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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% | 133.00 | 130.00 | 136.00 | 133.00 | 131.00 | 131.00 | 0.00 | 08:00:00 |
Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
---|---|---|---|---|---|
Mortgage Bankers & Loan Corr | 4.68B | 1.66B | 157.6429 | 0.51 | 849.4M |
TIDMNBS TIDMNAWI
RNS Number : 7694W
Nationwide Building Society
17 November 2017
Nationwide Building Society
Interim Results
For the period ended 30 September 2017
Contents
Page Key highlights and quotes 3 Financial summary 5 Chief Executive's review 6 Financial review 10 Business and risk report 17 Consolidated interim financial statements 46 Notes to the consolidated interim financial statements 52 Responsibility statement 72 Independent review report 73 Other information 75 Contacts 75
Introduction
Unless otherwise stated, the income statement analysis compares the period from 5 April 2017 to 30 September 2017 to the corresponding six months of 2016 and balance sheet analysis at 30 September 2017 with comparatives at 4 April 2017.
Underlying profit
Profit before tax shown on a statutory and underlying basis is set out on page 5. Statutory profit before tax of GBP628 million has been adjusted for a number of items to derive an underlying profit before tax of GBP588 million. The purpose of this measure is to reflect management's view of the Group's underlying performance and to assist with like for like comparisons of performance across periods. Underlying profit is not designed to measure sustainable levels of profitability as it potentially requires exclusion of non-recurring items even though they are closely related to (or even a direct consequence of) the Group's core business activities.
Nationwide has developed a financial performance framework based on the fundamental principle of maintaining its capital at a prudent level in excess of regulatory requirements. The framework provides parameters which allow it to calibrate future performance and help ensure that it achieves the right balance between distributing value to members, investing in the business and maintaining financial strength. The most important of these parameters is underlying profit which is a key component of Nationwide's capital. In this context, Nationwide currently believes that generating underlying profit of approximately GBP0.9 billion to GBP1.3 billion per annum over the medium term is an appropriate target for capital planning purposes. This range is based on our current assumptions as to the size of the mortgage market, and maintaining a UK leverage ratio in excess of 4%. This range, which will vary from time to time, should not be construed as a forecast of the likely level of Nationwide's underlying profit for any financial year or period within a financial year.
Forward looking statements
Certain statements in this document are forward looking with respect to plans, goals and expectations relating to the future financial position, business performance and results of Nationwide. Although Nationwide believes that the expectations reflected in these forward looking statements are reasonable, Nationwide can give no assurance that these expectations will prove to be an accurate reflection of actual results. By their nature, all forward looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond the control of Nationwide including, amongst other things, UK domestic and global economic and business conditions, market related risks such as fluctuation in interest rates and exchange rates, inflation/deflation, the impact of competition, changes in customer preferences, risks concerning borrower credit quality, delays in implementing proposals, the timing, impact and other uncertainties of future acquisitions or other combinations within relevant industries, the policies and actions of regulatory authorities, the impact of tax or other legislation and other regulations in the jurisdictions in which Nationwide operates. As a result, Nationwide's actual future financial condition, business performance and results may differ materially from the plans, goals and expectations expressed or implied in these forward looking statements. Due to such risks and uncertainties Nationwide cautions readers not to place undue reliance on such forward looking statements.
Nationwide undertakes no obligation to update any forward looking statements whether as a result of new information, future events or otherwise.
This document does not constitute or form part of an offer of securities for sale in the United States. Securities may not be offered or sold in the United States absent registration or an exemption from registration. Any public offering to be made in the United States will be made by means of a prospectus that may be obtained from Nationwide and will contain detailed information about Nationwide and management as well as financial statements.
NATIONWIDE DELIVERS GBP245M OF MEMBER FINANCIAL BENEFIT AND
GAINS MORE CURRENT ACCOUNT SWITCHERS THAN THE MAJOR BANKS COMBINED(1)
First choice for switchers, gaining more than three times as many switchers as nearest rival(1)
Helped a record 39,500 first time buyers into homes
Highest customer satisfaction in high street peer group(2)
Delivering strong profits and enhancing financial strength
o Statutory profit of GBP628m (H1 2016/17: GBP696m); underlying profit(3) of GBP588m (H1 2016/17: GBP615m)
o Profits include GBP26m one-off gain from VocaLink disposal (H1 2016/17: GBP100m one-off gain from Visa disposal)
o Capital strength at all-time high: CET1 ratio of 29.6% and UK leverage ratio of 4.9%, strengthened by issuance of GBP0.8bn of core capital deferred shares (4 April 2017: 25.4% and 4.4% respectively)
o Underlying cost income ratio of 59.0% (H1 2016/17: 57.1%), down from 60.2% for the full year 2016/17; on track for broadly flat costs for the full year
Demonstrating mutual value, rewarding members with GBP245m financial benefit
o Supported savings members, paying them GBP180m in extra interest (H1 2016/17: GBP185m) by keeping average rates around 50% higher than the market average(4)
o Rewarded members holding other products with better than average rates(4) , incentives and fees
Helping a record 39,500 first time buyers onto the housing ladder
o Prime mortgage gross lending increased to GBP15.0bn (H1 2016/17: GBP14.7bn)
o Helped a record 39,500 first time buyers into homes, 1 in 5 of total (H1 2016/17: 38,600)
o Buy to let gross lending reduced to GBP1.7bn reflecting changes in the market (H1 2016/17: GBP2.8bn)
o Grew member deposit balances by GBP1.8bn in a challenging market (H1 2016/17: GBP4.7bn)
Leading current account attracts over three times as many net switchers as nearest competitor(1)
o Remained UK's top choice for current accounts(5)
o Added more current account switchers than the major banks combined(1)
o Continued record current account growth, opening 427,000 accounts in the period, up 13%
o Grew stock share of youth accounts to 10.3% from 8.2%
Remained top for customer satisfaction in our high street peer group(2)
o Remaining at top for most trusted financial brand(6) , offering digital convenience with a human touch
o Grew active mobile users by 15.5%
o Investing in new branch formats in 20 locations nationwide
Well placed to support members in uncertain times
o Household incomes being squeezed by slowing growth and inflation, but borrowing costs will stay low
o Modest growth outlook expected to limit further rate rises and constrain housing market
o Mortgage demand has been strong, but intensifying competition may lead to a moderation in our volumes
o Nationwide's financial strength means we can support our members in uncertain times
Nationwide Chief Executive, Joe Garner, said:
"Nationwide is delivering strong profits through growing our membership and providing the best customer satisfaction in our high street peer group(2) . As a building society we are able to manage our profits in our members' interests, investing in current and future services to improve the lives of our members.
"People are attracted to Nationwide because we care, we deliver fair and good value products and services, and because of our mutual philosophy. Nationwide gained more than three times as many current account switchers as our nearest rival(1) .
"Our customer satisfaction remains the best in our high street peer group(2) . We aspire to become as well known for our service outside our industry, and were delighted to make the Which? all-industry customer service top 10 this year.
"We've demonstrated the value of mutuality in the period by returning GBP245 million to members in the form of better than average interest rates(4) , lower fees and higher incentives (H1 2016/17: GBP250 million). We know that exceptionally low interest rates have placed a strain on savers, so we've chosen to protect them by directing most of this financial benefit into higher savings rates: our average savings rates in the period were approximately 50% higher than the average market rate(4) . We were the first in the industry to respond to the recent base rate rise, passing on the full benefit to those members whose savings rates fell by 0.25% following the last base rate reduction in August 2016.
"Building societies were founded to help people into their own homes and, with consumers increasingly struggling to get on the housing ladder today, we're proud to continue to support homebuyers. In the last six months, we helped a record 39,500 first time buyers into their first home (H1 2016/17: 38,600), and a further 47,700 homeowners to move or re-mortgage (H1 2016/17: 48,500). We are extending choice for older members too, with the launch today of our new Lifetime Mortgage, which will allow people to access equity in their home in later life.
"Looking ahead, the UK economy should continue to grow, albeit at a slower rate due to the uncertainties around Brexit. Despite the recent base rate rise, borrowing costs overall remain low. However, we know that low wage growth and inflation are putting pressure on household budgets and we remain alert to signs of financial strains on consumers.
"Nationwide is in very good shape after another strong set of results. The second half may bring tougher trading conditions, but we remain well placed to stand by our members in these uncertain times. Nationwide is financially secure and will continue to promote the long-term interests of both the Society and our members."
Nationwide Chief Financial Officer, Mark Rennison, said:
"Nationwide has traded strongly in a highly competitive market in the first six months of the year. Our statutory profit before tax was GBP628 million for the period (H1 2016/17: GBP696 million), and our underlying profit was GBP588 million (H1 2016/17: GBP615 million). After excluding one-off gains(7) , profits increased year on year.
"This strong performance was underpinned by business growth and lower cost growth. We grew our current account base substantially, exceeding 7 million accounts for the first time, we increased prime mortgage gross lending, and maintained our share of retail deposits. Cost growth was contained to 3%, and is on track to be broadly flat for the full year.
"Our capital strength reached an all-time high, with a CET1 ratio of 29.6% (4 April 2017: 25.4%) and a UK leverage ratio of 4.9% (4 April 2017: 4.4%), well above regulatory requirements. This was supported by issuing a second tranche of CCDS, a form of Common Equity Tier 1 capital specific to building societies, demonstrating capacity and liquidity in the CCDS market. Our offer was more than two times over-subscribed, reflecting the Society's financial strength, and raised GBP0.8 billion of capital. We remain on course to meet our Minimum Requirement for Own Funds and Eligible Liabilities in advance of the regulatory January 2020 target date."
1 Source: Current Account Switch Service Dashboard, Issue 16 quarterly participant data, 3 months to March 2017.
2 (c) GfK 2017, Financial Research Survey (FRS), 12 months ending 30 September 2017 vs 31 March 2017, proportion of extremely/very satisfied customers minus proportion of extremely/very/fairly dissatisfied customers summed across current account, mortgage and savings. High street peer group defined as providers with main current account market share >4% (Barclays, Halifax, HSBC, Lloyds Bank (inc C&G), NatWest, Santander and TSB).
3 Underlying profit represents management's view of underlying performance and excludes bank levy charges, FSCS costs and gains/losses from derivatives and hedge accounting.
4 Market average interest rates are based on Bank of England whole of market average interest rates adjusted to exclude Nationwide's balances.
5 Source: Nationwide Brand and Advertising tracker - compiled by Independent Research Agency. 'Top choice' is most considered ie 'first choice' or 'seriously considered' current account provider amongst non-customers, based on responses from non-customers of each brand, 3 months ending September 2017. Financial brands included Nationwide, Barclays, Cooperative Bank, First Direct, Halifax, HSBC, Lloyds, NatWest, TSB and Santander.
6 Source: Nationwide Brand and Advertising tracker - compiled by Independent Research Agency, based on all consumer responses, 3 months ending September 2017. Financial brands included Nationwide, Barclays, Co-operative Bank, First Direct, Halifax, HSBC, Lloyds, NatWest, TSB and Santander. Nationwide's lead on trust is not statistically significant and therefore positioned as joint top with Halifax.
7 H1 2017/18: GBP26m one-off gain from sale of investment in VocaLink (H1 2016/17: GBP100m one-off gain from the sale of investment in Visa Europe).
Financial summary
Half year Half year to 30 September to 30 September 2017 2016 ------------------------------------------------- ------------------ ------------------ Financial performance GBPm GBPm Total underlying income 1,639 1,642 Underlying profit before tax 588 615 Statutory profit before tax 628 696 ------------------------------------------------- --------- ------- --------- ------- Mortgage lending GBPbn % GBPbn% Group residential - gross/gross market share 16.7 12.9 17.5 14.5 Group residential - net/net market share 3.9 16.5 6.0 33.9 % % Average loan to value of new residential lending (by value) 71 71 ------------------------------------------------- --------- ------- --------- ------- Deposit balances GBPbn % GBPbn% Member deposits balance movement/market share (note i) 1.8 7.8 4.7 10.3 Net receipts (note ii) (0.5) 3.7 ------------------------------------------------- --------- ------- --------- ------- Key ratios % % Cost income ratio - underlying basis 59.0 57.1 Cost income ratio - statutory basis 57.7 54.6 Net interest margin 1.34 1.33 ------------------------------------------------- --------- ------- --------- ------- 30 September 4 April 2017 2017 --------------------------------------------------- -------------- ----------- Balance sheet GBPbn % GBPbn % Total assets 227.5 221.7 Loans and advances to customers 190.7 187.4 Member deposits/market share (note i) 146.4 10.0 144.5 10.1 --------------------------------------------------- ------- ----- ----- ---- Asset quality % % Residential mortgages Proportion of residential mortgage accounts 3 months+ in arrears 0.44 0.45 Average indexed loan to value of residential mortgage book (by value) 55 55 Total provisions as % of non-performing balances 5.5 5.3 Consumer banking Non-performing loans as % of total (excluding charged off balances) 3.8 3.6 Total provisions as a % of non-performing loans (including charged off balances) 88.4 86.5 --------------------------------------------------- ------- ----- ----- ---- Key ratios % % Capital Common Equity Tier 1 ratio (note iii) 29.6 25.4 UK leverage ratio (note iv) 4.9 4.4 CRR leverage ratio (note iii) 4.6 4.2 Other balance sheet ratios Liquidity coverage ratio 125.2 124.0 Wholesale funding ratio (note v) 28.2 27.1 --------------------------------------------------- ------- ----- ----- ----
Notes:
i. Member deposits include current account credit balances.
ii. Net receipts include outflows of non-member deposits relating to the closure of off-shore operations in the Isle of Man and Republic of Ireland.
iii. Reported under CRD IV on an end point basis. The CRR leverage ratio is calculated using the Capital Requirements Regulation (CRR) definition of Tier 1 for the capital amount and the Delegated Act definition of the exposure measure.
iv. The UK leverage ratio is shown on the basis of measurement announced by the Prudential Regulation Authority and excludes eligible central bank reserves from the leverage exposure measure.
v. The wholesale funding ratio includes all balance sheet sources of funding (including securitisations) but excludes Funding for Lending Scheme (FLS) drawings which, as asset swaps, are not included on Nationwide's balance sheet, reflecting the substance of the arrangement. Off-balance sheet FLS drawings totalled GBP3.0 billion (4 April 2017: GBP4.8 billion).
Chief Executive's review
A strong and growing Society, well placed to support members in the challenging environment ahead
As a mutual, owned by our members, Nationwide is driven by a strong sense of social purpose, based on our history and founding principles. As we exist primarily for the benefit of our members, we organise ourselves around their needs, as we set out in our refreshed strategy at the start of the financial year. Building society, nationwide describes our aspirations to grow the Society in a sustainable way that benefits our members, customers, colleagues, and society more generally.
Underpinning our strategy are our five strategic cornerstones. These set out what we aim to do and how we will do it. First, we must be built to last: financially strong, profitable, prudent and efficient, so that we are here for our members in the long term. A healthy society is a growing society, which is reflected in our second cornerstone, building thriving membership; this is about growing our relationship with existing members, and attracting new ones. Building legendary service is our commitment to becoming known for industry-leading service within our industry but also outside it. PRIDE describes our culture and deeply-held mutual values, and guides our people to do the right thing in the right way. Finally, we aspire to be a 'national treasure', one of the UK's most trusted and respected organisations, known for championing the interests of our members and society more generally.
We can only achieve all these aspirations by running a successful business, and I'm pleased to say our first half results demonstrated the strength of the Society.
Our underlying profit for the period was GBP588 million (H1 2016/17: GBP615 million). After excluding one-off gains from the sale of our interests in Visa and VocaLink([1]) , profits increased year on year. This reflected good trading in our core businesses as we maintain our low risk balance sheet.
This strong performance allowed us to reward members, putting GBP245 million in their pockets in member financial benefit (H1 2016/17: GBP250 million). Offering our members better rates, incentives and fees than the market([2]) as a whole is one of the ways we deliver better value to members, which is what makes Nationwide, and our mutuality, distinctive.
We believe that mutuality, driven by social purpose as well as commercial needs, resonates today. In an era of declining trust in business, Nationwide remains at the top for most trusted financial brand([3]) and first for customer satisfaction in our high street peer group with a lead of 2.7%([4]) .
This unique combination of leading value, trust and service is a compelling proposition and helped us attract 159,000 new members, leading to a record total membership of 15.4 million people. Our engaged members - those who do most business with us - also grew to a new high of 8.0 million, putting us well on track to reach our strategic target of 10 million engaged members by 2022.
Built to last: robust profits and enhanced financial strength
As a mutual, profit matters to us because it allows us to grow and invest in our business and deliver value to our members. Our statutory profit for the period was GBP628 million (H1 2016/17: GBP696 million) and on an underlying basis, profit was GBP588 million (H1 2016/17: GBP615 million) benefiting from a GBP26 million one-off gain from the VocaLink disposal (H1 2016/17: GBP100 million one-off gain from the Visa disposal). This strong profit performance is comfortably within our strategic target range of GBP0.9 to GBP1.3 billion annually.
We improved our capital strength, with our CET1 ratio increasing to 29.6% (4 April 2017: 25.4%), and improved our UK leverage ratio to 4.9% (4 April 2017: 4.4%), both well in excess of regulatory requirements. We are on course to meet our Minimum Requirements for Own Funds and Eligible Liabilities (MREL) in advance of the January 2020 target date. We enhanced our capital strength by issuing a second tranche of core capital deferred shares (CCDS), a form of CET1 capital specific to building societies. Our issuance both supported capacity and liquidity in the CCDS market, and raised GBP0.8 billion of capital.
Our net interest margin improved modestly to 1.34% (H1 2017/18: 1.33%) due to lower funding costs, which were partially offset by lower mortgage margins in a highly competitive market.
Our strong performance allowed us to continue to deliver incremental value to members, maintaining our member financial benefit of GBP245 million in the period (H1 2016/17: GBP250 million).
1 H1 2017/18: GBP26m one-off gain from sale of investment in VocaLink (H1 2016/17: GBP100m one-off gain from the sale of investment in Visa Europe).
2 Market average interest rates are based on Bank of England whole of market average interest rates adjusted to exclude Nationwide's balances.
3 Source: Nationwide Brand and Advertising tracker - compiled by Independent Research Agency, based on all consumer responses, 3 months ending September 2017. Financial brands included Nationwide, Barclays, Co-operative Bank, First Direct, Halifax, HSBC, Lloyds, NatWest, TSB and Santander. Nationwide's lead on trust is not statistically significant and therefore positioned as joint top with Halifax.
4 (c) GfK 2017, Financial Research Survey (FRS), 12 months ending 30 September 2017 vs 31 March 2017, proportion of extremely/very satisfied customers minus proportion of extremely/very/fairly dissatisfied customers summed across current account, mortgage and savings. High street peer group defined as providers with main current account market share >4% (Barclays, Halifax, HSBC, Lloyds Bank (inc C&G), NatWest, Santander and TSB).
Chief Executive's review (continued)
While costs have risen in recent years as we have made strategic investments in the Society, invested in our people and grown our business, we've worked hard to contain them. Our underlying cost income ratio of 59.0% (H1 2016/17: 57.1%) reduced from 60.2% for the year ended 4 April 2017. Our ongoing efficiency programme is delivering sustainable savings, and we're on track to deliver broadly flat costs for the full year, as we promised.
Building thriving membership: helping members into homes, to save and to manage their finances
Attracting a new generation of members while retaining the loyalty of our existing members is important for the long-term sustainability of the Society.
Mortgages: helping members onto or up the housing ladder
Our founding purpose - helping people into homes - is still the heart of our business. Although housing market activity remained subdued and competition intensified, prime mortgage gross lending of GBP15.0 billion was up 2% over the same period last year. At a time when many have difficulty getting on the property ladder, first time buyers remain a priority for us, and we helped a record 39,500 homebuyers into their first homes, 1 in 5 of all first time buyers (H1 2016/17: 38,600). Following our decision in 2016 to extend our borrowing in retirement options, we are launching a new Lifetime Mortgage that does not require repayments during the customer's lifetime. This is Nationwide's response to today's reality - that many older people have considerable wealth tied up in their property, which they can't - or can't afford to - access without moving home. Our Lifetime Mortgage will give members access to their capital in a flexible and affordable way.
We also want to remain the provider of choice for our existing members. 7 out of 10 members chose to renew their mortgage with Nationwide. In a more challenging environment for landlords, buy to let mortgages remain less attractive to borrowers. Buy to let lending in the period was in line with expectations, reflecting the highly competitive market and our decision to tighten our lending criteria in 2016, ahead of regulation and our competitors.
As 1 in 5 people now live in private rented accommodation, we want to help both tenants and landlords by using our influence to improve the standards of privately rented homes. We've introduced improved standards that landlords must meet in order to secure a mortgage with us. We've also launched the Nationwide Partnership Board, a cross-industry alliance, to monitor the health of the rental market, recommend solutions, and take action which delivers decent, affordable homes.
Savings: supporting savings members with above average rates
We've heard strongly from savings members about the strain of a decade of low interest rates and, despite market pressures, we're committed to helping savers make the most of their money. We've maintained our average rates approximately 50% higher than the market average([5]) , putting a financial benefit in members' pockets of over GBP180 million in the period (H1 2016/17: GBP185 million). And while our deposit balances grew more slowly than last year, we maintained our market share at 10% largely through growth in current accounts.
With low rates a disincentive for people to save, over the first half of the year we continued to encourage our loyal members to keep saving by offering exclusive products with higher rates, such as Flexclusive Regular Saver, our Loyalty Bonds and FRISAs.
We were the first in the industry to respond to the recent base rate rise, passing on the full benefit to those members whose savings rates fell by 0.25% following the last base rate reduction in August 2016. This includes popular products such as our Loyalty Saver, Flexclusive ISA and children's products like Smart Junior ISA.
Leading current account attracts more net switchers than the major banks combined([6])
We offer very attractive current accounts, which drew in record new accounts for the seventh half year running. We opened 427,000 accounts, a 13% increase year on year, bringing our market share of main standard and packaged accounts to 7.7% (4 April 2017 7.5%). We were delighted to be the UK's top choice([7]) for current accounts again and to be first choice for switchers once more, attracting more than three times as many net switchers as our nearest competitor through the Current Account Switching Service (CASS)([6]) .
Our stock share of youth and student accounts increased to 10.3% in the period (4 April 2017: 8.2%), with 76,300 FlexOne (H1 2016/17: 70,300) and 17,700 FlexStudent (H1 2016/17: 9,400) account openings.
We also extended our 'recommend a friend' scheme to allow mortgage and savings members to benefit from loyalty incentives from recommending our current account.
In the last two years, our total stock of current accounts has increased by 19%, to a record 7.1 million.
5 Market average interest rates are based on Bank of England whole of market average interest rates adjusted to exclude Nationwide's balances.
6 Source: Current Account Switch Service Dashboard, Issue 16 quarterly participant data, 3 months to March 2017.
7 Source: Nationwide Brand and Advertising tracker - compiled by Independent Research Agency. 'Top choice' is most considered ie 'first choice' or 'seriously considered' current account provider amongst non-customers, based on responses from non-customers of each brand, 3 months ending September 2017. Financial brands included Nationwide, Barclays, Cooperative Bank, First Direct, Halifax, HSBC, Lloyds, NatWest, TSB and Santander.
Chief Executive's review (continued)
Building legendary service: digital convenience with a human touch
High quality service has been a hallmark of the Society for many years. We are pleased to still have the highest customer satisfaction in our high street peer group with an overall lead of 2.7% over our nearest competitor and 7.5% over the peer group average([8]) . This is despite extending the group we measure ourselves against this year. Importantly we also have a lead of 9.7% on current account customer satisfaction([9]) . Longer term, our aim is to be among the best for service outside our industry, as well as within it.
We continue to work hard to deserve our reputation for service by investing in delivering excellent service across all our channels - branch, digital, mobile and telephony.
Through our Member Connect panel we know members want a balance of convenient technology and human interaction. With active mobile users up 15.5% since 4 April 2017, we're continuing to rethink and reconfigure our branch network by rolling out a new design, with branches organised in four separate zones: Convenience, where we offer speedy service; Conversation, for help and advice; Consultation, with private space for discussions; and a Community space where members can have a coffee and a chat. The new design has already been rolled out to seven locations, with a further 30 planned before the middle of next year.
We have started to prepare for the advent of Open Banking in 2018. This will give customers the opportunity to ask their banking provider, including Nationwide, to share their current account balance, transaction history and payment data with other financial institutions, in a secure manner so that they can see their accounts across different organisations. The result should be greater visibility for the consumer, and more control of their finances. Nationwide has taken a leading role in developing the industry standards that will protect consumers, and we're exploring how we can use Open Banking to provide a better sales and service experience for members. IT resilience is one of our highest priorities and we continue to focus on protecting customer services and data, balancing understandable customer expectations for 'always on' digital services with the need for resilient and secure systems.
PRIDE: investing in our employees and values
Our 18,000 employees provide the high-quality service and care ethic that underpin our performance, which is why we place a high emphasis on being one of the best places to work in the UK. You can see this in our high employee engagement and enablement levels. Nationwide was named as a UK top three Outstanding Employer in Korn Ferry's 2017 employee engagement awards.
Our culture, which is summed up in our PRIDE values, has consistently driven an intense focus on our members, and the conduct we aspire to. Recently, 150 colleagues volunteered as PRIDE champions, to ensure we live our values and culture every day. In addition, a number of colleagues were chosen in a 'People's Choice' vote to join our leadership community and will take part in our Leading for Mutual Good programme for the Society's existing and future leaders.
Building a national treasure: building society, nationwide
We want to earn people's trust, help them understand our mutual difference and see that Nationwide makes a positive impact on people's lives. Among consumers, we remain at the top for trust and fair financial brands([10]) .
As a business with a social purpose at its heart, sharing the rewards of our success with society more generally is an important part of what we do. We have launched a new five-year social investment programme aimed at helping people find a place fit to call home. We expect to invest some GBP20 million over five years to help local communities solve their housing issues, with local members voting to choose which projects we will support. The programme is being piloted in the second half of 2017, before going nationwide in 2018.
Outlook: financial strength and strong trading allows us to support members in challenging times
Turning to the outlook. A number of financial factors are weighing on the economy and our members. On the one hand, employment is at or close to historic highs. On the other, uncertainty appears to be holding back investment, wages are shrinking in real terms, and inflation has ticked up to its highest level in five years. Annual house price growth has moderated to 2-4% in recent months. And of course, uncertainty about Brexit continues.
8 (c) GfK 2017, Financial Research Survey (FRS), 12 month rolling data from April 2012 to September 2017, proportion of extremely/very satisfied customers minus proportion of extremely/very/fairly dissatisfied customers summed across current account, mortgage and savings. High street peer group defined as providers with main current account market share >4% (Barclays, Halifax, HSBC, Lloyds Bank (inc C&G), NatWest, Santander and TSB). Prior to April 2017, high street peer group defined as providers with main current account market share >6% (Barclays, Halifax, HSBC, Lloyds Bank (inc C&G), NatWest and Santander). Prior to April 2015, Lloyds Bank and TSB combined as Lloyds TSB Group (including Lloyds Bank, TSB and C&G).
9 (c) GfK 2017, Financial Research Survey (FRS), 12 months ending 30 September 2017, proportion of extremely/very satisfied main current account customers minus proportion of extremely/very/fairly dissatisfied main current account customers. High street peer group defined as providers with main current account market share >4% (Barclays, Halifax, HSBC, Lloyds Bank (inc C&G), NatWest, Santander and TSB).
10 Source: Nationwide Brand and Advertising tracker - compiled by Independent Research Agency, based on all consumer responses, 3 months ending September 2017. Financial brands included Nationwide, Barclays, Co-operative Bank, First Direct, Halifax, HSBC, Lloyds, NatWest, TSB and Santander. Nationwide's lead on trust is not statistically significant and therefore positioned as joint top with Halifax.
Chief Executive's review (continued)
Overall, however, we expect the economy to grow in the quarters ahead. While the pace of expansion is likely to remain sluggish in the near term, our central expectation is that it will accelerate in the years ahead, once Brexit uncertainties recede and the squeeze on incomes reduces. We expect the housing market to mirror trends in the wider economy.
This mixed economic picture means that it is vital we continue to support our members, providing them with the appropriate products and services to manage their financial lives.
In the housing market, with interest rates still at historic lows, November's rate rise should only have a modest impact on most households. Further interest rate rises are likely to be gradual and, providing employment remains buoyant, mortgages will remain affordable. There are, however, some signs of a squeeze on household finances from low wage growth and above-target inflation. Our member panel tells us people are beginning to cut back, particularly on savings and discretionary expenditure, which is not surprising when real incomes are falling.
Competition in the mortgage market remains intense, and shows no sign of abating. Although mortgage volumes remain strong, we're prepared for the possibility that intense competition combined with declining consumer confidence may lead to a moderation in gross lending and market share in the second half of the year.
The launch of Open Banking in 2018 will also bring new competitive challenges and opportunities for a growing Society like Nationwide. We will meet any pressures by being more efficient - we're already on track to deliver broadly flat costs for the full year - and by continuing to attract new members with our distinctive combination of excellent value, leading service, and social purpose.
Nationwide is in very good shape after another strong set of results. The second half may bring tougher trading conditions, but we remain well placed to stand by our members in these uncertain times. Nationwide is financially secure and will continue to promote the long-term interests of both the Society and our members.
Financial review
Overall performance
Our financial performance for the period ended 30 September 2017 was in line with expectations. Statutory profit before tax was GBP628 million (H1 2016/17: GBP696 million) and includes GBP36 million (H1 2016/17: GBP77 million) of derivative and hedge accounting gains. Underlying profit before tax was GBP588 million (H1 2016/17: GBP615 million). Profits in the prior period benefited from a one-off gain of GBP100 million from the sale of our investment in Visa Europe; the current period profits included a gain of GBP26 million from the sale of our investment in VocaLink.
Our underlying cost income ratio was 59.0% (H1 2016/17: 57.1%), reflecting increased costs and broadly unchanged total income. The rise in costs is primarily due to higher defined benefit pension costs and an increase in depreciation. We remain committed to a lower trajectory of cost growth in the future and, compared to the same period last year, cost growth has slowed to 3% (H1 2016/17: 9% growth). We anticipate full year costs will be broadly flat year on year, in line with the expectations communicated in our 2016/17 financial results.
Impairment losses on loans and advances to customers have increased by GBP27 million to GBP59 million (H1 2016/17: GBP32 million), reflecting a rate of incurred losses which is in line with the full year performance for 2016/17. The increase in impairments is driven by updates to our provision assumptions to reflect the current economic environment. Delinquency levels remain low across all our portfolios.
A GBP6 billion growth in total assets to GBP228 billion has been driven mainly by a GBP4 billion growth in residential mortgage balances to GBP175 billion, reflecting strong trading in the period. The remaining asset growth reflects an increase in high quality liquid assets from on-balance sheet Term Funding Scheme (TFS) drawdowns (replacing off-balance sheet Funding for Lending Scheme (FLS) liquidity) and from cash received in relation to the Society's recent core capital deferred shares (CCDS) issuance.
Our capital levels have improved during the period with CET1 and UK leverage ratios of 29.6% and 4.9% respectively (4 April 2017: 25.4% and 4.4%) comfortably in excess of current regulatory requirements. The recent CCDS issuance improved our CET1 and UK leverage ratios by 2.4 percentage points and 0.4 percentage points respectively.
During the period, competition in the mortgage market has intensified and the savings market has experienced increased competition from challenger banks, alongside slower market growth. We anticipate these conditions will continue, resulting in the moderation of trading volumes during the remainder of the current financial year. Notwithstanding this, our financial strength and high quality balance sheet mean that we are well placed to deliver long term value to our members.
Income statement
Underlying and statutory results Half year to Half year to 30 September 30 September 2017 2016 GBPm GBPm -------------------------------------------- ------------- ------------- Net interest income 1,514 1,449 Net other income 125 193 -------------------------------------------- ------------- ------------- Total underlying income 1,639 1,642 Underlying administrative expenses (967) (938) Impairment losses (59) (37) Underlying provisions for liabilities and charges (25) (52) -------------------------------------------- ------------- ------------- Underlying profit before tax (note i) 588 615 Bank levy (note ii) 1 - Financial Services Compensation Scheme (FSCS) (note ii) 3 4 Gains from derivatives and hedge accounting (notes ii and iii) 36 77 -------------------------------------------- ------------- ------------- Statutory profit before tax 628 696 -------------------------------------------- ------------- ------------- Taxation (157) (194) -------------------------------------------- ------------- ------------- Profit after tax 471 502 -------------------------------------------- ------------- -------------
Notes:
i. Underlying profit represents management's view of underlying performance and is presented to aid comparability across reporting periods.
ii. Within the statutory results presented in the financial statements: a. bank levy is included within administrative expenses b. FSCS costs are included within provisions for liabilities and charges c. gains from derivatives and hedge accounting are presented separately within total income.
iii. Although we only use derivatives to hedge market risks, income statement volatility can still arise due to hedge accounting ineffectiveness or because hedge accounting is either not currently applied or is not currently achievable. This volatility is largely attributable to accounting rules which do not fully reflect the economic reality of the hedging strategy.
Financial review (continued)
Total income and margin Half year to Half year to 30 September 30 September 2017 2016 GBPm GBPm -------------------------------------------- ------------- ------------- Net interest income 1,514 1,449 Net other income 125 193 -------------------------------------------- ------------- ------------- Total underlying income 1,639 1,642 Gains from derivatives and hedge accounting 36 77 -------------------------------------------- ------------- ------------- Total statutory income 1,675 1,719 -------------------------------------------- ------------- ------------- Weighted average total assets 228,263 220,364 Net interest margin (NIM) % 1.34 1.33 -------------------------------------------- ------------- -------------
Net interest income has increased 4% during the period to GBP1,514 million (H1 2016/17: GBP1,449 million), benefiting from lower funding costs. NIM of 1.34% is largely consistent with the same period last year (H1 2016/17: 1.33%).
Savings rates across the industry continued to fall during the first half of the year. Whilst we reduced the rates paid to our members on some of our savings products, our savings range remained competitively positioned in the market and continues to reflect our mutual principle of providing products that represent good long term value to our members. Over the last six months our depositors have benefited from average rates approximately 50% higher than the average market rate([1]) . In anticipation of the base rate increase in November, we committed to increase rates on products impacted by the previous reductions.
The benefit to NIM from lower funding costs has been offset by a decrease in mortgage margins. Competition in retail lending markets remains intense and has resulted in more borrowers switching to competitively priced products. Our legacy base mortgage rate (BMR) balances, at GBP26.3 billion, have progressively declined period on period (4 April 2017: GBP29.1 billion) in line with both recent experience and our expectations. We are planning for market conditions to remain highly competitive, and the run-off of BMR balances to continue, and consequently we expect our reported margin to trend lower during the second half of the year and into 2018/19.
Other income has decreased during the period to GBP125 million (H1 2016/17: GBP193 million) predominantly due to the prior period impact of a one-off gain of GBP100 million from the sale of our investment in Visa Europe. This is offset in part by a current period gain of GBP26 million from the sale of our investment in VocaLink.
Administrative expenses Half year to Half year to 30 September 30 September 2017 2016 GBPm GBPm ------------------------------------------ ------------- ------------- Employee costs 407 388 Other administrative expenses 368 375 Depreciation, amortisation and impairment 192 175 ------------------------------------------ ------------- ------------- Total underlying administrative expenses 967 938 Bank Levy expense/(reversal) (1)- Total statutory administrative expenses 966 938 %% Cost income ratio - underlying basis 59.0 57.1 Cost income ratio - statutory basis 57.7 54.6 ------------------------------------------ ------------- -------------
Underlying administrative expenses increased by 3%, driven by higher defined benefit pension costs as a result of market conditions, and the depreciation impact of previous investment in our infrastructure to enhance products and services. The remainder of our cost base was essentially unchanged compared with a year ago despite volume growth and the impact of inflation. The underlying cost income ratio of 59.0% (H1 2016/17: 57.1%) is down from 60.2% for the full year 2016/17.
To support the long-term interests of our members, we continue to invest in our products, service and resilience. During the period, investment spend has focused on improvements to our branches, continued updates to our digital channels and preparation for Open Banking. We have also invested in IT resilience and ensuring compliance with UK and EU regulatory requirements.
1 Market average interest rates are based on Bank of England whole of market average interest rates adjusted to exclude Nationwide's balances.
Financial review (continued)
We have continued our focus on operational efficiency, whilst ensuring the needs of our members are prioritised. We have made good progress with our efficiency programme, which targets GBP300 million of sustainable cost savings by 2022. Cost growth in the first half of the year slowed to 3% compared with 9% in the same period last year, and we have invested GBP15 million in the period in improving longer-term efficiency. This has included redesign of member processes, organisational simplification and improvements to the way we deliver change. Our efficiency programme is a key priority and we remain committed to a lower trajectory of cost growth in the future and a broadly flat cost position for the current year compared with 2016/17.
Impairment losses Half year to Half year to 30 September 30 September 2017 2016 GBPm GBPm ------------------------------------------- ------------- ------------- Residential lending 12 5 Consumer banking 52 32 ------------------------------------------- ------------- ------------- Retail lending 64 37 Commercial lending (5) (5) Impairment losses on loans and advances to customers 59 32 Impairment losses on investment securities - 5 ------------------------------------------- ------------- ------------- Total 59 37 ------------------------------------------- ------------- -------------
Impairment losses have increased by GBP22 million to GBP59 million (H1 2016/17: GBP37 million) but reflect a rate of incurred losses in line with the full year performance for 2016/17. The increase is driven mainly by additional consumer banking impairments from updating provision assumptions to reflect current economic conditions. Although loans continue to perform and delinquency levels have remained low across all portfolios during the period, there are emerging indications that affordability is under more pressure from the impact of inflation.
Further details on asset quality are included in the Business and risk report.
Provisions for liabilities and charges Half year to Half year to 30 September 30 September 2017 2016 GBPm GBPm ------------------------------------------- ------------- ------------- Underlying provisions for liabilities and charges - Customer redress 25 52 FSCS levy (release) (3) (4) ------------------------------------------- ------------- ------------- Total statutory provisions for liabilities and charges 22 48 ------------------------------------------- ------------- -------------
We hold provisions for customer redress to cover the costs of remediation and redress in relation to past sales of financial products and post sales administration, including compliance with consumer credit legislation and other regulatory requirements. The charge for the period primarily relates to customer redress provisions recognised in respect of PPI and Plevin, including the cost of administering these claims.
The income statement charge for the half year mainly reflects updated assumptions for provisions previously recognised. This includes a GBP28 million charge in relation to PPI, driven by an increase in the anticipated number of future complaints we expect to receive ahead of the Financial Conduct Authority's August 2019 deadline.
More information on customer redress and FSCS provisions is included in note 16.
Taxation
The tax charge for the period of GBP157 million (H1 2016/17: GBP194 million) represents an effective tax rate of 25% (H1 2016/17: 27.9%) which is higher than the statutory UK corporation tax rate of 19% (H1 2016/17: 20%). The effective tax rate is higher due to the 8% banking surcharge, equivalent to GBP33 million (H1 2016/17: GBP40 million), and the tax effect of disallowable customer redress costs and other disallowable expenses of GBP1 million and GBP4 million (H1 2016/17: GBP7 million and GBP7 million) respectively. Further information is provided in note 9.
Financial review (continued)
Member financial benefit
As a building society, we seek to maintain our financial strength whilst returning value to our members through pricing and service. We provide value to our members through the highly competitive mortgage, savings and banking products we can offer as a direct result of being a member-owned business. The calculation method used to quantify our member financial benefit is described in full in the Financial review section of the Annual Report and Accounts 2017. In summary, we quantify the financial benefit of being a member by comparing the following to industry benchmarks:
-- our interest rate pricing on prime mortgages, unsecured lending and retail deposits; and -- the lower fees we charge and higher incentives we provide to our members.
For the period ended 30 September 2017, this measure shows we have provided our members with a financial benefit of GBP245 million (H1 2016/17: GBP250 million). This reflects our ongoing commitment to delivering long-term value to our members despite strong levels of competition in our core markets.
Balance sheet
Total assets have increased to GBP228 billion at 30 September 2017 (4 April 2017: GBP222 billion) with a strong trading performance driving GBP4.1 billion of net prime mortgage lending (H1 2016/17: GBP5.0 billion). The remainder of the balance sheet growth largely reflects an increase in high quality liquid assets.
Mortgage lending has been partially funded by growth in retail deposits, with member deposits increasing by GBP1.8 billion to GBP146.4 billion (4 April 2017 GBP144.5 billion). The growth in member balances is primarily attributable to increased current account balances as we focus on growing our base of engaged members. This includes growth from existing account holders, as well as 427,000 new current accounts opened during the period (H1 2016/17: 377,000). In a highly competitive market, our market share of UK household deposits remained stable at 10.0% at 30 September 2017 (4 April 2017: 10.1%).
Assets 30 September 4 April 2017 2017 ----------------------------------------------- GBPm % GBPm % ----------------------------------------------- --------- --- --------- --- Residential mortgages 175,262 92 171,263 91 Commercial lending 11,772 6 12,580 7 Consumer banking 4,011 2 3,949 2 Other lending 76 - 17 - ----------------------------------------------- --------- --- --------- --- 191,121 100 187,809 100 Impairment provisions (455) (438) ----------------------------------------------- --------- --- --------- --- Loans and advances to customers 190,666 187,371 Other financial assets 34,397 31,231 Other non-financial assets 2,465 3,068 ----------------------------------------------- --------- --- --------- --- Total assets 227,528 221,670 ----------------------------------------------- --------- --- --------- --- Asset quality Residential mortgages: % % Proportion of residential mortgage accounts 3 months+ in arrears 0.44 0.45 Average indexed loan to value of residential mortgage book (by value) 55 55 Impairment provisions as a percentage of non-performing balances 5.5 5.3 Consumer banking: Non-performing loans as percentage of total balances (excluding charged off balances) (note i) 3.8 3.6 Impairment provisions as a percentage of non-performing balances (including charged off balances) (note i) 88.4 86.5 Liquidity coverage ratio 125.2 124.0 ----------------------------------------------- --------- --- --------- ---
Note:
i. Charged off balances relate to accounts which are closed to future transactions and are held on the balance sheet for an extended period (up to 36 months, depending on the product) whilst recovery procedures take place.
Financial review (continued)
Residential mortgages
Residential mortgages include prime and specialist loans, with the specialist portfolio primarily comprising buy to let (BTL) lending. Gross mortgage lending in the period reduced by GBP0.8 billion to GBP16.7 billion (H1 2016/17: GBP17.5 billion), representing a market share of 12.9% for the period (H1 2016/17: 14.5%). Gross prime mortgage lending remained strong at GBP15.0 billion (H1 2016/17: GBP14.7 billion). Following the affordability criteria changes we made last year, and the impacts of the stamp duty increase on the BTL market, gross BTL mortgage lending for the period reduced to GBP1.7 billion (H1 2016/17: GBP2.8 billion).
Net mortgage lending has decreased during the period by GBP2.1 billion to GBP3.9 billion (H1 2016/17: GBP6.0 billion), reflecting the reduction in BTL advances and increased prime mortgage redemptions due to ongoing market competition. Net lending for the period includes GBP4.1 billion of prime lending (H1 2016/17: GBP5.0 billion). Given the sustained levels of competition in the prime mortgage market, and the slowdown in BTL volumes, we expect net lending to moderate in the period ahead.
The average loan to value (LTV) of our portfolio, weighted by value, was unchanged at 55% (4 April 2017: 55%). The average LTV of new lending in the period also remained unchanged at 71% (4 April 2017: 71%), reflecting our continued support of the first time buyer market as we recognise the importance of helping people take their initial steps onto the housing ladder.
The impairment provision balance has increased to GBP150 million (4 April 2017: GBP144 million) due to updated provision assumptions to reflect current economic conditions. The impact of these conditions has not yet been evident in arrears performance, which improved marginally, with cases more than three months in arrears improving slightly to 0.44% (4 April 2017: 0.45%).
Commercial lending
Total commercial lending balances were GBP11.8 billion (4 April 2017: GBP12.6 billion) and, given deleveraging activity undertaken in recent years, our overall portfolio is increasingly weighted towards registered social landlords, with balances of GBP7.4 billion (4 April 2017: GBP7.5 billion). The registered social landlords' portfolio is fully performing, reflecting its low risk nature.
The strategy for the commercial lending portfolio continues to be to hold and actively manage to maturity in line with contractual terms. During the period the commercial real estate (CRE) balances decreased by GBP0.4 billion to GBP2.2 billion (4 April 2017:
GBP2.6 billion).
Consumer banking
Consumer banking comprises personal loans of GBP2.0 billion (4 April 2017: GBP2.0 billion), credit cards of GBP1.8 billion (4 April 2017: GBP1.7 billion) and current account overdrafts of GBP0.2 billion (4 April 2017: GBP0.2 billion). Delinquency levels in the portfolio remain low, benefiting from prudent lending criteria, proactive risk management practices and continued low interest rates.
Impairment provisions have increased to GBP282 million (4 April 2017: GBP269 million), primarily due to updated provision assumptions to reflect current economic conditions.
Further details of our lending are provided in the 'Lending risk' section of the Business and risk report.
Other financial assets
Other financial assets of GBP34.4 billion (4 April 2017: GBP31.2 billion) comprise liquidity and investment assets held by our Treasury function of GBP29.1 billion (4 April 2017: GBP25.4 billion), derivatives with positive fair values of GBP5.1 billion (4 April 2017: GBP5.0 billion) and fair value adjustments and other assets of GBP0.2 billion (4 April 2017: GBP0.8 billion). Derivatives are primarily interest rate and foreign exchange derivatives which economically hedge financial risks inherent in our core lending and funding activities.
Growth in the levels of on-balance sheet liquid assets is predominantly due to the replacement of off-balance sheet FLS liquidity with on-balance sheet TFS drawdowns, additional cash from the recent issuance of CCDS and an increase in held to maturity investment securities. Although total on-balance sheet liquidity has increased, our Liquidity Coverage Ratio (LCR) has remained broadly stable at 125.2% (4 April 2017: 124.0%) due to certain assets not being eligible for the LCR calculation, and changes to LCR requirements.
Financial review (continued)
Members' interests, equity and liabilities 30 September 4 April 2017 2017 GBPm GBPm ------------------------------------------- ------------ ------------ Member deposits 146,384 144,542 Debt securities in issue 40,491 40,339 Other financial liabilities 26,562 23,940 Other liabilities 1,804 1,716 ------------------------------------------- ------------ ------------ Total liabilities 215,241 210,537 Members' interests and equity 12,287 11,133 ------------------------------------------- ------------ ------------ Total members' interests, equity and liabilities 227,528 221,670 ------------------------------------------- ------------ ------------ %% Wholesale funding ratio (note i) 28.2 27.1 ------------------------------------------- ------------ ------------
Note:
i. The wholesale funding ratio includes all balance sheet sources of funding (including securitisations) but excludes Funding for Lending Scheme (FLS) drawings which, as an asset swap, are not included on Nationwide's balance sheet, reflecting the substance of the arrangement. Off-balance sheet FLS drawings have reduced during the period to GBP3.0 billion (4 April 2017: GBP4.8 billion).
Member deposits
Member deposits have increased by GBP1.8 billion to GBP146.4 billion (4 April 2017: GBP144.5 billion). This includes current account credit balances, which have increased to GBP19.8 billion (4 April 2017: GBP17.5 billion).
Our market share of all UK household deposits at 30 September 2017 was 10.0% (4 April 2017: 10.1%).
Debt securities in issue
Debt securities in issue of GBP40.5 billion (4 April 2017: GBP40.3 billion) are used to raise funding in wholesale markets to finance our core activities. The wholesale funding ratio has increased to 28.2% (4 April 2017: 27.1%), reflecting wholesale issuance activity, as well as the drawdown of TFS.
Other financial liabilities
Other financial liabilities have increased during the period to GBP26.6 billion (4 April 2017: GBP23.9 billion) driven by an increase in bank deposits (which includes TFS drawdowns). This growth has been partly offset by a decrease in Nationwide International balances which have now fully run off. Following our strategic decision to exit the business, the outflow of Nationwide International balances was managed in an orderly manner, with the funding replaced by additional member deposits and the use of wholesale funding where appropriate.
Members' interests and equity
Movements in the period reflect the retained profit after tax and the issuance of CCDS during the period, details of which are included in the Capital structure section on the next page.
Statement of comprehensive income Half year to Half year to 30 September 30 September 2017 2016 GBPm GBPm Profit after tax 471 502 Net remeasurement of pension obligations 71 (405) Net movement in cash flow hedge reserve (114) 310 Net movement in available for sale reserve (15) (12) Other items - 3 ------------------------------------------- ------------- ------------- Total comprehensive income 413 398 ------------------------------------------- ------------- -------------
Movements in the table above are shown net of related taxation.
The net remeasurement of pension obligations of GBP71 million income (H1 2016/17: GBP405 million expense) mainly reflects GBP226 million of actuarial gains (H1 2016/17: GBP1,359 million actuarial losses). This is partly offset by a GBP129 million loss resulting from pension asset returns being lower than the rate used to discount future cashflows in calculating the pension obligation (H1 2016/17: GBP807 million gain). Further information on gross movements in the pension obligation is included in note 18.
The net movement in cash flow hedge reserve of GBP114 million expense (H1 2016/17: GBP310 million income) is driven by changes in derivative valuations from movements in foreign exchange rates and interest rates. Further information is included in note 6.
Financial review (continued)
Capital structure
Capital structure 30 September 2017 4 April 2017 GBPm GBPm ------------------------------------- ------------- ------------- Capital resources (note i) Common Equity Tier 1 (CET1) capital 9,758 8,555 Total Tier 1 capital 10,750 9,547 Total regulatory capital 14,104 12,129 Risk weighted assets (RWAs) 32,999 33,641 UK leverage exposure 220,614 215,894 CRR leverage exposure 236,002 228,428 CRD IV capital ratios: % % CET1 ratio 29.6 25.4 UK leverage ratio (note ii) 4.9 4.4 CRR leverage ratio (note iii) 4.6 4.2 ------------------------------------- ------------- -------------
Notes:
i. Data in the table is reported under CRD IV on an end point basis.
ii. The UK leverage ratio is shown on the basis of measurement announced by the Prudential Regulation Authority (PRA) and excludes eligible central bank reserves from the leverage exposure measure.
iii. The Capital Requirements Regulation (CRR) leverage ratio is calculated using the CRR definition of Tier 1 for the capital amount and the Delegated Act definition of the exposure measure and is reported on an end point basis.
In September 2017, the Society issued an additional five million of GBP1 CCDS, as part of our strategy to maintain broad access to capital markets. This issuance supports the continued relevance of this instrument in the context of our strategic capital management and enhances its liquidity. Issuing from a position of strength, we remain well in excess of regulatory capital requirements. These CCDS form a single series together with the CCDS previously issued in December 2013. Further information on CCDS can be found in note 19. Detailed information on the key features of CCDS and other capital instruments can be found within the Interim Pillar 3 Disclosure 2017 at nationwide.co.uk
CET1 capital resources have increased over the period by GBP1.2 billion mainly due to the CCDS issuance, which raised GBP0.8 billion of CET1 capital, and profit after tax for the period of GBP471 million. Risk weighted assets (RWAs) reduced over the period by GBP0.6 billion primarily due to the continued run-off of the commercial book.
The movements described above have resulted in an increase in the CET1 ratio to 29.6% (4 April 2017: 25.4%).
The UK leverage ratio was 4.9% at 30 September 2017 (4 April 2017: 4.4%). The increase was a result of the CCDS issuance and profits for the period. The CRR leverage ratio also increased to 4.6% (4 April 2017: 4.2%).
We continue to monitor regulatory developments that could lead to an increased level of capital requirements. Whilst there are a number of areas where potential requirements are yet to be finalised, regulatory announcements on the UK leverage ratio mean that we have a clearer understanding of the expected impact on our capital requirement. However, we will remain engaged in the development of the regulatory approach to ensure we are prepared for any changes. Whilst further amendments may result in significant increases to RWAs, we do not believe these will lead to a material increase in our overall capital requirements.
Further details of the capital position are included in the 'Solvency risk' section of the Business and risk report.
Business and risk report
Contents
Page Introduction 18 Principal risks 18 Top and emerging risks 18 Lending risk 19 Residential mortgages 20 Consumer banking 26 Commercial lending 28 Treasury assets 33 Financial risk 36 Liquidity and funding risk 36 Solvency risk 41 Pension risk 44 Earnings risk 44 Operational risk 45 Conduct and compliance risk 45
Introduction
The Interim Business and risk report provides information on developments during the period in relation to the Group's business, the risks it is exposed to and how it manages those risks. Where there has been no change to the Group's approach to managing its risks, or there has been no material change to the relevant risk environment from that disclosed at year end, then this information has not been repeated in the 2017/18 Interim Results and can be found in the Business and risk report in the Annual Report and Accounts 2017.
Principal risks
Whilst it is accepted that all business activities involve some degree of risk, Nationwide seeks to protect its members by appropriately managing the risks that arise from its activities. The principal types of risk inherent within the business remain unchanged from those set out in the Business and risk report in the Annual Report and Accounts 2017, namely:
-- Lending risk -- Financial risk -- Operational risk -- Conduct and compliance risk -- Strategic risk.
Top and emerging risks
Nationwide's top and emerging risks to the delivery of the strategy are identified through the process outlined in the Business and risk report section of the Annual Report and Accounts 2017. These risks are kept under close observation through the risk reporting and governance structure.
Nationwide's top and emerging risks continue to relate to three key themes:
-- Macroeconomic and competitive environment -- Cyber security, data protection and operational resilience -- The pace of change in the digital and regulatory environment.
The latest developments in relation to the Group's top and emerging risks are set out below.
Macroeconomic and competitive environment
Nationwide continues to regularly monitor economic factors, including undertaking regular assessments of how economic stresses may impact its business model. Factors including the UK vote to leave the EU, geopolitical tensions, and European and domestic political changes are regularly discussed. While Nationwide's business model means it has limited direct exposure to the EU, should the UK leave the EU without a transitional deal in place, Nationwide could be exposed to secondary impacts.
Whilst the Bank of England has raised the base rate, interest rates remain at a historically low level. The Board continues to monitor closely and discuss the impact of any change in interest rates, competitor activity, and associated risks to economic growth and our margin.
In addition, the Board continues to balance carefully affordability with credit supply to support members, and actively monitors key indicators for any effect on credit losses or customer outcomes driven by the growth in the levels of UK household debt, or customer affordability resulting from wages not keeping pace with inflation.
Cyber security, data protection and operational resilience
Nationwide continues to focus on protecting customer services and data, balancing customer expectations for "always on" digital services with the need to provide compliant, resilient and secure systems.
Recent high profile attacks, such as WannaCry and NotPetya ransomware attacks, have not directly affected Nationwide, but emphasise the need for continued vigilance to ensure systems remain resilient and customers are protected from any future attacks.
Top and emerging risks (continued)
The pace of change in the digital and regulatory environment
Nationwide recognises both the risks and opportunities associated with changes that could impact the structure of the market, such as challenges from new competition as a result of Open Banking, artificial intelligence and automation, as well as broader changes to the external environment including climate change and the UK's aging population. Nationwide's stress testing activities consider a number of these to ensure the associated risks are understood and potential management responses have been identified.
Lending risk
Lending risk is the risk that a borrower or counterparty fails to pay interest or to repay the principal on a loan or other financial instrument (such as a bond) on time. Lending risk also encompasses extension risk and concentration risk. Further details on how Nationwide manages lending risk are available in the Annual Report and Accounts 2017. The table below summarises the Group's assets subject to lending risk.
Balances subject to lending risk 30 September 2017 Gross balances Less: impairment Carrying % of total provisions value GBPm GBPm GBPm % ------------------------------------ -------------- ---------------- -------- ---------- Cash 15,302 - 15,302 7 Loans and advances to banks 3,009 - 3,009 1 Investment securities 10,788 - 10,788 5 Derivative financial instruments 5,066 - 5,066 2 Fair value adjustment for portfolio hedged risk (note i) 191 - 191 - Investments in equity shares 41 - 41 - -------------- ---------------- -------- ---------- 34,397 - 34,397 15 Loans and advances to customers:
Residential mortgages 175,262 (150) 175,112 78 Consumer banking 4,011 (282) 3,729 2 Commercial lending (note i) 11,772 (23) 11,749 5 Other lending (note ii) 76 - 76 - -------------- ---------------- -------- ---------- 191,121 (455) 190,666 85 Total 225,518 (455) 225,063 100 ------------------------------------ -------------- ---------------- -------- ---------- Balances subject to lending risk 4 April 2017 Gross balances Less: impairment Carrying % of total provisions value GBPm GBPm GBPm % ------------------------------------ -------------- ---------------- -------- ---------- Cash 13,017 - 13,017 6 Loans and advances to banks 2,587 - 2,587 1 Investment securities 9,764 - 9,764 5 Derivative financial instruments 5,043 - 5,043 2 Fair value adjustment for portfolio hedged risk (note i) 746 - 746 - Investments in equity shares 67 - 67 - -------------- ---------------- -------- ---------- 31,224 - 31,224 14 Loans and advances to customers: Residential mortgages 171,263 (144) 171,119 78 Consumer banking 3,949 (269) 3,680 2 Commercial lending (note i) 12,580 (25) 12,555 6 Other lending (note ii) 17 - 17 - -------------- ---------------- -------- ---------- 187,809 (438) 187,371 86 Total 219,033 (438) 218,595 100 ------------------------------------ -------------- ---------------- -------- ----------
Notes:
i. The fair value adjustment for portfolio hedged risk and the fair value adjustment for micro hedged risk (included within the carrying value of the commercial lending portfolio) represent hedge accounting adjustments. They are indirectly exposed to lending risk through the relationship with the underlying loans covered by Nationwide's hedging programmes.
ii. The other lending portfolio includes deferred consideration relating an investment in Visa Inc and collateral balances to support repo transactions.
Lending risk - Residential mortgages
Nationwide's residential mortgages include both prime and specialist loans. Prime residential mortgages are mainly Nationwide branded advances made through the branch network and intermediary channels. Specialist lending primarily consists of buy to let mortgages originated under The Mortgage Works (UK) plc (TMW) brand, but also includes other specialist lending which is now closed to new business.
New lending in the prime portfolio has seen the residential mortgage exposure grow from GBP171 billion to GBP175 billion over the period. This has mainly been driven by continued support for first time buyers and reflects Nationwide's commitment to help people become homeowners.
Over the period the geographical distribution across the UK has remained stable and the average LTV, weighted by value, has remained at 55%. Support for first time buyers has seen the proportion of new lending made to this segment increase to 37%
(H1 2016/17: 35%). Average LTV of new lending is unchanged at 71% and the proportion of the portfolio with an LTV above 80% fell to 9.5% (4 April 2017: 9.6%).
The proportion of lending made to the buy to let segment has reduced over the period to 10% (H1 2016/17: 16%). In May 2017 Nationwide reintroduced a 125% Interest Cover Ratio (ICR) mortgage for basic rate taxpayers to recognise the lower impact the phased changes to income tax relief for buy to let investors will have on these borrowers.
Arrears levels remain low across prime and specialist lending, reflecting the favourable economic conditions, the low interest rate environment and robust lending controls. The proportion of loans more than three months in arrears reduced to 0.44%
(4 April 2017: 0.45%), significantly below the Council of Mortgage Lenders (CML) average of 0.86%. With the immediate outlook for the UK less certain and the buy to let market facing increased costs, the expectation is for a very gradual rise in arrears from these low levels.
The proportion of non-performing loans reduced to 1.5% of the total mortgage portfolio. Provisions for impairment remain broadly stable.
Lending and new business
The table below summarises the residential mortgage portfolios:
Residential mortgage lending 30 September 4 April 2017 2017 GBPm % GBPm % ----------------------------- --------- --- --------- --- Prime 142,138 81 138,004 81 Specialist: Buy to let 30,139 18 30,087 18 Self-certified 1,942 1 2,071 1 Near prime 742 - 784 - Sub prime 301 - 317 - ----------------------------- --------- --- --------- --- 33,124 19 33,259 19 Total residential mortgages 175,262 100 171,263 100 ----------------------------- --------- --- --------- ---
Note:
Self-certified, near prime and sub prime lending were discontinued in 2009.
Lending risk - Residential mortgages (continued)
Distribution of new business by borrower Half year to Half year to type (by value) 30 September 30 September 2017 2016 % % ----------------------------------------- ------------- ------------- Prime: First time buyers 37 35 Home movers 31 30 Remortgagers 21 18 Other 1 1 ------------- ------------- Total prime 90 84 Specialist: Buy to let new purchases 2 4 Buy to let remortgagers 8 12 Total specialist 10 16 Total new business 100 100 ----------------------------------------- ------------- -------------
Note:
All new business measures exclude existing customers who are only switching products and/or taking further advances.
The proportion of prime remortgage lending increased during the period reflecting an increased customer appetite for remortgaging.
The proportion of lending to buy to let investors reduced during the period. Influencing factors include a contraction in the buy to let market following the introduction of further stamp duty charges for additional property purchases, and Nationwide taking a lead in the market by increasing its minimum interest cover ratio requirement in anticipation of the effect phased tax rises will have on affordability for some property investors.
Lending risk
Residential mortgage lending continues to have a low risk profile as demonstrated by a low level of arrears compared to the industry average. The residential mortgages portfolio comprises many relatively small loans which are broadly homogenous, have low volatility of credit risk outcomes and are diversified in terms of the UK market and geographic segments.
LTV and lending risk concentration
Average LTV shown below is calculated by weighting by value as this is considered to reflect most appropriately the exposure at risk.
Average LTV of loan stock (by value) 30 September 4 April 2017 2017 ------------------------------------- % % ------------------------------------- ------------ ------------ Prime 54 54 Specialist 58 59 ------------------------------------- ------------ ------------ Total 55 55 ------------------------------------- ------------ ------------ Average LTV of new business (by value) Half year to Half year to 30 September 30 September 2017 2016 --------------------------------------- % % --------------------------------------- ------------- ------------- Prime 72 72 Specialist (buy to let) 61 63
--------------------------------------- ------------- ------------- Total 71 71 --------------------------------------- ------------- -------------
Note:
The LTV of new business excludes further advances and product switchers.
The average LTV of buy to let new lending reduced by two percentage points in the period. This is due in part to the introduction of a reduced maximum LTV of 75% in May 2016 (previously 80%).
Lending risk - Residential mortgages (continued)
LTV distribution of new business (by Half year to Half year to value) 30 September 30 September 2017 2016 ------------------------------------ % % ------------------------------------ ------------- ------------- 0% to 60% 27 25 60% to 75% 31 32 75% to 80% 8 9 80% to 85% 13 14 85% to 90% 17 16 90% to 95% 4 4 Total 100 100 ------------------------------------ ------------- -------------
The maximum LTV for new prime residential customers is 95%. The proportion of new lending below 60% increased, in part as a consequence of an increased customer appetite for remortgaging.
Geographical concentration
Residential Greater Central Northern South South Scotland Wales Northern Total mortgage balances London England England East West Ireland by LTV and region England England 30 September GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm % 2017 ------------------------ ------- -------- -------- -------- -------- -------- ----- -------- ------- ----- Performing loans Fully collateralised LTV ratio: Up to 50% 27,812 10,511 6,818 9,051 5,980 3,019 1,360 893 65,444 50% to 60% 11,771 6,106 4,040 4,683 3,355 1,694 767 381 32,797 60% to 70% 8,916 6,882 6,098 3,671 3,335 2,516 1,222 398 33,038 70% to 80% 5,877 4,734 5,513 2,511 2,226 2,472 1,137 380 24,850 80% to 90% 3,952 2,230 3,246 1,556 1,212 1,259 652 302 14,409 90% to 100% 465 200 492 173 95 133 71 105 1,734 ------- -------- -------- -------- -------- -------- ----- -------- ------- 58,793 30,663 26,207 21,645 16,203 11,093 5,209 2,459 172,272 98.4 Not fully collateralised Over 100% LTV (A) 4 4 25 2 2 12 2 199 250 0.1 Collateral value on A 3 4 21 2 2 11 2 167 212 Negative equity on A 1 - 4 - - 1 - 32 38 ------- -------- -------- -------- -------- -------- ----- -------- ------- Total performing loans 58,797 30,667 26,232 21,647 16,205 11,105 5,211 2,658 172,522 98.5 ------------------------ ------- -------- -------- -------- -------- -------- ----- -------- ------- ----- Non-performing loans Fully collateralised LTV ratio: Up to 50% 494 165 110 127 69 39 21 27 1,052 50% to 60% 200 107 78 69 47 30 16 11 558 60% to 70% 75 111 120 59 56 42 23 11 497 70% to 80% 24 86 104 21 26 37 21 10 329 80% to 90% 12 34 82 7 5 19 15 8 182 90% to 100% 3 2 41 1 1 7 10 8 73 808 505 535 284 204 174 106 75 2,691 1.5 Not fully collateralised Over 100% LTV (B) - 1 7 - - 1 1 39 49 - Collateral value on B - 1 6 - - 1 1 31 40 Negative equity on B - - 1 - - - - 8 9 ------- -------- -------- -------- -------- -------- ----- -------- ------- Total non-performing loans 808 506 542 284 204 175 107 114 2,740 1.5 ------------------------ ------- -------- -------- -------- -------- -------- ----- -------- ------- ----- Total residential mortgages 59,605 31,173 26,774 21,931 16,409 11,280 5,318 2,772 175,262 100.0 ------------------------ ------- -------- -------- -------- -------- -------- ----- -------- ------- ----- Geographical concentrations 34% 18% 15% 13% 9% 6% 3% 2% 100% ------------------------ ------- -------- -------- -------- -------- -------- ----- -------- ------- -----
Lending risk - Residential mortgages (continued)
Residential Greater Central Northern South South Scotland Wales Northern Total mortgage balances London England England East West Ireland by LTV and region England England 4 April 2017 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm % ------------------------ ------- -------- -------- -------- -------- -------- ------ -------- -------- ----- Performing loans Fully collateralised LTV ratio: Up to 50% 28,493 9,737 6,361 8,783 5,630 2,915 1,208 833 63,960 50% to 60% 11,822 5,612 3,748 4,637 3,141 1,649 681 357 31,647 60% to 70% 8,659 6,888 5,737 3,852 3,426 2,366 972 395 32,295 70% to 80% 5,169 4,905 5,897 2,216 2,198 2,619 1,296 352 24,652 80% to 90% 3,084 2,483 3,304 1,314 1,207 1,285 707 324 13,708 90% to 100% 288 237 699 132 102 157 233 140 1,988 ------- -------- -------- -------- -------- -------- ------ -------- -------- 57,515 29,862 25,746 20,934 15,704 10,991 5,097 2,401 168,250 98.2 Not fully collateralised Over 100% LTV (A) 5 6 40 2 3 16 8 239 319 0.2 ------- -------- -------- -------- -------- -------- ------ -------- -------- Collateral value on A 4 5 35 1 2 15 8 199 269 Negative equity on A 1 1 5 1 1 1 - 40 50 ------- -------- -------- -------- -------- -------- ------ -------- -------- Total performing loans 57,520 29,868 25,786 20,936 15,707 11,007 5,105 2,640 168,569 98.4 ------------------------ ------- -------- -------- -------- -------- -------- ------ -------- -------- ----- Non-performing loans Fully collateralised LTV ratio: Up to 50% 504 153 100 120 66 40 20 25 1,028 50% to 60% 192 98 69 69 41 28 12 11 520 60% to 70% 69 105 107 58 49 42 17 12 459 70% to 80% 17 94 105 21 32 36 24 10 339 80% to 90% 8 42 86 6 6 18 15 11 192 90% to 100% 1 7 53 - 1 7 14 7 90 ------- -------- -------- -------- -------- -------- ------ -------- -------- 791 499 520 274 195 171 102 76 2,628 1.6 Not fully collateralised Over 100% LTV (B) - 1 12 - - 2 3 48 66 - ------- -------- -------- -------- -------- -------- ------ -------- -------- Collateral value on B - 1 11 - - 2 3 38 55 Negative equity on B - - 1 - - - - 10 11
------- -------- -------- -------- -------- -------- ------ -------- -------- Total non-performing loans 791 500 532 274 195 173 105 124 2,694 1.6 ------------------------ ------- -------- -------- -------- -------- -------- ------ -------- -------- ----- Total residential mortgages 58,311 30,368 26,318 21,210 15,902 11,180 5,210 2,764 171,263 100.0 ------------------------ ------- -------- -------- -------- -------- -------- ------ -------- -------- ----- Geographical concentrations 34% 18% 15% 12% 9% 7% 3% 2% 100% ------------------------ ------- -------- -------- -------- -------- -------- ------ -------- -------- -----
The value of partially collateralised non-performing loans has reduced to GBP49 million (4 April 2017: GBP66 million), primarily reflecting the growth in house prices.
During the period the proportion of loan balances with an LTV greater than 80% has reduced to 9.5% (4 April 2017: 9.6%).
Arrears
Number of cases more than 3 months in 30 September 4 April 2017 arrears as % of total book 2017 -------------------------------------- % % -------------------------------------- ------------ ------------ Prime 0.35 0.36 Specialist 0.86 0.89 -------------------------------------- ------------ ------------ Total 0.44 0.45 -------------------------------------- ------------ ------------ CML industry average 0.86 0.91 -------------------------------------- ------------ ------------
Favourable economic conditions and a continued low interest environment have resulted in the arrears performance of both the prime and specialist mortgage portfolios reaching a level where any future changes are more likely to be gradual increases rather than further falls. The combined arrears rate of 0.44% is approximately half of the Council of Mortgage Lenders' (CML) industry average rate of 0.86%.
Lending risk - Residential mortgages (continued)
Impaired loans
Impaired and non-performing loans are identified primarily by arrears status, as shown in the table below.
Residential mortgages by payment status 30 September 2017 Prime Specialist Total GBPm GBPm GBPm % ----------------------------------------------- ------- ---------- ------- ----- Performing: Neither past due nor impaired 140,460 32,062 172,522 98.5 Non-performing: Past due up to 3 months 1,303 678 1,981 1.1 Impaired: Past due 3 to 6 months 155 165 320 0.2 Past due 6 to 12 months 112 110 222 0.1 Past due over 12 months 99 84 183 0.1 Litigations (past term interest only) 1 1 2 - Possessions 8 24 32 - ----------------------------------------------- ----- Total non-performing loans 1,678 1,062 2,740 1.5 ----------------------------------------------- ------- ---------- ------- ----- Total residential mortgages 142,138 33,124 175,262 100.0 ----------------------------------------------- ------- ---------- ------- ----- Non-performing loans as a % of total residential mortgages 1.2% 3.2% 1.6% Impairment provisions (GBPm) 37 113 150 Impairment provisions as a % of non-performing balances 2.2% 10.6% 5.5% Impairment provisions as a % of total residential mortgages 0.03% 0.34% 0.09% ----------------------------------------------- ------- ---------- ------- ----- Residential mortgages by payment status 4 April 2017 Prime Specialist Total GBPm GBPm GBPm % ----------------------------------------------- ------- ---------- ------- ----- Performing: Neither past due nor impaired 136,374 32,195 168,569 98.4 Non-performing: Past due up to 3 months 1,258 663 1,921 1.1 Impaired: Past due 3 to 6 months 156 173 329 0.2 Past due 6 to 12 months 117 118 235 0.2 Past due over 12 months 91 91 182 0.1 Litigations (past term interest only) - 1 1 - Possessions 8 18 26 - ----------------------------------------------- ------- ---------- ------- ----- Total non-performing loans 1,630 1,064 2,694 1.6 ----------------------------------------------- ------- ---------- ------- ----- Total residential mortgages 138,004 33,259 171,263 100.0 ----------------------------------------------- ------- ---------- ------- ----- Non-performing loans as a % of total residential mortgages 1.2% 3.2% 1.6% Impairment provisions (GBPm) 34 110 144 Impairment provisions as a % of non-performing balances 2.1% 10.3% 5.3% Impairment provisions as a % of total residential mortgages 0.02% 0.33% 0.08% ----------------------------------------------- ------- ---------- ------- -----
Impairment provisions increased to GBP150 million (4 April 2017: GBP144 million) due to updates to assumptions to reflect current economic conditions.
Impairment losses for the period Half year to Half year to 30 September 30 September 2017 2016 GBPm GBPm --------------------------------- ------------- ------------- Prime 4 1 Specialist 8 4 Total 12 5 --------------------------------- ------------- -------------
Lending risk - Residential mortgages (continued)
Interest only mortgages
Nationwide does not offer any new advances for prime residential mortgages on an interest only basis. However, there are historical balances which were originally advanced as interest only mortgages or where a change in terms to an interest only basis was agreed (this option was withdrawn in 2012). Maturities of interest only mortgages are managed closely, engaging regularly with customers to ensure the loan can be redeemed or to agree a strategy for repayment.
The majority of the specialist portfolio comprises buy to let loans, of which approximately 82% continue to be advanced on an interest only basis.
Interest only Term Due within Due after Due after Due after Total % of mortgages expired one year one year two years more than total book (still and before and before five years open) two years five years 30 September GBPm GBPm GBPm GBPm GBPm GBPm % 2017 -------------- -------- ---------- ----------- ----------- ----------- ------ ----------- Prime 66 323 408 1,612 12,381 14,790 10.4 Specialist 105 203 213 1,231 27,835 29,587 89.3 -------------- -------- ---------- ----------- ----------- ----------- ------ ----------- Total 171 526 621 2,843 40,216 44,377 25.3 -------------- -------- ---------- ----------- ----------- ----------- ------ ----------- 4 April 2017 -------------- -------- ---------- ----------- ----------- ----------- ------ ----------- Prime 64 337 444 1,636 13,604 16,085 11.7 Specialist 104 202 216 1,173 28,037 29,732 89.4 -------------- -------- ---------- ----------- ----------- ----------- ------ ----------- Total 168 539 660 2,809 41,641 45,817 26.8 -------------- -------- ---------- ----------- ----------- ----------- ------ -----------
Interest only loans that are 'term expired (still open)' are, to the extent that they are not otherwise in arrears, considered performing for six months, pending renegotiation of the facility. After six months, the loans are, if not in litigation, classified as forborne.
Forbearance
Nationwide is committed to supporting customers facing financial difficulty by working with them to find a solution through proactive arrears management and forbearance.
The table below provides details of residential mortgages subject to forbearance. The Annual Report and Accounts 2017 sets out details of concession events included within forbearance.
Balance subject to forbearance 30 September 2017 4 April 2017 Prime Specialist Total Prime Specialist Total GBPm GBPm GBPm GBPm GBPm GBPm ------------------------------- ----- ---------- ----- ----- ---------- ----- Past term interest only concessions 151 147 298 154 141 295 Interest only concessions 506 70 576 501 70 571 Capitalisation 54 64 118 59 72 131 Term extension (within term) 35 14 49 42 16 58 Permanent interest only conversions 5 27 32 6 33 39 ------------------------------- ----- ---------- ----- ----- ---------- ----- Total forbearance 751 322 1,073 762 332 1,094 ------------------------------- ----- ---------- ----- ----- ---------- ----- Impairment provision on forborne loans 8 10 18 7 11 18 ------------------------------- ----- ---------- ----- ----- ---------- -----
Note:
Loans where more than one concession event has occurred are reported under the latest event.
Lending risk - (continued)
Consumer banking
The consumer banking portfolio comprises balances on unsecured retail banking products, specifically overdrawn current accounts, personal loans and credit cards. Total balances across these portfolios have grown by 2% to GBP4,011 million during the period
(4 April 2017: GBP3,949 million).
Nationwide continues to monitor carefully the composition and performance of the unsecured portfolios, in light of the growth in consumer credit balances observed across the industry. A number of proactive steps have been taken in order to enhance monitoring and controls, ensuring all lending continues to be undertaken responsibly.
Impairment provisions are held against both performing and non-performing segments of the consumer banking portfolio. Provision balances have increased in the period, largely due to updates to provision assumptions to reflect the current economic conditions. Although loans continue to perform, there are emerging indications that borrowers are under more pressure from levels of debt relative to income. Across the consumer banking portfolios this has led to increased provision coverage as a percentage of total non-performing balances by 2%.
Consumer banking balances 30 September 4 April 2017 2017 GBPm % GBPm % --------------------------- -------- ---- -------- ---- Overdrawn current accounts 210 5 261 7 Personal loans 2,006 50 1,957 49 Credit cards 1,795 45 1,731 44 --------------------------- -------- ---- -------- ---- Total consumer banking 4,011 100 3,949 100 --------------------------- -------- ---- -------- ----
Impaired loans
Lending risk on the consumer banking portfolios is primarily monitored and reported based on delinquency status, since no security is held against the loans. The Annual Report and Accounts 2017 sets out how impaired loans are defined.
Consumer banking by payment due 30 September 2017 status Overdrawn Personal Credit Total current loans cards accounts GBPm GBPm GBPm GBPm % ------------------------------------ --------- -------- ------ ----- --- Performing: Neither past due nor impaired 171 1,864 1,657 3,692 92 Non-performing: Past due up to 3 months 13 41 33 87 Impaired: Past due 3 to 6 months 4 11 11 26 Past due 6 to 12 months 3 11 2 16 Past due over 12 months 3 14 - 17 ------------------------------------ --------- -------- ------ ----- 23 77 46 146 4 Charged off (note i) 16 65 92 173 4 ------------------------------------ --------- -------- ------ ----- Total non-performing 39 142 138 319 Total consumer banking lending 210 2,006 1,795 4,011 100 ------------------------------------ --------- -------- ------ ----- --- Non-performing loans as % of total (excluding charged off balances) 12% 4% 3% 4% Impairment provisions excluding charged off balances 17 53 50 120 Impairment provisions on charged off balances 15 62 85 162 ------------------------------------ --------- -------- ------ ----- Total impairment provisions 32 115 135 282 Impairment provisions as a % of non-performing loans (including charged off balances) 82% 81% 98% 88% Impairment provisions as % of total balances 15% 6% 8% 7% ------------------------------------ --------- -------- ------ ----- ---
Lending risk - Consumer banking (continued)
Consumer banking by payment due 4 April 2017 status Overdrawn Personal Credit Total current loans cards accounts GBPm GBPm GBPm GBPm % ------------------------------------ --------- -------- ------ ----- --- Performing: Neither past due nor impaired 225 1,822 1,591 3,638 92 Non-performing: Past due up to 3 months 12 38 28 78 Impaired: Past due 3 to 6 months 4 10 12 26 Past due 6 to 12 months 3 11 2 16 Past due over 12 months 3 14 - 17 ------------------------------------ --------- -------- ------ ----- 22 73 42 137 4 Charged off (note i) 14 62 98 174 4 ------------------------------------ --------- -------- ------ ----- Total non-performing 36 135 140 311 Total consumer banking lending 261 1,957 1,731 3,949 100 ------------------------------------ --------- -------- ------ ----- --- Non-performing loans as % of total (excluding charged off balances) 9% 4% 3% 4% Impairment provisions excluding charged off balances 15 48 42 105 Impairment provisions on charged off balances 13 60 91 164 ------------------------------------ --------- -------- ------ ----- Total impairment provisions 28 108 133 269 Impairment provisions as a % of non-performing loans (including charged off balances) 78% 80% 95% 86% Impairment provisions as % of total balances 11% 6% 8% 7% ------------------------------------ --------- -------- ------ ----- ---
Note:
i. Charged off balances relate to accounts which are closed to future transactions and are held on the balance sheet for an extended period (up to 36 months, depending on the product) whilst recovery procedures take place.
Total non-performing balances (excluding charged off accounts) have increased to GBP146 million (4 April 2017: GBP137 million), but represent a stable proportion of the overall balances as consumer banking portfolios have continued to grow modestly over recent periods.
Impairment losses for the period Overdrawn Personal Credit Total current loans cards accounts GBPm GBPm GBPm GBPm --------------------------------- --------- -------- ------ ----- Half year to 30 September 2017 7 19 26 52 Half year to 30 September 2016 4 11 17 32 --------------------------------- --------- -------- ------ -----
Impairment losses have increased compared with the same period last year, reflecting a rate of incurred losses which is in line with the full year performance for 2016/17. The charge in the period includes the impact of updated provision assumptions to reflect current economic conditions, including affordability trends.
Lending risk - Consumer banking (continued)
Forbearance
The table below provides details of consumer banking balances that are currently subject to forbearance, split by the concession events agreed. The Annual Report and Accounts 2017 sets out details of concession events included within forbearance.
Balances subject to forbearance Overdrawn Personal Credit Total current loans cards accounts 30 September 2017 GBPm GBPm GBPm GBPm --------------------------------------- --------- -------- ------ ----- Payment concession 18 - 2 20 Interest suppressed payment concession 5 30 18 53 Balances re-aged/re-written - - 4 4 --------------------------------------- --------- -------- ------ ----- Total forbearance 23 30 24 77 --------------------------------------- --------- -------- ------ ----- Impairment provision on forborne loans 3 25 15 43 --------------------------------------- --------- -------- ------ ----- 4 April 2017 --------------------------------------- --------- -------- ------ ----- Payment concession 17 - 2 19 Interest suppressed payment concession 5 29 18 52 Balances re-aged/re-written - - 5 5 --------------------------------------- --------- -------- ------ ----- Total forbearance 22 29 25 76 --------------------------------------- --------- -------- ------ ----- Impairment provision on forborne loans 3 24 16 43 --------------------------------------- --------- -------- ------ -----
Note:
Where more than one concession event has occurred, exposures are reported under the latest event.
Commercial lending
The commercial loan portfolio comprises the following:
Commercial lending balances 30 September 4 April 2017 2017 --------------------------------------- GBPm % GBPm % --------------------------------------- -------- ---- -------- ---- Commercial real estate (CRE) 2,231 21 2,568 23 Registered social landlords (note i) 7,356 69 7,546 67 Project finance (note ii) 1,013 10 1,096 10 --------------------------------------- -------- ---- -------- ---- Total commercial lending 10,600 100 11,210 100 Fair value adjustment for micro hedged risk (note iii) 1,172 1,370 --------------------------------------- -------- ---- -------- ---- Total 11,772 12,580 --------------------------------------- -------- ---- -------- ----
Notes:
i. Loans to registered social landlords are secured on residential property.
ii. Loans advanced in relation to project finance are secured on cash flows from government or local authority backed contracts.
iii. Micro hedged risk relates to loans hedged on an individual basis.
The strategy for the commercial lending portfolio continues to be to hold and actively manage to maturity in line with contractual terms.
The registered social landlord and project finance portfolios now amount to 79% (4 April 2017: 77%) of the commercial lending portfolio. This increase is due to the quicker run-off of the CRE portfolio, which is subject to shorter maturity dates. Notwithstanding the reduction in CRE lending, the exposure remains well spread across sectors and geographic regions. The registered social landlord and project finance assets are fully performing and remain stable, reflecting their long term, lower risk nature with a long history of zero defaults. The detailed disclosures below therefore relate only to the CRE portfolio.
Lending risk - Commercial lending (continued)
Lending risk
Lending risk in the commercial loan portfolio is linked to delinquency and the availability of collateral to cover any loan balances. Nationwide adopts robust credit management policies and processes designed to recognise and manage the risks arising, or likely to arise, from the portfolio.
The lending risk in the CRE portfolio continues to reduce as the portfolio of loans contracts, the volume of non-performing loans reduces and real estate market conditions remain stable.
Loan to value
The following tables show the CRE portfolio by LTV and region:
CRE lending balances by LTV London South East Rest of Total and region UK (note i) 30 September 2017 GBPm GBPm GBPm GBPm % -------------------------------- ------ ---------- --------- ----- --- Performing loans Fully collateralised LTV ratio (note ii): Less than 25% 221 22 50 293 25% to 50% 667 140 281 1,088 51% to 75% 376 42 302 720 76% to 90% 1 8 42 51 91% to 100% - - 1 1 ------ ---------- --------- ----- 1,265 212 676 2,153 97 Not fully collateralised: Over 100% LTV (A) - - 2 2 - ------ ---------- --------- ----- Collateral value on A - - 1 1 Negative equity on A - - 1 1 ------ ---------- --------- ----- Total performing loans 1,265 212 678 2,155 97 -------------------------------- ------ ---------- --------- ----- --- Non-performing loans (note iii) Fully collateralised LTV ratio: Less than 25% 1 - 1 2 25% to 50% 12 1 6 19 51% to 75% 4 1 5 10 76% to 90% 4 7 3 14 91% to 100% - - 2 2 ------ ---------- --------- ----- 21 9 17 47 2 Not fully collateralised Over 100% LTV (B) - - 29 29 1 ------ ---------- --------- ----- Collateral value on B - - 17 17 Negative equity on B (note iv) - - 12 12 ------ ---------- --------- ----- Total non-performing loans 21 9 46 76 3 -------------------------------- ------ ---------- --------- ----- --- Total CRE loans 1,286 221 724 2,231 100 -------------------------------- ------ ---------- --------- ----- --- Geographical concentration 58% 10% 32% 100% -------------------------------- ------ ---------- --------- ----- ---
Lending risk - Commercial lending (continued)
CRE lending balances by LTV London South East Rest of Total and region UK (note i) 4 April 2017 GBPm GBPm GBPm GBPm % -------------------------------- ------ ---------- --------- ----- --- Performing loans Fully collateralised LTV ratio (note ii) Less than 25% 217 19 38 274 25% to 50% 702 178 359 1,239 51% to 75% 466 66 361 893 76% to 90% 8 4 59 71 91% to 100% 1 8 1 10 ------ ---------- --------- ----- 1,394 275 818 2,487 97 Not fully collateralised Over 100% LTV (A) 2 - 5 7 - ------ ---------- --------- ----- Collateral value on A - - 4 4 Negative equity on A 2 - 1 3 ------ ---------- --------- ----- Total performing loans 1,396 275 823 2,494 97 -------------------------------- ------ ---------- --------- ----- --- Non-performing loans (note iii) Fully collateralised LTV ratio: Less than 25% 1 - - 1 25% to 50% 9 3 2 14 51% to 75% 8 1 4 13 76% to 90% - - 3 3 91% to 100% 3 4 3 10 ------ ---------- --------- ----- 21 8 12 41 2 Not fully collateralised Over 100% LTV (B) 1 3 29 33 1 ------ ---------- --------- ----- Collateral value on B - - 20 20
Negative equity on B (note iv) 1 3 9 13 ------ ---------- --------- ----- Total non-performing loans 22 11 41 74 3 -------------------------------- ------ ---------- --------- ----- --- Total CRE loans 1,418 286 864 2,568 100 -------------------------------- ------ ---------- --------- ----- --- Geographical concentration 55% 11% 34% 100% -------------------------------- ------ ---------- --------- ----- ---
Notes:
i. Includes lending to borrowers based in the Channel Islands.
ii. The LTV ratio is calculated using the on-balance sheet carrying amount of the loan divided by the indexed value of the most recent independent external collateral valuation. The Investment Property Databank (IPD) monthly index is used.
iii. Non-performing loans include impaired loans and loans with arrears of less than three months which are not impaired.
iv. All non-performing loans with negative equity are impaired.
Non-performing loans represent 3% of CRE balances (4 April 2017: 3%). Both the amount of partially collateralised non-performing loans and the shortfall on collateral for non-performing loans have marginally reduced, reflecting the improving book performance and managed exit activity.
Lending risk - Commercial lending (continued)
Credit risk concentrations
The CRE exposure remains well spread across sectors, and geographic regions as shown below:
CRE lending balances and impairment London South East Rest of UK Total provisions by type and region (note ii) (note i) 30 September 2017 GBPm GBPm GBPm GBPm ------------------------------------ ------ ---------- ---------- ----- Retail 271 118 138 527 Office 232 19 200 451 Residential 692 35 218 945 Industrial and warehouse 26 26 82 134 Leisure and hotel 65 23 65 153 Other - - 21 21 ------------------------------------ ------ ---------- ---------- ----- Total CRE lending 1,286 221 724 2,231 ------------------------------------ ------ ---------- ---------- ----- Impairment provision: Retail 1 1 2 4 Office - - 2 2 Residential 2 - 3 5 Industrial and warehouse - - - - Leisure and hotel - - 5 5 Other - - 7 7 ------------------------------------ ------ ---------- ---------- ----- Total impairment provisions 3 1 19 23 ------------------------------------ ------ ---------- ---------- ----- CRE lending balances and impairment London South East Rest of UK Total provisions by type and region (note ii) (note i) 4 April 2017 GBPm GBPm GBPm GBPm ------------------------------------ ------ ---------- ---------- ----- Retail 433 170 209 812 Office 222 28 222 472 Residential 686 37 263 986 Industrial and warehouse 29 29 99 157 Leisure and hotel 48 22 57 127 Other - - 14 14 ------------------------------------ ------ ---------- ---------- ----- Total CRE lending 1,418 286 864 2,568 ------------------------------------ ------ ---------- ---------- ----- Impairment provision: Retail 1 4 2 7 Office 1 - 2 3 Residential 1 - 5 6 Industrial and warehouse - - 1 1 Leisure and hotel - - 6 6 Other - - 2 2 ------------------------------------ ------ ---------- ---------- ----- Total impairment provisions 3 4 18 25 ------------------------------------ ------ ---------- ---------- -----
Notes:
i. A CRE loan may be secured on assets crossing different types and regions; the balances are therefore attributed to the sector and region where the majority of the exposure arises. This can lead to recategorisations occurring between periods if the asset mix changes.
ii. Includes lending to borrowers based in the Channel Islands.
Lending risk - Commercial lending (continued)
Arrears and impairment
No losses have been experienced on the registered social landlord or project finance portfolios and there is no non-performance within these portfolios. As a result, impairment provisions are only required against the CRE portfolio.
The table below sets out the payment due status and impairment provisions for the CRE portfolio:
CRE lending balances by payment due status 30 September 4 April 2017 2017 ------------------------------------------- GBPm % GBPm % ------------------------------------------- -------- ---- -------- ---- Performing: Neither past due nor impaired 2,155 97 2,494 97 Non-performing: Past due up to 3 months but not impaired (note i) 35 2 29 1 Impaired (note ii): Past due up to 3 months 12 - 24 1 Past due 3 to 6 months 4 - 1 - Past due 6 to 12 months 7 - 3 - Past due over 12 months 18 1 17 1 Possessions (note iii) - - - - -------- ---- -------- ---- Total non-performing balances 76 3 74 3 Total 2,231 100 2,568 100 ------------------------------------------- -------- ---- -------- ---- Impairment provisions Individual 18 78 20 80 Collective 5 22 5 20 ------------------------------------------- -------- ---- -------- ---- Total impairment provisions 23 100 25 100 ------------------------------------------- -------- ---- -------- ---- Provision coverage ratios Individual provisions as % of impaired balances 44 44 Total provisions as % of non-performing balances 30 34 Total provisions as % of total balances 1 1 Estimated collateral: Against loans past due but not impaired 35 100 29 100 Against impaired loans 29 71 32 71 ------------------------------------------- -------- ---- -------- ---- Total collateral against non-performing balances 64 84 61 82 ------------------------------------------- -------- ---- -------- ----
Notes:
i. The status 'past due up to 3 months but not impaired' includes any asset where a payment due under strict contractual terms is received late or missed. The amount included is the entire financial asset rather than just the payment overdue.
ii. Impaired loans include those balances which are more than three months in arrears, or against which an individual provision is held.
iii. Possession balances represent loans for which Nationwide has taken ownership of security pending sale. Assets in possession are realised to derive the maximum benefit for all interested parties. Nationwide does not occupy or otherwise use for any purposes the repossessed assets.
Total non-performing loans, before provisions, have increased by GBP2 million to GBP76 million. This increase is due to loans, which are past their maturity date, being held whilst exit strategies are agreed and executed with the borrower. There has been a reduction of GBP2 million in total impairment provisions, reflecting the managed exit activity and improving book performance.
Impairment reversal for the period Half year to Half year to 30 September 30 September 2017 2016 ----------------------------------- GBPm GBPm ----------------------------------- ------------- ------------- Total 5 5 ----------------------------------- ------------- -------------
Improved CRE market conditions, including increased liquidity and capital values, have resulted in a net impairment reversal of GBP5 million (H1 2016/17: GBP5 million), including recoveries.
Lending risk - Commercial lending (continued)
Forbearance
The table below provides details of CRE balances that are currently subject to forbearance, split by the concession events agreed. The Annual Report and Accounts 2017 sets out further details of concession events included within forbearance.
Balances subject to forbearance 30 September 4 April 2017 2017 GBPm GBPm --------------------------------------- ------------ ------------ Refinance 83 34 Modifications: Interest concession - 1 Capital concession 51 50 Security amendment 19 56 Extension at maturity 77 126 Breach of covenant 41 80 --------------------------------------- ------------ ------------ Total forbearance 271 347 --------------------------------------- ------------ ------------ Impairment provision on forborne loans 14 17 --------------------------------------- ------------ ------------
Note:
Where more than one concession event has occurred, exposures are reported under the latest event.
Overall, the level of forbearance has reduced, reflecting the managed exit activity and improving book performance. The increase in forbearance, as a result of refinance, reflects short term support provided to borrowers in the execution of the portfolio exit strategy.
Treasury assets
The Treasury portfolio is held primarily for liquidity management and, in the case of derivatives, for market risk management.
The net increase in the portfolio is predominantly due to an increase in cash balances. This follows further drawdowns in the Term Funding Scheme (TFS).
Treasury asset balances 30 September 4 April 2017 2017 GBPm GBPm -------------------------------------------- ------------ ------------ Cash 15,302 13,017 Loans and advances to banks 3,009 2,587 Investment securities 10,829 9,831 -------------------------------------------- ------------ ------------ Treasury liquidity and investment portfolio 29,140 25,435 Derivative assets 5,066 5,043 Total treasury portfolio 34,206 30,478 -------------------------------------------- ------------ ------------
Note:
Derivatives are classified as assets where their fair value is positive and liabilities where their fair value is negative. At 30 September 2017, derivative liabilities were GBP2,549 million (4 April 2017: GBP3,182 million).
In line with the Board's risk appetite, investment activity is restricted to high quality liquid securities. In addition, cash is invested in highly rated liquid assets that are eligible for accessing central bank funding operations.
The balance of out of policy legacy assets has reduced from GBP172 million to GBP73 million during the period through ongoing sales. Opportunities to exit positions continue to be assessed against prevailing market conditions and financial implications.
Managing treasury credit risk
Credit risk within the Treasury portfolio arises primarily from the instruments held for operational, liquidity and investment purposes. The Treasury Credit Risk function manages all aspects of credit risk in accordance with Nationwide's risk governance framework, details of which are provided in the Annual Report and Accounts 2017.
Lending risk - Treasury assets (continued)
Liquidity and investment portfolios
The liquidity and investment portfolio of GBP29,140 million (4 April 2017: GBP25,435 million) comprises liquid assets and other securities. The size of the portfolio reflects operational and strategic liquidity requirements. An analysis of the on-balance sheet portfolios by asset class, credit rating and geographical location of the issuers is set out below.
Liquidity and investment portfolio AAA AA A Other UK US Europe Other by credit rating (note i) 30 September 2017 GBPm % % % % % % % % ----------------------------------- ------ --- --- ----- --- --- ------ ----- Liquid assets: Cash and reserves at central banks 15,302 - 100 - - 100 - - - Government bonds 6,538 10 90 - - 78 6 16 - Supranational bonds 547 95 5 - - - - - 100 Covered bonds 982 100 - - - 46 - 34 20 Residential mortgage backed securities (RMBS) 802 100 - - - 62 - 38 - Asset-backed securities (other) 300 100 - - - 74 - 26 - Liquid assets total 24,471 13 87 - - 88 2 7 3 ----------------------------------- ------ --- --- ----- --- --- ------ ----- Other securities: RMBS 1,403 75 7 16 2 100 - - - Collateralised loan obligations 80 83 17 - - 100 - - - Student loans 68 24 76 - - - 100 - - Other investments 109 - 39 37 24 28 34 38 - ----------------------------------- ------ --- --- ----- --- --- ------ ----- Other securities total 1,660 68 12 16 4 92 6 2 - ----------------------------------- ------ --- --- ----- --- --- ------ ----- Loans and advances to banks (note ii) 3,009 - 57 42 1 86 6 7 1 Total 29,140 15 80 5 - 88 2 7 3 ----------------------------------- ------ --- --- ----- --- --- ------ ----- Liquidity and investment portfolio AAA AA A Other UK US Europe Other by credit rating (note i) 4 April 2017 GBPm % % % % % % % % ----------------------------------- ------ --- ----- --- ------ ----- Liquid assets: Cash and reserves at central banks 13,017 - 90 - 10 90 - 10 - Government bonds 6,438 10 90 - - 78 9 13 - Supranational bonds 459 88 12 - - - - - 100 Covered bonds 931 100 - - - 51 - 33 16 Residential mortgage backed securities (RMBS) 922 100 - - - 61 - 39 - Asset-backed securities (other) 285 100 - - - 83 - 17 - Liquid assets total 22,052 14 80 - 6 81 3 13 3 ----------------------------------- ------ --- ----- --- ------ ----- Other securities: RMBS 288 27 3 70 - 98 - 2 - Commercial mortgage backed securities (CMBS) 11 - 38 24 38 38 62 - - Collateralised loan obligations 226 86 14 - - 88 12 - - Student loans 120 48 52 - - - 100 - - Other investments 151 - 32 28 40 44 24 32 - ----------------------------------- ------ --- ----- --- ------ ----- Other securities total 796 42 19 31 8 69 24 7 - ----------------------------------- ------ --- ----- --- ------ ----- Loans and advances to banks (note ii) 2,587 - 47 51 2 70 18 10 2 Total 25,435 14 74 6 6 80 5 12 3 ----------------------------------- ------ --- ----- --- ------ -----
Notes:
i. Ratings used are obtained from Standard & Poor's (S&P), and from Moody's if no S&P rating is available. Internal ratings are used if neither is available.
ii. Loans and advances to banks include derivative collateral and reverse repo balances.
Country exposures
The following table summarises the exposure (shown at their balance sheet carrying values) to institutions outside the UK; none of these exposures are in default, and Nationwide has not incurred any impairment on these assets in the period.
Lending risk - Treasury assets (continued)
Country exposures Cash Government Mortgage Covered Supra-national Loans Other Other Total bonds backed bonds bonds to banks corporate assets securities 30 September GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm 2017 ------------------ ---- ---------- ----------- ------- -------------- --------- ---------- ------- ----- Austria - 67 - - - - - - 67 Belgium - 45 - - - - - - 45 Finland - 270 - 25 - - - - 295 France - - - 32 - - - 45 77
Germany - 395 - - - 61 - 76 532 Ireland - - - - - 7 - - 7 Netherlands - 250 308 - - - - - 558 Total Eurozone - 1,027 308 57 - 68 - 121 1,581 ------------------ ---- ---------- ----------- ------- -------------- --------- ---------- ------- ----- USA - 408 - - - 182 - 106 696 Rest of world (note i) - - - 479 547 201 - - 1,227 ------------------ ---- ---------- ----------- ------- -------------- --------- ---------- ------- ----- Total - 1,435 308 536 547 451 - 227 3,504 ------------------ ---- ---------- ----------- ------- -------------- --------- ---------- ------- ----- Country exposures Cash Government Mortgage Covered Supra-national Loans Other Other Total bonds backed bonds bonds to banks corporate assets securities (note ii) 4 April 2017 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm ------------------ ----- ---------- ----------- ------- -------------- ---------- ---------- ------- ----- Finland - 218 - 24 - - - - 242 France - - - 31 - - 1 54 86 Germany - 484 - - - 44 - 43 571 Ireland 1,258 - - - - 27 - - 1,285 Italy - - - - - - 3 - 3 Netherlands - 153 366 - - - - - 519 Total Eurozone 1,258 855 366 55 - 71 4 97 2,706 ------------------ ----- ---------- ----------- ------- -------------- ---------- ---------- ------- ----- USA 16 600 7 - - 474 - 182 1,279 Rest of world (note i) - - - 400 459 232 - - 1,091 ------------------ ----- ---------- ----------- ------- -------------- ---------- ---------- ------- ----- Total 1,274 1,455 373 455 459 777 4 279 5,076 ------------------ ----- ---------- ----------- ------- -------------- ---------- ---------- ------- -----
Notes:
i. Rest of world exposure is to Australia, Canada, Denmark, Norway, Sweden and Switzerland.
ii. Other corporate exposures were held via a European commercial loan facility reported as part of loans and advances to customers, which has now been sold.
Derivative financial instruments
Derivatives are used to reduce exposure to market risks, although the application of accounting rules can create volatility in the income statement. The fair value of derivative assets at 30 September 2017 was GBP5.1 billion (4 April 2017: GBP5.0 billion).
To comply with EU regulatory requirements, Nationwide has indirect clearing arrangements with a central counterparty (CCP) which it uses to clear standardised derivatives. Details of the market standard approach adopted for derivative transactions are provided in the Annual Report and Accounts 2017.
The International Swaps and Derivatives Association (ISDA) Master Agreement is Nationwide's preferred agreement for documenting derivative transactions. A Credit Support Annex (CSA) is always executed in conjunction with the ISDA Master Agreement. Under the terms of a CSA, collateral is passed between parties to mitigate the market-contingent counterparty risk inherent in the outstanding positions.
Netting arrangements can be applied to outstanding transactions with the same counterparty and settled net following a default or any other predetermined event. Under CSA arrangements, netting benefits of GBP1.9 billion (4 April 2017: GBP2.2 billion) were available and GBP3.0 billion of collateral (4 April 2017: GBP2.8 billion) was held. Only cash is held as collateral. The following table shows the exposure to counterparty credit risk for derivative contracts after netting benefits and collateral.
Derivative credit exposure 30 September 2017 4 April 2017 Counterparty credit quality AA A BBB Total AA A BBB Total GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm ---------------------------- ------- ------- ---- ------- ------- ------- ----- ------- Gross positive fair value of contracts 2,041 3,125 - 5,166 2,077 2,600 390 5,067 Amounts offset - (100) - (100) - (24) - (24) ---------------------------- ------- ------- ---- ------- ------- ------- ----- ------- Net amounts reported on the balance sheet 2,041 3,025 - 5,066 2,077 2,576 390 5,043 Netting benefits (583) (1,286) - (1,869) (797) (1,030) (389) (2,216) ---------------------------- ------- ------- ---- ------- ------- ------- ----- ------- Net current credit exposure 1,458 1,739 - 3,197 1,280 1,546 1 2,827 Collateral (1,385) (1,662) - (3,047) (1,261) (1,537) (1) (2,799) ---------------------------- ------- ------- ---- ------- ------- ------- ----- ------- Net derivative credit exposure 73 77 - 150 19 9 - 28 ---------------------------- ------- ------- ---- ------- ------- ------- ----- -------
Financial risk
Financial risk is the risk of Nationwide having inadequate earnings, cash flow or capital to meet current or future requirements and expectations. Financial risk comprises:
-- Liquidity and funding risk -- Solvency risk -- Pension risk -- Market risk -- Earnings risk.
Information on Nationwide's exposure to liquidity and funding risk, solvency risk, pension risk and earnings risk, including developments in the period, is provided in the subsequent sections of this report. Nationwide's exposure to market risk has not changed significantly since the financial year end; further information is available in the Annual Report and Accounts 2017.
Liquidity and funding risk
Nationwide manages liquidity and funding risks within a comprehensive risk framework which includes its policy, strategy, limit setting and monitoring, stress testing and robust governance controls.
This framework ensures that Nationwide maintains a stable and diverse funding base and sufficient holdings of high-quality liquid assets so that there is no significant risk that liabilities cannot be met as they fall due.
Liquidity and funding levels continued to be within Board risk appetite and regulatory requirements at all times during the period.
Nationwide monitors its position relative to internal risk appetite and the regulatory short term liquidity stress metric, the Liquidity Coverage Ratio (LCR), which ensures that sufficient high quality liquid assets are held to survive a short term severe but plausible liquidity stress.
Nationwide's LCR at 30 September 2017 was 125.2% (4 April 2017: 124.0%), which reflects its strategy of maintaining a LCR above 100%.
Nationwide also monitors its position against the future longer term regulatory funding metric, the Net Stable Funding Ratio (NSFR). Based on current interpretations of regulatory requirements and guidance, the NSFR at 30 September 2017 was 131.5%
(4 April 2017: 132.6%) which exceeds the expected 100% minimum future requirement.
Further details of Nationwide's policies for the management of liquidity and funding risk are contained within the Annual Report and Accounts 2017.
Funding profile
Assets 30 September 4 April Liabilities 30 September 4 April 2017 2017 2017 2017 GBPbn GBPbn GBPbn GBPbn --------------------------- ------------ ------- -------------------- ------------ ------- Retail mortgages 175.1 171.1 Retail funding 146.9 146.9 Treasury assets (including liquidity portfolio) 29.1 25.4 Wholesale funding 60.0 55.5 Other retail lending 3.7 3.7 Capital and reserves 16.3 14.3 Commercial/Other lending 11.8 12.6 Other liabilities 4.3 5.0 Other assets 7.8 8.9 --------------------------- ------------ ------- -------------------- ------------ ------- Total 227.5 221.7 Total 227.5 221.7 --------------------------- ------------ ------- -------------------- ------------ -------
Nationwide's loan to deposit ratio(1) at 30 September 2017 was 125.5% (4 April 2017: 122.6%).
(1) The loan to deposit ratio represents loans and advances to customers divided by shares + other deposits + amounts due to customers (excluding repurchase agreements and collateral received).
Financial risk - Liquidity and funding risk (continued)
Wholesale funding
The wholesale funding portfolio is made up of a range of secured and unsecured instruments to ensure Nationwide has a diversified funding base across a range of instruments, currencies, maturities and investor types. Nationwide's wholesale funding strategy is to remain active in core markets and currencies.
Wholesale funding has increased by GBP4.5 billion to GBP60.0 billion. This is due to GBP3.5 billion of drawings from the Bank of England's Term Funding Scheme (TFS) during the period, to support core activities and replace off-balance sheet Funding for Lending Scheme (FLS) maturities. This additional funding is reflected in Nationwide's wholesale funding ratio (on-balance sheet wholesale funding as a proportion of total funding liabilities) which was 28.2% at 30 September 2017 (4 April 2017: 27.1%).
The table below sets out an analysis by currency of Nationwide's wholesale funding.
Wholesale funding 30 September 2017 4 April 2017 by currency GBP EUR USD Other Total % of GBP EUR USD Other Total % of GBPbn GBPbn GBPbn GBPbn GBPbn total GBPbn GBPbn GBPbn GBPbn GBPbn total ------------------------ ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Repos 1.1 0.2 0.3 - 1.6 3 - - - - - - Deposits (note i) 6.6 1.4 0.3 - 8.3 14 7.7 1.4 0.1 - 9.2 16 Certificates of deposit 5.1 - 0.1 - 5.2 9 5.3 - - - 5.3 10 Commercial paper - - 1.5 - 1.5 2 - - 1.8 - 1.8 3 Covered bonds 2.5 12.7 - 0.2 15.4 26 3.3 11.4 - 0.2 14.9 27 Medium term notes 3.4 7.1 3.3 0.7 14.5 24 3.1 6.2 3.6 0.8 13.7 25 Securitisations 0.8 1.3 1.0 - 3.1 5 0.9 1.2 1.4 - 3.5 6 TFS 9.5 - - - 9.5 16 6.0 - - - 6.0 11 Other - 0.9 - - 0.9 1 0.3 0.8 - - 1.1 2 ------------------------ ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Total 29.0 23.6 6.5 0.9 60.0 100 26.6 21.0 6.9 1.0 55.5 100 ------------------------ ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Note:
i. Includes protected equity bond (PEB) balances of GBP0.2 billion (4 April 2017: GBP0.8 billion).
To mitigate cross-currency refinancing risk, Nationwide ensures it holds liquidity in each currency to cover at least the next ten business days of wholesale funding maturities.
The residual maturity of the wholesale funding book, on a contractual maturity basis, is set out below.
Wholesale Not more Over one Over three Over six Subtotal Over one Over two Total funding than one month months months less than year but years - residual month but not but not but not one year not more maturity more than more than more than than two three six months one year years months 30 September GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn 2017 ---------------- ------------ ------------ ------------ ------------- ------------- ------------ ------------ -------------- Repos 1.6 - - - 1.6 - - 1.6 Deposits (note i) 5.5 0.9 1.4 0.5 8.3 - - 8.3 Certificates of deposit 0.9 1.7 1.8 0.8 5.2 - - 5.2 Commercial paper 0.6 0.3 0.6 - 1.5 - - 1.5 Covered bonds 0.1 - - 0.8 0.9 1.6 12.9 15.4 Medium term notes - - 1.2 0.2 1.4 3.0 10.1 14.5 Securitisations 0.1 - 0.2 0.4 0.7 0.7 1.7 3.1 TFS - - - - - - 9.5 9.5 Other - - - - - - 0.9 0.9 ---------------- ------------ ------------ ------------ ------------- ------------- ------------ ------------ -------------- Total 8.8 2.9 5.2 2.7 19.6 5.3 35.1 60.0 ---------------- ------------ ------------ ------------ ------------- ------------- ------------ ------------ -------------- Of which secured 1.8 - 0.2 1.2 3.2 2.3 24.9 30.4 Of which unsecured 7.0 2.9 5.0 1.5 16.4 3.0 10.2 29.6 ---------------- ------------ ------------ ------------ ------------- ------------- ------------ ------------ -------------- % of total 14.7% 4.8% 8.7% 4.5% 32.7% 8.8% 58.5% 100.0% ---------------- ------------ ------------ ------------ ------------- ------------- ------------ ------------ --------------
Financial risk - Liquidity and funding risk (continued)
Wholesale funding Not more Over one Over three Over six Subtotal Over one Over two Total - residual than one month months months less than year but years maturity month but not but not but not one year not more more than more than more than than two three six months one years months year 4 April 2017 GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn ------------------- --------- ---------- ----------- ---------- ---------- --------- -------- -------- Repos - - - - - - - - Deposits (note i) 5.3 1.3 2.0 0.6 9.2 - - 9.2 Certificates of deposit 0.4 1.7 2.4 0.8 5.3 - - 5.3 Commercial paper 0.5 0.6 0.6 0.1 1.8 - - 1.8 Covered bonds - - 0.8 - 0.8 0.8 13.3 14.9 Medium term notes - - 0.1 1.2 1.3 1.8 10.6 13.7 Securitisations 0.3 - 0.3 0.1 0.7 0.6 2.2 3.5 TFS - - - - - - 6.0 6.0 Other - - - - - - 1.1 1.1 ------------------- --------- ---------- ----------- ---------- ---------- --------- -------- -------- Total 6.5 3.6 6.2 2.8 19.1 3.2 33.2 55.5 ------------------- --------- ---------- ----------- ---------- ---------- --------- -------- -------- Of which secured 0.3 - 1.1 0.1 1.5 1.4 22.4 25.3 Of which unsecured 6.2 3.6 5.1 2.7 17.6 1.8 10.8 30.2 ------------------- --------- ---------- ----------- ---------- ---------- --------- -------- -------- % of total 11.7% 6.5% 11.2% 5.0% 34.4% 5.8% 59.8% 100.0% ------------------- --------- ---------- ----------- ---------- ---------- --------- -------- --------
Note:
i. Includes protected equity bond (PEB) balances of GBP0.2 billion (4 April 2017: GBP0.8 billion).
At 30 September 2017 cash, government bonds and supranational bonds included in the liquid asset buffer, including FLS treasury bills, represented 121% (4 April 2017: 129%) of wholesale funding maturing in less than one year, assuming no rollovers.
Total liquidity
Nationwide ensures it has sufficient liquid assets, both in terms of amount and quality, to meet daily cash flow needs as well as stressed requirements driven by internal and regulatory liquidity assessments.
The table below sets out the sterling equivalent fair value of the liquidity portfolio, categorised by issuing currency. It includes off-balance sheet liquidity (FLS treasury bills) and excludes encumbered assets.
Liquid assets 30 September 2017 4 April 2017 GBP EUR USD Total GBP EUR USD Total GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn ----------------------------- ----- ----- ----- ----- ----- ----- ----- ----- Cash and reserves at central banks 15.3 - - 15.3 11.8 1.2 - 13.0 Government bonds 7.1 0.6 0.2 7.9 10.0 0.5 0.7 11.2 Supranational bonds 0.3 - 0.3 0.6 0.2 - 0.3 0.5 Covered bonds 0.3 0.6 - 0.9 0.4 0.5 - 0.9 RMBS 1.9 0.3 - 2.2 0.5 0.4 - 0.9 Asset-backed securities - 0.1 0.1 0.2 0.3 - - 0.3 Other securities 0.3 0.1 - 0.4 0.3 0.2 0.2 0.7 Total 25.2 1.7 0.6 27.5 23.5 2.8 1.2 27.5 ----------------------------- ----- ----- ----- ----- ----- ----- ----- -----
Government bonds in the table above include GBP3.0 billion of off-balance sheet FLS treasury bills. The average combined month end balance of cash and reserves at central banks, government and supranational bonds during the period was GBP26.6 billion
(4 April 2017: GBP29.5 billion).
Financial risk - Liquidity and funding risk (continued)
Residual maturity of financial assets and liabilities
The table below segments the carrying value of financial assets and financial liabilities into relevant maturity groupings based on the final contractual maturity date (residual maturity).
Residual Due less Due Due Due Due Due between Due between Due Total maturity than between between between between one and two and after (note i) one month one and three six and nine two five more (note three and six nine and twelve years years than ii) months months months months five years 30 September GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm 2017 ------------- ---------- ---------- ---------- ---------- ---------- ----------- ----------- ------- -------- Financial assets Cash 15,302 - - - - - - - 15,302 Loans and advances to banks 2,663 2 - - - - - 344 3,009 Investment securities 2 80 68 124 - 326 2,490 7,698 10,788 Loans and advances to customers 2,935 1,341 1,957 1,920 1,887 7,471 22,640 150,515 190,666 Derivative financial instruments 6 31 195 31 4 629 2,348 1,822 5,066 Other financial assets (note iii) 1 - - (4) (5) (21) 23 238 232 Total financial assets 20,909 1,454 2,220 2,071 1,886 8,405 27,501 160,617 225,063 ------------- ---------- ---------- ---------- ---------- ---------- ----------- ----------- ------- -------- Financial liabilities Shares 114,761 2,722 4,483 4,642 4,213 10,368 3,898 1,297 146,384 Deposits from banks 3,209 49 19 2 32 - 9,455 - 12,766 ------------- ---------- ---------- ---------- ---------- ---------- ----------- ----------- ------- -------- Of which repo 467 - - - - - - - 467 Of which TFS - - - - - - 9,455 - 9,455 ------------- ---------- ---------- ---------- ---------- ---------- ----------- ----------- ------- -------- Other deposits 3,982 882 1,403 152 288 19 - - 6,726 ------------- ---------- ---------- ---------- ---------- ---------- ----------- ----------- ------- -------- Of which repo 1,177 - - - - - - - 1,177 ------------- ---------- ---------- ---------- ---------- ---------- ----------- ----------- ------- -------- Due to customers 548 - - - - - - - 548 Secured funding - ABS and covered bonds 147 9 190 912 269 2,344 8,156 7,280 19,307 Senior unsecured funding 1,548 2,038 3,564 702 280 2,991 5,330 4,731 21,184 Derivative financial instruments 108 20 27 33 23 61 304 1,973 2,549 Other financial liabilities (note iii) - - - (1) - (2) (22) - (25) Subordinated liabilities - - 111 - - - 713 2,909 3,733 Subscribed capital (note iv) - - - - - - - 265 265 ------------- ---------- ---------- ---------- ---------- ---------- ----------- ----------- ------- -------- Total financial liabilities 124,303 5,720 9,797 6,442 5,105 15,781 27,834 18,455 213,437 ------------- ---------- ---------- ---------- ---------- ---------- ----------- ----------- ------- -------- Off-balance sheet commitments (note v) 13,117 - - - - - - - 13,117 ------------- ---------- ---------- ---------- ---------- ---------- ----------- ----------- ------- -------- Net liquidity difference (116,511) (4,266) (7,577) (4,371) (3,219) (7,376) (333) 142,162 (1,491) ------------- ---------- ---------- ---------- ---------- ---------- ----------- ----------- ------- -------- Cumulative liquidity difference (116,511) (120,777) (128,354) (132,725) (135,944) (143,320) (143,653) (1,491) - ------------- ---------- ---------- ---------- ---------- ---------- ----------- ----------- ------- --------
Financial risk - Liquidity and funding risk (continued)
Residual Due less Due Due Due Due between Due between Due between Due Total maturity than between between between nine one and two and after (note i) one month one and three six and and twelve two five more (note three and six nine months years years than ii) months months months five years 4 April 2017 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm ------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------- ------- Financial assets Cash 13,017 - - - - - - - 13,017 Loans and advances to banks 2,226 - - - - - - 361 2,587 Investment securities 40 13 116 66 57 216 2,002 7,254 9,764 Loans and advances to customers 2,890 1,309 1,937 1,877 1,910 7,259 22,057 148,132 187,371 Derivative financial instruments 11 94 130 30 121 324 2,317 2,016 5,043 Other financial assets (note iii) 36 22 15 28 10 60 265 384 820 Total financial assets 18,220 1,438 2,198 2,001 2,098 7,859 26,641 158,147 218,602 ------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------- ------- Financial liabilities Shares 112,403 1,666 6,169 4,905 4,513 9,842 3,870 1,174 144,542 Deposits from banks 2,499 123 20 48 16 28 6,000 - 8,734 ------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------- ------- Of which repo - - - - - - - - - Of which TFS - - - - - - 6,000 - 6,000
------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------- ------- Other deposits 2,882 1,075 1,885 336 255 15 11 - 6,459 ------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------- ------- Of which repo - - - - - - - - - ------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------- ------- Due to customers 1,818 130 305 45 67 11 - - 2,376 Secured funding - ABS and covered bonds 341 20 1,086 128 90 1,394 10,137 6,280 19,476 Senior unsecured funding 894 2,339 3,126 657 1,431 1,765 5,022 5,629 20,863 Derivative financial instruments 37 11 35 41 57 135 505 2,361 3,182 Other financial liabilities (note iii) - - (2) - 1 8 1 - 8 Subordinated liabilities - - - - 103 - 700 2,102 2,905 Subscribed capital (note iv) - - - - - - - 276 276 ------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------- ------- Total financial liabilities 120,874 5,364 12,624 6,160 6,533 13,198 26,246 17,822 208,821 ------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------- ------- Off-balance sheet commitments (note v) 15,784 - - - - - - - 15,784 ------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------- ------- Net liquidity difference (118,438) (3,926) (10,426) (4,159) (4,435) (5,339) 395 140,325 (6,003) ------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------- ------- Cumulative liquidity difference (118,438) (122,364) (132,790) (136,949) (141,384) (146,723) (146,328) (6,003) - ------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------- -------
Notes:
i. The analysis excludes certain non-financial assets (including property, plant and equipment, intangible assets, investment property, other assets, deferred tax assets and accrued income and expenses prepaid) and non-financial liabilities (including provisions for liabilities and charges, accruals and deferred income, current tax liabilities, other liabilities and retirement benefit obligations).
ii. Due less than one month includes amounts repayable on demand.
iii. Other financial assets and liabilities include the fair value adjustments for portfolio hedged risk and investments in equity shares.
iv. The principal amount for undated subscribed capital is included within the due more than five years column.
v. Off-balance sheet commitments include amounts payable on demand for unrecognised loan commitments, customer overpayments on residential mortgages where the borrower is able to draw down the amount overpaid and commitments to acquire financial assets.
Asset encumbrance
Asset encumbrance arises from collateral pledged against secured funding and other collateralised obligations. The majority of asset encumbrance within Nationwide arises from the use of prime mortgage pools to collateralise the Covered Bond and Silverstone asset-backed funding programmes and from participation in the TFS and FLS. Encumbrance also results from repurchase transactions, voluntary excess collateral balances, participation in payment schemes and collateral posted for derivative margin requirements. Assets that have been used for any of these purposes cannot be utilised for other purposes and are therefore classified as encumbered.
At 30 September 2017, Nationwide had GBP34,142 million (4 April 2017: GBP33,232 million) of externally encumbered assets with counterparties other than central banks. Nationwide also had GBP35,465 million (4 April 2017: GBP34,335 million) of pre-positioned and encumbered assets held at central banks and GBP149,268 million (4 April 2017: GBP144,690 million) of assets neither encumbered nor pre-positioned but capable of being encumbered. Further details of Nationwide's policies for asset encumbrance are contained within the Annual Report and Accounts 2017.
Financial risk - Liquidity and funding risk (continued)
External credit ratings
The Group's long term and short term credit ratings are shown in the table below.
Credit ratings Long term Short term Tier 2 Date of last rating Outlook action / confirmation ----------------- --------- ---------- ------ ---------------------- ------- Standard & Poor's A A-1 BBB November 2017 Stable Moody's Aa3 P-1 Baa1 August 2017 Stable Fitch A+ F1 A- February 2017 Stable ----------------- --------- ---------- ------ ---------------------- -------
In August 2017, Standard and Poor's affirmed Nationwide's A/A-1 long and short term ratings, with a negative outlook reflecting its view on a negative trend for economic risk in the UK following the outcome of the EU referendum. In November 2017, Standard & Poor's revised the trend on economic risk for the UK banking sector to stable and revised Nationwide's outlook to stable. In addition, Moody's changed the outlook on Nationwide's deposits and senior unsecured debt to stable from negative in August 2017, reflecting its expectation of a moderate deterioration in the operating environment in the UK, to which Nationwide is now more resilient.
Solvency risk
Solvency risk is the risk that Nationwide fails to maintain sufficient capital to absorb losses throughout a full economic cycle and sufficient to maintain the confidence of current and prospective investors, members, the Board and regulators. Further information on solvency risk and how it is managed can be found in the Annual Report and Accounts 2017 and the Annual Pillar 3 Disclosure 2017 at nationwide.co.uk
Capital position
The capital disclosures included in this report are on a Capital Requirements Directive IV (CRD IV) end point basis. This assumes that all CRD IV requirements are in force during the period, with no transitional provisions permitted. In addition, the disclosures are on a consolidated Group basis, including all subsidiary entities, unless otherwise stated.
Key capital ratios 30 September 4 April 2017 2017 ----------------------------------- ------------- ------------- Solvency % % Common Equity Tier 1 (CET1) ratio 29.6 25.4 Total Tier 1 ratio 32.6 28.4 Total regulatory capital ratio 42.7 36.1 ----------------------------------- ------------- ------------- Leverage GBPm GBPm UK leverage exposure (note i) 220,614 215,894 CRR leverage exposure (note ii) 236,002 228,428 Tier 1 capital 10,750 9,547 % % UK leverage ratio 4.9 4.4 CRR leverage ratio 4.6 4.2 ----------------------------------- ------------- -------------
Notes:
i. The UK leverage ratio is shown on the basis of measurement announced by the Prudential Regulation Authority (PRA) and excludes eligible central bank reserves from the leverage exposure measure.
ii. The Capital Requirements Regulation (CRR) leverage ratio is calculated using the CRR definition of Tier 1 for the capital amount and the Delegated Act definition of the exposure measure.
Capital and leverage ratios have remained well in excess of regulatory requirements with a Common Equity Tier 1 (CET1) ratio of 29.6% (4 April 2017: 25.4%) and a UK leverage ratio of 4.9% (4 April 2017: 4.4%).
In September 2017, the Society issued an additional five million of GBP1 core capital deferred shares (CCDS), as part of our strategy to maintain broad access to capital markets. This issuance supports the continued relevance of this instrument in the context of our strategic capital management and enhances its liquidity. Issuing from a position of strength, we remain well in excess of regulatory capital requirements. These CCDS form a single series together with the CCDS previously issued in December 2013. Further information on CCDS can be found in note 19. Detailed information on the key features of CCDS and other capital instruments can be found within the Interim Pillar 3 Disclosure 2017 at nationwide.co.uk
The CET1 ratio has improved following an increase in CET1 capital resources and a reduction in RWAs. CET1 capital resources increased by GBP1.2 billion as a result of the issuance of CCDS, with net proceeds of GBP0.8 billion, and profit after tax for the period of GBP0.5 billion. This was offset by a small increase in regulatory deductions. RWAs reduced by GBP0.6 billion primarily due to the continued run-off of the commercial book.
Financial risk - Solvency risk (continued)
The total regulatory capital ratio has increased to 42.7% (4 April 2017: 36.1%), due to the CET1 capital increases and the issuance of EUR1 billion of qualifying Tier 2 subordinated debt in line with plans to meet the pending Minimum Requirement for Own Funds and Eligible Liabilities (MREL).
Nationwide has been granted permission to report a UK leverage ratio on the basis of measurement announced by the PRA in August 2016. Minimum leverage requirements are monitored by the PRA on this basis. It is calculated using the Capital Requirements Regulation (CRR) definition of Tier 1 for the capital amount and the Delegated Act definition of the exposure measure, excluding eligible central bank reserves.
The UK leverage ratio of 4.9% at 30 September 2017 (4 April 2017: 4.4%) has increased due to profits in the period and an increase in Tier 1 capital resources, following the issuance of CCDS.
The CRR leverage ratio is calculated using the same definition of Tier 1 for the capital amount and the Delegated Act definition of the exposure measure. The CRR leverage ratio also increased to 4.6% (4 April 2017: 4.2%).
Further details on the leverage exposure can be found in the Group's Interim Pillar 3 Disclosure 2017 at nationwide.co.uk
Nationwide's latest Pillar 2A Individual Capital Guidance (ICG) was received in August 2017. It equates to circa GBP2.3 billion, of which at least circa GBP1.3 billion must be met by CET1 capital, and was broadly in line with the previous ICG. This amount is equivalent to 7.0% of RWAs as at 30 September 2017 (4 April 2017: 6.6%), reflecting the low average risk weight, given that approximately 74% (4 April 2017: 75%) of total assets are in the form of secured residential mortgages, of which 81% (4 April 2017: 81%) are prime.
The table below reconciles the general reserves to total regulatory capital on an end-point basis and so does not include non-qualifying instruments.
Total regulatory capital 30 September 2017 4 April 2017 GBPm GBPm ---------------------------------------------- ------------- ------------- General reserve 9,805 9,316 Core capital deferred shares (CCDS) 1,325 531 Revaluation reserve 67 67 Available for sale reserve 29 44 Regulatory adjustments and deductions: ------------- ------------- Foreseeable distributions (note i) (68) (43) Prudent valuation adjustment (note ii) (27) (23) Own credit and debit valuation adjustments (1) - (note iii) Intangible assets (note iv) (1,250) (1,174) Goodwill (note iv) (12) (12) Excess of regulatory expected losses over impairment provisions (note v) (110) (151) ------------- ------------- Total regulatory adjustments and deductions (1,468) (1,403) Common Equity Tier 1 capital 9,758 8,555 ---------------------------------------------- ------------- ------------- Additional Tier 1 capital securities (AT1) 992 992 Total Tier 1 capital 10,750 9,547 ---------------------------------------------- ------------- ------------- Dated subordinated debt (note vi) 3,330 2,555 Collectively assessed impairment allowances 24 27 Tier 2 capital 3,354 2,582 ---------------------------------------------- ------------- ------------- Total regulatory capital 14,104 12,129 ---------------------------------------------- ------------- -------------
Notes:
i. Foreseeable distributions in respect of CCDS and AT1 securities are deducted from CET1 capital under CRD IV.
ii. A prudent valuation adjustment (PVA) is applied in respect of fair valued instruments as required under regulatory capital rules.
iii. Own credit and debit valuation adjustments are applied to remove balance sheet gains or losses of fair valued liabilities and derivatives that result from changes in Nationwide's own credit standing and risk, in accordance with CRD IV rules.
iv. Intangible assets and goodwill do not qualify as capital for regulatory purposes.
v. The net regulatory capital expected loss in excess of accounting impairment provisions is deducted from CET1 capital, gross of tax.
vi. Subordinated debt includes fair value adjustments related to changes in market interest rates, adjustments for unamortised premiums and discounts that are included in the consolidated balance sheet, and any amortisation of the capital value of Tier 2 instruments required by regulatory rules for instruments with fewer than five years to maturity.
Financial risk - Solvency risk (continued)
Tier 2 capital has increased, in line with plans to meet pending MREL requirements, following the issuance of EUR1 billion of qualifying Tier 2 subordinated debt in July 2017. As part of the Bank Recovery and Resolution Directive (BRRD), the Bank of England, in its capacity as the UK resolution authority, has published its policy for setting the MREL and provided firms with indicative MREL. It is anticipated that Nationwide will be subject to a requirement to hold twice the minimum capital requirements (i.e. 6.5% of UK leverage exposure), plus the applicable buffers, from January 2020. At 30 September 2017 total MREL resources are equal to circa 6.6% of UK leverage ratio exposure (4 April 2017: 5.9% of UK leverage ratio exposure). Nationwide has a strong foundation from which to meet MREL requirements by 2020 through issuance of Tier 2 capital, or, when it becomes available through legislative changes, a senior non-preferred debt instrument.
Detailed information on the key features of the Group's other capital instruments can be found within the Group's Interim Pillar 3 Disclosure at nationwide.co.uk
Risk weighted assets
The table below shows the breakdown of risk weighted assets (RWAs) by risk type:
Risk Weighted Assets 30 September 4 April 2017 2017 GBPm GBPm ------------------------------------ ------------- ------------- Credit risk: Retail mortgages 13,743 13,863 Retail unsecured lending 5,740 5,641 Commercial loans 5,028 5,636 Treasury 639 849 Counterparty credit risk (note i) 1,515 1,221 Other (note ii) 1,469 1,566 ------------------------------------ ------------- ------------- Total credit risk 28,134 28,776 Operational risk (note iii) 4,865 4,865 Market risk (note iv) - - ------------------------------------ ------------- ------------- Total risk weighted assets 32,999 33,641 ------------------------------------ ------------- -------------
Notes:
i. Relates to derivative financial instruments and repurchase agreements. ii. Relates to fixed and other assets, including investments in equity shares.
iii. Operational risk RWAs have remained the same as the calculation is carried out annually as at 4 April.
iv. Market risk has been set to zero as permitted by the CRR, as the exposure is below the threshold of 2% of own funds.
RWAs have reduced by GBP642 million since 4 April 2017 to GBP32,999 million. Commercial RWAs continue to decrease, driven by the run-off of the commercial book. Treasury RWAs are lower due to a reduction in securitisation exposures. These decreases were offset by higher RWAs for counterparty credit risk due to an increase in exposures through balance sheet hedging activities. Details on how RWAs are calculated can be found in the Group's annual Pillar 3 Disclosure 2017 at nationwide.co.uk
Regulatory developments
Whilst there are a number of areas where potential requirements are yet to be finalised, Nationwide will remain engaged in the development of the regulatory approach to ensure it is prepared for any change.
Nationwide is currently required to maintain a minimum leverage ratio of 3.25% following the recalibration to adjust for the impact of excluding central bank holdings from the exposure measure. There is a supplementary leverage ratio buffer of 0.35% to be implemented in 2019. Following the Financial Policy Committee's (FPC) announcement on the countercyclical buffer
(June 2018: 0.5%, November 2018: 1%), the equivalent countercyclical leverage ratio buffer will be 0.2% from June 2018, increasing to 0.4% from November 2018. Therefore, the minimum leverage ratio requirement will be 4% by January 2019. Nationwide is confident it is in a strong position to meet the minimum requirements.
The Basel Committee continues to reaffirm its commitment to finalising reforms to the Basel III framework, including the risk weighted assets framework, the leverage ratio framework and the introduction of an output floor (which will prevent IRB risk weights falling below a certain level). The PRA's revised expectations for IRB models for residential mortgages will be effective in 2020. Whilst these amendments are expected to result in an increase in RWAs and therefore a reduction in the CET1 ratio, they are not expected to result in a material increase in Nationwide's overall capital requirements.
During the summer of 2017, the major UK banks and building societies, including Nationwide, took part in the third of the PRA's annual concurrent stress tests; the results are expected on 28 November 2017.
Financial risk (continued)
Pension risk
Nationwide has funding obligations to defined benefit pension schemes, the most significant being the Nationwide Pension Fund (the Fund). Further information is set out in the Annual Report and Accounts 2017.
The retirement benefit obligations which appear within liabilities on the balance sheet, have decreased from GBP423 million to
GBP262 million. For further information, refer to note 18.
The Fund's accounting deficit has reduced since 4 April 2017, largely due to employer contributions and rises in long-term interest rates. However, the income statement charge for the Fund's current service cost increased to GBP48m (H1 2016/17: GBP30m) due to falling corporate bond yields between April 2016 and April 2017 which are used in the calculation of the charge for the year.
Nationwide has undertaken activities which are expected to have a positive long-term impact on the volatility of the Fund's deficit. During the period, the Fund progressed its liability hedging strategy and transacted approximately GBP140 million of interest rate swaps, along with an additional GBP130 million investment in index-linked and conventional gilts, to further reduce its exposure to inflation and interest rate risk.
2016 triennial valuation
During the period, the 31 March 2016 triennial valuation of the Fund was finalised, revealing an increased funding deficit of
GBP605 million (31 March 2013: GBP580 million). The increase in the funding deficit was mainly driven by an increase in liabilities due to falling bond yields over the three-year period to 31 March 2016, partially offset by employer contributions, positive asset performance and the updating of mortality assumptions to reflect recent data. The methods for deriving the main financial assumptions (for example, the discount rate and long term inflation) remain unchanged from the 2013 triennial valuation.
As a result, Nationwide has agreed a deficit recovery plan with the Trustee of the Fund, consisting of GBP86 million paid during the period (H1 2016/17: GBP49 million), with annual deficit recovery plan payments of GBP61 million for each of the next four years, although in certain circumstances the GBP61 million payments may not be payable.
Deficit recovery contributions are in addition to ongoing contributions to meeting the costs of future benefit accrual. The next triennial valuation has an effective date of 31 March 2019 and is expected to be completed in 2020/21.
Earnings risk
Nationwide ensures that it can generate sustainable profits by focusing on recurrent sources of income that provide value which is commensurate with the risks taken. Earnings risk is defined as the risk that sources of income are unable to continue to add the expected value due to changes in market, regulatory or other environmental factors. This risk is managed and monitored as part of ongoing business performance reporting to senior management and the Board. Further information on the measures used to manage and mitigate earnings risk is available in the Annual Report and Accounts 2017.
Given the ongoing ambiguity surrounding what an orderly exit from the European Union will look like, and wider global political uncertainty, there is an increased risk of volatility in the economic markets in which we operate. In addition, there has been an increase in the level of competition in core mortgage and savings markets. This economic and market context is expected to maintain pressure on Nationwide's ability to generate both trading volumes and margin.
To mitigate against threats to forecast earnings, Nationwide will continue to regularly monitor and review its financial results against forecast in order to understand any deviations from expected performance, and identify any corrective actions required. This will be combined with continuous monitoring of the external environment, to add further context to whether Nationwide is likely to achieve earnings.
Operational risk
Nationwide defines operational risk as the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Nationwide's operational risk profile is informed by risk assessments from across the business, and by review and challenge by both management and the oversight functions. Details of the risk profile, environment and outlook are included in the Annual Report and Accounts 2017.
Ensuring that the increasing expectations of an "always on" digital operation are met is a key area of focus for Nationwide. The Society is also committed to make it easier for members to transact through a range of channels. The scale and pace of change required to achieve these aims, with the implementation of new systems and upgrading of infrastructures and processes, alongside the maintenance of legacy systems, can create delivery challenges. Such challenges introduce an additional level of operational complexity and is viewed as a key operational risk.
These challenges have the potential to disrupt Nationwide's operating environment and negatively impact the service experienced by customers. Nationwide manages the operational risks of this through a strong focus on service management, transformation governance and programme management disciplines. Nationwide continues to invest in a dedicated Operational Resilience Function that strives to ensure it meets customer expectations for service levels associated with both internal and externally sourced IT and operations.
Cyber threats also continue to evolve in maturity and sophistication. We actively monitor cyber threats and work closely with partners to ensure systems continue to be resilient and customers remain protected from the impact of any attacks. In the last six months there have been several global, high profile attacks. Whilst the WannaCry and NotPetya ransomware attacks did not directly affect Nationwide, they reinforce the need for continued vigilance. Nationwide's security controls have needed to keep pace to prevent, detect and respond to any threats or attacks like these.
The threat posed by cyber-attacks directly impacts the existing risks associated with external fraud, data loss, data integrity and availability. Nationwide recognises the negative impact a successful cyber-attack could have on these and ultimately its customers. As a result, Nationwide continues to focus significant effort on discharging its cyber-risk management responsibilities with ongoing investment in appropriate technology and ensuring that it's cyber-security framework is designed to manage
cyber-risk effectively.
Conduct and compliance risk
Nationwide defines conduct and compliance risk as the risk of exercising inappropriate judgements or making errors in the execution of its business activities, leading to non-compliance with regulation or legislation, market integrity being undermined, or an unfair outcome being created for members and customers.
There have been no significant changes in the way Nationwide manages and monitors its conduct and compliance risks nor are any expected for the remaining six months of the financial year. Further detail on these risks and how they are managed is available in the Annual Report and Accounts 2017.
During the period, Nationwide continued to focus on delivering fair customer outcomes to its members, embedding conduct risk management, improving frameworks and guidance to support potentially vulnerable customers, and interpreting and implementing regulatory obligations.
During the period, the FCA commenced its new Payment Protection Insurance (PPI) awareness campaign, urging policy holders to make a decision on whether to make a PPI complaint before the deadline of 29 August 2019. Nationwide continues its programme of activity to respond to an expected increase in complaints arising from the campaign, and to address the specific new requirements implemented by the FCA in response to the Supreme Court ruling on 'Plevin v Paragon Personal Finance Ltd' ('Plevin'). These requirements apply to PPI cases where there were high levels of commission that were not disclosed at the point of sale. Details of PPI redress are provided in note 16.
The FCA has announced a strategic review of business models in the retail banking sector. It aims to identify any potential conduct or competition issues, understand how free-if-in-credit banking is paid for, understand the impact of changes such as increased use of digital channels and reduced branch usage on business models and consider potential consequences for its consumer protection and competition objectives. An update is expected in H1 2018/19 explaining the preliminary analysis and conclusions. Nationwide will continue to engage with the regulator to better understand the impact, if any, this review will have for the Society.
Consolidated interim financial statements
Contents
Page Consolidated income statement 47 Consolidated statement of comprehensive income 48 Consolidated balance sheet 49 Consolidated statement of movements in members' interests and equity 50 Consolidated cash flow statement 51 Notes to the consolidated interim financial statements 52 Consolidated income statement (Unaudited) Notes Half year Half year to 30 September to 30 September 2017 2016 GBPm GBPm --------------------------------------------- ----- ---------------- ---------------- Interest receivable and similar income 3 2,347 2,576 Interest expense and similar charges 4 (833) (1,127) --------------------------------------------- ----- ---------------- ---------------- Net interest income 1,514 1,449 Fee and commission income 214 204 Fee and commission expense (120) (108) Other operating income 5 31 97 Gains from derivatives and hedge accounting 6 36 77 Total income 1,675 1,719 Administrative expenses 7 (966) (938) Impairment losses on loans and advances to customers 8 (59) (32) Impairment losses on investment securities - (5) Provisions for liabilities and charges 16 (22) (48) Profit before tax 628 696 Taxation 9 (157) (194) --------------------------------------------- ----- ---------------- ---------------- Profit after tax 471 502 --------------------------------------------- ----- ---------------- ----------------
The notes on pages 52 to 71 form an integral part of these consolidated interim financial statements.
Consolidated statement of comprehensive income
(Unaudited)
Notes Half year Half year to 30 September to 30 September 2017 2016 GBPm GBPm ----------------------------------------------- ------ ----------------- ----------------- Profit after tax 471 502 Other comprehensive income/(expense): Items that will not be reclassified to the income statement Remeasurements of retirement benefit obligations: ----------------- ----------------- Retirement benefit remeasurements before tax 18 97 (552) Taxation (26) 147 ----------------- ----------------- 71 (405) Revaluation of property: Adjustments to taxation in respect of prior periods - 3 71 (402) Items that may subsequently be reclassified to the income statement Cash flow hedge reserve: Fair value movements taken to members' interests and equity (373) 2,669 Amount transferred to income statement 219 (2,264) Taxation 40 (95) ----------------- ----------------- 6 (114) 310 Available for sale reserve: ----------------- ----------------- Fair value movements taken to members' interests and equity 27 95 Amount transferred to income statement (47) (112) Taxation 5 5 ----------------- ----------------- (15) (12) Other comprehensive expense (58) (104) Total comprehensive income 413 398 ----------------------------------------------- ------ ----------------- -----------------
The notes on pages 52 to 71 form an integral part of these consolidated interim financial statements.
Consolidated balance sheet
(Unaudited)
Notes 30 September 4 April 2017 2017 GBPm GBPm Assets Cash 15,302 13,017 Loans and advances to banks 3,009 2,587 Investment securities 10,788 9,764 Derivative financial instruments 5,066 5,043 Fair value adjustment for portfolio hedged risk 191 746 Loans and advances to customers 10 190,666 187,371 Investments in equity shares 41 67 Intangible assets 1,300 1,230 Property, plant and equipment 841 851 Investment properties 8 8 Accrued income and expenses prepaid 173 191 Deferred tax 67 103 Other assets 76 692 ------------------------------------------------ --- ------------- -------- Total assets 227,528 221,670 ------------------------------------------------ --- ------------- -------- Liabilities Shares 146,384 144,542 Deposits from banks 12,766 8,734 Other deposits 6,726 6,459 Due to customers 548 2,376 Fair value adjustment for portfolio hedged risk (25) 8 Debt securities in issue 40,491 40,339 Derivative financial instruments 2,549 3,182 Other liabilities 728 391 Provisions for liabilities and charges 16 313 387 Accruals and deferred income 311 333 Subordinated liabilities 11 3,733 2,905 Subscribed capital 11 265 276 Deferred tax 66 100 Current tax liabilities 124 82 Retirement benefit obligations 18 262 423 ------------------------------------------------ --- ------------- -------- Total liabilities 215,241 210,537 ------------------------------------------------ --- ------------- -------- Members' interests and equity Core capital deferred shares 19 1,325 531 Other equity instruments 20 992 992 General reserve 9,805 9,316 Revaluation reserve 67 67 Cash flow hedge reserve 69 183 Available for sale reserve 29 44 ------------------------------------------------ --- ------------- -------- Total members' interests and equity 12,287 11,133 ------------------------------------------------ --- ------------- -------- Total members' interests, equity and liabilities 227,528 221,670 ----------------------------------------------------- ------------- --------
The notes on pages 52 to 71 form an integral part of these consolidated interim financial statements.
Consolidated statement of movements in members' interests and equity
For the period ended 30 September 2017
(Unaudited)
Core capital Other General Revaluation Cash flow Available Total deferred equity reserve reserve hedge for sale shares instruments reserve reserve GBPm GBPm GBPm GBPm GBPm GBPm GBPm ------------------------ ------------- ------------- --------- ------------ ---------- ---------- ------- At 5 April 2017 531 992 9,316 67 183 44 11,133 ------------- ------------- --------- ------------ ---------- ---------- ------- Profit for the period - - 471 - - - 471 Net remeasurements of retirement benefit obligations - - 71 - - - 71 Net movement in cash flow hedge reserve - - - - (114) - (114) Net movement in available for sale reserve - - - - - (15) (15) Total comprehensive income - - 542 - (114) (15) 413 Issue of core capital deferred shares 794 - - - - - 794 Distribution to the holders of core capital deferred shares - - (28) - - - (28) Distribution to the holders of Additional Tier 1 capital (note i) - - (25) - - - (25) At 30 September 2017 1,325 992 9,805 67 69 29 12,287 ------------------------ ------------- ------------- --------- ------------ ---------- ---------- -------
For the period ended 30 September 2016
(Unaudited)
Core capital Other General Revaluation Cash flow Available Total deferred equity reserve reserve hedge for sale shares instruments reserve reserve GBPm GBPm GBPm GBPm GBPm GBPm GBPm ------------------------ ------------- ------------- --------- ------------ ---------- ---------- ------- At 5 April 2016 531 992 8,921 64 430 (8) 10,930 ------------- ------------- --------- ------------ ---------- ---------- ------- Profit for the period - - 502 - - - 502 Net remeasurements of retirement benefit obligations - - (405) - - - (405) Net revaluation of property - - - 3 - - 3 Net movement in cash flow hedge reserve - - - - 310 - 310 Net movement in available for sale reserve - - - - - (12) (12) Total comprehensive income - - 97 3 310 (12) 398 Distribution to the holders of core capital deferred shares - - (28) - - - (28) Distribution to the holders of Additional Tier 1 capital (note i) - - (25) - - - (25) ------------------------ ------------- ------------- --------- ------------ ---------- ---------- ------- At 30 September 2016 531 992 8,965 67 740 (20) 11,275 ------------------------ ------------- ------------- --------- ------------ ---------- ---------- -------
Note:
i. The distribution to the holders of Additional Tier 1 capital is shown net of an associated tax credit of GBP9 million (H1 2016/17: GBP9 million).
The notes on pages 52 to 71 form an integral part of these consolidated interim financial statements.
Consolidated cash flow statement (Unaudited) Notes Half year Half year to to 30 September 30 September 2017 2016 GBPm GBPm Cash flows generated from/(used in) operating activities Profit before tax 628 696 Adjustments for: Non-cash items included in profit before tax 22 179 95 Changes in operating assets and liabilities 22 1,816 610 Interest paid on subordinated liabilities (64) (40) Interest paid on subscribed capital (7) (11) Taxation (86) (133) ----------------------------------------------- ------ -------------- -------------- Net cash flows generated from operating activities 2,466 1,217 Cash flows (used in)/generated from investing activities Purchase of investment securities (3,818) (2,336) Sale and maturity of investment securities 2,633 3,713 Purchase of property, plant and equipment (59) (96) Sale of property, plant and equipment 5 4 Purchase of intangible assets (184) (139) Net cash flows (used in)/generated from investing activities (1,423) 1,146 Cash flows generated from/(used in) financing activities Issue of core capital deferred shares 794 - Distributions paid to the holders of core capital deferred shares (28) (28) Distributions paid to the holders of Additional Tier 1 capital (34) (34) Issue of debt securities 11,158 15,704 Redemption of debt securities in issue (11,077) (10,825) Issue of subordinated liabilities 868 949 Net cash flows generated from financing activities 1,681 5,766 Net increase in cash and cash equivalents 2,724 8,129 Cash and cash equivalents at start of period 15,243 12,063 ----------------------------------------------- ------ -------------- -------------- Cash and cash equivalents at end of period 22 17,967 20,192 ----------------------------------------------- ------ -------------- --------------
The notes on pages 52 to 71 form an integral part of these consolidated interim financial statements.
Notes to the consolidated interim financial statements
1 General information and reporting period
Nationwide Building Society ('the Society') and its subsidiaries (together, 'the Group') provide financial services to retail and commercial customers within the United Kingdom.
Nationwide is a building society incorporated and domiciled in the United Kingdom. The address of its registered office is Nationwide Building Society, Nationwide House, Pipers Way, Swindon, Wiltshire SN38 1NW.
There were no material changes in the composition of the Group in the half year to 30 September 2017.
These condensed consolidated interim financial statements ('consolidated interim financial statements') have been prepared as at 30 September 2017 and show the financial performance for the period from, and including, 5 April 2017 to this date. They were approved for issue on 16 November 2017.
These consolidated interim financial statements have been reviewed, not audited.
2 Basis of preparation
The consolidated interim financial statements of the Group for the half year ended 30 September 2017 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with International Accounting Standard (IAS) 34 'Interim Financial Reporting'. The consolidated interim financial statements should be read in conjunction with the Group's annual financial statements for the year ended 4 April 2017, which were prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU.
Terminology used in these consolidated interim financial statements is consistent with that used in the Annual Report and Accounts 2017, where a full glossary of terms can be found.
Copies of the Annual Report and Accounts 2017 are available on the Group's website at nationwide.co.uk
Accounting policies
The accounting policies adopted by the Group in the preparation of these consolidated interim financial statements and those which the Group currently expects to adopt in the Annual Report and Accounts 2018 are consistent with those disclosed in the Annual Report and Accounts 2017, except for an update to the segmental reporting policy.
In line with the Group's decision to wind down its commercial lending business, and the strategic review outlined in the Annual Report and Accounts 2017, the segmental reporting policy has been updated to better reflect the way in which the chief operating decision maker now manages the business. The updated policy states:
-- The Group's Executive Committee is responsible for allocating resources and assessing the performance of the business and is therefore identified as the chief operating decision maker.
-- The Group has determined that it has one reportable segment as the Executive Committee reviews performance and makes decisions based on the Group as whole. No segmental analysis is required on geographical lines as substantially all of the Group's activities are in the United Kingdom. As a result, no additional segmental disclosure is provided.
Standards and amendments applied during the half year to 30 September 2017
There were no new standards applied during the half year to 30 September 2017.
A number of amendments and improvements to accounting standards have been issued by the IASB with an effective date of 1 January 2017. Those relevant to these consolidated interim financial statements, being minor amendments to IAS 12 'Income Taxes', together with certain of the annual improvements to the IFRSs 2014-2016 cycle, were adopted with no significant impact for the Group.
Future accounting developments
An overview of pronouncements that will be relevant to the Group in future periods was provided in the Annual Report and Accounts 2017. Of these pronouncements the most significant is IFRS 9 'Financial Instruments', an update on which is included below.
Notes to the consolidated interim financial statements (continued)
2 Basis of preparation (continued)
IFRS 9 'Financial Instruments'
IFRS 9 will be implemented in the financial statements for year ending 4 April 2019 and will replace IAS 39 'Financial Instruments: Recognition and Measurement'. The requirements are outlined in the Annual Report and Accounts 2017.
Implementation update
In the first half of the year, we have completed the development of our core models and systems, and commenced a period of dual running of our IFRS 9 processes in advance of implementation. In the second half of the year we will continue to refine our models and conclude our work in respect of the sensitivity of models to different economic conditions.
Responsibilities and accountabilities
The Group has an established IFRS 9 implementation programme with formal governance reporting to the Chief Financial Officer and Chief Risk Officer. Progress is reported regularly to the Audit Committee. This includes formal oversight of the new IFRS 9 ECL calculations ahead of the application of the new accounting policy from 5 April 2018.
Impact of IFRS 9
It is currently estimated that the CET1 ratio impact of IFRS 9 on transition at 5 April 2018 will be a reduction of between 10 and 40 basis points. The equivalent UK leverage ratio impact is estimated as a reduction of between 0 and 4 basis points. As a result, IFRS 9 is not expected to have a significant impact on the Group's capital position. The impact results primarily from increased impairment provisions, but also includes the estimated impact of the classification and measurement requirements of IFRS 9. It includes an offset against regulatory expected losses, and excludes any transitional arrangements for capital purposes. The actual impact on transition could be different as a result of changes in the balance sheet, economic conditions and forward-looking economic assumptions, as well as ongoing refinement of models.
The Group does not expect to restate comparatives on the initial adoption of IFRS 9 but will provide detailed transitional disclosures.
Judgements in applying accounting policies and critical accounting estimates
The Group has to make judgements in applying its accounting policies which affect the amounts recognised in these consolidated interim financial statements. In addition, estimates and assumptions are made that could affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates.
There have been no changes to the areas of significant judgement and estimate from those disclosed in the Annual Report and Accounts 2017 which comprised:
-- impairment provisions on loans and advances -- provisions for customer redress -- retirement benefit obligations (pensions).
Going concern
The Group's business activities and financial position, the factors likely to affect its future development and performance, its objectives and policies in managing the financial risks to which it is exposed, and its capital, funding and liquidity positions are discussed in the Business and risk report.
In the light of current and anticipated economic conditions, the directors have assessed the Group's ability to continue as a going concern. The directors confirm they are satisfied that the Group has adequate resources to continue in business and that it is therefore appropriate to adopt the going concern basis in preparing these consolidated interim financial statements.
Notes to the consolidated interim financial statements (continued)
3 Interest receivable and similar income
Half year Half year to to 30 September 30 September 2017 2016 GBPm GBPm ---------------------------------------------- ------------- ------------- On residential mortgages 2,258 2,454 On other loans 361 381 On investment securities 101 262 On other liquid assets 33 27 Net expense on financial instruments hedging assets (406) (548) Total 2,347 2,576 ---------------------------------------------- ------------- -------------
Included within interest receivable and similar income is interest income on impaired financial assets of
GBP14 million (H1 2016/17: GBP17 million).
4 Interest expense and similar charges
Half year Half year to to 30 September 30 September 2017 2016 GBPm GBPm --------------------------------------------------- ------------- ------------- On shares held by individuals 538 755 On subscribed capital 7 24 On deposits and other borrowings: Subordinated liabilities Other 74 54 227 315 On debt securities in issue 354 385 Net income on financial instruments hedging liabilities (371) (409) Interest on net defined benefit pension liability (note 18) 4 3 --------------------------------------------------- ------------- ------------- Total 833 1,127 --------------------------------------------------- ------------- -------------
Interest on deposits and other borrowings includes an expense of GBP184 million (H1 2016/17: GBP247 million) in relation to the redemption and maturity of Protected Equity Bond (PEB) deposits which have returns linked to the performance of specified stock market indices. The PEBs are economically hedged using equity-linked derivatives. Net income on financial instruments hedging liabilities includes income of GBP180 million (H1 2016/17: GBP235 million) in relation to the associated derivatives. Further details are included in note 13.
5 Other operating income
Half year Half year to to 30 September 30 September 2017 2016 GBPm GBPm ---------------------------------- ------------- ------------- Gains on disposal of investments 26 100 Other income/(expense) 5 (3) Total 31 97 ---------------------------------- ------------- -------------
On 28 April 2017, the Group disposed of shares in VocaLink Holdings Limited, resulting in a gain on disposal of GBP26 million. On 21 June 2016, the Group disposed of its share in Visa Europe Limited, resulting in a gain on disposal of GBP100 million.
Other income/(expense) includes rental income, profits or losses on the sale of property, plant and equipment and increases or decreases in the valuations of branches and non-specialised buildings which are not recognised in other comprehensive income.
Notes to the consolidated interim financial statements (continued)
6 Gains from derivatives and hedge accounting
The Group only uses derivatives for the hedging of risks, however income statement volatility can still arise due to hedge accounting ineffectiveness or because hedge accounting is either not currently applied or is not currently achievable. The overall impact of derivatives will remain volatile from period to period as new derivative transactions replace those which mature to ensure that interest rate and other market risks are continually managed. This volatility does not reflect the economic reality of the Group's hedging strategy.
Half year Half year to to 30 September 30 September 2017 2016 Gains from derivatives and hedge accounting GBPm GBPm -------------------------------------------------- -------------- -------------- Ineffectiveness from fair value hedge accounting (note i) (32) 58 Ineffectiveness from cash flow hedge accounting (note ii) 58 5 Net gain from mortgage pipeline (note iii) 22 8 Fair value losses from other derivatives (note iv) (3) (17) Foreign exchange retranslation (note v) (9) 23 -------------------------------------------------- -------------- -------------- Total 36 77 -------------------------------------------------- -------------- --------------
Notes:
i. Gains or losses from fair value hedges can arise where there is an IFRS hedge accounting relationship in place and either:
-- the relationship passed all the monthly effectiveness tests but the fair value movement of the derivative was not exactly offset by the change in fair value of the asset or liability being hedged (referred to as hedge ineffectiveness); or
-- the relationship failed a monthly effectiveness test which, for that month, disallows recognition of the change in fair value of the underlying asset or liability being hedged and in following months leads to the amortisation of existing balance sheet positions.
ii. In cash flow hedge accounting the effective portion of the fair value movement of designated derivatives is deferred to the cash flow hedge reserve. The fair value movement is subsequently recycled to the income statement when amounts relating to the underlying hedged asset or liability are recognised in the income statement. The ineffective portion of the fair value movement is recognised immediately in the income statement.
iii. The mortgage pipeline in the above table includes interest rate swaps used to economically hedge expected new mortgage business, as well as some firm mortgage commitments which the Group has elected to fair value in order to reduce the accounting mismatch.
iv. Other derivatives are those used for economic hedging but which are not in an IAS 39 hedge accounting relationship because hedge accounting is not currently in place.
v. Gains or losses arise from the retranslation of foreign currency monetary items not subject to effective hedge accounting.
The deferral of fair value movements to the cash flow hedge reserve, and the transfer of amounts from the cash flow hedge reserve to the income statement, are shown in the consolidated statement of comprehensive income. The net transfer after taxation of GBP114 million (H1 2016/17: net deferral after taxation of GBP310 million) is driven by changes in derivative valuations caused by movements in interest rates and foreign exchange rates.
7 Administrative expenses
Half year Half year to 30 September to 30 September 2017 2016 GBPm GBPm Employee costs: Wages, salaries and bonuses 290 289 Social security costs 31 31 Pension costs 86 68 ------------------------------------------- ---------------- ---------------- 407 388 Other administrative expenses 367 375 774 763 Depreciation, amortisation and impairment 192 175 ------------------------------------------- ---------------- ---------------- Total 966 938 ------------------------------------------- ---------------- ----------------
Notes to the consolidated interim financial statements (continued)
8 Impairment losses on loans and advances to customers
The following tables set out impairment losses and reversals during the period and the closing provision balances which are deducted from the appropriate asset values in the balance sheet:
Half year Half year to to 30 September 30 September 2016 2017 GBPm GBPm --------------------------------------------------------------- ------------- Impairment losses/(reversals) for the period Prime residential 4 1 Specialist residential 8 4 Consumer banking 52 32 Commercial lending (5) (5) Total 59 32 ------------------------------------------------ -------------- ------------- 30 September 4 April 2017 2017 GBPm GBPm ------------------------------------------------ -------------- ------------- Impairment provision at the end of the period Prime residential 37 34 Specialist residential 113 110 Consumer banking 282 269 Commercial lending 23 25 Total 455 438 ------------------------------------------------ -------------- -------------
The Group impairment provision of GBP455 million at 30 September 2017 (4 April 2017: GBP438 million) comprises individual provisions of GBP42 million (4 April 2017: GBP45 million) and collective provisions of GBP413 million (4 April 2017: GBP393 million). Further credit risk information on loans and advances to customers is included in the 'Lending risk' section of the Business and risk report.
9 Taxation
Half year Half year to to 30 September 30 September 2017 2016 Tax charge in the income statement GBPm GBPm ------------------------------------------ -------------- -------------- Current tax: UK corporation tax 150 223 ------------------------------------------ -------------- -------------- Total current tax 150 223 Deferred tax: Current period charge/(credit) 7 (30) Adjustments in respect of prior periods - 1 Total deferred tax 7 (29) ------------------------------------------ -------------- -------------- Tax charge 157 194 ------------------------------------------ -------------- --------------
The actual tax charge differs from the theoretical amount that would arise using the standard rate of corporation tax in the UK as follows:
Half year Half year to to 30 September 30 September 2017 2016 Reconciliation of tax charge GBPm GBPm ------------------------------------------- -------------- -------------- Profit before tax 628 696 ------------------------------------------- -------------- -------------- Tax calculated at a tax rate of 19% (2016 20%) 119 139 Banking surcharge 33 40 Expenses not deductible for tax purposes 5 14 Adjustments in respect of prior periods - 1 Tax charge 157 194 ------------------------------------------- -------------- --------------
The Finance (No. 2) Act 2015 introduced a surcharge of 8% on banking profits from 1 January 2016 and reduced the corporation tax rate from 20% to 19% with effect from 1 April 2017. The Finance Act 2016 was enacted on 15 September 2016 and reduces the corporation tax rate from 19% to 17% from 1 April 2020.
Notes to the consolidated interim financial statements (continued)
10 Loans and advances to customers
30 September 4 April 2017 2017 GBPm GBPm Prime residential mortgages 142,101 137,970 Specialist residential mortgages 33,011 33,149 Consumer banking 3,729 3,680 Commercial lending 10,577 11,185 Other lending 76 17 189,494 186,001 Fair value adjustment for micro hedged risk 1,172 1,370 Total 190,666 187,371
Loans and advances to customers in the table above are shown net of impairment provisions held against them. The fair value adjustment for micro hedged risk relates to commercial lending.
Asset backed funding
Certain prime residential mortgages have been pledged to the Group's asset backed funding programmes or utilised as whole mortgage loan pools for the Bank of England's (BoE) Funding for Lending Scheme (FLS) and Term Funding Scheme (TFS). The programmes have enabled the Group to obtain secured funding or to create additional collateral which could be used to source additional funding.
Mortgages pledged and the nominal values of the notes in issue are as follows:
Mortgages pledged to asset backed funding programmes Mortgages pledged Notes in issue Held by Held by the Group Total notes third parties in issue Drawn Undrawn 30 September 2017 GBPm GBPm GBPm GBPm GBPm Covered bond programme 19,494 15,372 - - 15,372 Securitisation programme 9,577 2,938 - 337 3,275 Whole mortgage loan pools 18,932 - 16,246 2,686 18,932 Total 48,003 18,310 16,246 3,023 37,579 4 April 2017 Covered bond programme 19,322 14,927 - - 14,927 Securitisation programme 10,412 3,622 - 448 4,070 Whole mortgage loan pools 16,136 - 13,505 2,631 16,136 Total 45,870 18,549 13,505 3,079 35,133
The securitisation programme notes are issued by Silverstone Master Issuer plc which is fully consolidated by the Group.
The whole mortgage loan pools are pledged at the BoE under the FLS and TFS. Notes are not issued when pledging the mortgage loan pools at the BoE. Instead, the whole loan pool is pledged to the BoE and drawings are made directly against the eligible collateral, subject to a haircut. Therefore, values shown under notes in issue are the whole mortgage loan pool notional balances.
Mortgages pledged include GBP8.7 billion (4 April 2017: GBP9.1 billion) in the covered bond and securitisation programmes that are in excess of the amount contractually required to support notes in issue.
Notes to the consolidated interim financial statements (continued)
10 Loans and advances to customers (continued)
Mortgages pledged are not derecognised from the balance sheet as the Group has retained substantially all the risks and rewards of ownership. The Group continues to be exposed to the liquidity risk, interest rate risk and credit risk of the mortgages. No gain or loss has been recognised on pledging the mortgages to the programmes.
Notes in issue which are held by third parties are included within debt securities in issue.
Notes in issue, held by the Group and drawn are whole mortgage loan pools securing amounts drawn under the FLS and TFS. At 30 September 2017 the Group had outstanding FLS drawings of GBP3.0 billion (4 April 2017: GBP4.8 billion) and TFS drawings of GBP9.5 billion (4 April 2017: GBP6.0 billion).
Notes in issue, held by the Group and undrawn, are debt securities issued by the programmes to the Society and mortgage loan pools that have been pledged to the BoE but not utilised.
In accordance with accounting standards, notes in issue and held by the Group are not recognised by the Group in its balance sheet.
The Group established the Nationwide Covered Bond programme in November 2005. Mortgages pledged provide security for issues of covered bonds made by the Group. During the period ended 30 September 2017, EUR1.0 billion (GBP0.9 billion sterling equivalent) of notes were issued, and GBP0.8 billion of notes matured.
The Group established the Silverstone Master Trust securitisation programme in July 2008. Notes are issued under the programme and the issuance proceeds are used to purchase, for the benefit of note holders, a share of the beneficial interest in the mortgages pledged by the Group. The remaining beneficial interest in the pledged mortgages of GBP6.7 billion (4 April 2017: GBP7.0 billion) stays with the Group and includes its required minimum seller share in accordance with the rules of the programme. The Group is under no obligation to support losses incurred by the programme or holders of the notes and does not intend to provide such further support. The entitlement of note holders is restricted to payment of principal and interest to the extent that the resources of the programme are sufficient to support such payment and the holders of the notes have agreed not to seek recourse in any other form. During the period ended 30 September 2017, GBP0.3 billion and $0.5 billion (total GBP0.7 billion sterling equivalent) of notes matured and no notes were issued.
11 Subordinated liabilities and subscribed capital
30 September 4 April 2017 2017 GBPm GBPm Subordinated liabilities Subordinated notes 3,708 2,871 Fair value hedge accounting adjustments 42 45 Unamortised premiums and issue costs (17) (11) Total 3,733 2,905 Subscribed capital Permanent interest bearing shares 222 222 Fair value hedge accounting adjustments 46 57 Unamortised premiums and issue costs (3) (3) Total 265 276
On 25 July 2017 the Group issued EUR1.0 billion of subordinated notes and on 1 September 2017 the Group redeemed GBP30 million of subordinated notes at par.
All of the Group's subordinated notes and permanent interest bearing shares (PIBS) are unsecured. The Group may, with the prior consent of the Prudential Regulation Authority (PRA), repay the PIBS and redeem the subordinated notes early.
The subordinated notes rank pari passu with each other and behind claims against the Society of all depositors, creditors and investing members, other than the holders of PIBS, Additional Tier 1 (AT1) capital and core capital deferred shares (CCDS).
The PIBS rank pari passu with each other and the AT1 instruments, behind claims against the Society of the subordinated noteholders, depositors, creditors and investing members but ahead of claims by the holders of CCDS.
Notes to the consolidated interim financial statements (continued)
12 Fair value hierarchy of financial assets and liabilities held at fair value
IFRS 13 requires an entity to classify assets and liabilities held at fair value, and those not measured at fair value but for which the fair value is disclosed, according to a hierarchy that reflects the significance of observable market inputs in calculating those fair values. The three levels of the fair value hierarchy are defined in note 1 of the Annual Report and Accounts 2017.
Further details of those financial assets and liabilities not measured at fair value are included in note 14.
The following tables show the Group's financial assets and liabilities that are held at fair value by fair value hierarchy, balance sheet classification and product type:
Fair values based on Level 1 Level 2 Level 3 Total 30 September 2017 GBPm GBPm GBPm GBPm Financial assets Government and supranational investments 7,085 - - 7,085 Other debt investment securities 983 1,545 - 2,528 Investment securities (note i) 8,068 1,545 - 9,613 Investments in equity shares (note ii) - - 40 40 Interest rate swaps - 1,796 - 1,796 Cross currency interest rate swaps - 3,182 - 3,182 Forward foreign exchange - 6 - 6 Equity index swaps - - 59 59 Index linked swaps - 23 - 23 Total derivative financial instruments - 5,007 59 5,066 Financial assets 8,068 6,552 99 14,719 Financial liabilities Interest rate swaps - (2,353) (5) (2,358) Cross currency interest rate swaps - (106) - (106) Forward foreign exchange - (80) - (80) Swaptions - (5) - (5) Total derivative financial instruments - (2,544) (5) (2,549) Other deposits - PEBs (note iii) - - (192) (192) Other financial liabilities (note iv) - (9) - (9) Total financial liabilities - (2,553) (197) (2,750)
Notes to the consolidated interim financial statements (continued)
12 Fair value hierarchy of financial assets and liabilities held at fair value (continued)
Fair values based on Level 1 Level 2 Level 3 Total 4 April 2017 GBPm GBPm GBPm GBPm Financial assets Government and supranational investments 6,897 - - 6,897 Other debt investment securities 931 1,936 - 2,867 Investment securities (note i) 7,828 1,936 - 9,764 Investments in equity shares (note ii) - - 66 66 Interest rate swaps - 1,859 - 1,859 Cross currency interest rate swaps - 2,915 - 2,915 Forward foreign exchange - 16 - 16 Equity index swaps - - 233 233 Index linked swaps - 20 - 20 Total derivative financial instruments - 4,810 233 5,043 Other financial assets (note iv) - 7 - 7 Total financial assets 7,828 6,753 299 14,880 Financial liabilities Interest rate swaps - (3,096) (5) (3,101) Cross currency interest rate swaps - (71) - (71) Forward foreign exchange - (4) - (4) Forward rate agreements - (1) - (1) Swaptions - (5) - (5) Total derivative financial instruments - (3,177) (5) (3,182) Other deposits - PEBs (note iii) - - (810) (810) Total financial liabilities - (3,177) (815) (3,992)
Notes:
i. Investment securities held at fair value exclude GBP1,175 million (4 April 2017: GBPnil) of held to maturity investment securities. Further details are included in note 14.
ii. Investments in equity shares exclude GBP1 million (4 April 2017: GBP1 million) of investments in equity shares which are held at cost.
iii. Other deposits comprise PEBs which are held at fair value through the income statement. The remaining other deposits are held at amortised cost and are included in note 14.
iv. Other financial assets and other financial liabilities represent the fair value of certain mortgage commitments.
The Group's Level 1 portfolio comprises highly rated government securities for which traded prices are readily available.
Asset valuations for Level 2 investment securities are sourced from consensus pricing or other observable market prices. None of the Level 2 assets are valued from models. Level 2 derivative assets and liabilities are valued from discounted cash flow models using yield curves based on observable market data.
Further detail on the Level 3 portfolio is provided in note 13.
Transfers between fair value hierarchies
Instruments move between fair value hierarchies primarily due to increases or decreases in market activity or changes to the significance of unobservable inputs to their valuation. There were no significant transfers between the Level 1, Level 2 and Level 3 portfolios during the period.
Notes to the consolidated interim financial statements (continued)
13 Fair value of financial assets and liabilities held at fair value - Level 3 portfolio
The main constituents of the Level 3 portfolio are as follows:
Investments in equity shares
The Level 3 investments in equity shares include investments of GBP40 million (4 April 2017: GBP66 million) in industry-wide banking and credit card service operations.
Derivative financial instruments
Level 3 assets and liabilities in this category are primarily equity linked derivatives with external counterparties which economically match the investment return payable by the Group to investors in Protected Equity Bonds (PEBs). The derivatives are linked to the performance of specified stock market indices and have been valued by an external third party. Fair value changes are recognised within gains/losses from derivatives and hedge accounting. Upon maturity the gain/loss is transferred to interest expense and similar charges.
Other deposits - PEBs
This category relates to deposit accounts with the potential for stock market correlated growth linked to the performance of specified stock market indices. The PEBs liability of GBP192 million (4 April 2017: GBP810 million) is valued at a discount to reflect the time value of money, overlaid by a fair value adjustment representing the expected return payable to the customer. The fair value adjustment has been constructed from the valuation of the associated derivatives as valued by an external third party. Fair value changes are recognised within gains/losses from derivatives and hedge accounting. Upon maturity the gain/loss is transferred to interest expense and similar charges.
The minimum amount on an undiscounted basis that the Group is contractually required to pay at maturity for the PEBs is GBP133 million (4 April 2017: GBP621 million). The maximum additional amount which would also be payable at maturity in respect of additional investment returns is GBP71 million (4 April 2017: GBP250 million). The payment of additional investment returns is dependent upon performance of certain specified stock indices during the period of the PEBs. As noted above, the Group has entered into equity linked derivatives with external counterparties which economically match the investment returns on the PEBs.
Notes to the consolidated interim financial statements (continued)
13 Fair value of financial assets and liabilities held at fair value - Level 3 portfolio (continued)
The tables below set out movements in the Level 3 portfolio:
Investments Net derivative Other in equity financial deposits Movements in Level 3 portfolio shares instruments PEBs GBPm GBPm GBPm At 5 April 2017 66 228 (810) Gains/(losses) recognised in the income statement: Net interest income/(expense) - 180 (184) (Losses)/gains from derivatives and hedge accounting - (175) 174 Other operating income 26 - - Losses recognised in other comprehensive income: Fair value movement taken to members' interests and equity (22) - - Settlements - (179) 628 Disposals (30) - - At 30 September 2017 40 54 (192) At 5 April 2016 125 431 (1,885) Gains/(losses) recognised in the income statement: Net interest income/(expense) - 235 (247) (Losses)/gains from derivatives and hedge accounting - (171) 169 Other operating income 100 - - Losses recognised in other comprehensive income: Fair value movement taken to members' interests and equity (76) - - Settlements - (233) 830 Acquisitions 25 - -
Disposals (118) - - At 30 September 2016 56 262 (1,133)
Level 3 portfolio sensitivity analysis of valuations using unobservable inputs
The fair value of financial instruments is, in certain circumstances, measured using valuation techniques based on market prices that are not observable in an active market or on significant unobservable market inputs.
Reasonable alternative assumptions can be applied for sensitivity analysis, taking account of the nature of valuation techniques used, as well as the availability and reliability of observable proxy and historic data. The following table shows the sensitivity of the Level 3 fair values to reasonable alternative assumptions (as set out in the table of significant unobservable inputs below) and the resultant impact of such changes in fair value on the income statement or members' interests and equity:
Members' interests Sensitivity of Level 3 fair values and equity Fair value Favourable Unfavourable changes changes 30 September 2017 GBPm GBPm GBPm Investments in equity shares 40 12 (27) Net derivative financial instruments (note i) 54 - - Other deposits - PEBs (note i) (192) - - Total (98) 12 (27) 4 April 2017 Investments in equity shares 66 12 (24) Net derivative financial instruments (note i) 228 - - Other deposits - PEBs (note i) (810) - - Total (516) 12 (24)
Note:
i. Changes in fair values of the equity index swaps included in net derivative financial instruments will be largely offset by the change in fair value of the PEBs deposits. Any resultant impact is deemed by the Group to be insignificant; therefore these sensitivities have been excluded from the table above.
Notes to the consolidated interim financial statements (continued)
13 Fair value of financial assets and liabilities held at fair value - Level 3 portfolio (continued)
Investments in equity shares of GBP40 million (4 April 2017: GBP66 million) are accounted for as available for sale assets. The Level 3 portfolio at 30 September 2017 did not include any impaired assets (4 April 2017: GBPnil) and as such the sensitivity analysis in the table above does not impact the income statement.
Alternative assumptions are considered for each product and varied according to the quality of the data and variability of the underlying market.
The following table discloses the significant unobservable inputs underlying the above alternative assumptions for assets and liabilities recognised at fair value and classified as Level 3, along with the range of values for those significant unobservable inputs. Where sensitivities are described the inverse relationship will also generally apply:
Significant unobservable inputs Weighted Total Total Significant average assets liabilities Valuation unobservable Range (note 30 September 2017 GBPm GBPm technique inputs (note ii) iii) Units In Investments in Discount equity shares 40 - rate 10.00 12.00 11.00% Discounted cash flows Share conversion - 100.00 77.76% Net derivative financial instruments (note i) 54 - Other deposits - PEBs (note i) - (192) 4 April 2017 Investments in Discount equity shares 66 - Discounted rate 6.41 7.75 7.08% cash flows Share conversion - 100.00 77.76% Net derivative financial instruments (note i) 228 - Other deposits - PEBs (note i) - (810)
Notes:
i. Changes in fair values of the equity index swaps included in net derivative financial instruments will be largely offset by the change in fair value of the PEBs deposits. Any resultant impact is deemed by the Group to be insignificant; therefore these sensitivities have been excluded from the table above.
ii. The range represents the values of the highest and lowest levels used in the calculation of favourable and unfavourable changes as presented in the previous table.
iii. Weighted average represents the input values used in calculating the fair values for the above financial instruments.
Some of the significant unobservable inputs used in fair value measurement are interdependent. Where this is the case, a description of those interrelationships is included below.
Discount rate
The discount rate is used to determine the present value of future cash flows. The level of the discount rate takes into account the time value of money, but also the risk or uncertainty of future cash flows. Typically, the greater the uncertainty, the higher the discount rate. A higher discount rate leads to a lower valuation and vice versa.
Share conversion
Where the conversion of a security into an underlying instrument is subject to underlying security market pricing and contingent litigation risk, share conversion is factored into the fair value. The higher the share conversion, the higher the valuation and vice versa.
Notes to the consolidated interim financial statements (continued)
14 Fair value of financial assets and liabilities measured at amortised cost
The following table summarises the carrying value and fair value of financial assets and liabilities measured at amortised cost on the Group's balance sheet:
Fair values based on Carrying Level Level Total fair value 1 Level 2 3 value 30 September 2017 GBPm GBPm GBPm GBPm GBPm Financial assets Loans and advances to banks 3,009 - 3,009 - 3,009 Held to maturity investment securities (note i) 1,175 - 1,180 - 1,180 Loans and advances to customers: Residential mortgages 175,112 - - 173,892 173,892 Consumer banking 3,729 - - 3,600 3,600 Commercial lending 11,749 - - 10,362 10,362 Other lending 76 - 68 8 76 Total 194,850 - 4,257 187,862 192,119 Financial liabilities Shares 146,384 - 146,368 - 146,368 Deposits from banks 12,766 - 12,766 - 12,766 Other deposits (note ii) 6,534 - 6,534 - 6,534 Due to customers 548 - 548 - 548 Debt securities in issue 40,491 15,857 25,520 - 41,377 Subordinated liabilities 3,733 - 3,901 - 3,901 Subscribed capital 265 - 257 - 257 Total 210,721 15,857 195,894 - 211,751 4 April 2017 Financial assets Loans and advances to banks 2,587 - 2,587 - 2,587 Loans and advances to customers: Residential mortgages 171,119 - - 170,542 170,542 Consumer banking 3,680 - - 3,546 3,546 Commercial lending 12,555 - - 11,284 11,284 Other lending 17 - 5 12 17 Total 189,958 - 2,592 185,384 187,976 Financial liabilities Shares 144,542 - 144,664 - 144,664 Deposits from banks 8,734 - 8,736 - 8,736 Other deposits (note ii) 5,649 - 5,651 - 5,651 Due to customers 2,376 - 2,377 - 2,377 Debt securities in issue 40,339 15,399 25,837 - 41,236 Subordinated liabilities 2,905 - 3,053 - 3,053 Subscribed capital 276 - 244 - 244 Total 204,821 15,399 190,562 - 205,961
Notes:
i. On 25 April 2017, the Group purchased residential mortgage backed securities under a programme to securitise Bradford & Bingley plc residential mortgage assets. These financial assets have been classified as held to maturity investment securities and are held at amortised cost.
ii. Other deposits exclude PEBs which are held at fair value through the income statement and which are included in note 12.
Notes to the consolidated interim financial statements (continued)
14 Fair value of financial assets and liabilities measured at amortised cost (continued)
Loans and advances to banks
The fair value of loans and advances to banks is estimated by discounting expected cashflows at a market discount rate. The carrying amount is considered a reasonable approximation of fair value.
Held to maturity investment securities
The fair value of held to maturity investment securities is sourced from consensus pricing or other observable market prices.
Loans and advances to customers
The fair value of loans and advances to customers is estimated by discounting expected cash flows to reflect current rates for similar lending.
Consistent modelling techniques are used across the different loan books. The estimates take into account expected future cash flows and future lifetime expected losses, based on historic trends and discount rates appropriate to the loans, to reflect a hypothetical exit price value on an asset by asset basis. Variable rate loans are modelled on estimated future cash flows, discounted at current market interest rates. Variable rate retail mortgages are discounted at the currently available market standard variable interest rate (SVR) which, for example, in the case of the Group's residential base mortgage rate (BMR) mortgage book, generates a fair value lower than the amortised cost value as those mortgages are priced below the SVR.
For fixed rate loans, discount rates have been based on the expected funding and capital cost applicable to the book. When calculating fair values on fixed rate loans, no adjustment has been made to reflect interest rate risk management through internal natural hedges or external hedging via derivatives.
Shares, deposits and amounts due to customers
The estimated fair value of shares, deposits and amounts due to customers with no stated maturity, including non-interest bearing deposits, is the amount repayable on demand. For items without quoted market prices the estimated fair value represents the discounted amount of estimated future cash flows based on expectations of future interest rates, customer withdrawals and interest capitalisation. For variable interest rate items, estimated future cash flows are discounted using current market interest rates for new debt with similar remaining maturity. For fixed rate items, the estimated future cash flows are discounted based on market offer rates currently available for equivalent deposits.
Debt securities in issue
The estimated fair values of longer dated liabilities are calculated based on quoted market prices where available or using similar instruments as a proxy for those liabilities that are not of sufficient size or liquidity to have an active market quote. For those notes for which quoted market prices are not available, a discounted cash flow model is used based on a current yield curve appropriate for the remaining term to maturity.
Subordinated liabilities and subscribed capital
The fair value of subordinated liabilities and subscribed capital is determined by reference to quoted market prices of similar instruments
Notes to the consolidated interim financial statements (continued)
15 Offsetting financial assets and financial liabilities
The Group has financial assets and financial liabilities for which there is a legally enforceable right to set off the recognised amounts, and there is an intention to settle on a net basis, or realise the asset and liability simultaneously. In accordance with IAS 32 Financial Instruments: Presentation, where the right to set off is not unconditional in all circumstances this does not result in an offset of balance sheet assets and liabilities.
In accordance with IFRS 7 Financial Instruments: Disclosures, the following table shows the impact of offsetting on financial assets and financial liabilities, where:
-- there is an enforceable master netting arrangement or similar agreement in place and an unconditional right to offset is in place ('amounts offset'),
-- there is an enforceable master netting arrangement or similar agreement in place but the offset criteria are otherwise not satisfied ('master netting arrangements'), and
-- financial collateral is paid and received ('financial collateral'). Gross Amounts Net amounts Master Financial Net amounts amounts offset reported netting collateral after offsetting recognised (note on the arrangements (note under IFRS i) balance ii) 7 sheet 30 September GBPm GBPm GBPm GBPm GBPm GBPm 2017 Financial assets Derivative financial instruments 5,166 (100) 5,066 (1,869) (3,047) 150 Total financial assets 5,166 (100) 5,066 (1,869) (3,047) 150 Financial liabilities Derivative financial liabilities 2,580 (31) 2,549 (1,869) (615) 65 Repurchase agreements 1,644 - 1,644 - (1,644) - Total financial liabilities 4,224 (31) 4,193 (1,869) (2,259) 65 4 April 2017 Financial assets Derivative financial instruments 5,067 (24) 5,043 (2,216) (2,799) 28 Total financial assets 5,067 (24) 5,043 (2,216) (2,799) 28 Financial liabilities Derivative financial liabilities 3,210 (28) 3,182 (2,216) (921) 45 Total financial liabilities 3,210 (28) 3,182 (2,216) (921) 45
Notes:
i. Amounts offset for derivative financial assets of GBP100 million (4 April 2017: GBP24 million) include cash collateral netted of GBP80 million (4 April 2017: GBP3 million). Amounts offset for derivative financial liabilities of GBP31 million (4 April 2017: GBP28 million) include cash collateral netted of GBP11 million (4 April 2017: GBP7 million). Excluding the cash collateral netted, the remaining amounts represent GBP20 million (4 April 2017: GBP21 million) of derivative financial assets and derivative financial liabilities which are offset.
ii. The financial collateral is presented at fair value.
Master netting arrangements consist of agreements such as an ISDA Master Agreement, global master repurchase agreements and global master securities lending agreements, whereby outstanding transactions with the same counterparty can be offset and settled net, either unconditionally or following a default or other predetermined event.
Financial collateral on derivative financial instruments consists of cash posted, typically daily or weekly, to mitigate the mark to market exposures. Financial collateral on repurchase agreements typically comprises highly liquid securities which are legally transferred and can be liquidated in the event of counterparty default.
The net amounts after offsetting under IFRS 7 presented below show the exposure to counterparty credit risk for derivative contracts after netting benefits and collateral, and are not intended to represent the Group's actual exposure to credit risk. This is due to a variety of credit mitigation strategies which are employed in addition to netting and collateral arrangements.
Notes to the consolidated interim financial statements (continued)
16 Provisions for liabilities and charges
Bank levy FSCS Customer Other Total redress provisions GBPm GBPm GBPm GBPm GBPm At 5 April 2017 16 42 305 24 387 Provisions utilised (15) (25) (48) (4) (92) Charge for the period - - 31 - 31 Release for the period (1) (3) (6) (3) (13) Net income statement charge (1) (3) 25 (3) 18 At 30 September 2017 - 14 282 17 313 At 5 April 2016 22 84 227 10 343 Provisions utilised (22) (42) (35) (2) (101) Charge for the period - - 58 9 67 Release for the period - (4) (6) (1) (11) Net income statement charge - (4) 52 8 56 At 30 September 2016 - 38 244 16 298
The income statement charge for provisions for liabilities and charges of GBP22 million (H1 2016/17: GBP48 million) includes the customer redress net income statement charge of GBP25 million (H1 2016/17: GBP52 million), and the FSCS release of GBP3 million (H1 2016/17: GBP4 million). The income statement release for bank levy of GBP1 million (H1 2016/17: GBPnil), and the income statement release for other provisions of GBP3 million (H1 2016/17: charge of GBP8 million) are included within administrative expenses in the income statement.
Financial Services Compensation Scheme (FSCS)
The FSCS provision of GBP14 million represents the Group's interest and management expense levy in respect of the 2017/18 scheme year (4 April 2017: GBP42 million in respect of the 2017/18 and 2016/17 scheme years).
Customer redress
During the course of its business, the Group receives complaints from customers in relation to past sales or conduct. The Group is also subject to enquiries from and discussions with its regulators, governmental and other public bodies, including the Financial Ombudsman Service (FOS), on a range of matters. Customer redress provisions are recognised where the Group considers it is probable that payments will be made as a result of such complaints and other matters.
The Group holds provisions of GBP282 million (4 April 2017: GBP305 million) in respect of the potential costs of remediation and redress in relation to historic sales of financial products and post sales administration. This includes amounts for past sales of PPI, non-compliance with consumer credit legislation and other regulatory matters.
The net income statement charge for the year mainly reflects updated assumptions for provisions previously recognised. This includes a GBP28 million charge in relation to PPI, driven primarily by an increase in the anticipated total number of complaints expected to be received before the Financial Conduct Authority (FCA) complaints deadline of August 2019.
It is considered appropriate for the Group to provide for the estimated total amount required to deal with all ongoing and future PPI complaints. The amount provided at 30 September 2017 therefore reflects the compensation and administrative costs associated with cases that the Group expects to uphold and the cost of processing invalid claims which the Group expects to receive. This estimate will be re-assessed on an ongoing basis in the light of actual claims levels observed.
The table below shows the sensitivity of the PPI provision to changes in complaints volumes, along with other significant assumptions used in calculating the provision:
Cumulative Future expected Sensitivity to 30 September 2017 Claims ('000s of policies) (note i) 345 157 10 = GBP9m Average uphold rate (note ii) 31% 48% 5% = GBP10m Average redress per claim (note GBP100 = iii) GBP1,355 GBP701 GBP15m
Notes:
i. Claims include responses to proactive mailing.
ii. Future expected average uphold rate includes an anticipated increase in the overall uphold rate driven by complaints related to the Supreme Courts' decision in the case of Plevin vs Paragon Personal Finance Limited ('Plevin').
iii. Future expected average redress reflects the expected mix of future claims upheld, including Plevin.
Notes to the consolidated interim financial statements (continued)
16 Provisions for liabilities and charges (continued)
Other provisions
Other provisions include provisions for severance costs and a number of property related provisions. Provisions are made for the expected severance costs in relation to the Group's restructuring activities where there is a present obligation and it is probable that the expenditure will be made.
17 Contingent liabilities
During the ordinary course of business, the Group receives complaints, is subject to threatened or actual legal proceedings, and manages regulatory enquiries, reviews, challenges and investigations. It also receives and reviews allegations of wrongdoing raised by employees and others and provides support and assistance, when it is appropriate to do so, to relevant Law Enforcement Agencies in connection with investigations they may undertake. All such material matters are periodically reassessed, with the assistance of external professional advisers where appropriate, to determine the likelihood of incurring a liability. Where it is concluded that it is more likely than not that a payment will be made a provision is recognised based on management's best estimate of the amount that will be payable. For other matters no provision is recognised but disclosure is made of items which are potentially material, either individually or in aggregate, except in cases where the likelihood of a liability crystallising is considered to be remote. Currently the Group does not expect the ultimate resolution of any such matters to have a material adverse impact on its financial position.
18 Retirement benefit obligations
30 September 4 April 2017 2017 Retirement benefit obligations on the balance GBPm GBPm sheet Present value of funded obligations 5,866 6,039 Present value of unfunded obligations 12 12 5,878 6,051 Fair value of fund assets (5,616) (5,628) Net defined benefit liability 262 423
The Group continues to operate two defined contribution schemes and a number of defined benefit pension arrangements, the most significant being the Nationwide Pension Fund. These pension schemes are principally unchanged from the year ended 4 April 2017; further details are set out in note 33 of the Annual Report and Accounts 2017.
The principal actuarial assumptions used are as follows:
30 September 4 April 2017 2017 Principal actuarial assumptions % % Discount rate 2.55 2.40 Future salary increases 3.15 3.20 Future pension increases 2.95 2.95 Retail price index (RPI) inflation 3.15 3.20 Consumer price index (CPI) inflation 2.15 2.20
The assumptions for mortality rates are based on up to date industry standard mortality tables, which allow for future improvements in life expectancies.
Notes to the consolidated interim financial statements (continued)
18 Retirement benefit obligations (continued)
Changes in the present value of the net defined benefit liability (including unfunded obligations) are as follows:
Movements in the net defined benefit liability 30 September 30 September 2017 2016 GBPm GBPm Net defined benefit liability at 5 April 423 213 Current service cost 48 30 Past service cost 3 1 Curtailment gains (5) (1) Interest on net defined benefit liability 4 3 Return on assets less/(greater) than discount rate 129 (807) Contributions by employer (116) (77) Administrative expenses 2 2 Actuarial (gains)/losses on defined benefit obligations (226) 1,359 Net defined benefit liability 262 723
The reduction in the net defined benefit liability is mainly due to a decrease in the value of defined benefit obligations combined with employer contributions, partially offset by return on assets less than the discount rate.
The GBP226 million of actuarial gains (H1 2016/17: GBP1,359 million of actuarial losses) on defined benefit obligations is driven by a 0.15% increase in the discount rate and a 0.05% decrease in assumed long term inflation since 4 April 2017, as a result of changes in market conditions.
The GBP129 million from a return on assets, which is less than the discount rate (H1 2016/17: GBP807 million from a return greater than the discount rate), is driven by changes in market conditions, including rising bond yields partially offset by strong equity returns.
The net impact of actuarial gains and return on assets is an increase of GBP97 million in other comprehensive income over the period (H1 2016/17: reduction of GBP552 million).
The GBP116 million of employer contributions includes a deficit contribution of GBP49 million in July 2017 (H1 2016/17: GBP49 million), along with an additional deficit contribution of GBP37 million in August 2017 following completion of the triennial valuation. The remainder relates to employer contributions in respect of future benefit accrual.
19 Core capital deferred shares (CCDS)
Number of CCDS Share premium Total shares GBPm GBPm GBPm At 4 April 2017 5,500,000 6 525 531 Issuance 5,000,000 5 802 807 Issue costs (13) (13) At 30 September 2017 10,500,000 11 1,314 1,325
In September 2017, the Society issued 5,000,000 of GBP1 core capital deferred shares (CCDS). These CCDS form a single series along with the CCDS previously issued in December 2013. The gross proceeds of the issuance were GBP807 million (GBP794 million net of issuance costs).
CCDS are a form of Common Equity Tier 1 (CET1) capital which have been developed to enable the Group to raise capital from the capital markets. Previously issued Tier 1 capital instruments, PIBS, no longer meet the regulatory capital requirements of CRD IV and are being gradually phased out of the calculation of capital resources under transitional rules.
CCDS are perpetual instruments. They rank pari passu to each other and are junior to claims against the Society of all depositors, creditors and investing members. Each holder of CCDS has one vote, regardless of the number of CCDS held.
In the event of a winding up or dissolution of the Society and if there was surplus available, the amount that the investor would receive for each CCDS held is limited to the average principal amount in issue, which is currently GBP129.24 per share.
There is a cap placed on the amount of distributions that can be paid to holders of CCDS in any financial year. The cap is currently set at GBP15.67 per share and is adjusted annually in line with CPI.
Notes to the consolidated interim financial statements (continued)
19 Core capital deferred shares (CCDS) (continued)
A final distribution of GBP28 million (GBP5.125 per share) for the financial year ended 4 April 2017 was paid on 20 June 2017. This distribution has been recognised in the consolidated statement of movements in members' interests and equity.
Since the balance sheet date the directors have declared a distribution of GBP5.125 per share in respect of the period to 30 September 2017, amounting in aggregate to GBP54 million. This has not been reflected in these interim financial statements as it is recognised by reference to the date at which it was declared. The distribution will be paid on 20 December 2017.
20 Other equity instruments
Total GBPm At 30 September 2017 992 At 4 April 2017 992
Other equity instruments are Additional Tier 1 (AT1) capital instruments. AT1 instruments rank pari passu to each other and to PIBS. They are junior to claims against the Society of all depositors, creditors and investing members, other than the holders of CCDS.
AT1 instruments pay a fully discretionary, non-cumulative fixed coupon at an initial rate of 6.875% per annum. The rate will reset on 20 June 2019 and every five years thereafter to the five year mid swap rate plus 4.88%. Coupons are paid semi-annually in June and December.
A coupon of GBP34 million, covering the period to 19 June 2017, was paid on 20 June 2017. This payment has been recognised in the consolidated statement of movements in members' interests and equity.
A coupon payment of GBP34 million, covering the period to 19 December 2017, is expected to be paid on 20 December 2017. This is not reflected in these interim financial statements as it is recognised by reference to the date at which it is paid.
The coupons paid and declared represent the maximum non-cumulative fixed coupon of 6.875%.
AT1 instruments have no maturity date. They are repayable at the option of the Society on 20 June 2019 and on every fifth anniversary thereafter. AT1 instruments are only repayable with the consent of the PRA.
If the fully loaded CET1 ratio for the Society, on either a consolidated or unconsolidated basis, falls below 7% the AT1 instruments convert to CCDS instruments at the rate of one CCDS share for every GBP80 of AT1 holding.
21 Related party transactions
There were no related party transactions during the period ended 30 September 2017 which were significant to the Group's financial position or performance.
Full details of the Group's related party transactions for the year to 4 April 2017 can be found in note 38 of the Annual Report and Accounts 2017.
Notes to the consolidated interim financial statements (continued)
22 Notes to the consolidated cash flow statement
Half year Half year to to 30 September 30 September 2017 2016 Non-cash items included in profit before tax GBPm GBPm Net increase/(decrease) in impairment provisions 17 (40) Net decrease in provisions for liabilities and charges (74) (45) Impairment losses on investment securities - 5 Depreciation, amortisation and impairment 192 175 Profit on sale of property, plant and equipment (1) (1) Interest on subordinated liabilities 74 54 Interest on subscribed capital 7 24 Gains from derivatives and hedge accounting (36) (77) Total 179 95 Changes in operating assets and liabilities Loans and advances to banks 17 (19) Net derivative financial instruments and fair value adjustment for portfolio hedged risk (212) (1,809) Loans and advances to customers (3,312) (6,279) Other operating assets 806 (625) Shares 1,842 4,700 Deposits from banks, customers and others 2,471 1,666 Debt securities in issue 71 2,686 Deferred taxation 2 (83) Retirement benefit obligations (161) 510 Other operating liabilities 292 (137) Total 1,816 610 Cash and cash equivalents Cash 15,302 17,213 Loans and advances to banks repayable in 3 months or less (note i) 2,665 2,979 Total 17,967 20,192
Note:
i. Cash equivalents include GBP1,924 million (30 September 2016: GBP2,216 million) of cash collateral posted with bank counterparties.
The Group is required to maintain balances with the Bank of England and certain other central banks which, at 30 September 2017, amounted to GBP344 million (30 September 2016: GBP344 million). These balances are included within loans and advances to banks on the balance sheet and are not included in the cash and cash equivalents in the cash flow statement as they are not liquid in nature.
Responsibility statement
The directors confirm that, to the best of their knowledge, the consolidated interim financial statements have been prepared in accordance with IAS 34, as adopted by the European Union. The Interim Results include a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R, namely:
-- an indication of important events that have occurred in the first six months of the financial year and their impact on the consolidated interim financial statements and a description of the principal risks and uncertainties for the remaining six months of the financial year; and
-- material related party transactions in the first six months of the financial year and any material changes in the related party transactions described in the Annual Report and Accounts 2017.
A full list of the board of directors can be found in the Annual Report and Accounts 2017, subject to the following update in respect of a change that has occurred during the period to 30 September 2017:
-- Gunn Waersted was appointed to the Board on 1 June 2017 and is a member of the IT Strategy and Resilience Committee.
Signed on behalf of the Board by
Mark Rennison
Chief Financial Officer
16 November 2017
Independent review report to Nationwide Building Society
Report on the consolidated interim financial statements
Our conclusion
We have reviewed the consolidated interim financial statements (the "interim financial statements") for Nationwide Building Society and its subsidiaries ("the Group") on pages 46 to 71 in the interim results for the six month period ended 30 September 2017. Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.
What we have reviewed
The interim financial statements comprise:
-- the consolidated balance sheet as at 30 September 2017;
-- the consolidated income statement and consolidated statement of comprehensive income for the period then ended;
-- the consolidated cash flow statement for the period then ended;
-- the consolidated statement of movements in members' interests and equity for the period then ended; and
-- the explanatory notes to the interim financial statements.
The interim financial statements included in the interim results for the period ended 30 September 2017 have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.
As disclosed in note 2 to the interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.
Responsibilities for the interim financial statements and the review
Our responsibilities and those of the directors
The interim results for the period ended 30 September 2017, including the interim financial statements, are the responsibility of, and have been approved by, the directors. The directors are responsible for preparing the interim results for the period ended 30 September 2017 in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.
Our responsibility is to express a conclusion on the interim financial statements in the interim results for the period ended 30 September 2017 based on our review. This report, including the conclusion, has been prepared for and only for the Group for the purpose of complying with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
What a review of interim financial statements involves
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.
A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Independent review report to Nationwide Building Society (continued)
Report on the consolidated interim financial statements (continued)
We have read the other information contained in the interim results for the period ended 30 September 2017 and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
London
16 November 2017
Notes:
a) The maintenance and integrity of the Nationwide Building Society website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the interim financial statements since they were initially presented on the website.
b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Other information
The interim results information set out in this announcement is unaudited and does not constitute accounts within the meaning of section 73 of the Building Societies Act 1986.
The financial information for the year ended 4 April 2017 has been extracted from the Annual Report and Accounts 2017. The Annual Report and Accounts 2017 has been filed with the Financial Conduct Authority and the Prudential Regulation Authority. The Independent Auditors' Report on the Annual Report and Accounts 2017 was unqualified.
Nationwide adopted the British Bankers' Association Code for Financial Reporting Disclosure ('the BBA code') in its Annual Report and Accounts 2017. The code sets out five disclosure principles together with supporting guidance. Full details of the principles are included in the Annual Report and Accounts 2017. These principles have been applied, as appropriate, in the context of these interim results.
A copy of the Interim Results is placed on the website of Nationwide Building Society. The directors are responsible for the maintenance and integrity of information on the Society's website. Information published on the internet is accessible in many countries with different legal requirements. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Contacts
Media queries: Investor queries: Sara Batchelor Alex Wall Tel: 01793 657770 Tel: 020 7261 6568 Mobile: 07785 344137 Mobile: 07917 093632 sara.batchelor@nationwide.co.uk alexander.wall@nationwide.co.uk
This information is provided by RNS
The company news service from the London Stock Exchange
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