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RNS Number:1443D
Nationwide Building Society
18 May 2006
Nationwide Building Society
Preliminary Results Announcement
For the year ended
4 April 2006
INTERNATIONAL FINANCIAL REPORTING STANDARDS
The 2006 results have been prepared using International Financial Reporting
Standards (IFRS) for the first time. IFRS differs from UK GAAP which was used
in the preparation of the 2005 financial statements. The impact of the
implementation of IFRS on the 2005 financial results was published in a
restatement on 22 September 2005 and is available at
www.nationwide.co.uk/about_nationwide/results_accounts/.
2006 underlying results
As a consequence of the introduction of IFRS, the 2006 balance sheet and income
statement are subject to a certain amount of volatility arising from the
requirement to fair value derivatives, hedge accounting and the consolidation on
a line by line basis of our life insurance business. Where appropriate, certain
aspects of the results for 2006 are presented to reflect management's view of
the underlying results, to provide a clearer representation of the underlying
performance of the Group. Underlying profit before tax of #539.4m equates to
reported profit before tax of #559.2m adjusted for net gains from derivatives
and hedge accounting of #10.9m and policyholder tax of #8.9m.
2005 pro-forma results
Comparative analysis of the results is also complicated as a result of certain
IFRS only having been applied from 5 April 2005. This means that the revised
IFRS 2005 results only include the impact of certain of the IFRS used in the
preparation of the 2006 results. To facilitate comparison and understanding of
the 2006 results, 2005 pro-forma comparatives have been prepared. These show
how the 2005 results would have looked, where it is possible to determine what
the impact would have been, if all the standards had been effective in 2005.
However, they do not show the full impact of all the IAS 39 accounting rules as
hedges and financial assets to be fair valued were only designated and
documented from 5 April 2005.
Management's view is that a comparison of like-for-like 2006 underlying and 2005
pro-forma results, as included on page 28, provide the best measure of
performance. The primary focus of the Business Review commentary is therefore
against these measures. The adjustments required to the reported comparative
income statement to get to the proforma comparative income statement are also
set out on page 28.
HIGHLIGHTS
Nationwide Building Society today announced its results for the year ended 4
April 2006.
Financial performance
* Underlying profit before tax up 15.3% to #539.4m (2005 - pro-forma #467.7m)
* Record reported profit before tax #559.2m (2005 - #513.9m)
* Total assets up 8.1% to #120.6bn
* Costs as a percentage of mean total assets reduced for the 17th successive
year to 0.85%
Member value
* Members have benefited by an estimated #690m in the year through
competitive interest rates and lower fees and charges, up 7% on 2005
* Retained profits for future growth and investment of #397.2m, resulting in
estimated total member value of #1,087m (2005 - #1,011m)
* Refurbishment and re-site of over 160 branches and 60 agencies in the past
two years (over 25% of our retail network)
Operating highlights
* Sales performance
* 2.9m products sold during the year, up 12% on 2005
* Greater diversification, with an increase of 20% in non-mortgage and
savings sales, to 1.5m products sold
* Lending activities
* We are the UK's fourth largest mortgage lender
* High quality residential gross lending of #21.1bn (2005 - #23.2bn) and
net lending of #6.3bn (2005 - #10.9bn)
- our share of mortgage accounts 3 months or more in arrears fell
to 0.28% whilst the industry average continued to rise to 0.97%
(CML 31 March 2006)
- average LTV of new lending 55% (2005 - 53%) and seasoned book 39%
(2005 - 38%)
* Unsecured gross personal lending up 15.5% to #1.3bn
- our share of loans 30 days or more in arrears is 4.6% - 40% below
industry average
* Commercial gross lending up 27.8% to a record #5.5bn and record net
lending of #1.8bn
- number of loans 3 months or more in arrears 69 (2005 - 79), the
lowest level in 10 years
* Retail savings and investments
* We are the UK's number two savings provider
* Retail savings deposits grew by #8.3bn, a 23% increase on 2005,
representing a 12.8% market share
- new monthly income 65+ product aimed at over 65 year olds
introduced in response to member feedback - around 80,000
accounts opened since July 2005 launch with over #1.7bn
attracted,
- e-savings balances up 37% to #13.8bn, number of accounts now
exceed 1 million
- ISA cash balances up 15% to #19.8bn
* Market share for net sales of equity ISAs increased to 4.0% (2005 -
3.4%)
* Market share of Child Trust Fund is 17%, equivalent to 1 in 6 of all
accounts in the UK
* Banking products
* current account sales of 622,000 (up 9%)
* credit card sales of 252,000 (up 16%)
* Market share of new current accounts estimated at nearly 11% (based on
CACI's Current Account and Savings Market Database)
* Insurance
* Insurance commission contribution held strong at #119 million (2005 -
#119 million)
* Nationwide's over 55's life cover launched in November 2005 to meet
the protection needs of the c. 2.5 million members aged 55 to 75
* Travel insurance for 65s and over introduced in December 2005
* Balance sheet growth
* World's largest building society with total assets of #120.6bn, up
8.1%
- risk weighted assets grew by 7.6%
* Reserves up 10.3% to #5.0bn and total regulatory capital up 6.2% to
#7.0bn
- tier 1 capital ratio 8.8% (2005 - 8.8%)
- total capital ratio 11.0% (2005 - 11.1%)
* Inaugural covered bond issued in November 2005
- Euro2.0bn issue 118% over subscribed
* Social responsibility
* Donations to Nationwide Foundation (established in 1997) exceed #24m
to date
* Over #4m raised for Macmillan, our employee nominated charity, since
1994
* Nationwide became the main sponsor of Disability Sport Events in a
deal worth #1m over the next seven years. Nationwide also aims to
raise up to a further #100,000 for the charity to encourage voting at
this year's AGM.
* Development of our own environmental management system to limit our
environmental impact
* In October we entered a contract to buy electricity from renewable
energy sources
* Over 10 million Cats Eyes for Kids (branded reflectors) donated to
primary school pupils
* Local Heritage Initiative funding c. 1,300 local projects involving c.
1.5m people
* Nationwide Awards for Voluntary Endeavour recognising c. 1,200
individuals and groups
CHIEF EXECUTIVE'S COMMENT
Philip Williamson, chief executive, said: "This has been an outstandingly
successful year. We have delivered record profits and record member value in a
highly competitive market. Over 3,000 new members are joining Nationwide every
day because we make them better off than the banks - that's why we now have a
growing membership base well in excess of 11 million people.
"People are increasingly attracted to our wide range of products. As well as
mortgages and savings, we are opening record numbers of current accounts, credit
cards and personal loans - areas in which the banks used to dominate.
"Over the past 12 months we have led the way in the Child Trust Fund market and
have introduced a new savings account for those aged 65 and over which has
proved hugely popular. We have also introduced a comprehensive travel insurance
policy for the over 65s. These initiatives provide clear evidence that we have
listened to our customers and responded to their feedback. That's what makes us
different.
"We aimed to achieve sufficient levels of profit to ensure that Nationwide
remains safe and secure and to enable us to continue to invest in the business
and grow at a sustainable rate - and that's exactly what we've done..
"As we stated last year we planned to do less mortgage business as we wanted to
maintain our focus on quality during a period when we knew the housing market
and general economic environment would be changing. Quality was our key
priority and we have achieved our goal. Looking forward, whilst I expect
competition in our core markets to remain keen, I believe we are in a strong
position to continue to deliver outstanding pricing benefits to our members.
"These results provide clear evidence that more and more people are defecting
from the banks and choosing to do business with Nationwide because we give them
a better deal. This is testimony to the fact that, with no shareholders to
worry about, we genuinely put our members at the heart of everything we do."
BUSINESS REVIEW
OVERVIEW
We operate as a retailer of a broad range of personal financial services
products to provide maximum value to our membership through better pricing and
an excellent service delivered using an efficient distribution and support
infrastructure.
The success of this strategy is evidenced by our delivering a broad range of
financial services products to our members whilst increasing our underlying
profit before tax to #539.4m, an increase of 15.3% compared with 2005 pro-forma
results of #467.7m. This resulted in #397.2m profit (2005 - #367.0m) being
retained in the business for future growth and investment. At the same time we
also generated a record estimated #690m (2005 - #644m) in the form of pricing
benefit to our members by offering better rates and by charging lower fees and
charges than our competitors.
Our funding is primarily from retail members and this year we were particularly
successful in the UK retail savings market where we achieved a market share of
12.8% - substantially greater than our par share of 9.2%. In the wholesale
funding market, we became the first UK building society to issue a Covered Bond.
The Euro2bn 10 year transaction gives us access to new global capital market
investors.
In a highly competitive mortgage market, we have maintained our focus on prime
quality residential loans, achieving net advances of #6.3bn. The quality of our
residential mortgage book remains very high and the incidence of arrears is less
than one third of the industry average.
We continued to increase our share of the current account, credit card and
personal loan markets. Non-mortgage and savings sales volumes increased by 20%,
reflecting our continued focus on expanding the franchise. Overall, total retail
sales increased by 12%, evidence of success of our investment programme to
improve access to our services for members. We are now two years into the #300m
six-year programme to improve access by phone, post, on-line or through our
network of branches and agencies. So far, over 160 branches and over 60
agencies have been refurbished. In February, a new call centre in Wakefield was
opened. In addition to this investment in infrastructure, we are investing
#100m over the next five years in our front line employees including recruiting
an extra 350 people into our branch network and call centres.
PERFORMANCE BY BUSINESS STREAM
Nationwide operates three main business streams as follows:
* Personal financial services
Mortgages, savings, banking, consumer lending, general insurance, life
insurance and investment business.
* Commercial
Commercial lending and Treasury income generation activities together with
at.home nationwide ltd, the Society's residential letting subsidiary.
* Group
Treasury group operations, capital and items classified as being
non-attributable to our core business areas.
The contribution to underlying profit before tax against pro-forma comparatives
by each of these business streams is set out in the table below. Summary income
statements on the same basis are included on page 29.
Contribution before tax
2006 2005 Growth
Underlying Pro-forma %
#m #m
Personal financial services 270.9 231.9 16.8
Commercial 194.2 160.3 21.1
Group 74.3 75.5 (1.6)
Total 539.4 467.7 15.3
Underlying contribution before tax of #539.4m equates to reported profit before
tax of #559.2m adjusted for net gains from derivatives and hedge accounting of
#10.9m and policyholder tax of #8.9m.
PERSONAL FINANCIAL SERVICES (PFS) BUSINESS STREAM
2006 2005 Growth
Underlying Pro-forma %
#m #m
Net interest income 921.3 861.3 7.0
Other income 351.8 318.7 10.4
Total income 1,273.1 1,180.0 7.9
Expenses 896.2 844.6 6.1
Impairment and other provisions 106.0 103.5 2.4
Contribution from PFS 270.9 231.9 16.8
The underlying contribution from the PFS business stream increased by 16.8% to
#270.9m which represents just over half of the Group's total contribution. All
of the pricing benefit given to our members is delivered through this business
stream which reduces its relative contribution. The total number of PFS sales
has grown by 12% compared with 2005. Within this we have achieved 20% growth in
non-mortgage and savings sales, reflecting our focus on expanding our franchise.
Expenses increased by 6.1% reflecting growth in volumes, particularly in high
transaction products such as our current account and credit card. Unsecured loan
impairment charges increased to #73.7m (2005 - pro-forma #53.1m). Whilst much of
the additional charge has arisen from increased volumes in lending,
approximately #8m has arisen from a worsening in rates of delinquency. Secured
loan impairment charges are minimal for the current and previous year. Arrears
across all products remain significantly better than industry averages. A
further provision of #28.5m for the cost of customer redress relating to all
current and estimated future endowment review claims has been raised (2005 -
#44.6m).
Lending
Loans and advances to customers total #101.4bn of which #86.9bn, (86%) relates
to retail lending activity.
The composition of our PFS lending continues to be low risk. At 4 April 2006,
95% of our PFS lending was residential mortgages, 2% was buy-to-let mortgages,
2% was unsecured personal loans with the balance of 1% lending on overdrafts and
credit cards. This mix is not expected to change significantly going forward.
UK residential mortgage market
2005/6 was a year of some recovery in the housing market. Activity levels
recovered as borrowers' pessimism about a house price crash evaporated. This
latent demand was boosted further by the cut in base rate in August and fed into
a modest acceleration in house prices from the autumn. The value of house
purchase approvals increased by an estimated 22% compared with last year and
reached levels similar to the boom of spring 2004.
Higher house prices helped to swell gross mortgage lending for house purchases,
while highly competitive mortgage rates and the maturing of fixed rate products
in the autumn helped to support remortgaging, which accounted for an estimated
40% (2005 - 43%) of all mortgage lending. While the value of total market gross
advances increased by 9% over the year, strong competition also led to higher
redemptions. This dampened net lending, which grew by only around 2.5% over the
same period and put increased emphasis on retention strategies.
UK residential mortgages - Nationwide performance
Total gross lending was #21.1bn (2005 - #23.2bn), a market share of 7.0% (2005 -
8.4%). Net lending was #6.3bn (2005 - #10.9bn). We continued to be highly
successful in retaining borrowers and this has made a significant contribution
to net lending this year. Our 7.2% market share of principal repaid in the
Group was below our mortgage par share of 9.0%. This strong performance was
partly driven by our policy of charging between 0.5% to 1% less interest on our
standard variable rate mortgage compared with our major competitors as well as
having competitively priced fixed and tracker products available to existing
borrowers on the same terms as new borrowers. In addition, good service and an
active policy of customer contact enabled us to retain borrowers with maturing
fixed rate and tracker rate mortgage products.
During the year we have extended the range of options available to our borrowers
by including the facility to add reservation fees to the loan balance or to
forego the fee completely and pay a slightly higher interest rate. In January,
we launched a lifetime tracker product that tracks the Bank of England base rate
for up to 40 years. We also introduced a "switch and fix" facility that gives
borrowers confidence when taking out a tracker mortgage that they can switch to
one of our fixed rate products at any time without paying early redemption
charges.
The profile of our new lending has remained low risk. Based on value, the
proportion of lending to first time buyers has increased to 15% (2005 - 12%).
82% (2005 - 86%) of new lending was in respect of next time buyers, remortgage
and on further advance with the borrowers having a proven payment track record.
Only 3% (2005 - 2%) was in respect of buy to let.
Our prudent lending to creditworthy customers is demonstrated by continuing high
asset quality. The average loan to value (LTV) of the residential book has
remained broadly constant at 39% and new lending has averaged 55%. The number
of Group mortgages 3 or more months in arrears reduced by 10% over the year
compared with an increase in the market of 11% (Council of Mortgage Lenders'
(CML) figures March 2005 to March 2006). The overall proportion of mortgages 3
or more months in arrears as a proportion of the book is 0.28% (2005 - 0.31%)
compared to the March 2006 CML average of 0.97% (March 2005 - 0.87%).
Personal loans
Personal loans are offered through the Society's personal loans subsidiary,
Nationwide Trust Limited. Gross unsecured personal loan lending increased by
15.5% to #1.3bn (2005 - #1.1bn). Loans are sold through our retail network,
over the telephone and via the internet. Nationwide Trust has in excess of
310,000 unsecured personal loan customers, a 14% increase on last year.
The growth has not been at the expense of quality of lending. We continue to
maintain prudent lending criteria employing the use of credit scoring,
affordability and indebtedness rules as part of our assessment of whether to
lend or not. This process results in approximately one in every two unsecured
loan applications received being rejected. Most of our borrowers are 'known to
Nationwide' with over three quarters already being members or customers of the
Group.
In line with industry wide credit experience, we have seen increases in the
impairment charge on our personal loan book. However, continuing high levels of
asset quality are demonstrated by the ratio of the value of loans 30 days or
more in arrears as a percentage of the total book being 4.6% (2005 - 4.1%),
around 40% lower than the average for members of the Finance and Leasing
Association.
Savings and investments
UK savings and investments market
The market for UK retail funds has intensified in the year with lenders looking
to fund more of their lending from retail savers. There has also been stronger
competition from savings only competitors and increased fund raising by National
Savings to support Government spending.
UK savings and investments market - Nationwide performance
Despite this continued competition, we achieved a 12.8% (2005 - 11.1%) share of
the overall increase in UK retail savings, representing #8.3bn (2005 - #6.7bn).
This compared favourably with a par share of 9.2%. Total retail member deposits
as at 4 April 2006 amounted to #80.9bn (2005 - #72.6bn) and represent our
primary source of funding. We have consolidated our position as the second
largest savings provider in the UK with Nationwide's savings accounts, on
average, 0.4% better priced than those of our competitors.
Strong savings flows were primarily driven by our e-Savings and Individual
Savings Accounts (ISAs) products which in aggregate generated #5.4bn (2005 -
#5.0bn) of net receipts. The Society again launched a number of highly
competitive bonds throughout the year. A major product innovation was the
Monthly Income 65 + launched in July, an account designed specifically for the
over 65s. Since launch in July 2005, around 80,000 accounts have been opened
with over #1.7bn attracted.
The Society, through its wholly owned subsidiary Nationwide Unit Trust Managers
Limited (NUTM), writes a range of investment contracts including unit trusts and
ISAs. At 4 April 2006 our range of unit trust investment products held by our
customers had a market value of over #2.5bn (2005 - #2.0bn). Following last
year's re-launch of its range of investments, abolishing initial charges and
introducing a #20 minimum monthly investment, NUTM has recorded 94,000 sales
(excluding Child Trust Funds) (2005 - 61,000). Nationwide continues to be one
of only a handful of national high street providers to offer the choice of an
equity or cash based Child Trust Fund with over 103,000 equity applications
received since launch.
Banking
Current accounts
The Society's current account, FlexAccount, is a key product in developing and
retaining customer relationships. We offer a highly competitive account with a
range of good value features including a market leading rate of up to 4.25%
credit interest and no charge for overseas transactions. More than 48% of
FlexAccount customers now regularly use our internet banking service, (2005 -
25%) and over 2.4 million members are registered to use Nationwide's online
banking service.
In August we launched a Telephone Self Service banking facility, giving our
current account customers a fully automated facility to carry out transactions.
The service uses the latest speech recognition technology supported by
traditional 'touch tone' functions to allow customers to access their account
anytime, anywhere. So far, over 50,000 members have registered for the service.
The total number of Nationwide current accounts is now in excess of 3.6m. Our
market share of new accounts is estimated at nearly 11% (based on CACI's Current
Account and Savings Market Database)
Credit cards
The Society continues to differentiate its credit card from others on offer in
the UK by not charging for international use and by allocating payments to clear
the most expensive debt first. Growth in the credit card market has been
largely unchanged year on year with market gross lending in 2006 only 1% lower
than in 2005. The market has been moving away from large bonus cash reward and
free balance transfers as these products have become unprofitable for suppliers.
In response, Nationwide repositioned the portfolio by launching new introductory
terms for the classic card and closing the cash reward card to new business.
Despite this slowing market in the year we issued 252,000 new credit card
accounts (2005- 217,000) taking total accounts up to 974,000 (2005 - 796,000)
and total cards in issue to 1,222,000 (2005 - 1,054,000). Balances outstanding
on credit cards at the year end amounted to #670m (2005 - #567m).
As with personal loans, there has been an increase in the impairment charge in
line with industry wide credit experience. However, asset quality compared with
the industry remains very favourable with the value of 30 days or more in
arrears as a percentage of the book being 6.9% (2005 - 6.4%). We are around 30%
lower than the average for members of APACS.
General insurance
During the year over 322,000 (2005 - 431,000) general insurance covers were sold
and the book stood at over 1.5 million (2005 - 1.6 million) covers at the year
end. The primary general insurance products we sell are buildings and contents
insurance, payment protection policies, motor insurance, travel insurance and
personal accident insurance. Sales of general insurance products are often
linked to mortgage sales. The reduction in the number of general insurance
covers sold in the year reflects the lower volume of mortgage sales experienced
this year.
We have continued to use leading insurers as third-party underwriters and the
commission and profit share we receive is an important source of non-interest
income. Despite the reduction in covers sold we still earned a consistent #119m
(2005 - #119m) from commission and profit share during the year.
On the 1st December 2005, Nationwide launched annual travel insurance for the
over 65 market. The policy covers Europe and where other high street banks are
able to offer this product it is priced competitively in comparison. Having
re-entered the market, take-up has been positive and feedback from members has
been complimentary. We will continue to look for product gaps and ways of
making our existing products more attractive.
Life assurance
The Society, through its wholly owned subsidiary, Nationwide Life Limited (NL),
writes a range of investment and protection products. These include two types of
insurance product: term life assurance and critical illness cover. 65,000 life
policies were sold during the year (2005 - 74,000 policies). As with general
insurance covers, this lower volume of life policies stems from the lower volume
of mortgages issued this year. NL also provides pension contracts and
guaranteed equity bonds. Nationwide's Guaranteed Equity Bond was improved and
re-launched in September; the new offer has improved sales by around 36%.
Pricing benefit
The estimated pricing benefit is calculated by comparing the price of each of
our products (including interest rates, fees and charges) with the equivalent
products of our main competitors. During the year we generated an estimated
#690m (2005 - #644m) in the form of pricing benefit to our members by offering
better rates and by charging lower fees and charges than our competitors.
Benefit generated over the year for mortgage borrowers has now come into line
with that generated for savers. This reflects the increasing proportion of
competitively priced fixed rate and tracker rate mortgages. Pricing benefit is
distributed to members as follows:
Pricing benefit distributed to members 2006 2005
#m % #m %
Benefit to mortgage borrowers 252 37 216 34
Benefit to savers 251 36 259 40
Benefit to members with other products 187 27 169 26
Total 690 100 644 100
Distribution channels
We are continuing the #300m, six year investment programme announced in 2004 to
develop a modern business and to ensure that our branch, telephones and other
access channels are maintained at the modern standards expected by our members.
This programme is going very well with over 160 branches refurbished or re-sited
since its inception, investment in our agency network is well underway and a
number of technology investments have already been successfully deployed. To
allow our customers to do business, when and how they wish, we have continued
our investment in UK call centres with a new facility in Wakefield which opened
in February 2006. All of our call centres remain in the UK. In addition to
the investment in physical infrastructure we will also be investing #100m over
the next five years in our front line employees. As well as recruiting an extra
350 people into our branch network and call centres and creating over 1,000
opportunities for promotion, we are strengthening our management structure and
providing additional sales coaching and compliance management.
COMMERCIAL BUSINESS STREAM
2006 2005 Growth
Underlying Pro-forma %
#m #m
Net interest income 199.6 186.7 6.9
Other income 37.3 22.9 63.0
Total income 236.9 209.6 13.0
Expenses 43.6 42.4 2.8
Impairment and other provisions (0.9) 6.9 (113.0)
Contribution from Commercial 194.2 160.3 21.1
The underlying contribution from the commercial business stream increased by
21.1% to a record #194.2m. This represents around 35% of the Group's total
contribution in both years, an impressive performance given that assets account
for only 15% of the Group's total. The book continues to be high quality, with
record levels of gross lending achieved in the year. This was achieved against
a background of further competition which continues to increase pressure on
margins. Underlying contribution from investment assets held by Treasury was
#29.8m (2005 - #9.0m) an increase of 230%. This increase arises from additional
investment return in the current year and an impairment gain as compared with a
charge last year. The contribution from at.home nationwide was #13.1m (2005 -
pro-forma #4.6m) an increase of 185% on the previous year. This increase
primarily arises from revaluation gains in the current year as compared with
losses last year.
Commercial lending
Commercial lending is a significant part of our business and of our total loans
and advances to customers of #101.4bn, #14.5bn (14%) is in respect of commercial
lending.
The composition of our commercial portfolio at 4 April 2006 was 33% to UK
Registered Social Landlords, 6% to support Private Finance Initiatives and the
balance of 61% secured on other commercial property. Loans to Registered Social
Landlords are secured on residential property. Loans advanced under Private
Finance Initiatives are secured on cash flows from Government backed contracts.
Commercial property loans are secured against properties supported by strong
cash flows and tenant covenants. In addition loans are well diversified by
industry type and geographic location. There is no speculative lending and no
development finance. In terms of counterparty concentration, the largest single
borrower represents only 2.0% of the total commercial book.
We remain the lender with the largest volume of funding commitments to
Registered Social Landlords. Whilst there have been fewer transfers of
municipal housing stock from local authorities this year, there have been
several refinancings and increases in borrowing as Registered Social Landlords
merge in response to government initiatives to increase efficiency.
Gross commercial lending in the year totalled #5.5bn (2005 - #4.3bn)
representing an increase of 27.8% with balances outstanding of #14.5bn (2005 -
#12.7bn). Redemptions have been contained at the level seen last year. Net
lending of #1.8bn constitutes a record performance.
Asset quality remains strong. Commercial lending arrears levels of three months
or more have improved year on year from 79 to 69 cases.
at.home nationwide
at.home is the Society's residential letting subsidiary. The subsidiary
represents a non-core, non strategic activity and it has been decided to dispose
of the business. The Society has been in exclusive negotiation for the sale of
the at.home property portfolio and contracts were exchanged on 15 May 2006. The
disposal will not have a material impact on the income statement or balance
sheet of the Group.
GROUP BUSINESS STREAM
2006 2005 Growth
Underlying Pro-forma %
#m #m
Net interest income 113.4 119.4 (5.0)
Other income 12.3 9.4 30.9
Total income 125.7 128.8 (2.4)
Expenses 51.4 53.3 (3.6)
Contribution from Group 74.3 75.5 (1.6)
Contribution from the Group business stream was #74.3m (2005 - #75.5m) a
decrease of 1.6%. The contribution from this business stream includes the
contribution derived from capital held for regulatory purposes in excess of that
allocated to other business streams, on the basis of an economic capital
assessment, together with other elements of contribution that cannot be
allocated directly to business streams. It also includes contribution from the
Group's treasury operations, excluding the contribution from assets held solely
for investment purposes which is included in the contribution from the
Commercial business stream.
Liquidity
Liquidity balances totalled #14.7bn at 4 April 2006 (2005 - #15.3bn)
representing a prudential liquidity ratio of 10.0% (2005 -11.5%). Prudential
liquidity has been managed down in the year to improve the efficiency of the
balance sheet.
We continue to have no exposure to emerging markets. 96% of our Treasury
investment portfolio comprised assets which are rated single A or better.
Wholesale funding
Total wholesale funding decreased by #0.7bn. At 4 April 2006, wholesale
balances stood at #29.2bn (2005 - #29.9bn) representing a funding ratio of 26.6%
(2005 - 28.6%). This is one of the lowest levels of wholesale funding of
organisations of comparable size and provides significant headroom for
additional funding in the future in addition to our retail deposit taking
activities.
During the year, we successfully executed our inaugural covered bond to further
broaden our global investor base. The Euro2bn issue was the first by a UK building
society. We were pleased that Nationwide was recognised for the success of this
transaction by being awarded - 'Best Covered Bond Deal of the Year' - by
Euroweek magazine. The Society has continued to enjoy a strong appetite from
wholesale funding investors and has operated successful Medium Term Note
programmes in the Dollar, Euro and Sterling markets. During the year, we
transacted a #500m five year sterling issue on the EMTN programme with strong
demand from our UK investor base. The funding programmes have been updated, so
that the EMTN and US MTN programmes are fully compliant with the new EU
Prospective Directive.
Our short and medium term credit ratings from the major rating agencies have
remained stable during the year. They are as follows:
Short term Long term
Fitch IBCA F1+ AA-
Moody's P-1 Aa3
S&P A-1 A+
PERFORMANCE BY INCOME STATEMENT CATEGORY
Profit
A Summary Income Statement on an underlying and pro-forma basis is as follows:
2006 2005 Growth
Underlying Pro-forma %
#m #m
Net interest income 1,234.3 1,167.4 5.7
Other income 401.4 351.0 14.4
Total income 1,635.7 1,518.4 7.7
Expenses 991.2 940.3 5.4
Impairment and other provisions 105.1 110.4 (4.8)
Profit before tax 539.4 467.7 15.3
The Group has seen a strong growth in underlying profit before tax of 15.3% to
#539.4m compared with 2005 pro-forma results. The increase in profit was
consistent with our strategy of retaining sufficient profit to allow continued
investment in the business and to support its future growth.
On a reported basis, profit before tax has increased 8.8% to #559.2m from
#513.9m. However, the reported 2006 profit includes fair value gains from
derivatives and hedge accounting (#10.9m) and policyholder tax (#8.9m) and the
reported 2005 comparative does not include the impact of some of the IFRS
standards (IAS 32, IAS 39 and IFRS 4) that are only applied from 5 April 2005.
Management's view is that a comparison of like-for-like 2006 underlying and 2005
pro-forma results provide the best measure of performance. A reconciliation
from reported to underlying and pro-forma pre-tax profit is included on page 28.
Net interest income
Net interest income is earned on a combination of our PFS and Commercial
products together with interest income from activity within Treasury.
Net interest income increased by 5.7% to #1,234.3m in the year compared with
2005 pro-forma results. Effective margin management throughout the year has
maintained the net interest margin at 1.06% a reduction of only 3 basis points
from last year.
Throughout the current year we have had a LIBOR denominated net asset exposure
of approximately #20bn which benefited from LIBOR being an average of 9 basis
points higher than base rate. This differential was 15 basis points lower than
last year and its impact represented 2 of the 3 basis points reduction in the
net interest margin.
Other income
Other income primarily comprises income earned from the sale and manufacture of
insurance products together with administration fees not included within
interest margin. During the year underlying other income increased by 14.4% to
#401.4m compared with 2005 pro-forma results reflecting our strong general
insurance book and continued focus on banking products and personal loans.
Expenses
Total expenses amounted to #991.2m representing an increase of 5.4% over 2005.
This increase compares with an increase in assets of 8.1% over the year and a
rise in underlying total income of 7.7%. As a result our cost to mean total
asset ratio improved for the 17th successive year to 0.85% (2005 - pro-forma
0.88%) and the underlying cost to income ratio, one of our principal measures of
efficiency, improved to 60.6% (2005 - pro-forma 61.9%).
Total expenses include increased costs arising from the continued investment in
our customer service improvement programme. During the year we opened our fifth
UK regional call centre in Wakefield and have continued with our extensive
branch refurbishment programme. We have also announced a #100m investment in
our people ensuring that an additional 350 employees will be available to serve
our customers in our branches and call centres. Whilst increasing costs in the
current year, these initiatives will continue to improve our retailing capacity
and ensure continued future income growth.
Impairment losses on loans and advances
2006 2005 Change
Pro-forma
#m #m %
Secured lending 2.9 3.5 (17.1)
Unsecured lending 73.7 53.1 38.8
Customer redress 32.1 46.7 (31.3)
Treasury investments (3.6) 7.1 (150.7)
105.1 110.4 (4.8)
Our high quality lending policy has again resulted in a minimal impairment
charge arising from secured lending.
In line with other lenders we have experienced an increase in the impairment
charge for unsecured lending products. Whilst much of the additional charge has
arisen from increased volumes in lending, approximately #8m has arisen from a
worsening in rates of delinquency. However, our levels of arrears remain
significantly lower than industry averages for all unsecured products.
The charge from customer redress primarily relates to the estimated cost of all
current and estimated future endowment review claims.
Following an improvement in the credit quality of a particular treasury
investment security an impairment gain has been recognised resulting in a #3.6m
credit from treasury investments.
Taxation
The effective rate of tax was 29.0% (2005 - 28.6%) compared with the standard
rate of corporation tax of 30%. Under IFRS, the tax charge in respect of the
life assurance subsidiary is included on an actual basis rather than using the
30% 'gross up' permitted under UK GAAP. Stripping out the life assurance
subsidiary, the effective rate of tax was 27.9% (2005 - 29.2%).
Gains from derivatives and hedge accounting
Following the introduction of IFRS all derivatives entered into by Nationwide,
which under UK GAAP were held off balance sheet, are now recorded on the balance
sheet at fair value with any fair value movements being taken to the income
statement. Derivatives are only used to limit the extent to which the Group
will be affected by changes in interest rates, exchange rates or other factors
specified in building society legislation. Derivatives are therefore used
exclusively to hedge risk exposures and are not used for speculative purposes.
Where effective hedge accounting relationships can be established, the movement
in the fair value of the derivative instrument is offset in full or in part by
opposite movements in fair value of the underlying asset or liability being
hedged. Any ineffectiveness arising from different movements in fair value will
trend to zero over time so any recorded ineffectiveness is excluded from
underlying results in that accounting period.
In addition, we enter into certain derivative contracts which although efficient
economically cannot be included in effective hedge accounting relationships.
Consequently, although the implicit interest cost of the underlying instrument
and associated derivatives are included in "Net interest income" in the income
statement, fair value movements on such derivatives are included in "Gains from
derivatives and hedge accounting". These fair value movements are therefore also
excluded from underlying results as they will not be realised in cash terms.
Accordingly #10.9m gains from derivatives and hedge accounting has been deducted
to arrive at underlying profit. In future periods if net losses are recorded
these will similarly be added in calculating underlying profit.
CAPITAL STRUCTURE
Regulatory capital stood at #7.0bn (2005 - #6.6bn) with the Group's total
solvency ratio remaining strong at 11.0% (5 April 2005 - 11.1%). The Tier 1
solvency ratio stood at 8.8% (5 April 2005 - 8.8%). Both ratios remain well in
excess of the minimum established by the Society's Regulator.
2006 2005
(Note i)
#m #m
Tier 1
General reserve 4,825.6 4,432.7
Permanent interest bearing shares (note ii) 700.0 700.0
Pension fund deficit add back (note iii) 126.0 113.0
Intangible assets (80.5) (44.2)
5,571.1 5,201.5
Tier 2
Revaluation reserve 117.0 103.0
Subordinated debt (note ii) 1,484.0 1,446.9
Collective impairment allowance 145.2 134.9
1,746.2 1,684.8
Deductions 333.7 309.1
Total capital 6,983.6 6,577.2
Risk weighted assets (#bn) 63.6 59.1
Tier 1 ratio (%) 8.8 8.8
Total capital (%) 11.0 11.1
Tier 2 to Tier 1 ratio (%) 31.3 32.4
Notes
(i) The comparative information is at 5 April 2005 to incorporate the impact
of IAS 32, IAS 39, and IFRS 4.
(ii) Permanent interest bearing shares and subordinated debt exclude any fair
value adjustments arising from micro hedging that are included in the
consolidated balance sheet.
(iii) The regulatory capital rules allow the pension fund deficit to be added
back to regulatory capital and a deduction taken instead for an estimate
of the additional contributions to be made in the next 5 years, less
associated deferred tax
Nationwide continued to make progress on its preparations for Basel II. A
notable achievement last year was the submission of the waiver application to
the FSA in December 2005 within the first wave of applicants. The waiver seeks
permission to use the Internal Ratings Based approach to credit risk on all our
major portfolios. Given the quality and composition of our business, the
Internal Ratings Based approach offers us a potential reduction in our
regulatory capital requirement. Basel II is scheduled to commence with effect
from 1 January 2007.
PENSION FUND (RETIREMENT BENEFIT OBLIGATIONS)
The majority of Group employees are members of the Nationwide Pension Fund (the
Fund). The Group operates both Final Salary and Career Average Revalued
Earnings (CARE) defined benefit arrangements.
The valuation of the Fund at 31 March 2006 resulted in a deficit of #283.6m
(2005 - #342.6m) using the methodology set out in IAS 19. Our total retirement
benefit liability under IAS 19, including other schemes, is #294.2m (2005 -
#351.6m). On an actuarial basis the Fund deficit is estimated at around #100m
(2005 - #230m). We have been actively managing this deficit and have taken a
number of steps to contain and reduce the deficit over time:
* Final Salary arrangements closed to new members since December 2001
* Employee contributions (final salary arrangements) increased from 5% to
61/2% (7% from 1 July 2006)
* A series of three special contributions of #50m to be paid in the period
2005/06 - 2006/07
* The trustees have worked closely with their advisors to optimise the
investment strategy for the Fund's assets.
We will continue to review our options to manage the Fund in a timely and
responsible way such that the deficit is reduced to a neutral position over the
next ten years.
OUTLOOK
The economy throughout 2005/6 was relatively benign, with a slight rise in
unemployment and weak consumer spending. As a result, interest rates remained
low and relatively stable throughout the year. We expect conditions to improve
during 2006, although threats to consumer spending such as oil prices and
utility bills are expected to result in interest rates continuing to remain
relatively low.
We expect UK gross residential lending in 2006/7 to be slightly higher than 2005
/6 at around #306 billion. This will be driven mainly by a more buoyant housing
purchase market, with remortgage activity largely unchanged.
Throughout the year we have continued to comment on the state of the UK housing
market by monthly publication of our House Price Index. Prices in 2005
increased by 3%, and we expect a similar rise in 2006. We expect the strong
start to the housing market for 2006/7 to moderate somewhat as high prices and
stretched affordability of first-time buyers reduces demand towards historic
trends.
Our monthly Consumer Confidence Index was formally launched in August 2005,
measuring consumer views on their current and expected future situations.
Expectations form an important element in decision making and the results
indicate some pessimism about future prospects for consumer spending. This is
likely to constrain the growth in both personal loan and credit card markets,
where we expect net lending to be slightly lower than 2005/6 at around #9
billion and #4 billion respectively.
Our core markets have seen fierce competition throughout 2005/6. We expect this
to continue in 2006/7 as lenders seek to protect their market shares, with a
continued squeeze on retail margins. With a strong opening pipeline of business
and an excellent track record on retention, we expect to deliver mortgage asset
growth in line with our par share of 9%, funded with a cost effective mix of
retail and wholesale funds.
Our asset growth will be dominated by good quality prime residential mortgages.
Although the extremely benign credit conditions of the last few years are
unlikely to continue, we do not expect them to deteriorate significantly.
We will work hard to deliver another set of excellent results with good growth
in all of our key markets, further improvement in our efficiency and stringent
control over asset quality. In particular we are reviewing a number of
initiatives to improve our capacity and capability to reduce overall costs and
improve income. This should lead to the delivery of increased profits while
maintaining the distribution of substantial pricing benefits to our members.
Graham Beale
Group Finance Director
17 May 2006
CONSOLIDATED INCOME STATEMENT
For the year ended 4 April 2006
Year ended Year ended
4 April 2006 4 April 2005
Notes #m #m
Interest receivable and similar income 3 5,799.9 5,211.2
Interest expense and similar charges 4 4,565.6 4,019.6
Net interest income 1,234.3 1,191.6
Fee and commission income* 309.3 384.0
Fee and commission expense* (2.9) (102.8)
Premiums on insurance contracts 146.9 141.5
Fair value gains on insurance assets 132.0 55.6
Income from investments 7.9 0.3
Other operating income 25.5 31.7
Gains from derivatives and hedge accounting 10.9 -
Total income 1,863.9 1,701.9
Insurance claims and change in liabilities 208.4 152.4
Total income net of claims on insurance
contracts 1,655.5 1,549.5
Administrative expenses 5 873.7 833.2
Depreciation and amortisation 117.5 107.1
Impairment losses on loans and advances to customers 6 76.6 46.6
Provisions for liabilities and charges 7 32.1 46.7
Impairment (gains) / losses on investment securities 8 (3.6) 2.0
Profit before tax 559.2 513.9
Taxation 162.0 146.9
Profit after tax 397.2 367.0
The results have been prepared under IFRS. In accordance with the transitional
rules on first-time adoption of IFRS, the 2005 comparatives do not follow IAS 32
'Financial Instruments: Presentation', IAS 39 'Financial Instruments:
Recognition and Measurement', and IFRS 4 'Insurance Contracts' but instead
follow applicable UK GAAP requirements.
The main impacts on the comparative income statement, had these standards been
applied, would have been:
* Fee and commission income and expenses would have been lower and interest
receivable would have increased due to the recognition of certain fees on
an effective interest basis spread over the expected life of the asset;*
* Impairment losses on loans and advances to customers would have reflected
impairment only where objective evidence of impairment existed; and
* The movement in the fair value of derivatives and hedged risk would have
been included within gains/(losses) from derivatives and hedge accounting.
Underlying profit before tax of #539.4m equates to profit before tax of #559.2m
adjusted for gains from derivatives and hedge accounting of #10.9m and
policyholder tax of #8.9m.
CONSOLIDATED BALANCE SHEET
At 4 April 2006
At At
4 April 2006 4 April 2005
#m #m
Notes
ASSETS
Cash and balances with the Bank of England 368.6 362.5
Loans and advances to banks 1,364.0 751.6
Investment securities - available for sale 13,007.7 14,145.0
Derivative financial instruments 541.1 -
Other financial assets at fair value 1,918.2 1,825.2
Fair value adjustment for portfolio hedged risk (52.2) -
Loans and advances to customers 9 101,347.6 92,721.9
Investments in equity shares 22.0 14.9
Value in force of life insurance contract business 125.4 127.6
Intangible fixed assets 80.5 44.2
Property, plant and equipment 648.0 620.0
Investment properties 279.1 242.6
Accrued income and expenses prepaid 416.8 366.7
Deferred tax assets 110.0 81.9
Other assets 409.2 292.7
Total assets 120,586.0 111,596.8
LIABILITIES
Shares 80,918.6 72,594.1
Deposits from banks 2,697.4 2,453.3
Other deposits 3,161.4 2,802.4
Due to customers 2,608.3 2,257.0
Debt securities in issue 20,767.6 22,377.6
Fair value adjustment for portfolio hedged risk 53.9 -
Derivative financial instruments 631.3 -
Insurance contract liabilities 1,190.5 1,132.1
Other liabilities 515.8 404.9
Provisions for liabilities and charges 7 40.3 49.0
Accruals and deferred income 313.5 373.4
Subordinated liabilities 1,446.3 1,439.8
Subscribed capital 741.2 692.2
Current tax liabilities 174.3 105.8
Retirement benefit obligations 294.2 351.6
Total liabilities 115,554.6 107,033.2
General reserve 10 4,825.6 4,460.6
Revaluation reserve 11 117.0 103.0
Available for sale reserve 12 88.8 -
Total equity & liabilities 120,586.0 111,596.8
In accordance with the transitional rules on first-time adoption of IFRS, the
2005 comparatives do not follow IAS 32, IAS 39, and IFRS 4 but instead follow
applicable UK GAAP requirements.
CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE
For the year ended 4 April 2006
Year ended 4 Year ended
April 2006 4 April 2005
#m #m
Available for sale investments - net fair value gain 55.3 -
Property revaluation 24.1 24.9
Actuarial (loss)/gain on retirement benefit obligations (6.1) 104.9
Taxation on items through equity (23.4) (38.2)
Net income recognised directly in equity 49.9 91.6
Net profit for the year 397.2 367.0
Total recognised income and expense for the year 447.1 458.6
Adoption of IFRS 4 and IAS 39 33.3 -
Tax on adoption of IFRS 4 and IAS 39 (12.6) -
Adoption of IFRS 4 and IAS 39 20.7 -
The results for 2006 have been prepared under IFRS. In accordance with the
transitional rules on first-time adoption of IFRS, the 2005 comparatives do not
follow IAS 32, IAS 39 and IFRS 4 but instead follow applicable UK GAAP
requirements.
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 4 April 2006
Year ended 4 Year ended
April 2006 4 April 2005
Notes #m #m
Cash flows from operating activities
Profit before tax 559.2 513.9
Adjustments for:
- Non-cash items included in 13 133.1 211.0
profit before tax
- Changes in operating assets 13 (10,110.1) (12,566.2)
- Changes in operating liabilities 13 8,519.8 9,111.3
- Interest paid on subordinated liabilities (54.8) (46.7)
- Interest paid on subscribed capital (46.8) (46.9)
- Taxation (149.5) (103.8)
Net cash flows from operating activities (1,149.1) (2,927.4)
Cash flows from investing activities
Purchase of investment securities (9,989.9) (12,122.9)
Sale and maturity of investment securities 10,286.5 15,623.2
Purchase of property, plant and equipment (76.9) (109.4)
Sale of property, plant and equipment 1.9 2.7
Sale of investment properties (23.1) (8.9)
Purchase of investment properties 5.0 9.3
Purchase of intangible fixed assets (77.6) (17.0)
Net cash flows from investing activities 125.9 3,377.0
Cash flows from financing activities
Issue of subordinated liabilities - 513.9
Net cash flows from financing activities - 513.9
Net (decrease)/increase in cash (1,023.2) 963.5
Cash and cash equivalents at start of year 4,985.3 4,013.6
Cash and cash equivalents at end of year 13 3,962.1 4,977.1
An explanation of the significant changes between the cash flow statement
prepared under UK GAAP and IFRS is included in Note 13.
NOTES TO THE PRELIMINARY RESULTS ANNOUNCEMENT
1 Reporting period
These results have been prepared as at 4 April 2006 and show the financial
performance for the year from, and including, 5 April 2005 to this date.
2 Basis of preparation
The 2006 preliminary results have been prepared in accordance with International
Financial Reporting Standards ('IFRS') as adopted by the European Union and in
effect for the year ending 4 April 2006. The accounting polices adopted for use
in the preparation of these 2006 preliminary results and which will be used in
preparing the Annual Report and Accounts for the year ending 4 April 2006 were
included in the 'Restatement of 2004/05 Financial Results to International
Financial Reporting Standards' document published on 22 September 2005. Copies
of this document are available at
www.nationwide.co.uk/about_nationwide/results_accounts/.
Comparative information for 2005 has been restated to take into account the
requirements of all of the standards except for IAS 32, IAS 39 and IFRS 4. In
accordance with the requirements of IFRS, these standards have been implemented
with effect from 5 April 2005 and the balance sheet at this date has been
adjusted accordingly.
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Although these estimates are based on management's best
knowledge of the amount, event or actions, actual results ultimately may differ
from those estimates.
3 Interest receivable and similar income
Year ended Year ended
4 April 2006 4 April 2005
#m #m
On loans fully secured on residential property 4,481.8 3,988.5
On other loans 743.6 672.9
On investment securities 548.4 574.5
On other liquid assets 64.8 92.7
Other interest receivable 1.1 7.0
Net expense on financial instruments hedging assets (127.8) (196.5)
Expected return on pension assets 88.0 72.1
5,799.9 5,211.2
4 Interest expense and similar charges
Year ended Year ended
4 April 2006 4 April 2005
#m #m
On shares 3,126.0 2,769.7
On subscribed capital 47.1 47.3
On deposits and other borrowings
- Subordinated liabilities 64.8 48.9
- Other 379.8 337.9
Debt securities in issue 830.0 707.0
Foreign exchange differences 2.3 1.3
Net expense on financial instruments hedging liabilities 35.6 29.4
Unwind of discount of pension liabilities 80.0 78.1
4,565.6 4,019.6
5 Administrative expenses
Year ended Year ended
4 April 2006 4 April 2005
#m #m
Employee costs
- Wages and salaries 348.7 341.9
- Social security costs 29.6 29.6
- Pension costs - defined benefit plans 81.1 76.2
459.4 447.7
Other administrative expenses 414.3 385.5
873.7 833.2
6 Impairment provisions on loans and advances
Year ended Year ended
4 April 2006 4 April 2005
#m #m
Impairment charge for the period
Loans fully secured on residential property:
Collective (0.3) -
Individual 1.2 -
General provision - -
Specific provision - (0.3)
0.9 (0.3)
Loans fully secured on land:
Collective 1.8 -
Individual 0.2 -
General provision - -
Specific provision - (1.4)
2.0 (1.4)
Other loans:
Collective 73.7 -
Individual - -
General provision - 0.2
Specific provision - 48.1
73.7 48.3
Total 76.6 46.6
Impairment provision at the end of the period
Loans fully secured on residential property:
Collective 30.1 -
Individual 1.8 -
General provision - 99.9
Specific provision - 5.9
31.9 105.8
Loans fully secured on land:
Collective 23.2 -
Individual 9.6 -
General provision - 60.0
Specific provision - 7.1
32.8 67.1
Other loans:
Collective 91.9 -
Individual - -
General provision - 4.4
Specific provision - 50.0
91.9 54.4
Total 156.6 227.3
These provisions have been deducted from the appropriate asset values in the
balance sheet.
Following the adoption of IAS 39 at 5 April 2005, the existing general and
specific provisions under UK GAAP were released to the general reserve. At the
same time the collective provisions of #134.9m and individual provisions of
#10.1m were set up in accordance with IAS 39, with an adjustment made to the
general reserve.
7 Provisions for liabilities and charges
Year ended Year ended
4 April 2006 4 April 2005
#m #m
At 5 April 2005 49.0 42.8
Provisions utilised (40.8) (40.5)
Charge for the year 32.1 46.7
At 4 April 2006 40.3 49.0
8 Impairment (gains) / losses on investment securities
Following the adoption of IAS 39 at 5 April 2005, the existing general provision
of #15.7m and specific provision of #14.1m under UK GAAP were released to the
general reserve. At the same time an impairment loss of #14.1m was recognised
in the general reserve. During the year an impairment gain of #3.6m (2005 -
loss of #2.0m, pro-forma loss of #7.1m) has been recognised in the income
statement as a result of an improvement in the credit quality of a particular
treasury investment security. As at 4 April 2006 a cumulative impairment loss
of #10.5m has been charged to the general reserve.
9 Loans and advances to customers
At At
4 April 2006 4 April 2005
#m #m
Loans fully secured on residential property 89,587.4 82,303.2
Loans fully secured on land 8,050.2 7,300.5
Other loans 3,592.3 3,118.2
101,229.9 92,721.9
Fair value adjustment for micro hedged risk 117.7 -
101,347.6 92,721.9
Loans fully secured on land include #578.7m (2005 - #719.4m) of loans which are
fully secured on residential property but are classified as 'loans fully secured
on land' in accordance with the Building Societies Act 1997.
10 General reserve
Movements in general reserve were as follows: Year ended Year ended
4 April 2006 4 April 2005
#m #m
At 4 April 2005 4,460.6
Effect of adoption of IFRS 4 and IFRS 39
* Effective interest basis (8.7)
* Available for sale assets 16.0
* Derivatives and hedging (94.4)
* Derecognition of financial liabilities (33.1)
* Insurance (3.3)
* Loan impairment and suspended interest 86.0
* Tax 9.6
Brought forward at 5 April 2005 4,432.7 4,019.1
Profit for the year 397.2 367.0
Actuarial (loss)/gain on retirement benefit obligations (6.1) 104.9
Taxation on actuarial (loss)/gain on retirement benefit obligations 1.8 (31.4)
Transfer from the revaluation reserve - 1.0
At 4 April 2006 4,825.6 4,460.6
11 Revaluation reserve
Movements in the revaluation reserve were as follows: Year ended Year ended
4 April 2006 4 April 2005
#m #m
Brought forward at 5 April 103.0 85.9
Revaluation increase on land and buildings 24.1 24.9
(Increase) in deferred tax liability on revaluation of
land and buildings (10.1) (6.8)
Transfer to the general reserve - (1.0)
At 4 April 2006 117.0 103.0
12 Available for sale reserve
Movements in the available for sale reserve were as follows: Year ended
4 April 2006
#m
At 4 April 2005
-
Available for sale assets on adoption of IAS 39 70.8
Tax on adoption of IAS 39 (22.2)
At 5 April 2005 48.6
Net gains from changes in fair value 59.8
Amounts transferred to income statement on disposal and impairment (4.5)
(Increase) in tax liability (15.1)
At 4 April 2006 88.8
13 Notes to the cash flow statement
Year ended Year Ended
4 April 2006 4 April 2005
#m #m
Non-cash items included in profit before tax
Net (decrease)/increase in impairment provisions (70.8) 5.4
Impairment (gains)/losses on investment securities (3.6) 2.0
Depreciation and amortisation 117.5 107.1
(Profit) on sale of land and buildings (1.6) (2.1)
Interest on subordinated liabilities 64.8 48.9
Interest on subscribed capital 47.1 47.3
Gain on the revaluation of property plant and equipment (3.5) (0.4)
(Gain)/loss on revaluation of investment properties (5.9) 2.8
(Gains) from derivatives and hedge accounting (10.9) -
133.1 211.0
Changes in operating assets
Loans and advances to banks (21.5) (16.2)
Investment securities (409.0) (177.2)
Derivative financial instruments and fair value adjustment
for portfolio hedged risk (595.7) -
Other financial instruments at fair value (463.5) (116.0)
Loans and advances to customers (8,437.2) (12,021.2)
Other operating assets (183.2) (235.6)
(10,110.1) (12,566.2)
Changes in operating liabilities
Shares 8,324.5 6,650.2
Deposits from banks, customers and other 954.4 (343.5)
Derivative financial liabilities and fair value adjustment
for portfolio hedged risk 685.2 -
Debt securities in issue (1,610.0) 2,671.1
Insurance contract liabilities 58.4 25.2
Retirement benefit obligations (57.4) 10.4
Other operating liabilities 164.7 97.9
Cash generated from operations 8,519.8 9,111.3
(ii) Cash and cash equivalents
Year ended Year ended
4 April 2006 4 April 2005
#m #m
Cash and balances with the Bank of England 368.6 362.5
Loans and advances to other banks repayable in 3 months or less * 1,460.0 1,239.6
Investment securities with a maturity period of 3 months or less 2,133.5 3,375.0
3,962.1 4,977.1
* The loans and advances to banks cash equivalents include amounts classified as
'Other financial assets at fair value' on the balance sheet.
On adoption of IAS 39 certain components of the cash equivalents were re-stated
from cost to fair value, this resulted in a net increase of cash and cash
equivalents at 5 April 2005 by #8.2m from #4,977.1m to #4,985.3m.
The group is required to maintain balances with the Bank of England which, at 4
April 2006, amounted to #138.8m (2005 - #125.9m). 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.
Explanation of the significant adjustments to the cash flow statement prepared
under IFRS
Under IFRS the cash flow statement is prepared to reconcile the movement in cash
and cash equivalents, under UK GAAP only the movement in cash was reconciled.
Cash, under IFRS and UK GAAP, comprises cash in hand and demand deposits. In
addition cash equivalents comprise balances of highly liquid investments with a
maturity of three months or less from the date of acquisition. A number of debt
securities included as liquid resources under UK GAAP and some loans and
advances to banks are included as cash equivalents since they have a maturity
period of three months or less from the date of acquisition or issue.
ADDITIONAL INFORMATION
(a) Financial performance summary - underlying and pro-forma basis
Profit before tax shown on a reported basis and on an underlying basis for 2006
and on a reported and pro-forma basis for 2005 are set out as follows:
2006
As Adjustments Underlying
reported
#m #m #m
Net interest income 1,234.3 - 1,234.3
Other income net of claims on insurance contracts 410.3 (8.9) 401.4
Gain from derivatives and hedge accounting 10.9 (10.9) -
Total income net of claims on insurance contracts 1,655.5 (19.8) 1,635.7
Administrative expenses 873.7 - 873.7
Depreciation and amortisation 117.5 - 117.5
Impairment losses on loans and advances to customers 76.6 - 76.6
Provisions for liabilities and charges 32.1 - 32.1
Impairment gains on investment securities (3.6) - (3.6)
Profit before tax 559.2 (19.8) 539.4
2005
As reported Adjustments Pro-forma
#m #m #m
Net interest income 1,191.6 (24.2) 1,167.4
Other income net of claims on insurance contracts 357.9 (6.9) 351.0
Total income net of claims on insurance contracts 1,549.5 (31.1) 1,518.4
Administrative expenses 833.2 - 833.2
Depreciation and amortisation 107.1 - 107.1
Impairment losses on loans and advances to customers 46.6 10.0 56.6
Provisions for liabilities and charges 46.7 - 46.7
Impairment losses on investment securities 2.0 5.1 7.1
Profit before tax 513.9 (46.2) 467.7
The adjustments can be analysed as follows:
2006 2005
#m #m
Implementation of IAS 39 and IFRS 4:
* Effective interest basis (35.3)
* Impairment losses on investment securities (5.1)
* Insurance 0.1
* Impairment losses on loans and advances to customers (10.0)
- (50.3)
Gains from derivatives and hedge accounting (10.9) -
Policyholder tax (see below) (8.9) 4.1
(19.8) (46.2)
As a result of the IFRS requirement to consolidation the Group's life business
on a line by line basis, the income statement includes amounts attributable to
policyholders which affect profit before tax, the most significant of which is
policyholder tax. Under IFRS tax on policyholder investment returns is included
in the Group's tax charge rather than being offset against the related income.
In order to provide a clearer representation of the performance of the Group,
these items have been offset in the underlying results.
Based on the 2006 underlying and 2005 pro-forma results, profit before tax
increased by 15.3% to #539.4m (2005 - #467.7m). Profit before tax increased by
8.8% to #559.2m (2005 - #513.9m).
Total assets increased by 8.1% over the year. This would not be materially
different using an underlying and pro-forma basis.
(b) Business stream financial performance summary - underlying and pro-forma
basis
2006
Personal Commercial Group Total
financial
services
#m #m #m #m
Net interest income 1,116.0 898.3 (780.0) 1,234.3
Other income net of claims on insurance
contracts 351.8 37.3 12.3 401.4
External revenues 1,467.8 935.6 (767.7) 1,635.7
Revenues from other segments (194.7) (698.7) 893.4 -
Total revenues 1,273.1 236.9 125.7 1,635.7
Administrative expenses 783.9 39.8 50.0 873.7
Depreciation and amortisation 112.3 3.8 1.4 117.5
Impairment losses on loans and advances to
customers 73.9 2.7 - 76.6
Provisions for liabilities and charges 32.1 - - 32.1
Impairment gains on investment securities - (3.6) - (3.6)
Contribution 270.9 194.2 74.3 539.4
2005
Personal Commercial Group Total
financial
services
#m #m #m #m
Net interest income 939.3 872.8 (644.7) 1,167.4
Other income net of claims on insurance
contracts 318.7 22.9 9.4 351.0
External revenues 1,258.0 895.7 (635.3) 1,518.4
Revenues from other segments (78.0) (686.1) 764.1 -
Total revenues 1,180.0 209.6 128.8 1,518.4
Administrative expenses 744.1 38.6 50.5 833.2
Depreciation and amortisation 100.5 3.8 2.8 107.1
Impairment losses on loans and advances to
customers 56.8 (0.2) - 56.6
Provisions for liabilities and charges 46.7 - - 46.7
Impairment gains on investment securities - 7.1 - 7.1
Contribution 231.9 160.3 75.5 467.7
OTHER INFORMATION
The financial information set out in this announcement which was approved by the
Board on 17th May 2006, 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 2005 has been restated and
prepared under IFRS having been first extracted from the Annual Accounts
prepared on a UK GAAP basis for that year. The Annual Accounts for the year
ended 4 April 2005 prepared under UK GAAP have been filed with the Financial
Services Authority and Registry of Friendly Societies in England and Wales. The
Auditors' Report on these Annual Accounts was unqualified. The Annual Accounts
for the year ended 4 April 2006 will be lodged with the Financial Services
Authority and the Mutual Societies Registration following publication.
This announcement will also be available on the Nationwide Building Society
website, www.nationwide.co.uk, from 18 May 2006.
CONTACTS
Alan Oliver
01793 655956
07850 810745 (mobile)
alanm.oliver@nationwide.co.uk
Steve Cowdry
01793 657112
07850 810746 (mobile)
steve.cowdry@nationwide.co.uk
These materials are not 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 the means of a prospectus that may be obtained from the
Society and will contain detailed information about the Society and management
as well as financial statements.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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