customer and compliance risks
Overview
The Group defines 'customer and compliance risk' as the risk
that the organisation fails to design and implement operational
arrangements, or systems and controls, such that it cannot maintain
legal and regulatory compliance, deliver fair customer outcomes or
achieve a positive experience for its customers. The definition is
further defined into six risk sub-categories:
Risk category Definition
Firm and culture The risk that the Group fails to implement
operational arrangements, systems and controls
that achieve legal and regulatory compliance
and embed a corporate culture where fair
customer outcomes and the achievement of
a positive experience are central to the
Group's values and behaviours.
Customer experience The risk that the Group's customers do not
have a positive experience.
Retail conduct The risk that the Group's products and services
(including contracts and terms and conditions)
are not designed, developed and operated
to deliver fair customer outcomes and compliance.
Wholesale conduct The risk that the Group's commercial and
financial markets activity is inappropriate
and/or does not comply with regulatory requirements.
Prudential standards The risk that the design and operation of
the Group's systems and controls fails to
maintain compliance with prudential requirements.
Financial crime The risk that the Group fails to establish
effective systems and controls to prevent
the risk that it might be used to further
financial crime.
Significant events/environment
In recent years, issues associated with non-compliant processes
and failures to meet legitimate expectations of customers have
proven to be significant source of cost for the industry. The
industry will continue to evolve as it responds to the volume and
scale of regulation it will experience in the coming years, while
also delivering products and services that meet the demands of the
Digital Society. The ongoing focus of good consumer outcomes in
this environment will remain a key area of risk for the
industry.
The Groups's mutual ethos and long standing commitment to "doing
the right thing" means it is well placed to meet these challenges
and serve its members safely. The business will continue to
deliver, and further develop, systems and controls that protect its
members, with carefully designed products delivered by a sales
force that is well trained and monitored.
Regulatory change
The pace of regulatory change has increased since April 2013,
following the regulatory split between the Prudential Regulatory
Authority (PRA) and Financial Conduct Authority (FCA). Like most
banks and building societies, the Group has been impacted by two
core regulatory changes in 2013-14: the Capital Requirements
Regulations combined with the Capital Requirements Directive IV,
and the lead-up to the Mortgage Market Review (MMR) implementation.
In addition, the Group has continued to support the additional
changes from the Retail Distribution review and the implementation
of the 7-Day Account Switcher Service.
Internal change
The Group has introduced the customer and compliance risk
frameworks, which provide a solid foundation for the organisation
to understand potential risks to which it could be exposed and to
consider these in the design and distribution of products and
associated systems and controls.
Nationwide has expanded its Group Compliance division in 2013/14
and it will expand further in 2014/15, with additional skills and
capabilities to meet the needs of the changing environment and the
Digital Society. A key change has been the recruitment of a Chief
Compliance Officer. This move, along with the inclusion of this
role on the Executive Committee, recognises the importance of
customer and compliance risk to the organisation.
Customer and compliance risk profile
Nationwide has not been subject to the same level of regulatory
censure as its main competitors reflecting its commitment to
delivering fair customer outcomes. However, the Group recognises
the need to continue to transform and innovate to meet the demands
of its members, the regulators and the wider financial services
industry.
Compared to the industry as a whole, far fewer customer
complaints about Nationwide to the Financial Ombudsman Service
(FOS) have been upheld: only 10% of the complaints to FOS about the
Group have been upheld compared to 51% across the industry as a
whole. This reflects the Group's approach to resolving complaints
against it fairly.
No additional provision has been made this year for PPI. The
Group has continued to experience a significant but declining
volume of reactive PPI complaints during the financial year, a
substantial proportion of which relate to cases where there has
been either no sale or no evidence of mis-selling. The Group
continues to re-assess the ultimate level of complaints expected
and the appropriateness of the provision, which reflects the
redress and associated administration that will be payable in
relation to claims it expects to uphold. Further costs in relation
to invalid claims are recognised in administrative expenses as
incurred.
The Group is reviewing its compliance with various regulatory
matters, including consumer credit legislation and during the year
it made a provision of GBP69 million in respect of potential
customer redress. However, no customer detriment has been
identified.
Tax compliance
The statutory reported tax charge for the year is GBP128 million
(2013: GBP10 million credit). This represents an effective tax rate
of 18.9%, which is lower than the statutory rate in the UK of 23%
(2013: 24%). The lower rate is due principally to adjustments with
respect to prior periods and the effect of the change in the UK
corporation tax rate. Further information is provided in notes 12
and 21.
During the year the Group income statement bore taxes of GBP345
million (2013: GBP258 million) including irrecoverable VAT, bank
levy, employment and property taxes which are charged to profit
before tax as part of administrative expenses and depreciation.
With the exception of the bank levy, all of these amounts are
recognised in arriving at underlying profit.
The Group complies with all UK tax laws. Nationwide has an open
and transparent relationship with HMRC, such that HMRC has accorded
the Group a "low risk" status.
Taxes borne in the year Year Year
to to
4 April 4 April
2014 2013
GBPm GBPm
Corporate income taxes 87 33
Bank levy 17 16
Taxes on property 24 23
Employment taxes 47 47
Indirect taxes 170 139
Total 345 258
In addition, the Group collected and remitted a further GBP397
million (2013: GBP454 million) of taxes to the UK and overseas
exchequers through deduction of taxes at source on payroll and
customer accounts.
Additional taxes collected and remitted Year Year
to to
4 April 4 April
2014 2013
GBPm GBPm
Tax withheld at source (on savings accounts) 247 303
Payroll taxes 141 134
Indirect taxes (Insurance Premium Tax and VAT) 9 17
Total 397 454
Outlook for customer and compliance risk
The FCA, which is significantly more assertive than its
predecessor, will continue to develop the regulatory regime around
the concept of culture and conduct risk.
The Group will remain alert to the challenges that it faces in a
rapidly changing environment, with further development of its
controls and processes and a focus on consumer outcomes and
protecting the Group's members, now and in the future:
-- The Group will further enhance the customer and compliance risk frameworks, to improve its identification, management and governance of aggregate risks and enhance its understanding of conduct and culture risk.
-- The Group will constantly review its products and services,
to ensure they continue to meet the Group's members'
expectations.
-- The Group will continue to keep pace with the volume of legal
and regulatory change, through proactive management of its business
strategy and proposition.
This pace of change will continue with the recent transfer of
Consumer Credit Regulation to the FCA, and the impending Mortgage
Credit Directive; introduction of a new payments regulator; and
Senior Managers and Certification Regimes, which will replace the
existing Approved Persons Regime (APR).
The PRA and FCA will consult with the industry on the detail in
2014, with the regimes coming into force in 2015, with the
intention to capture a wider range of individuals from an
accountability and liability perspective than under the existing
APR.
There will be increasing prudential requirements being placed on
the business, with greater scrutiny on the level of capital
required, implementation of the Firm Data Submission (FDS) and a
new stress testing regime.
The FCA will continue to develop its regulatory approach in
respect of its consumer protection, market integrity and
competition objectives, with the focus of supervision being the
assessment of whether the firm has the customer at the heart of how
the business is being run.
The digitisation of the Group's proposition provides further
challenges where legislation and processes are carried forward into
the digital age. Increasing standards for conduct could restrict
the Group's channels, services or proposition. The Group will
design and implement appropriate controls and process in order to
continue to provide the services that its members value against the
changing regulatory backdrop.
Strategic risks
Strategic risk is split into the following sub-categories:
Risk category Definition
Business model The risk associated with failing to adopt an
appropriate business model, set appropriate
goals and targets in the Corporate Plan, or
adapt to external developments.
Reputation The risk that arises from material adverse publicity
resulting in a loss of confidence from key stakeholders
sufficient to threaten the strategic objectives
of the business.
Strategic initiatives The risk that the Group enters into strategic
initiatives that undermine the business model,
or does not enter into appropriate strategic
initiatives that would enhance the business
model.
Strategic risk focuses on large, longer term risks that could
become a material problem for the Group. Whilst all business areas
are responsible for managing their own risks, management of
strategic risk is primarily the responsibility of senior management
and committees whose remit encompasses all the risk categories on a
Group-wide combined basis.
The management of strategic risk is intrinsically linked to the
corporate planning and stress testing processes, and is further
supported by the regular provision of consolidated business
performance and risk reporting data to the Board and senior risk
committees.
Reputation risk is inherent in all risk categories where actions
and incidents can affect whether people trust, and wish to do
business with, Nationwide. Reputation is monitored via incident
reporting, media monitoring, business performance, complaints
monitoring and both internal and external benchmarking.
A number of the top and emerging risks have the potential to
affect more than one risk category and could have significant
impact on the business model if these were to crystallise in the
same timeframe. In addition, regulatory changes affecting several
risk categories have the potential to threaten the viability of the
mutual model.
In particular, the Group faces a challenge to build new digital
services that appeal to new members whilst not compromising the
traditional services that are valued by longer established
customers.
To manage strategic risk, the Group therefore focuses on serving
both current and future members while maximising member benefit.
Activities are centred on mainstream UK retail personal financial
services, with participation in other non-member businesses only
where these activities fit with core capabilities, diversify risks,
and earn a premium return for members. The Group also operates as a
single business unit, with organisational and legal structures
aligned to this, which ensures no material exposure to Group
'contagion' risk.
CAPITAL MANAGEMENT REPORT
Capital is held by the Group to protect its depositors, cover
its inherent risks, provide a cushion for stress events and support
its business strategy. In assessing the adequacy of its capital
resources, Nationwide considers its risk appetite in the context of
the material risks to which it is exposed and the appropriate
strategies required to manage those risks.
The Group manages its capital structure to ensure it continues
to meet minimum regulatory requirements, as well as meeting the
expectations of other key stakeholders. As part of the risk
appetite framework, the Group targets a Common Equity Tier 1 (CET1)
ratio amongst the best in market compared to major banking peers.
Nationwide's strategy is to meet this primarily through retained
earnings, supplemented by external capital issuances where
appropriate, as well as the strategic management of credit
risk.
Capital position
The Group's capital and leverage ratios have increased this year
as a result of a strong trading performance and strategic capital
management activities including deleveraging. The successful
issuances of core capital deferred shares (CCDS) and Additional
Tier 1 (AT1) securities also strengthened the Group's capital base
and improved its regulatory capital ratios.
Nationwide's capital position at 4 April 2014 is summarised in
the table below. All tables in this section show the capital
position for 4 April 2014 on a CRD IV 'end point' basis with the
exception of total Tier 1 capital and total regulatory capital
resources and associated ratios, which include grandfathered legacy
Tier 1 and 2 instruments under transitional rules. This reflects
the PRA's accelerated implementation of CET1 deductions, so that
they apply in full from 1 January 2014, but retaining transitional
phasing for grandfathering of capital instruments. Proforma 4 April
2013 CRD IV capital figures are included on the same basis to allow
comparability. In addition, the proforma figures reflect the change
in treatment of securitisation exposures rated below BB- as
described below.
Key capital ratios 4 April 2014 4 April 2013 4 April 2013
CRD IV Basel II
PROFORMA(2)
CRD IV(1)
Capital - CRD IV (end point)
unadjusted
CET1 ratio (3) 14.5% 9.1% 12.3%
Leverage ratio (4)
PRA adjusted ratios 3.3% 2.2% -
PRA Adjusted CET1 ratio (5) 11.2% -
PRA Adjusted Leverage ratio
(5) 3.2% - -
1. Capital ratios are reported under CRD IV on an 'end point'
basis.
2. On 1 January 2014 CRD IV was introduced. The column headed 4
April 2013 CRD IV shows the 4 April 2013 figures on a proforma
basis, had these rules applied then, and reflecting a change in
treatment of securitisation exposures rated below BB-. It is
provided to assist in understanding the changes in the regulatory
capital position during the year.
3 For 4 April 2013, on a Basel II basis Core Tier 1 ratio is reported in this line.
4 The Group reported a leverage ratio of 2.0% in the 2013 Pillar
3 disclosures. The principal reason for the difference between the
figure previously reported and the proforma figure now reported of
2.2% is the change in treatment of securitisation exposures rated
below BB-.
5. On 20 June 2013 the PRA published CET1 and leverage ratios
for major banks and building societies, including Nationwide, on an
adjusted basis to reflect "regulatory headwinds" as estimated by
the PRA. They also set minimum targets for these ratios of 7% and
3% respectively.
The introduction of Basel III on 1 January 2014 was implemented
through the Capital Requirements Regulation and Directive, together
referred to as CRD IV. These new regulations reduced CET1 capital
resources, increased capital requirements and made certain existing
capital instruments ineligible. As a result, the application of CRD
IV reduced the Group's previously reported regulatory capital and
capital ratios including the CET1 ratio.
The capital disclosures included in this report are on a Group
basis, including all subsidiary entities. For regulatory purposes
the Group also reports on an Individual Consolidated basis, which
only includes those subsidiaries meeting particular criteria
contained within CRD IV. Nationwide's CET1 ratio on this basis at 4
April 2014 is 0.1% lower than the Group basis due to reserves held
by entities that sit outside of the Individual Consolidation, with
a small impact from the risk weighted assets of these entities.
More detail on an Individual Consolidated basis can be found in the
Group's 2014 Pillar 3 disclosure.
In December 2013 the Group successfully issued GBP550 million
(GBP531 million net of issuance costs) of CCDS which qualifies as
CET1 capital. In addition the Group issued GBP1 billion (GBP992
million net of issuance costs) of Additional Tier 1 capital in
March 2014. These successful transactions demonstrate that
Nationwide has access to the external market when required to
support the Group's capital position and the achievement of its
strategic objectives.
As part of its capital management strategy the Group bought back
GBP506 million of its own permanent interest bearing shares (PIBS)
in September and October 2013. This transaction removed instruments
that are not eligible as capital under end-point CRD IV rules and
generated additional CET1 by crystallising gains. Future liability
management options and decisions with respect to capital calls will
be made at the Group's discretion in light of the then prevailing
market, economic and regulatory conditions.
In June 2013 the PRA set an expectation that major UK firms
maintain a minimum 7% end-point CET1 ratio and 3% leverage ratio.
In calculating these target ratios, the PRA initially applied
adjustments to Nationwide's CET1 resources and applied a risk
weight floor to prime mortgages thus increasing risk weighted
assets by GBP10.6 billion. The adjustment to capital resources
related to the commercial real estate portfolio and this has since
been reduced (from GBP0.4 billion to GBP0.1 billion).
Since the year end the Group has sold commercial real estate
loans which represented gross balances of GBP694 million at 4 April
2014 and over 90% of its remaining exposure to the German real
estate market. The disposal will be recognised in the first quarter
of 2014/15 and has a positive impact on the CET1 and leverage
ratios on a pro-forma basis of approximately 0.5% and 0.1%
respectively.
After applying the PRA adjustments, the adjusted end point CET1
ratio is 11.2% and the adjusted leverage ratio is 3.2% as at 4
April 2014, meaning that the Group's ratios now exceed the targets
of 7% and 3% respectively established by the PRA in June 2013.
Total regulatory capital
The table opposite reconciles the general reserves to total
regulatory capital and explains the movement in regulatory capital
by category.
Explanatory notes (to table opposite)
(1) Under CRD IV the revaluation reserve is included as CET1
capital
(2) Foreseeable distributions in respect of CCDS and AT1
securities are deducted from CET1 capital under CRD IV.
(3) A prudent valuation adjustment is applied in respect of fair
valued instruments as required under regulatory capital rules.
(4) Own credit and debit valuation adjustments are applied to
remove balance sheet gains or losses of fair valued liabilities and
derivatives that result from changes in the Group's own credit
standing and risk, in accordance with CRD IV rules.
(5) The available for sale reserve is included in regulatory
capital under CRD IV.
(6) CRD IV does not permit the pension fund deficit to be added
back to regulatory capital, in contrast to Basel II.
(7) Intangible assets and goodwill do not qualify as capital for
regulatory purposes.
(8) Under CRD IV the net capital expected loss over accounting
provisions is deducted from CET1 capital, gross of tax. Any
provisions in excess of expected loss are included in Tier 2
capital. Under Basel II the deduction was split 50%, net of tax,
from Core Tier 1 and 50%, gross of tax, from Tier 2 with the Tier 2
tax offset being counted within Tier 1 capital.
(9) Securitisation assets rated below BB- are being risk
weighted at 1250% in the 2014 and proforma disclosures. The Group
has changed its treatment of these items, which were previously
treated as a deduction from capital, from 1 January 2014. The
proforma disclosures for 2013 have been prepared reflecting the
revised treatment to aid comparability.
(10) Permanent interest bearing shares and subordinated debt
include 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 less than five years to
maturity. The values are subject to the CRD IV grandfathering cap
as at January 2014.
Capital position
4 April 4 April 4 April
2014 2013 2013
CRD IV CRD IV Basel
Transitional Transitional II
GBPm GBPm GBPm
PROFORMA(1)
General reserve 7,363 6,765 6,765
Core capital deferred shares (CCDS) 531 - -
Revaluation reserve (note 1) 71 67 -
Regulatory adjustments and deductions:
-- Foreseeable distributions (note 2) (45) - -
-- Prudent valuation adjustment (note
3) (5) (13)
-- Own credit and debit valuation adjustments
(note 4) (17) (37) -
-- Available for sale reserve (note 5) (51) (252) -
-- Defined benefit pension fund adjustment
(note 6) - - 263
-- Intangible assets (note 7) (890) (821) (878)
-- Goodwill (note 7) (12) (16) (16)
-- Excess of expected losses over impairment
(note 8) (1,096) (1,130) (429)
-- Securitisation and other positions
(note 9) - (12) (251)
Total regulatory adjustments and deductions (2,116) (2,281) (1,311)
Common Equity Tier 1 capital 5,849 4,551 5,454
Additional Tier 1 Capital Securities
(AT1) 992 - -
Permanent interest bearing shares (note
10) 592 937 1,304
Tax in respect of expected loss excess
over impairment (note 8) - - 136
Total Tier 1 capital 7,433 5,488 6,894
Dated subordinated debt (note 10) 2,073 2,167 2,281
Revaluation reserve (note 1) - - 67
Surplus of impairment over expected loss
(note 8) 171 - -
Collectively assessed impairment allowances 27 91 70
Deductions:
-- Excess of expected losses over impairment (note 8) - - (565)
-- Securitisation and other positions
(note 9) - - (251)
Total deductions - - (816)
Tier 2 capital 2,271 2,258 1,602
Total regulatory capital 9,704 7,746 8,496
1. On 1 January 2014 CRD IV was introduced. The column headed 4
April 2013 CRD IV shows the 4 April 2013 figures on a proforma
basis, had these rules applied then, and reflecting a change in
treatment of securitisation exposures rated below BB-. It is
provided to assist in understanding the changes in the regulatory
capital position during the year.
The new CRD IV regulatory framework replaces the previous set of
PRA capital rules, and is supplemented by a number of technical
standards published by the European Banking Authority. The PRA
published its final rules to implement CRD IV in the UK through
Policy Statement PS7/13 and associated Supervisory Statements in
December 2013.
Total regulatory capital has increased from GBP8,496 million to
GBP9,704 million over the year with increases in CET1 capital,
total tier 1 capital and Tier 2 capital despite the fact that CRD
IV introduced adjustments which reduce constituents of CET1 and
Tier 1 capital, as indicated in the 4 April 2013 CRD IV column. The
key movements include:
-- Reduced Common Equity Tier 1 capital, through changes to the
definition, such as the recognition of available for sale reserves,
the 100% deduction of expected losses from CET1, gross of tax, and
the fact that CET1 capital can no longer be adjusted to exclude
pension deficits;
-- The first stage of a phased removal of permanent interest
bearing shares (PIBS) and some subordinated debt instruments, which
will be phased out over eight years from January 2014.
Compared to the proforma 4 April 2013 CRD IV position, CET1
capital has increased as a result of:
-- Increases in the general reserve (principally from profit after tax);
-- A reduction in the negative AFS reserve due to deleveraging
of our asset backed securities (ABS) portfolio and improved market
values;
-- Net proceeds from the issue of CCDS.
In addition, total Tier 1 capital has increased compared to the
proforma 4 April 2013 CRD IV position as a result of net proceeds
from the issue of AT1 capital, offset by the buy back of PIBS.
Taken together these changes account for the increase in total
regulatory capital compared to the proforma 4 April 2013 CRD IV
position.
Risk weighted assets
The table below sets out the Group's 4 April 4 April 4 April
risk weighted assets.
2014 2013 2013
CRD IV CRD IV Basel II
PROFORMA(1)
Risk weighted assets GBPm GBPm GBPm
Credit risk:
Retail mortgages 15,105 16,953 16,953
Retail unsecured lending 6,899 6,485 6,485
Commercial loans 9,061 13,643 13,643
Treasury 4,304 8,119 2,802
Other 1,295 1,635 1,107
Total credit risk 36,664 46,835 40,990
Operational risk 3,762 3,398 3,398
Market risk 29 52 52
Total risk weighted assets 40,455 50,285 44,440
1. On 1 January 2014 CRD IV was introduced, the column headed 4
April 2013 CRD IV shows the 4 April 2013 figures on a proforma
basis, had these rules applied then, and reflecting a change in
treatment of securitisation exposures rated below BB-. It is
provided to assist in understanding the changes in the regulatory
capital position during the year.
The CRD IV Pillar 1 capital requirements (risk weights) are
calculated using:
-- The retail IRB approach for prime, buy to let and
self-certified mortgages (other than those originated by the
Derbyshire, Cheshire and Dunfermline building societies) and
unsecured lending;
-- Foundation IRB and the PRA's "slotting" methodology for
Treasury and commercial portfolios (other than sovereign
exposures);
-- The Standardised approach for all other credit risk
exposures, including some treasury and commercial exposures that
are exempt from using the IRB approach.
The introduction of CRD IV increased risk weighted assets (RWAs)
principally through asset value correlation, credit value
adjustments and increased weightings for deferred tax assets. In
addition, as referred to above in note 9, the Group elected to risk
weight securitisation exposures rated below BB- rather than deduct
them from capital such that they are included in treasury RWA's;
this change was made from 1 January 2014 but has been reflected in
the 4 April 2013 CRD IV proforma disclosures to aid comparability.
Compared to the April 2013 CRD IV position, RWAs have decreased by
GBP9,830 million. This has been driven by deleveraging of the
commercial and treasury ABS portfolios and the transfer of some
retail specialised lending portfolios onto the IRB approach.
Key ratios
The table below sets out the key capital ratios:
4 April 4 April 4 April
2014 2013 2013
CRD IV CRD IV Basel II
PROFORMA(1)
Solvency ratios (note 1) % % %
Common Equity Tier 1 (CET1) 14.5% 9.1% 12.3
Total Tier 1 capital (transitional) 18.4% 10.9% 15.5
Total regulatory capital (transitional) 24.0% 15.4% 19.1
Leverage (note 2) GBPm GBPm
Exposure 207,562 205,919
Capital (excluding PIBS) 6,841 4,551
Leverage ratio 3.3% 2.2%(3)
1. On 1 January 2014 CRD IV was introduced, the column headed
4 April 2013 CRD IV shows the 4 April 2013 figures on a proforma
basis, had these rules applied then, and reflecting a change
in treatment of securitisation exposures rated below BB-. It
is provided to assist in understanding the changes in the regulatory
capital position during the year.
2. Capital ratios above are reported under CRD IV on an 'end
point' basis with the exception of total Tier 1 and total regulatory
capital, which include grandfathered legacy Tier 1 and 2 instruments
under transitional rules.
3. The Group reported a leverage ratio of 2.0% in the 2013 Pillar
3 disclosures. The principal reason for the difference between
the figure previously reported and the proforma figure now reported
of 2.2% is the change in treatment of securitisation exposures
rated below BB-.
Explanatory notes
(1) Solvency ratios are calculated as the relevant eligible regulatory
capital divided by risk weighted assets, on a Group basis.
(2) The leverage ratio is calculated using the CRR definition
of Tier 1 capital, and the December 2010 Basel III exposure definition
in accordance with PRA guidance. Exposures include on and off
balance sheet exposures with some regulatory adjustments applied.
Ratios using alternative definitions of the exposure and capital
metrics can be found in section 3 of the Group's Pillar 3 disclosure
at nationwide.co.uk.
A more detailed review of the Group's capital can be found in
sections 3 and 4 of our 2014 Pillar 3 disclosure to be published on
18 June 2014 at www.nationwide.co.uk.
Regulatory developments
Whilst the CRD IV and PRA's policy statement have been
published, many of the technical standards being published by the
European Banking Authority have not been finalised and the Basel
Committee is still consulting on a number of topics.
The leverage ratio has been introduced as a backstop to
risk-based capital requirements. The Basel Committee is using a
period to 2017 to test a minimum leverage ratio of 3%, whilst the
Financial Policy Committee has commenced its own review into the
role of the leverage ratio as part of the UK capital framework.
This review is expected to be completed by the end of 2014.
Furthermore, there is a requirement in CRD IV for the European
Banking Authority to consider the impact of the leverage ratio on
different business models.
In October 2013, the Bank of England published a Discussion
Paper on a framework for stress testing the UK banking system. This
new framework assists the PRA to assess the resilience of major UK
banks and building societies under stressed macroeconomic and
financial conditions. The stress tests will project how firms would
be expected to perform under the scenario where there is a
significant decline in HPI and a rise in unemployment and the Bank
of England base rate. Results of the stress tests are expected to
be published by the regulator towards the end of 2014.
The PRA announced in December 2013 that the total Pillar 2A
capital requirement should be met with a minimum level of CET1 and
Tier 1 capital from January 2015. We anticipate further changes to
be announced during 2014 after the anticipated PRA consultation on
the Pillar 2 framework.
Outlook for capital management
The Group monitors regulatory changes at a UK, European and
global level and, based on current understanding of the reforms, is
confident it is well positioned to maintain its overall capital
strength as the regulatory framework continues to evolve. All the
above regulatory changes are reflected in the Group's capital
management plan based on its understanding of the latest
developments. The recent capital issuance demonstrates access to
external markets and gives increased strategic flexibility to
manage the Group's capital position, providing sufficient headroom
against future changes to capital requirements.
Regulatory standards, for example the minimum leverage ratio,
could increase the regulatory expectations and requirements set for
financial services providers are still undergoing change as
national and international regulatory initiatives develop. There is
a risk that further increases in capital and leverage requirements
have the potential to adversely impact the building society model,
constraining growth or forcing retrenchment.
There remains a risk that the Financial Policy Committee (FPC)
may apply a countercyclical buffer or sectoral capital
requirements, which would increase Nationwide's capital requirement
and/or risk weighted assets. The FPC has stated its intention to
give at least twelve months' notice of any implementation of a
countercyclical buffer, providing firms with time to ensure they
can meet increased requirements.
CONSOLIDATED INCOME STATEMENT
For the year ended 4 April 2014
Notes 2014 2013*
GBPm GBPm
Interest receivable and similar income 3 5,295 5,395
Interest expense and similar charges 4 (2,892) (3,414)
Net interest income 2,403 1,981
Fee and commission income 489 558
Fee and commission expense (135) (113)
Income from investments 4 13
Other operating income 5 134 46
Losses from derivatives and hedge accounting
6 (51) (165)
Total income 2,844 2,320
Administrative expenses 7 (1,611) (1,420)
Impairment losses on loans and advances
to customers 8 (380) (589)
Impairment losses on investment securities (3) (2)
Provisions for liabilities and charges 9 (173) (141)
Profit before tax 677 168
Taxation 10 (128) 10
Profit after tax 549 178
*Comparatives have been restated in accordance with IAS 19
Employee Benefits (Revised). Refer to note 2 for further
details.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 4 April 2014
2014 2013*
GBPm GBPm
Profit after tax 549 178
Other comprehensive income/(expense):
Items that will not be reclassified to
the income statement
Remeasurements of retirement benefit obligations
:
------
Retirement benefit remeasurements before
tax 82 191
Taxation charge (33) (53)
49 138
Revaluation gain on property:
------
Revaluation before tax 4 3
Taxation 1 -
5 3
Other items though general reserve, including
effect of corporation tax rate change (1) (2)
53 139
Items that may subsequently be reclassified
to the income statement
Available for sale investments:
------
Fair value movements taken to members'
interests and equity 185 258
Amount transferred to income statement 80 (115)
Taxation (64) (39)
201 104
Other comprehensive income 254 243
Total comprehensive income 803 421
------
*Comparatives have been restated in accordance with IAS 19
Employee Benefits (Revised). Refer to note 2 for further
details.
CONSOLIDATED BALANCE SHEET
As at 4 April 2014
2014 2013
Notes GBPm GBPm
Assets
Cash 5,342 7,886
Loans and advances to banks 2,110 2,522
Investment securities - available
for sale 10,563 13,421
Derivative financial instruments 3,020 4,212
Fair value adjustment for portfolio
hedged risk 221 872
Loans and advances to customers 11 166,574 159,587
Investments in equity shares 29 28
Intangible assets 956 894
Property, plant and equipment 852 886
Investment properties 9 8
Accrued income and expenses
prepaid 185 147
Deferred tax assets 33 154
Current tax assets - 15
Other assets 32 86
Total assets 189,926 190,718
Liabilities
Shares 130,468 125,574
Deposits from banks 1,984 3,230
Other deposits 7,135 6,747
Due to customers 6,208 5,960
Fair value adjustment for portfolio
hedged risk 33 150
Debt securities in issue 28,557 33,429
Derivative financial instruments 2,391 3,885
Other liabilities 269 251
Provisions for liabilities
and charges 9 310 318
Accruals and deferred income 461 366
Subordinated liabilities 12 2,269 2,540
Subscribed capital 12 601 1,304
Deferred tax liabilities 25 30
Current tax liabilities 74 -
Retirement benefit obligations 235 354
Total liabilities 181,020 184,138
Core capital deferred shares 13 531 -
Other equity instruments 14 992 -
General reserve 7,363 6,765
Revaluation reserve 71 67
Available for sale reserve (51) (252)
Total members' interests and
equity 8,906 6,580
Total members' interests, equity and liabilities 189,926 190,718
Consolidated Statement of Movements in MEMBERS' INTERESTS AND
EQUITY
For the year ended 4 April 2014
Core Other General Revaluation Available
capital equity instruments reserve reserve for sale Total
deferred reserve
shares
GBPm GBPm GBPm GBPm GBPm GBPm
At 5 April 2013 - - 6,765 67 (252) 6,580
Profit for the year - - 549 - - 549
Net movement in available
for sale reserve - - - - 201 201
Net revaluation of
property - - - 5 - 5
Reserve transfer - - 1 (1) - -
Effect of tax rate
change on other items
through the general
reserve - - (1) - - (1)
Net remeasurements
of retirement benefit
obligations - - 49 - - 49
Total comprehensive
income - - 598 4 201 803
Issue of core capital
deferred shares 531 - - - - 531
Issue of Additional
Tier 1 capital - 992 - - - 992
At 4 April 2014 531 992 7,363 71 (51) 8,906
Consolidated Statement of Movements in Members' Interests AND
EQUITY
For the year ended 4 April 2013
Core Other General Revaluation Available
capital equity instruments reserve reserve for sale Total*
deferred reserve
shares
GBPm GBPm GBPm GBPm GBPm GBPm
At 5 April 2012 - - 6,450 65 (356) 6,159
Profit for the year - - 178 - - 178
Net movement in available
for sale reserve - - - - 104 104
Net revaluation of
property - - - 3 - 3
Reserve transfer - - 1 (1) - -
Effect of tax rate
change on other items
through the general
reserve - - (2) - - (2)
Net remeasurements
of retirement benefit
obligations - - 138 - - 138
Total comprehensive
income - - 315 2 104 421
At 4 April 2013 - - 6,765 67 (252) 6,580
*Comparatives have been restated in accordance with IAS 19
Employee Benefits (Revised). Refer to note 2 for further
details.
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 4 April 2014
2014 2013*
Notes GBPm GBPm
Cash flows (used in)/generated from
operating activities
Profit before tax 677 168
Adjustments for:
- Non-cash items included in profit
before tax 15 451 922
- Changes in operating assets 15 (4,705) (6,615)
- Changes in operating liabilities 15 2,200 (1,198)
- Interest paid on subordinated liabilities (129) (93)
- Interest paid on subscribed capital (60) (88)
Taxation (18) (27)
Net cash flows used in operating activities (1,584) (6,931)
Cash flows generated from/(used in)
investing activities
Purchase of investment securities (2,300) (3,010)
Sale and maturity of investment securities 4,634 14,030
Purchase of property, plant and equipment (128) (53)
Sale of property, plant and equipment 20 10
Purchase of intangible assets (208) (295)
Proceeds from the sale of an investment
in equity shares - 12
Dividends received from non-Group entities 4 6
Net cash flow generated from investing
activities 2,022 10,700
Cash flows (used in)/generated from
financing activities
Issue of core capital deferred shares 531 -
Issue of Additional Tier 1 capital 992 -
Issue of debt securities in issue 21,013 27,535
Redemption of debt securities in issue (25,401) (32,492)
Maturity of subordinated liabilities (153) (200)
Redemption of subscribed capital (506) (305)
Issue of subordinated liabilities - 1,068
Net cash flows used in financing activities (3,524) (4,394)
Net decrease in cash (3,086) (625)
Cash and cash equivalents at start
of year 10,075 10,700
Cash and cash equivalents at end of
year 15 6,989 10,075
*Comparatives have been restated in accordance with IAS 19
Employee Benefits (Revised). Refer to note 2 for further
details.
NOTES TO THE PRELIMINARY RESULTS ANNOUNCEMENT
1 Reporting period
These results have been prepared as at 4 April 2014 and show the
financial performance for the year from, and including, 5 April
2013 to this date.
2 Basis of preparation
The 2014 preliminary results have been prepared in line with
International Financial Reporting Standards (IFRSs) and
interpretations (IFRICs) issued by the International Financial
Reporting Interpretations Committee, as adopted by the European
Union and in effect for the year ended 4 April 2014. The accounting
policies adopted for use in the preparation of this Preliminary
Results Announcement and which will be used in preparing the Annual
Report and Accounts for the year ended 4 April 2014 were included
in the 'Annual Report and Accounts 2013' document except as
detailed below. Copies of this document are available
atnationwide.co.uk/about_nationwide/results_and_accounts
Changes in accounting policy
The following IFRS pronouncements, relevant to the Group, were
adopted with effect from 5 April 2013:
-- IAS 19 Employee Benefits (Revised): The revised standard
updates the recognition, presentation and disclosures of retirement
benefit plans. The most significant impact for the Group is the
replacement of the interest cost and expected return on plan assets
with a single interest amount calculated by applying the discount
rate to the net defined asset or liability.
The impact of adopting IAS 19 Employee Benefits (Revised) for
the year ended 4 April 2014 has been a reduction in profit before
tax of GBP31 million with a corresponding increase in other
comprehensive income. The changes have been applied retrospectively
and comparatives restated accordingly.
A summary of the line item restatements for the year ended 4
April 2013 is provided below. There has been no impact on the
Group's total assets, net assets or reserves at 4 April 2014 or 4
April 2013 as a result of the restatement.
Previously Adjustment
published Restated
Notes GBPm GBPm GBPm
Income statement
for the year ended 4 April
2013
Interest receivable and similar
income 3 5,581 (186) 5,395
Interest expense and similar
charges 4 (3,563) 149 (3,414)
Net interest income 2,018 (37) 1,981
Administrative expenses 7 (1,415) (5) (1,420)
Profit before tax 210 (42) 168
Taxation 10 - 10 10
Profit after tax 210 (32) 178
Other comprehensive income
for the year ended 4 April 2013
Remeasurements of retirement benefit
obligations:
- Retirement benefit remeasurements
before tax 149 42 191
- Taxation (43) (10) (53)
106 32 138
In addition, notes 15 (Notes to the cash flow statement) and 17
(Operating segments) have been impacted by the restatement.
-- IFRS 13 Fair Value Measurement: The standard has replaced
guidance on fair value measurement in previous IFRS accounting
publications with a single standard. The standard, which is
required to be applied prospectively, provides guidance on the
calculation of the fair value of financial and non-financial assets
and liabilities and additionally requires enhanced disclosures.
With the exception of the enhanced disclosures, the new standard
has not had a material impact for the Group.
The additional disclosures, which include valuation techniques,
inputs used in measuring fair value and significant detail on the
fair value hierarchy, have been given in note 18. The disclosure
requirements of IFRS 13 do not require comparative information to
be provided for periods prior to initial application.
-- Amendments to IFRS 7 Disclosures - Offsetting Financial
Assets and Financial Liabilities: The amendments require disclosure
of the effect or potential effects of netting arrangements on an
entity's financial position including financial instruments that
are subject to an enforceable master netting arrangement or similar
agreement. The amendments have been applied retrospectively with
the additional disclosures provided in note 20.
-- IAS 39 (Amendments) Novation of derivatives and continuation
of hedge accounting: The amendment provides relief from
discontinuing hedge accounting in the limited situations where a
novation has been made to clearing counterparty as a consequence of
laws or regulations. The Group applied the amendment in the current
year, although it did not have a material impact on the results or
financial position of the Group.
Future accounting developments
An overview of pronouncements that will be relevant to the Group
in future periods was provided in the 2013 Annual Report and
Accounts. The IASB has issued further pronouncements; however, the
Group does not expect adoption of any of the new guidance to have a
significant impact on its results with the exception of IFRS 9
Financial Instruments.
The following new guidance should be noted:
-- IFRS 9 Financial Instruments replaces IAS 39. Changes include
classification and measurement of the Group's financial assets and
liabilities, the recognition of impairment, and hedge accounting. A
number of the proposals are not expected to be finalised until
later in 2014. It is therefore not yet possible to estimate the
financial effects of the new standard, although it is expected to
have a significant impact for the Group, in line with the wider
industry. Subject to confirmation by the IASB later in 2014, IFRS 9
is expected to be effective for annual periods beginning on or
after 1 January 2018.
-- IFRIC 21 Levies - this interpretation provides guidance on
accounting for the liability to pay a government imposed levy.
IFRIC 21 is effective for annual periods beginning on or after 1
January 2014, subject to endorsement by the EU. The interpretation
will impact the timing of recognition of FSCS and bank levies
throughout the financial year, but will not impact the full year
results.
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 this
document.
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 for the foreseeable
future and that therefore, it is appropriate to adopt the going
concern basis in preparing this preliminary financial
information.
3 Interest receivable and similar income
2014 2013*
GBPm GBPm
On residential mortgages 4,825 4,851
On other loans 1,039 1,130
On investment securities 396 1,280
On other liquid assets 38 49
Net expense on financial instruments hedging
assets (1,003) (1,915)
5,295 5,395
*Comparatives have been restated in accordance with IAS 19
Employee Benefits (Revised). Refer to note 2 for further
details.
Included within interest receivable and similar income is
interest accrued on loans three or more months in arrears: GBP44
million (2013: GBP43 million) and the unwind of the discount on
impairment provisions: GBP66 million (2013: GBP46 million).
Interest receivable on residential mortgages includes
adjustments to reflect the changes in the Group's effective
interest rate assumptions, including a charge of GBP20 million
(2013: GBP18 million) in respect of an update of early redemption
charges and a credit of GBP12 million (2013: GBP2 million) which
resulted from an update to effective interest rate assumptions
applicable to the recognition of mortgage fee income.
The lower amounts recorded in the financial year for interest
receivable on investment securities and net expense on financial
instruments hedging assets are driven primarily by a significant
number of disposals of investment securities during the prior year
as part of an exercise to deleverage legacy treasury assets. These
disposals generated a net loss of GBP45 million (2013: GBP139
million net gain).
4 Interest expense and similar charges
2014 2013*
GBPm GBPm
On shares held by individuals 2,250 2,741
On subscribed capital 59 89
On deposits and other borrowings;
- Subordinated liabilities 129 96
- Other 167 210
On debt securities in issue 814 944
Foreign exchange differences 28 -
Net income on financial instruments hedging
liabilities (570) (689)
Interest on net defined benefit pension liability 15 23
2,892 3,414
*Comparatives have been restated in accordance with IAS 19
Employee Benefits (Revised). Refer to note 2 for further
details.
Interest expense is net of a GBP38 million credit (2013: GBP60
million credit) which resulted from an update of the Group's
effective interest rate assumptions in relation to savings accounts
which offer an initial bonus.
5 Other operating income
2014 2013
GBPm GBPm
Net gain on redemption of subscribed capital 125 43
Rental income 5 5
Profit from sale of property, plant and equipment 4 -
Other - (2)
134 46
6 Losses from derivatives and hedge accounting
2014 2013
GBPm GBPm
Losses from fair value hedge accounting (note
i) (66) (113)
Fair value movement attributable to mortgage
commitments (note ii) 1 14
Fair value gains/(losses) from other derivatives
(note iii) 14 (66)
(51) (165)
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 of the derivative was not exactly offset by the
change in fair value of the asset or liability being hedged
(sometimes referred to as hedge ineffectiveness) or
-- the relationship failed a monthly effectiveness test which,
for that month, disallows recognition of the change in fair value
of the underlying asset or liability being hedged and in following
months leads to the amortisation of existing balance sheet
positions.
(ii) The Group elects to fair value its mortgage commitments in
order to reduce the accounting mismatch caused when derivatives are
used to hedge mortgage commitments.
(iii) Other derivatives are those used for economic hedging but
which are not in an IAS 39 hedge accounting relationship because
hedge accounting is not currently achievable.
Although the Group only uses derivatives for the hedging of
risks, income statement volatility can still arise due to hedge
accounting ineffectiveness or because hedge accounting is not
achievable. Management recognise that this arises from the
application of accounting rules which do not reflect the economic
reality of the business and as such this volatility will continue
period on period but will always trend back to zero over time.
A loss of GBP51 million (2013: loss of GBP165 million) has been
recognised in the year for derivatives and hedge accounting.
Included within this result was the impact of the following:
-- Losses of GBP66 million (2013: losses of GBP113 million) on
hedge relationships. The 2014 charge includes losses of GBP65
million (2013: GBP84 million gain) on micro hedges, resulting from
relatively large sterling and euro interest rate increases in the
first half of the year, coupled with bond maturities and disposals.
The 2013 charge includes losses of GBP203 million principally
arising from the amortisation of balances relating to past
ineffectiveness on fixed rate mortgages.
-- A GBP5 million gain (2013: loss of GBP74 million) on cross
currency interest rate swaps which economically hedge non-sterling
wholesale funding, but where hedge accounting 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.
7 Administrative expenses
2014 2013*
GBPm GBPm
Employee costs:
- Wages and salaries 439 413
- Bonuses 63 67
- Social security costs 48 47
- Pension costs 86 77
636 604
Other administrative expenses 676 584
Bank levy (note 9) 17 16
1,329 1,204
Depreciation, amortisation and impairment 282 216
1,611 1,420
*Comparatives have been restated in accordance with IAS 19
Employee Benefits (Revised). Refer to note 2 for further
details.
Administrative expenses include GBP75 million (2013: GBP16
million) of transformation costs, including a charge of GBP18
million relating to severance provisions (2013: GBP7 million) and a
charge of GBP9 million (2013: GBP1 million) relating to onerous
lease and other property related provisions. Transformation costs
are driven primarily by ongoing integration of the activities of
the Derbyshire, Cheshire and Dunfermline brands, as well as
strategic changes to the Group's IT service delivery model.
8 Impairment losses on loans and advances to customers
The following provisions have been deducted from the appropriate
asset values in the balance sheet:
2014 2013
GBPm GBPm
Impairment charge/(credit) for the year
Prime residential - (6)
Specialist residential - 22
Consumer banking 60 79
Commercial lending 309 493
Other lending 11 1
380 589
Impairment provision at the end of the year
Prime residential 18 32
Specialist residential 84 133
Consumer banking 173 87
Commercial lending 1,001 958
Other lending 12 14
1,288 1,224
The Group impairment provision of GBP1,288 million at 4 April
2014 (2013: GBP1,224 million) comprises individual provisions of
GBP959 million (2013: GBP871 million) and collective provisions of
GBP329 million (2013: GBP353 million).
Further credit risk related information on loans and advances to
customers is included in the Business and Risk Report.
9 Provisions for liabilities and charges
Bank FSCS Customer Other Total
levy redress provisions
GBPm GBPm GBPm GBPm GBPm
At 5 April 2013 8 133 142 35 318
Provisions utilised (19) (95) (87) (13) (214)
Charge for the year 17 104 72 27 220
Release for the year - - (3) (11) (14)
Net income statement charge 17 104 69 16 206
At 4 April 2014 6 142 124 38 310
At 5 April 2012 5 111 105 74 295
Provisions utilised (13) (46) (36) (31) (126)
Charge for the year 16 68 73 8 165
Release for the year - - - (16) (16)
Net income statement charge/(release) 16 68 73 (8) 149
At 4 April 2013 8 133 142 35 318
The income statement charge for provisions for liabilities and
charges of GBP173 million (2013: GBP141 million) includes the FSCS
charge of GBP104 million (2013: GBP68 million) and the customer
redress charge of GBP69 million (2013: GBP73 million).
The net income statement charge for bank levy of GBP17 million
(2013: GBP16 million) and other provisions of GBP16 million (2013:
GBP8 million credit) are included within administrative expenses in
the income statement.
Financial Services Compensation Scheme (FSCS)
The FSCS, the UK's independent statutory compensation fund for
customers of authorised financial services firms, pays compensation
if a firm is unable to pay claims against it. The FSCS is funded by
levies on the industry.
Following the default of a number of deposit takers, the FSCS
borrowed funds from HM Treasury, which currently total
approximately GBP17 billion, to meet the compensation costs for
customers of those firms. The FSCS recovers the interest cost,
together with ongoing management expenses, by way of annual levies
on member firms. The charge recognised by the Group for interest is
GBP57 million (2013: GBP26 million), which comprises GBP44 million
for the 2014/15 scheme year and a GBP13 million adjustment to the
2013/14 scheme year reflecting fluctuating gilt rates by reference
to which the interest is calculated.
While it is anticipated that the majority of the borrowings will
be repaid wholly from recoveries from the institutions concerned,
the FSCS has advised of an expected shortfall. At current rates and
based on latest information which is subject to change, the Group's
share of the expected remaining shortfall will total approximately
GBP70 million. In line with the intentions of the FSCS on timing of
resultant levies, the Group has recognised GBP35 million of this
amount within the 2013/14 charge with the remaining GBP35 million
expected during the next financial year.
The Group has also recognised GBP12 million in respect of the
shortfall resulting from the failure of the Dunfermline Building
Society. The FSCS has confirmed that this levy will be made during
September 2014. Potential further shortfalls in relation to
Dunfermline Building Society in future years remain uncertain in
terms of both quantification and timing.
The amount provided by the Group of GBP142 million (2013: GBP133
million) comprises GBP91 million of interest and capital due
relating to 2014/15 scheme year and GBP51 million of interest due
relating to the 2013/14 scheme year.
Customer redress
The Group holds a provision for customer redress which reflects
management's best estimate of the cost of complaints related to
past sales of financial products, including PPI.
The Group has continued to experience a significant but
declining volume of reactive PPI complaints during the financial
year, a substantial proportion of which relate to cases where there
has been either no sale or no evidence of mis-selling. The Group
continues to re-assess the ultimate level of complaints expected
and the appropriateness of the provision, which reflects the
redress and associated administration that will be payable in
relation to claims we expect to uphold. Further costs in relation
to invalid claims are recognised in administrative expenses as
incurred.
In line with much of the industry, the Group is reviewing its
compliance with various regulatory matters, including consumer
credit legislation, and has made a provision of GBP69 million in
respect of potential customer redress.
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. All components of the net charge
for other provisions in the years ended 4 April 2013 and 4 April
2014 are included within administrative expenses.
10 Taxation
A current year tax charge of GBP161 million (2013: GBP41
million) has been offset by adjustments in relation to prior
periods of GBP18 million (2013: GBP44 million) and the impact of
the change in the corporation tax rate on deferred tax of GBP15
million (2013: GBP7 million) to result in the tax charge of GBP128
million (2013: credit of GBP10 million) as shown below:
2014 2013*
GBPm GBPm
Current Tax:
UK corporation tax 87 33
Corporation tax - adjustment in respect of
prior years (3) (29)
Total current tax 84 4
Deferred tax:
Current year 74 8
Adjustment in respect of prior years (15) (15)
Effect of corporation tax rate change (15) (7)
Total deferred taxation 44 (14)
Tax charge/(credit) 128 (10)
*Comparatives have been restated in accordance with IAS 19
Employee Benefits (Revised). Refer to note 2 for further
details.
The actual tax charge differs from the theoretical amount that
would arise using the standard rate of corporation tax in the UK as
follows:
2014 2013*
GBPm GBPm
Profit before tax 677 168
Tax calculated at a tax rate of 23% (2013:
24%) 156 40
Adjustments in respect of prior years (18) (44)
Effect of different tax rates in other countries (3) (4)
Expenses not deductible for tax purposes: 2 2
Building depreciation 4 4
Bank levy 2 -
Other
Previously unrecognised losses - (1)
Effect of corporation tax rate change (15) (7)
128 (10)
*Comparatives have been restated in accordance with IAS 19
Employee Benefits (Revised). Refer to note 2 for further
details.
11 Loans and advances to customers
2014 2013
GBPm GBPm
Prime residential mortgages 119,301 110,587
Specialist residential mortgages 26,257 24,806
Consumer banking 3,689 3,401
Commercial lending 16,283 18,958
Other lending 164 422
165,694 158,174
Fair value adjustment for micro hedged risk* 880 1,413
166,574 159,587
*The fair value adjustment for micro hedged risk relates to
commercial lending
Loans and advances to customers in the table above are shown net
of impairment provisions held against them.
Asset backed funding
Certain prime residential mortgages have been pledged to the
Group's asset backed funding programmes or utilised as whole
mortgage loan pools for the Bank of England's (BoE) Funding for
Lending Scheme (FLS). The programmes have enabled the Group to
obtain secured funding or to create additional collateral which
could be used to source additional funding.
Mortgages pledged and the nominal values of the notes in issue
are as follows:
Mortgages 2014
Pledged Notes in issue
Held by third Held by the Group Total notes
parties in issue
Drawn Undrawn
GBPm GBPm GBPm GBPm GBPm
Covered bond programme 20,211 9,457 - 4,500 13,957
Securitisation programme 24,303 6,906 - 12,291 19,197
Whole mortgage loan
pools 13,762 - 11,681 2,081 13,762
58,276 16,363 11,681 18,872 46,916
2013
Mortgages Notes in issue
pledged
Held by third Held by the Group Total notes
parties in issue
Drawn Undrawn
GBPm GBPm GBPm GBPm GBPm
Covered bond programme 21,856 11,376 - 4,500 15,876
Securitisation programme 24,994 7,606 1,250 12,291 21,147
Whole mortgage loan
pools 4,891 - 3,490 1,401 4,891
51,741 18,982 4,740 18,192 41,914
The securitisation programme notes are issued by Silverstone
Master Issuer plc. Silverstone Master Issuer plc is fully
consolidated into the accounts of the Group.
The whole mortgage loan pools are pre-positioned at the BoE
under the FLS. No loans are issued when pre-positioning 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 GBP2.9 billion (2013: GBP3.6 billion)
in the covered bond and securitisation programmes that are in
excess of the amount contractually required to support notes in
issue.
Mortgages pledged are not derecognised from the 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 and held by third parties are included within
debt securities in issue.
Notes in issue, held by the Group and drawn are:
-- Debt securities issued by the programmes to the Society which
have been used as collateral in sale and repurchase agreements with
third parties, and
-- Whole mortgage loan pools securing amounts drawn under the
FLS. At 4 April 2014 the Group had outstanding FLS drawings of
GBP8.5 billion (2013: GBP2.5 billion).
Notes in issue, held by the Group and undrawn are debt
securities issued by the programmes to the Society and mortgage
loan pools that have been pledged to the BoE FLS but not utilised.
The majority of these are held to provide collateral for potential
future use in repurchase agreements or central bank operations.
In accordance with accounting standards, notes in issue and held
by the Group are not recognised in the balance sheet.
The Society established the Nationwide Covered Bond programme in
November 2005. Mortgages pledged provide security for issues of
covered bonds made by the Society. During the year ended 4 April
2014 GBP0.03 billion and EUR2.0 billion (GBP1.4 billion sterling
equivalent) of notes matured. There were no new issuances in the
year.
The Society established the Silverstone Master Trust
securitisation programme in July 2008. Mortgages pledged are held
by Silverstone Finance Trustee Limited. The proceeds of notes
issued by this programme have been used to purchase a share of the
beneficial interest in the mortgages pledged for the benefit of the
note holders. The remaining beneficial interest in the pledged
mortgages of GBP6.4 billion (2013: GBP4.0 billion) stays with the
Society and incorporates its required minimum seller share in
accordance with the rules of the programme. The Group is under no
obligation to support losses incurred by the programme or holders
of the notes and does not intend to provide such further support.
The entitlement of note holders is restricted to payment of
principal and interest to the extent that the resources of the
programme are sufficient to support such payment and the holders of
the notes have agreed not to seek recourse in any other form.
During the year ended 4 April 2014 GBP1.25 billion and $0.55
billion (GBP1.6 billion sterling equivalent) of notes were redeemed
early or matured. There were no new issuances in the year.
12 Subordinated liabilities and subscribed capital
2014 2013
GBPm GBPm
Subordinated liabilities
Subordinated notes 2,198 2,426
Fair value adjustment for micro hedged risk 85 130
Unamortised premiums and issue costs (14) (16)
2,269 2,540
Subscribed capital
Permanent interest bearing shares 562 1,068
Fair value adjustment for micro hedged risk 64 270
Unamortised premiums and issue costs (25) (34)
601 1,304
All of the Society's subordinated notes and permanent interest
bearing shares (PIBS) are unsecured. The Society may, with the
prior consent of the Prudential Regulation Authority (PRA), repay
the PIBS and redeem the subordinated notes early.
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
note holders but ahead of claims by the holders of CCDS.
In September 2013, the Group, with the consent of the PRA,
redeemed GBP485 million of PIBS. In October 2013, the Group, with
the consent of the PRA, redeemed a further GBP21 million of PIBS.
The redemptions resulted in a net gain of GBP125 million in other
operating income.
13 Core capital deferred shares (CCDS)
CCDS Share premium Total
GBPm GBPm GBPm
At 5 April 2013 - - -
Issuance 6 544 550
Issue costs (net of tax) - (19) (19)
At 4 April 2014 6 525 531
In December 2013, the Society issued 5,500,000 of new GBP1 core
capital deferred shares (CCDS) at GBP100 per share. The gross
proceeds of the issuance were GBP550 million (GBP531 million net of
issuance costs).
CCDS are a new form of Common Equity Tier 1 (CET 1) 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 capital requirements of CRD IV and are
being gradually phased out under the grandfathering regime.
CCDS 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 GBP100 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 GBP15.24 per share and is adjusted annually in line with
CPI.
The Directors have declared an unconditional final distribution
of GBP5.50 per CCDS in respect of the financial year ended 4 April
2014, amounting in aggregate to GBP30 million. The distribution
will be recognised in the statement of movements in members'
interests and equity in the financial year ended 4 April 2015.
14 Other equity instruments
In March 2014, the Society issued GBP1,000 million (GBP992
million net of issuance costs) of new Additional Tier 1 (AT1)
capital.
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. The first coupon payment of GBP19 million, covering
the period to 19 June 2014, is expected to be paid on 20 June 2014
and will be recognised in the statement of movements in members'
interests and equity in the financial year ended 4 April 2015.
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 is 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 a rate of one CCDS share
for every GBP80 of AT1 holding.
15 Notes to the cash flow statement
2014 2013*
GBPm GBPm
Non-cash items included in profit before tax
Net increase in impairment provisions 64 381
Net (decrease)/increase in provisions for liabilities
and charges (8) 23
Impairment losses on investment securities 3 2
Depreciation, amortisation and impairment 282 216
Profit on sale of property, plant and equipment (4) -
Interest on subordinated liabilities 129 96
Interest on subscribed capital 59 89
Losses from derivatives and hedge accounting 51 165
Gain on the redemption of subscribed capital (125) (43)
Gain on the sale of investments in equity shares - (7)
451 922
Changes in operating assets
Loans and advances to banks (130) 7
Investment securities 524 (1,116)
Derivative financial instruments and fair value
adjustment for portfolio hedged risk 1,792 257
Deferred tax assets 121 75
Loans and advances to customers (7,051) (5,799)
Other operating assets 39 (39)
(4,705) (6,615)
Changes in operating liabilities
Shares 4,894 (43)
Deposits from banks, customers and others (610) (165)
Derivative financial instruments and fair value
adjustment for portfolio hedged risk (1,611) (530)
Debt securities in issue (484) (468)
Deferred tax liabilities (5) 2
Retirement benefit obligations (119) (163)
Other operating liabilities 135 169
2,200 (1,198)
Cash and cash equivalents
Cash 5,342 7,886
Loans and advances to banks repayable in 3 months
or less 1,647 2,189
6,989 10,075
*Comparatives have been restated in accordance with IAS 19
Employee Benefits (Revised). Refer to note 2 for further
details
The Group is required to maintain balances with the Bank of
England which, at 4 April 2014, amounted to GBP315 million (2013:
GBP185 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.
16 Contingent liabilities
The Group does not expect the ultimate resolution of any
threatened or actual legal proceedings to have a significant
adverse impact on the financial position of the Group.
17 Operating segments
For management reporting purposes, the Group is organised into
the following business streams, determined according to similar
economic characteristics and customer base:
-- Retail
-- Commercial
-- Head office functions.
The Group uses a funds transfer pricing mechanism to recognise
the internal cost of funds and allocate this cost between different
product groups and business segments. The retail and commercial
business segments are charged for the benefit of free capital as
part of the funds transfer pricing mechanism. Comparative results
for the year ended 4 April 2013 have been restated in order to
align presentation with 4 April 2014, updating the funding costs to
reflect a change in capital allocation methodology. In addition,
the comparative results are restated for the impact of IAS 19
Employee Benefits (Revised) explained in note 2.
2014 Notes Retail Commercial Head office Total
functions
GBPm GBPm GBPm GBPm
Net income/(expense) from external
customers 2,853 683 (1,133) 2,403
(Charge)/revenue from other
segments (216) (564) 780 -
Net interest income 2,637 119 (353) 2,403
Other income (i) 353 17 122 492
Total revenue 2,990 136 (231) 2,895
Administrative expenses (ii) (1,417) (59) (43) (1,519)
Impairment and other provisions (iii) (129) (309) (14) (452)
Underlying profit/(loss) before
tax 1,444 (232) (288) 924
FSCS levies (104) - - (104)
Transformation costs (40) - (35) (75)
Bank levy - - (17) (17)
Losses from derivatives and
hedge accounting - - (51) (51)
Profit/(loss) before tax 1,300 (232) (391) 677
Taxation (128)
Profit after tax 549
Total assets (iv) 149,259 17,163 23,504 189,926
Total liabilities 135,925 1,039 44,056 181,020
2013 Notes Retail Commercial Head office Total
functions
GBPm GBPm GBPm GBPm
Net income/(expense) from external
customers 2,284 794 (1,097) 1,981
(Charge)/revenue from other
segments (343) (720) 1,063 -
Net interest income 1,941 74 (34) 1,981
Other income (i) 433 18 53 504
Total revenue 2,374 92 19 2,485
Administrative expenses (ii) (1,309) (46) (33) (1,388)
Impairment and other provisions (iii) (166) (493) (5) (664)
Underlying profit/(loss) before
tax 899 (447) (19) 433
FSCS levies (68) - - (68)
Transformation costs (3) - (13) (16)
Bank levy - - (16) (16)
Losses from derivatives and
hedge accounting - - (165) (165)
Profit/(loss) before tax 828 (447) (213) 168
Taxation 10
Profit after tax 178
Total assets (iv) 138,810 20,371 31,537 190,718
Total liabilities 131,184 526 52,428 184,138
Notes
(i) Other income excludes losses from derivatives and hedge
accounting which are shown separately.
(ii) Administrative expenses exclude transformation costs and
bank levy which are shown separately.
(iii) Impairment and other provisions includes impairment losses
on loans and advances to customers, provisions for liabilities and
charges (excluding FSCS) and impairment losses on investment
securities.
(iv) Retail assets include goodwill arising on the acquisitions
of The Mortgage Works (UK) plc.
18 Fair value hierarchy of financial assets and liabilities held
at fair value
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
4 April 2014 GBPm GBPm GBPm GBPm
Financial assets
Government and supranational
investments 6,994 - - 6,994
Other debt investment securities - 3,498 71 3,569
Total investment securities
- AFS 6,994 3,498 71 10,563
Investments in equity shares
- AFS - - 28 28
Interest rate swaps - 1,718 - 1,718
Cross currency interest rate
swaps - 619 - 619
Forward foreign exchange - 13 - 13
Equity index swaps - - 670 670
Total derivative financial
instruments - 2,350 670 3,020
Total financial assets 6,994 5,848 769 13,611
Financial liabilities
Interest rate swaps - (1,985) - (1,985)
Cross currency interest rate
swaps - (351) - (351)
Forward foreign exchange - (42) - (42)
Swaptions - (12) - (12)
Equity index swaps - - (1) (1)
Total derivative financial
instruments - (2,390) (1) (2,391)
Other deposits - PEBs - - (3,222) (3,222)
Total financial liabilities - (2,390) (3,223) (5,613)
Fair values based on
Level 1 Level 2 Level 3 Total
4 April 2013 GBPm GBPm GBPm GBPm
Financial assets
Government and supranational
investments 8,641 343 - 8,984
Other debt investment securities - 4,377 60 4,437
Total investment securities
- AFS 8,641 4,720 60 13,421
Investments in equity shares
- AFS - - 28 28
Interest rate swaps - 2,524 - 2,524
Cross currency interest rate
swaps - 1,150 - 1,150
Forward foreign exchange - 152 - 152
Swaptions - 2 - 2
Equity index swaps - - 384 384
Total derivative financial
instruments - 3,828 384 4,212
Other financial assets - 8 - 8
Total financial assets 8,641 8,556 472 17,669
Financial liabilities
Interest rate swaps - (3,735) (10) (3,745)
Cross currency interest rate
swaps - (90) - (90)
Caps, collars and floors - (1) - (1)
Forward foreign exchange - (22) - (22)
Swaptions - (27) - (27)
Total derivative financial
instruments - (3,875) (10) (3,885)
Other deposits - PEBs - (2,985) (2,985)
Total financial liabilities - (3,875) (2,995) (6,870)
The Group's Level 1 portfolio comprises highly rated government
securities for which traded prices are readily available. During
the year ended 4 April 2014, the Group has reduced this portfolio
in response to the changing regulatory environment created by the
Funding for Lending Scheme (FLS).
Asset valuations for Level 2 AFS investment securities are
sourced from consensus pricing or other observable market prices.
None of the Level 2 AFS 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.
Other financial assets represent fair value movements in mortgage
commitments entered into where a loan has not yet been made. During
the year ended 4 April 2014, the Group's Level 2 portfolio has
decreased, primarily due to deleveraging of legacy treasury
assets.
Transfers between fair value hierarchies
Instruments move between fair value hierarchies primarily due to
increases or decreases in market activity or changes to the
significance of unobservable inputs to valuation. There were no
significant transfers between Level 1 and Level 2 portfolios during
the year.
The main constituents of the Level 3 portfolio are as
follows:
Investment securities - AFS
The Group's GBP71 million Level 3 AFS investment securities at 4
April 2014 comprise mainly GBP59 million of collateralised debt
obligations (CDOs), including CDOs with a fair value of GBP13
million that are subject to impairment. Substantially all of these
securities are priced from internal models based on observable and
unobservable performance assumptions.
Investments in equity shares
The Level 3 investments in equity shares of GBP28 million at 4
April 2014 consist primarily of an interest in a fund which is
supported by zero coupon bonds of an A rated bank. External
valuations are used to obtain the fair value of the instrument.
Derivative financial instruments
Level 3 assets and liabilities in this category are equity
linked derivatives with external counterparties which economically
match the investment return payable by the Group to investors in
the PEB product. The derivatives are linked to the performance of
specified stock market indices and have been valued by an external
third party.
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 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 derivative as valued by an external
third party.
The tables below set out movements in the Level 3 portfolio,
including transfers in and out of Level 3.
During the period one US CDO investment was transferred from
Level 2 to Level 3 and one US asset backed security was transferred
from level 3 to level 2 due to changes in the availability of
observable market prices.
Investment Investments Net derivative Other
securities in equity financial deposits
Movements in level 3 portfolio - AFS shares instruments - PEBs
GBPm GBPm GBPm GBPm
At 5 April 2013 60 28 374 (2,985)
(Losses)/gains recognised in
the income statement:
Net interest expense - - (39) -
Gains/(losses) from derivatives
and hedge accounting - - 295 (305)
- Net impairment losses on investment
securities 2 - - -
Gain recognised in other comprehensive
income
- fair value movement taken
to members' interests and equity 5 - - -
Settlements (6) - 39 68
Transfers into Level 3 portfolio 11 - - -
Transfers out of Level 3 portfolio (1) - - -
At 4 April 2014 71 28 669 (3,222)
Investment Investments Net derivative Other
securities in equity financial deposits
- AFS shares instruments - PEBs
GBPm GBPm GBPm GBPm
At 5 April 2012 76 20 197 (2,890)
(Losses)/gains recognised in
the income statement:
Net interest expense - - (52) -
Gains/(losses) from derivatives
and hedge accounting - - 174 (160)
Net impairment losses on investment
securities (23) - - -
Gain recognised in other comprehensive
income - fair value movement
taken to members' interests
and equity 3 8 - -
Settlements - - 55 65
Transfers into Level 3 portfolio 4 - - -
At 4 April 2013 60 28 374 (2,985)
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 significant
unobservable market inputs.
Reasonable alternative assumptions can be applied for
sensitivity analysis, taking account of the nature of valuation
techniques used, as well as the availability and reliability of
observable proxy and historic data. The following table shows the
sensitivity of these fair values to reasonable alternative
assumptions (as set out in the table of significant unobservable
inputs) and the resultant impact of such changes in fair value on
the income statement or members' interests and equity:
At 4 April 2014 Fair value Favourable changes Unfavourable changes
Income Members' Income Members'
statement interests statement interests
and equity and equity
GBPm GBPm GBPm GBPm GBPm
Investment securities
- AFS:
Collateralised debt
obligations 71 4 7 (5) (9)
Investments in equity
shares 28 - 1 - (2)
Net derivative financial
instruments (note i) 669 - - - -
Other deposits - PEBs
(note i) (3,222) - - - -
Total (2,454) 4 8 (5) (11)
At 4 April 2013 Fair value Favourable changes Unfavourable changes
Income Members' Income Members'
statement interests statement interest
and equity and equity
GBPm GBPm GBPm GBPm GBPm
Investment securities
- AFS:
Collateralised debt
obligations 6 5 10 (2) (9)
Investments in equity
shares 28 - - - (7)
Net derivative financial
instruments (note i) 374 - - - -
Other deposits - PEBs
(note i) (2,985) - - - -
Total (2,523) 5 10 (2) (16)
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 so these sensitivities have
therefore been excluded from the table above.
Alternative assumptions are considered for each product and
varied according to the quality of the data and variability of the
underlying market. For investment securities - AFS, sensitivities
on these assets where there are no alternative pricing sources,
have been calculated by applying a range of probable scenarios
against our current valuation process, resulting in a range of
possible prices. Scenarios for investments in equity shares reflect
prices seen in these holdings in the preceding twelve months.
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.
Range
Min Max Weighted
Total Total Significant average Units
assets liabilities Valuation unobservable Note Note
At 4 April 2014 GBPm GBPm technique inputs (i) (ii)
Investments securities
- AFS: Conditional
Collateralised Discounted prepayment
debt obligations 59 cash flows rate 13.11 21.45 16.94%
Loss given
default 48.10 56.58 51.98%
Probability
of default 12.07 20.00 14.81%
Credit
spread 125 375 250 Bps
Mark
12 to market Price 65.00 80.00 75.00 Points
71
Investments in Mark
equity shares 28 to market Price 97.00 110.50 106.00 Points
Net derivative
financial Instruments
(note iii) 669
Other deposits
- PEBs (note iii) (3,222)
Notes
(i) Weighted average represents the input values used in
calculating the fair values for the above financial
instruments.
(ii) The units used to disclose ranges for significant
unobservable inputs are percentages, points and basis points (bps).
Points are a percentage of par; for example 100 points equals 100%
of par. One basis point (bps) equals 0.01% for example, 125 basis
points (bps) equals 1.25%.
(iii) 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 so these sensitivities
have therefore been excluded from the table above.
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.
Conditional prepayment rate
For asset backed securities where the borrower is able to prepay
all or part of a loan before the contractual repayment date, the
conditional prepayment rate will affect the fair value by altering
the timing of future projected cash flows. The effect of a
significant increase in conditional prepayment rate on fair value
could be favourable or unfavourable, depending on the specific
terms of the instrument. Conditional prepayment rates are typically
inversely correlated to credit spread. For example, securities with
high borrower credit spread typically experience lower prepayment
rates, and also tend to experience higher default rates.
Loss given default
Loss given default represents the expected loss upon liquidation
of the collateral as a percentage of the balance outstanding. In
general, lower recovery and lower projected cash flows will
translate to a significant increase in the loss given default,
resulting in a reduction in fair value that is unfavourable for the
holder of the securitised product.
Probability of default
The probability of default represents an annualised rate of
default of the loan principal by the borrower. A significant
increase in a probability of default in isolation will typically
result in a movement in fair value that is unfavourable.
Probability of default and conditional prepayment rates are
typically inversely correlated; lower defaults on loans typically
will mean higher credit quality and therefore more prepayments.
Credit spread
The more perceived credit risk there is, the higher the yield
that will be demanded for the instrument. This is reflected in the
credit spread which typically represents the difference in yield
between an instrument and a benchmark security or reference rate.
The credit spread for an instrument forms part of the yield used in
a discounted cash flow calculation. In general a significant
increase in credit spread in isolation will result in a movement in
fair value that is unfavourable for the holder of a cash
instrument. For a derivative instrument, a significant increase in
credit spread in isolation can result in a movement in fair value
that is favourable or unfavourable depending on the specific terms
of the instrument.
Price
Prices for securities that are marked to market, where the
market is illiquid and supporting price information is scarce, are
typically subject to significant uncertainty. An increase in the
price will directly cause an increase in fair value and vice
versa.
19 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 Total
value Level 1 Level 2 3 fair value
4 April 2014 GBPm GBPm GBPm GBPm GBPm
Financial assets
Loans and advances
to banks 2,110 2,110 - - 2,110
Loans and advances
to customers:
Residential mortgages 145,558 - - 141,660 141,660
Consumer banking 3,689 - - 3,551 3,551
Commercial lending 17,163 - - 15,675 15,675
Other lending 164 - - 164 164
Investments in equity
shares 1 - - 1 1
168,685 2,110 - 161,051 163,161
Financial liabilities
Shares 130,468 - 130,491 - 130,491
Deposits from banks 1,984 - 1,985 - 1,985
Other deposits 3,913 - 3,915 - 3,915
Due to customers 6,208 - - 6,210 6,210
Debt securities
in issue 28,557 - 29,168 - 29,168
Subordinated liabilities 2,269 - 2,434 - 2,434
Subscribed capital 601 - 583 - 583
174,000 - 168,576 6,210 174,786
Carrying
value Fair values based on Total fair
Level 1 Level 2 Level 3 value
4 April 2013 GBPm GBPm GBPm GBPm GBPm
Financial assets
Loans and advances
to banks 2,522 2,522 - - 2,522
Loans and advances
to customers:
Residential mortgages 135,393 - - 130,871 130,871
Consumer banking 3,401 - - 3,413 3,413
Commercial lending 20,371 - - 20,752 20,752
Other lending 422 - - 422 422
162,109 2,522 - 155,458 157,980
Financial liabilities
Shares 125,574 - 125,316 - 125,316
Deposits from banks 3,230 - 3,232 - 3,232
Other deposits 3,762 - 4,141 - 4,141
Due to customers 5,960 - - 5,958 5,958
Debt securities
in issue 33,429 - 34,003 - 34,003
Subordinated liabilities 2,540 - 2,566 - 2,566
Subscribed capital 1,304 - 1,012 - 1,012
175,799 - 170,270 5,958 176,228
Loans and advances to customers
In adopting the requirements of IFRS 13, the Group has reviewed
and modified its approach to the fair value disclosures for
financial assets and liabilities measured at amortised cost on the
balance sheet in line with the guidance in the standard to reflect
a hypothetical exit price as indicated by the standard, valued on
an asset by asset basis, with no liquidity discount.
The change in relationship between carrying value and fair value
compared to last year is principally due to the change in valuation
methodology. IFRS 13 is not retrospective in application and the
Group has not restated the position at 4 April 2013. Whilst figures
for the year have not been restated, it is estimated that if this
methodology had been applied at 4 April 2013, the reported fair
value would have been lower than reported and broadly consistent
with the relationship between carrying value and fair value at 4
April 2014.
In arriving at the fair value of loans and advances to
customers, the Group uses consistent modelling techniques across
the different loan books, taking into account expected future cash
flows and future lifetime expected losses, based on historic trends
and discount rates appropriate to the loans. 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 our
residential BMR mortgage book generates a reduction in fair value
as those mortgages are priced below the SVR. For variable rate
commercial loans, separate market interest rates are utilised to
discount our commercial real estate, registered social landlord and
project finance lending portfolios.
For fixed rate loans, discount rates have been based on the
expected funding and capital cost applicable to the book. When
calculating fair values on fixed rate loans, no adjustment has been
made to reflect interest rate risk management through internal
natural hedges or external hedging via derivatives.
Shares, deposits and borrowings
The estimated fair value of shares and deposits with no stated
maturity, (including non-interest bearing deposits) is the amount
repayable on demand. The estimated fair value of fixed interest
rate shares, deposits and other borrowings without quoted market
prices represents the discounted amount of estimated future cash
flows based on expectations of future interest rates, customer
withdrawals and interest capitalisation. For variable interest rate
deposits, estimated future cash flows are discounted using current
market interest rates for new debt with similar remaining maturity.
For fixed rate shares and deposits, the estimated future cash flows
are discounted based on market offer rates currently available for
equivalent deposits.
Debt securities in issue
The estimated fair values of longer dated liabilities are
calculated based on quoted market prices where available or using
similar instruments as a proxy for those liabilities that are not
of sufficient size or liquidity to have an active market quote. For
those notes for which quoted market prices are not available, a
discounted cash flow model is used based on a current yield curve
appropriate for the remaining term to maturity.
20 Offsetting financial assets and financial liabilities
The Group has financial assets and liabilities for which there
is a legally enforceable right to set off the recognised amounts,
and which may be settled net, however the netting arrangements do
not result in an offset of balance sheet assets and liabilities for
accounting purposes as the right to set off is not unconditional in
all circumstances. Therefore, in accordance with IAS 32 Financial
Instruments: Presentation, there are no financial assets or
liabilities which are offset with the net amount presented on the
balance sheet. All financial assets and liabilities are presented
on a gross basis on the balance sheet.
In accordance with IFRS 7 Financial Instruments: Disclosures,
the following table shows the impact on derivative financial
instruments, total return swaps, reverse repurchase agreements and
repurchase agreements relating to transactions where:
-- There is an enforceable master netting arrangement or similar
agreement in place but the Offset Criteria are otherwise not
satisfied, and
-- Financial collateral is paid and received.
Master netting arrangements consist of agreements such as an
ISDA Master Agreement, global master repurchase agreements and
global master securities lending agreements, whereby outstanding
transactions with the same counterparty can be offset and settled
net following a default or other predetermined event.
Financial collateral on derivative financial instruments
consists of cash and securities settled, typically daily or weekly,
to mitigate the mark to market exposures. Financial collateral on
total return swaps, repurchase agreements and reverse 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.
2014 Gross and net Master netting Financial Net amounts
amounts reported arrangements collateral after offsetting
on the balance under IFRS
sheet 7
GBPm GBPm GBPm GBPm
Financial assets
Derivative financial
instruments 3,020 (1,440) (1,356) 224
Total return swaps 149 - (149) -
--------------
Total assets 3,169 (1,440) (1,505) 224
--------------
Financial liabilities
Derivative financial
liabilities 2,391 (1,440) (873) 78
--------------
Total liabilities 2,391 (1,440) (873) 78
--------------
2013 Gross and net Master netting Financial Net amounts
amounts reported arrangements collateral after offsetting
on the balance under IFRS
sheet 7
GBPm GBPm GBPm GBPm
Financial assets
Derivative financial
instruments 4,212 (2,208) (1,631) 373
Total return swaps 149 - (149) -
Total assets 4,361 (2,208) (1,780) 373
Financial liabilities
Derivative financial
liabilities 3,885 (2,208) (1,559) 118
Repurchase agreements 1,207 - (1,207) -
Total liabilities 5,092 (2,208) (2,766) 118
The fair value of the financial collateral is the same as the
values shown in the table above, except for the total return swaps
collateral which has a fair value of GBP175 million (2013: GBP188
million) and at 4 April 2013, the repurchase agreements collateral
which had a fair value of GBP1,486 million.
21 Related party transactions
There have been no significant related party transactions in the
year to 4 April 2014. Loans to key management personnel, undertaken
on normal commercial terms, were GBP0.8 million (4 April 2013:
GBP0.8 million).
22 Post balance sheet event
Included within loans and advances to customers at 4 April 2014
are commercial real estate loans with gross balances of GBP694m
(EUR841m) which the Group has sold since the year end. Net sales
proceeds are in line with the carrying value of the assets.
RESPONSIBILITY STATEMENT
The Directors confirm that the financial statements, prepared in
accordance with International Financial Reporting Standards as
adopted by the EU, give a true and fair view of the assets,
liabilities, financial position and income and expenditure of the
Group as required by the Disclosure and Transparency rules (DTR
4.1.12). The Chief Executive's Review and the Financial Review
together include a fair review of the development and performance
of the business and the Group, and taken together with the primary
financial statements, supporting notes and the Business and Risk
Report provide a description of the principal risks and
uncertainties faced.
A full list of the Board of Directors will be disclosed in the
Annual Report and Accounts 2014.
Signed on behalf of the Board by
Mark Rennison
Group Finance Director
27 May 2014
OTHER INFORMATION
The financial information set out in this announcement which was
approved by the Board on 27 May 2014 does not constitute accounts
within the meaning of section 73 of the Building Societies Act
1986.
The Annual Accounts for the year ended 4 April 2013 have been
filed with the former Financial Services Authority and Registry of
Friendly Societies in England and Wales. The Independent Auditors'
Report on these Annual Accounts was unqualified. The Annual
Accounts for the year ended 4 April 2014 will be lodged with the
Prudential Regulation Authority and the Registry of Friendly
Societies following publication.
A copy of this Preliminary report is placed on the website of
Nationwide Building Society, nationwide.co.uk, from 28 May 2014.
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
Stuart Williamson
Tel: 0207 2 616215
Mobile: 07545 740195
Clare Crowley
Tel: 0207 2 616211
Mobile: 07776 994058
This information is provided by RNS
The company news service from the London Stock Exchange
END
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