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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Nationwide Building Society | LSE:NBS | London | Ordinary Share | GB00BBQ33664 | CORE CAPITAL DEFERRED SHS (MIN 250 CCDS) |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 134.50 | 132.00 | 137.00 | 134.50 | 132.00 | 132.00 | 0.00 | 08:00:30 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Mortgage Bankers & Loan Corr | 4.68B | 1.66B | 157.6429 | 0.51 | 849.4M |
From Apr 2019 to Apr 2024
TIDMNBS TIDMNAWI
RNS Number : 5185P
Nationwide Building Society
18 November 2016
Nationwide Building Society
Interim Results
For the period ended
30 September 2016
Contents
Hot Features
Premium
Page
Chief Executive and Finance Director quotes 3
Key highlights 4
Financial summary 5
Chief Executive's review 6
Financial review 10
Business and Risk Report 18
Consolidated interim financial statements 53
Notes to the consolidated interim financial statements 59
Responsibility statement 84
Independent review report 85
Other information 87
Contacts 87
Appendix - Additional capital disclosures 88
Underlying profit
Profit before tax shown on a statutory and underlying basis is set out on page 5. Statutory profit before tax of GBP696 million has been adjusted for a number of items, consistent with prior periods, to derive an underlying profit before tax of GBP615 million. The purpose of this measure is to reflect management's view of the Group's underlying performance and to assist with like for like comparisons of performance across periods. Underlying profit is not designed to measure sustainable levels of profitability as that 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.
Forward looking statements
Statements in this document are forward looking with respect to plans, goals and expectations relating to the future financial position, business performance and results of Nationwide. Although Nationwide believes that the expectations reflected in these forward looking statements are reasonable, Nationwide can give no assurance that these expectations will prove to be an accurate reflection of actual results. By their nature, all forward looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond the control of Nationwide including, amongst other things, UK domestic and global economic and business conditions, market related risks such as fluctuation in interest rates and exchange rates, inflation/deflation, the impact of competition, changes in customer preferences, risks concerning borrower credit quality, delays in implementing proposals, the timing, impact and other uncertainties of future acquisitions or other combinations within relevant industries, the policies and actions of regulatory authorities, the impact of tax or other legislation and other regulations in the jurisdictions in which Nationwide operates. As a result, Nationwide's actual future financial condition, business performance and results may differ materially from the plans, goals and expectations expressed or implied in these forward looking statements. Due to such risks and uncertainties Nationwide cautions readers not to place undue reliance on such forward looking statements.
Nationwide undertakes no obligation to update any forward looking statements whether as a result of new information, future events or otherwise.
This document does not constitute or form part of an offer of securities for sale in the United States. Securities may not be offered or sold in the United States absent registration or an exemption from registration. Any public offering to be made in the United States will be made by means of a prospectus that may be obtained from the Society and will contain detailed information about the Society and management as well as financial statements.
RECORD CURRENT ACCOUNT AND LING GROWTH AND PROTECTION FOR SAVERS AS NATIONWIDE SUPPORTS MEMBERS DURING UNCERTAIN TIMES
Nationwide Chief Executive, Joe Garner, said:
"As a building society we are owned by our members and are answerable to them, which is why, for 170 years, we have made decisions focused on their best interests. The performance we are announcing today is a reflection of this. Despite economic uncertainty following the EU referendum, the Society has continued to lend to help our members get onto and move up the housing ladder, with record net lending in the half year. We have offered long term value for those who want to save for their future and more people than ever before have chosen to open a Nationwide current account. We have also continued to be ranked number one for customer service satisfaction amongst our high street peer group(1) .
"We have made a number of pledges to help our savers and borrowers. These include protecting selected savings rates to minimise the impact of the base rate change and helping our members with variable rate mortgages by passing on the base rate decrease in full. These conscious decisions and those taken over recent years have contributed to a reduction in profits in the first half of the year in line with expectations, demonstrating our commitment to putting members' interests at the heart of everything we do.
"Our investment in technology, is enabling us to test the viability of returning branches to communities which have been left without banking services, by opening a pilot branch in Glastonbury which will use the latest technology alongside the personal service so many value.
"Nationwide's strong capital position and commitment to continue to deliver the best service on the high street mean we are well placed to continue to support members whatever the prevailing economic conditions."
Nationwide Finance Director, Mark Rennison, said:
"Nationwide has traded strongly over the first six months of the year, increasing gross mortgage lending by 17% to GBP17.5 billion, a market share of 14.5%. Our focus on offering attractive products and rewarding loyal savers has resulted in member deposit balances increasing by GBP4.7 billion.
"Statutory profit for the period was GBP696 million and underlying profit was GBP615 million, both of which include a gain of GBP100 million on the disposal of our stake in Visa Europe. Our profit performance has reduced in line with our expectations and reflects continued margin pressure due to the prevailing low interest rate environment and the conscious decisions we have taken over recent years to support our members.
"We have also increased investment in our products and services for the long term benefit of our membership consistent with our position as the leader for customer service on the high street."
(1) (c) GfK 2016, Financial Research Survey (FRS), 3 months ending 30 September 2016 vs. 31 March 2016, proportion of extremely/very satisfied customers minus proportion of extremely/very/fairly dissatisfied customers summed across current account, mortgage and savings; high street peer group defined as providers with main current account market share >6% (Barclays, Halifax, HSBC, Lloyds Bank (inc C&G), NatWest and Santander).
Key highlights
-- A strong Society, making decisions for the benefit of members over the long term
o in line with expectations statutory profit reduced to GBP696 million (H1 2015/16: GBP802 million)
o underlying profit GBP615 million (H1 2015/16: GBP801 million)
o Common Equity Tier 1 ratio of 23.3% and leverage ratio of 4.0% (4 April 2016: 23.2% and 4.2% respectively)
-- Record prime gross mortgage lending
o gross mortgage lending up 17% to GBP17.5 billion
o best ever net mortgage lending, up 46% to GBP6 billion
o record gross prime lending of GBP14.7 billion, up 23%
o accounted for one-third of UK net mortgage lending over the past five years
o helped a record number of first-time buyers, up 50% to 38,600
-- Strong growth in deposit balances
o increased our member deposit balances by GBP4.7 billion (H1 2015/16: GBP2.6 billion)
o average deposit rate of 1.07%, 25 basis points higher than the market average, equating to an annualised benefit for our members of GBP380 million
-- Record numbers of new current accounts
o record 377,000 current accounts opened, an increase of 36%
o 75,500 accounts switched to Nationwide, up 61%, representing a 15.8% market share
o continued investment with the launch of FlexStudent, our first student current account
o 'Best Rewards' - uSwitch Current Accounts Awards (2016); 'Best Online Current Account Provider 2016' - Your Money
-- No.1 for customer service
o ranked number one for customer service satisfaction amongst our high street peer group with a lead of 8.0%(2)
o No. 1 in Forrester UK 2016 Customer Experience Index
o 'Best Extra Large Call Centre' - Top 50 Companies for Customer Service
-- Building society, nationwide
o testing the viability of returning branches to communities, with a pilot branch in Glastonbury
o supported savers and borrowers after the base rate cut, protecting rates for those with Regular Saver and Help to Buy products, and making GBP10 billion a year available to first time buyers
o Ministry of Defence Gold Award for our support of the military community
o our Specialist Support Service has helped more than 700 members affected by life-limiting situations, unlocking almost GBP66,000 in financial support
-- Housing market outlook
o demand and supply well matched with modest slowdown in activity since the EU referendum
o less certain economic outlook may soften demand but prices will continue to be supported by low interest rates and limited supply of new homes
(2) (c) GfK 2016, Financial Research Survey (FRS), 30 September 2016 vs. 31 March 2016, proportion of extremely/very satisfied customers minus proportion of extremely/very/fairly dissatisfied customers summed across current account, mortgage and savings; high street peer group defined as providers with main current account market share >6% (Barclays, Halifax, HSBC, Lloyds Bank (inc C&G), NatWest and Santander).
Financial summary
Half year Half year
to to
30 September 30 September
2016 2015
------------------------------------------------------------ ---------------- ----------------
Financial performance GBPm GBPm
Total underlying income 1,642 1,683
Underlying profit before tax 615 801
Statutory profit before tax 696 802
------------------------------------------------------------ -------- ------ -------- ------
Mortgage lending GBPbn % GBPbn %
Group residential - gross/gross market share 17.5 14.5 14.9 13.2
Group residential - net/net market share 6.0 33.9 4.1 21.2
% %
Average loan to value of new residential lending
(by value) 71 69
------------------------------------------------------------ -------- ------ -------- ------
Member deposits (note i) GBPbn % GBPbn %
Balance movement/market share 4.7 10.3 2.6 8.5
Key ratios % %
Cost income ratio - underlying basis 57.1 51.0
Cost income ratio - statutory basis 54.6 51.0
Net interest margin 1.33 1.58
------------------------------------------------------------ -------- ------ -------- ------
At At
30 September 4 April
2016 2016
------------------------------------------------------------ ---------------- ----------------
Balance sheet GBPbn GBPbn
Total assets 225.5 208.9
Loans and advances to customers 185.1 178.8
Member deposits (shares) (note i) 143.4 138.7
------------------------------------------------------------ -------- ------ -------- ------
Asset quality
Residential mortgages: % %
Proportion of residential mortgage accounts
3 months+ in arrears 0.45 0.45
Average indexed loan to value of residential
mortgage book (by value) 54 55
Impairment provisions as a % of non-performing
balances 3.2 3.2
Consumer banking:
Non-performing loans as a percentage of total
balances (excluding charged off balances) (note
ii) 3 4
Impairment provisions as a percentage of non-performing
balances (including charged off balances) (note
ii) 83 81
Key ratios % %
Capital - CRD IV:
Common Equity Tier 1 ratio (note iii) 23.3 23.2
Leverage ratio (note iii) 4.0 4.2
Other balance sheet ratios:
Liquidity coverage ratio 140.6 142.6
Wholesale funding ratio 27.2 24.8
Loan to deposit ratio (note iv) 117.7 117.2
------------------------------------------------------------ -------- ------ -------- ------
Notes:
i. Member deposits include current account credit balances.
ii. Charged off balances relate to accounts which are closed to future transactions and are held on the balance sheet for an extended period (up to 36 months, depending on the product) whilst recovery procedures take place.
iii. Reported under CRD IV on an end point basis. The leverage ratio is calculated using the Capital Requirements Regulation (CRR) definition of Tier 1 for the capital amount and the Delegated Act definition of the exposure measure.
iv. The loan to deposit ratio represents loans and advances to customers divided by (shares + other deposits + amounts due to customers).
Chief Executive's review
Making decisions for the benefit of members over the long term
As a building society, we were founded by ordinary people who came together to achieve things they could not achieve alone, like owning a home and saving for their future. To this day, we remain a member-owned mutual building society able to take a long term view and focus on providing excellent service, security and stability for our members, our owners. This has been particularly important over the first half of the year given the uncertainty and market volatility which followed the EU referendum.
We have taken the conscious decision to stand by our members, continuing to help them by reducing variable mortgage rates and offering long term value to savers, even in the current low interest rate environment. As expected these conscious decisions and those taken in recent years have had a knock-on impact on our profits. At the same time more people than ever before have chosen us for their everyday banking needs, attracted by the breadth, value and quality of our current account range. This has resulted in strong trading and a good financial performance over the first half of the year.
Underlying profit has reduced in the period to GBP615 million. This is due to three things. First, a reduction in net interest income due to the prevailing low interest rate environment, competition in the mortgage market and the active decisions we have taken to support savers and variable rate mortgage members. Second, a growth in underlying costs. And third, a modest increase in impairment provisions. These have been partially offset by a gain of GBP100 million from the disposal of the Society's stake in Visa Europe during the period. Our NIM in the period of 1.33% was lower than the same period last year (H1 2015/16: 1.58%), but has been broadly stable over the first half of the year, with closing spot NIM in September 2016 in line with that for the period.
Strategic investment into the Society is greater than ever before reflecting our financial strength and ability to make the right long term decisions for our members. We are investing in new products and investing to provide members with better service propositions such as our new banking app and further expansion of Nationwide Now (our video link advice service) which is proving so successful. We also continue to make investment in strengthening our resilience and control environment to keep our members' money safe, as well as supporting our people as a responsible employer through increases to our pension contributions. This investment, along with costs driven by our strong trading performance, has led to an increased underlying cost income ratio of 57.1% (H1 2015/16: 51.0%). Whilst sharpening our focus on efficiency, we will continue to invest where we believe it is in the long term interests of our members.
Nationwide remains safe and secure as evidenced by our strong capital position and balance sheet, with consolidated CET1 and leverage ratios of 23.3% and 4.0% respectively (4 April 2016: 23.2% and 4.2% respectively).
Building society, nationwide
As a mutual we do not aim to maximise profit, instead retaining sufficient earnings to support future growth and sustain a strong capital position. Being member-owned we are in an enviable position that allows us to take the right long term decisions and invest in making a tangible difference to our members' and employees' lives by tackling the issues that are important to them.
We believe that there is still a role for the branch on the high street, offering people the choice of managing their money using the latest technology in branch together with the personal service so many value in a digital age. Indeed, our branches are alive and well as evidenced by the fact that of all new current account openings during the first half of the year, over half were opened in a branch, and of these almost 20% were opened through Nationwide Now. We believe we can use this technology and digital investment to test the viability of opening a branch on high streets with limited access to a bank or building society. We will pilot this concept with a 'community contract' branch in Glastonbury, Somerset, where a consultation suggested that residents were willing to become a member of Nationwide to support the Society's investment. This branch will feature the latest technology, including the Nationwide Now service which gives members access to our financial consultants at a time that suits them.
Chief Executive's review (continued)
We were delighted to have been awarded the Employer Recognition Scheme's Gold award by the Ministry of Defence in recognition of our support for former and serving armed forces personnel.
Following the EU referendum, we have established a Brexit Consumer Support Panel which brings together leading consumer industry organisations to address the challenges facing consumers as the UK's relationship with the EU evolves. The panel, chaired by Nationwide Building Society, will provide insights to Government into consumer attitudes and behaviours in relation to Brexit and will help to promote positive outcomes for consumers as the renegotiation process is progressed. The organisations represented on this panel have millions of members, customers and employees across the UK, bringing a real insight into the levels of confidence around the country and we look forward to working with the Government over the coming months to better understand the challenges households face.
We are also committed to investing in our people. Not only have we championed fair pay as one of the first high street names to sign up to the Living Wage Foundation but we have also improved our pension scheme, increasing the amount we contribute to our employees' pensions. For employees in our defined contribution scheme who pay up to 7% of their salary into their pension, Nationwide will put in 16%, representing one of the most attractive pension schemes in the UK.
We continue to place a sharp focus on our core purpose of building society, nationwide and making decisions which are in the best interests of our membership. It is for this reason, following a strategic review of our commercial real estate (CRE) business, we have concluded our CRE lending is not key to the Society's vision for the future and that our resources would be better deployed elsewhere. Therefore, we will stop lending to new and existing CRE customers. We will maintain a dedicated service for each existing CRE customer throughout the remainder of their loan term. We will continue to provide funding to registered social landlords and existing Project Finance customers as well as continuing our Business Savings proposition.
Helping members buy homes and save for the future
Nationwide was founded to help people own their own homes and save for the future.
We have continued to help more members get onto or move up the housing ladder in the last six months. Gross mortgage lending increased by 17% to GBP17.5 billion (H1 2015/16: 14.9 billion) and net lending was up 46% to GBP6.0 billion (H1 2015/16: GBP4.1 billion), representing our best period ever. These equate to market shares of 14.5% and 33.9% respectively, well above our natural par share and strengthening our position as the UK's second largest mortgage lender. Within this, we delivered record prime gross mortgage lending of GBP14.7 billion, up 23%.
We arranged a record 38,600 mortgages for people buying their first home, an increase of 50%. This represents one in five of all first time buyers. We are committed to helping first time buyers by maintaining low deposit lending and minimising costs with schemes such as Help to Buy and Save to Buy.
We have taken a stand to help more people onto the housing ladder. As part of our five-point plan, launched to underline our commitment to our members, the Society will make at least GBP10 billion a year available to lend to first time buyers, where it is appropriate and responsible to do so. We have also protected the rates on Nationwide's Help to Buy ISA and Save to Buy products following the base rate decrease. This will help ensure the road to home ownership does not get longer for those saving to buy their first home.
At the same time, the Society passed on the base rate cut in full to Base Mortgage Rate (BMR), Standard Mortgage Rate (SMR) and tracker mortgage members, thereby lowering their monthly payments.
Chief Executive's review (continued)
As the proportion of UK households living in rented accommodation continues to grow, we have maintained support for the private rented sector through our dedicated buy to let subsidiary, The Mortgage Works (TMW). Gross buy to let mortgage lending for the first six months of the year was GBP2.8 billion (H1 2015/16: GBP2.9 billion). The buy to let sector is going through a period of substantial change resulting from new rules on landlord taxation and a new regulatory regime which provides guidance on underwriting and affordability standards for lending to landlords. As a responsible lender we took the decision to lead the market in making changes to our affordability assessment criteria to ensure our borrowers do not overstretch themselves. This is expected to result in lower buy to let lending in the second half of the year.
While borrowers have benefited from lower interest rates, we have also offered a support package for savers, protecting rates where possible and offering competitive products.
We have protected our Help to Buy ISA and Save to Buy rates, as well as maintaining the rates on the Flexclusive Regular Saver and Regular Saver accounts. During the period our members have benefited from an average rate on their deposits of 1.07%, 25 basis points higher than the market average, equating to an annualised benefit for our members of GBP380 million. Our loyal savers(3) have received an average rate of 1.13% over the last six months, 46 basis points higher than the equivalent market average, equating to an annualised benefit of almost GBP100 million.
In addition, over 185,000 Flexclusive Regular Saver accounts have been opened in the first half of the year, offering current account holders 5.00% on monthly payments of up to GBP500 for the first 12 months.
Thanks to our competitive savings range, we have seen an increase in member deposit balances of GBP4.7 billion, maintaining our position as the UK's second largest savings provider with a market share of over 10%.
More people than ever before choose Nationwide for everyday banking
As well as strong mortgage and savings growth, more people than ever before are choosing Nationwide for their everyday banking, attracted by the breadth, value and quality of our current account range. We opened a record 377,000 current accounts during the first half of the year, a 36% increase on last year (H1 2015/16: 277,000). Again, we have been a net beneficiary of customers switching via the Current Account Switch Service, driven by the popular 'Recommend a Friend' referral scheme. In total 75,500 accounts were switched to Nationwide, an increase of 61%, representing a market share of switchers of 15.8%.
Our continued investment in growing our current account base has contributed to the record account openings. During the half year we have extended our product range with the launch of FlexStudent, our first ever student account, and offered members innovative new ways to manage their money. This has led to an increase in our share of main standard and packaged current accounts to 7.3%(4) (4 April 2016: 7.1%).
Number one for customer satisfaction amongst our high street peer group(5)
We strive to provide members with excellent service whether they choose the convenience of managing their money digitally or the personal touch in a branch. We continue to invest in technology to make life easier for members. As with Apple Pay, we were amongst the first in the UK to provide Android Pay and we have launched a new version of our mobile banking app, which allows customers to manage their accounts quicker and easier than ever before.
We know our members still value the face to face help and support they can receive in a branch so we are using the latest fibre optic technology to enhance and deliver great service in locations which our members find convenient.
We continue to be ranked number one for customer satisfaction amongst our high street peer group, with a lead of
8.0%(5) .
(3) Nationwide rewards loyalty by giving members with a Loyalty Saver product a higher rate of interest depending on the length of their membership.
(4) Based on market data as at August 2016.
(5) (c) GfK 2016, Financial Research Survey (FRS), 3 months ending 30 September 2016 vs. 31 March 2016, proportion of extremely/very satisfied customers minus proportion of extremely/very/fairly dissatisfied customers summed across current account, mortgage and savings; high street peer group defined as providers with main current account market share >6% (Barclays, Halifax, HSBC, Lloyds Bank (inc C&G), NatWest and Santander).
Chief Executive's review (continued)
Our record on complaints continues to be very strong. Despite having a 12.8% market share of mortgages and a 10.1% market share of savings, we account for only 2% of total industry complaints, and we make every attempt to resolve complaints with the customer. If complaints are referred to the Financial Ombudsman, latest figures show that the Ombudsman upholds our decisions in 85% of cases, compared with an industry average of only 52%.
Supporting members in uncertain times
The UK economy grew at a respectable pace in the first nine months of 2016. However, uncertainty following the EU referendum is likely to adversely impact investment and hiring decisions which in turn is likely to result in slower growth in the quarters ahead. To date, market data points to a modest slowdown in the wider economy and our core markets. Policy stimulus measures aimed at lowering borrowing costs should help to provide support for economic activity and policymakers appear willing to further ease monetary and fiscal policy if required.
The longer term impacts of the EU referendum will depend on a range of factors, not least the time it takes to reach trading agreements with EU and non-EU economies and the nature of those agreements. Though the outlook is uncertain, our assumption is that economic growth will be maintained at a modest pace in the years ahead. Interest rates are expected to remain at historically low levels for a prolonged period in order to support economic activity, where further stimulus measures (including a base rate cut to close to, but above, zero) may still be required.
The recent decline in sterling should provide some support for UK exports, though in the short term it will also exert upward pressure on inflation which will act as a drag on real income growth. However, the impact on inflation is expected to prove transitory and is unlikely to prevent policymakers implementing further stimulus if required.
There are signs of a modest slowdown in activity in the housing market, especially in regard to the buy to let market, and this has made it difficult to assess the underlying strength of demand in recent quarters. The number of mortgages approved for house purchase has moderated, and new buyer enquiries remain subdued, though the supply of houses is also constrained. Indeed, demand and supply have remained fairly well matched and the annual pace of house price growth has remained in a narrow range of between 3% and 6% since early 2015.
Housing market trends will depend crucially on developments in the wider economy. This suggests activity may soften further in the months ahead, though the low level of interest rates will provide support for demand and the limited supply of homes on the market is likely to provide support for prices.
We will continue to act in the best interests of our members. Nationwide's strong capital position, high quality balance sheet and lead on customer satisfaction means we are well placed to continue to help our members whatever the prevailing economic conditions. We face the future with confidence and will continue to do the right thing for our members.
Financial review
Overall performance
Our financial results for the period ended 30 September 2016 show a statutory profit before tax of GBP696 million (H1 2015/16: GBP802 million) and underlying profit before tax of GBP615 million (H1 2015/16: GBP801 million). These results include a gain of GBP100 million on the disposal of our stake in Visa Europe.
Underlying profit has reduced 23% to GBP615 million, predominantly due to a reduction in net interest income, growth in underlying costs and an increase in impairment charges. As indicated when announcing our results for the 2015/16 financial year, our margins have trended lower as a result of ongoing competition in the mortgage market, combined with continued natural attrition of BMR balances and the impact of the prolonged low interest rate environment, including the cut in the base rate to 0.25% in August.
Profit for the period remains within the target range of our financial performance framework (GBP1 billion to GBP1.5 billion per annum), which we introduced in the Annual Report and Accounts 2016. This range represents the level of annual profit we believe is necessary for us to continue to invest and support members' needs while maintaining financial strength. The framework is based on the underlying principle of maintaining capital comfortably in excess of regulatory leverage ratio requirements. As a consequence of lowering our forecast balance sheet in light of the outcome of the EU referendum, we expect to update the target range at the end of the year.
The underlying cost income ratio has increased to 57.1% (H1 2015/16: 51.0%). The movement reflects the reduction in net interest income combined with incremental expenditure on strategic investment to enhance efficiency and service for our members, and increased employee costs, including our investment in a 'Living Pension' for our employees. Whilst sharpening our focus on efficiency, we will continue to invest where we believe it is right for our members.
Total assets have grown by GBP17 billion to GBP226 billion as at 30 September 2016. This increase is attributable to GBP6 billion growth in residential mortgage lending, reinforcing our position as the second largest mortgage lender in the UK and increasing our market share of prime mortgage balances to 12.7% (4 April 2016: 12.4%). In addition, there has been an increase in our high quality liquid assets primarily due to pre-funding of wholesale maturities and an increase in collateral relating to derivatives.
Our capital levels have remained strong during the period with CET1 and leverage ratios of 23.3% and 4.0% respectively (4 April 2016: 23.2% and 4.2%), comfortably in excess of current regulatory requirements, and well placed to meet foreseeable regulatory capital requirements.
Income statement
Underlying and statutory results Half year to Half year to
30 September 30 September
2016 2015
GBPm GBPm
-------------------------------------------- ------------- -------------
Net interest income 1,449 1,557
Net other income 193 126
-------------------------------------------- ------------- -------------
Total underlying income 1,642 1,683
Underlying administrative expenses (938) (858)
Impairment losses (37) -
Underlying provisions for liabilities
and charges (52) (24)
-------------------------------------------- ------------- -------------
Underlying profit before tax (note i) 615 801
Transformation costs (note ii) - (8)
FSCS (note ii) 4 (5)
Gains from derivatives and hedge accounting
(note ii) 77 14
-------------------------------------------- ------------- -------------
Statutory profit before tax 696 802
-------------------------------------------- ------------- -------------
Taxation (194) (166)
-------------------------------------------- ------------- -------------
Profit after tax 502 636
-------------------------------------------- ------------- -------------
Notes:
i. Underlying profit represents management's view of underlying performance and is presented to aid comparability across reporting periods. It is not designed to measure sustainable levels of profitability.
ii. Within the statutory results presented in the financial statements:
- transformation costs are included within administrative expenses
- FSCS costs are included within provisions for liabilities and charges
- gains/losses from derivatives and hedge accounting are presented separately within total income.
Financial review (continued)
Net interest income and margin Half year to Half year to
30 September 30 September
2016 2015
GBPm GBPm
------------------------------- ------------- -------------
Net interest income 1,449 1,557
Weighted average total assets 220,364 200,112
%%
Net interest margin 1.33 1.58
------------------------------- ------------- -------------
As anticipated our net interest margin (NIM) in the period of 1.33% was lower than the same period last year (H1 2015/16: 1.58%). The reduction in NIM relative to the previous year is primarily due to ongoing competition in the mortgage market, combined with continued natural attrition of BMR balances and the impact of medium term interest rate expectations. The NIM position has stabilised, with closing spot NIM at 30 September 2016 in line with that for the period.
Our BMR balances have reduced by GBP7.1 billion over the past 12 months to GBP32.3 billion as at 30 September 2016 and we expect this trend to continue for the remainder of the financial year. This, together with the impact of competition on new business pricing, has resulted in a reduction of approximately 20 bps in the average margin on mortgage balances, measured against relevant market indices (swaps or Libor).
At a market level, the incentive to support overall margins through lower deposit rates in the face of competition for lending, combined with deposit growth in excess of demand for lending, has resulted in retail funding costs declining over the last 12 months. Against this backdrop we have sought to support our saving members as far as possible by deferring rate reductions and maintaining rates significantly in excess of those on offer from our major high street peers. Following the decision by the Bank of England to cut the base rate to 0.25% we committed to protecting members who save regularly, or are building a deposit to buy their own home, resulting in selected products being maintained at their existing rates. As a mutual we offer savings products which represent long term good value and over the last six months our depositors have benefited from an average rate of 1.07%, 25 bps higher than the market average rate, equating to an annualised benefit to savers of some GBP380 million.
Key factors influencing NIM in the second half of the year are likely to be interest rate expectations, sustained mortgage market competition, and our continued focus on delivering long term value to our savers. We currently expect that our NIM for the second half of the year will be only modestly lower than for the first half.
Net other income Half year to Half year to
30 September 30 September
2016 2015
GBPm GBPm
-------------------------------------------- ------------- -------------
Current account and savings 35 38
Protection and investments 36 37
General insurance 30 37
Mortgage 4 4
Credit card (3) 8
Commercial 5 7
Other 86 (5)
Total underlying net other income 193 126
Gains from derivatives and hedge accounting 77 14
-------------------------------------------- ------------- -------------
Total statutory net other income 270 140
-------------------------------------------- ------------- -------------
Underlying net other income has increased by 53% to GBP193 million (H1 2015/16: GBP126 million) primarily due to a gain of GBP100 million from the disposal of our stake in Visa Europe during the period, which is included in 'Other' above. Excluding this gain, net underlying other income has reduced during the period primarily due to a decrease in interchange income from credit card and current account transactions, following the introduction of regulatory caps. In addition current account fee income has reduced following the introduction of our FlexBasic current account, which has no fees for certain transactions.
Our general insurance income has reduced by GBP7 million due to an increasingly challenging market environment, combined with our pricing proposition which is focused on delivering value to members.
Financial review (continued)
Gains or losses from derivatives and hedge accounting arise due to hedge accounting ineffectiveness or because hedge accounting is not achievable. This volatility is largely attributable to accounting rules which do not fully reflect the economic reality of the Group's hedging strategy. Details of fair value gains and losses relating to derivatives and hedge accounting are provided in note 6 to the consolidated interim financial statements.
Administrative expenses Half year to Half year to
30 September 30 September
2016 2015
GBPm GBPm
----------------------------------------- ------------- -------------
Employee costs 388 349
Other administrative expenses 375 354
Depreciation and amortisation 175 155
----------------------------------------- ------------- -------------
Total underlying administrative expenses 938 858
Transformation costs -8
----------------------------------------- ------------- ------------
Total statutory administrative expenses 938 866
----------------------------------------- ------------- -------------
%%
Cost income ratio - underlying basis 57.1 51.0
Cost income ratio - statutory basis 54.6 51.0
----------------------------------------- ------------- -------------
The strong trading performance in the period which has led to additional business volumes, coupled with increases to employee costs and strategic investment in propositions and service for members, has resulted in an increase in underlying administrative expenses of 9.3% (GBP80 million). At a statutory level administrative expenses have increased by 8.3% (GBP72 million). As a result, the cost income ratio (CIR), on an underlying basis, has increased to 57.1% (H1 2015/16: 51.0%).
Employee costs have increased, reflecting the impact of an annual pay award averaging 2.1% and higher costs resulting from enhancements to the Group's defined contribution pension scheme in line with our policy of providing a 'Living Pension' alongside being a Living Wage employer. In addition, average employee numbers have increased by 4% period on period as we continue to build greater capacity to meet additional business volumes and further strengthen risk and control functions.
Strategic investment has been greater than ever before, with the majority relating to initiatives that directly benefit members and reflecting our strategy of taking decisions to support the long term interests of our members. During the period, investment has focused on service and efficiency improvements, both in branch and through digital channels, such as payments through mobile phones, updating our savings point of sale systems and video links in branches which allow members to speak face to face with advisors in another location. Further investment has concentrated on IT resilience and ensuring compliance with UK and EU regulatory requirements.
Our cost trajectory reflects significant growth and investment over recent years. Mortgage balances have grown 12.8% over the last 2 years and we have 24% more main current account members today than in 2014. Investment in support of our member proposition will continue though we expect the impact on the cost base from this activity to be offset by the efficiencies it provides and efficiencies realised from previous investment. The continuing low rate environment will constrain income growth over the foreseeable future and we therefore intend to increase focus on driving our efficiency agenda, exploiting the benefits of past and ongoing investment to accelerate automation and digitise service delivery in line with the needs of our members. This will result in lower cost growth in future periods and we will provide further information in our full year results announcement.
Financial review (continued)
Impairment losses/(reversals) Half year to Half year to
30 September 30 September
2016 2015
GBPm GBPm
------------------------------------------- ------------- -------------
Residential lending 5 (7)
Consumer banking 32 33
------------------------------------------- ------------- -------------
Retail lending 37 26
Commercial lending (5) (27)
Other lending - 1
------------------------------------------- ------------- -------------
Impairment losses on loans and advances 32 -
Impairment losses on investment securities 5 -
------------------------------------------- ------------- -------------
Total 37 -
------------------------------------------- ------------- -------------
Impairment losses for the period of GBP37 million have increased compared to the same period last year (H1 2015/16: GBPnil) primarily due to a lower level of net recoveries in the commercial real estate (CRE) portfolio.
Residential lending impairment charges for the period of GBP5 million (H1 2015/16: GBP7 million reversal) reflect a lower benefit from house price improvement than seen in the previous period. Arrears performance and LTV profile have been stable with cases in excess of three months in arrears amounting to 0.45% (4 April 2016: 0.45%) and the indexed LTV of the portfolio now at 54% (4 April 2016: 55%).
Consumer banking impairment losses have remained broadly stable at GBP32 million (H1 2015/16: GBP33 million), with the overall performance and risk profile of the portfolio improving during the period.
Commercial lending impairments relate exclusively to commercial real estate (CRE) lending, with no arrears in our registered social landlords and Project Finance portfolios. A continuation of improved CRE market conditions in the early part of the period, including increased liquidity and capital values, has resulted in a net impairment reversal of GBP5 million. The higher reversal in the previous year reflected strongly improving market conditions impacting higher impaired balances, which have been reducing in line with the managed run-off of the book. Since the EU referendum expectations for commercial property values have moderated and most forecasts are predicting modest falls.
The impairment on investment securities of GBP5 million relates to the revaluation of a single available for sale asset which is held within our closed out of policy Treasury portfolio.
Provisions for liabilities and charges Half year Half year
to to
30 September 30 September
2016 2015
GBPm GBPm
-------------------------------------------------- ------------- -------------
Underlying provisions for liabilities and charges
- Customer redress 52 24
FSCS levy (4) 5
-------------------------------------------------- ------------- -------------
Total provisions for liabilities and charges 48 29
-------------------------------------------------- ------------- -------------
We hold provisions for customer redress to cover the costs of remediation and redress in relation to past sales of financial products and post sales administration, including compliance with consumer credit legislation and other regulatory requirements. The charge in the period predominantly relates to updated estimates for provisions previously recognised, including GBP30 million relating to Payment Protection Insurance (PPI) redress and GBP15 million for the related cost of administering PPI claims. When assessing the adequacy of our PPI provision we have considered the implications of the proposals published by the Financial Conduct Authority in its August 2016 consultation paper (CP16/20), including the estimated impact of the Plevin case.
The Financial Services Compensation Scheme (FSCS) release of GBP4 million (H1 2015/16: GBP5 million charge), reflects a small reduction in the balance sheet amount provided on 4 April 2016 for our anticipated share of interest costs in relation to the 2016/17 FSCS scheme year. More information on customer redress and FSCS is included in note 18 to the consolidated interim financial statements.
Financial review (continued)
Taxation
The statutory reported tax charge for the period of GBP194 million (H1 2015/16: GBP166 million) represents an effective tax rate of 27.9% (H1 2015/16: 20.7%), which is higher than the statutory rate in the UK of 20% (H1 2015/16: 20%). The higher effective rate is due principally to the banking surcharge of 8%, equivalent to GBP40 million (H1 2015/16: GBPnil), together with the tax effect of disallowable expenses. Further information is provided in note 9 to the consolidated interim financial statements.
Balance sheet
Total assets have increased 8% during the period to reach GBP226 billion at 30 September 2016 (4 April 2016: GBP209 billion). This increase is in part attributable to net mortgage lending of GBP6.0 billion resulting from our continued strong trading performance. The remainder of the growth in total assets predominantly reflects an increase of GBP8.4 billion in high quality liquid assets.
Mortgage lending has largely been supported by strong retail funding flows with member balances growing by GBP4.7 billion in the period, resulting in our market share of savings stock remaining broadly flat at 10.1% (4 April 2016: 10.2%). Of the growth in member balances, GBP1.8 billion is attributable to our current account proposition as we have continued to increase our market share of main current accounts from 7.1% at 4 April 2016 to 7.3%(6) . Debt securities in issue have increased by GBP7.6 billion to GBP43.7 billion reflecting additional issuance activity in the wholesale markets during the period to support the increase in liquidity.
The Group intends to participate in the Bank of England's Term Funding Scheme (TFS) which provides cash secured against eligible collateral and has a four year maturity.
Assets 30 September 4 April
2016 2016
GBPm % GBPm %
---------------------------------------------------------- --------- --- ------- ---
Residential mortgages 168,356 91 162,164 91
Commercial lending 13,134 7 13,197 7
Consumer banking 3,909 2 3,869 2
Other lending 130 - 20 -
---------------------------------------------------------- --------- --- ------- ---
185,529 100 179,250 100
Impairment provisions (403) (443)
---------------------------------------------------------- --------- --- ------- ---
Loans and advances to customers 185,126 178,807
Other financial assets 37,835 27,782
Other non-financial assets 2,585 2,350
---------------------------------------------------------- --------- --- ------- ---
Total assets 225,546 208,939
---------------------------------------------------------- --------- --- ------- ---
Asset quality % %
Residential mortgages:
Proportion of residential mortgage accounts
3 months+ in arrears 0.45 0.45
Average indexed loan to value of residential
mortgage book (by value) 54 55
Impairment provisions as a percentage of non-performing
balances 3.2 3.2
Consumer banking:
Non-performing loans as a percentage of total
balances (excluding charged off balances)
(note i) 3 4
Impairment provisions as a percentage of non-performing
balances (including charged off balances)
(note i) 83 81
Other key ratios % %
Loan to deposit ratio (note ii) 117.7 117.2
Liquidity coverage ratio 140.6 142.6
---------------------------------------------------------- --------- --- ------- ---
Note:
i. Charged off balances relate to accounts which are closed to future transactions and are held on the balance sheet for an extended period (up to 36 months, depending on the product) whilst recovery procedures take place.
ii. The loan to deposit ratio represents loans and advances to customers divided by (shares + other deposits + amounts due to customers).
(6) Based on market data as at August 2016.
Financial review (continued)
Residential mortgages
Residential mortgages include prime and specialist loans, with the specialist portfolio primarily comprising buy to let (BTL) lending. Gross mortgage lending in the period increased 17% to GBP17.5 billion (H1 2015/16: GBP14.9 billion), representing a market share of 14.5% (H1 2015/16: 13.2%).
Net mortgage lending was GBP6.0 billion (H1 2015/16: GBP4.1 billion), a market share of 33.9% (H1 2015/16: 21.2%), of which GBP5.0 billion was prime lending (H1 2015/16: GBP2.7 billion) and GBP1.0 billion related to BTL lending (H1 2015/16: GBP1.4 billion).
The flow of BTL advances has slowed following our decision to increase the minimum interest coverage ratio from 125% to 145%, with a particular decrease in the proportion of our new BTL lending that is secured on properties located in London.
The average loan to value (LTV) of new lending in the period, weighted by value, increased 2% to 71% (H1 2015/16: 69%) primarily due to our strategy to increase lending to the first time buyer market. House price growth has continued, albeit modestly, resulting in the average LTV of the Group's portfolio reducing slightly to 54% (4 April 2016: 55%). Our residential mortgage arrears have remained flat at 0.45% (4 April 2016: 0.45%) as we continue to benefit from low unemployment and growth in household income. Our arrears levels continue to be significantly lower than the Council of Mortgage Lenders industry average of 1.01%, demonstrating our low risk appetite and strong underwriting standards.
Non-performing balances have reduced by GBP147 million, with particular improvements in balances past due up to 3 months. Impairment provisions have fallen by GBP6 million to GBP96 million (4 April 2016: GBP102 million) reflecting this improvement and house price growth during the period.
Commercial lending
As a result of deleveraging activity undertaken in recent years, our overall commercial portfolio is increasingly weighted towards registered social landlords, with balances of GBP7.5 billion (4 April 2016: GBP7.6 billion), and a portfolio of loans made under the Government's Project Finance initiative amounting to GBP1.1 billion (4 April 2016: GBP1.2 billion). These portfolios are fully performing and remain stable, reflecting their low risk nature. The commercial portfolio also includes commercial real estate (CRE) loans of GBP2.8 billion (4 April 2016: GBP3.0 billion) and fair value adjustments of GBP1.7 billion (4 April 2016: GBP1.4 billion) relating to loans where we have hedged associated financial risks, typically interest rate risk.
We have undertaken GBP192 million of new CRE lending during the period which has been focused on low risk commercial loans with an average LTV of new business of 51%. The level of impaired balances as a proportion of our total CRE exposure has fallen from 6% at 4 April 2016 to 3%, reflecting resolution of impaired asset positions and improved asset quality.
In line with our managed run-off of the CRE book, it has been concluded that our CRE business is not key to the Society's vision for the future and therefore we have decided to cease new CRE lending. We will maintain a dedicated service for existing CRE customers throughout the remainder of their loan term. We will continue to provide funding to registered social landlords and existing Project Finance customers.
Consumer banking
Despite particularly intense competition in the consumer banking market in recent months, balances have grown modestly reflecting our attractive pricing propositions and loyalty offers. Consumer banking comprises personal loans of GBP1.9 billion (4 April 2016: GBP1.9 billion), credit cards of GBP1.8 billion (4 April 2016: GBP1.7 billion) and current account overdrafts of GBP0.2 billion (4 April 2016: GBP0.2 billion). Asset quality has benefited in the period from previous tightening of our credit risk policies reducing our early arrears rates, and more competitive pricing on personal loans attracting higher quality new business.
Further details of our lending and lending risks are provided in the 'Lending risk' section of the Business and Risk Report.
Financial review (continued)
Other financial assets
Other financial assets of GBP37.8 billion (4 April 2016: GBP27.8 billion) comprise cash of GBP17.2 billion (4 April 2016: GBP8.8 billion), other liquidity and investment assets held by our Treasury Division of GBP13.2 billion (4 April 2016: GBP14.3 billion), derivatives with positive fair values of GBP6.2 billion (4 April 2016: GBP3.9 billion), and fair value adjustments and other assets of GBP1.2 billion (4 April 2016: GBP0.8 billion).
Levels of liquidity have increased, reflecting both an element of pre-funding of wholesale maturities and an increase in collateral relating to derivatives following the EU referendum. The increased amount of high quality liquidity being held on the balance sheet is reflected in the Liquidity Coverage Ratio (LCR) remaining broadly consistent at 140.6% (4 April 2016: 142.6%), with higher liquidity balances being offset by increased LCR requirements relating to upcoming wholesale funding maturities and increased collateral holdings.
Further details of our treasury portfolios are included in the 'Treasury assets' section of the Business and Risk Report.
Liabilities 30 September 4 April 2016
2016 GBPm
GBPm
------------------------------------------------- ------------ ------------
Member deposits 143,415 138,715
Debt securities in issue 43,650 36,085
Other financial liabilities 24,941 21,637
Other liabilities 2,265 1,572
------------------------------------------------- ------------ ------------
Total liabilities 214,271 198,009
Members' interests and equity 11,275 10,930
------------------------------------------------- ------------ ------------
Total members' interests, equity and liabilities 225,546 208,939
------------------------------------------------- ------------ ------------
%%
Wholesale funding ratio (note i) 27.2 24.8
------------------------------------------------- ------------ ------------
Note:
i. The wholesale funding ratio includes all balance sheet sources of funding (including securitisations) but excludes Funding for Lending Scheme (FLS) drawings which, as an asset swap, are not included on the Group's balance sheet, reflecting the substance of the arrangement. Off balance sheet FLS drawings have reduced from GBP8.5 billion at 4 April 2016 to GBP8.0 billion at 30 September 2016.
Member deposits
Member deposits have increased by GBP4.7 billion to GBP143.4 billion (4 April 2016: GBP138.7 billion) as we continue to offer competitive savings and current account propositions which provide long term good value and seek to support members in the current low base rate environment. Our market share of savings stock at 30 September 2016 was 10.1% (4 April 2016: 10.2%). Current account credit balances have increased to GBP16.6 billion (4 April 2016: GBP14.8 billion) which reflects the increase in our market share of main standard and packaged accounts stock to 7.3%(7) (4 April 2016: 7.1%).
Debt securities in issue
Debt securities in issue of GBP43.7 billion (4 April 2016: GBP36.1 billion) are used to raise funding in wholesale markets in order to finance core activities. The increase in outstanding amounts reflects increased issuance activity in the wholesale markets during the period to support planned increased liquidity and pre-fund wholesale maturities in the second half of the year. The wholesale funding ratio has increased to 27.2% (4 April 2016: 24.8%).
Further details on the Group's wholesale funding mix and liquidity holdings are included in the 'Liquidity and funding risk' section of the Business and Risk Report.
(7) Based on market data as at August 2016.
Financial review (continued)
Other financial liabilities
Other financial liabilities have increased from GBP21.6 billion as at 4 April 2016 to GBP24.9 billion primarily due to increases in customer and bank deposits of GBP1.7 billion and issuances of subordinated debt during the period of GBP1.1 billion.
Capital structure
30 September 4 April 2016
2016 GBPm
GBPm
------------------------------------ ------------ ------------
Capital resources (note i)
Common Equity Tier 1 (CET1) capital 8,067 8,013
Total Tier 1 capital 9,059 9,005
Total regulatory capital 11,706 10,654
Risk weighted assets 34,636 34,475
Leverage exposure 227,886 213,181
CRD IV capital ratios %%
CET1 ratio 23.3 23.2
Leverage ratio (note ii) 4.0 4.2
------------------------------------ ------------ ------------
Notes:
i. Data in the table is reported under CRD IV on an end point basis.
ii. The leverage ratio is calculated using the Capital Requirements Regulation definition of Tier 1 for the capital amount and the Delegated Act definition of the exposure measure.
CET1 capital resources have increased over the period by GBP54 million, with GBP502 million of profit after tax being largely offset by an increase in the pension deficit decreasing the general reserve by GBP405 million. The pension deficit has significantly increased over the period, driven by changes in the economic environment impacting long-term interest rates and causing the value of the Pension Fund's liabilities to increase significantly. Further details of the pension deficit are included within the 'Pension risk' section of the Business and Risk Report and note 20 of the consolidated interim financial statements.
Risk weighted assets (RWAs) have increased slightly over the period due to higher derivative market values driven by the fall in sterling following the EU referendum. This was partially offset by a reduction in residential mortgage RWAs due to improved book quality from rising house prices, which outweighed the increase in balances. As a result the CET1 ratio has remained broadly stable at 23.3% (4 April 2016: 23.2%).
The modest growth in capital resources, combined with an increase in leverage exposure of GBP14.7 billion, resulted in a leverage ratio at 30 September 2016 of 4.0% (4 April 2016: 4.2%). The increase in leverage exposure is mainly attributable to net lending in the period and increased liquidity balances.
The Group continues to monitor regulatory developments that could lead to an increased level of capital requirements. Whilst there are a number of areas where potential requirements are yet to be finalised, recent regulatory announcements mean that we have better visibility of expectations for future capital requirements. On 8 November, the Bank of England published its policy for the UK Minimum Requirement for own funds and Eligible Liabilities (MREL) framework. In line with our expectations, this confirmed that our MREL requirement from 2020 will be twice our minimum leverage capital requirements plus CRD IV capital buffers. We are confident in our ability to meet this new requirement over the transitional period based on our recent successful issuance of $1.25 billion of Tier 2 securities. We will remain engaged in the development of the regulatory capital framework to ensure we are prepared for any additional changes.
We expect to have a steady state leverage ratio requirement of 3.75% from 2019, which comprises a minimum requirement of 3%, a supplementary leverage ratio buffer of 0.35% and Countercyclical Leverage Ratio Buffer (CCyLB) of 0.4%. The Financial Policy Committee (FPC) could set a CCyLB of up to 0.9% (i.e. a total leverage requirement of 4.25%) if it deems risks to be elevated; however following recent guidance on the CCyLB, Nationwide's minimum leverage requirements are expected to remain at 3% until at least June 2017.
Further details of the capital position are included in the 'Solvency risk' section of the Business and Risk Report.
Business and Risk Report
Contents
Page
Introduction 19
Principal risks 19
Top and emerging risks 19
Lending risk 20
Residential mortgages 21
Consumer banking 29
Commercial lending 33
Treasury assets 38
Financial risk 42
Liquidity and funding risk 42
Solvency risk 47
Pension risk 51
Earnings risk 51
Operational risk 52
Conduct and compliance risk 52
Introduction
The Interim Business and Risk Report provides information on key developments during the period in relation to the Group's business, the risks it is exposed to and how it manages those risks. Where there has been no change to the Group's approach to managing its risks, or there has been no material change to the relevant risk environment from that disclosed at the year end, then this information has not been repeated in this report and can be found in the Business and Risk Report in the Annual Report and Accounts 2016.
As the risks of the organisation are managed on a Group basis, the disclosures in the Business and Risk Report are on a consolidated basis covering the activities of both the Society and its subsidiaries.
Principal risks
Whilst the Group accepts that all business activities involve risk, it seeks to protect members by managing the risks that arise appropriately. The Group adopts an enterprise-wide risk management framework to manage risk; further details of this and the risks managed can be found in the Business and Risk Report in the Annual Report and Accounts 2016. The principal categories of risk inherent within the business remain unchanged, namely:
-- Lending risk -- Financial risk -- Operational risk -- Conduct and compliance risk -- Strategic risk
Top and emerging risks
The Group's top and emerging risks are identified through the process outlined in the 'Managing risk' section of the Annual Report and Accounts 2016 and are closely tracked throughout the governance structure. The Group continues to keep these risks under close observation through risk reporting and governance.
The Group's top and emerging risks continue to relate to four key themes:
-- Macroeconomic environment -- Cyber attack and business resilience -- Changing face of financial services -- Conduct and compliance challenges
The latest developments in relation to the Group's top and emerging risks are set out below:
Top and emerging Developments in the period
risk
----------------- ------------------------------------------------------------
Macroeconomic Since the UK voted to leave the EU in June, this has
environment created increased uncertainty and reduced confidence
in the long-term economic outlook. In response, the
Bank of England base rate reduced to 0.25%. In addition,
UK growth projections have been downgraded following
the referendum result
If the base rate remains at its current low level for
a sustained period or reduces further, this will constrain
margins. Furthermore, a move to zero or negative rates,
although not expected, may reduce incentives for customers
to save, potentially impacting the Group's business
model.
The Group continues to regularly monitor economic factors,
including undertaking regular assessments of how economic
stresses may impact its business model. Factors including
European and US political changes, a slowdown in China
and the impact on earnings and lending risk performance
from a domestic or global economic downturn are regularly
discussed by the Board and continually evaluated against
the Group's principal risks and strategy.
----------------- ------------------------------------------------------------
Top and emerging risks (continued)
Top and emerging Developments in the period
risk
------------------- ------------------------------------------------------------
Cyber attack The Group continues to make significant investment
and business in transforming its products and delivery channels,
resilience and has recently launched a new Mobile Banking application
to embrace advances in digital technology. The usage
of digital channels continues to increase the risk
of cyber security attacks and failures of technology
infrastructures. The Group continues to invest in security
and detection capabilities designed to ensure it can
respond to such threats effectively and has recently
announced the appointment of external experts to its
IT Strategy and Resilience Committee.
During the period, the Group successfully implemented
the first change of the base rate since 2009. The Group's
plans for dealing with the operational impact of any
future rate changes remain under regular review, to
ensure that we have the capacity to respond to customer
needs.
------------------- ------------------------------------------------------------
Changing The Group continues to monitor changes that could impact
face of financial the structure of the market such as the challenge from
services new competition as a result of Open Banking (as discussed
in the Competition and Markets Authority's (CMA) report
'Making the Banks work harder for you'), and the likely
increase in competition that newly ring-fenced banking
peers will bring to our core markets.
------------------- ------------------------------------------------------------
Conduct and The EU referendum result has created uncertainties
compliance within our operating environment but, as a UK-focused
challenges building society, the direct regulatory, conduct and
compliance impact of the vote to leave the EU on the
Group should be limited. The potential impact of the
vote is being considered on an ongoing basis.
------------------- ------------------------------------------------------------
Lending risk
Lending risk is the risk that a borrower or counterparty fails to pay interest or to repay the principal on a loan or other financial instrument (such as a bond) on time. Lending risk also encompasses extension risk and concentration risk. Further details on how the Group manages lending risk are available in the Annual Report and Accounts 2016.
The table below summarises the Group's assets subject to lending risk.
Balances subject to lending 30 September 2016
risk
Gross balances Less: Impairment Carrying % of total
provisions value
GBPm GBPm GBPm %
--------------------------------- -------------- ---------------- -------- ----------
Cash 17,213 - 17,213 8
Loans and advances to banks 3,323 - 3,323 1
Investment securities - AFS 9,862 - 9,862 4
Derivative financial instruments 6,180 - 6,180 3
Fair value adjustment for
portfolio hedged risk (note
i) 1,197 - 1,197 1
Investments in equity shares 57 - 57 -
-------------- ---------------- -------- ----------
37,832 - 37,832 17
Loans and advances to customers:
Residential mortgages 168,356 (96) 168,260 75
Consumer banking 3,909 (262) 3,647 2
Commercial lending (note i) 13,134 (44) 13,090 6
Other lending (note ii) 130 (1) 129 -
-------------- ---------------- -------- ----------
185,529 (403) 185,126 83
Total 223,361 (403) 222,958 100
--------------------------------- -------------- ---------------- -------- ----------
Lending risk (continued)
Balances subject to lending 4 April 2016
risk
Gross balances Less: Impairment Carrying % of total
provisions value
GBPm GBPm GBPm %
--------------------------------- -------------- ---------------- -------- ----------
Cash 8,797 - 8,797 4
Loans and advances to banks 3,591 - 3,591 2
Investment securities - AFS 10,612 - 10,612 5
Derivative financial instruments 3,898 - 3,898 2
Fair value adjustment for
portfolio hedged risk (note
i) 756 - 756 -
Investments in equity shares 126 - 126 -
-------------- ---------------- -------- ----------
27,780 - 27,780 13
Loans and advances to customers:
Residential mortgages 162,164 (102) 162,062 79
Consumer banking 3,869 (281) 3,588 2
Commercial lending (note i) 13,197 (59) 13,138 6
Other lending (note ii) 20 (1) 19 -
-------------- ---------------- -------- ----------
179,250 (443) 178,807 87
Total 207,030 (443) 206,587 100
--------------------------------- -------------- ---------------- -------- ----------
Note:
i. The fair value adjustment for portfolio hedged risk and the fair value adjustment for micro hedged risk (included within the carrying value of the commercial lending portfolio) represent hedge accounting adjustments. They are indirectly exposed to lending risk through the relationship with the underlying loans covered by the Group's hedging programmes.
ii. The other lending portfolio includes collateral balances relating to repo transactions.
Further information on the residential mortgages, consumer banking, commercial lending and treasury portfolios is provided in the subsequent sections of this report.
Residential mortgages
The Group's residential mortgages comprise prime and specialist loans. Prime residential mortgages are mainly Nationwide branded advances made through the Group's branch network and intermediary channels; all new specialist lending is limited to buy to let mortgages originated under The Mortgage Works (UK) plc (TMW) brand.
The residential mortgage portfolio has increased to GBP168 billion (4 April 2016: GBP162 billion), predominantly driven by strong levels of prime lending, particularly in the first time buyer segment which has increased as a proportion of Group new lending to 35% (H1 2015/16: 27%). The increase in first time buyer lending is partly attributed to the widening of the availability of mortgages at 90% to 95% LTV since September 2015. Our support of this market has been reinforced by a commitment to make at least GBP10 billion a year available to first time buyers where it is appropriate, provided we are able to lend responsibly and within appetite. This is one of a number of commitments Nationwide has made to the Government, demonstrating our intention to stand by our customers and members as the economy enters a period of uncertainty following the result of the EU referendum.
The growth of the buy to let portfolio has slowed following the decision to increase the minimum interest coverage ratio (ICR) from 125% to 145% and lower the maximum LTV for buy to let borrowing from 80% to 75% in May 2016. These steps were taken in direct response to the new government policy for personal income tax relief for buy to let properties, due to be phased in between April 2017 and March 2021. The new policy for income tax relief will materially affect the cash flow of many investors, including existing investors, and these changes to our lending policy help ensure that buy to let borrowing remains sustainable and affordable.
The PRA published the Supervisory Statement 'Underwriting standards for buy to let contracts' in September 2016, outlining the minimum standards they expect firms to employ as part of their lending decision. Nationwide is reviewing the requirements and will respond accordingly.
Lending risk - Residential mortgages (continued)
The proportion of loans that are more than three months in arrears has remained stable at 0.45% (4 April 2016: 0.45%) and remains materially below the CML industry average of 1.01%.
Lending and new business
The table below summarises the Group's residential mortgages portfolio:
Residential mortgage lending 30 September 2016 4 April 2016
GBPm % GBPm %
----------------------------- ------------ ----- --------- ---
Prime 135,088 80 129,973 80
Specialist:
Buy to let 29,902 18 28,646 18
Self-certified 2,209 1 2,338 1
Near prime 825 1 859 1
Sub prime 332 - 348 -
----------------------------- ------------ ----- --------- ---
33,268 20 32,191 20
Total residential mortgages 168,356 100 162,164 100
----------------------------- ------------ ----- --------- ---
Note: Self-certified, near prime and sub prime lending were discontinued in 2009.
Over the coming months the Group's residential mortgage portfolio is expected to shift towards prime lending as the tightening of interest cover and LTV thresholds continue to slow the growth in the buy to let portfolio.
Distribution of new business by borrower Half year to Half year to
type (by value) 30 September 30 September
2016 2015
% %
----------------------------------------- ------------- -------------
Prime:
Home movers 30 32
First time buyers 35 27
Remortgagers 18 20
Other 1 1
----------------------------------------- ------------- -------------
Total prime 84 80
Specialist:
Buy to let new purchases 4 8
Buy to let remortgagers 12 12
----------------------------------------- ------------- -------------
Total specialist 16 20
Total new business 100 100
----------------------------------------- ------------- -------------
Note: All new business measures exclude existing customers who are only switching products, and further advances.
Lending risk - Residential mortgages (continued)
Lending risk
Residential mortgage lending in the Group continues to have a low risk profile as demonstrated by a low level of arrears compared to the industry average. The Group's residential mortgages portfolio comprises a large number of relatively small loans which are broadly homogenous, have low volatility of credit risk outcomes and are intrinsically highly diversified in terms of the UK market and geographic segments.
LTV and lending risk concentration
The Group calculates LTV by weighting the account level LTV by loan balance to arrive at an average LTV. This approach is considered to most accurately reflect the exposure at risk to the Group.
Average LTV of loan stock 30 September 4 April 2016
2016
% %
-------------------------- ------------ ------------
Prime 53 54
Specialist 59 61
-------------------------- ------------ ------------
Group 54 55
-------------------------- ------------ ------------
Average LTV of new business Half year to Half year to
30 September 30 September
2016 2015
% %
---------------------------- ------------- -------------
Prime 72 70 Specialist (buy to let) 63 65 ---------------------------- ------------- ------------- Group 71 69 ---------------------------- ------------- -------------
Note: The LTV of new business excludes further advances.
LTV distribution of new business Half year to Half year to
30 September 30 September
2016 2015
--------------------------------
% %
-------------------------------- ------------- -------------
0% to 60% 25 26
60% to 75% 32 43
75% to 80% 9 9
80% to 85% 14 11
85% to 90% 16 10
90% to 95% 4 1
Over 95% - -
-------------------------------- ------------- -------------
Total 100 100
-------------------------------- ------------- -------------
Although the rate of growth has slowed in some areas, house prices continue to increase, reducing the average LTV of loan stock to 54% (4 April 2016: 55%).
The average LTV of new prime residential mortgages has increased to 72% (H1 2015/16: 70%) with the proportion greater than 80% increasing to 34% (H1 2015/16: 22%) as a direct result of the Group's strategy to extend its product offering at 95% LTV and support the first time buyer market. The growth in higher LTV lending, which reflects an increased commitment to lending to first time buyers, is monitored closely. Underwriting standards have been maintained which contain tighter credit controls for higher LTV lending. Lending remains within the Group's appetite.
From May 2016 the maximum LTV for buy to let was lowered from 80% to 75%.
Lending risk - Residential mortgages (continued)
Geographical concentration
Residential mortgage Greater Central Northern South South Scotland Wales Northern Total
balances by LTV London England England East West Ireland
and region England England
(excluding
London)
30 September 2016 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm %
----------------------- ------- -------- -------- ----------- -------- -------- ----- -------- ------- -----
Performing loans
Fully collateralised
LTV ratio:
Up to 50% 29,119 9,638 6,494 8,593 5,474 2,878 1,268 878 64,342
50% to 60% 11,940 5,597 3,830 4,691 3,047 1,644 719 376 31,844
60% to 70% 8,504 6,960 5,943 4,000 3,498 2,300 1,066 423 32,694
70% to 80% 4,369 4,804 5,743 2,056 2,147 2,658 1,237 342 23,356
80% to 90% 2,237 2,043 2,914 1,027 1,008 1,308 624 273 11,434
90% to 100% 126 194 453 110 82 157 104 113 1,339
------- -------- -------- ----------- -------- -------- ----- -------- -------
56,295 29,236 25,377 20,477 15,256 10,945 5,018 2,405 165,009 98.0
Not fully
collateralised
- Over 100% LTV
(A) 7 5 37 1 3 21 5 236 315 0.2
- Collateral value
on A 5 4 32 1 2 20 5 197 266
- Negative equity
on A 2 1 5 - 1 1 - 39 49
------- -------- -------- ----------- -------- -------- ----- -------- -------
Total performing
loans 56,302 29,241 25,414 20,478 15,259 10,966 5,023 2,641 165,324 98.2
----------------------- -----
Non-performing
loans (note i)
Fully collateralised
LTV ratio:
Up to 50% 553 170 111 129 73 43 26 28 1,133
50% to 60% 208 105 77 78 50 26 15 11 570
60% to 70% 83 120 123 70 61 46 20 13 536
70% to 80% 25 105 122 31 40 47 26 12 408
80% to 90% 11 52 99 7 11 25 17 10 232
90% to 100% 1 7 51 1 - 8 13 10 91
881 559 583 316 235 195 117 84 2,970 1.8
Not fully
collateralised
- Over 100% LTV
(B) - 1 9 - 1 2 2 47 62 -
------- -------- -------- ----------- -------- -------- ----- -------- -------
- Collateral value
on B - 1 8 - 1 2 2 37 51
- Negative equity
on B - - 1 - - - - 10 11
------- -------- -------- ----------- -------- -------- ----- -------- -------
Total non-performing
loans 881 560 592 316 236 197 119 131 3,032 1.8
-----------------------
Total residential
mortgages 57,183 29,801 26,006 20,794 15,495 11,163 5,142 2,772 168,356 100.0
----------------------- -----
Geographical
concentrations 34% 18% 15% 12% 9% 7% 3% 2% 100%
----------------------- ------- -------- -------- ----------- -------- -------- ----- -------- ------- -----
Lending risk - Residential mortgages (continued)
Residential mortgage Greater Central Northern South South Scotland Wales Northern Total
balances by LTV London England England East West Ireland
and region England England
(excluding
London)
4 April 2016 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm %
----------------------- ------- -------- -------- ----------- -------- -------- ----- -------- ------- -----
Performing loans
Fully collateralised
LTV ratio:
Up to 50% 26,991 8,795 5,866 7,855 5,051 2,711 1,178 785 59,232
50% to 60% 12,350 4,971 3,402 4,262 2,733 1,547 637 346 30,248
60% to 70% 8,465 6,636 5,052 4,363 3,460 2,095 903 390 31,364
70% to 80% 4,062 5,454 6,282 2,211 2,359 2,776 1,273 371 24,788
80% to 90% 1,559 2,210 3,135 894 918 1,380 657 271 11,024
90% to 100% 85 177 901 66 60 232 212 151 1,884
53,512 28,243 24,638 19,651 14,581 10,741 4,860 2,314 158,540 97.7
Not fully
collateralised
- Over 100% LTV
(A) 7 8 80 1 4 31 13 301 445 0.3
------- -------- -------- ----------- -------- -------- ----- -------- -------
- Collateral value
on A 6 7 73 1 3 29 13 248 380
- Negative equity
on A 1 1 7 - 1 2 - 53 65
Total performing
loans 53,519 28,251 24,718 19,652 14,585 10,772 4,873 2,615 158,985 98.0
----------------------- -----
Non-performing
loans (note i)
Fully collateralised
LTV ratio:
Up to 50% 522 161 107 127 73 43 27 26 1,086
50% to 60% 245 100 68 74 52 28 13 12 592
60% to 70% 110 131 108 76 60 42 20 12 559
70% to 80% 29 114 139 42 48 46 24 12 454
80% to 90% 7 74 98 7 17 28 19 12 262
90% to 100% 1 14 73 1 2 13 16 7 127
914 594 593 327 252 200 119 81 3,080 1.9
Not fully
collateralised
- Over 100% LTV
(B) - 3 25 2 1 3 5 60 99 0.1
------- -------- -------- ----------- -------- -------- ----- -------- -------
- Collateral value
on B - 3 22 1 1 3 5 46 81
- Negative equity
on B - - 3 1 - - - 14 18
------- -------- -------- ----------- -------- -------- ----- -------- -------
Total non-performing
loans 914 597 618 329 253 203 124 141 3,179 2.0
----------------------- ------- -------- -------- ----------- -------- -------- ----- -------- ------- -----
Total residential
mortgages 54,433 28,848 25,336 19,981 14,838 10,975 4,997 2,756 162,164 100.0
----------------------- ------- -------- -------- ----------- -------- -------- ----- -------- ------- -----
Geographical
concentrations 33% 18% 16% 12% 9% 7% 3% 2% 100%
----------------------- ------- -------- -------- ----------- -------- -------- ----- -------- ------- -----
Note:
i. Non-performing loans are all loans which are in arrears, including impaired loans with individually assessed impairment provisions.
The value of non-performing loans in negative equity has reduced to GBP62 million (4 April 2016: GBP99 million) due to a combination of increasing house prices and an overall reduction in non-performing loans.
House price growth in London is slowing as weaker investor demand, deteriorating affordability metrics and uncertainty caused by the vote to leave the EU have reduced demand at a time when supply has increased. Whilst there is currently no indication of a significant house price correction, the Group continues to monitor potential exposure to negative equity should house prices reverse. Stress tests have shown that even in the event of an extreme reduction in house prices this would not undermine the Group's strong capital position.
Arrears
Number of cases more than 3 months in 30 September 4 April 2016
arrears as percentage of total book 2016
--------------------------------------
% %
-------------------------------------- ------------ ------------
Prime 0.35 0.35
Specialist 0.93 0.90
-------------------------------------- ------------ ------------
Group 0.45 0.45
-------------------------------------- ------------ ------------
CML industry average 1.01 1.04
-------------------------------------- ------------ ------------
Lending risk - Residential mortgages (continued)
Impaired loans
Please refer to the Annual Report and Accounts 2016 for details of how the Group identifies impaired loans.
Residential mortgages by payment status 30 September 2016
Prime Specialist Total
lending lending
GBPm GBPm GBPm %
----------------------------------------------- -------- ---------- ------- -----
Performing:
Neither past due nor impaired 133,186 32,138 165,324 98.2
Non-performing
Past due up to 3 months 1,529 708 2,237 1.3
Impaired:
Past due 3 to 6 months 166 191 357 0.2
Past due 6 to 12 months 119 127 246 0.2
Past due over 12 months 80 86 166 0.1
Possessions 8 18 26 -
-----------------------------------------------
Total non-performing loans 1,902 1,130 3,032 1.8
----------------------------------------------- -------- ---------- ------- -----
Total residential mortgages 135,088 33,268 168,356 100.0
----------------------------------------------- -------- ---------- ------- -----
Non-performing loans as a % of total
residential mortgages 1.4% 3.4% 1.8%
Impairment provisions (GBPm) 25 71 96
Impairment provisions as a % of non-performing
balances 1.3% 6.3% 3.2%
Impairment provisions as a % of total
residential mortgages 0.02% 0.21% 0.06%
----------------------------------------------- -------- ---------- ------- -----
Residential mortgages by payment status 4 April 2016
Prime Specialist Total
lending lending
GBPm GBPm GBPm %
----------------------------------------------- -------- ---------- ------- -----
Performing:
Neither past due nor impaired 127,986 30,999 158,985 98.0
Non-performing
Past due up to 3 months 1,621 780 2,401 1.5
Impaired:
Past due 3 to 6 months 170 188 358 0.2
Past due 6 to 12 months 115 115 230 0.2
Past due over 12 months 75 91 166 0.1
Possessions 6 18 24 -
----------------------------------------------- -------- ---------- ------- -----
Total non-performing loans 1,987 1,192 3,179 2.0
----------------------------------------------- -------- ---------- ------- -----
Total residential mortgages 129,973 32,191 162,164 100.0
----------------------------------------------- -------- ---------- ------- -----
Non-performing loans as a % of total
residential mortgages 1.5% 3.7% 2.0%
Impairment provisions (GBPm) 25 77 102
Impairment provisions as a % of non-performing
balances 1.3% 6.5% 3.2%
Impairment provisions as a % of total
residential mortgages 0.02% 0.24% 0.06%
----------------------------------------------- -------- ---------- ------- -----
The provision balance has reduced to GBP96 million (4 April 2016: GBP102 million). This reflects a lower proportion of non-performing loans particularly in relation to balances which are past due up to 3 months, together with house price growth during the period.
Lending risk - Residential mortgages (continued)
Impairment loss/(reversal) for the Half year to Half year to
period 30 September 2016 30 September 2015
GBPm GBPm
----------------------------------- ------------------ ------------------
Prime 1 (1)
Specialist 4 (6)
Total 5 (7)
----------------------------------- ------------------ ------------------
The GBP5 million residential impairment loss for the period reflects the stable arrears performance and LTV profile, with house price improvements more modest than experienced in the prior year.
Interest only mortgages
The Group does not offer any new advances for prime residential mortgages on an interest only basis. However, the Group has 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). The Group manages maturities on interest only mortgages closely, engaging regularly with customers to ensure the loan is redeemed or to agree a strategy for repayment.
The majority of the specialist portfolio is made up of buy to let loans, of which approximately 90% are advanced on an interest only basis.
Interest only Term expired Due within Due after Due after Due after Total % of total
mortgages (still one year one year two years more than book
open) and before and before five years
two years five years
30 September
2016 GBPm GBPm GBPm GBPm GBPm GBPm %
-------------- ------------ ---------- ----------- ----------- ----------- ------ ----------
Prime 66 364 466 1,666 14,846 17,408 12.9
Specialist 88 184 252 1,068 28,017 29,609 89.0
-------------- ------------ ---------- ----------- ----------- ----------- ------ ----------
Total 154 548 718 2,734 42,863 47,017 28.0
-------------- ------------ ---------- ----------- ----------- ----------- ------ ----------
Interest only Term expired Due within Due after Due after Due after Total % of total
mortgages (still one year one year two years more than book
open) and before and before five years
two years five years
4 April
2016 GBPm GBPm GBPm GBPm GBPm GBPm %
-------------- ------------ ---------- ----------- ----------- ----------- ------ ----------
Prime 58 396 475 1,731 16,178 18,838 14.5
Specialist 98 174 254 1,002 27,084 28,612 88.9
-------------- ------------ ---------- ----------- ----------- ----------- ------ ----------
Total 156 570 729 2,733 43,262 47,450 29.3
-------------- ------------ ---------- ----------- ----------- ----------- ------ ----------
The proportion of interest only mortgages included within the prime residential portfolio has continued to fall and now stands at 12.9% (4 April 2016: 14.5%).
Interest only loans which are 'term expired (still open)' are, to the extent they are not otherwise in arrears, reported as performing. They are included within the 'Repair: Term extensions' category in the renegotiated loans tables on the following pages.
Lending risk - Residential mortgages (continued)
Renegotiated loans
Where residential mortgage customers face financial difficulty the Group seeks to find a solution to mitigate losses and, where possible, to support customers through a change in terms, forbearance or repair. Collectively, these loans are classified as renegotiated. Please refer to the Annual Report and Accounts 2016 for details of the Group's policies for renegotiated loans.
The following table provides the loans still on the books at the period end which have been subject to renegotiation (change in terms, forbearance or repair) since 2008:
Residential mortgage Greater Central Northern South South Scotland Wales Northern Total
balances London England England East England West Ireland
subject to renegotiation (excluding England
since January 2008 (note London)
i)
30 September 2016 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- ------- -------- -------- ------------- -------- -------- ----- -------- -------
Change in terms:
Payment holidays 844 643 594 429 273 221 105 125 3,234
Term extensions (within
term) 2,049 1,244 1,071 881 631 421 228 203 6,728
Payment concessions 300 183 194 112 79 43 40 29 980
Interest only conversions 613 302 297 211 157 80 60 82 1,802
---------------------------- ------- -------- -------- ------------- -------- -------- ----- -------- -------
3,806 2,372 2,156 1,633 1,140 765 433 439 12,744
Elimination of multiple
events (419) (287) (247) (187) (124) (74) (49) (68) (1,455)
---------------------------- ------- -------- -------- ------------- -------- -------- ----- -------- -------
Total change in terms 3,387 2,085 1,909 1,446 1,016 691 384 371 11,289
Forbearance:
Temporary interest only
concessions 346 320 335 174 111 99 55 58 1,498
Repair:
Capitalisations 175 102 107 68 41 16 22 9 540
Term extensions 173 99 80 68 55 36 21 21 553
---------------------------- ------- -------- -------- ------------- -------- -------- ----- -------- -------
348 201 187 136 96 52 43 30 1,093
Elimination of multiple
events (3) (1) (1) - (1) - - - (6)
---------------------------- ------- -------- -------- ------------- -------- -------- ----- -------- -------
Total repairs 345 200 186 136 95 52 43 30 1,087
Elimination of multiple
events (286) (229) (226) (128) (87) (55) (42) (45) (1,098)
Total renegotiated loans 3,792 2,376 2,204 1,628 1,135 787 440 414 12,776
---------------------------- ------- -------- -------- ------------- -------- -------- ----- -------- -------
Of which prime/specialist
lending:
Prime 3,129 2,022 1,829 1,390 956 724 369 352 10,771
Specialist 663 354 375 238 179 63 71 62 2,005
---------------------------- ------- -------- -------- ------------- -------- -------- ----- -------- -------
Total 3,792 2,376 2,204 1,628 1,135 787 440 414 12,776
Of which loans are still
on special terms (note
ii):
Prime 45 32 32 21 14 15 7 5 171
Specialist 6 3 3 1 4 1 2 - 20
---------------------------- ------- -------- -------- ------------- -------- -------- ----- -------- -------
Total 51 35 35 22 18 16 9 5 191
Impairment provisions
on renegotiated loans:
Individually assessed - - 1 - - - - - 1
Collectively assessed - 3 5 - 1 1 1 4 15
---------------------------- ------- -------- -------- ------------- -------- -------- ----- -------- -------
Total impairment provisions - 3 6 - 1 1 1 4 16
---------------------------- ------- -------- -------- ------------- -------- -------- ----- -------- -------
Lending risk - Residential mortgages (continued)
Residential mortgage Greater Central Northern South South Scotland Wales Northern Total
balances London England England East England West Ireland
subject to renegotiation (excluding England
since London)
January 2008 (note
i)
4 April 2016 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- ------- -------- -------- ------------- -------- -------- ----- -------- -------
Change in terms:
Payment holidays 890 686 627 459 287 234 112 130 3,425
Term extensions (within
term) 2,003 1,259 1,087 878 633 427 230 208 6,725
Payment concessions 292 179 190 111 75 41 39 27 954
Interest only conversions 625 311 292 219 163 81 61 79 1,831
---------------------------- ------- -------- -------- ------------- -------- -------- ----- -------- -------
3,810 2,435 2,196 1,667 1,158 783 442 444 12,935
Elimination of multiple
events (396) (285) (243) (186) (121) (73) (48) (65) (1,417)
---------------------------- ------- -------- -------- ------------- -------- -------- ----- -------- -------
Total change in terms 3,414 2,150 1,953 1,481 1,037 710 394 379 11,518
Forbearance:
Temporary interest
only concessions 356 335 350 182 115 100 56 59 1,553
Repair:
Capitalisations 180 105 110 72 43 17 22 9 558
Term extensions (at
term expiry) 175 95 78 67 53 35 19 19 541
---------------------------- ------- -------- -------- ------------- -------- -------- ----- -------- -------
355 200 188 139 96 52 41 28 1,099
Elimination of multiple
events (3) (1) (2) (1) (1) - - - (8)
---------------------------- ------- -------- -------- ------------- -------- -------- ----- -------- -------
Total repairs 352 199 186 138 95 52 41 28 1,091
Elimination of multiple
events (290) (236) (235) (133) (85) (55) (43) (44) (1,121)
Total renegotiated
loans 3,832 2,448 2,254 1,668 1,162 807 448 422 13,041
---------------------------- ------- -------- -------- ------------- -------- -------- ----- -------- -------
Of which prime/specialist
lending: Prime 3,183 2,106 1,895 1,436 988 747 381 362 11,098 Specialist 649 342 359 232 174 60 67 60 1,943 ---------------------------- ------- -------- -------- ------------- -------- -------- ----- -------- ------- Total 3,832 2,448 2,254 1,668 1,162 807 448 422 13,041 Of which loans are still on special terms: (note ii) Prime 42 34 27 23 14 15 6 3 164 Specialist 5 5 7 3 1 1 1 1 24 ---------------------------- ------- -------- -------- ------------- -------- -------- ----- -------- ------- Total 47 39 34 26 15 16 7 4 188 Impairment provisions on renegotiated loans: Individually assessed - - 1 - - - - 1 2 Collectively assessed - 2 4 1 1 1 1 3 13 ---------------------------- ------- -------- -------- ------------- -------- -------- ----- -------- ------- Total impairment provisions - 2 5 1 1 1 1 4 15 ---------------------------- ------- -------- -------- ------------- -------- -------- ----- -------- -------
Notes:
i. Information on renegotiated balances is reported since January 2008, reflecting the point in time from which this data was captured for reporting purposes.
ii. Special terms refer to loans which are actively subject to a payment holiday, a payment concession or a temporary interest only concession. They do not include term extensions, permanent interest only conversions or capitalisations.
For those cases that remain on special terms the average LTV is comparable with the overall stock position at 53% (4 April 2016: 55%).
Consumer banking
The Group's consumer banking portfolio comprises unsecured balances for overdrawn current accounts, credit cards and personal loans. During the period, total balances have increased by 1% to GBP3,909 million (4 April 2016: GBP3,869 million).
A number of new initiatives have been successfully launched during this period to meet more member needs. These include the introduction of a student account, which is expected to drive growth in both the number of accounts and balances. The credit risk of the portfolio, including any new segments, will be closely monitored and managed.
Lending risk - Consumer banking (continued)
The table below summarises the Group's consumer banking portfolio:
Consumer banking balances 30 September 2016 4 April 2016
GBPm % GBPm %
--------------------------- ----------- ------ -------- ----
Overdrawn current accounts 198 5 247 6
Personal loans 1,955 50 1,901 49
Credit cards 1,756 45 1,721 45
--------------------------- ----------- ------ -------- ----
Total consumer banking 3,909 100 3,869 100
--------------------------- ----------- ------ -------- ----
Despite particularly intense competition in the consumer banking market in recent months, balances have grown modestly reflecting our attractive pricing propositions and loyalty offers.
The difference in overdrawn current account balances between April 2016 and September 2016 is predominantly due to the position of the reporting date within the month.
Impaired loans
The Group monitors and reports lending risk on consumer banking portfolios primarily on delinquency status, since no security is held against the loans.
Please refer to the Annual Report and Accounts 2016 for details of the Group's processes for impaired loans.
Consumer banking by payment due 30 September 2016
status
Overdrawn Personal Credit Total
current loans cards
accounts
GBPm GBPm GBPm GBPm %
---------------------------------------- --------- -------- ------ ----- ---
Performing:
Neither past due nor impaired 164 1,822 1,607 3,593 92
Non-performing:
Past due up to 3 months 13 38 28 79
Impaired:
Past due 3 to 6 months 3 10 11 24
Past due 6 to 12 months 2 11 2 15
Past due over 12 months 3 15 - 18
----------------------------------------- --------- -------- ------ -----
21 74 41 136 3
Charged off (note i) 13 59 108 180 5
---------------------------------------- --------- -------- ------ -----
Total non-performing 34 133 149 316
Total consumer banking lending 198 1,955 1,756 3,909 100
---------------------------------------- --------- -------- ------ ----- ---
Non-performing loans as a % of
total (excluding charged off balances) 11% 4% 2% 3%
Impairment provisions excluding
charged off balances (GBPm) 12 44 38 94
Impairment provisions on charged
off balances (GBPm) 12 55 101 168
---------------------------------------- --------- -------- ------ -----
Total impairment provisions (GBPm) 24 99 139 262
Impairment provisions as a % of
non-performing loans (including
charged off balances) 71% 74% 93% 83%
Impairment provisions as a % of
total balances 12% 5% 8% 7%
---------------------------------------- --------- -------- ------ ----- ---
Lending risk - Consumer banking (continued)
Consumer banking by payment due 4 April 2016
status
Overdrawn Personal Credit Total
current loans cards
accounts
GBPm GBPm GBPm GBPm %
---------------------------------------- --------- -------- ------ ----- ---
Performing:
Neither past due nor impaired 206 1,742 1,576 3,524 91
Non-performing:
Past due up to 3 months 16 42 27 85
Impaired:
Past due 3 to 6 months 4 11 11 26
Past due 6 to 12 months 3 11 3 17
Past due over 12 months 4 16 - 20
---------------------------------------- --------- -------- ------ -----
27 80 41 148 4
Charged off (note i) 14 79 104 197 5
---------------------------------------- --------- -------- ------ -----
Total non-performing 41 159 145 345
Total consumer banking lending 247 1,901 1,721 3,869 100
---------------------------------------- --------- -------- ------ ----- ---
Non-performing loans as a % of
total (excluding charged off balances) 11% 4% 2% 4%
Impairment provisions excluding
charged off balances (GBPm) 13 46 38 97
Impairment provisions on charged
off balances (GBPm) 12 75 97 184
---------------------------------------- --------- -------- ------ -----
Total impairment provisions (GBPm) 25 121 135 281
Impairment provisions as a % of
non-performing balances (including
charged off balances) 61% 76% 93% 81%
Impairment provisions as % of
total balances 10% 6% 8% 7%
---------------------------------------- --------- -------- ------ ----- ---
Note:
i. Charged off balances relate to accounts which are closed to future transactions and are held on the balance sheet for an extended period (up to 36 months, depending on the product) whilst recovery procedures take place.
The performance and risk profile of the portfolio has improved during in the period. Provision balances have reduced primarily as a result of GBP17 million of expected write offs in relation to charged off balances within the personal loans portfolio. Non-performing balances (excluding charged off amounts) have decreased by GBP12 million to GBP136 million, driven by a reduction in early arrears in both the current account and personal loan portfolios.
Impairment losses
Impairment losses for the period Overdrawn Personal Credit Total
current loans cards
accounts
GBPm GBPm GBPm GBPm
--------------------------------- --------- -------- ------ -----
Half year to 30 September 2016 4 11 17 32
Half year to 30 September 2015 5 12 16 33
--------------------------------- --------- -------- ------ -----
Lending risk - Consumer banking (continued)
Renegotiated loans
The Group's approach is to reduce lending risk through good lending decisions. When customers do face financial difficulty the Group seeks to find a solution to support the customer and to mitigate losses, through either a proactive management of exposure, forbearance or arrears management. Collectively, loans subject to these actions are classified as renegotiated. Please refer to the Annual Report and Accounts 2016 for details of the Group's processes for renegotiating loans.
The balances at the balance sheet date which have been subject to a change in terms, forbearance or repair at any point since March 2010 are summarised in the table below. It is possible for borrowers to have more than one type of renegotiation and in this instance they are shown in both categories and multiple events are eliminated.
Balances subject to renegotiation Overdrawn Personal Credit Total
since March 2010 (note i) current accounts loans cards
30 September 2016 GBPm GBPm GBPm GBPm
------------------------------------- ----------------- -------- ------ -----
Change in terms 27 117 7 151
Forbearance 15 28 22 65
Repair 22 1 17 40
------------------------------------- ----------------- -------- ------ -----
Gross total 64 146 46 256
Elimination of multiple events (32) (17) (6) (55)
------------------------------------- ----------------- -------- ------ -----
Total 32 129 40 201
------------------------------------- ----------------- -------- ------ -----
Of which loans still on renegotiated
terms 19 91 15 125
------------------------------------- ----------------- -------- ------ -----
Balances subject to renegotiation Overdrawn Personal Credit Total
since March 2010 (note i) current loans cards
accounts
4 April 2016 GBPm GBPm GBPm GBPm
------------------------------------- --------- -------- ------ -----
Change in terms 29 126 8 163
Forbearance 16 30 23 69
Repair 21 1 19 41
------------------------------------- --------- -------- ------ -----
Gross total 66 157 50 273
Elimination of multiple events (32) (19) (8) (59)
------------------------------------- --------- -------- ------ -----
Total 34 138 42 214
------------------------------------- --------- -------- ------ -----
Of which loans still on renegotiated
terms 21 95 17 133
------------------------------------- --------- -------- ------ -----
Note:
i. Renegotiated balances information for consumer banking is reported since March 2010, reflecting the point in time from which this data was captured for reporting purposes.
Lending risk (continued)
Commercial lending
The Group holds a reducing portfolio of commercial loans. The registered social landlord and Project Finance assets make up 76% of the portfolio, are fully performing and remain stable. The commercial real estate (CRE) balances have been in active run-off since 2012 as part of the Group's strategy to dispose of non-core CRE assets.
Following a strategic review of the CRE business, it has been concluded that this is no longer key to the Group's vision for the future and as such the decision has been made to cease any further lending to new and existing CRE customers. The Group's book of existing CRE loans will continue to run off in line with their contractual terms. We will continue to maintain a dedicated service for each existing CRE customer throughout the remainder of their loan term. This will ultimately culminate in the closure of our CRE business.
Nationwide will continue to provide funding to registered social landlords and existing Project Finance customers.
The Group's commercial loan portfolio comprises the following:
Commercial lending balances 30 September 2016 4 April 2016
GBPm % GBPm %
----------------------------- ------------ ----- -------- ----
Commercial real estate (CRE) 2,764 24 3,009 25
Registered social landlords
(note i) 7,532 66 7,625 65
Project Finance (note ii) 1,158 10 1,197 10
----------------------------- ------------ ----- -------- ----
Total commercial lending 11,454 100 11,831 100
Fair value adjustment for
micro hedged risk 1,680 1,366
----------------------------- ------------ ----- -------- ----
Total 13,134 13,197
----------------------------- ------------ ----- -------- ----
Notes:
i. Loans to registered social landlords are secured on residential property.
ii. Loans advanced in relation to Project Finance are secured on cash flows from government or local authority backed contracts.
The registered social landlord portfolio, which represents 66% (4 April 2016: 65%) of total commercial lending balances, is long-term and low risk in nature. The portfolio is risk rated using the Group's internal rating models with the major drivers being financial strength, independent viability assessment ratings provided by the Homes and Communities Agency and the type and size of the registered social landlord. The distribution of exposures is weighted more towards the stronger risk ratings and, against a backdrop of a long history of zero defaults, the risk profile of the portfolio remains low.
The Project Finance portfolio is secured against contractual cash flows from projects procured under the UK Private Finance Initiative rather than physical assets. The majority of loans are secured on projects which are now operational and benefiting from secure long term cash flows, with only one case remaining in the construction phase.
There have been no losses incurred on either the registered social landlord or Project Finance portfolios, no amounts are in arrears and there are no instances of forbearance.
Lending risk - Commercial lending (continued)
Lending risk
Lending risk in the commercial loan portfolio is linked to delinquency and the availability of collateral to cover any loan balances. The Group adopts robust credit management policies and processes designed to recognise and manage the risks arising, or likely to arise, from the portfolio.
The following table shows the CRE portfolio split by LTV and region:
CRE lending balances by LTV and London South Rest of Total
region East UK
(note
i)
30 September 2016 GBPm GBPm GBPm GBPm %
------------------------------- ------ ----- ------- ----- ---
Performing loans
Fully collateralised
LTV ratio (note ii):
Less than 25% 238 20 53 311
25% to 50% 746 183 340 1,269
51% to 75% 422 131 408 961
76% to 90% 3 4 77 84
91% to 100% 1 12 7 20
------ ----- ------- -----
1,410 350 885 2,645 96
Not fully collateralised
- Over 100% LTV (A) - - 5 5 -
------ ----- ------- -----
- Collateral value on A - - 4 4
- Negative equity on A - - 1 1
------ ----- ------- -----
Total performing loans 1,410 350 890 2,650 96
------------------------------- ------ ----- ------- ----- ---
Non-performing loans
Fully collateralised
LTV ratio (note iii):
Less than 25% 6 - - 6
25% to 50% 5 5 7 17
51% to 75% 6 3 12 21
76% to 90% - 1 15 16
91% to 100% - - 4 4
------ ----- ------- -----
17 9 38 64 2
Not fully collateralised
- Over 100% LTV (B) 2 12 36 50 2
------ ----- ------- -----
- Collateral value on B - 2 20 22
- Negative equity on B 2 10 16 28
------ ----- ------- -----
Total non-performing loans 19 21 74 114 4
------------------------------- ------ ----- ------- ----- ---
Total CRE loans 1,429 371 964 2,764 100
------------------------------- ------ ----- ------- ----- ---
Geographical concentration 52% 13% 35% 100%
------------------------------- ------ ----- ------- ----- ---
Lending risk - Commercial lending (continued)
CRE lending balances by LTV and London South Rest of Total
region East UK
(note
i)
4 April 2016 GBPm GBPm GBPm GBPm %
------------------------------- ------ ----- ------- ----- ---
Performing loans
Fully collateralised
LTV ratio (note ii):
Less than 25% 136 24 60 220
25% to 50% 1,021 219 419 1,659
51% to 75% 329 111 390 830
76% to 90% 3 13 46 62
91% to 100% 1 - 5 6
------ ----- ------- -----
1,490 367 920 2,777 92
Not fully collateralised
- Over 100% LTV (A) - 3 3 6 -
------ ----- ------- -----
- Collateral value on A - 2 2 4
- Negative equity on A - 1 1 2
------ ----- ------- -----
Total performing loans 1,490 370 923 2,783 92
------------------------------- ------ ----- ------- ----- ---
Non-performing loans
Fully collateralised
LTV ratio (note iii):
Less than 25% 17 - 2 19
25% to 50% 10 9 5 24
51% to 75% 8 5 17 30
76% to 90% 3 - 18 21
91% to 100% - - 6 6
------ ----- ------- -----
38 14 48 100 4
Not fully collateralised
- Over 100% LTV (B) 7 52 67 126 4
------ ----- ------- -----
- Collateral value on B 5 36 47 88
- Negative equity on B 2 16 20 38
------ ----- ------- -----
Total non-performing loans 45 66 115 226 8
------------------------------- ------ ----- ------- ----- ---
Total CRE loans 1,535 436 1,038 3,009 100
------------------------------- ------ ----- ------- ----- ---
Geographical concentration 51% 14% 35% 100%
------------------------------- ------ ----- ------- ----- ---
Notes:
i Includes lending to borrowers in the Channel Islands.
ii. The LTV ratio is calculated using the gross carrying amount of the loan divided by the indexed value of the most recent independent external collateral valuation. The Investment Property Databank (IPD) monthly index is used.
iii. Non-performing loans include impaired loans and loans with arrears of less than three months which are not impaired.
There have been no significant changes to geographic concentrations in the book and overall credit quality has continued to improve.
Non-performing loans have reduced and now represent 4% of CRE balances (4 April 2016: 8%), whilst both the proportion of partially collateralised non-performing loans and the shortfall on collateral for non-performing loans have also reduced. These changes reflect the impact of improving book performance and managed exit activity to reduce exposure to assets that were outside of the Group's risk appetite or did not align to the Group's lending strategy.
Lending risk - Commercial lending (continued)
Credit risk concentrations
The following table provides details of the Group's sectoral and regional CRE concentrations together with an impairment analysis in respect of these concentrations:
CRE lending balances and impairment London South East Rest of Total
provisions by type and region UK (note
i)
30 September 2016 GBPm GBPm GBPm GBPm
------------------------------------ ------ ---------- --------- -----
Retail 438 207 269 914
Office 198 61 215 474
Residential 706 46 266 1,018
Industrial and warehouse 29 32 130 191
Leisure and hotel 47 24 67 138
Other 11 1 17 29
------------------------------------ ------ ---------- --------- -----
Total CRE lending 1,429 371 964 2,764
------------------------------------ ------ ---------- --------- -----
Impairment provision:
Retail 1 8 3 12
Office 2 1 2 5
Residential 1 - 5 6
Industrial and warehouse - - 12 12
Leisure and hotel - 1 6 7
Other - - 2 2
------------------------------------ ------ ---------- --------- -----
Total impairment provisions 4 10 30 44
------------------------------------ ------ ---------- --------- -----
CRE lending balances and impairment London South East Rest of Total
provisions by type and region UK
(note i)
4 April 2016 GBPm GBPm GBPm GBPm
------------------------------------ ------ ---------- --------- -----
Retail 459 235 317 1,011
Office 201 69 208 478
Residential 666 71 256 993
Industrial and warehouse 29 36 158 223
Leisure and hotel 88 25 87 200
Other 92 - 12 104
------------------------------------ ------ ---------- --------- -----
Total CRE lending 1,535 436 1,038 3,009
------------------------------------ ------ ---------- --------- -----
Impairment provision:
Retail 2 12 8 22
Office 4 1 3 8
Residential 1 - 5 6
Industrial and warehouse - - 12 12
Leisure and hotel 1 - 7 8
Other - - 3 3
------------------------------------ ------ ---------- --------- -----
Total impairment provisions 8 13 38 59
------------------------------------ ------ ---------- --------- -----
Note:
i. Includes lending to borrowers based in the Channel Islands.
Lending risk - Commercial lending (continued)
Arrears and impairment
No losses have been experienced on the registered social landlord or Project Finance portfolios and there is no non-performance within these portfolios. As a result, impairment provisions are only made against the CRE portfolio, as set out below.
CRE lending balances by payment 30 September 2016 4 April 2016
due status
----------------------------------------
GBPm % GBPm %
---------------------------------------- ----------- ------ -------- ----
Performing:
Neither past due nor impaired 2,650 96 2,783 92
Non-performing:
Past due up to 3 months but not
impaired (note i) 34 1 55 2
Impaired (note ii):
Past due up to 3 months 27 1 115 4
Past due 3 to 6 months 16 - 21 1
Past due 6 to 12 months 18 1 4 -
Past due over 12 months 19 1 28 1
Possessions (note iii) - - 3 -
----------- ------ -------- ----
Total non-performing balances 114 4 226 8
Total 2,764 100 3,009 100
---------------------------------------- ----------- ------ -------- ----
Impairment provisions
Individual 39 89 54 92
Collective 5 11 5 8
---------------------------------------- ----------- ------ -------- ----
Total impairment provisions 44 100 59 100
---------------------------------------- ----------- ------ -------- ----
Individual provisions as % of impaired
balances 49 32
Total provisions as % of non-performing
balances 39 26
Total provisions as % of total
gross balances 2 2
Estimated collateral:
Against loans past due but not
impaired 34 100 55 100
Against impaired loans 52 65 133 78
---------------------------------------- ----------- ------ -------- ---- Total collateral 86 75 188 83 ---------------------------------------- ----------- ------ -------- ----
Notes:
i. The status 'past due up to 3 months but not impaired' includes any asset where a payment due under contractual terms is received late or missed. The amount included is the entire financial asset rather than just the payment overdue.
ii. Impaired loans include those balances which are more than three months in arrears, or against which a provision is held.
iii. Possession balances represent loans for which the Group has taken ownership of security pending sale. Assets in possession are realised to derive the maximum benefit for all interested parties. The Group does not occupy or otherwise use for any purposes the repossessed assets.
Total non-performing loans, before provisions, have reduced by GBP112 million to GBP114 million, with a corresponding reduction of GBP15 million in total impairment provisions, reflecting the managed exit activity, improving book performance and an improvement in market conditions in the early part of the period.
Impairment reversal Half year to Half year to
30 September 30 September
2016 2015
GBPm GBPm
----------------------------------- ------------- -------------
Impairment reversal for the period (5) (27)
----------------------------------- ------------- -------------
Lending risk - Commercial lending (continued)
The improved CRE market conditions, including increased liquidity and capital values, have resulted in a net impairment reversal of GBP5 million. The higher reversal in the previous year reflects higher impaired balances impacted by improving market conditions.
Forbearance
The table below provides details of the CRE lending that is currently subject to forbearance, split by the concession events agreed. Please refer to the Annual Report and Accounts 2016 for details of the Group's policies for classifying lending in forbearance.
CRE lending subject to forbearance 30 September 2016 4 April 2016
-----------------------------------
GBPm % GBPm %
----------------------------------- ---------- ------- ------- -----
Covenant breach 39 8 54 9
Extension at maturity 65 13 42 7
Multiple forbearance events 384 78 484 82
Other 6 1 8 2
----------------------------------- ---------- ------- ------- -----
Total 494 100 588 100
----------------------------------- ---------- ------- ------- -----
There are no instances of forbearance in either the registered social landlord or Project Finance portfolios.
CRE exposures currently subject to forbearance have decreased to GBP494 million, principally as a result of the controlled exit from non-core higher risk loans, and now represent 18% of CRE loan balances (4 April 2016: 20%).
Treasury assets
The Group's treasury portfolio is held primarily for liquidity management purposes and, in the case of derivatives, for market risk management.
Treasury asset balances 30 September 4 April
2016 2016
GBPm GBPm
-------------------------------------------- ------------ -------
Cash 17,213 8,797
Loans and advances to banks 3,323 3,591
Investment securities 9,919 10,738
-------------------------------------------- ------------ -------
Treasury liquidity and investment portfolio 30,455 23,126
Derivative assets (note i) 6,180 3,898
-------------------------------------------- ------------ -------
Total treasury portfolio 36,635 27,024
-------------------------------------------- ------------ -------
Note:
i. Derivatives are classified as assets where their fair value is positive and liabilities where their fair value is negative. At 30 September 2016, the Group had derivative liabilities of GBP3,972 million (4 April 2016: GBP3,463 million).
Cash has increased to GBP17,213 million (4 April 2016: GBP8,797 million), reflecting the pre-funding of wholesale and Bank of England Funding for Lending Scheme (FLS) maturities. Legacy out of policy assets, included within investment securities, have reduced from GBP423 million to GBP371 million during the period through ongoing sales, maturities and amortisation. An impairment loss of GBP5 million (H1 2015/16: GBPnil) has been recognised in the income statement in respect of one asset held within the out of policy portfolio.
Managing treasury credit risk
Credit risk within the Treasury portfolio arises primarily from the instruments held for operational, liquidity and investment purposes. The Treasury Credit Risk function manages all aspects of credit risk in accordance with the Group's risk governance framework, details of which are provided in the Annual Report and Accounts 2016.
Lending risk - Treasury assets (continued)
Liquidity and investment portfolio
The Group's liquidity and investment portfolio held on the balance sheet at 30 September 2016 of GBP30,455 million (4 April 2016: GBP23,126 million) is held in two separate portfolios: liquid assets and other securities. The size of the portfolio fluctuates with movements reflecting legacy asset disposals, market prices and the Group's operational and strategic liquidity requirements. An analysis of the on-balance sheet portfolios by asset class, credit rating and geographical location of the issuers is set out below.
Liquidity and investment portfolio AAA AA A Other UK US Europe Other by credit rating (note i) 30 September 2016 GBPm % % % % % % % % ----------------------------------- ------ --- --- ----- --- ------ ----- Liquid assets: Cash and reserves at central banks 17,213 - 89 11 - 89 - 11 - Government bonds 5,875 5 95 - - 79 12 9 - Supranational bonds 464 88 12 - - - - - 100 Covered bonds 1,018 100 - - - 53 - 34 13 Residential mortgage backed securities (RMBS) 1,026 100 - - - 60 - 40 - Asset backed securities (other) 265 100 - - - 66 - 34 - Liquid assets total 25,861 11 81 8 - 82 3 13 2 ----------------------------------- ------ --- --- ----- --- ------ ----- Other securities: RMBS 422 25 13 52 10 74 - 23 3 Commercial mortgage backed securities (CMBS) 36 - 13 69 18 18 82 - - Collateralised loan obligations 494 84 16 - - 85 15 - - Covered bonds 34 - - 100 - - - 100 - Student loans 132 20 50 30 - - 100 - - Other Investments 153 - 33 26 41 39 28 33 - ----------------------------------- ------ --- --- ----- --- ------ ----- Other securities total 1,271 43 20 28 9 63 22 14 1 ----------------------------------- ------ --- --- ----- --- ------ ----- Loans and advances to banks (note ii) 3,323 - 47 38 15 74 4 16 6 Total 30,455 12 75 12 1 80 4 13 3 ----------------------------------- ------ --- --- ----- --- ------ ----- Liquidity and investment portfolio AAA AA A Other UK US Europe Other by credit rating (note i) 4 April 2016 GBPm % % % % % % % % ----------------------------------- ------ --- --- ----- ------ ----- Liquid assets: Cash and reserves at central banks 8,797 99 - 1 - 90 - 10 - Government bonds 6,321 82 18 - - 75 14 11 - Supranational bonds 522 90 10 - - - - - 100 Covered bonds 980 100 - - - 52 - 36 12 Residential mortgage backed securities (RMBS) 1,068 100 - - - 65 - 35 - Asset backed securities (other) 318 100 - - - 62 - 38 - Liquid assets total 18,006 92 7 1 - 78 5 13 4 ----------------------------------- ------ --- --- ----- ------ ----- Other securities: RMBS (note iii) 563 20 15 54 11 72 - 25 3 Commercial mortgage backed securities (CMBS) 40 - 16 67 17 16 84 - - Collateralised loan obligations 528 84 13 3 - 78 22 - - Covered bonds 31 - - 100 - - - 100 - Student loans (note iii) 145 22 50 26 2 6 94 - - Other investments 222 - 28 50 22 28 50 22 -
----------------------------------- ------ --- --- ----- ------ ----- Other securities total 1,529 39 19 34 8 58 26 15 1 ----------------------------------- ------ --- --- ----- ------ ----- Loans and advances to banks (note ii) 3,591 25 19 31 25 68 9 11 12 Total 23,126 79 10 7 4 75 7 13 5 ----------------------------------- ------ --- --- ----- ------ -----
Notes:
i. Ratings used are obtained from Standard & Poor's (S&P) in the majority of cases, from Moody's if there is no S&P rating available, and internal ratings are used if neither is available.
ii. Loans and advances to banks includes derivative collateral (CSA) and reverse repo balances.
iii. Comparatives have been restated for the reclassification of certain amounts based on underlying assets.
The change in credit rating profile of the liquidity and investment portfolio primarily reflects Standard & Poor's (S&P) downgrade of the UK from AAA to AA in June 2016.
Lending risk - Treasury assets (continued)
Country exposures
The Group holds GBP125 million (4 April 2016: GBP162 million) of securities which are domiciled in the peripheral Eurozone countries; these are all out of policy legacy assets. This exposure has decreased by 23% in the period due primarily to the disposal of Italian and Spanish mortgage backed assets and scheduled amortisation. The Group continues to actively manage these exposures.
In advance of the maturity of euro-denominated debt during the second half of the year, the Group's holding of cash in Ireland has been increased from GBP871 million to GBP1,927 million.
The following table summarises the Group's exposure to issuers outside the UK. The exposures are shown at their balance sheet carrying values.
Country exposures Cash Government Mortgage Covered Supra-national Loans Other Other Total
bonds backed bonds bonds to banks corporate assets
securities (note
i)
30 September GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
2016
------------------ ----- ---------- ----------- ------- -------------- --------- ---------- ------- -----
Finland - 246 - 25 - - - - 271
France - - - 58 - - 2 62 122
Germany - 236 - - - 264 - 77 577
Ireland 1,927 - - - - 30 - - 1,957
Italy - - - - - - 3 - 3
Netherlands - 44 417 - - - - - 461
Portugal - - 23 - - - - - 23
Spain - - 65 34 - - - - 99
Total Eurozone 1,927 526 505 117 - 294 5 139 3,513
------------------ ----- ---------- ----------- ------- -------------- --------- ---------- ------- -----
USA 10 725 30 - - 163 - 249 1,177
Rest of world
(note ii) - - 13 399 464 398 - - 1,274
------------------ ----- ---------- ----------- ------- -------------- --------- ---------- ------- -----
Total 1,937 1,251 548 516 464 855 5 388 5,964
------------------ ----- ---------- ----------- ------- -------------- --------- ---------- ------- -----
Country exposures Cash Government Mortgage Covered Supra-national Loans Other Other Total
bonds backed bonds bonds to banks corporate assets
securities (note
i)
4 April 2016 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ---- ---------- ----------- ------- -------------- --------- ---------- ------- -----
Finland - 242 - 23 - - - - 265
France - - - 52 - 60 4 66 182
Germany - 365 - - - 107 3 102 577
Ireland 871 - - - - 18 - - 889
Italy - - 21 - - - 3 - 24
Netherlands - 82 385 - - - - - 467
Portugal - - 22 - - - - - 22
Spain - - 85 31 - - - - 116
Total Eurozone 871 689 513 106 - 185 10 168 2,542
------------------ ---- ---------- ----------- ------- -------------- --------- ---------- ------- -----
USA 8 902 35 - - 350 - 365 1,660
Rest of world
(note ii) - - 17 383 522 627 - - 1,549
------------------ ---- ---------- ----------- ------- -------------- --------- ---------- ------- -----
Total 879 1,591 565 489 522 1,162 10 533 5,751
------------------ ---- ---------- ----------- ------- -------------- --------- ---------- ------- -----
Notes:
i. Other corporate exposures are held via a European commercial loan facility reported as part of loans and advances to customers.
ii. Rest of world exposure is to Australia, Canada, Denmark, Norway, Sweden and Switzerland.
None of the Group's exposures to Eurozone countries detailed in the table above are in default, and the Group has not incurred any impairment on these assets in the period.
Lending risk - Treasury assets (continued)
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. Details of the Group's market standard approach to derivative transactions are provided in the Annual Report and Accounts 2016.
The fair value of derivative assets at 30 September 2016 grew to GBP6,180 million (4 April 2016: GBP3,898 million). This is due to an increase in the value of derivatives held to hedge the Group's foreign currency liabilities, following the fall in the sterling exchange rate after the UK voted to leave the EU. The fair value of derivative liabilities was GBP3,972 million (4 April 2016: GBP3,463 million).
As a result of CSA netting arrangements, outstanding transactions with the same counterparty can be offset and settled net following a default or other predetermined event. Under CSA arrangements netting benefits of GBP2,858 million (4 April 2016: GBP2,020 million) are available and GBP3,226 million of collateral is held (4 April 2016: GBP1,804 million); cash is the only collateral held.
The following table shows the exposure to counterparty credit risk for derivative contracts after netting benefits and collateral:
Derivative credit exposure 30 September 2016 4 April 2016
Counterparty credit quality AA A BBB Total AA A BBB Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- ------- ------- ----- ------- ----- ------- ---- -------
Gross positive fair value
of contracts 2,386 3,209 585 6,180 1,128 2,770 - 3,898
Netting benefits (998) (1,293) (567) (2,858) (532) (1,488) - (2,020)
---------------------------- ------- ------- ----- ------- ----- ------- ---- -------
Net current credit exposure 1,388 1,916 18 3,322 596 1,282 - 1,878
Collateral (1,360) (1,857) (9) (3,226) (580) (1,224) - (1,804)
---------------------------- ------- ------- ----- ------- ----- ------- ---- -------
Net derivative credit
exposure 28 59 9 96 16 58 - 74
---------------------------- ------- ------- ----- ------- ----- ------- ---- -------
Financial risk
Financial risk is the risk of the Group having inadequate earnings, cash flow or capital to meet current or future requirements and expectations. Financial risk comprises:
-- Liquidity and funding risk -- Solvency risk -- Pension risk -- Market risk -- Earnings risk
Information on the Group's exposure to liquidity and funding risk, solvency risk, pension risk and earnings risk, including developments in the period, is provided in the subsequent sections of this report. The Group's exposure to market risk has not changed significantly since the financial year end; further information is available in the Annual Report and Accounts 2016.
Liquidity and funding risk
The Group's liquidity and funding levels continue to be within Board risk appetite and regulatory requirements.
The Group monitors its position relative to internal risk appetite and the regulatory short-term liquidity stress metric, the Liquidity Coverage Ratio (LCR). The Group's LCR at 30 September 2016 was 140.6% (4 April 2016: 142.6%), which reflects the Group's strategy of maintaining a LCR above 100% and represents a surplus to the UK regulatory minimum requirement of 80%, which will rise to 100% by January 2018.
The Group also monitors its position against the longer-term funding metric, the Net Stable Funding Ratio (NSFR), which is due to become a regulatory standard in January 2018. Based on interpretations of current regulatory requirements and guidance, the Group's NSFR at 30 September 2016 was 130.5% (4 April 2016: 127.9%) which exceeds the expected 100% minimum future requirement.
The Group monitors liquidity and funding risks on an ongoing basis. This includes consideration of the current geopolitical uncertainty, such as the impact of the UK's vote to leave the EU and the potential for a sustained global economic slowdown, which could have an impact on funding markets.
Overall, the Group's stable and diverse funding base and sufficient holdings of high-quality liquid assets combine to ensure that there is no significant risk that liabilities cannot be met as they fall due.
Further details of the Group's policies for the management of liquidity and funding risk are contained within the Annual Report and Accounts 2016.
Funding profile
Assets 30 September 4 April Liabilities 30 September 4 April
2016 2016 2016 2016
GBPbn GBPbn GBPbn GBPbn
--------------------------- ------------ ------- ----------------- ------------ -------
Retail mortgages 168.3 162.1 Retail funding 149.4 144.9
Treasury assets (including
liquidity portfolio) 30.5 23.1 Wholesale funding 55.3 45.8
Capital and
Other retail lending 3.6 3.6 reserves 14.6 13.2
Commercial/Other lending 13.2 13.1 Other liabilities 6.2 5.0
Other assets 9.9 7.0
--------------------------- ------------ ------- ----------------- ------------ -------
Total 225.5 208.9 Total 225.5 208.9
--------------------------- ------------ ------- ----------------- ------------ -------
The Group's loan to deposit ratio at 30 September 2016 was 117.7% (4 April 2016: 117.2%).
Financial risk - Liquidity and funding risk (continued)
Funding risk
Wholesale funding
On-balance sheet wholesale funding has increased by GBP9.5 billion to GBP55.3 billion, as set out in the table below. This reflects the ongoing prudent management of the Group's liquidity and funding, including an element of pre-funding of wholesale and Bank of England Funding for Lending Scheme (FLS) maturities. The wholesale funding portfolio is made up of a range of secured and unsecured instruments to ensure the Group has a diversified funding base across a range of instruments, currencies, maturities and investor types.
The table below sets out an analysis by currency of the Group's wholesale funding.
Wholesale funding 30 September 2016 4 April 2016
currency
GBP EUR USD Other Total % of GBP EUR USD Other Total % of
GBPbn GBPbn GBPbn GBPbn GBPbn total GBPbn GBPbn GBPbn GBPbn GBPbn total
------------------------ ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Repo and other secured
agreements 0.1 0.2 0.2 - 0.5 1 - - - - - -
Deposits, including
PEB balances 9.5 1.7 0.1 - 11.3 20 9.0 0.5 0.2 - 9.7 21
Certificates of deposit 4.2 0.3 0.3 - 4.8 9 4.7 - 0.4 - 5.1 11
Commercial paper - - 2.6 - 2.6 5 0.2 - 1.1 - 1.3 3
Covered bonds 3.3 12.1 - 0.2 15.6 28 2.5 11.1 - 0.2 13.8 30
Medium term notes 2.8 7.1 3.5 0.8 14.2 25 2.3 4.8 2.2 0.6 9.9 22
Securitisations 1.8 1.3 1.8 - 4.9 9 1.9 1.2 1.6 - 4.7 10
Other 0.3 0.7 0.1 0.3 1.4 3 0.2 1.0 0.1 - 1.3 3
------------------------ ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total 22.0 23.4 8.6 1.3 55.3 100 20.8 18.6 5.6 0.8 45.8 100
------------------------ ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
To mitigate cross-currency refinancing risk, the Group ensures it holds liquidity in each currency to cover at least the next ten business days of wholesale funding maturities.
The residual maturity of the wholesale funding book, on a contractual maturity basis, is set out below.
Wholesale funding Not more Over one Over three Over six Subtotal Over one Over Total
- residual than one month months months less than year but two years
maturity month but not but not but not one year not more
more than more than more than than two
three six months one year years
months
30 September GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
2016
-------------------- --------- ---------- ----------- ---------- ---------- --------- ---------- -----
Repo and other
secured agreements 0.5 - - - 0.5 - - 0.5
Deposits, including
PEB balances 6.0 1.6 1.8 1.7 11.1 0.2 - 11.3
Certificates
of deposit 1.2 2.3 1.3 - 4.8 - - 4.8
Commercial
paper 0.4 2.2 - - 2.6 - - 2.6
Covered bonds 1.4 - 0.1 0.7 2.2 0.8 12.6 15.6
Medium term
notes - - - 1.1 1.1 1.1 12.0 14.2
Securitisations 1.0 - 0.3 0.7 2.0 0.5 2.4 4.9
Other - - - - - - 1.4 1.4
-------------------- --------- ---------- ----------- ---------- ---------- --------- ---------- -----
Total 10.5 6.1 3.5 4.2 24.3 2.6 28.4 55.3
-------------------- --------- ---------- ----------- ---------- ---------- --------- ---------- -----
Of which secured 2.9 - 0.4 1.4 4.7 1.3 16.1 22.1
Of which unsecured 7.6 6.1 3.1 2.8 19.6 1.3 12.3 33.2
-------------------- --------- ---------- ----------- ---------- ---------- --------- ---------- -----
% of total 19.0 11.0 6.3 7.6 43.9 4.7 51.4 100.0
-------------------- --------- ---------- ----------- ---------- ---------- --------- ---------- -----
Financial risk - Liquidity and funding risk (continued)
Wholesale funding Not more Over one Over three Over six Subtotal Over one Over Total
- residual than one month months months less than year but two years
maturity month but not but not but not one year not more
more than more than more than than two
three six months one year years
months
4 April 2016 GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
-------------------- --------- ---------- ----------- ---------- ---------- --------- ---------- -----
Repo and other
secured agreements - - - - - - - -
Deposits, including
PEB balances 4.1 1.2 1.6 1.9 8.8 0.9 - 9.7
Certificates
of deposit 1.3 1.6 1.7 0.5 5.1 - - 5.1
Commercial
paper 0.3 0.9 0.1 - 1.3 - - 1.3
Covered bonds 0.1 - - 1.2 1.3 0.8 11.7 13.8
Medium term
notes - - - 0.9 0.9 0.6 8.4 9.9
Securitisations - - - 1.4 1.4 0.7 2.6 4.7 Other - - - - - - 1.3 1.3 -------------------- --------- ---------- ----------- ---------- ---------- --------- ---------- ----- Total 5.8 3.7 3.4 5.9 18.8 3.0 24.0 45.8 -------------------- --------- ---------- ----------- ---------- ---------- --------- ---------- ----- Of which secured 0.1 - - 2.6 2.7 1.5 15.3 19.5 Of which unsecured 5.7 3.7 3.4 3.3 16.1 1.5 8.7 26.3 -------------------- --------- ---------- ----------- ---------- ---------- --------- ---------- ----- % of total 12.6 8.1 7.4 12.9 41.0 6.6 52.4 100.0 -------------------- --------- ---------- ----------- ---------- ---------- --------- ---------- -----
The Group's wholesale funding ratio (wholesale funding as a proportion of total funding liabilities) was 27.2% at 30 September 2016 (4 April 2016: 24.8%). The wholesale funding ratio includes all balance sheet sources of funding (including securitisations) and therefore excludes off-balance sheet FLS drawings.
The proportion of on-balance sheet funding categorised as long-term (more than one year to maturity) is 56% (4 April 2016: 59%) which reflects an increase in shorter term deposits and commercial paper, with covered bond and securitisation maturities falling into the next 12 months also increasing.
Liquidity risk
Total liquidity
The Group ensures it has sufficient resources to meet day-to-day cash flow needs and to meet internal and regulatory liquidity requirements, which are calibrated to ensure the Group has sufficient liquidity, both in terms of amount and quality, in a range of stress scenarios and across multiple time horizons.
The table below sets out the sterling equivalent fair value of the liquidity portfolio, categorised by issuing currency. It includes off-balance sheet liquidity (GBP8 billion of off-balance sheet FLS treasury bills included in government bonds at 30 September) and excludes encumbered assets.
Liquid assets 30 September 2016 4 April 2016
GBP EUR USD Total GBP EUR USD Total
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
----------------------------- ----- ----- ----- ----- ----- ----- ----- -----
Cash and reserves at central
banks 15.5 1.9 - 17.4 7.9 0.9 - 8.8
Government bonds 12.7 0.1 0.5 13.3 13.4 0.5 0.9 14.8
Supranational bonds 0.3 - 0.2 0.5 0.4 - 0.1 0.5
Covered bonds 0.5 0.5 - 1.0 0.5 0.6 - 1.1
RMBS 0.6 0.4 - 1.0 0.7 0.3 0.1 1.1
Asset backed securities 0.2 0.1 - 0.3 0.2 0.1 - 0.3
Other securities 0.3 0.6 0.3 1.2 0.4 0.6 0.3 1.3
Total 30.1 3.6 1.0 34.7 23.5 3.0 1.4 27.9
----------------------------- ----- ----- ----- ----- ----- ----- ----- -----
The average combined month end balance of cash and reserves at central banks, government and supranational bonds during the period was GBP30.2 billion (4 April 2016: GBP22.8 billion).
At 30 September 2016, cash, government bonds (including FLS treasury bills) and supranational bonds included in the liquidity pool represented 128% (4 April 2016: 128%) of wholesale funding maturing in less than one year, assuming no rollovers.
Financial risk - Liquidity and funding risk (continued)
The Group intends to participate in the Bank of England's Term Funding Scheme (TFS) which provides cash secured against eligible collateral and has a flexible four year maturity.
Residual 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 final contractual maturity date (residual maturity). In practice, customer behaviours mean that liabilities are often retained for longer than their contractual maturities and assets are repaid faster.
The balance sheet structure and risks are managed and monitored by ALCO. For forecasting purposes, the Group uses judgement and past behavioural performance of each asset and liability class to anticipate likely cash flow requirements of the Group.
Residual Due less Due Due Due Due Due Due between Due after Total
maturity than between between between between between two and more
one month one and three six and nine one and five than
(note three and six nine and twelve two years years five
i) months months months months years
30 September GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
2016
------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- --------- -------
Financial
assets
Cash 17,213 - - - - - - - 17,213
Loans and
advances
to banks 2,979 - - - - - - 344 3,323
Available for
sale
investment
securities 2 14 190 36 107 158 2,582 6,773 9,862
Loans and
advances
to customers 2,936 1,260 1,905 1,878 1,858 7,199 21,173 146,917 185,126
Derivative
financial
instruments 85 106 38 111 114 236 1,855 3,635 6,180
Other
financial
assets (note
ii) 4 30 58 49 54 183 396 483 1,257
Total
financial
assets 23,219 1,410 2,191 2,074 2,133 7,776 26,006 158,152 222,961
------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- --------- -------
Financial
liabilities
Shares 106,747 2,891 5,114 5,394 6,217 9,130 6,584 1,338 143,415
Deposits from
banks 3,504 78 25 52 - 27 - - 3,686
------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- --------- -------
Of which repo 536 - - - - - - - 536
------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- --------- -------
Other
deposits 3,044 1,567 1,798 630 692 179 16 - 7,926
Due to
customers 3,325 1,049 1,002 244 216 112 37 - 5,985
Secured
funding
- ABS and
covered
bonds 2,396 15 440 324 1,068 1,347 7,522 8,485 21,597
Senior
unsecured
funding 1,574 4,474 1,258 1,236 216 1,061 6,542 5,692 22,053
Derivative
financial
instruments 39 13 25 37 66 287 689 2,816 3,972
Other
financial
liabilities
(note ii) - - - 3 1 8 19 - 31
Subordinated
liabilities - - - - - 108 722 2,076 2,906
Subscribed
capital
(note iii) - - - - - - - 435 435
------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- --------- -------
Total
financial
liabilities 120,629 10,087 9,662 7,920 8,476 12,259 22,131 20,842 212,006
------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- --------- -------
Off-balance
sheet
commitments
(note iv) 14,520 - - - - - - - 14,520
------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- --------- -------
Net liquidity
difference (111,930) (8,677) (7,471) (5,846) (6,343) (4,483) 3,875 137,310 (3,565)
------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- --------- -------
Cumulative
liquidity
difference (111,930) (120,607) (128,078) (133,924) (140,267) (144,750) (140,875) (3,565)
------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- --------- -------
Financial risk - Liquidity and funding risk (continued)
Residual Due less Due Due Due Due Due Due Due after Total
maturity than between between between between between between more
one month one and three six and nine one and two and than
(note three and six nine and twelve two years five five
i) months months months months years years
4 April 2016 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- --------- --------
Financial
assets
Cash 8,797 - - - - - - - 8,797
Loans and
advances
to banks 3,179 87 - - - - - 325 3,591
Available for
sale
investment
securities 6 15 14 1 178 352 3,680 6,366 10,612
Loans and
advances
to customers 2,825 1,256 1,929 1,810 1,823 7,124 20,237 141,803 178,807
Derivative
financial
instruments 25 151 128 102 30 227 994 2,241 3,898
Other
financial
assets (note
ii) 5 15 107 17 65 142 234 299 884
Total
financial
assets 14,837 1,524 2,178 1,930 2,096 7,845 25,145 151,034 206,589
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- --------- --------
Financial
liabilities
Shares 103,296 1,632 5,875 4,608 5,122 10,731 6,251 1,200 138,715
Deposits from
banks 1,658 184 168 41 19 - 25 - 2,095
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- --------- --------
Of which repo 122 - 5 - - - - - 127
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- --------- --------
Other
deposits 2,549 1,392 1,843 716 391 737 7 - 7,635
Due to
customers 3,563 543 1,347 345 215 126 62 - 6,201
Secured
funding
- ABS and
covered
bonds 65 19 43 2,238 323 1,524 7,002 8,263 19,477
Senior
unsecured
funding 1,637 2,478 1,810 315 1,040 632 3,878 4,818 16,608
Derivative
financial
instruments 31 9 23 33 84 338 647 2,298 3,463
Other
financial
liabilities
(note ii) 2 2 1 1 (1) - 8 - 13
Subordinated
liabilities - - - - - 114 669 1,034 1,817
Subscribed
capital
(note iii) - - - - - - - 413 413
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- --------- --------
Total
financial
liabilities 112,801 6,259 11,110 8,297 7,193 14,202 18,549 18,026 196,437
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- --------- --------
Off-balance
sheet
commitments
(note iv) 13,630 - - - - - - - 13,630
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- --------- --------
Net liquidity
difference (111,594) (4,735) (8,932) (6,367) (5,097) (6,357) 6,596 133,008 (3,478)
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- --------- --------
Cumulative
liquidity
difference (111,594) (116,329) (125,261) (131,628) (136,725) (143,082) (136,486) (3,478)
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- --------- --------
Notes:
i. Due less than one month includes amounts repayable on demand.
ii. Other financial assets and liabilities include the fair value adjustments for portfolio hedged risk and investments in equity shares.
iii. The principal amount for undated subscribed capital is included within the due more than five years column. On 17 October 2016, the Group issued notice to call GBP140 million of subscribed capital in December 2016.
iv. Off-balance sheet commitments include amounts payable on demand for unrecognised loan commitments and customer overpayments on residential mortgages, where the borrower is able to draw down the amount overpaid.
Asset encumbrance
Asset encumbrance arises from collateral pledged against secured funding and other collateralised obligations. The majority of asset encumbrance within the Group arises from the use of prime mortgage pools to collateralise the Covered Bond and Silverstone asset-backed funding programmes and from participation in the FLS. Encumbrance also results from repurchase transactions, voluntary excess collateral balances, participation in payment schemes and collateral posted for derivative margin requirements. Assets that have been used for any of these purposes cannot be utilised for other purposes and are classified as encumbered.
At 30 September 2016 the Group had GBP36,013 million (4 April 2016: GBP34,728 million) of externally encumbered assets with counterparties other than central banks. The Group also had GBP26,915 million (4 April 2016: GBP29,194 million) of pre-positioned and encumbered assets held at central banks and GBP151,255 million (4 April 2016: GBP136,349 million) of assets neither encumbered nor pre-positioned but capable of being encumbered.
Further details of the Group's policies for asset encumbrance are contained within the Annual Report and Accounts 2016.
Financial risk - Liquidity and funding risk (continued)
External credit ratings
During the period all of the major rating agencies reviewed the Society's credit ratings. The Society's short and long-term credit ratings at 18 November 2016 are as follows:
Credit ratings Long-term Short-term Tier 2 Date of last rating Outlook
action / confirmation
----------------- --------- ---------- ------ ---------------------- --------
Standard & Poor's A A-1 BBB June 2016 Negative
Moody's Aa3 P-1 Baa1 June 2016 Negative
Fitch A F1 A- May 2016 Positive
----------------- --------- ---------- ------ ---------------------- --------
In May 2016, Fitch revised Nationwide's outlook to positive from stable reflecting the potential for increased subordinated debt issuance leading to lower than expected losses for the Society's deposits and senior unsecured debt.
In June 2016, Moody's upgraded Nationwide's deposit and senior unsecured ratings to Aa3 from A1. This reflected the benefit of the recent issuance of senior unsecured debt leading to improved loss absorbency.
Since the result of the EU referendum was announced, all three rating agencies have taken action on their UK sovereign rating. On 28 June 2016, Moody's placed Nationwide's long term rating on negative outlook. This was part of a sector-wide action involving all UK banks and building societies and Nationwide was not singled out. On 7 July 2016, Standard & Poor's placed Nationwide, along with various other UK financial institutions, on negative outlook as they now see a negative trend for UK banking economic risk.
Solvency risk
Solvency risk is the risk that the Group fails to maintain sufficient capital to absorb losses throughout a full economic cycle and sufficient to maintain the confidence of current and prospective investors, members, the Board and regulators. Further information on solvency risk and how it is managed by the Group can be found in the Annual Report and Accounts 2016.
Capital position
The capital disclosures included in this report are on a Capital Requirements Directive IV (CRD IV) end point basis unless otherwise stated. This assumes that all CRD IV requirements are in force during the period, with no transitional provisions permitted. In addition, the disclosures are on a Group (consolidated) basis, including all subsidiary entities.
The Group's capital and leverage ratios have remained well in excess of regulatory requirements with a Common Equity Tier 1 (CET1) ratio of 23.3% (4 April 2016: 23.2%) and a leverage ratio of 4.0% (4 April 2016: 4.2%). The CET1 ratio has remained broadly stable due to a good financial performance, with GBP502 million of profit after tax for the period being offset by an increase in the pension deficit which reduced the general reserve by GBP405 million. The table below reconciles the general reserves to total regulatory capital.
Financial risk - Solvency risk (continued)
Total regulatory capital 30 September 4 April
2016 2016
GBPm GBPm
-------------------------------------------------------- ------------- --------
General reserve (note i) 8,965 8,921
Core capital deferred shares (CCDS) 531 531
Revaluation reserve 67 64
Available for sale reserve (20) (8)
Regulatory adjustments and deductions:
------------- --------
Foreseeable distributions (note ii) (42) (42)
Prudent valuation adjustment (note iii) (47) (55)
Own credit and debit valuation adjustments (note
iv) (1) (2)
Intangible assets (note v) (1,165) (1,120)
Goodwill (note v) (12) (12)
Excess of regulatory expected losses over impairment
provisions (note vi) (209) (264)
------------- --------
Total regulatory adjustments and deductions (1,476) (1,495)
-------------------------------------------------------- ------------- --------
Common Equity Tier 1 capital 8,067 8,013
-------------------------------------------------------- ------------- --------
Additional Tier 1 capital securities (AT1) 992 992
-------------------------------------------------------- ------------- --------
Total Tier 1 capital 9,059 9,005
-------------------------------------------------------- ------------- --------
Dated subordinated debt (note vii) 2,628 1,628
Collectively assessed impairment allowances 19 21
-------------------------------------------------------- ------------- --------
Tier 2 capital 2,647 1,649
-------------------------------------------------------- ------------- --------
Total regulatory capital 11,706 10,654
-------------------------------------------------------- ------------- --------
Solvency ratios % %
Common Equity Tier 1 ratio 23.3 23.2
Total Tier 1 capital ratio 26.2 26.1
Total regulatory capital ratio 33.8 30.9
-------------------------------------------------------- ------------- --------
Notes:
i. The general reserve includes independently verified profits for the period to 30 September 2016.
ii. Foreseeable distributions in respect of CCDS and AT1 securities are deducted from CET1 capital under CRD IV.
iii. A prudent valuation adjustment (PVA) is applied in respect of fair valued instruments as required under regulatory capital rules.
iv. 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.
v. Intangible assets and goodwill do not qualify as capital for regulatory purposes.
vi. The net regulatory capital expected loss in excess of accounting impairment provisions is deducted from CET1 capital, gross of tax.
vii. Subordinated debt includes fair value adjustments related to changes in market interest rates, adjustments for unamortised premiums and discounts that are included in the consolidated balance sheet, and any amortisation of the capital value of Tier 2 instruments required by regulatory rules for instruments with fewer than five years to maturity.
The Group's CET1 ratio on a transitional basis is in line with end point at 23.3% (4 April 2016: 23.2%). The total Tier 1 capital ratio and total regulatory capital ratio are 27.4% (4 April 2016: 27.3%) and 35.1% (4 April 2016: 32.2%) respectively on a transitional basis, as PIBS and some additional subordinated debt instruments qualify under grandfathering provisions under CRD IV.
Tier 2 capital has increased following the issuance of $1.25 billion of qualifying Tier 2 subordinated debt with a coupon of 4% and a maturity of 10 years. Detailed information on the key features of the Group's other capital instruments can be found within the Group's annual Pillar 3 Disclosure 2016 at nationwide.co.uk
A breakdown of the movements in regulatory capital can be found in the Appendix.
RWAs have increased by GBP161 million since 4 April 2016, to GBP34,636 million. Counterparty credit risk and credit value adjustment RWAs have increased due to higher derivative market values. Residential mortgage RWAs have decreased as a result of improved book quality from rising house prices, which outweighed the increase in mortgage balances.
Financial risk - Solvency risk (continued)
A breakdown in the Group's RWAs is set out in the table below. Additional details, including minimum Pillar 1 capital requirements and a RWA flow table, are contained in the Appendix. Details on how RWAs are calculated can be found in the Group's annual Pillar 3 Disclosure 2016 at nationwide.co.uk
Breakdown of RWAs RWAs at RWAs at
30 September 4 April
2016 2016
GBPm GBPm
--------------------------------------- -------------- ---------
Credit risk:
Residential mortgages 13,853 14,086
Unsecured lending 5,809 5,621
Commercial 6,096 6,194
Treasury 867 1,039
Counterparty credit risk (note i) 773 598
Credit valuation adjustment (note i) 883 698
Other (note ii) 1,751 1,635
--------------------------------------- -------------- ---------
Total credit risk 30,032 29,871
Operational risk 4,604 4,604
Market risk (note iii) - -
--------------------------------------- -------------- ---------
Total 34,636 34,475
--------------------------------------- -------------- ---------
Notes:
i. Counterparty credit risk and credit valuation adjustment credit risk relate to derivative financial instruments and repurchase agreements.
ii. Other relates to fixed and other assets and equities held on the balance sheet.
iii. The Group has elected to set this to zero, as permitted by the CRR, as exposure is below the threshold of 2% of own funds.
Nationwide's latest Pillar 2A Individual Capital Guidance (ICG) was received in August 2016 following an Individual Capital Adequacy Assessment Process (ICAAP). The ICG is a point in time estimate by the PRA (which may change over time) of the amount of capital required to be held to meet risks partly covered by Pillar 1, such as credit concentration and operational risk, and those risks not covered by Pillar 1, such as pensions and interest rate risk. It equates to circa GBP2.2 billion, of which at least circa GBP1.3 billion must be met by CET1 capital (previously circa GBP2.2 billion, of which at least circa GBP1.2 billion must be met by CET1 capital). This amount is equivalent to 6.5% of RWAs as at 30 September 2016, reflecting the Group's low average risk weight, given that approximately 75% of the Group's total assets are in the form of secured residential mortgages.
Leverage
CRD IV requires firms to calculate a non-risk based leverage ratio, to supplement risk-based capital requirements. Our leverage ratio is calculated using the Capital Requirements Regulation (CRR) definition of Tier 1 for the capital amount and the Delegated Act definition of the exposure measure and is reported on an end point basis. We manage the risk of excessive leverage through regular monitoring and reporting of the leverage ratio, which forms part of the Group's risk appetite framework. Further information can be found within the Group's annual Pillar 3 Disclosure 2016 at nationwide.co.uk
The leverage ratio decreased to 4.0% (4 April 2016: 4.2%) due to a higher pension deficit as profits have broadly offset the increase in leverage exposure of GBP14,705 million. Balance sheet growth was driven by increased mortgage balances and liquid assets, in particular central bank reserves.
The table below provides further detail on the components of the exposures measure:
Leverage ratio 30 September 4 April
2016 2016
GBPm GBPm
----------------- ------------- --------
Tier 1 capital 9,059 9,005
Total exposures 227,886 213,181
Leverage ratio 4.0% 4.2%
----------------- ------------- --------
A more detailed breakdown of the leverage exposure is contained in the Appendix.
Financial risk - Solvency risk (continued)
In August, the PRA announced a modification to the calculation of leverage exposure for the purposes of the UK leverage ratio framework by excluding central bank reserves. Under the modified basis of measurement the Group's leverage ratio at 30 September 2016 is 4.3% (4 April 2016: 4.4%). The permission to modify the basis of measurement for the purposes of the UK regulatory regime does not affect the requirement to calculate and report leverage in accordance with the CRR as disclosed in the table above.
Regulatory developments
The Group continues to monitor regulatory developments that could lead to an increase in capital requirements and will remain engaged in the development of the regulatory approach to ensure it is prepared for any change.
We expect to have a steady state leverage ratio requirement of 3.75% based on the UK leverage ratio framework, which comprises a minimum requirement of 3%, a supplementary leverage ratio buffer of 0.35% and Countercyclical Leverage Ratio Buffer (CCyLB) of 0.4%. The Financial Policy Committee (FPC) could set a CCyLB of up to 0.9% (i.e. a total leverage requirement of 4.25%) if it deems risks to be elevated; however, following recent guidance on the CCyLB, Nationwide's minimum leverage requirements are expected to remain at 3% until at least June 2017.
Whilst we continue to calculate and disclose our leverage ratio based on the CRR methodology, we will also monitor our leverage requirements using the PRA's modified leverage exposure, as announced in August 2016. The Basel Committee on Banking Supervision (BCBS) and the European Banking Authority (EBA) are currently reviewing the leverage ratio requirement for banks and building societies, but it is expected that the UK leverage ratio framework will remain the Group's binding requirement. We expect our leverage ratio to remain above 4% in the medium term reflecting our desire to maintain capital levels above binding regulatory requirements given that this will also support our future Minimum Requirement for own funds and Eligible Liabilities (MREL) requirements, which are explained below.
As part of the European Bank Recovery and Resolution Directive (BRRD), the Bank of England (BoE), in its capacity as the UK resolution authority, has published a policy confirming the UK MREL framework. Whilst we await our formal individual requirement from the BoE, we expect to have a MREL requirement equal to double minimum capital requirements plus capital buffers from 2020. The Group is confident it has a strong foundation from which to meet the requirement, and has recently issued Tier 2 capital which will support this.
The BCBS is expected to finalise its revisions to the standardised approach for credit and operational risks in late 2016. We do not believe that these will lead to a material increase in capital requirements for the Group. Whilst the revised standardised approach is due to be used as a basis for a floor for minimum capital requirements, the calibration of this has not yet been published. In addition, a BCBS consultation proposing constraints on the use of IRB approaches for credit risk was published in March 2016 and a PRA consultation on residential risk weights, proposing revised expectations for IRB models, was published in July 2016. These proposals could lead to higher risk weights for certain portfolios in the medium term.
During the summer of 2016, the major UK banks and building societies, including Nationwide, took part in the third of the PRA's annual concurrent stress tests, which assessed the resilience to a severe slowdown in the UK and global economies. The results of the 2016 concurrent stress test are expected on 30 November 2016.
Financial risk (continued)
Pension risk
The Group has funding obligations to defined benefit pension schemes, the most significant being the Nationwide Pension Fund (the Fund). Further information, including key risk factors, is set out in the Annual Report and Accounts 2016.
There has been a significant increase in the Group's retirement benefit deficit, from GBP213 million to GBP723 million, since 4 April 2016. This has been driven by changes in the economic environment associated with the EU referendum, which have impacted key risk factors such as long-term interest rates and inflation, and caused the value of the Fund's liabilities to increase significantly. Assets performed strongly over the period, driven by increases in bond and equity valuations; however this was more than offset by the increase in the value of the liabilities.
The latest triennial valuation of the Fund, which has an effective date of 31 March 2016, is currently underway. Employer contributions in future years, including a new deficit recovery plan, are expected to be agreed by the Group and the Trustee by mid-2017.
The Group continues to actively engage with the Trustee to ensure broad alignment on investment objectives and implementation. This is supported by a joint investment working group which considers specific risk management initiatives. This includes, but is not limited to, investment strategy de-risking and diversification.
Over the period, approximately GBP350 million of equities were sold and reinvested into credit and liability matching assets to reduce risk and increase investment diversification. Furthermore, the Fund transacted approximately GBP250 million of long-dated inflation swaps to further reduce its exposure to inflation risk. These activities have partially offset the impact of the adverse economic environment on the Fund's deficit.
Further information on the pension deficit as at 30 September 2016 is included in note 20 of the consolidated interim financial statements.
Earnings risk
Earnings risk is defined as the risk that the Group's sources of income are unable to continue to add the expected value, due to changes in market, regulatory or other environmental factors. Further information on the Group's strategy for managing and how it seeks to mitigate earnings risk is available in the Business and Risk Report in the Annual Report and Accounts 2016.
Following the EU referendum and the subsequent reduction in the base rate to 0.25% there is an increased risk that interest rates will remain lower for longer. This is expected to have an adverse impact on earnings for the UK Retail Banking sector. Furthermore, the economic uncertainty since the referendum may reduce the expected growth in the mortgage market and increase the risk of credit losses in the medium term.
The Group will continue to monitor the external economic environment to identify and mitigate any threats to achieving its forecasted earnings.
Operational risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. The Group's operational risk profile continues to be informed by risk assessments from the business and by review and challenge from internal teams and committees.
The Annual Report and Accounts 2016 details our risk profile, environment and outlook; developments during the period are outlined below.
Consistent with the position at the financial year end, the majority of the Group's operational risk events continue to be recorded against two of the Basel II categories: 'External Fraud' and 'Clients, Products and Business Practices' and are categorised as having minor impact. During the period, the Group had one significant operational incident which resulted in restricted access to the previous version of the Mobile Banking application over three days. Following a full investigation, remediation activities have been carried out to prevent a reoccurrence.
Over the last six months, the external operational risk environment has continued to see a number of high profile cyber-attacks and failures of technology infrastructures. The increased use of digital banking services means that the financial services sector is seeing increased expectations of an 'always on' 24/7 service and lower tolerance of system unavailability combined with heightened concerns over the security of banking systems. The Group is committed to protecting both itself and its members from the threat of fraudulent attacks by increasingly sophisticated cyber criminals and continues to invest in security and detection capabilities, designed to ensure it can respond to such threats effectively. As part of this ongoing commitment, the Group has also recently announced the appointment of a number of external experts to its IT Strategy and Resilience Committee.
During the period, the Group successfully implemented the first change of the base rate since 2009. The Group continues to keep plans for the operational impact of any future changes to the interest rate under regular review, to ensure that we have the capacity to respond to customer needs.
Conduct and compliance risk
Conduct and compliance risk is defined as the risk that the Group exercises inappropriate judgement or makes errors in the execution of its business activities, leading to non-compliance with regulation or legislation, market integrity being undermined, or an unfair outcome being created for customers. The associated risk management framework has not substantially changed from the position reported in the Annual Report and Accounts 2016. However, further activity is underway to ensure that the management and measurement of conduct risk is effectively embedded across the Group.
In line with the outlook provided in the Annual Report and Accounts 2016, the Group will continue to develop its service propositions to meet the changing demands and behaviours of customers.
During the period, the outcome of the EU referendum has given rise to a number of potential uncertainties but, as a UK-focused building society, the direct impact of the vote to leave the EU on the Group is likely to be limited. The potential impact of the vote in relation to the Group's business is, though, being considered on an ongoing basis, including potential changes to law and regulation that may occur when the UK leaves the EU.
Consolidated interim financial statements
Contents
Page
Consolidated income statement 54
Consolidated statement of comprehensive income 55
Consolidated balance sheet 56
Consolidated statement of movements in members' interests
and equity 57
Consolidated cash flow statement 58
Notes to the consolidated interim financial statements 59
Consolidated income statement
(Unaudited)
Notes Half year Half year
to to
30 September 30 September
2016 2015
GBPm GBPm
Interest receivable and similar income 3 2,576 2,613
Interest expense and similar charges 4 (1,127) (1,056)
--------------------------------------------- ------ -------------- --------------
Net interest income 1,449 1,557
Fee and commission income 204 212
Fee and commission expense (108) (91)
Income from investments - 2
Other operating income 5 97 3
Gains from derivatives and hedge accounting 6 77 14
Total income 1,719 1,697
Administrative expenses 7 (938) (866)
Impairment losses on loans and advances 8 (32) -
Impairment losses on investment securities (5) -
Provisions for liabilities and charges 18 (48) (29)
Profit before tax 696 802
Taxation 9 (194) (166)
----------------------------------------------------- -------------- --------------
Profit after tax 502 636
----------------------------------------------------- -------------- --------------
The notes on pages 59 to 83 form an integral part of these consolidated interim financial statements.
Consolidated statement of comprehensive income
(Unaudited)
Notes Half year Half year
to to
30 September 30 September
2016 2015
GBPm GBPm
-------------------------------------------------------- -------------- --------------
Profit after tax 502 636
Other comprehensive (expense)/income:
Items that will not be reclassified to
the income statement
Remeasurements of retirement benefit obligations:
Retirement benefit remeasurements before
tax (552) 46
Taxation 147 (9)
20 (405) 37
Revaluation of property:
Adjustments to taxation in respect of
prior periods 3 -
(402) 37
Items that may subsequently be reclassified
to the income statement
Cash flow hedge reserve:
Fair value movements taken to members'
interests and equity 2,669 (54)
Amount transferred to income statement (2,264) (67)
Taxation (95) 24
6 310 (97)
Available for sale reserve:
Fair value movements taken to members'
interests and equity 95 (54)
Amount transferred to income statement (112) 6
Taxation 5 14
(12) (34)
Other comprehensive expense (104) (94)
Total comprehensive income 398 542
The notes on pages 59 to 83 form an integral part of these consolidated interim financial statements.
Consolidated balance sheet
(Unaudited)
Notes 30 September 4 April
2016 2016
GBPm GBPm
Assets
Cash 17,213 8,797
Loans and advances to banks 3,323 3,591
Available for sale investment
securities 9,862 10,612
Derivative financial instruments 6,180 3,898
Fair value adjustment for portfolio
hedged risk 1,197 756
Loans and advances to customers 11 185,126 178,807
Investments in equity shares 57 126
Intangible assets 1,221 1,191
Property, plant and equipment 846 823
Investment properties 8 8
Accrued income and expenses
prepaid 272 166
Deferred tax 168 35
Other assets 73 129
Total assets 225,546 208,939
Liabilities
Shares 143,415 138,715
Deposits from banks 3,686 2,095
Other deposits 7,926 7,635
Due to customers 12 5,985 6,201
Fair value adjustment for portfolio
hedged risk 31 13
Debt securities in issue 43,650 36,085
Derivative financial instruments 3,972 3,463
Other liabilities 508 414
Provisions for liabilities
and charges 18 298 343
Accruals and deferred income 297 288
Subordinated liabilities 13 2,906 1,817
Subscribed capital 13 435 413
Deferred tax 236 186
Current tax liabilities 203 128
Retirement benefit obligations 20 723 213
Total liabilities 214,271 198,009
Members' interests and equity
Core capital deferred shares 21 531 531
Other equity instruments 22 992 992
General reserve 8,965 8,921
Revaluation reserve 67 64
Cash flow hedge reserve 740 430
Available for sale reserve (20) (8)
Total members' interests and
equity 11,275 10,930
Total members' interests, equity and liabilities 225,546 208,939
The notes on pages 59 to 83 form an integral part of these consolidated interim financial statements.
Consolidated statement of movements in members' interests and equity
For the period ended 30 September 2016
(Unaudited)
Core Other General Revaluation Cash flow Available Total
capital equity reserve reserve hedge for sale
deferred instruments reserve reserve
shares
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 5 April 2016 531 992 8,921 64 430 (8) 10,930
Profit for the
period - - 502 - - - 502
Net remeasurements
of retirement
benefit obligations - - (405) - - - (405)
Net revaluation
of property - - - 3 - 3
Net movement in
cash flow hedge
reserve - - - - 310 - 310
Net movement in
available for
sale reserve - - - - - (12) (12)
Total comprehensive
income - - 97 3 310 (12) 398
Distribution to
the holders of
core capital deferred
shares - - (28) - - - (28)
Distribution to
the holders of
Additional Tier
1 capital* - - (25) - - - (25)
At 30 September
2016 531 992 8,965 67 740 (20) 11,275
For the period ended 30 September 2015
(Unaudited)
Core Other General Revaluation Cash flow Available Total
capital equity reserve reserve hedge for sale
deferred instruments reserve reserve
shares
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 5 April 2015 531 992 7,995 68 129 26 9,741
Profit for the
period - - 636 - - - 636
Net remeasurements
of retirement
benefit obligations - - 37 - - - 37
Net movement in
cash flow hedge
reserve - - - - (97) - (97)
Net movement in
available for
sale reserve - - - - - (34) (34)
Total comprehensive
income - - 673 - (97) (34) 542
Distribution to
the holders of
core capital deferred
shares - - (28) - - - (28)
Distribution to
the holders of
Additional Tier
1 capital* - - (28) - - - (28)
At 30 September
2015 531 992 8,612 68 32 (8) 10,227
*The distribution to the holders of Additional Tier 1 capital is shown net of an associated tax credit of GBP9 million (H1 2015/16: GBP6 million).
The notes on pages 59 to 83 form an integral part of these consolidated interim financial statements.
Consolidated cash flow statement
(Unaudited)
Notes Half year Half year
to to
30 September 30 September
2016 2015
GBPm GBPm
Cash flows generated from/(used in)
operating activities
Profit before tax 696 802
Adjustments for:
Non-cash items included in profit
before tax 24 95 (86)
Changes in operating assets and liabilities 24 610 (733)
Interest paid on subordinated liabilities (40) (48)
Interest paid on subscribed capital (11) (11)
Taxation (133) (115)
Net cash flows generated from/(used
in) operating activities 1,217 (191)
Cash flows generated from/(used in)
investing activities
Purchase of investment securities (2,336) (2,443)
Sale and maturity of investment securities 3,713 1,893
Purchase of property, plant and equipment (96) (80)
Sale of property, plant and equipment 4 7
Purchase of intangible assets (139) (143)
Dividends received from non-Group
entities - 2
Net cash flows generated from/(used
in) investing activities 1,146 (764)
Cash flows generated from financing
activities
Distributions paid to the holders
of core capital deferred shares (28) (28)
Distributions paid to the holders
of additional tier 1 capital (34) (34)
Issue of debt securities 15,704 15,974
Redemption of debt securities in issue (10,825) (10,751)
Issue of subordinated liabilities 949 -
Redemption of subordinated liabilities - (256)
Net cash flows generated from financing
activities 5,766 4,905
Net increase in cash and cash equivalents 8,129 3,950
Cash and cash equivalents at start
of period 12,063 7,250
Cash and cash equivalents at end of
period 24 20,192 11,200
The notes on pages 59 to 83 form an integral part of these consolidated interim financial statements.
Notes to the consolidated interim financial statements
1 General information and reporting period
Nationwide Building Society ('the Society') and its subsidiaries (together, 'the Group') provide financial services to retail and commercial customers within the United Kingdom.
Nationwide is a building society incorporated and domiciled in the United Kingdom. The address of its registered office is Nationwide Building Society, Nationwide House, Pipers Way, Swindon, Wiltshire SN38 1NW.
There were no material changes in the composition of the Group in the half year to 30 September 2016.
These condensed consolidated interim financial statements ('consolidated interim financial statements') have been prepared as at 30 September 2016 and show the financial performance for the period from, and including, 5 April 2016 to this date. They were approved for issue on 17 November 2016.
These consolidated interim financial statements have been reviewed, not audited.
2 Basis of preparation
The consolidated interim financial statements of the Group for the half year ended 30 September 2016 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with International Accounting Standard (IAS) 34 'Interim Financial Reporting' as issued by the International Accounting Standards Board (IASB) and as endorsed by the European Union (EU). The consolidated interim financial statements should be read in conjunction with the Group's annual financial statements for the year ended 4 April 2016, which were prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU.
Terminology used in these consolidated interim financial statements is consistent with that used in the Annual Report and Accounts 2016, where a full glossary of terms can be found.
Copies of the Annual Report and Accounts 2016 are available on the Group's website at:
nationwide.co.uk/about_nationwide/results_and_accounts
Accounting policies
The accounting policies adopted by the Group in the preparation of these consolidated interim financial statements and those which the Group currently expects to adopt in the Annual Report and Accounts 2017 are consistent with those disclosed in the Annual Report and Accounts 2016, except for a minor change to the derivatives and hedge accounting policy in respect of the disclosure of cash collateral.
The policy includes additional wording to clarify the treatment of situations where collateral is received from or given to counterparties other than banks and now states:
Where cash collateral is received, to mitigate the risk inherent in amounts due to the Group, it is included as a liability within either deposits from banks or other deposits, depending on the counterparty. Similarly, where cash collateral is given, to mitigate the risk inherent in amounts due from the Group, it is included as an asset in either loans and advances to banks or loans and advances to customers.
There is no impact on prior period comparatives as a result of this change.
Notes to the consolidated interim financial statements (continued)
2 Basis of preparation (continued)
Standards and amendments applied during the half year to 30 September 2016
There were no new standards applied during the half year to 30 September 2016. Minor amendments to IAS 16 'Property, Plant and Equipment', IAS 38 'Intangible Assets' and IAS 1 'Presentation of Financial Statements', together with the annual improvements to the IFRSs 2012-2014 cycle, were effective for the first half of the financial year. These amendments and improvements were adopted with no significant impact for the Group.
Future accounting developments
An overview of pronouncements that will be relevant to the Group in future periods was provided in the Annual Report and Accounts 2016. Of these pronouncements the most significant is IFRS 9 'Financial Instruments' as detailed further below.
IFRS 9 'Financial Instruments'
IFRS 9 will be implemented in the financial statements for the year ending 4 April 2019 and will replace IAS 39 'Financial Instruments: Recognition and Measurement'.
The principal requirements of IFRS 9 are as follows:
Classification and measurement
The classification of financial assets will be based on the objectives of the Group's business model and the contractual cash flow characteristics of the instruments. Financial assets will then be classified as held at amortised cost, at fair value through other comprehensive income (FVOCI), or at fair value through profit or loss (FVTPL). The changes in classification from the accounting treatment under IAS 39 are not expected to be significant for the Group.
Impairment of financial assets
IFRS 9 changes the basis of recognition of impairment on financial assets from an incurred loss to an expected credit loss (ECL) approach for amortised cost and FVOCI financial assets. ECLs are based on an assessment of the probability of default, loss given default and exposure at default, discounted to give a net present value. The estimation of ECLs should be unbiased and probability-weighted, taking into account all reasonable and supportable information, including forward looking economic assumptions and a range of possible outcomes.
A key feature of IFRS 9 compared with existing approaches under IAS 39 is that where a loan has experienced a significant increase in credit risk since initial recognition, even though this may not lead to a conclusion that the loan is impaired, provisions will be made based on the likelihood of default over the full life of the loan.
Notes to the consolidated interim financial statements (continued)
2 Basis of preparation (continued)
Implementation strategy
The Group's implementation strategy for IFRS 9 is based on an integrated solution using common systems, tools and data to assess credit risk and account for ECLs. This is consistent with guidance issued by the Basel Committee on Banking Supervision which sets an expectation of a high quality implementation, and will entail changes to the governance, controls, models and business processes relating to credit loss provisioning. An extensive period of dual running of internal management information and processes is planned in advance of the implementation date. The design phase of the programme has been completed and build and test activities are progressing in line with implementation plans.
Judgements in applying accounting policies and critical accounting estimates
The Group has to make judgements in applying its accounting policies which affect the amounts recognised in these consolidated interim financial statements. In addition, estimates and assumptions are made that could affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates.
There have been no changes to the areas of significant judgement and estimate from those disclosed in the Annual Report and Accounts 2016 which comprised:
-- impairment provisions on loans and advances -- provisions for customer redress -- retirement benefit obligations (pensions).
Going concern
The Group's business activities and financial position, the factors likely to affect its future development and performance, its objectives and policies in managing the financial risks to which it is exposed, and its capital, funding and liquidity positions are discussed in the Business and Risk Report.
In the light of current and anticipated economic conditions, the directors have assessed the Group's ability to continue as a going concern. The directors confirm they are satisfied that the Group has adequate resources to continue in business and that it is therefore appropriate to adopt the going concern basis in preparing these consolidated interim financial statements.
3 Interest receivable and similar income
Half year Half year
to 30 September to
2016 30 September
GBPm 2015
GBPm
On residential mortgages 2,454 2,462
On other loans 381 412
On investment securities 262 173
On other liquid assets 27 10
Net expense on financial instruments hedging
assets (548) (444)
Total 2,576 2,613
Included within interest receivable and similar income is interest income on impaired financial assets of GBP17 million (H1 2015/16: GBP21 million).
Notes to the consolidated interim financial statements (continued)
4 Interest expense and similar charges
Half year Half year
to 30 September to 30 September
2016 2015
GBPm GBPm
On shares held by individuals 755 762
On subscribed capital 24 13
On deposits and other borrowings: 54
Subordinated liabilities 315 51
Other 240
On debt securities in issue 385 335
Net income on financial instruments hedging
liabilities (409) (349)
Interest on net defined benefit pension liability
(note 20) 3 4
Total 1,127 1,056
Interest on deposits and other borrowings includes an expense of GBP247 million (H1 2015/16: GBP177 million) in relation to the redemption and maturity of Protected Equity Bond (PEB) deposits which have returns linked to the performance of specified stock market indices. The PEBs are economically hedged using equity-linked derivatives. Net income on financial instruments hedging liabilities includes income of GBP235 million (H1 2015/16: GBP136 million) in relation to the associated derivatives. Further details are included in note 15.
Interest on debt securities in issue has increased as a result of higher debt securities balances, reflecting the pre--funding of wholesale maturities during the period.
5 Other operating income
Half year Half year
to 30 September to 30 September
2016 2015
GBPm GBPm
Gain on disposal of investment in Visa Europe
Limited 100 -
Other (expense)/income (3) 3
Total 97 3
On 21 June 2016, the Group disposed of its share in Visa Europe Limited, resulting in a gain on disposal of GBP100 million.
Other (expense)/income includes rental income, profits or losses on the sale of property, plant and equipment and increases or decreases in the valuations of branches and non-specialised buildings which are not recognised in other comprehensive income.
Notes to the consolidated interim financial statements (continued)
6 Gains from derivatives and hedge accounting
Half year Half year
to to 30 September
30 September 2015
2016 GBPm
GBPm
Gains from fair value hedge accounting (note
i) 58 40
Ineffectiveness from cash flow hedge accounting
(note ii) 5 4
Net gain/(loss) from mortgage pipeline (note
iii) 8 (29)
Fair value losses from other derivatives (note
iv) (17) (26)
Foreign exchange differences 23 25
Total 77 14
Notes:
i. Gains or losses from fair value hedges can arise where there is an IFRS hedge accounting relationship in place and either:
-- the relationship passed all the monthly effectiveness tests but the fair value movement of the derivative was not exactly offset by the change in fair value of the asset or liability being hedged (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. In cash flow hedge accounting the effective portion of the fair value movement of designated derivatives is deferred to the cash flow hedge reserve. The fair value movement is subsequently recycled to the income statement when amounts relating to the underlying hedged asset or liability is recognised in the income statement. The ineffective portion of the fair value movement is recognised immediately in the income statement.
iii. The Group elects to fair value certain mortgage commitments in order to reduce the accounting mismatch caused when derivatives are used to hedge these commitments.
iv. Other derivatives are those used for economic hedging but which are not in an IAS 39 hedge accounting relationship because hedge accounting is not currently 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 either not currently applied or is not currently achievable. This volatility does not reflect the economic reality of the Group's hedging strategy.
Included within the gain of GBP77 million (H1 2015/16: GBP14 million) was the impact of the following:
-- Gains of GBP58 million (H1 2015/16: GBP40 million) from fair value hedge accounting ineffectiveness and the amortisation of existing balance sheet amounts.
-- A net gain of GBP8 million (H1 2015/16: GBP29 million loss) from the accounting impact of hedging the pipeline of new mortgage business. Losses of GBP26 million (H1 2015/16: GBP40 million) from changes in the fair value of forward starting derivatives economically hedging the mortgage pipeline have been offset by gains of GBP34 million (H1 2015/16: GBP11 million) from the movement in the fair value of mortgage commitments.
-- Losses of GBP17 million (H1 2015/16: GBP26 million) from valuation adjustments and volatility on other derivatives which are not currently in an IAS 39 hedge accounting relationship.
-- Gains of GBP23 million (H1 2015/16: GBP25 million) from the retranslation of foreign currency monetary items not subject to effective hedge accounting, against a backdrop of significant sterling depreciation.
The deferral of fair value movements to the cash flow hedge reserve, and the transfer of amounts from the cash flow hedge reserve to the income statement, are shown in the consolidated statement of comprehensive income. The net deferral after taxation of GBP310 million (H1 2015/16: net transfer after taxation of GBP97 million) is driven by significant changes in derivative valuations caused by movements in foreign exchange rates.
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.
Notes to the consolidated interim financial statements (continued)
7 Administrative expenses
Half year Half year
to 30 September to
2016 30 September
GBPm 2015
GBPm
Employee costs:
Wages, salaries and bonuses 289 269
Social security costs 31 26
Pension costs 68 54
388 349
Other administrative expenses 375 362
763 711
Depreciation and amortisation 175 155
Total 938 866
8 Impairment losses on loans and advances to customers
The following tables set out impairment losses and reversals during the period and the closing provision balances which are deducted from the appropriate asset values in the balance sheet:
Half year Half year
to 30 September to
2016 30 September
GBPm 2015
GBPm
Impairment losses/(reversals) for the period
Prime residential 1 (1)
Specialist residential 4 (6)
Consumer banking 32 33
Commercial lending (5) (27)
Other lending - 1
Total 32 -
30 September 4 April
2016 2016
GBPm GBPm
Impairment provision at the end of the period
Prime residential 25 25
Specialist residential 71 77
Consumer banking 262 281
Commercial lending 44 59
Other lending 1 1
Total 403 443
The Group impairment provision of GBP403 million at 30 September 2016 (4 April 2016: GBP443 million) comprises individual provisions of GBP60 million (4 April 2016: GBP75 million) and collective provisions of GBP343 million (4 April 2016: GBP368 million).
The decrease in the balance sheet provision on Prime and Specialist residential loans to GBP96 million (4 April 2016: GBP102 million) is driven largely by a reduction in the level of non-performing loans, combined with modest house price growth during the period.
The consumer banking impairment charge has remained broadly stable at GBP32 million (H1 2015/16: GBP33 million). The overall performance and risk profile of the portfolio has improved, driven by previous improvements to credit policies.
Notes to the consolidated interim financial statements (continued)
8 Impairment losses on loans and advances to customers (continued)
The commercial balance sheet provision has continued to fall to GBP44 million (4 April 2016: GBP59 million) reflecting improved conditions in the commercial real estate market. The higher reversal in the previous year reflected greater impaired balances impacted by improving market conditions.
Further credit risk information on loans and advances to customers is included in the 'Lending risk' section of the Business and Risk Report.
9 Taxation
Tax charge in the income statement Half year Half year
to 30 September to
2016 30 September
GBPm 2015
GBPm
Current tax:
UK corporation tax 223 170
Total current tax 223 170
Deferred tax:
Current period credit (30) (4)
Adjustments in respect of prior periods 1 -
Total deferred tax (29) (4)
Tax charge 194 166
The actual tax charge differs from the theoretical amount that would arise using the standard rate of corporation tax in the UK as follows:
Reconciliation of tax charge Half year Half year
to 30 September to
2016 30 September
GBPm 2015
GBPm
Profit before tax 696 802
Tax calculated at a tax rate of 20% 139 160
Banking surcharge 40 -
Expenses not deductible for tax purposes 14 6
Adjustments in respect of prior periods 1 -
Tax charge 194 166
The Finance (No. 2) Act 2015 introduced legislation to impose a surcharge of 8% on the profits of banking companies after 1 January 2016. As a result, a banking surcharge of GBP40 million (H1 2015/16: GBPnil) is included in the UK corporation tax charge shown above.
Notes to the consolidated interim financial statements (continued)
10 Operating segments
For management reporting purposes, the Group is organised into the following operating segments, determined according to similar economic characteristics and customer base:
-- Retail -- Commercial -- Head office functions
Details of the operating segments and the funds transfer pricing methodology are contained in note 11 of the Annual Report and Accounts 2016.
Half year to 30 September 2016 Retail Commercial Head office Total
GBPm GBPm functions GBPm
GBPm
Net income/(expense) from external
customers 1,805 202 (558) 1,449
(Charge)/revenue from other segments (381) (153) 534 -
Net interest income 1,424 49 (24) 1,449
Net other income (note i) 203 5 (15) 193
Total revenue 1,627 54 (39) 1,642
Administrative expenses (883) (20) (35) (938)
Impairment and other provisions (note
ii) (79) (5) (5) (89)
Underlying profit/(loss) before tax 665 29 (79) 615
FSCS levies 4 - - 4
Gains from derivatives and hedge
accounting - - 77 77
Profit/(loss) before tax 669 29 (2) 696
Taxation (194)
Profit after tax 502
Total assets (note iii) 171,919 13,090 40,537 225,546
Total liabilities 149,183 3,032 62,056 214,271
Half year to 30 September 2015 Retail Commercial Head office Total
GBPm GBPm functions GBPm
GBPm
Net income/(expense) from external
customers 1,814 229 (486) 1,557
(Charge)/revenue from other segments (296) (174) 470 -
Net interest income 1,518 55 (16) 1,557
Net other income (note i) 126 7 (7) 126
Total revenue 1,644 62 (23) 1,683
Administrative expenses (note iv) (807) (19) (32) (858)
Impairment and other provisions (note
ii) (50) 28 (2) (24)
Underlying profit/(loss) before tax 787 71 (57) 801
FSCS levies (5) - - (5)
Transformation costs (2) - (6) (8)
Gains from derivatives and hedge
accounting - - 14 14
Profit/(loss) before tax 780 71 (49) 802
Taxation (166)
Profit after tax 636
Total assets (note iii) 160,540 13,503 29,068 203,111
Total liabilities 140,886 2,373 49,625 192,884
Notes:
i. Other income excludes gains from derivatives and hedge accounting which are shown separately. The gain on disposal of the Group's investment in Visa Europe Limited in the half year to 30 September 2016 is included in the Retail segment.
ii. Impairment and other provisions includes impairment losses on loans and advances, provisions for liabilities and charges (excluding FSCS) and impairment losses on investment securities.
iii. Retail assets include goodwill arising on the acquisition of The Mortgage Works (UK) plc. iv. Administrative expenses exclude transformation costs which are shown separately.
Notes to the consolidated interim financial statements (continued)
11 Loans and advances to customers
30 September 4 April
2016 2016
GBPm GBPm
Prime residential mortgages 135,063 129,948
Specialist residential mortgages 33,197 32,114
Consumer banking 3,647 3,588
Commercial lending 11,410 11,772
Other lending 129 19
183,446 177,441
Fair value adjustment for micro hedged risk 1,680 1,366
Total 185,126 178,807
Loans and advances to customers in the table above are shown net of impairment provisions held against them. The fair value adjustment for micro hedged risk relates to commercial lending.
Asset-backed funding
Certain prime residential mortgages have been pledged to the Group's asset-backed funding programmes or utilised as whole mortgage loan pools for the Bank of England's (BoE) Funding for Lending Scheme (FLS). The programmes have enabled the Group to obtain secured funding or to create additional collateral which could be used to source additional funding.
Mortgages pledged and the nominal values of the notes in issue are as follows:
Mortgages pledged to asset-backed funding programmes
Mortgages Notes in issue
pledged
30 September 2016 Held by third Held by the Group Total notes
parties in issue
GBPm GBPm Drawn Undrawn GBPm
GBPm GBPm
Covered bond programme 20,372 15,488 - - 15,488
Securitisation programme 11,409 4,898 - 1,635 6,533
Whole mortgage loan
pools 11,375 - 10,048 1,327 11,375
Total 43,156 20,386 10,048 2,962 33,396
Mortgages pledged to asset-backed funding programmes
Mortgages Notes in issue
pledged
4 April 2016 Held by third Held by the Group Total notes
parties in issue
GBPm GBPm Drawn Undrawn GBPm
GBPm GBPm
Covered bond programme 18,996 13,709 - - 13,709
Securitisation programme 12,368 4,705 - 1,635 6,340
Whole mortgage loan
pools 12,344 - 10,749 1,595 12,344
Total 43,708 18,414 10,749 3,230 32,393
The securitisation programme notes are issued by Silverstone Master Issuer plc which is fully consolidated by the Group.
The whole mortgage loan pools are pledged at the BoE under the FLS. Notes are not issued when pledging the mortgage loan pools at the BoE. Instead, the whole loan pool is pledged to the BoE and drawings are made directly against the eligible collateral, subject to a haircut. Therefore, values shown under notes in issue are the whole mortgage loan pool notional balances.
Notes to the consolidated interim financial statements (continued)
11 Loans and advances to customers (continued)
Mortgages pledged include GBP10.3 billion (4 April 2016: GBP7.4 billion) in 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 which are held by third parties are included in debt securities in issue.
Notes in issue, held by the Group and drawn are whole mortgage loan pools securing amounts drawn under the FLS. At 30 September 2016 the Group had outstanding FLS drawings of GBP8.0 billion (4 April 2016: GBP8.5 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.
In accordance with accounting standards, notes in issue and held by the Group are not recognised by the Group in its balance sheet.
The Group established the Nationwide Covered Bond programme in November 2005. Mortgages pledged provide security for issues of covered bonds made by the Group. During the period ended 30 September 2016, GBP750 million and EUR85 million (GBP67 million sterling equivalent) of notes were issued, and no notes matured.
The Group established the Silverstone Master Trust securitisation programme in July 2008. Notes are issued under the programme and the issuance proceeds are used to purchase, for the benefit of note holders, a share of the beneficial interest in the mortgages pledged by the Group. The remaining beneficial interest in the pledged mortgages of GBP6.3 billion (4 April 2016: GBP6.3 billion) stays with the Group and includes its required minimum seller share in accordance with the rules of the programme. The Group is under no obligation to support losses incurred by the programme or holders of the notes and does not intend to provide such further support. The entitlement of note holders is restricted to payment of principal and interest to the extent that the resources of the programme are sufficient to support such payment and the holders of the notes have agreed not to seek recourse in any other form. During the period ended 30 September 2016 there were two scheduled repayments of principal totalling GBP68 million, no notes were redeemed early or matured and no new notes were issued.
12 Due to customers
On 22 September 2016 the Group announced the closure of its Isle of Man operations. Amounts due to customers include GBP4,588 million (4 April 2016: GBP4,813 million) in respect of balances deposited with the Group's Isle of Man branch.
Notes to the consolidated interim financial statements (continued)
13 Subordinated liabilities and subscribed capital
30 September 4 April
2016 2016
GBPm GBPm
Subordinated liabilities
Subordinated notes 2,849 1,750
Fair value hedge accounting adjustments 69 77
Unamortised premiums and issue costs (12) (10)
Total 2,906 1,817
Subscribed capital
Permanent interest bearing shares 362 362
Fair value hedge accounting adjustments 78 68
Unamortised premiums and issue costs (5) (17)
Total 435 413
$1,250 million (GBP949 million) of subordinated notes were issued during the period.
All of the Group's subordinated notes and permanent interest bearing shares (PIBS) are unsecured. The Group may, with the prior consent of the Prudential Regulation Authority (PRA), redeem the subordinated notes and repay the PIBS early.
The subordinated notes rank pari passu with each other and behind claims against the Society of all depositors, creditors and investing members, other than the holders of PIBS, Additional Tier 1 (AT1) capital and core capital deferred shares (CCDS).
The PIBS rank pari passu with each other and the AT1 instruments, behind claims against the Society of the subordinated noteholders, depositors, creditors and investing members, but ahead of claims by the holders of CCDS.
14 Fair value hierarchy of financial assets and liabilities held at fair value
IFRS 13 requires an entity to classify assets and liabilities held at fair value and those not measured at fair value but for which the fair value is disclosed according to a hierarchy that reflects the significance of observable market inputs in calculating those fair values. The three levels of the fair value hierarchy are defined below:
Level 1 - Valuation using quoted market prices
Assets and liabilities are classified as Level 1 if their value is observable in an active market. Such instruments are valued by reference to unadjusted quoted prices for identical assets or liabilities in active markets where the quoted price is readily available, and the price reflects actual and regularly occurring market transactions on an arm's length basis. An active market is one in which transactions occur with sufficient volume and frequency to provide pricing information on an ongoing basis.
Level 2 - Valuation technique using observable inputs
Assets and liabilities classified as Level 2 have been valued using models whose inputs are observable in an active market. Valuations based on observable inputs include derivative financial instruments such as swaps and forwards which are valued using market standard pricing techniques, and options that are commonly traded in markets where all the inputs to the market standard pricing models are observable. They also include investment securities valued using consensus pricing or other observable market prices.
Notes to the consolidated interim financial statements (continued)
14 Fair value hierarchy of financial assets and liabilities held at fair value (continued)
Level 3 - Valuation technique using significant unobservable inputs
Assets and liabilities are classified as Level 3 if their valuation incorporates significant inputs that are not based on observable market data ('unobservable inputs'). A valuation input is considered observable if it can be directly observed from transactions in an active market, or if there is compelling external evidence demonstrating an executable exit price. An input is deemed significant if it is shown to contribute more than 10% to the valuation of a financial instrument. Unobservable input values are generally determined based on observable inputs of a similar nature, historical observations or other analytical techniques.
The following tables show the Group's financial assets and liabilities that are held at fair value by fair value hierarchy, balance sheet classification and product type:
Fair values based on
Level 1 Level 2 Level 3 Total
30 September 2016 GBPm GBPm GBPm GBPm
Financial assets
Government and supranational
investments 6,340 - - 6,340
Other debt investment securities 1,051 2,471 - 3,522
Available for sale investment
securities 7,391 2,471 - 9,862
Investments in equity shares
(note i) - - 56 56
Interest rate swaps - 2,796 - 2,796
Cross currency interest rate
swaps - 3,031 - 3,031
Forward foreign exchange - 78 - 78
Equity index swaps - - 267 267
Index linked swaps - 8 - 8
Total derivative financial
instruments - 5,913 267 6,180
Other financial assets (note
ii) - 3 - 3
Total financial assets 7,391 8,387 323 16,101
Financial liabilities
Interest rate swaps - (3,908) (4) (3,912)
Cross currency interest rate
swaps - (49) - (49)
Forward foreign exchange - (3) - (3)
Forward rate agreement - (1) - (1)
Swaptions - (6) - (6)
Equity index swaps - - (1) (1)
Total derivative financial
instruments - (3,967) (5) (3,972)
Other deposits - PEBs (note
iii) - - (1,133) (1,133)
Total financial liabilities - (3,967) (1,138) (5,105)
Notes to the consolidated interim financial statements (continued)
14 Fair value hierarchy of financial assets and liabilities held at fair value (continued)
Fair values based on
Level 1 Level 2 Level 3 Total
4 April 2016 GBPm GBPm GBPm GBPm
Financial assets
Government and supranational
investments 6,843 - - 6,843
Other debt investment securities 1,011 2,758 - 3,769
Available for sale investment
securities 7,854 2,758 - 10,612
Investments in equity shares
(note i) - - 125 125
Interest rate swaps - 2,180 - 2,180
Cross currency interest rate
swaps - 1,238 - 1,238
Forward foreign exchange - 44 - 44
Equity index swaps - - 436 436
Total derivative financial
instruments - 3,462 436 3,898
Other financial assets (note
ii) - 2 - 2
Total financial assets 7,854 6,222 561 14,637
Financial liabilities
Interest rate swaps - (3,103) (4) (3,107)
Cross currency interest rate
swaps - (338) - (338)
Forward foreign exchange - (4) - (4)
Swaptions - (8) - (8) Equity index swaps - - (1) (1) Index linked swaps - (5) - (5) Total derivative financial instruments - (3,458) (5) (3,463) Other deposits - PEBs (note iii) - - (1,885) (1,885) Total financial liabilities - (3,458) (1,890) (5,348)
Notes:
i. Investments in equity shares shown above are held at fair value and exclude GBP1 million of investments in equity shares which are held at cost.
ii. Other financial assets represent the fair value of certain mortgage commitments included within other assets in the balance sheet.
iii. Other deposits comprise PEBs which are held at fair value through the income statement. The remaining other deposits are held at amortised cost and are included in note 16.
The Group's Level 1 portfolio comprises highly rated government securities for which traded prices are readily available.
Asset valuations for Level 2 available for sale investment securities are sourced from consensus pricing or other observable market prices. None of the Level 2 available for sale assets are valued from models. Level 2 derivative assets and liabilities are valued from discounted cash flow models using yield curves based on observable market data.
Further detail on the Level 3 portfolio is provided in note 15.
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 period.
Notes to the consolidated interim financial statements (continued)
15 Fair value of financial assets and liabilities held at fair value - Level 3 portfolio
The main constituents of the Level 3 portfolio are as follows:
Investments in equity shares
The Level 3 investments in equity shares include investments of GBP56 million (4 April 2016: GBP125 million) in industry wide banking and credit card service operations.
Derivative financial instruments
Level 3 assets and liabilities in this category are primarily equity linked derivatives with external counterparties which economically match the investment return payable by the Group to investors in Protected Equity Bonds (PEBs). The derivatives are linked to the performance of specified stock market indices and have been valued by an external third party. Fair value changes are recognised within gains/losses from derivatives and hedge accounting. Upon maturity the gain/loss is transferred to interest expense and similar charges.
Other deposits - PEBs
This category relates to deposit accounts with the potential for stock market correlated growth linked to the performance of specified stock market indices. The PEBs liability of GBP1,133 million (4 April 2016: GBP1,885 million) is valued at a discount to reflect the time value of money, overlaid by a fair value adjustment representing the expected return payable to the customer. The fair value adjustment has been constructed from the valuation of the associated derivatives as valued by an external third party. Fair value changes are recognised within losses/gains from derivatives and hedge accounting. Upon maturity the gain/loss is transferred to interest expense and similar charges.
The minimum amount on an undiscounted basis that the Group is contractually required to pay at maturity for the PEBs is GBP913 million (4 April 2016: GBP1,551 million). The maximum additional amount which would also be payable at maturity in respect of additional investment returns is GBP401 million (4 April 2016: GBP636 million). The payment of additional investment returns is dependent upon performance of certain specified stock indices during the period of the PEBs. As noted above, the Group has entered into equity linked derivatives with external counterparties which economically match the investment returns on the PEBs.
Notes to the consolidated interim financial statements (continued)
15 Fair value of financial assets and liabilities held at fair value - Level 3 portfolio (continued)
The tables below set out movements in the Level 3 portfolio, including transfers in and out of Level 3.
Movements in Level 3 portfolio Investments Net derivative Other
in equity financial deposits
shares instruments - PEBs
GBPm GBPm GBPm
At 5 April 2016 125 431 (1,885)
Gains/(losses) recognised in the income
statement:
Net interest income/(expense) - 235 (247)
(Losses)/gains from derivatives and hedge
accounting - (171) 169
Other operating income 100 - -
Losses recognised in other comprehensive
income:
Fair value movement taken to members'
interests and equity (76) - -
Settlements - (233) 830
Acquisitions 25 - -
Disposals (118) - -
At 30 September 2016 56 262 (1,133)
Movements in Level 3 portfolio Available Investments Net derivative Other
for sale in equity financial deposits
investment shares instruments - PEBs
securities
GBPm GBPm GBPm GBPm
At 5 April 2015 12 25 910 (3,332)
Gains/(losses) recognised in
the income statement:
Net interest income/(expense) - - 136 (177)
(Losses)/gains from derivatives
and hedge accounting - - (319) 311
Settlements - - (136) 548
Transfers out of Level 3 portfolio (12) - - -
At 30 September 2015 - 25 591 (2,650)
Notes to the consolidated interim financial statements (continued)
15 Fair value of financial assets and liabilities held at fair value - Level 3 portfolio (continued)
Level 3 portfolio sensitivity analysis of valuations using unobservable inputs
The fair value of financial instruments is, in certain circumstances, measured using valuation techniques based on market prices that are not observable in an active market or on significant unobservable market inputs.
Reasonable alternative assumptions can be applied for sensitivity analysis, taking account of the nature of valuation techniques used, as well as the availability and reliability of observable proxy and historic data. The following table shows the sensitivity of these fair values to reasonable alternative assumptions (as set out in the table of significant unobservable inputs below) and the resultant impact of such changes in fair value on the income statement or members' interests and equity:
Members' interests and
Sensitivity of Level 3 fair values equity
Fair value Favourable Unfavourable
changes changes
At 30 September 2016 GBPm GBPm GBPm
Investments in equity shares 56 19 (25)
Net derivative financial instruments
(note i) 262 - -
Other deposits - PEBs (note i) (1,133) - -
Total (815) 19 (25)
Members' interests and
Sensitivity of Level 3 fair values equity
Fair value Favourable Unfavourable
changes changes
At 4 April 2016 GBPm GBPm GBPm
Investments in equity shares 125 41 (32)
Net derivative financial instruments
(note i) 431 - -
Other deposits - PEBs (note i) (1,885) - -
Total (1,329) 41 (32)
Note:
i. Changes in fair values of the equity index swaps included in net derivative financial instruments will be largely offset by the change in fair value of the PEBs deposits. Any resultant impact is deemed by the Group to be insignificant; therefore these sensitivities have been excluded from the table above.
The level 3 portfolio at 30 September 2016 did not include any impaired assets (4 April 2016: GBPnil). The sensitivity analysis on fair values in the tables above therefore does not impact on the income statement.
Alternative assumptions are considered for each product and varied according to the quality of the data and variability of the underlying market.
The following table discloses the significant unobservable inputs underlying the above alternative assumptions for assets and liabilities recognised at fair value and classified as Level 3 along with the range of values for those significant unobservable inputs. Where sensitivities are described the inverse relationship will also generally apply.
Significant unobservable
inputs
Weighted Units
Total Total Significant average (note
At 30 September assets liabilities Valuation unobservable Range (note iv)
2016 GBPm GBPm technique inputs (note ii) iii)
Investments in Discount
equity shares 56 rate 10.00 12.00 11.00%
Discounted
cash flows Share conversion - 100.00 77.30%
Execution
risk - 30.00 20.00%
Net derivative
financial instruments
(note i) 262
Other deposits
- PEBs (note i) (1,133)
Notes to the consolidated interim financial statements (continued)
15 Fair value of financial assets and liabilities held at fair value - Level 3 portfolio (continued)
Significant unobservable
inputs
Weighted
Total Total Significant average Units
assets liabilities Valuation unobservable Range (note (note
At 4 April 2016 GBPm GBPm technique inputs (note ii) iii) iv)
Investments in Mark to
equity shares 18 market Price 93.30 107.00 98.00 Points
Discount
107 rate 10.00 12.00 11.00%
Discounted
cash flows Share conversion - 100.00 77.30%
Execution
risk - 30.00 12.41%
125
Net derivative
financial instruments
(note i) 431
Other deposits
- PEBs (note i) (1,885)
Notes:
i. Changes in fair values of the equity index swaps included in net derivative financial instruments will be largely offset by the change in fair value of the PEBs deposits. Any resultant impact is deemed by the Group to be insignificant; therefore these sensitivities have been excluded from the table above.
ii. The range represents the values of the highest and lowest levels used in the calculation of favourable and unfavourable changes as presented in the previous table.
iii. Weighted average represents the input values used in calculating the fair values for the above financial instruments.
iv. 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%.
Some of the significant unobservable inputs used in fair value measurement are interdependent. Where this is the case, a description of those interrelationships is included below.
Discount rate
The discount rate is used to determine the present value of future cash flows. The level of the discount rate takes into account the time value of money, but also the risk or uncertainty of future cash flows. Typically, the greater the uncertainty, the higher the discount rate. A higher discount rate leads to a lower valuation and vice versa.
Share conversion
Where the conversion of a security into an underlying instrument is subject to underlying security market pricing and contingent litigation risk, this is factored in to the fair value. The higher the share conversion factor, the higher the valuation and vice versa.
Execution risk
Where a security's value is dependent on a future transaction taking place, and the occurrence of this is not certain, execution risk is factored into the security's valuation. The greater the execution risk, the lower the valuation and vice versa.
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.
Notes to the consolidated interim financial statements (continued)
16 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 Total
value Level 1 Level 2 Level 3 fair value
30 September 2016 GBPm GBPm GBPm GBPm GBPm
Financial assets
Loans and advances to
banks 3,323 - 3,323 - 3,323
Loans and advances to
customers:
Residential mortgages 168,260 - - 167,332 167,332
Consumer banking 3,647 - - 3,511 3,511
Commercial lending 13,090 - - 11,909 11,909
Other lending 129 - 116 13 129
Total 188,449 - 3,439 182,765 186,204
Financial liabilities
Shares 143,415 - 143,660 - 143,660
Deposits from banks 3,686 - 3,689 - 3,689
Other deposits (note
i) 6,793 - 6,796 - 6,796
Due to customers 5,985 - 5,988 - 5,988
Debt securities in issue 43,650 15,954 29,352 - 45,306
Subordinated liabilities 2,906 - 3,081 - 3,081
Subscribed capital 435 - 387 - 387
Total 206,870 15,954 192,953 - 208,907
Fair values based on
Total
Level 1 Level 2 Level 3 fair value
Carrying
value
4 April 2016 GBPm GBPm GBPm GBPm GBPm
Financial assets
Loans and advances to
banks (note ii) 3,591 - 3,591 - 3,591
Loans and advances to
customers:
Residential mortgages 162,062 - - 161,766 161,766
Consumer banking 3,588 - - 3,458 3,458
Commercial lending 13,138 - - 13,077 13,077
Other lending (note
iii) 19 - 5 14 19
Total 182,398 - 3,596 178,315 181,911
Financial liabilities
Shares 138,715 - 138,896 - 138,896
Deposits from banks 2,095 - 2,096 - 2,096
Other deposits (note
i) 5,750 - 5,752 - 5,752
Due to customers (note
ii) 6,201 - 6,204 - 6,204
Debt securities in issue 36,085 13,582 23,195 - 36,777
Subordinated liabilities 1,817 - 1,949 - 1,949
Subscribed capital 413 - 381 - 381
Total 191,076 13,582 178,473 - 192,055
Notes:
i. Other deposits exclude PEBs which are held at fair value through the income statement and which are included in note 14.
ii. The comparative fair values for loans and advances to banks and due to customers have been moved to Level 2, to better reflect the valuation approach, consistent with the current period presentation.
iii. Within other lending the comparative fair value for cash collateral posted with non-bank counterparties has been moved to Level 2 to better reflect the valuation approach, consistent with the current period presentation.
Notes to the consolidated interim financial statements (continued)
16 Fair value of financial assets and liabilities measured at amortised cost (continued)
Loans and advances to customers
The Group estimates the fair value of loans and advances to customers using consistent modelling techniques across the different loan books. The estimates take into account expected future cash flows and future lifetime expected losses, based on historic trends and discount rates appropriate to the loans, to reflect a hypothetical exit price value on an asset by asset basis. Variable rate loans are modelled on estimated future cash flows, discounted at current market interest rates. Variable rate retail mortgages are discounted at the currently available market standard variable interest rate (SVR) which, for example, in the case of the Group's residential base mortgage rate (BMR) mortgage book generates a fair value lower than the amortised cost value as those mortgages are priced below the SVR.
For fixed rate loans, discount rates have been based on the expected funding and capital cost applicable to the book. When calculating fair values on fixed rate loans, no adjustment has been made to reflect interest rate risk management through internal natural hedges or external hedging via derivatives.
Shares, deposits and 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.
17 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.
In accordance with IFRS 7 'Financial Instruments: Disclosures', the following table shows the impact on derivative financial instruments and total return swaps 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 typically comprises highly liquid securities which are legally transferred and can be liquidated in the event of counterparty default.
Notes to the consolidated interim financial statements (continued)
17 Offsetting financial assets and financial liabilities (continued)
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.
At 30 September 2016 Gross and Master netting Financial Net amounts
net amounts arrangements collateral after offsetting
reported on under IFRS
the balance 7
sheet
GBPm GBPm GBPm GBPm
Financial assets
Derivative financial
instruments 6,180 (2,858) (3,226) 96
Reverse repurchase agreements 200 - (200) -
Total financial assets 6,380 (2,858) (3,426) 96
Financial liabilities
Derivative financial
liabilities 3,972 (2,858) (1,078) 36
Repurchase agreements 536 - (536) -
Total financial liabilities 4,508 (2,858) (1,614) 36
At 4 April 2016 Gross and Master netting Financial Net amounts
net amounts arrangements collateral after offsetting
reported on under IFRS
the balance 7
sheet
GBPm GBPm GBPm GBPm
Financial assets
Derivative financial
instruments 3,898 (2,020) (1,804) 74
Total return swaps 87 - (87) -
Reverse repurchase agreements 450 - (450) -
Total financial assets 4,435 (2,020) (2,341) 74
Financial liabilities
Derivative financial
liabilities 3,463 (2,020) (1,391) 52
Repurchase agreements 127 - (127) -
Total financial liabilities 3,590 (2,020) (1,518) 52
The fair value of the financial collateral is the same as the values shown in the table above, except for the repurchase agreements collateral which has a fair value of GBP533 million (4 April 2016: GBP128 million) and the total return swaps collateral at 4 April 2016 which had a fair value of GBP127 million.
Notes to the consolidated interim financial statements (continued)
18 Provisions for liabilities and charges
Bank FSCS Customer Other Total
levy redress provisions
GBPm GBPm GBPm GBPm GBPm
At 5 April 2016 22 84 227 10 343
Provisions utilised (22) (42) (35) (2) (101)
Charge for the period - - 58 9 67
Release for the period - (4) (6) (1) (11)
Net income statement charge - (4) 52 8 56
At 30 September 2016 - 38 244 16 298
At 5 April 2015 13 126 140 16 295
Provisions utilised (13) (88) (12) (4) (117)
Charge for the period - 5 32 1 38
Release for the period - - (8) (1) (9)
Net income statement charge - 5 24 - 29
At 30 September 2015 - 43 152 12 207
The income statement charge for provisions for liabilities and charges of GBP48 million (H1 2015/16: GBP29 million) includes the FSCS release of GBP4 million (H1 2015/16: charge of GBP5 million) and the customer redress net income statement charge of GBP52 million (H1 2015/16: GBP24 million). The net income statement charge for other provisions of GBP8 million (H1 2015/16: GBPnil) is included within administrative expenses in the income statement.
Financial Services Compensation Scheme (FSCS)
The FSCS provision of GBP38 million represents the Group's interest and management expense levy in respect of the 2016/17 scheme year (4 April 2016: GBP84 million in respect of the 2016/17 and 2015/16 scheme years).
During October 2016, HM Treasury confirmed that approval had been given to UK Asset Resolution (UKAR) to begin the process of a major sales programme of Bradford & Bingley plc. The Group will continue to monitor the progress of this and will assess the financial impact as more information becomes available.
Customer redress
During the course of its business, the Group receives complaints from customers in relation to past sales or conduct. The Group is also subject to enquiries from and discussions with its regulators, governmental and other public bodies, including the Financial Ombudsman Service (FOS), on a range of matters. Customer redress provisions are recognised where the Group considers it is probable that payments will be made as a result of such complaints and other matters.
The Group holds provisions of GBP244 million (4 April 2016: GBP227 million) in respect of potential redress and the costs of remediation in relation to historic sales of financial products and post sales administration. This includes amounts for past sales of PPI, non-compliance with consumer credit legislation and other regulatory matters.
The income statement charge for the year mainly reflects the Group's updated assumptions for provisions previously recognised. This includes a GBP45 million charge in relation to PPI, largely in response to the consultation paper CP16/20 issued by the Financial Conduct Authority (FCA) in August 2016. A further review will be undertaken when the policy statement is issued.
At 30 September 2016, the Group held a PPI provision of GBP146 million (4 April 2016: GBP117 million). This represents management's best estimate of future costs including the expected impact of Plevin v Paragon Personal Finance Limited. The principal uncertainty in this calculation is the impact of the proposed FCA media campaign on complaints volumes.
Notes to the consolidated interim financial statements (continued)
18 Provisions for liabilities and charges (continued)
The table below shows the sensitivity of the PPI provision to changes in complaints volumes, along with other significant assumptions used in calculating the provision.
Cumulative to Future expected Sensitivity
30 September
2016
Claims ('000s of policies)
(note i) 296 92 10 = GBP11m
Average uphold rate (note ii) 33% 57% 5% = GBP5m
Average redress per claim (note
iii) GBP1,323 GBP871 GBP100 = GBP11m
Notes:
i. Claims include responses to proactive mailing.
ii. Future expected average uphold rate includes anticipated increase in uphold rate for Plevin related complaints.
iii. Future expected average redress includes redress for future claims upheld for Plevin.
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.
19 Contingent liabilities
During the ordinary course of business the Group is subject to complaints and threatened or actual legal proceedings, as well as regulatory reviews, challenges and investigations. All such material matters are periodically reassessed, with the assistance of external professional advisers where appropriate, to determine the likelihood of incurring a liability. Where it is concluded that it is more likely than not that a payment will be made a provision is recognised based on management's best estimate of the amount that will be payable. For other matters no provision is recognised but disclosure is made of items which are potentially material, either individually or in aggregate, except in cases where the likelihood of a liability crystallising is considered to be remote. Currently the Group does not expect the ultimate resolution of any such matters to have a material adverse impact on its financial position.
20 Retirement benefit obligations
Retirement benefit obligations on the balance 30 September 4 April
sheet 2016 2016
GBPm GBPm
Present value of funded obligations 6,059 4,645
Present value of unfunded obligations 12 12
6,071 4,657
Fair value of fund assets (5,348) (4,444)
Net defined benefit liability 723 213
The Group continues to operate two defined contribution schemes and a number of defined benefit pension arrangements, the most significant being the Nationwide Pension Fund. These pension schemes are principally unchanged from the year ended 4 April 2016; further details are set out in note 31 of the Annual Report and Accounts 2016.
Notes to the consolidated interim financial statements (continued)
20 Retirement benefit obligations (continued)
The principal actuarial assumptions used are as follows:
30 September 4 April
2016 2016
Principal actuarial assumptions % %
Discount rate 2.30 3.45
Future salary increases 3.00 2.90
Future pension increases (maximum 5%) 2.85 2.75
Retail price index (RPI) inflation 3.00 2.90
Consumer price index (CPI) inflation 2.00 1.90
The assumptions for mortality rates are based on standard mortality tables which allow for future improvements in life expectancies.
Changes in the present value of the net defined benefit liability (including unfunded obligations) are as follows:
Movements in the net defined benefit liability 30 September 30 September
2016 2015
GBPm GBPm
At 5 April 213 286
Current service cost 30 31
Past service cost 1 1
Curtailment gains (1) (1)
Interest on net defined benefit liability 3 4
Return on assets (greater)/less than discount
rate (807) 268
Contributions by employer (77) (78)
Administrative expenses 2 2
Actuarial losses/(gains) on defined benefit
obligations 1,359 (314)
Net defined benefit liability 723 199
The increase in the net defined benefit liability is mainly due to an increase in the value of defined benefit obligations, partially offset by the return on assets and employer contributions.
The GBP1,359 million of actuarial losses (H1 2015/16: GBP314 million of actuarial gains) on defined benefit obligations is driven by a 1.15% decrease in the discount rate and a 0.10% increase in assumed long-term inflation since 4 April 2016, as a result of changes in market conditions.
The GBP807 million from a return on assets which is greater than the discount rate (H1 2015/16: GBP268 million from a return less than the discount rate), is driven by changes in market conditions, including falling bond yields and strong equity returns.
The net impact of the actuarial losses and the return on assets is a reduction of GBP405 million (H1 2015/16: increase of GBP37 million) in general reserves.
The GBP77 million of employer contributions includes a deficit contribution of GBP49 million in July 2016 (H1 2015/16: GBP49 million), with the remainder relating to employer contributions in respect of the accrual of future benefits during the period.
21 Core capital deferred shares (CCDS)
Number of CCDS Share premium Total
shares
GBPm GBPm GBPm
At 30 September 2016 5,500,000 6 525 531
At 4 April 2016 5,500,000 6 525 531
Notes to the consolidated interim financial statements (continued)
21 Core capital deferred shares (CCDS) (continued)
CCDS are a form of Common Equity Tier 1 (CET1) capital which have been developed to enable the Group to raise capital from the capital markets. Previously issued Tier 1 capital instruments, PIBS, no longer meet the regulatory capital requirements of CRD IV and are being phased out of the calculation of capital resources under transitional rules.
CCDS are perpetual instruments. They rank pari passu to each other and are junior to claims against the Society of all depositors, creditors and investing members. Each holder of CCDS has one vote, regardless of the number of CCDS held.
In the event of a winding up or dissolution of the Society and if there was surplus available, the amount that the investor would receive for each CCDS held is limited to the average principal amount in issue, which is currently 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 GBP15.32 per share and is adjusted annually in line with CPI.
A final distribution of GBP28 million (GBP5.125 per share) for the financial year ended 4 April 2016 was paid on 20 June 2016. This distribution has been recognised in the statement of movements in members' interests and equity.
The directors have declared a distribution of GBP5.125 per share in respect of the period to 30 September 2016, amounting in aggregate to GBP28 million. The distribution will be paid on 20 December 2016 and will be recognised through the consolidated statement of movements in members' interests and equity by reference to the date at which it was approved.
22 Other equity instruments
Total
GBPm
At 30 September 2016 992
At 4 April 2016 992
AT1 instruments rank pari passu to each other and to PIBS. They are junior to claims against the Society of all depositors, creditors and investing members, other than the holders of CCDS.
AT1 instruments pay a fully discretionary, non-cumulative fixed coupon at an initial rate of 6.875% per annum. The rate will reset on 20 June 2019 and every five years thereafter to the five year mid swap rate plus 4.88%. Coupons are paid semi-annually in June and December.
A coupon of GBP34 million, covering the period to 19 June 2016, was paid on 20 June 2016. This payment has been recognised in the statement of movements in members' interests and equity.
A coupon of GBP34 million in respect of the period to 19 December 2016 is expected to be paid on 20 December 2016 and will be recognised in the statement of movements in members' interests and equity by reference to the date at which it is paid.
The coupons paid and declared represent the maximum non-cumulative fixed coupon of 6.875%.
AT1 instruments have no maturity date. They are repayable at the option of the Society on 20 June 2019 and on every fifth anniversary thereafter. AT1 instruments are only repayable with the consent of the PRA.
If the fully-loaded CET1 ratio for the Society, on either a consolidated or unconsolidated basis, falls below 7% the AT1 instruments convert to CCDS instruments at the rate of one CCDS share for every GBP80 of AT1 holding.
Notes to the consolidated interim financial statements (continued)
23 Related party transactions
Related party transactions in the period ended 30 September 2016 are similar in nature to those included in the Annual Report and Accounts 2016. Loans to key management personnel at 30 September 2016, undertaken on normal commercial terms, were GBP1.2 million (4 April 2016: GBP1.4 million).
Full details of the Group's related party transactions for the year to 4 April 2016 can be found in note 36 of the Annual Report and Accounts 2016.
24 Notes to the cash flow statement
Half year Half year
to 30 September to
2016 30 September
GBPm 2015
GBPm
Non-cash items included in profit before tax
Net decrease in impairment provisions (40) (199)
Net decrease in provisions for liabilities
and charges (45) (88)
Impairment losses on investment securities 5 -
Depreciation and amortisation 175 155
Profit from sale of property plant and equipment (1) (1)
Interest on subordinated liabilities 54 50
Interest on subscribed capital 24 11
Gains from derivatives and hedge accounting (77) (14)
Total 95 (86)
Changes in operating assets and liabilities
Loans and advances to banks (19) 5
Net derivative financial instruments and fair
value adjustment for portfolio hedged risk
(note i) (1,809) (67)
Loans and advances to customers (6,279) (3,219)
Other operating assets (625) (20)
Shares 4,700 2,582
Deposits from banks, customers and others 1,666 (9)
Debt securities in issue 2,686 37
Deferred taxation (note i) (83) (20)
Retirement benefit obligations 510 (87)
Other operating liabilities (137) 65
Total (note i) 610 (733)
Cash and cash equivalents
Cash 17,213 7,899
Loans and advances to banks repayable in 3
months or less (note ii) 2,979 3,301
Total 20,192 11,200
Notes:
i. Amounts in relation to derivative financial instruments and fair value adjustment for portfolio hedged risk and deferred taxation are presented on a net basis; comparative information has been reclassified to conform to the current presentation.
ii. Cash equivalents include GBP2,216 million (30 September 2015: GBP2,599 million) of cash collateral posted with bank counterparties.
The Group is required to maintain balances with the Bank of England and certain other central banks which, at 30 September 2016, amounted to GBP344 million (30 September 2015: GBP307 million). These balances are included within loans and advances to banks on the balance sheet but are not included in the cash and cash equivalents in the cash flow statement as they are not liquid in nature.
25 Post balance sheet event
On 4 November 2016 the Group announced that it will cease new lending to commercial real estate (CRE) customers. Existing CRE loans will continue to run off in line with their contractual terms.
Responsibility statement
The directors confirm that, to the best of their knowledge, the consolidated interim financial statements have been prepared in accordance with IAS 34, as adopted by the European Union. The Interim Results include a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R, namely:
-- an indication of important events that have occurred in the first six months of the financial year and their impact on the consolidated interim financial statements and a description of the principal risks and uncertainties for the remaining six months of the financial year; and
-- material related party transactions in the first six months of the financial year and any material changes in the related party transactions described in the Annual Report and Accounts 2016.
A full list of the board of directors can be found in the Annual Report and Accounts 2016, with the following updates in respect of changes that have occurred during the period to 30 September 2016:
-- Roger Perkin retired from the Board on 21 July 2016 following the AGM. -- Lynne Peacock was appointed as the Senior Independent Director on 21 July 2016.
-- Kevin Parry was appointed as the Chairman of the Audit Committee and a member of the Nomination and Governance Committee on 21 July 2016.
Signed on behalf of the Board by
Mark Rennison
Group Finance Director
17 November 2016
Independent review report to Nationwide Building Society ('the Society')
Report on the consolidated interim financial statements
Our conclusion
We have reviewed Nationwide Building Society's consolidated interim financial statements (the "interim financial statements") on pages 54 to 83 in the interim results of Nationwide Building Society for the six month period ended 30 September 2016. Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority.
What we have reviewed
The interim financial statements comprise:
-- the consolidated balance sheet as at 30 September 2016;
-- the consolidated income statement and consolidated statement of comprehensive income for the period then ended;
-- the consolidated cash flow statement for the period then ended;
-- the consolidated statement of movements in members' interests and equity for the period then ended; and
-- the explanatory notes to the interim financial statements.
The interim financial statements included in the interim results have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority.
As disclosed in note 2 to the interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.
Responsibilities for the interim financial statements and the review
Our responsibilities and those of the directors
The interim results, including the interim financial statements, are the responsibility of, and have been approved by, the directors. The directors are responsible for preparing the interim results in accordance with the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority.
Our responsibility is to express a conclusion on the interim financial statements in the interim results based on our review. This report, including the conclusion, has been prepared for and only for the Society for the purpose of complying with the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
What a review of interim financial statements involves
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.
A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the interim results and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
London
17 November 2016
Notes:
a) The maintenance and integrity of the Nationwide Building Society website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the interim financial statements since they were initially presented on the website.
b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Other information
The interim results information set out in this announcement is unaudited and does not constitute accounts within the meaning of section 73 of the Building Societies Act 1986.
The financial information for the year ended 4 April 2016 has been extracted from the Annual Report and Accounts 2016. The Annual Report and Accounts 2016 has been filed with the Financial Conduct Authority and the Prudential Regulation Authority. The Independent Auditors' Report on the Annual Report and Accounts 2016 was unqualified.
Nationwide has adopted the British Bankers' Association Code on Financial Reporting Disclosure ('the BBA code') in its Annual Report and Accounts 2016. The code sets out five disclosure principles together with supporting guidance. Full details of the principles are included in the Annual Report and Accounts 2016. These principles have been applied, as appropriate, in the context of these interim results.
A copy of the Interim Results is placed on the website of Nationwide Building Society. The directors are responsible for the maintenance and integrity of information on the Society's website. Information published on the internet is accessible in many countries with different legal requirements. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Contacts
Investor queries:
Media queries: Sarah Gardiner
Stuart Williamson Tel: 0845 602 9053
Tel: 01793 654 756 Mobile: 07720 426 180
Mobile: 07545 740 195 sarah.gardiner@nationwide.co.uk
stuart.williamson@nationwide.co.uk
Alan Oliver
Tel: 0207 261 6201
Mobile: 07850 810 745
alanm.oliver@nationwide.co.uk
Appendix - Additional capital disclosures
Following publication of 'EBA Guidelines on Materiality, Proprietary and Confidentiality and on Disclosure Frequency', additional disclosures on the capital position are required as part of the Group's interim reporting. These are included within this Appendix.
These additional disclosures have not been subject to review by PricewaterhouseCoopers LLP.
Table 1: EBA Own Funds disclosure Current Rules (note Full Impact (note
template i) ii)
30 September 4 April 30 September 4 April
2016 2016 2016 2016
GBPm GBPm GBPm GBPm
Common Equity Tier 1 (CET1)
Capital: instruments and
reserves
Capital Instruments and
the related share premium
1 accounts 531 531 531 531
2 Retained earnings 8,463 7,937 8,463 7,937
Accumulated other comprehensive
3 income (and other reserves) 47 56 47 56
Independently reviewed
interim profits net of
any foreseeable charge
5a or dividend 460 942 460 942
Common Equity Tier 1 (CET1)
capital before regulatory
6 adjustments 9,501 9,466 9,501 9,466
Common Equity Tier 1 (CET1)
capital: regulatory adjustments
Additional value adjustments
7 (negative amount) (47) (55) (47) (55)
Intangible assets (net
of related tax liability)
8 (negative amount) (1,177) (1,132) (1,177) (1,132)
Negative amounts resulting
from the calculation of
12 expected loss amounts (209) (264) (209) (264)
Gains or losses on liabilities
valued at fair value resulting
from changes in own credit
14 standing (1) (2) (1) (2)
Total regulatory adjustments
to Common Equity Tier 1
28 (CET1) (1,434) (1,453) (1,434) (1,453)
Common Equity Tier 1 (CET1)
29 capital 8,067 8,013 8,067 8,013
Additional Tier 1 (AT1)
capital: instruments
Capital instruments and
the related share premium
30 accounts 992 992 992 992
of which: classified as
equity under applicable
31 accounting standards 992 992 992 992
Amount of qualifying items
referred to in Article
484 (4) and the related
share premium accounts
subject to phase out of
33 AT1 426 404 - -
Additional Tier 1 (AT1)
capital before regulatory
36 adjustments 1,418 1,396 992 992
Additional Tier 1 (AT1)
44 capital 1,418 1,396 992 992
Tier 1 capital (T1 = CET1
45 +AT1) 9,485 9,409 9,059 9,005
Appendix - Additional capital disclosures (continued)
Current Rules (note Full Impact (note
i) ii)
30 September 4 April 30 September 4 April
2016 2016 2016 2016
GBPm GBPm GBPm GBPm
Tier 2 (T2) capital: instruments
and provisions
T2 Capital instruments
and the related share premium
46 accounts 2,628 1,628 2,628 1,628
Amount of qualifying items
referred to in Article
484 (5) and the related
share premium accounts
subject to phase out from
47 T2 30 29 - -
50 Credit risk adjustments 19 21 19 21
Tier 2 (T2) capital before
51 regulatory adjustments 2,677 1,678 2,647 1,649
58 Tier 2 (T2) capital 2,677 1,678 2,647 1,649
Total capital (TC = T1
59 + T2) 12,162 11,087 11,706 10,654
60 Total risk weighted assets 34,636 34,475 34,636 34,475
Capital ratio and buffers
Common Equity Tier 1 (as
a percentage of total risk
61 exposure amount) 23.3% 23.2% 23.3% 23.2%
Tier 1 (as a percentage
of total risk exposure
62 amount) 27.4% 27.3% 26.2% 26.1%
Total capital (as a percentage
of total risk exposure
63 amount) 35.1% 32.2% 33.8% 30.9%
Common Equity Tier 1 available
to meet buffers (as a percentage
68 of risk exposure amount) 23.3% 23.2% 23.3% 23.2%
Applicable caps on the
inclusion of provisions
in Tier 2
Credit risk adjustment
included in T2 in respect
of exposures subject to
standardised approach (prior
to the application of the
76 cap) 19 21 19 21
Cap on inclusion of credit
risk adjustments in T2
77 under standardised approach 34 38 34 38
Cap for inclusion of credit
risk adjustments in T2
under internal ratings-based
79 approach 153 154 153 154
Current cap on AT1 instruments
82 subject to phase out arrangements 633 633 - -
Current cap on T2 instruments
84 subject to phase out arrangements 237 237 - -
Notes:
i. Also referred to as 'transitional' basis.
ii. Also referred to as 'end point' basis (i.e. assuming all CRD IV requirements were in force in full with no transitional provisions permitted).
Appendix - Additional capital disclosures (continued)
Table 2: Movements in regulatory capital GBPm
Common Equity Tier 1 capital at 5 April 2016 8,013
Profit for the period 502
Other movement in general reserves (note i) (458)
Movement in foreseeable distributions -
Available for sale reserve (12)
Revaluation reserves 3
Decrease/(increase) in:
Prudent valuation adjustment 8
Own credit risk adjustment 1
Intangible assets and goodwill (45)
Excess of regulatory expected loss over impairment
provisions 55
Common Equity Tier 1 capital at 30 September 2016 8,067
Additional Tier 1 capital at 4 April 2016 and 30 September
2016 992
Total Tier 1 capital at 30 September 2016 9,059
-------
Tier 2 capital at 5 April 2016 1,649
Subordinated debt instrument issuance 964
Amortisation on dated subordinated debt (88)
Fair value adjustments on dated subordinated debt 124
Increase/(decrease) in:
Collectively assessed impairment allowances (2)
Excess of impairment provisions over regulatory expected -
loss
Tier 2 capital at 30 September 2016 2,647
Total regulatory capital at 5 April 2016 10,654
Total regulatory capital at 30 September 2016 11,706
-------
Note:
i. Includes all movements in general reserves, other than profit for the period.
CET1 capital resources have increased over the period by GBP54 million, mainly as a result of a good financial performance, with GBP502 million of profit after tax for the period, being offset by an increase in other movements in general reserves, mainly as a result of a higher pension deficit. Tier 2 capital has increased following the issuance of $1.25 billion of qualifying Tier 2 subordinated debt with a coupon of 4% and a maturity of 10 years.
Appendix - Additional capital disclosures (continued)
The movements in credit risk RWAs over the period are set out in the table below:
RWA flow statement RWAs Growth/ (Improvement)/ Model RWAs at
at 4 (reduction) deterioration changes 30 September
April in book in book quality 2016
2016 size
GBPm GBPm GBPm GBPm GBPm
Credit risk:
Residential mortgages 14,086 186 (419) - 13,853
Unsecured lending 5,621 131 131 (74) 5,809
Commercial 6,194 (170) 72 - 6,096
Treasury (note i) 1,039 (186) 14 - 867
Counterparty credit risk
and credit valuation adjustment
(note ii) 1,296 489 (129) - 1,656
Other (note iii) 1,635 116 - - 1,751
Total credit risk 29,871 566 (331) (74) 30,032
Operational risk 4,604 - - - 4,604
Market risk (note iv) - - - - -
Total 34,475 566 (331) (74) 34,636
Notes:
i. Treasury excludes RWA movements in prime liquidity assets, as these are zero risk weighted.
ii. Counterparty credit risk includes the credit valuation adjustment and relates to derivative financial instruments and repurchase agreements.
iii. Other relates to fixed and other assets and equity holdings held on the balance sheet.
iv. The Group has elected to set this to zero, as permitted by the CRR, as exposure was below the threshold of 2% of own funds.
Regulatory capital for credit risk
The Pillar 1 credit risk capital requirements (risk weights) are calculated using:
-- The retail Internal Ratings Based (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
-- The foundation IRB and specialised lending 'slotting' methodology for treasury and commercial portfolios respectively (other than sovereign exposures)
-- The standardised approach for all other credit risk exposures, including some treasury (including sovereign) and commercial exposures which are exempt from the IRB approach.
Pillar 1 capital requirements are calculated at 8% of the risk weighted assets, so the Group's credit RWAs of GBP30,032 million generate a Pillar 1 capital requirement of GBP2,403 million. The following table shows how the capital requirements for Pillar 1 credit risk are attributed to exposure classes (as defined by the Capital Requirements Regulation) and by risk calculation approach at 30 September 2016.
Appendix - Additional capital disclosures (continued)
Table 4: Minimum Pillar 1 capital requirements 30 September 4 April
for credit risk 2016 2016
GBPm GBPm
Internal Ratings Based (IRB) exposure classes:
Institutions 26 38
Corporates (commercial lending) 483 480
Retail mortgages (secured against residential
lending) 911 917
Qualifying revolving retail 342 325
Other retail (unsecured loans) 123 125
Securitisation positions 25 27
Equity (note i) 9 24
Non-credit obligation assets (fixed assets
and other) 90 90
Counterparty credit risk 133 104
Total IRB exposure classes 2,142 2,130
Standardised exposure classes:
Central government and central banks (note - -
ii)
Regional governments and local authorities 1 1
Multilateral development banks (note ii) - -
Corporates (non-commercial) 8 7
Retail mortgages (secured against residential
property) 177 190
Other Retail (note iii) - -
Commercial lending (secured against property) 3 5
Commercial lending (other) 1 7
Past due 20 22
Other (note iv) 51 28
Total standardised exposure classes 261 260
Total capital requirements for credit risk 2,403 2,390
Notes:
i. The reduction in equity capital requirements relates to the disposal of the Group's investment in Visa Europe Limited.
ii. Exposures to central banks and governments and multilateral development banks are all zero risk weighted, so there is no Pillar 1 capital requirement.
iii. Other Retail contains personal loan exposures with a capital requirement of GBP0.1 million.
iv. The items included in the 'Other' exposure class that attract a capital charge include items in the course of collection, cash in hand and deferred tax assets that rely on future profitability.
Table 5: Internal Ratings 30 September 4 April 30 September 4 April
Based (IRB) exposures and 2016 2016 2016 2016
average risk-weights
Exposure Exposure Average RWA Average RWA
GBPm GBPm % %
IRB exposure classes:
Foundation IRB
Institutions 2,277 2,961 14.5 16.0
Corporates (commercial
lending) 14,175 14,046 42.6 42.7
Securitisation positions 2,398 2,686 13.0 12.5
Equity 30 81 370.0 370.0
Non-credit obligation assets
(fixed assets and other) 1,128 1,126 100.0 100.0
Counterparty credit risk 5,531 3,693 14.0 16.2
Advanced IRB
Retail Mortgages (secured
against residential lending) 176,757 168,998 6.4 6.8
Qualifying revolving retail 8,595 8,420 49.8 48.2
Other retail (unsecured
loans) 2,022 1,962 75.7 79.5
Total IRB exposure classes 212,913 203,973 12.2 12.7
------------ ------------
There has been a small improvement in average IRB risk-weights from 12.7% to 12.2%, mainly due to an improvement in the book quality of the retail mortgages portfolio as a result of rising house prices.
Appendix - Additional capital disclosures (continued)
The following three tables provide details on the components of the exposure measure used to calculate the Group's leverage ratio, disclosed in templates prescribed by the EBA. The exposure measure has increased by GBP14.7 billion from GBP213.2 billion to GBP227.9 billion. This is due to growth in on balance sheet exposures driven by increases in residential mortgage balances and central bank reserves.
Table 7a: (LRSum) Summary reconciliation of 30 September 4 April
accounting assets and leverage ratio exposures 2016 2016
GBPm GBPm
Total assets as per published financial
1 statements 225,546 208,939
4 Adjustments for derivative financial instruments (5,528) (3,974)
5 Adjustments for Securities Financing Transactions 3,484 4,004
(SFTs)
6 Adjustment for off-balance sheet items 5,817 5,663
(ie conversion to credit equivalent amounts
of off-balance sheet exposures)
7 Other adjustments (1,433) (1,451)
8 Leverage ratio exposure 227,886 213,181
Table 7b: (LRSpl) Split of on-balance sheet CRR Leverage Ratio
exposures (excluding derivatives and securities Exposure
financing transactions)
30 September 4 April
2016 2016
GBPm GBPm
Total on-balance sheet exposures (excluding
EU-1 derivatives and SFTs), of which: 219,366 205,041
EU-3 Banking book exposures, of which: 219,366 205,041
EU-4 Covered bonds 1,053 1,012
EU-5 Exposures treated as sovereigns 24,213 15,838
Exposures to regional governments, MDB,
international organisations and public
EU-6 sector entities not treated as sovereigns 472 530
EU-7 Institutions 1,224 1,949
EU-8 Secured by mortgages of immovable properties 168,017 162,000
EU-9 Retail exposures 3,746 4,300
EU-10 Corporate 13,891 13,329
EU-11 Exposures in default (standardised) 243 273
Other exposures (eg equity, securitisations,
EU-12 and other non-credit obligation assets) 6,507 5,810
Appendix - Additional capital disclosures (continued)
Table 7c: (LRCom) Leverage ratio common disclosure CRR leverage ratio
exposures
30 September 4 April
2016 2016
GBPm GBPm
On-balance sheet exposures (excluding derivatives
and SFTs)
On-balance sheet items (excluding derivatives
1 and SFTs, but including collateral) 219,366 205,041
2 Asset amounts deducted in determining Tier (1,433) (1,451)
1 capital (note i)
3 Total on-balance sheet exposures (excluding 217,933 203,590
derivatives and SFTs)
Derivative exposures
4 Replacement cost associated with derivatives 3,326 1,883
transactions
5 Add-on amounts for Potential Future Exposure 1,516 1,236
(PFE) associated with derivatives transactions
Cash variation margin (as per Delegated
7 Act) (4,190) (3,195)
11 Total derivative exposures 652 (76)
Securities Financing Transaction (SFT) exposures
14 SFT Adjustment 3,484 4,004
16 Total securities financing transaction exposures 3,484 4,004
Off-balance sheet exposures
17 Off-balance sheet exposures at gross notional 23,345 22,143
amount
18 Adjustments for conversion to credit equivalent (17,528) (16,480)
amounts
Total off-balance sheet exposures (note
19 ii) 5,817 5,663
Capital and total exposures
20 Tier 1 capital 9,059 9,005
21 Total Exposures 227,886 213,181
Leverage ratio
22 Leverage ratio 4.0% 4.2%
Choice on transitional arrangements and amount of
derecognised fiduciary items
EU-23 Choice on transitional arrangements for Full Impact
the definition of the capital measure
Notes:
i. Representing intangible assets (including goodwill), expected loss deductions and prudent valuation adjustment.
ii. This is the total credit equivalent amount of off-balance sheet exposures as required by the Capital Requirements Regulation (CRR).
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