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Nationwide Building Society Annual Financial Report

21/05/2021 7:00am

UK Regulatory (RNS & others)


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RNS Number : 3592Z

Nationwide Building Society

21 May 2021

Nationwide Building Society

Preliminary Results Announcement

for the year ended

4 April 2021

CONTENTS

 
Key highlights and quotes               3 
Financial summary                       4 
Chief Executive's review                5 
Financial review                        8 
Risk report                            16 
Consolidated financial statements      78 
Notes to the consolidated financial 
 statements                            83 
Responsibility statement              108 
Other information                     108 
Contacts                              108 
 

Underlying profit

Profit before tax shown on a statutory and underlying basis is set out on page 9 . Statutory profit before tax of GBP 823 million has been adjusted to derive an underlying profit before tax of GBP790 million. The purpose of this measure is to reflect management's view of the Group's underlying performance and to assist with like for like comparisons of performance across periods. Underlying profit is not designed to measure sustainable levels of profitability as that potentially requires exclusion of non-recurring items even though they are closely

related to (or even a direct consequence of) the Group's core business   activities. 

Forward looking statements

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. The economic outlook also remains unusually uncertain due to Brexit and the impacts of Covid-19. 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.

Britain's biggest mutual supports homebuyers and savers while enhancing financial strength

Headlines

-- Enhanced our financial strength to navigate challenges of the pandemic and have the flexibility to support our members

-- Supported homebuyers with responsible lending and higher loan to value mortgages for lower risk first time buyers

-- Launched market leading Member Exclusive Fixed Rate ISA and prize draws to encourage savings habit.

-- No. 1 for customer satisfaction for 9 years among our peer group(1) and Which? Banking Brand of the Year in 2020, for the fourth year running

   --      Backing our communities, by extending our Branch Promise until 2023 
   --      Allowing 13,000 employees to 'work anywhere' improving flexibility and productivity 

Numbers at a glance

Financial highlights

-- Underlying profit improved to GBP790m (2020: GBP469m), driven by improved income and margin, and statutory profit increased to GBP823m (2020: GBP466m)

-- Well capitalised with higher UK leverage ratio of 5.4% (2020: 4.7%) and higher CET1 ratio of 36.4% (2020: 31.9%)

   --      Managed costs down by GBP94m to GBP2,218m (2020: GBP2,312m) 

-- Set aside GBP190m (2020: GBP209m) for loans that may not be repaid in light of uncertain outlook, although arrears remain low

-- Member financial benefit of GBP265m (2020: GBP735m), below our GBP400m target, mainly reflecting lower savings rates

Trading highlights

-- Gross lending of GBP29.6bn (2020: GBP30.9bn) and net lending of GBP1.9bn (2020: GBP2.8bn); our market share was broadly flat, with growth in buy to let offsetting lower prime lending

-- Deposits up GBP10.6bn (2020: GBP5.7bn) reflecting some members retaining higher balances during lockdown

   --      Maintained market share of 10% of all current accounts(2) 

(1) (c)Ipsos MORI 2021, Financial Research Survey (FRS), for the 12 months ending 31 March 2013 to the 12 months ending 31 March 2021. For more information, see footnote 5 on page 6.

(2) CACI's Current account and savings database (February 2021 and February 2020).

Joe Garner, Chief Executive, Nationwide Building Society, said:

This year has shown the financial strength of the building society mutual model. It has been a tough year, one that tested the resilience of people and businesses. Given the profound uncertainties we faced, we focused on the things that were most important in times of crisis: namely to keep our people and members safe and our Society strong.

We entered the crisis in a position of financial strength and, in the face of a highly uncertain environment, we took steps to protect our finances. This meant we could stand by our members, colleagues and communities when they needed us most. From payment holidays and socially distanced services, to personal assistance for the most vulnerable and remote working for all our office employees, we responded with flexibility and humanity.

We also continued to help members achieve their financial goals. We supported homebuyers by lending responsibly, including at 90% LTV, and more recently at 95% LTV. Later in the year, we were able to start giving more value back to savers again through innovative products that reward membership such as our market leading Member Exclusive Fixed Rate ISA.

We finished the year financially and operationally strong, and well-placed to support our members in future.

Chris Rhodes, Chief Financial Officer, Nationwide Building Society, said:

Our longstanding prudent approach to managing our finances proved its worth in this crisis year.

Our capital ratios were already at a high level as we went into the pandemic and we took quick and decisive action to protect our financial strength. Our UK leverage ratio is substantially above our minimum target and our CET1 ratio strengthened further.

On financial performance, our interest income and margin improved and we also reduced our costs. Although arrears remain low today, unsurprisingly, provisions for loans that might not be repaid have remained elevated, in light of the uncertain economic times ahead.

Our member financial benefit - the extra value we give to members as a mutual - was lower than our GBP400m target, having significantly exceeded it in recent years. In the medium term, we expect member financial benefit to exceed GBP400m a year again.

Our profitability recovered, enhancing our financial strength at a time of uncertainty. We face the future from a position of strength.

Financial summary

 
 
                                             2021         2020 
                                          -----------  ----------- 
Financial performance                      GBPm         GBPm 
----------------------------------------               -----  ---- 
Total underlying income                   3,285        3,046 
----------------------------------------  -----  ----  -----  ---- 
Underlying profit before tax 
 (note i)                                   790          469 
----------------------------------------  -----  ----  -----  ---- 
Statutory profit before tax                 823          466 
----------------------------------------  -----  ----  -----  ---- 
 
Mortgage lending                          GBPbn     %  GBPbn% 
----------------------------------------  -----  ----  ----- --- 
Group residential - gross/market 
 share                                     29.6  11.1   30.9  11.4 
----------------------------------------  -----  ----  -----  ---- 
Group residential - net/market 
 share                                      1.9   2.1    2.8   4.8 
----------------------------------------  -----  ----  -----  ---- 
 
Average loan to value of new 
 residential lending (by value)                    70           72 
----------------------------------------  -----------  ----------- 
 
Deposit balances                          GBPbn     %  GBPbn% 
----------------------------------------  -----  ----  ----- --- 
Member deposits balance increase/market 
 share (note ii)                           10.6   5.6    5.7   6.9 
----------------------------------------  -----  ----  -----  ---- 
 
Key ratios                                          %            % 
----------------------------------------  -----------  ----------- 
Underlying cost income ratio 
 (note iii)                                      67.5         75.9 
----------------------------------------  -----------  ----------- 
Statutory cost income ratio 
 (note iii)                                      66.8         76.1 
----------------------------------------  -----------  ----------- 
Net interest margin                              1.21         1.13 
----------------------------------------  -----------  ----------- 
 
 
 
                                            2021         2020 
                                         -----------  ----------- 
Balance sheet                            GBPbn     %  GBPbn     % 
---------------------------------------               -----  ---- 
Total assets                             254.9        248.0 
---------------------------------------  -----  ----  -----  ---- 
Loans and advances to customers          201.5        201.0 
---------------------------------------  -----  ----  -----  ---- 
Mortgage balances/market share           191.0  12.5  188.8  12.9 
---------------------------------------  -----  ----  -----  ---- 
Member deposits/market share (note 
 ii)                                     170.3   9.4  159.7   9.9 
---------------------------------------  -----  ----  -----  ---- 
 
Asset quality                                      %      % 
--------------------------------------- 
Residential mortgages 
---------------------------------------  -----------  ----- 
   Proportion of residential mortgage 
    accounts 3 months+ in arrears               0.43   0.41 
---------------------------------------  -----------  ----- 
   Impairment charge as a % of average 
    gross balance (note iv)                     0.04   0.03 
---------------------------------------  -----------  ----- 
   Average indexed loan to value 
    (by value)                                    56     58 
---------------------------------------  -----------  ----- 
 
Consumer banking 
---------------------------------------  -----------  ----- 
   Proportion of customer balances 
    with amounts past due more than 
    3 months (excluding charged off 
    balances)                                   1.33   1.22 
---------------------------------------  -----------  ----- 
   Impairment charge as a % of average 
    gross balance (note iv)                     2.68   3.27 
---------------------------------------  -----------  ----- 
 
Key ratios                                         %            % 
--------------------------------------- 
Capital 
---------------------------------------  -----------  ----------- 
   Common Equity Tier 1 ratio                   36.4         31.9 
---------------------------------------  -----------  ----------- 
   UK leverage ratio (note v)                    5.4          4.7 
---------------------------------------  -----------  ----------- 
   CRR leverage ratio (note v)                   5.0          4.4 
---------------------------------------  -----------  ----------- 
 
Other balance sheet ratios 
---------------------------------------  -----------  ----------- 
   Liquidity coverage ratio                    164.6        163.1 
---------------------------------------  -----------  ----------- 
   Wholesale funding ratio (note 
    vi)                                         26.7         28.5 
---------------------------------------  -----------  ----------- 
 
 

Notes:

i. Underlying profit represents management's view of underlying performance. The following items are excluded from statutory profit to arrive at underlying profit:

a. FSCS costs and refunds arising from institutional failures, which are included within provisions for liabilities and charges.

b. Gains or losses from derivatives and hedge accounting, which are presented separately within total income.

ii. Member deposits include current account credit balances.

iii. The underlying cost income ratio represents management's view of underlying performance. Gains or losses from derivatives and hedge accounting are excluded from the statutory cost income ratio to arrive at the underlying cost income ratio.

iv. In the calculation of 'Impairment charge as a % of average gross balance', average gross balance is calculated as the average of balances at each month end date.

v. The difference between the Capital Requirements Regulation (CRR) leverage ratio and the UK leverage ratio is driven by the exclusion of qualifying central bank claims from the UK leverage exposure measure as per the PRA Rulebook.

vi. The wholesale funding ratio includes all balance sheet sources of funding (including securitisations).

Chief Executive's review

The last year has been dominated by the pandemic which continues to be - first and foremost - a human crisis. The pandemic has tested the resilience of people, communities and organisations and has shown once again how important it is that we work together. Nationwide is a mutual organisation, founded on the belief that we can achieve more by acting together. Everyone has dug deep to help us keep members and colleagues safe, to keep our services running smoothly, and to safeguard our financial strength. By working together, we have come through this year financially strong, which means we have been able to support our members and communities through uncertain times: this is the essence of what it means to be a mutual. I would like to thank you, our members, and my colleagues, for your support for our Society during the last year.

During the pandemic, we have been focused on the following key priorities which are aligned to our purpose, and the five cornerstones of our strategy.

Keeping members and colleagues safe

Protecting the health and wellbeing of colleagues and members, while also maintaining essential services, remained our main priority through last year.

We rapidly put in place measures to protect members and colleagues, which meant more than 90% of branches remained open through the first lockdown and 98% in the latest lockdown. We introduced social distancing in our branches and offered members video appointments in their homes. We supported vulnerable members with, for example, cash deliveries and specialist telephone helplines. We moved many services online at speed, such as only taking 12 days to introduce online valuations. We also extended 'tea & tech' sessions to de-mystify our digital services for members who had not used them before.

Meanwhile, the vast majority of our office-based colleagues moved to home working almost overnight. We supported colleagues with a 'click and collect' office supply service and colleagues supported one another by working flexibly. For example, branches answered over 1.5 million member calls to relieve pressure on call centres.

We put in place a range of wellbeing initiatives to support our employees and encouraged them to take a proactive approach to their social, mental, physical, emotional, and financial wellbeing.

With 13,000 colleagues working from home during the pandemic, we have had a unique opportunity to review our working practices. Remote working has been popular with colleagues and made us more productive. The flexibility also helps us better serve our members. We are therefore adopting a flexible working model into the future, where colleagues can choose where they work.

Supporting members and communities

Supporting members facing financial hardship has been a key priority this year. We put in place a comprehensive home support package to enable people to stay in their homes. As well as payment holidays, this included an industry leading 'no repossessions' pledge until May 2021. We supported 256,000 people with mortgage payment holidays, and gave payment breaks on 105,000 loans and credit cards, as well as interest-free overdrafts.

We continued helping people into homes despite the unpredictable nature of last year's housing market. After months of almost complete closure due to the pandemic, the market bounced back thanks to pent-up demand, the stamp duty holiday and because the pandemic prompted people to re-evaluate their homes and where they wanted to live. The partial market closure reduced our overall gross lending compared with last year, but our market share was broadly the same. Within that, buy to let grew and prime declined.

We supported one in seven of all first time buyers onto the housing ladder (2020: one in six). We lent responsibly and, by tightening our lending criteria, were one of the first few lenders to offer 90% loan to value mortgages. Since the year end, the launch of our Helping Hand mortgage saw us become the first major lender to offer first time buyers the ability to borrow 5.5 times salary on 5 or 10 year fixed rate mortgages, with a loan to value of up to 90%, enabling home ownership for many who have been frozen out. In May 2021 we became the largest mortgage provider to reintroduce 95% loan to value lending without government support, offering market-leading mortgages to first time buyers and home movers.

Our buy to let business, The Mortgage Works (TMW), has had one of its strongest ever years for gross lending. As people increasingly live in privately rented homes, supporting good landlords is becoming an important way in which we can fulfil our role as a building society to help people into high quality homes. This business diversifies our income and supports our profitability, which in turn helps us reward members with value and service.

We continued to offer interest rates on deposits that, on average over the year, were above the market average. Nationwide has a proven record of paying higher deposit rates than the market average - in the last five years, we have paid over GBP2 billion in extra interest to depositors - however, we had to reduce our savings rates in light of the cut to bank base rate. This meant that member financial benefit fell below our target of GBP400 million, having significantly exceeded it in recent years. Since December, we have once again been increasing value to members through new propositions including our Start to Save account, Mutual Reward Bond, our Triple Access Online accounts and our market-leading Member Exclusive Fixed Rate ISA. I am pleased to report a recovery in our savings volumes towards the end of the year as a result of this activity.

Chief Executive's review (continued)

Overall, total deposit balances increased by around GBP11 billion, due to members both holding more cash in their current accounts and putting more into new savings products later in the year. However, our market share of deposits was slightly lower.

Last year we reached a 10% market share of all current accounts(3) . This year, we have focused on serving our existing members during this uncertain time. However, we maintained our share(3) , and continued to attract new current account members through the Current Account Switching Service, reflecting our continued appeal to existing and new customers(4) .

In 2020, we were delighted to be named Which? Banking Brand of the Year for the fourth year running. We were no. 1 for customer satisfaction among our peer group for the ninth year running(5) , although our lead narrowed and fell below our target. Our own member experience survey highlighted that this was because lower savings rates and the disruption to branch services, both caused by the pandemic, reduced satisfaction among savers and branch users, although this recovered towards the year end as things began to normalise(6) . We were ranked joint 13th in the all-sector UK Customer Satisfaction Index, below our top 5 target, but the highest ranked high street financial services provider(7) .

As a result of the pandemic, more members are choosing to interact through digital services, which is why we are investing in our digital tools and capabilities. At the same time, we are protecting the branch services members value by extending our Branch Promise until 2023. This decision, alongside giving charities the flexibility to use our funding to help those most in need, will continue to support people and communities during the difficult period ahead.

Safeguarding our Society and maintaining financial strength

Our prudent approach to managing our finances proved its worth in this crisis year.

Our capital ratios remain high. Our UK leverage ratio is above our target, and our already strong CET1 ratio improved further.

On the income side, our net interest income and margin improved. We also reduced our costs. Arrears remain low today but, unsurprisingly, in light of the uncertain economic times ahead, the impairment charge for loans that might not be repaid remained high. We have reduced our total headcount with a reduction both in employee numbers and, more significantly, in our use of third-party contractors.

   (3) CACI's Current account and savings database   (February 2021 and February 2020). 

(4) Pay.UK quarterly CASS data, 9 months to December 2020.

(5) (c) Ipsos MORI 2021, Financial Research Survey (FRS), for the 12 months ending 31 March 2013 to the 12 months ending 31 March 2021. Results based on a sample of around 47,000 adults (aged 16+). The survey contacts around 54,000 adults (aged 16+) a year in total across Great Britain. Interviews were face to face, over the phone and online, taking into account (and weighted to) the overall profile of the adult population. The results reflect the percentage of extremely satisfied and very satisfied customers minus the percentage of customers who were extremely or very or fairly dissatisfied across those customers with a main current account, mortgage or savings. Those in our peer group are providers with more than 3.5% of the main current account market as of April 2020 - Barclays, Halifax, HSBC, Lloyds Bank, NatWest, Santander and TSB. Prior to April 2017, those in our peer group were providers with more than 6% of the main current account market - Barclays, Halifax, HSBC, Lloyds Bank (Lloyds TSB prior to April 2015), NatWest and Santander.

(6) Member experience tracker survey asks members to rate their satisfaction and provide feedback, following a specific interaction across channels and products. Survey results for the 3 months ending 31 March 2020 to the 3 months ending 31 March 2021.

(7) Institute of Customer Service UK Customer Satisfaction Index (UKCSI) as at January 2021.

Overall, these factors combined to significantly increase profitability year on year. This enhances our financial strength at a time of uncertainty, allowing us to support our members, colleagues and communities, including extending our Branch Promise. We will also continue to invest in our technology transformation, to deliver the services, platforms and capacity that our members will want and need in the future.

Looking after our communities and wider society

The pandemic has exposed the character of many organisations, and our care for communities has been evident through this time.

We continued with our long-term programme of helping people into a place fit to call home, and awarded GBP4 million in grants to support almost 100 charitable housing projects (2020: GBP5.5 million). We are funding a not-for-profit housing development, Oakfield, in Swindon, which aims to build 239 homes to high environmental standards, with an EPC A rating. Build is now underway and we hope the Oakfield development will be a blueprint for others to develop sustainable homes. We continue to actively support campaigns to improve housing provision for both renters and homebuyers.

Climate change and broader environmental issues continue to be a major risk to our way of life. We want to contribute to tackling these issues by both reducing our direct impact and encouraging members to reduce theirs. We have maintained our Carbon Trust Triple Standard accreditation.

We want to lead the greening of UK homes, which account for 15% of the UK's total carbon emissions(8) . Although we have made a GBP1 billion loan fund available, at preferential rates, to encourage people to make their homes greener, slow take-up highlights the scale of the challenge the UK faces if it is to improve the energy efficiency of its homes. To further encourage greener, more energy-efficient home ownership, since year end, we launched a new cashback offer for those purchasing a property with a high-energy efficiency rating.

We have launched the Nationwide Incubator to work with FinTechs to address the challenges faced by people who are struggling financially. In partnership with Fair by Design, our incubator will support FinTech start-ups with advice and funding so that they can develop products and services that will improve financial wellbeing and tackle the poverty premium.

(8) Office for National Statistics, February 2020.

Chief Executive's review (continued)

We are committed to help build a more mutually respectful and inclusive society, in line with our mutual values. The last year, in particular the Black Lives Matter campaign, has shown how far society still has to go to achieve true diversity and inclusion.

We have entered into partnerships with The Diana Award and the Football Association's Respect programme to engage young people and parents to think about these important issues. We have also led a Together Against Hate public campaign, which has focused on protecting frontline workers across all industries from unacceptable behaviour.

Internally, we are also doing more to promote diversity and inclusion, with mentoring and sponsorship programmes, and firm measures monitored by the Board.

Looking ahead

Looking ahead, we and our members face a radically different business and economic outlook compared with 18 months ago. Although the success of the UK's vaccination programme gives grounds for optimism, there is continued uncertainty around how quickly life and the economy can return to normal.

While the outlook is undoubtedly challenging, over the last year we have demonstrated the Society's resilience - financially, operationally, and culturally. The strength of our values, our social purpose and finances mean we can continue to work for the mutual good of our members, colleagues and communities, as we re-build society, nationwide.

Financial review

In summary

 
 
Throughout the financial year, we have faced an uncertain and unprecedented               Underlying profit: 
 period. The global pandemic led to the reduction of bank base rate to a historic               GBP790m 
 low and created significant macroeconomic disruption and uncertainty.                      (2020: GBP469m) 
 
 We have therefore focused on preserving our strong capital position and continuing 
 to support our members through these challenging times. As a result, underlying 
 profit for the year has improved to GBP790 million (2020: GBP469 million) 
 and statutory profit increased to GBP823 million (2020: GBP466 million), reflecting 
 strong income and a reduction in administrative expenses. 
 
 Total income increased by GBP239 million, as our net interest margin (NIM) 
 increased to 1.21% (2020: 1.13%). Mortgage income increased as the macroeconomic 
 uncertainty resulted in stronger new business margins across the market. 
 
 The reduction in our savings rates, in response to the cut in bank base rate 
 to 0.1%, reduced member financial benefit to GBP265 million (2020: GBP735 
 million(9) ). Over the medium term we expect member financial benefit to return 
 to above our GBP400 million target. 
 
 Our continued focus on our cost base has led to administrative expenses reducing 
 by GBP94 million to GBP2,218 million (2020: GBP2,312 million). Reductions 
 from reprioritisation of investment spend over the medium term, and lower 
 business as usual run costs, have been partly offset by restructuring costs 
 as we took action to reduce our future cost base. 
 
 The total credit impairment charge remains elevated compared to pre-pandemic 
 levels at GBP190 million (2020: GBP209 million). The forward-looking scenarios 
 that we have used to determine the charge encompass a range of outcomes that 
 could arise as a result of the pandemic. However, arrears rates on lending 
 portfolios have remained low, in part due to the impact of government support 
 schemes on our borrowers' finances and the use of payment deferrals. 
 
 We have continued to support our 16.3 million members through these challenging 
 times, providing 256,000 mortgage payment holidays and granting 105,000 payment 
 breaks or interest free periods on loans, credit cards and overdrafts. 
 
 We have remained open for business, with total residential mortgage lending 
 of GBP29.6 billion (2020: GBP30.9 billion). Our market share of mortgage balances 
 was 12.5% (2020: 12.9%). 
 
 We saw significant net deposit growth of GBP10.6 billion (2020: GBP5.7 billion) 
 due to strong current account inflows as consumer spending was subdued. Our 
 market share of all deposit balances reduced to 9.4% (4 April 2020: 9.9%), 
 reflecting our lower proportion of current account balances, and therefore 
 lower inflows, relative to the market. 
 
 In this exceptional year, we have demonstrated the Society's financial resilience 
 by improving our balance sheet strength. Our CET1 and UK leverage ratios improved 
 to 36.4% and 5.4% (4 April 2020: 31.9% and 4.7%) respectively, although this 
 includes a regulatory change in the treatment of intangible assets which the 
 PRA is proposing to reverse. Our Liquidity Coverage Ratio (LCR) was 165% (4 
 April 2020: 163%). 
 
 By preserving our capital strength, we can face the future with confidence, 
 as we continue to support members through a highly uncertain period. 
 
 
 (9) The comparative for member financial benefit has been restated. More 
 information on member financial benefit can be found on page 9. 
 
 
 
 
 
                                                                                          Statutory profit: 
                                                                                                GBP823m 
                                                                                            (2020: GBP466m) 
                                                                                          ------------------ 
 
 
 
 
 
                                                                                          UK leverage ratio: 
                                                                                                 5.4% 
                                                                                             (2020: 4.7%) 
                                                                                          ------------------ 
 
 
 
 
 
 

Income statement

 
 
  Net Interest 
     Margin: 
      1.21% 
  (2020: 1.13%) 
 
 
 
Underlying Cost 
  Income Ratio: 
      67.5% 
  (2020: 75.9%, 
    note iii) 
 
 
 
 
 Statutory Cost 
  Income Ratio: 
      66.8% 
  (2020: 76.1%, 
    note iii) 
 
 
 
Return on Assets 
      0.24% 
  (2020: 0.15%) 
 
 
Underlying and statutory results 
                                                   2021     2020 
                                                -------  ------- 
                                                   GBPm     GBPm 
----------------------------------------------  -------  ------- 
Net interest income                               3,146    2,810 
----------------------------------------------  -------  ------- 
Net other income                                    139      236 
----------------------------------------------  -------  ------- 
Total underlying income                           3,285    3,046 
----------------------------------------------  -------  ------- 
Administrative expenses                         (2,218)  (2,312) 
----------------------------------------------  -------  ------- 
Impairment losses                                 (190)    (209) 
----------------------------------------------  -------  ------- 
Provisions for liabilities and charges             (87)     (56) 
----------------------------------------------  -------  ------- 
Underlying profit before tax                        790      469 
----------------------------------------------  -------  ------- 
Financial Services Compensation Scheme (FSCS) 
 (note i)                                           (1)        4 
----------------------------------------------  -------  ------- 
Gains/(losses) from derivatives and hedge 
 accounting (notes i, ii)                            34      (7) 
----------------------------------------------  -------  ------- 
Statutory profit before tax                         823      466 
----------------------------------------------  -------  ------- 
Taxation                                          (205)    (101) 
----------------------------------------------  -------  ------- 
Profit after tax                                    618      365 
----------------------------------------------  -------  ------- 
 

Notes:

i. Underlying profit represents management's view of underlying performance. The following items are excluded from statutory profit to arrive at underlying profit:

-- FSCS costs and refunds arising from institutional failures, which are included within provisions for liabilities and charges.

-- Gains or losses from derivatives and hedge accounting, which are presented separately within total income.

ii. 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 applied or is not achievable. This volatility is largely attributable to accounting rules which do not fully reflect the economic reality of the hedging strategy.

iii. The underlying cost income ratio represents management's view of underlying performance. Gains or losses from derivatives and hedge accounting are excluded from the statutory cost income ratio to arrive at the underlying cost income ratio.

Total income and net interest margin

Total income has increased by GBP239 million to GBP3,285 million (2020: GBP3,046 million), with a GBP336 million increase in net interest income. The macroeconomic outlook has been particularly uncertain during the year, with impairment losses across the past two years being higher than pre-pandemic levels. In response to the increased credit risk, mortgage margins have increased across the market. This has generated higher net interest income in the year, which provides some protection against the elevated risk of further impairment losses.

The increase in net interest income was further supported by our reduction in savings interest rates, following the fall in bank base rate to 0.1% and in recognition of the highly uncertain future. Net interest margin (NIM) has increased to 1.21% (2020: 1.13%).

Net other income has reduced by GBP97 million to GBP139 million (2020: GBP236 million) reflecting our decision to buy back covered bond funding which will support income in future years, realising a loss of GBP35 million. In addition, the prior year included material one-off gains relating to contingent consideration recognised on previous investment disposals.

Member financial benefit

As a building society, we seek to maintain our financial strength whilst providing value to our members through pricing, propositions and service. Through our member financial benefit, we measure the additional financial value for members from the highly competitive mortgage, savings and banking products that we offer compared to the market. Member financial benefit is calculated by comparing, in aggregate, Nationwide's average interest rates and incentives across mortgages, savings, current accounts, personal loans and credit cards to the market, predominantly using market data provided by the Bank of England and CACI, alongside internal calculations. The value for individual members will depend on their circumstances and product choices.

During the first half of the year we made a change to our methodology for calculating member financial benefit, where instead of using market non-mortgage household lending data from the Bank of England to derive interest rate comparators for personal loans, we are now using data from CACI. This more specifically covers personal loans and provides a good level of coverage of our peer lending group, making it a more appropriate comparator. The impact of this change is to increase member financial benefit for 2019/20 by GBP20 million.

We quantify member financial benefit as:

Our interest rate differential + incentives and lower fees

Interest rate differential

We measure how our average interest rates across our member balances in total compare against the market over the period.

For our two largest member segments, mortgages and retail deposits , we compare the average member interest rate for these portfolios against Bank of England and CACI industry data. A market benchmark based upon the data from CACI and internal Nationwide calculations is used for mortgages and a Bank of England benchmark is used for retail deposits, both adjusted to exclude Nationwide balances. The differentials derived in this way are then applied to member balances for mortgages and deposits.

For unsecured lending, a similar comparison is made. We calculate an interest rate differential based on available market data from the Bank of England and CACI and apply this to the total interest-bearing balances of credit cards and personal loans .

Member incentives and fees

Our member financial benefit measure also includes amounts in relation to incentives and fees that Nationwide offers to members. The calculation includes annual amounts for the following:

   --    Mortgages: the differential on incentives for members compared to the market 

-- 'Recommend a friend': the amount paid to existing members, when they recommend a new current account member to the Society, although we removed this incentive during 2020/21

-- FlexPlus account: this current account is considered market leading against major banking competitors, with a high level of benefits for a relatively smaller fee. The difference between the monthly account fee of GBP13 and the market average of GBP17 is included in the member financial benefit measure.

For the year ended 4 April 2021, this measure shows we have provided our members with a financial benefit of GBP265 million (2020: GBP735 million). This is below our target of GBP400 million, reflecting the low interest rate environment and the importance of preserving our strong capital position during a period of significant macroeconomic uncertainty. Over the medium term, we expect this to return to in excess of GBP400 million .

In calculating member financial benefit using available market or industry level data, no adjustment is made to take account of factors such as customer mix, risk appetite and product strategy, due to limitations in the availability of data and to avoid bias from segments in which Nationwide may be under or over-represented. Furthermore, due to data non-availability, deposits with National Savings & Investments are not included in the market benchmark for deposits. We will continue to review our methodology to ensure it remains relevant given changing market conditions, as well as to ensure it captures all the key elements of the financial benefits we provide to our members, where data is available.

Administrative expenses

Administrative expenses reduced by GBP94 million to GBP2,218 million (2020: GBP2,312 million). The reduction is attributable to lower costs relating to strategic investment spend of GBP160 million and a GBP22 million reduction in business as usual costs. These are in part offset by an increase in restructuring costs of GBP72 million for severance and property closures, following actions taken to reduce our future cost base and our decision to enable our colleagues to work from home where they choose to do so. The prior year also included a non-recurrent item associated with the development and subsequent cessation of Nationwide for Business of GBP88 million, and the GBP104 million benefit from closure of the defined benefit pension scheme to future accrual.

Impairment losses/(reversals) on loans and advances to customers

 
Impairment losses/(reversals) (note i) 
                                          2021  2020 
                                          ----  ---- 
                                          GBPm  GBPm 
----------------------------------------  ----  ---- 
Residential lending                         71    53 
----------------------------------------  ----  ---- 
Consumer banking                           125   159 
----------------------------------------  ----  ---- 
Retail lending                             196   212 
----------------------------------------  ----  ---- 
Commercial                                 (6)   (3) 
----------------------------------------  ----  ---- 
Impairment losses on loans and advances    190   209 
----------------------------------------  ----  ---- 
 

Note:

i. Impairment losses/(reversals) represent the net amount charged/(credited) through the income statement, rather than amounts written off during the period.

Impairment losses have decreased year on year to GBP190 million (2020: GBP209 million) but remain elevated due to the continued uncertainty over the economic impacts of the pandemic. The underlying arrears performance of our portfolios has remained broadly stable, with the impacts of Covid-19 on borrowers offset by government support schemes and the use of payment deferrals. During the year additional payment deferrals have been granted and, whilst the majority have now expired, the outlook for borrowers remains uncertain.

More information on the key judgements, including the forward-looking economic information used in our impairment calculations, is included in note 8 to the financial statements.

Provisions for liabilities and charges

We hold provisions for customer redress to cover the costs of remediation and redress in relation to past sales of financial products and ongoing administration, including non-compliance with consumer credit legislation and other regulatory requirements. The customer redress charge has increased to GBP87 million (2020: GBP56 million charge) primarily as a result of a GBP42 million charge relating to historical quality control procedures and a GBP36 million charge in relation to past administration of customer accounts. The remainder of the charge relates to remediation costs for other redress issues, including the processing of remaining PPI complaints. More information is included in note 12 of the financial statements.

Taxation

The tax charge for the year of GBP205 million (2020: GBP101 million) represents an effective tax rate of 24.9% (2020: 21.7%) which is higher than the statutory UK corporation tax rate of 19% (2020: 19%). The effective tax rate is higher due to the 8% banking surcharge of GBP38 million (2020: GBP24 million), the tax effect of disallowable bank levy and customer redress costs of GBP5 million and GBP8 million (2020: GBP11 million and GBP4 million) respectively and unrecognised deferred tax assets of GBP10 million (2020: GBPnil) primarily in respect of expected future capital losses on revalued properties. This is partially offset by the tax credit on the distribution to the holders of Additional Tier 1 capital instruments of GBP12 million (2020: GBP9 million) and the tax impact of deferred tax provided at different rates of GBP5 million (2020: GBP17 million). Further information is provided in note 9 to the financial statements.

Balance sheet

Total assets have increased by 3% to reach GBP254.9 billion at 4 April 2021 (2020: GBP248.0 billion). Growth is predominantly due to higher holdings of cash and liquid assets driven largely by an increase in member deposits.

Member deposit balance growth has been strong, with balances increasing by GBP10.6 billion to GBP170.3 billion (2020: GBP159.7 billion) as a reduction in consumer spending during the national and regional lockdowns has led to an increase in current account credit balances.

 
Assets                                                                     Liquidity Coverage 
                                                                            Ratio at 4 April 
                                                                                  2021: 
                                                                                  165% 
                                                                              (2020: 163%) 
------------------------------------------------------------------------- 
                                                   2021          2020 
                                                             ------------ 
                                                  GBPm    %     GBPm    % 
---------------------------------------------                -------  --- 
Cash                                            16,693        13,748 
---------------------------------------------  -------  ---  -------  --- 
Residential mortgages (note i)                 191,023   95  188,839   94 
---------------------------------------------           ---  -------  --- 
Commercial                                       6,972    3    7,931    4 
---------------------------------------------           ---  -------  --- 
Consumer banking                                 4,404    2    4,994    2 
---------------------------------------------  -------  ---  -------  --- 
                                               202,399  100  201,764  100 
---------------------------------------------           ---  -------  --- 
Impairment provisions                            (852)         (786) 
---------------------------------------------  -------  ---  -------  --- 
Loans and advances to customers                201,547       200,978 
---------------------------------------------           ---  -------  --- 
Other financial assets                          33,888        30,185 
---------------------------------------------           ---  -------  --- 
Other non-financial assets                       2,786         3,130 
---------------------------------------------  -------  ---  -------  --- 
Total assets                                   254,914       248,041 
---------------------------------------------  -------  ---  -------  --- 
 
Asset quality                                        %     % 
---------------------------------------------           ---   ------  --- 
Residential mortgages (note i): 
---------------------------------------------           ---  -------  --- 
Proportion of residential mortgage accounts 
 more than 3 months in arrears                    0.43          0.41 
---------------------------------------------           ---  -------  --- 
Average indexed loan to value (by value)            56            58 
---------------------------------------------           ---  -------  --- 
 
Consumer banking: 
---------------------------------------------           ---  -------  --- 
Proportion of customer balances with amounts 
 past due more than 
 3 months (excluding charged off balances)        1.33          1.22 
---------------------------------------------  -------  ---  -------  --- 
 

Note:

i. Residential mortgages include prime, buy to let and legacy lending.

Cash

Cash comprises liquidity held by our Treasury function amounting to GBP16.7 billion (2020: GBP13.7 billion). The GBP2.9 billion increase in cash is driven by inflows of member deposits during the year, reflecting the accumulation of funds during the national and regional lockdowns, coupled with increased repurchase agreement balances as we managed the assets within our liquidity portfolio. This was in part offset by a reduction in wholesale funding and an increase in the size of the liquid asset portfolio.

The average Liquidity Coverage Ratio over the 12 months ending 4 April 2021 increased to 159% (2020: 152%). We continue to manage liquidity against our internal risk appetite which is more prudent than regulatory requirements. Further details are included in the Liquidity and funding risk section of the Risk report.

Residential mortgages

Total gross mortgage lending in the year was GBP29.6 billion (2020: GBP30.9 billion) as significantly lower new lending during the first national lockdown was later offset by stronger demand, in part due to the temporary changes to stamp duty. Our market share of gross lending was 11.1% (2020: 11.4%). Total mortgage net lending in the year was GBP1.9 billion (2020: GBP2.8 billion) which includes buy to let mortgage net lending of GBP3.6 billion (2020: GBP3.3 billion).

Total mortgage balances grew to GBP191.0 billion (2020: GBP188.8 billion). Strong buy to let mortgage lending resulted in our buy to let and legacy mortgage balances growing to GBP41.2 billion (2020: GBP37.7 billion). Prime mortgage balances declined to GBP149.8 billion (2020: GBP151.1 billion) as we tightened our lending criteria.

Arrears increased slightly during the year but remain low, with cases more than three months in arrears at 0.43% of the total portfolio (2020: 0.41%). Arrears have been suppressed by payment deferrals and other government support measures, and in view of UK economic conditions, an increase in arrears from current levels is expected over the medium term. Impairment provision balances have increased to GBP317 million (2020: GBP252 million) due to the deterioration in the economic outlook reflected in the economic scenarios used to model expected credit losses. We have granted 256,000 payment deferrals in the year to support members impacted by the pandemic.

Commercial lending

During the year, commercial lending balances have decreased to GBP7.0 billion (2020: GBP7.9 billion). Continuing the deleveraging activity in previous financial years, the overall portfolio is increasingly weighted towards public sector lending. This includes registered social landlords with balances of GBP4.8 billion (2020: GBP5.4 billion), and project finance with balances of GBP0.7 billion (2020: GBP0.7 billion). With a smaller book, and fewer active borrowers requiring further lending, our commercial real estate balances decreased during the year to GBP0.8 billion (2020: GBP1.0 billion).

Impairment provision balances have decreased to GBP33 million (4 April 2020: GBP40 million) due to improvements to a small number of individually assessed exposures.

Consumer banking

Consumer banking balances have decreased to GBP4.4 billion (2020: GBP5.0 billion). Consumer banking comprises personal loans of GBP2.8 billion (2020: GBP3.0 billion), credit cards of GBP1.4 billion (2020: GBP1.7 billion) and overdrawn current account balances of GBP0.2 billion (2020: GBP0.3 billion). The pandemic has resulted in balances declining as the market demand for consumer credit has decreased.

Impairment provision balances have increased to GBP502 million (4 April 2020: GBP494 million) primarily due to the deterioration in economic outlook, reflected in the economic scenarios used to model expected credit losses, with underlying performance remaining broadly stable. To support members impacted by the pandemic, we have granted 105,000 payment deferrals and interest holidays in the year.

Other financial assets

Other financial assets total GBP33.9 billion (2020: GBP30.2 billion) and comprise investment assets held by our Treasury function amounting to GBP29.1 billion (2020: GBP23.6 billion), derivatives with positive fair values of GBP3.8 billion (2020: GBP4.8 billion) and fair value adjustments and other assets of GBP1.0 billion (2020: GBP1.8 billion). The GBP3.7 billion increase is driven primarily by an increase in liquid asset holdings. Derivatives largely comprise interest rate and foreign exchange contracts which economically hedge financial risks inherent in core lending and funding activities.

 
Members' interests, equity and liabilities                               Wholesale funding 
                                                                               ratio: 
                                                                               26.7% 
                                                                           (2020: 28.5%) 
                                                      2021     2020 
                                                   -------  ------- 
                                                      GBPm     GBPm 
-------------------------------------------------  -------  ------- 
Member deposits                                    170,313  159,691 
-------------------------------------------------  -------  ------- 
Debt securities in issue                            27,923   35,963 
-------------------------------------------------  -------  ------- 
Other financial liabilities                         41,009   37,817 
-------------------------------------------------  -------  ------- 
Other liabilities                                    1,556    1,608 
-------------------------------------------------  -------  ------- 
Total liabilities                                  240,801  235,079 
-------------------------------------------------  -------  ------- 
Members' interests and equity                       14,113   12,962 
-------------------------------------------------  -------  ------- 
Total members' interests, equity and liabilities   254,914  248,041 
-------------------------------------------------  -------  ------- 
 

Member deposits

Member deposit balance growth of GBP10.6 billion (2020: GBP5.7 billion) to GBP170.3 billion (2020: GBP159.7 billion) represents growth in current account credit balances and retail savings balances of GBP8.0 billion and GBP2.6 billion respectively. Increased current account credit balances were driven by 'forced' saving during the national and regional lockdowns as consumer spending remained subdued. There were savings outflows in H1 2020/21 following the decision to reduce interest rates across our savings range, as a result of the bank base rate reductions in March 2020. However, these were more than offset by savings inflows in the second half of the year reflecting the launch of more competitive propositions including our leading Mutual Reward Bond, Start to Save account and our

Triple Access Online account, in addition to NS&I's decision to reduce rates in November. There was a more significant overall increase in deposit balances across the UK as our competitors hold a greater proportion of current account balances which experienced strong growth during periods of lockdown. This has led to a reduction in our deposit stock market share to 9.4% (2020: 9.9%). Our market share of all current accounts remains stable at 10.2% (2020: 10.0%)(10) .

Debt securities in issue and other financial liabilities

Debt securities in issue primarily comprise wholesale funding but exclude subordinated debt, which is included within other financial liabilities. Balances have decreased to GBP27.9 billion (2020: GBP36.0 billion) largely due to a change in funding mix as member deposit balances have grown significantly. Other financial liabilities have increased to GBP41.0 billion (2020: GBP37.8 billion) principally due to an increase in repurchase agreement balances as we managed the composition of the liquidity portfolio. Nationwide's wholesale funding ratio has also decreased to 26.7% (2020: 28.5%) reflecting the change in funding mix; this ratio remains well below the statutory maximum of 50%. Further details are included in the Liquidity and funding risk section of the Risk report.

Members' interests and equity

Members' interests and equity have increased to GBP14.1 billion (2020: GBP13.0 billion) largely as a result of the issuance of GBP750 million of Additional Tier 1 capital in June 2020 and retained profits.

(10) CACI's Current account and savings database (February 2021 and February 2020).

Statement of comprehensive income

 
Statement of comprehensive income (note i) 
                                                          2021  2020 
                                                         -----  ---- 
                                                          GBPm  GBPm 
-------------------------------------------------------  -----  ---- 
Profit after tax                                           618   365 
-------------------------------------------------------  -----  ---- 
Net remeasurement of pension obligations                  (72)   119 
-------------------------------------------------------  -----  ---- 
Net movement in cash flow hedge reserve                  (111)  (14) 
-------------------------------------------------------  -----  ---- 
Net movement in other hedging reserve                      (4)  (42) 
-------------------------------------------------------  -----  ---- 
Net movement in fair value through other comprehensive 
 income reserve                                            131  (67) 
-------------------------------------------------------  -----  ---- 
Net movement in revaluation reserve                          2  (11) 
-------------------------------------------------------  -----  ---- 
Total comprehensive income                                 564   350 
-------------------------------------------------------  -----  ---- 
 

Notes:

   i.    Movements are shown net of related taxation. 

Gross movements are set out in the financial statements on page 80. Further information on movements in the pension obligation is included in note 14 to the financial statements.

Capital structure

Our capital position remains strong, with both the Common Equity Tier 1 (CET1) ratio and UK leverage ratio comfortably above regulatory capital requirements of 12.7% and 3.6% respectively. The CET1 ratio increased to 36.4% (2020: 31.9%) and the UK leverage ratio increased to 5.4% (2020: 4.7%). The capital disclosures included in this report are in line with Capital Requirements Directive IV (CRD IV) and on an end point basis with IFRS 9 transitional arrangements applied.

 
Capital structure 
                                          2021     2020 
------------------------------------  --------  ------- 
                                          GBPm     GBPm 
------------------------------------  --------  ------- 
Capital resources 
------------------------------------  --------  ------- 
Common Equity Tier 1 (CET1) capital     12,007   10,665 
------------------------------------  --------  ------- 
Total Tier 1 capital                    13,343   11,258 
------------------------------------  --------  ------- 
Total regulatory capital                16,176   14,578 
------------------------------------  --------  ------- 
 
Capital requirements 
------------------------------------  --------  ------- 
Risk weighted assets (RWAs)             32,970   33,399 
------------------------------------  --------  ------- 
UK leverage exposure                   248,402  240,707 
------------------------------------  --------  ------- 
CRR leverage exposure                  265,079  254,388 
------------------------------------  --------  ------- 
 
CRD IV capital ratios                        %% 
------------------------------------  -------- ------ 
CET1 ratio                                36.4     31.9 
------------------------------------  --------  ------- 
UK leverage ratio                          5.4      4.7 
------------------------------------  --------  ------- 
CRR leverage ratio                         5.0      4.4 
------------------------------------  --------  ------- 
 

The CET1 ratio increased to 36.4% (2020: 31.9%) as a result of an increase in CET1 capital of GBP1.3 billion and a reduction in RWAs of GBP0.4 billion. The CET1 capital increase was driven by GBP0.6 billion profit after tax and a GBP0.1 billion increase in IFRS 9 transitional capital relief. In addition, GBP0.6 billion of software intangible assets are no longer deducted from capital (11) . The reduction in RWAs was driven by unsecured loan RWAs linked to decreasing total loan balances and reduced probability of default (PD). In addition, modifications were made to risk weights for small and medium-sized enterprises (SMEs) and infrastructure loans in line with EU Regulation 2020/873, culminating in a reduction of commercial loan RWAs.

On 23 December 2020, EU Regulation 2020/2176 came into force, providing an amendment to the deduction of intangible assets from CET1 resources. The PRA confirmed as part of CP5/21 'Implementation of Basel standards' their intention to modify the applicable regulation and reverse this change by 1 January 2022. If the revised rules had not been applied, Nationwide's CET1 ratio and UK leverage ratio at 4 April 2021 would have been 35.4% and 5.2% respectively(11) .

Whilst the future economic impact of Covid-19 continues to be unclear, it may lead to some RWA inflation and therefore a lower CET1 ratio in the medium term. Once the extended government support schemes announced in November 2020 end, we will better understand how individual members have been affected and the subsequent impact on risk-based ratios. However, the current capital position and the published stress testing results show that we are well capitalised and positioned to meet such periods of financial stress.

The UK leverage ratio increased to 5.4% (2020: 4.7%), with Tier 1 capital increasing by GBP2.1 billion as a result of the CET1 capital movements referenced above and the issuance of GBP0.7 billion of AT1 capital instruments in June 2020. Partially offsetting the impact of this, there was an increase in UK leverage exposure of GBP7.7 billion, primarily as a result of net retail lending and treasury investments in the period.The CRR leverage ratio increased by 0.6%, closing at 5.0% (2020: 4.4%).

The difference between the Capital Requirements Regulation (CRR) leverage ratio and the UK leverage ratio is driven by the exclusion of qualifying central bank claims from the UK leverage exposure measure as required by the PRA Rulebook.

(11) Further details of the capital position, regulatory changes and developments are included in the Solvency risk section of the Risk report.

Risk report

Contents

 
                                       Page 
 Introduction                            17 
 Top and emerging risks                  17 
 Principal risks                         19 
 Credit risk: 
    Credit risk overview                 20 
    Residential mortgages                25 
    Consumer banking                     42 
    Commercial and other lending         52 
    Treasury assets                      59 
 Liquidity and funding risk              63 
 Solvency risk                           73 
 

Risk report

Introduction

Risk management is at the heart of our business and has an important part to play in delivering our shared purpose of building society, nationwide by making sure we are safe and secure for the future.

All business activities involve some degree of risk, Nationwide seeks to protect its members by managing appropriately the risks that arise from its activities. Nationwide's risk management processes ensure it is built to last by:

-- identifying risks through a robust assessment of principal risks and uncertainties facing the Society, including those that would threaten its business model, future performance, solvency, or liquidity;

-- robust decision making, ensuring we take the right risks, in a way that is considered and supports the strategy;

   --    ensuring the risks we do take are understood, controlled, and managed appropriately; and 

-- maintaining an appropriate balance between delivering member value and remaining a prudent and responsible lender.

Top and emerging risks

Top and emerging risks are those with potential to have a significant impact on Nationwide's financial results and delivery of its strategic objectives. Nationwide's strategic responses to its top and emerging risks are described below, together with developments in specific external and internal risks.

Covid-19 Pandemic

The effects of the Covid-19 pandemic have been far reaching with widespread restrictions placed on individuals and businesses, triggering a downturn in the UK economy. Nationwide invoked the highest level of incident management response to the pandemic and has taken unprecedented action to balance three key objectives: maintaining the safety of our members and colleagues; supporting our members with their individual needs; and ensuring the Society remains stable and secure. The unique challenges posed by the pandemic are reflected in a heightened risk profile both externally, driven by the macro-economic environment and the changing needs of our members, and internally as we seek to ensure our processes and systems remain robust whilst minimising risks to our colleagues and members.

Top and emerging risks (continued)

Top and emerging risks

 
External Risks                                                                                              Trend 
Geopolitical and macroeconomic environment - As a UK-focused building society, Nationwide's                 è 
 performance is naturally aligned to the UK's economic conditions, in particular household income 
 and the corresponding impact on the housing market. Despite significant government intervention, 
 economic conditions remain uncertain, having been severely impacted by a combination of the Covid-19 
 pandemic and the UK's exit from the European Union. The Society maintains strong capital and 
 liquidity levels and regularly undertakes robust internal and regulatory stress tests to ensure 
 these are sufficient under a range of severe scenarios, including the potential introduction 
 of negative bank base rates. 
                                                                                                            ------ 
Competitive environment - The operating environment remains highly competitive, with shifting               è 
 customer behaviours, regulatory changes and continued innovation in the financial services sector 
 leading to heightened competition in our core markets, as well as new entrants competing primarily 
 via digital channels. 
                                                                                                            ------ 
Regulatory change - The Society is responding to a high volume of complex regulatory changes                è 
 and engages with regulators to implement any relevant regulatory developments promptly and appropriately. 
                                                                                                            ------ 
Climate change - We continue to respond to the threat posed to our members and the Society's                ì 
 business activities by climate change. This includes both the physical risks to housing stock 
 and property, and the transitional risks as the UK transitions towards zero net emissions. 
                                                                                                            ------ 
Financial crime / cyber security - We continuously monitor the external landscape to identify               è 
 potential cyber or fraud threats whilst operating and maturing our key financial crime and cyber 
 controls to protect our members and services as financial crime levels rise in the industry. 
                                                                                                            ------ 
Libor transition - Preparations for the phasing out of Libor by the end of 2021 are ongoing.                è 
 This will impact a range of Libor-linked assets, liabilities and derivatives and work continues 
 to manage the impact on the Society and our customers, including working with regulators and 
 industry bodies. 
                                                                                                            ------ 
 
 
Internal Risks                                                                                       Trend 
Resilience - Maintaining resilient systems, infrastructure and processes remains critical as         è 
 Covid-19 restrictions influence member needs in accessing our products and services, and how 
 they interact with us. We continue to strengthen our control environment whilst pro actively 
 monitoring the resilience of our services to reduce disruption to our customers. 
                                                                                                     ------ 
People risk - Throughout the pandemic, ensuring the safety and wellbeing of our colleagues has       ì 
 been of paramount importance. We have implemented measures to ensure colleagues remain safe and 
 supported, including transitioning our workplace to comply with government Covid-19 guidance, 
 enabling colleagues to work from home through technology, allowing flexibility and additional 
 paid leave where necessary to look after children/dependants, and have introduced initiatives 
 to support the physical and mental wellbeing of all our colleagues. Our decision to allow remote 
 working permanently will benefit our colleagues, but we recognise the need to focus on maintaining 
 controls. 
                                                                                                     ------ 
Third parties - We rely on a network of suppliers to support the provision of member-facing          è 
 services. Throughout the pandemic, we have continued to work closely with our key suppliers to 
 identify and mitigate any risks which could impact our services. We continue to develop capability 
 to ensure consistent and robust management of third party risks. 
                                                                                                     ------ 
Data - As increasing volumes of customer data are utilised to improve customer experience and        è 
 deliver intuitive digital services, the safeguarding of customer data is becoming increasingly 
 critical. We are committed to protecting member and employee data and continue to invest in data 
 architecture and technology to manage and protect personal data more effectively in an evolving 
 digital environment. 
                                                                                                     ------ 
Model risk - Model risk is heightened under Covid-19 as unprecedented government support and         ì 
 industry measures break traditional economic and credit relationships. To manage the increased 
 model risk the understanding of model limitations has been revisited, model monitoring has been 
 enhanced, and, where appropriate, adjustments to model outputs are made. 
                                                                                                     ------ 
 

Key (change in level of risk to Nationwide in year)

ì Increased level of risk è Stable level of risk î Decreased level of risk

Principal risks and uncertainties

The principal risk types set out below are the key risks relevant to the Society's business model and achievement of its strategic objectives. These principal risks are further broken down into lower level categories to support day to day management. The principal risk categories remain unchanged from last year and are managed through the Society's Enterprise Risk Management Framework.

 
 Principal      Definition                                                                    Risk Committee 
  risk 
 Credit         The risk of loss as a result of a member, customer or counterparty            Credit Committee 
  risk           failing to meet their financial obligations. 
=============  ============================================================================  ========================= 
 Liquidity      Liquidity risk is the risk that Nationwide is unable to meet its              Assets and Liabilities 
  and funding   liabilities                                                                    Committee 
  risk          as they fall due and maintain member and other stakeholder confidence. 
                Funding risk is the risk that Nationwide is unable to maintain diverse 
                funding sources in wholesale and retail markets and manage retail funding 
                risk that can arise from excessive concentrations of higher risk deposits. 
=============  ============================================================================  ========================= 
 Solvency       The risk that Nationwide fails to maintain sufficient capital to absorb       Assets and Liabilities 
  risk           losses throughout a full economic cycle and to maintain the confidence        Committee 
                 of current and prospective members, investors, the Board, and regulators. 
=============  ============================================================================  ========================= 
 Market         The risk that the net value of, or net income arising from, the Society's     Assets and Liabilities 
  risk           assets and liabilities is impacted as a result of market price or rate        Committee 
                 changes. As Nationwide does not have a trading book, market risk only 
                 arises in the banking book. 
=============  ============================================================================  ========================= 
 Pension        The risk that the value of the pension schemes' assets will be insufficient   Assets and Liabilities 
  risk           to meet the estimated liabilities, creating a pension deficit.                Committee 
=============  ============================================================================  ========================= 
 Business       The risk that achievable volumes or margins decline relative to the           Executive Risk Committee 
  risk           cost base, affecting the sustainability of the business and the ability 
                 to deliver the strategy due to macro-economic, geopolitical, industry, 
                 regulatory, competitor or other external events. 
=============  ============================================================================  ========================= 
 Model risk     The risk of an adverse outcome (incorrect or unintended decision or           Model Risk Oversight 
                financial loss) that occurs as a direct result of weaknesses or failures       Committee 
                in the development, implementation or use of a model. The adverse 
                consequences 
                include financial loss, poor business or strategic decision making, 
                or damage to Nationwide's reputation. 
=============  ============================================================================  ========================= 
 Operational    The risk of Society impacts resulting from inadequate or failed internal      Conduct and Operational 
  and conduct    processes, conduct and compliance management, people and systems, or          Risk Committee (note 
  risk           from external events.                                                         i) 
=============  ============================================================================  ========================= 
 

Note:

i. Conduct and Operational Risk Committee was incepted in Q1 2021 and brought together two previous senior committees, Operational Risk Committee and Conduct & Compliance Committee.

Information on key developments and updated quantitative disclosures for credit risk, liquidity and funding risk, and solvency risk are included within this Risk report.

Credit risk - Overview

Credit risk is the risk of loss as a result of a member, customer or counterparty failing to meet their financial obligations. Credit risk encompasses:

-- borrower/counterparty risk - the risk of loss arising from a borrower or counterparty failing to pay, or becoming increasingly likely not to pay the interest or principal on a loan, or on a financial product, or for a service, on time;

-- security/collateral risk - the risk of loss arising from deteriorating security/collateral quality;

   --    concentration risk - the risk of loss arising from insufficient diversification; and 

-- refinance risk - the risk of loss arising when a repayment of a loan or other financial product occurs later than originally anticipated.

Nationwide manages credit risk for the following portfolios:

 
 Portfolio               Definition 
 Residential mortgages   Loans secured on residential property 
----------------------  ----------------------------------------------------------------------------------- 
 Consumer banking        Unsecured lending comprising current account overdrafts, personal loans and credit 
                          cards 
----------------------  ----------------------------------------------------------------------------------- 
 Commercial and other    Loans to registered social landlords, project finance loans made under the Private 
  lending                 Finance Initiative, commercial real estate lending and other balances due from 
                          counterparties not covered by other categories 
----------------------  ----------------------------------------------------------------------------------- 
 Treasury                Treasury liquidity, derivatives and discretionary investment portfolios 
----------------------  ----------------------------------------------------------------------------------- 
 

Forbearance

Forbearance occurs when concessions are made to the contractual terms of a loan when the customer is facing or about to face difficulties in meeting their financial commitments. A concession is where the customer receives assistance, which could be a modification to the previous terms and conditions of a facility or a total or partial refinancing of debt, either mid-term or at maturity. Requests for concessions are principally attributable to:

   --    temporary cash flow problems; 
   --    breaches of financial covenants; or 
   --    an inability to repay at contractual maturity. 

In addition, we are supporting borrowers financially affected by the Covid-19 pandemic with payment holidays and other concessions.

Consistent with the European Banking Authority reporting definitions, loans that meet the regulatory forbearance exit criteria are not reported as forborne. The concession events used to classify balances subject to forbearance for residential mortgages, consumer banking and commercial lending are described in the relevant sections of this report.

Impairment provision

Impairment provisions on financial assets are calculated on an expected credit loss (ECL) basis for assets held at amortised cost and at fair value through other comprehensive income (FVOCI). ECL impairment provisions are based on an assessment of the probability of default (PD), exposure at default (EAD) and loss given default (LGD), discounted to give a net present value. Provision calculations for retail portfolios are typically performed on a collective rather than individual loan basis. For collective assessments, whilst each loan will have an associated ECL calculation, the calculation will be based on cohort level data for assets with shared credit risk characteristics (e.g. origination date, origination loan to value, term).

Credit risk - Overview (continued)

Impairment provisions are calculated using a three stage approach depending on changes in credit risk since original recognition of the assets:

-- an asset which is not credit impaired on initial recognition and has not subsequently experienced a significant increase in credit risk is categorised as being within stage 1, with a provision equal to a 12 month ECL (losses arising on default events expected to occur within 12 months);

-- where a loan's credit risk increases significantly, it is moved to stage 2. The provision recognised is equal to the lifetime ECL (losses on default events expected to occur at any point during the life of the asset);

-- if a loan meets the definition of credit impaired, it is moved to stage 3 with a provision equal to its lifetime ECL.

For loans and advances held at amortised cost, the stage distribution and the provision coverage ratios are shown in this report for each individual portfolio. The provision coverage ratio is calculated by dividing the provisions by the gross balances for each main lending portfolio. Loans remain on the balance sheet, net of associated provisions, until they are deemed no longer recoverable, when such loans are written off.

Governance and oversight of impairment provisions

The models used in the calculation of impairment provisions are governed in accordance with the Society's Model Risk Framework. PD, EAD and LGD models are subject to regular monitoring and back testing and are reviewed annually. Where necessary, adjustments are approved for risks not captured in model outputs, for example where insufficient historic data exists. The economic scenarios used in the calculation of impairment provisions and associated probability weightings are proposed by our Chief Economist. Details of these economic assumptions and material adjustments are included in note 8 to the financial statements.

Governance and oversight of economic assumptions, weightings applied to economic scenarios and all key judgements relating to impairment provisions is through a formal monthly meeting including the Chief Financial Officer, Chief Risk Officer and Chief Credit Officer. Impairment provisions are regularly reported to the Audit Committee, which reviews and challenges the key judgements and estimates made by management.

Performance overview

A significant and prolonged contraction in economic activity was observed during the year, due to the Covid-19 pandemic and government measures to reduce the spread of the virus.

Government support schemes introduced at the onset of the Covid-19 pandemic and the Society's own support mechanisms, including a moratorium on possessions activity to protect and reassure members struggling with the financial impact of the pandemic and the furlough and payment deferral schemes, provided temporary financial relief for our members.

Help and support continues to be offered to members who have been impacted in these challenging times. This includes offering payment deferrals to affected borrowers, to temporarily suspend their contractual payments. In accordance with regulatory guidance, these payment concessions are not recorded as forbearance and do not automatically have an impact on the staging of balances used in calculating provisions. For borrowers applying for an initial payment deferral the deadline for applications was March 2021; payment deferrals can be taken beyond this point if they are consecutive, but all must end by July 2021. For borrowers who continue to need financial support after the payment deferral scheme ends, we will continue to offer non-arrears bearing concessions based on consideration of their individual circumstances.

The various measures of support have affected the relationship between the economic drivers for the retail models used in determining ECL. Specifically, unemployment rates remained relatively stable, whereas GDP saw a significant decline in 2020. To account for this, GDP forecasts, where used within the retail impairment models, have been updated. Due to these factors, careful consideration has been given to model performance during their annual reviews, and model monitoring continues to show the models are performing as expected.

Observed credit quality and performance has remained broadly stable over the period, with residential mortgage and consumer banking arrears remaining at a relatively low level. Whilst balances subject to arrears and forbearance have reduced during the reporting period, stage 2 balances have increased due to a change to our staging criteria. In our judgement, arrears performance has benefited from the government measures in combination with reduced spending on current account and credit cards and the low bank base rate environment, which have had the effect of suppressing what would otherwise have been a degradation in performance due to reduced economic activity that may have a lasting impact on consumer preferences and behaviour.

In addition, since the initial lockdown, housing market activity has recovered strongly. This has been driven by a combination of pent-up demand, stamp duty changes and a behavioural shift as people reassess their housing needs and preferences. This increased activity has resulted in house price growth, with the Nationwide House Price Index recording a 7.3% rise in house prices in 2020.

Outlook

Despite the stable performance over the year, the economic outlook and effects of the pandemic on the portfolio remain uncertain. Payment deferrals have now largely matured but may have suppressed underlying cases of financial difficulty which may now emerge; similarly, as the various support schemes offered by the Government (including the furlough scheme) begin to wind down

this may expose more borrowers to difficulties in making their repayments. There remains wider uncertainty related to the pandemic and its short- and medium-term impacts on the economy. Taken together, this points to a likely increase in arrears and losses over the next year. The potential impact on impairment is captured by the economic scenarios used within our IFRS 9 calculation. Further details are included in note 8 to the financial statements.

Maximum exposure to credit risk

Nationwide's maximum exposure to credit risk has increased to GBP265 billion (2020: GBP256 billion), principally reflecting higher holdings of liquid assets.

Credit risk largely arises from loans and advances to customers, which account for 81% (2020: 83%) of Nationwide's total credit risk exposure. Within this, the exposure relates primarily to residential mortgages, which account for 94% (2020: 94%) of total loans and advances to customers and comprise high quality assets with historically low occurrences of arrears and possessions.

In addition to loans and advances to customers, Nationwide is exposed to credit risk on all other financial assets. For all financial assets recognised on the balance sheet, the maximum exposure to credit risk represents the balance sheet carrying value after allowance for impairment, plus off-balance sheet commitments. For off-balance sheet commitments, the maximum exposure is the maximum amount that Nationwide would have to pay if the commitments were to be called upon. For loan commitments and other credit related commitments that are irrevocable over the life of the respective facilities, the maximum exposure is the full amount of the committed facilities.

Credit risk - Overview (continued)

 
Maximum exposure to credit risk 
2021                                         Gross   Impairment  Carrying  Commitments       Maximum    % of total 
                                          balances   provisions     value     (note i)   credit risk   credit risk 
                                                                                            exposure      exposure 
                                         ---------  -----------  --------  -----------  ------------  ------------ 
                                              GBPm         GBPm      GBPm         GBPm          GBPm             % 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
Amortised cost loans and advances 
 to customers: 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
Residential mortgages                      190,955        (317)   190,638       12,039       202,677            76 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
Consumer banking                             4,404        (502)     3,902           43         3,945             2 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
Commercial and other lending                 6,267         (33)     6,234        1,176         7,410             3 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
Fair value adjustment for micro 
 hedged risk (note ii)                         653            -       653            -           653             - 
=======================================  =========  ===========  ========  ===========  ============  ============ 
                                           202,279        (852)   201,427       13,258       214,685            81 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
FVTPL loans and advances to customers: 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
Residential mortgages (note iii)                68            -        68            -            68             - 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
Commercial                                      52            -        52            -            52             - 
=======================================  =========  ===========  ========  ===========  ============  ============ 
                                               120            -       120            -           120             - 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
Other items: 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
Cash                                        16,693            -    16,693            -        16,693             6 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
Loans and advances to banks and 
 similar institutions                        3,660            -     3,660            -         3,660             1 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
Investment securities - FVOCI               24,218            -    24,218            -        24,218             9 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
Investment securities - Amortised 
 cost                                        1,243            -     1,243            -         1,243             1 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
Investment securities - FVTPL                   12            -        12            1            13             - 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
Derivative financial instruments             3,809            -     3,809            -         3,809             2 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
Fair value adjustment for portfolio 
 hedged risk (note ii)                         946            -       946            -           946             - 
=======================================  =========  ===========  ========  ===========  ============  ============ 
                                            50,581            -    50,581            1        50,582            19 
=======================================  =========  ===========  ========  ===========  ============  ============ 
Total                                      252,980        (852)   252,128       13,259       265,387           100 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
 

Credit risk - Overview (continued)

 
Maximum exposure to credit risk 
2020                                         Gross   Impairment  Carrying  Commitments       Maximum    % of total 
                                          balances   provisions     value     (note i)   credit risk   credit risk 
                                                                                            exposure      exposure 
                                         ---------  -----------  --------  -----------  ------------  ------------ 
                                              GBPm         GBPm      GBPm         GBPm          GBPm             % 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
Amortised cost loans and advances 
 to customers: 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
Residential mortgages                      188,768        (252)   188,516       10,734       199,250            78 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
Consumer banking                             4,994        (494)     4,500           40         4,540             2 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
Commercial and other lending                 7,133         (40)     7,093          642         7,735             3 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
Fair value adjustment for micro 
 hedged risk (note ii)                         741            -       741            -           741             - 
=======================================  =========  ===========  ========  ===========  ============  ============ 
                                           201,636        (786)   200,850       11,416       212,266            83 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
FVTPL loans and advances to customers: 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
Residential mortgages (note iii)                71            -        71            -            71             - 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
Commercial                                      57            -        57            -            57             - 
=======================================  =========  ===========  ========  ===========  ============  ============ 
                                               128            -       128            -           128             - 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
Other items: 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
Cash                                        13,748            -    13,748            -        13,748             5 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
Loans and advances to banks and 
 similar institutions                        3,636            -     3,636            -         3,636             1 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
Investment securities - FVOCI               18,367            -    18,367            -        18,367             7 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
Investment securities - Amortised 
 cost                                        1,625            -     1,625            -         1,625             1 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
Investment securities - FVTPL                   12            -        12            -            12             - 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
Derivative financial instruments             4,771            -     4,771            -         4,771             2 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
Fair value adjustment for portfolio 
 hedged risk (note ii)                       1,774            -     1,774            -         1,774             1 
=======================================  =========  ===========  ========  ===========  ============  ============ 
                                            43,933            -    43,933            -        43,933            17 
=======================================  =========  ===========  ========  ===========  ============  ============ 
Total                                      245,697        (786)   244,911       11,416       256,327           100 
---------------------------------------  ---------  -----------  --------  -----------  ------------  ------------ 
 

Notes:

i. In addition to the amounts shown above, Nationwide has revocable commitments of GBP10,624 million (2020: GBP10,139 million) in respect of credit card and overdraft facilities. These commitments represent agreements to lend in the future, subject to certain considerations. Such commitments are cancellable by Nationwide, subject to notice requirements, and given their nature are not expected to be drawn down to the full level of exposure.

ii. The fair value adjustment for portfolio hedged risk and the fair value adjustment for micro hedged risk (which relates to the commercial lending portfolio) represent hedge accounting adjustments. They are indirectly exposed to credit risk through the relationship with the underlying loans covered by Nationwide's hedging programmes.

iii. FVTPL residential mortgages include equity release and shared equity loans.

Commitments

Irrevocable undrawn commitments to lend are within the scope of provision requirements. The commitments in the table above consist of overpayment reserves and separately identifiable irrevocable commitments for the pipeline of residential mortgages, personal loans, commercial loans and investment securities. These commitments are not recognised on the balance sheet and are predominantly within stage 1, with an associated provision of GBP0.5 million (2020: GBP0.4 million) which is included within provisions for liabilities and charges.

Revocable commitments relating to overdrafts and credit cards are included in ECL provisions, with the allowance for future drawdowns made as part of the exposure at default element of the ECL calculation.

Credit risk - Residential mortgages

Summary

Nationwide's residential mortgages comprise prime, buy to let and legacy loans. Prime residential mortgages are mainly Nationwide-branded advances made through the branch network and intermediary channels. Buy to let mortgages are now only originated under The Mortgage Works (UK) plc (TMW) brand. Legacy mortgages are smaller portfolios in run-off.

As highlighted in the Credit risk overview section of this report the Covid-19 pandemic has had a significant impact on the residential mortgage market and, whilst house prices have increased, the economic outlook is uncertain.

To date arrears remain low and credit quality continues to be strong; however, this performance is supported by government intervention, payment deferrals and the low bank base rate environment.

 
 Residential mortgage gross balances 
                                         2021          2020 
                                     ------------  ------------ 
                                        GBPm    %     GBPm    % 
-----------------------------------  -------  ---  -------  --- 
Prime                                149,706   78  151,069   80 
-----------------------------------  -------  ---  -------  --- 
 
Buy to let and legacy (note 
 i): 
-----------------------------------  -------  ---  -------  --- 
   Buy to let (note ii)               39,312   21   35,539   19 
-----------------------------------  -------  ---  -------  --- 
   Legacy (note iii)                   1,937    1    2,160    1 
===================================  =======  ===  =======  === 
                                      41,249   22   37,699   20 
-----------------------------------  -------  ---  -------  --- 
 
 Amortised cost loans and advances 
  to customers                       190,955  100  188,768  100 
-----------------------------------  -------  ---  -------  --- 
 
FVTPL loans and advances to 
 customers                                68            71 
===================================  =======  ===  =======  === 
Total residential mortgages          191,023       188,839 
-----------------------------------  -------  ---  -------  --- 
 

Notes:

i. This category of lending was previously referred to as specialist lending.

ii. Buy to let mortgages include GBP37,983 million (2020: GBP34,031 million) originated under the TMW brand.

iii. Legacy includes self-certified, near prime and sub-prime lending, all of which were discontinued in 2009.

Total balances across the residential mortgage portfolios have grown by 1% during the year to GBP191 billion (2020: GBP189 billion), in particular within the buy to let portfolio which saw 11% growth in the year.

Credit risk - Residential mortgages (continued)

Impairment losses for the year

 
 Impairment losses and write-offs for the year 
                                        2021   2020 
                                       -----  ----- 
                                        GBPm   GBPm 
-------------------------------------  -----  ----- 
Prime                                     39     13 
-------------------------------------  -----  ----- 
Buy to let and legacy                     32     40 
=====================================  =====  ===== 
Total impairment losses                   71     53 
=====================================  =====  ===== 
 
                                           %% 
-------------------------------------  ----- ---- 
Impairment charge as a % of 
 average gross balance                  0.04   0.03 
-------------------------------------  -----  ----- 
 
                                        GBPm   GBPm 
-------------------------------------  -----  ----- 
Gross write-offs                           9     11 
-------------------------------------  -----  ----- 
 

Impairment losses for the year include the impact of updating macroeconomic assumptions and weightings to reflect the impact of the Covid-19 pandemic; further details are included in note 8 to the financial statements. Updates to the severe downside scenario assumptions increased provisions by GBP33 million during the year. Additional provisions totalling GBP56 million have been recognised to reflect an increased risk relating to property valuations. This comprises GBP23 million to reflect risks associated with flats where work is required to meet fire safety standards, and GBP33 million to reflect an increase in the idiosyncratic risk associated with property recovery values for repossessed properties over the next few years. The prior year impairment losses included a GBP51 million charge reflecting the estimated impact of Covid-19 at 4 April 2020.

The following table shows residential mortgage lending balances carried at amortised cost, the stage allocation of the loans, impairment provisions and the resulting provision coverage ratios.

 
Residential mortgages staging analysis 
2021                          Stage 1  Stage 2  Stage 2   Stage 2    Stage 2  Stage 3     POCI     Total 
                                         total    Up to    1 - 30    >30 DPD             (note 
                                                   date       DPD                          ii) 
                                                  (note     (note      (note 
                                                     i)        i)         i) 
                             --------  -------  -------  --------  ---------  -------  -------  -------- 
                                 GBPm     GBPm     GBPm      GBPm       GBPm     GBPm     GBPm      GBPm 
---------------------------  --------  -------  -------  --------  ---------  -------  -------  -------- 
Gross balances 
---------------------------  --------  -------  -------  --------  ---------  -------  -------  -------- 
   Prime                      143,500    5,313    4,606       505        202      893        -   149,706 
---------------------------  --------  -------  -------  --------  ---------  -------  -------  -------- 
   Buy to let and legacy       35,247    5,346    5,009       201        136      508      148    41,249 
===========================  ========  =======  =======  ========  =========  =======  =======  ======== 
Total                         178,747   10,659    9,615       706        338    1,401      148   190,955 
===========================  ========  =======  =======  ========  =========  =======  =======  ======== 
 
Provisions 
---------------------------  --------  -------  -------  --------  ---------  -------  -------  -------- 
   Prime                           17       39       33         3          3       37        -        93 
---------------------------  --------  -------  -------  --------  ---------  -------  -------  -------- 
   Buy to let and legacy           49      137      118         9         10       38        -       224 
===========================  ========  =======  =======  ========  =========  =======  =======  ======== 
Total                              66      176      151        12         13       75        -       317 
===========================  ========  =======  =======  ========  =========  =======  =======  ======== 
 
Provisions as a % of total          %%                %%                   %%                %% 
 balance 
---------------------------  --------   ------  -------   -------  ---------   ------  -------   ------- 
   Prime                         0.01     0.74     0.73      0.59       1.39     4.10        -      0.06 
---------------------------  --------  -------  -------  --------  ---------  -------  -------  -------- 
   Buy to let and legacy         0.14     2.58     2.38      4.28       7.18     7.46        -      0.54 
===========================  ========  =======  =======  ========  =========  =======  =======  ======== 
Total                            0.04     1.66     1.59      1.64       3.72     5.32        -      0.17 
---------------------------  --------  -------  -------  --------  ---------  -------  -------  -------- 
 

Credit risk - Residential mortgages (continued)

 
Residential mortgages staging analysis 
2020                         Stage 1  Stage 2  Stage 2   Stage 2    Stage 2  Stage 3     POCI   Additional    Total 
                                                                                                 provision 
                                        total    Up to    1 - 30    >30 DPD             (note   (note iii) 
                                                  date       DPD                          ii) 
                                                 (note     (note      (note 
                                                    i)        i)         i) 
                             -------  -------  -------  --------  ---------  -------  -------  -----------  ------- 
                                GBPm     GBPm     GBPm      GBPm       GBPm     GBPm     GBPm         GBPm     GBPm 
---------------------------  -------  -------  -------  --------  ---------  -------  -------  -----------  ------- 
Gross balances 
---------------------------  -------  -------  -------  --------  ---------  -------  -------  -----------  ------- 
   Prime                     148,355    1,953      998       698        257      761        --              151,069 
---------------------------  -------  -------  -------  --------  ---------  -------  -------   ----------  ------- 
   Buy to let and legacy      29,399    7,642    7,115       270        257      503      155-               37,699 
===========================  =======  =======  =======  ========  =========  =======  =======   ==========  ======= 
Total                        177,754    9,595    8,113       968        514    1,264      155-              188,768 
===========================  =======  =======  =======  ========  =========  =======  =======   ==========  ======= 
 
Provisions 
---------------------------  -------  -------  -------  --------  ---------  -------  -------  -----------  ------- 
   Prime                          278                23                   3       10        -           11       56 
---------------------------  -------   ------  -------   -------  ---------  -------  -------  -----------  ------- 
   Buy to let and legacy          13      117       87        11         19       27      (1)           40      196 
===========================  =======  =======  =======  ========  =========  =======  =======  ===========  ======= 
Total                             40      125       89        14         22       37      (1)           51      252 
===========================  =======  =======  =======  ========  =========  =======  =======  ===========  ======= 
 
Provisions as a % of total         %%                %%                   %%                %%                    % 
 balance 
---------------------------  -------   ------  -------   -------  ---------   ------  -------   ----------  ------- 
   Prime                        0.02     0.41     0.22      0.46       1.02     1.30        --                 0.04 
---------------------------  -------  -------  -------  --------  ---------  -------  -------   ----------  ------- 
   Buy to let and legacy        0.05     1.53     1.23      3.93       7.22     5.33        --                 0.52 
===========================  =======  =======  =======  ========  =========  =======  =======   ==========  ======= 
Total                           0.02     1.30     1.11      1.42       4.12     2.90        --                 0.13 
---------------------------  -------  -------  -------  --------  ---------  -------  -------   ----------  ------- 
 

Notes:

i. Days past due (DPD) is a measure of arrears status.

ii. POCI loans are those which were credit-impaired on purchase or acquisition. The POCI loans shown in the table above were recognised on the balance sheet when the Derbyshire Building Society was acquired in December 2008. These balances, which are mainly interest-only, were 90 days or more in arrears when they were acquired and so have been classified as credit-impaired on acquisition. The gross balance for POCI is shown net of the lifetime ECL of GBP5 million (2020: GBP6 million).

iii. In recognition of the financial impact that Covid-19 may have on our borrowers, an additional provision of GBP51 million was included in the impairment provisions for residential mortgages at 4 April 2020. This additional provision was not allocated to underlying loans and therefore was not attributed to stages. During the reporting period this provision has been assigned across the stages and is reflected in the allocations for 4 April 2021.

At 4 April 2021, 93% (2020: 94%) of the residential mortgage portfolio is in stage 1, reflecting the portfolio's underlying strong credit quality. During the year there has been an increase in stage 2 balances to GBP10,659 million (2020: GBP9,595 million). The prime portfolio stage 2 balance has increased by GBP3,360 million. This increase is the result of a change to staging criteria from a multiple of 4 times origination PD to a multiple of 2. The change in criteria was made to increase staging sensitivity during the current uncertain economic conditions. In addition, a higher risk segment of loans with payment deferrals moved to stage 2 from stage 1. This change did not have a significant impact on provisions.

The buy to let and legacy portfolio stage 2 balances have reduced by GBP2,296 million, primarily due to a reduction in the refinance risk associated with interest only loans. The refinance assessment estimates the ability of a borrower with an interest only loan to refinance at maturity and considers both collateral values and affordability criteria. Due to the low bank base rate assumption used in the modelling of expected credit losses, a higher proportion of interest only mortgages are expected to meet the affordability criteria, so have therefore moved from stage 2 to stage 1 during the year. This reduction has been partially offset by the change in the multiple of PD described above. The impact of the staging criteria change across both portfolios has had no significant impact on provisions due to strong quality of the loans affected.

Credit risk - Residential mortgages (continued)

Stage 3 loans in the residential mortgage portfolio equate to 1% (2020: 1%) of the total residential mortgage exposure. Of the total GBP1,401 million (2020: GBP1,264 million) stage 3 loans, GBP690 million (2020: GBP679 million) is in respect of loans which are more than 90 days past due, with the remainder being impaired due to other indicators of unlikeliness to pay such as forbearance or the bankruptcy of the borrower. Stage 3 provisions have increased by GBP38 million during the year, primarily driven by an additional provision of GBP33 million to recognise an increase in the idiosyncratic risk associated with property recovery values for repossessed properties over the next few years. The uncertainty has arisen from shifts in the housing market, partly due to Covid-19, with the expectation that future repossessed properties may be more difficult to sell and may not follow the modelled HPI recovery assumed for the wider market.

For loans subject to forbearance, accounts are transferred from stage 3 to stages 1 or 2 only after being up to date and meeting contractual obligations for a period of 12 months; GBP242 million

(2020: GBP244 million) of the stage 3 balances in forbearance are in this probation period.

The table below summarises the movements between stages in the Group's residential mortgages held at amortised cost. The movements within the table are an aggregation of monthly movements over the year.

 
Reconciliation of movements in gross residential mortgage balances and impairment provisions 
                                      Non-credit impaired                  Credit impaired 
                                                                               (note i) 
                         ---------------------------------------------  ---------------------- 
                          Subject to 12-month    Subject to lifetime     Subject to lifetime            Total 
                                  ECL                     ECL                     ECL 
                         ---------------------  ----------------------  ----------------------  ---------------------- 
                                Stage 1                Stage 2             Stage 3 and POCI 
                         ---------------------  ----------------------  ----------------------  ---------------------- 
                             Gross  Provisions       Gross  Provisions       Gross  Provisions       Gross  Provisions 
                          balances                balances                balances                balances 
                         ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
                              GBPm        GBPm        GBPm        GBPm        GBPm        GBPm        GBPm        GBPm 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
At 5 April 2020 (note 
 ii)                       177,754          40       9,595         125       1,419          36     188,768         252 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
 
Stage transfers: 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Transfers from Stage 1 
 to Stage 
 2                        (17,422)        (15)      17,422          15           -           -           -           - 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Transfers to Stage 3         (409)           -       (812)        (38)       1,221          38           -           - 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Transfers from Stage 2 
 to Stage 
 1                          15,250         100    (15,250)       (100)           -           -           -           - 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Transfers from Stage 3         255           -         541          12       (796)        (12)           -           - 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Net remeasurement of 
 ECL arising 
 from transfer of stage                   (82)                     130                    (19)                      29 
=======================  =========  ==========  ==========  ==========  ==========  ==========  ==========  ========== 
Net movement arising 
 from transfer 
 of stage                  (2,326)           3       1,901          19         425           7           -          29 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
 
New assets originated 
 or purchased               29,452           9           -           -           -           -      29,452           9 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Net impact of further 
 lending 
 and repayments            (8,303)         (3)       (127)           -        (28)           -     (8,458)         (3) 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Changes in risk 
 parameters 
 in relation to credit 
 quality                         -          22           -          40           -          43           -         105 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Other items impacting 
 income 
 statement 
 charge/(reversal) 
 (including recoveries)          -           -           -           -           -         (3)           -         (3) 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Redemptions               (17,830)         (5)       (710)         (8)       (247)         (2)    (18,787)        (15) 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Removal of year-end 
 additional 
 provision for Covid-19 
 (note 
 ii)                                                                                                              (51) 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Income statement charge 
 for 
 the year                                                                                                           71 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Decrease due to 
 write-offs                      -           -           -           -        (20)         (9)        (20)         (9) 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Other provision 
 movements                       -           -           -           -           -           3           -           3 
=======================  =========  ==========  ==========  ==========  ==========  ==========  ==========  ========== 
4 April 2021               178,747          66      10,659         176       1,549          75     190,955         317 
=======================  =========  ==========  ==========  ==========  ==========  ==========  ==========  ========== 
Net carrying amount                    178,681                  10,483                   1,474                 190,638 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
 

Credit risk - Residential mortgages (continued)

 
Reconciliation of movements in gross residential mortgage balances and impairment provisions 
                                        Non-credit impaired                  Credit impaired 
                                                                                 (note i) 
                            --------------------------------------------  ---------------------  --------------------- 
                             Subject to 12-month    Subject to lifetime    Subject to lifetime           Total 
                                     ECL                    ECL                    ECL 
                            ---------------------  ---------------------  ---------------------  --------------------- 
                                   Stage 1                Stage 2           Stage 3 and POCI 
                            ---------------------  ---------------------  ---------------------  --------------------- 
                                Gross  Provisions      Gross  Provisions      Gross  Provisions      Gross  Provisions 
                             balances               balances               balances               balances 
                            ---------  ----------  ---------  ----------  ---------  ----------  ---------  ---------- 
                                 GBPm        GBPm       GBPm        GBPm       GBPm        GBPm       GBPm        GBPm 
--------------------------  ---------  ----------  ---------  ----------  ---------  ----------  ---------  ---------- 
At 5 April 2019               176,023          37      8,479         127      1,438          42    185,940         206 
--------------------------  ---------  ----------  ---------  ----------  ---------  ----------  ---------  ---------- 
 
Stage transfers: 
--------------------------  ---------  ----------  ---------  ----------  ---------  ----------  ---------  ---------- 
Transfers from Stage 1 to 
 Stage 2                     (15,257)        (15)     15,257          15          -           -          -           - 
--------------------------  ---------  ----------  ---------  ----------  ---------  ----------  ---------  ---------- 
Transfers to Stage 3            (315)           -      (779)        (31)      1,094          31          -           - 
--------------------------  ---------  ----------  ---------  ----------  ---------  ----------  ---------  ---------- 
Transfers from Stage 2 to 
 Stage 1                       12,923          66   (12,923)        (66)          -           -          -           - 
--------------------------  ---------  ----------  ---------  ----------  ---------  ----------  ---------  ---------- 
Transfers from Stage 3            199           1        539          13      (738)        (14)          -           - 
--------------------------  ---------  ----------  ---------  ----------  ---------  ----------  ---------  ---------- 
Net remeasurement of ECL 
 arising from 
 transfer of stage                           (52)                     72                   (12)                      8 
--------------------------  ---------  ----------  ---------  ----------  ---------  ----------  ---------  ---------- 
Net movement arising from 
 transfer 
 of stage                     (2,450)           -      2,094           3        356           5          -           8 
--------------------------  ---------  ----------  ---------  ----------  ---------  ----------  ---------  ---------- 
 
New assets originated or 
 purchased                     30,501           5          -           -          -           -     30,501           5 
--------------------------  ---------  ----------  ---------  ----------  ---------  ----------  ---------  ---------- 
Net impact of further 
 lending and repayments       (8,230)         (3)      (140)           1       (45)         (2)    (8,415)         (4) 
--------------------------  ---------  ----------  ---------  ----------  ---------  ----------  ---------  ---------- 
Changes in risk parameters 
 in relation 
 to credit quality                  -           4          -           3          -           3          -          10 
--------------------------  ---------  ----------  ---------  ----------  ---------  ----------  ---------  ---------- 
Other items impacting 
 income statement 
 charge/(reversal) 
 (including recoveries)             -           -          -           -          -         (4)          -         (4) 
--------------------------  ---------  ----------  ---------  ----------  ---------  ----------  ---------  ---------- 
Redemptions                  (18,090)         (3)      (838)         (9)      (295)         (1)   (19,223)        (13) 
--------------------------  ---------  ----------  ---------  ----------  ---------  ----------  ---------  ---------- 
Additional provision for 
 Covid-19 (note 
 ii)                                                                                                                51 
--------------------------  ---------  ----------  ---------  ----------  ---------  ----------  ---------  ---------- 
Income statement charge 
 for the year                                                                                                       53 
--------------------------  ---------  ----------  ---------  ----------  ---------  ----------  ---------  ---------- 
Decrease due to write-offs          -           -          -           -       (35)        (11)       (35)        (11) 
--------------------------  ---------  ----------  ---------  ----------  ---------  ----------  ---------  ---------- 
Other provision movements           -           -          -           -          -           4          -           4 
--------------------------  ---------  ----------  ---------  ----------  ---------  ----------  ---------  ---------- 
4 April 2020 (note ii)        177,754          40      9,595         125      1,419          36    188,768         252 
--------------------------  ---------  ----------  ---------  ----------  ---------  ----------  ---------  ---------- 
Net carrying amount                       177,714                  9,470                  1,383                188,516 
--------------------------  ---------  ----------  ---------  ----------  ---------  ----------  ---------  ---------- 
 

Notes:

i. Gross balances of credit impaired loans include GBP148 million (2020: GBP155 million) of POCI loans, which are presented net of lifetime ECL impairment provisions of GBP5 million (2020: GBP6 million).

ii. At 4 April 2020, an additional provision for credit losses of GBP51 million was recognised to reflect the estimated impact of the Covid-19 pandemic on ECLs. At 4 April 2020, this additional provision was not allocated to underlying loans, nor was it attributed to stages. During the year, this provision has been allocated to underlying loans and is reflected in the movements within the table and the 4 April 2021 position.

The increase in stage 2 balances is driven by a combination of the change to staging criteria, the movement of a higher risk segment of loans with payment deferrals to stage 2 from stage 1 and a reduction in the refinance risk associated with interest only loans. As the stage of individual loans is assessed monthly, the gross movements between stages 1 and 2 include the cumulative impact of transfers caused by changes in PD leading to the loans breaching the criteria for transferring assets to stage 2 and vice versa.

Further information on movements in total gross loans and advances to customers and impairment provisions, including the methodology applied in preparing the table, is included in note 10 to the financial statements.

Credit risk - Residential mortgages (continued)

 
Reason for residential mortgages being included in stage 2 (notes i and ii) 
2021                                          Prime               Buy to let and legacy               Total 
----------------------------------  --------------------------  --------------------------  -------------------------- 
                                    Gross balances  Provisions  Gross balances  Provisions  Gross balances  Provisions 
----------------------------------  --------------  ----------  --------------  ----------  --------------  ---------- 
                                              GBPm        GBPm            GBPm        GBPm            GBPm        GBPm 
----------------------------------  --------------  ----------  --------------  ----------  --------------  ---------- 
Quantitative criteria: 
----------------------------------  --------------  ----------  --------------  ----------  --------------  ---------- 
   Payment status (greater than 30 
    DPD)                                       202           3             136          10             338          13 
----------------------------------  --------------  ----------  --------------  ----------  --------------  ---------- 
   Increase in PD since 
    origination (less than 
    30 DPD)                                  5,067          36           3,288          70           8,355         106 
----------------------------------  --------------  ----------  --------------  ----------  --------------  ---------- 
 
Qualitative criteria: 
----------------------------------  --------------  ----------  --------------  ----------  --------------  ---------- 
   Forbearance (less than 30 DPD)                6           -               3           -               9           - 
----------------------------------  --------------  ----------  --------------  ----------  --------------  ---------- 
   Interest only - significant 
    risk of inability 
    to refinance at maturity (less 
    than 30 DPD)                                 -           -           1,914          57           1,914          57 
----------------------------------  --------------  ----------  --------------  ----------  --------------  ---------- 
   Other qualitative criteria                   38           -               5                          43           - 
----------------------------------  --------------  ----------  --------------  ----------  --------------  ---------- 
 
Total Stage 2 gross balances                 5,313          39           5,346         137          10,659         176 
----------------------------------  --------------  ----------  --------------  ----------  --------------  ---------- 
 
 
Reason for residential mortgages being included in stage 2 (note i and ii) 
2020                                          Prime               Buy to let and legacy               Total 
----------------------------------  --------------------------  --------------------------  -------------------------- 
                                    Gross balances  Provisions  Gross balances  Provisions  Gross balances  Provisions 
----------------------------------  --------------  ----------  --------------  ----------  --------------  ---------- 
                                              GBPm        GBPm            GBPm        GBPm            GBPm        GBPm 
----------------------------------  --------------  ----------  --------------  ----------  --------------  ---------- 
Quantitative criteria: 
----------------------------------  --------------  ----------  --------------  ----------  --------------  ---------- 
   Payment status (greater than 30 
    DPD)                                       257           3             257          19             514          22 
----------------------------------  --------------  ----------  --------------  ----------  --------------  ---------- 
   Increase in PD since 
    origination (less than 
    30 DPD)                                  1,509           5           2,697          27           4,206          32 
----------------------------------  --------------  ----------  --------------  ----------  --------------  ---------- 
 
Qualitative criteria: 
----------------------------------  --------------  ----------  --------------  ----------  --------------  ---------- 
   Forbearance (less than 30 DPD)              165           -               5           -             170           - 
----------------------------------  --------------  ----------  --------------  ----------  --------------  ---------- 
   Interest only - significant 
    risk of inability 
    to refinance at maturity (less 
    than 30 DPD)                                 -           -           4,678          71           4,678          71 
----------------------------------  --------------  ----------  --------------  ----------  --------------  ---------- 
   Other qualitative criteria                   22           -               5           -              27           - 
----------------------------------  --------------  ----------  --------------  ----------  --------------  ---------- 
 
Total Stage 2 gross balances                 1,953           8           7,642         117           9,595         125 
----------------------------------  --------------  ----------  --------------  ----------  --------------  ---------- 
 

Notes:

i. Where loans satisfy more than one of the criteria for determining a significant increase in credit risk, the corresponding gross balance has been assigned in the order in which the categories are presented above.

ii. In recognition of the financial impact that Covid-19 may have on our borrowers, an additional provision of GBP51 million was included in the impairment provisions for residential mortgages at 4 April 2020. This additional provision was not allocated to underlying loans and therefore was not attributed to stages. During the reporting period this provision has been assigned across the stages and is reflected in the allocations for 4 April 2021.

Credit risk - Residential mortgages (continued)

Loans which are reported within stage 2 are those which have experienced a significant increase in credit risk since origination, determined through both quantitative and qualitative indicators, as shown in the table below.

 
 Criteria      Detail 
Quantitative   The primary quantitative indicators are the outputs of internal credit risk assessments. 
                For residential mortgage exposures, PDs are derived using scorecards, which use external 
                information such as that from credit reference agencies, as well as internal information 
                such as known instances of arrears or other financial difficulty. While different approaches 
                are used within each portfolio, current and historical data relating to the exposure are 
                combined with forward-looking macroeconomic information to determine the likelihood of 
                default. 12-month and lifetime PDs are calculated for each loan. 
 
                The 12-month and lifetime PDs are compared to pre-determined benchmarks at each reporting 
                date to ascertain whether a relative or absolute increase in credit risk has occurred. 
                The indicators for a significant increase in credit risk are: 
 
                 *    Absolute measures: 
 
 
                 *    The 12-month PD exceeds the benchmark 12-month PD 
                      that is indicative, at the assessment date, of an 
                      account being in arrears. 
 
 
                 *    The residual lifetime PD exceeds the benchmark 
                      residual lifetime PD, set at inception, which 
                      represents the maximum credit risk that would have 
                      been accepted at that point. 
 
 
 
                 *    Relative measure: 
 
 
                 *    The residual lifetime PD has increased by at least 75 
                      basis points and a multiple of 2 (2020: 4x multiple). 
------------  ---------------------------------------------------------------------------------------------- 
Qualitative   Qualitative indicators include the increased risk associated with interest only loans 
               which may not be able to refinance at maturity. 
 
               Also included are forbearance events where full repayment of principal and interest is 
               still anticipated, on a discounted basis. 
------------  ---------------------------------------------------------------------------------------------- 
Backstop      In addition to the primary criteria for stage allocation described above, accounts that 
               are more than 30 days past due are also transferred to stage 2. 
------------  ---------------------------------------------------------------------------------------------- 
 

The value of loans reported within stage 2 as a result of being in arrears by 30 days or more has reduced to GBP338 million, 0.18% of total gross balances (2020: GBP514 million, 0.27% of total gross balances). Management has judged this to be a temporary position due to the availability of government support and payment deferral schemes and an adjustment has been made to recognise the underlying risk where modelled provisions would otherwise have been reduced.

Stage 2 loans include all loans greater than 30 days past due (DPD), including those where the original reason for being classified as stage 2 was other than arrears over 30 DPD. The total value of loans in stage 2 due solely to payment status is less than 0.1% (2020: <0.1%) of total stage 2 balances.

Credit risk - Residential mortgages (continued)

Credit quality

The residential mortgages portfolio comprises many small loans which are broadly homogenous, have low volatility of credit risk outcomes and are geographically diversified. The table below shows the loan balances and provisions for residential mortgages held at amortised cost, by PD range. The PD distributions shown are based on 12-month IFRS 9 PDs at the reporting date.

 
Loan balance and provisions by PD (notes i and ii) 
2021                          Gross balances                          Provisions 
                   -------------------------------------  ----------------------------------  --------- 
                    Stage 1  Stage 2    Stage 3    Total  Stage 1  Stage 2    Stage 3  Total  Provision 
                                       and POCI                              and POCI          coverage 
                   --------                      -------  -------  -------  ---------  -----  --------- 
PD Range               GBPm     GBPm       GBPm     GBPm     GBPm     GBPm       GBPm   GBPm          % 
-----------------  --------  -------  ---------  -------  -------  -------  ---------  -----  --------- 
0.00 to < 0.15%     156,099    2,573         52  158,724       34       28          -     62       0.04 
-----------------  --------  -------  ---------  -------  -------  -------  ---------  -----  --------- 
0.15 to < 0.25%      10,402    1,369         44   11,815        7       13          -     20       0.17 
-----------------  --------  -------  ---------  -------  -------  -------  ---------  -----  --------- 
0.25 to < 0.50%       7,334    1,298         29    8,661        9       19          -     28       0.31 
-----------------  --------  -------  ---------  -------  -------  -------  ---------  -----  --------- 
0.50 to < 0.75%       2,326      636         22    2,984        3       10          -     13       0.44 
-----------------  --------  -------  ---------  -------  -------  -------  ---------  -----  --------- 
0.75 to < 2.50%       2,442    1,085         60    3,587       10       19          -     29       0.82 
-----------------  --------  -------  ---------  -------  -------  -------  ---------  -----  --------- 
2.50 to < 10.00%        143      823         70    1,036        3       16          -     19       1.81 
-----------------  --------  -------  ---------  -------  -------  -------  ---------  -----  --------- 
10.00 to < 100%           1    2,875        324    3,200        -       71          8     79       2.48 
-----------------  --------  -------  ---------  -------  -------  -------  ---------  -----  --------- 
100% (default)            -        -        948      948        -        -         67     67       7.07 
-----------------  --------  -------  ---------  -------  -------  -------  ---------  -----  --------- 
Total               178,747   10,659      1,549  190,955       66      176         75    317       0.17 
-----------------  --------  -------  ---------  -------  -------  -------  ---------  -----  --------- 
 
 
Loan balance and provisions by PD (note i and ii) 
2020                          Gross balances                          Provisions 
                   -------------------------------------  ----------------------------------  --------- 
                    Stage 1  Stage 2    Stage 3    Total  Stage 1  Stage 2    Stage 3  Total  Provision 
                                       and POCI                              and POCI          coverage 
                   --------                      -------  -------  -------  ---------  -----  --------- 
PD Range               GBPm     GBPm       GBPm     GBPm     GBPm     GBPm       GBPm   GBPm          % 
-----------------  --------  -------  ---------  -------  -------  -------  ---------  -----  --------- 
0.00 to < 0.15%     168,240    5,124        103  173,467       33       40          -     73       0.04 
-----------------  --------  -------  ---------  -------  -------  -------  ---------  -----  --------- 
0.15 to < 0.25%       4,756      945         23    5,724        3        9          -     12       0.20 
-----------------  --------  -------  ---------  -------  -------  -------  ---------  -----  --------- 
0.25 to < 0.50%       2,317      477         35    2,829        2        7          -      9       0.29 
-----------------  --------  -------  ---------  -------  -------  -------  ---------  -----  --------- 
0.50 to < 0.75%       1,227      287         12    1,526        1        5          -      6       0.37 
-----------------  --------  -------  ---------  -------  -------  -------  ---------  -----  --------- 
0.75 to < 2.50%       1,109      866         54    2,029        1       18          -     19       0.96 
-----------------  --------  -------  ---------  -------  -------  -------  ---------  -----  --------- 
2.50 to < 10.00%        105    1,102        111    1,318        -       19          -     19       1.51 
-----------------  --------  -------  ---------  -------  -------  -------  ---------  -----  --------- 
10.00 to < 100%           -      794        203      997        -       27          2     29       2.97 
-----------------  --------  -------  ---------  -------  -------  -------  ---------  -----  --------- 
100% (default)            -        -        878      878        -        -         34     34       3.80 
-----------------  --------  -------  ---------  -------  -------  -------  ---------  -----  --------- 
Total               177,754    9,595      1,419  188,768       40      125         36    201       0.11 
-----------------  --------  -------  ---------  -------  -------  -------  ---------  -----  --------- 
 

Notes:

   i.   Includes POCI loans of GBP148 million (2020: GBP155 million). 

ii. In recognition of the financial impact that Covid-19 may have on our borrowers, an additional provision of GBP51 million was included in the impairment provisions for residential mortgages at 4 April 2020. This additional provision was not allocated to underlying loans or attributed to stages and is therefore excluded from this table. During the year this provision has been assigned across the stages and is reflected in the allocations for 4 April 2021. The additional provision resulted in a 4 April 2020 total provision coverage of 0.13%

Credit risk - Residential mortgages (continued)

At 4 April 2021, 97% (2020: 98%) of the portfolio had a PD of less than 2.5%, reflecting the high quality of the residential mortgage portfolios. The provisions allocated to the lowest PD range primarily reflect the fact that the majority of loans are in this range. The increase during the year within the 10.00% to 100% band is largely a result of an increase in the PD assigned to the higher risk loans with payment deferrals within the prime portfolio. The reduction in the stage 2 balance within the 0.00% to < 0.15% band is due to lower risk interest only cases within the buy to let and legacy portfolio moving from stage 2 to 1, as described below the residential mortgages staging analysis table on page 26.

Distribution of new business by borrower type (by value)

 
Distribution of new business by borrower type (by 
 value) (note i) 
                                           2021   2020 
                                                 ----- 
                                              %      % 
---------------------------------------  ------  ----- 
Prime: 
---------------------------------------  ------  ----- 
   First time buyers                         27     33 
---------------------------------------  ------  ----- 
   Home movers                               28     24 
---------------------------------------  ------  ----- 
   Remortgages                               19     20 
---------------------------------------  ------  ----- 
   Other                                      1      1 
---------------------------------------  ------  ----- 
Total prime                                  75     78 
---------------------------------------  ------  ----- 
 
Buy to let: 
---------------------------------------  ------  ----- 
   Buy to let new purchases                   9      6 
---------------------------------------  ------  ----- 
   Buy to let remortgages                    16     16 
---------------------------------------  ------  ----- 
Total buy to let                             25     22 
---------------------------------------  ------  ----- 
 
Total new business                          100    100 
---------------------------------------  ------  ----- 
 

Note:

i. All new business measures exclude further advances and product switches.

The proportion of lending by borrower type has been impacted by the pandemic with the house purchase market virtually closed during the initial lockdown. Following the lockdown, the housing market recovered strongly but the lower maximum LTV caps that were introduced (see LTV and credit risk concentration below) had a bigger impact on prime than buy to let. This is most evident in the proportion of lending to first time buyers which has reduced to 27% (2020: 33%).

Credit risk - Residential mortgages (continued)

LTV and credit risk concentration

Loan to value (LTV) is calculated by weighting the borrower level LTV by the individual loan balance to arrive at an average LTV. This approach is considered to reflect most appropriately the exposure at risk.

 
LTV distribution of new business (by value) 
 (note i) 
                                2021       2020 
                                      --------- 
                                   %          % 
------------------------  ----------  --------- 
0% to 60%                         26         22 
------------------------  ----------  --------- 
60% to 75%                        36         34 
------------------------  ----------  --------- 
75% to 80%                         7          7 
------------------------  ----------  --------- 
80% to 85%                        17         11 
------------------------  ----------  --------- 
85% to 90%                        12         22 
------------------------  ----------  --------- 
90% to 95%                         2          4 
------------------------  ----------  --------- 
Over 95%                           -          - 
------------------------  ----------  --------- 
Total                            100        100 
------------------------  ----------  --------- 
 

Notes:

i. The LTV of new business excludes further advances and product switches .

ii. The average LTV of loan stock includes both amortised cost and FVTPL balances. There have been no new FVTPL advances during the year.

 
 Average LTV of new business (by value) (note 
  i) 
                                  2021        2020 
                                        ---------- 
                                     %           % 
--------------------------  ----------  ---------- 
Prime                               71          74 
--------------------------  ----------  ---------- 
Buy to let                          67          65 
--------------------------  ----------  ---------- 
Group                               70          72 
--------------------------  ----------  ---------- 
 
 
Average LTV of loan stock (by value) (note ii) 
                                       2021    2020 
                                             ------ 
                                          %       % 
-----------------------------------  ------  ------ 
Prime                                    55      58 
-----------------------------------  ------  ------ 
Buy to let and legacy                    57      59 
-----------------------------------  ------  ------ 
Group                                    56      58 
-----------------------------------  ------  ------ 
 

The average LTV of prime new business completed in the period has reduced to 71% (2020: 74%), reflecting the withdrawal from higher LTV lending at the start of the pandemic. The maximum LTV was initially reduced to 85% in April 2020 and has since been increased back to 90% (2020: 95%). T he average LTV of buy to let new business increased from 65% to 67% due to higher proportion of loans being originated close to the maximum allowable LTV of 75%. With house price increases during the year, the average indexed LTV of total loan stock has reduced to 56% (2020: 58%).

Credit risk - Residential mortgages (continued)

Residential mortgage balances by LTV and region

Geographical concentration by stage

The following table shows residential mortgages, excluding FVTPL balances, by LTV and region across stages 1 and 2 (non credit-impaired) and stage 3 (credit-impaired).

 
Residential mortgage gross balances by LTV and region 
2021            Greater   Central  Northern         South         South  Scotland  Wales  Northern    Total  Provision 
                 London   England   England  East England  West England                    Ireland            Coverage 
                                                                                                                 (note 
                                                                                                                    i) 
                -------  --------  --------  ------------  ------------  --------  -----  --------  -------  --------- 
                   GBPm      GBPm      GBPm          GBPm          GBPm      GBPm   GBPm      GBPm     GBPm          % 
--------------  -------  --------  --------  ------------  ------------  --------  -----  --------  -------  --------- 
Stage 1 and 2 
loans 
--------------  -------  --------  --------  ------------  ------------  --------  -----  --------  -------  --------- 
Fully 
collateralised 
--------------  -------  --------  --------  ------------  ------------  --------  -----  --------  -------  --------- 
LTV ratio: 
--------------  -------  --------  --------  ------------  ------------  --------  -----  --------  -------  --------- 
   Up to 50%     24,487    12,484     9,340         8,930         6,454     3,526  1,944       995   68,160       0.06 
--------------  -------  --------  --------  ------------  ------------  --------  -----  --------  -------  --------- 
   50% to 60%    10,968     6,432     5,630         4,137         3,263     2,103  1,245       391   34,169       0.10 
--------------  -------  --------  --------  ------------  ------------  --------  -----  --------  -------  --------- 
   60% to 70%    11,326     7,119     6,351         4,653         3,653     2,427  1,311       446   37,286       0.13 
--------------  -------  --------  --------  ------------  ------------  --------  -----  --------  -------  --------- 
   70% to 80%     9,537     6,147     5,826         4,262         3,276     2,354  1,109       469   32,980       0.18 
--------------  -------  --------  --------  ------------  ------------  --------  -----  --------  -------  --------- 
   80% to 90%     6,129     2,828     1,914         2,132         1,741       974    359       237   16,314       0.20 
--------------  -------  --------  --------  ------------  ------------  --------  -----  --------  -------  --------- 
   90% to 100%      118        53        50            14            33        32      3        49      352       2.82 
--------------  -------  --------  --------  ------------  ------------  --------  -----  --------  -------  --------- 
                 62,565    35,063    29,111        24,128        18,420    11,416  5,971     2,587  189,261       0.12 
--------------  -------  --------  --------  ------------  ------------  --------  -----  --------  -------  --------- 
Not fully 
collateralised 
--------------  -------  --------  --------  ------------  ------------  --------  -----  --------  -------  --------- 
   Over 100% 
   LTV                8         4        28             1             2        18      1        83      145      15.07 
--------------  =======  ========  ========  ============  ============  ========  =====  ========  =======  --------- 
   Collateral 
   value              7         3        25             1             2        16      1        73      128 
--------------  -------  --------  --------  ------------  ------------  --------  -----  --------  -------  --------- 
   Negative 
   equity             1         1         3             -             -         2      -        10       17 
--------------  =======  ========  ========  ============  ============  ========  =====  ========  =======  --------- 
 
Total stage 1 
and 2 
loans            62,573    35,067    29,139        24,129        18,422    11,434  5,972     2,670  189,406       0.13 
--------------  -------  --------  --------  ------------  ------------  --------  -----  --------  -------  --------- 
 
 
Stage 3 and POCI loans 
                                   ------  ------  ------  ------  ------  ------  -----  -----  -------  ------ 
Fully collateralised 
---------------------------------  ------  ------  ------  ------  ------  ------  -----  -----  -------  ------ 
LTV ratio: 
---------------------------------  ------  ------  ------  ------  ------  ------  -----  -----  -------  ------ 
   Up to 50%                          264     100      86      77      44      24     16     13      624    1.72 
---------------------------------  ------  ------  ------  ------  ------  ------  -----  -----  -------  ------ 
   50% to 60%                         110      60      51      31      31      16      9      5      313    2.90 
---------------------------------  ------  ------  ------  ------  ------  ------  -----  -----  -------  ------ 
   60% to 70%                          67      61      58      28      30      17     12      6      279    4.60 
---------------------------------  ------  ------  ------  ------  ------  ------  -----  -----  -------  ------ 
   70% to 80%                          36      37      51      22      14      15      9      6      190    8.15 
---------------------------------  ------  ------  ------  ------  ------  ------  -----  -----  -------  ------ 
   80% to 90%                          32      11      25      10       7       8      3      5      101   12.49 
---------------------------------  ------  ------  ------  ------  ------  ------  -----  -----  -------  ------ 
   90% to 100%                          2       1      10       -       -       2      -      3       18   26.42 
---------------------------------  ------  ------  ------  ------  ------  ------  -----  -----  -------  ------ 
                                      511     270     281     168     126      82     49     38    1,525    4.31 
---------------------------------  ------  ------  ------  ------  ------  ------  -----  -----  -------  ------ 
Not fully collateralised 
---------------------------------  ------  ------  ------  ------  ------  ------  -----  -----  -------  ------ 
   Over 100% LTV                        1       1       5       1       -       2      -     14       24   41.07 
---------------------------------  ======  ======  ======  ======  ======  ======  =====  =====  =======  ------ 
   Collateral value                     1       1       4       1       -       2      -     12       21 
---------------------------------  ------  ------  ------  ------  ------  ------  -----  -----  -------  ------ 
   Negative equity                      -       -       1       -       -       -      -      2        3 
---------------------------------  ======  ======  ======  ======  ======  ======  =====  =====  =======  ------ 
 
Total stage 3 and POCI 
 loans                                512     271     286     169     126      84     49     52    1,549    4.80 
---------------------------------  ------  ------  ------  ------  ------  ------  -----  -----  -------  ------ 
 
Total residential mortgages        63,085  35,338  29,425  24,298  18,548  11,518  6,021  2,722  190,955    0.17 
---------------------------------  ------  ------  ------  ------  ------  ------  -----  -----  -------  ------ 
 
Total geographical concentrations     33%     19%     15%     13%     10%      6%     3%     1%     100% 
---------------------------------  ------  ------  ------  ------  ------  ------  -----  -----  -------  ------ 
 

Credit risk - Residential mortgages (continued)

 
Residential mortgage gross balances by LTV and region 
2020            Greater   Central  Northern         South         South  Scotland  Wales  Northern    Total  Provision 
                 London   England   England  East England  West England                    Ireland            Coverage 
                                                                                                                 (note 
                                                                                                                    i) 
                -------  --------  --------  ------------  ------------  --------  -----  --------  -------  --------- 
                   GBPm      GBPm      GBPm          GBPm          GBPm      GBPm   GBPm      GBPm     GBPm          % 
--------------  -------  --------  --------  ------------  ------------  --------  -----  --------  -------  --------- 
Stage 1 and 2 
loans 
--------------  -------  --------  --------  ------------  ------------  --------  -----  --------  -------  --------- 
Fully 
collateralised 
--------------  -------  --------  --------  ------------  ------------  --------  -----  --------  -------  --------- 
LTV ratio: 
--------------  -------  --------  --------  ------------  ------------  --------  -----  --------  -------  --------- 
   Up to 50%     22,883    10,946     7,695         8,033         5,713     3,040  1,606       913   60,829       0.03 
--------------  -------  --------  --------  ------------  ------------  --------  -----  --------  -------  --------- 
   50% to 60%    10,973     6,151     4,726         4,051         3,080     1,715  1,004       373   32,073       0.06 
--------------  -------  --------  --------  ------------  ------------  --------  -----  --------  -------  --------- 
   60% to 70%    10,701     6,871     6,552         4,180         3,418     2,351  1,386       412   35,871       0.09 
--------------  -------  --------  --------  ------------  ------------  --------  -----  --------  -------  --------- 
   70% to 80%     9,018     5,659     5,593         3,795         3,030     2,466  1,085       419   31,065       0.12 
--------------  -------  --------  --------  ------------  ------------  --------  -----  --------  -------  --------- 
   80% to 90%     8,360     4,047     3,665         3,448         2,375     1,574    666       346   24,481       0.11 
--------------  -------  --------  --------  ------------  ------------  --------  -----  --------  -------  --------- 
   90% to 100%      764       562       249           386           503       269     46        91    2,870       0.32 
--------------  -------  --------  --------  ------------  ------------  --------  -----  --------  -------  --------- 
                 62,699    34,236    28,480        23,893        18,119    11,415  5,793     2,554  187,189       0.08 
--------------  -------  --------  --------  ------------  ------------  --------  -----  --------  -------  --------- 
Not fully 
collateralised 
--------------  -------  --------  --------  ------------  ------------  --------  -----  --------  -------  --------- 
   Over 100% 
   LTV                5         5        16             2             3         6      -       123      160      11.27 
--------------  =======  ========  ========  ============  ============  ========  =====  ========  =======  --------- 
   Collateral 
   value              4         4        13             2             2         6      -       106      137 
--------------  -------  --------  --------  ------------  ------------  --------  -----  --------  -------  --------- 
   Negative 
   equity             1         1         3             -             1         -      -        17       23 
--------------  =======  ========  ========  ============  ============  ========  =====  ========  =======  --------- 
 
Total stage 1 
and 2 
loans            62,704    34,241    28,496        23,895        18,122    11,421  5,793     2,677  187,349       0.09 
--------------  -------  --------  --------  ------------  ------------  --------  -----  --------  -------  --------- 
 
 
Stage 3 and POCI loans 
                                                                                                 ------- 
Fully collateralised 
---------------------------------  ------  ------  ------  ------  ------  ------  -----  -----  -------  ------ 
LTV ratio: 
---------------------------------  ------  ------  ------  ------  ------  ------  -----  -----  -------  ------ 
   Up to 50%                          214      81      70      66      40      20     12     11      514    0.73 
---------------------------------  ------  ------  ------  ------  ------  ------  -----  -----  -------  ------ 
   50% to 60%                         109      48      46      32      26      13      9      4      287    1.01 
---------------------------------  ------  ------  ------  ------  ------  ------  -----  -----  -------  ------ 
   60% to 70%                          52      61      53      31      29      19      8      4      257    1.79 
---------------------------------  ------  ------  ------  ------  ------  ------  -----  -----  -------  ------ 
   70% to 80%                          27      48      55      16      20      17     14      6      203    3.51 
---------------------------------  ------  ------  ------  ------  ------  ------  -----  -----  -------  ------ 
   80% to 90%                          16      13      44       7       5       8      8      3      104    4.85 
---------------------------------  ------  ------  ------  ------  ------  ------  -----  -----  -------  ------ 
   90% to 100%                          2       1      15       -       -       3      1      5       27   15.46 
---------------------------------  ------  ------  ------  ------  ------  ------  -----  -----  -------  ------ 
                                      420     252     283     152     120      80     52     33    1,392    1.99 
---------------------------------  ------  ------  ------  ------  ------  ------  -----  -----  -------  ------ 
Not fully collateralised 
---------------------------------  ------  ------  ------  ------  ------  ------  -----  -----  -------  ------ 
   Over 100% LTV                        -       1       4       1       -       1      1     19       27   32.00 
---------------------------------  ======  ======  ======  ======  ======  ======  =====  =====  =======  ------ 
   Collateral value                     -       1       3       1       -       1      1     16       23 
---------------------------------  ------  ------  ------  ------  ------  ------  -----  -----  -------  ------ 
   Negative equity                      -       -       1       -       -       -      -      3        4 
---------------------------------  ======  ======  ======  ======  ======  ======  =====  =====  =======  ------ 
 
Total stage 3 and POCI 
 loans                                420     253     287     153     120      81     53     52    1,419    2.57 
---------------------------------  ------  ------  ------  ------  ------  ------  -----  -----  -------  ------ 
 
Total residential mortgages        63,124  34,494  28,783  24,048  18,242  11,502  5,846  2,729  188,768    0.11 
---------------------------------  ------  ------  ------  ------  ------  ------  -----  -----  -------  ------ 
 
Total geographical concentrations     34%     18%     15%     13%     10%      6%     3%     1%     100% 
---------------------------------  ------  ------  ------  ------  ------  ------  -----  -----  -------  ------ 
 

Note:

i. In recognition of the financial impact that Covid-19 may have on our borrowers, an additional provision of GBP51 million was included in the impairment provisions for residential mortgages at 4 April 2020. This additional provision was not allocated to underlying loans or attributed to stages and is therefore excluded from this table. During the year this provision has been assigned across the stages and is reflected in the allocations for the year.

Credit risk - Residential mortgages (continued)

Over the year, the geographical distribution of residential mortgages across the UK has remained stable, with the highest concentration continuing to be in Greater London, at 33% of the total (2020: 34%).

In addition to balances held at amortised cost shown in the table above, there are GBP68 million (2020: GBP71 million) of residential mortgages held at FVTPL which have an average LTV of 38% (2020: 39%). The largest geographical concentration within the FVTPL balances is also in Greater London, at 54% (2020: 49%).

Arrears and possessions

Residential mortgage lending continues to have a low risk profile as demonstrated by the low level of arrears compared to the industry average:

 
Number of cases more than 3 months in arrears 
 as % of total book (note i) 
                                       2021   2020 
                                      -----  ----- 
                                          %      % 
------------------------------------  -----  ----- 
Prime                                  0.35   0.33 
------------------------------------  -----  ----- 
Buy to let and legacy                  0.72   0.74 
------------------------------------  -----  ----- 
Total                                  0.43   0.41 
------------------------------------  -----  ----- 
 
UK Finance (UKF) industry 
 average                               0.85   0.74 
------------------------------------  -----  ----- 
 

Note:

i. The methodology for calculating mortgage arrears is based on the UKF definition of arrears, where months in arrears is determined by dividing the arrears balance outstanding by the latest monthly contractual payment.

 
Number of properties in possession as % of total 
 book 
                                2021                  2020 
                        --------------------  -------------------- 
                                Number     %          Number     % 
                         of properties         of properties 
----------------------  --------------  ----  --------------  ---- 
Prime                               33  0.00              98  0.01 
----------------------  --------------  ----  --------------  ---- 
Buy to let and legacy               51  0.01             150  0.05 
----------------------  --------------  ----  --------------  ---- 
Total                               84  0.00             248  0.02 
----------------------  --------------  ----  --------------  ---- 
 
UKF industry average                    0.01                  0.03 
----------------------  --------------  ----  --------------  ---- 
 

During the year, the proportion of cases more than 3 months in arrears has increased to 0.43% (2020: 0.41%). Whilst payment deferrals have helped supress the flow of cases into arrears, the ability of some borrowers to recover from arrears has slowed given the pressures on income. In addition, cases have remained in arrears as a result of the suspended flow of cases from arrears to possessions following the introduction of Nationwide's Home Support Package, which included flexibility for mortgage repayments and a pledge for no repossessions before 31 May 2021. Another factor explaining the increase in the number of cases more than 3 months in arrears is that under the UKF definition, as monthly payments reduced following the reduction in bank base rate from 0.75% to 0.1%, the arrears balance on mortgages linked to bank base rate will now represent a greater number of monthly payments.

Credit risk - Residential mortgages (continued)

Residential mortgages by payment status

The following table shows the payment status of all residential mortgages.

 
Residential mortgages gross balances by payment status 
                                             2021                                2020 
                              ----------------------------------  ---------------------------------- 
                                 Prime    Buy to     Total           Prime    Buy to     Total 
                                         let and                             let and 
                                          legacy                              legacy 
                              --------                      ----  --------  --------  --------  ---- 
                                  GBPm      GBPm      GBPm     %      GBPm      GBPm      GBPm     % 
----------------------------  --------  --------  --------  ----  --------  --------  --------  ---- 
Not past due                   148,285    40,460   188,745  98.8   149,387    36,684   186,071  98.5 
----------------------------  --------  --------  --------  ----  --------  --------  --------  ---- 
Past due 0 to 1 month              842       278     1,120   0.6     1,062       356     1,418   0.8 
----------------------------  --------  --------  --------  ----  --------  --------  --------  ---- 
Past due 1 to 3 months             259       159       418   0.2       311       307       618   0.3 
----------------------------  --------  --------  --------  ----  --------  --------  --------  ---- 
Past due 3 to 6 months             149       121       270   0.2       177       142       319   0.2 
----------------------------  --------  --------  --------  ----  --------  --------  --------  ---- 
Past due 6 to 12 months            113       108       221   0.1       112       109       221   0.1 
----------------------------  --------  --------  --------  ----  --------  --------  --------  ---- 
Past due over 12 months            123       113       236   0.1        82        81       163   0.1 
----------------------------  --------  --------  --------  ----  --------  --------  --------  ---- 
Possessions                          3        10        13     -         9        20        29     - 
----------------------------  --------  --------  --------  ----  --------  --------  --------  ---- 
Total residential mortgages    149,774    41,249   191,023   100   151,140    37,699   188,839   100 
----------------------------  --------  --------  --------  ----  --------  --------  --------  ---- 
 

The balance of cases past due by up to 3 months has decreased to GBP1,538 million (2020: GBP2,036 million). Management has judged this to be a temporary position due to the availability of government support and payment deferral schemes and an adjustment has therefore been made to recognise the underlying risk, retaining provisions of GBP21 million which would have otherwise been released.

The balance of cases past due by more than 12 months has increased to GBP236 million (2020: GBP163 million); this is principally due to the possession moratorium. The moratorium will remain in place until the end of May 2021 and has reduced possession balances to GBP13 million (2020: GBP29 million).

Interest only mortgages

Interest only balances for prime residential mortgages relate primarily to historical balances which were originally advanced as interest only mortgages or where a subsequent change in terms to an interest only basis was agreed. Maturities on interest only mortgages are managed closely, engaging regularly with borrowers to ensure the loan is redeemed or to agree a strategy for repayment. 90% of the buy to let and legacy portfolio relate to interest only balances (2020: 89%) and buy to let remains open to new interest only lending under standard terms. Nationwide also re-entered the prime market for interest only lending under a newly established credit policy in April 2020.

Credit risk - Residential mortgages (continued)

 
Interest only mortgages (gross balance) - term to maturity (note i) 
                         Term expired  Due within    Due after    Due after    Due after   Total   % of 
                         (still open)    one year     one year    two years    more than           book 
                                                    and before   and before   five years 
                                                     two years   five years 
                        -------------  ----------  -----------  -----------  -----------  ------  ----- 
2021                             GBPm        GBPm         GBPm         GBPm         GBPm    GBPm      % 
----------------------  -------------  ----------  -----------  -----------  -----------  ------  ----- 
Prime                              74         303          357        1,256        6,757   8,747    5.8 
----------------------  -------------  ----------  -----------  -----------  -----------  ------  ----- 
Buy to let and legacy             175         271          338        1,360       34,963  37,107   90.0 
----------------------  -------------  ----------  -----------  -----------  -----------  ------  ----- 
Total                             249         574          695        2,616       41,720  45,854   24.0 
----------------------  -------------  ----------  -----------  -----------  -----------  ------  ----- 
 
2020                             GBPm        GBPm         GBPm         GBPm         GBPm    GBPm      % 
----------------------  -------------  ----------  -----------  -----------  -----------  ------  ----- 
Prime                              68         258          370        1,412        7,726   9,834    6.5 
----------------------  -------------  ----------  -----------  -----------  -----------  ------  ----- 
Buy to let and legacy             134         211          334        1,236       31,737  33,652   89.3 
----------------------  -------------  ----------  -----------  -----------  -----------  ------  ----- 
Total                             202         469          704        2,648       39,463  43,486   23.0 
----------------------  -------------  ----------  -----------  -----------  -----------  ------  ----- 
 

Note:

i. Balances subject to forbearance with agreed term extensions are presented based on the latest agreed contractual term.

Interest only loans that are term expired (still open) are not considered to be past due where contractual interest payments continue to be met, pending renegotiation of the facility. These loans are, however, treated as credit impaired and categorised as stage 3 balances from three months after the maturity date.

Forbearance

Nationwide is committed to supporting borrowers facing financial difficulty by working with them to find a solution through proactive arrears management and forbearance. In addition, we are supporting borrowers financially affected by the Covid-19 pandemic. Further details of this support are provided at the end of this forbearance section.

The Group applies the European Banking Authority (EBA) definition of forbearance.

The following concession events are included within the forbearance reporting for residential mortgages:

Past term interest only concessions

Nationwide works with borrowers who are unable to repay the capital at term expiry of their interest only mortgage. Where a borrower is unable to renegotiate the facility within six months of maturity, but no legal enforcement is pursued, the account is considered forborne. Should another concession event such as a term extension occur within the six month period, this is also classed as forbearance.

Interest only concessions

Where a temporary interest only concession is granted the loans do not accrue arrears for the period of the concession and these loans are categorised as impaired.

Capitalisation

When a borrower emerges from financial difficulty, provided they have made at least six full monthly instalments, they are offered the option to capitalise arrears. This results in the account being repaired and the loans are categorised as not impaired provided contractual repayments are maintained.

Credit risk - Residential mortgages (continued)

Capitalisation - temporary suspension of payments following notification of death of a borrower

On notification of death, we offer a 12 month capitalisation concession to allow time for the estate to redeem the account. The loan does not accrue arrears for the period of the concession although interest will continue to be added. Accounts subject to this concession will be classed as forborne if the full contractual payment is not received.

Term extensions (within term)

Customers in financial difficulty may be allowed to extend the term of their mortgage. On a capital repayment mortgage this will reduce their monthly commitment; interest only borrowers will benefit by having a longer period to repay the capital at maturity.

Permanent interest only conversions

In the past, some borrowers in financial difficulty were granted a permanent interest only conversion, normally reducing their monthly commitment. This facility was withdrawn in March 2012; it remains available for buy to let lending in line with Nationwide's new business credit policy.

The table below provides details of residential mortgages held at amortised cost subject to forbearance. Accounts that are currently subject to forbearance are assessed as in either stage 2 or stage 3:

 
Gross balances subject to forbearance (note i) 
                                                               2021                     2020 
                                                     ------------------------  ---------------------- 
                                                      Prime    Buy to   Total  Prime    Buy to  Total 
                                                              let and                  let and 
                                                               legacy                   legacy 
                                                     ------            ------  -----  --------  ----- 
                                                       GBPm      GBPm    GBPm   GBPm      GBPm   GBPm 
---------------------------------------------------  ------  --------  ------  -----  --------  ----- 
Past term interest only (note ii)                       126       123     249    117       120    237 
---------------------------------------------------  ------  --------  ------  -----  --------  ----- 
Interest only concessions                               725        41     766    533        48    581 
---------------------------------------------------  ------  --------  ------  -----  --------  ----- 
Capitalisation                                           71        37     108     75        42    117 
---------------------------------------------------  ------  --------  ------  -----  --------  ----- 
Capitalisation - notification of death of borrower 
 (note iii)                                             103        91     194    156        70    226 
---------------------------------------------------  ------  --------  ------  -----  --------  ----- 
Term extensions (within term)                            35        15      50     34        13     47 
---------------------------------------------------  ------  --------  ------  -----  --------  ----- 
Permanent interest only conversions                       2        41      43      2        35     37 
---------------------------------------------------  ------  --------  ------  -----  --------  ----- 
Total forbearance (note iv)                           1,062       348   1,410    917       328  1,245 
---------------------------------------------------  ------  --------  ------  -----  --------  ----- 
 
Of which stage 2                                        200        66     266    160        53    213 
---------------------------------------------------  ------  --------  ------  -----  --------  ----- 
Of which stage 3                                        635       258     893    472       188    660 
---------------------------------------------------  ------  --------  ------  -----  --------  ----- 
 
Impairment provisions on forborne loans                  19        18      37      5        12     17 
---------------------------------------------------  ------  --------  ------  -----  --------  ----- 
 

Notes:

i. Where more than one concession event has occurred, balances are reported under the latest event.

ii. Includes interest only mortgages where a customer is unable to renegotiate the facility within six months of maturity and no legal enforcement is pursued. Should a concession event such as a term extension occur within the six-month period, this will also be classed as forbearance.

iii. The prior period comparative for Capitalisation - notification of death of borrower has been restated for buy to let and legacy lending, increasing the balance by GBP10 million to GBP70 million.

iv. For loans subject to concession events, accounts are transferred back to stage 1 or 2 only after being up to date and meeting contractual obligations for a period of 12 months.

Credit risk - Residential mortgages (continued)

Over the year, total balances subject to forbearance have increased to GBP1,410 million (2020: GBP1,245 million) driven largely by interest only concessions which accounts for the increase in stage 3 balances. Interest only concession balances have increased as some borrowers require further support following the expiry of their second payment deferral. However, this proportion is low with only 1% of borrowers exiting a payment deferral currently having gone on to take an interest only concession.

The average LTV for forborne accounts is 50% (2020: 50%).

In addition to the amortised cost balances above, there are GBP68 million FVTPL balances (2020: GBP71 million), of which GBP8 million (2020: GBP9 million) are forborne.

Support for borrowers impacted by Covid-19

Payment deferrals continue to be offered to impacted borrowers in accordance with regulatory guidance; in isolation these payment deferrals are not recorded as forbearance and do not automatically have an impact on the default status of borrowers. For borrowers who continue to need financial support after completion of a payment deferral period, Nationwide offers tailored concessions. Under regulatory guidance, where these concessions are not arrears-bearing they are treated as forbearance and are included, as applicable, in the reported staging balance.

The following table shows the value of residential mortgages with a payment deferral related to Covid-19, showing total deferrals granted and those still in place at year end.

 
Payment and interest deferrals granted due to Covid-19 
                                      4 April 2021        4 April 2020 
------------------------------  ------------------------  ------------ 
                                   Payment       Payment       Payment 
                                 deferrals     deferrals     deferrals 
                                   granted   outstanding   outstanding 
                                   to date 
------------------------------  ----------  ------------  ------------ 
Prime 
------------------------------  ----------  ------------  ------------ 
Number of properties (000s)            211             8           167 
------------------------------  ----------  ------------  ------------ 
Balance (GBPm)                      26,919         1,151        23,541 
------------------------------  ----------  ------------  ------------ 
   Share of book, balance (%)          18%            1%           16% 
------------------------------  ----------  ------------  ------------ 
   Weighted average LTV (%)            59%           61%           63% 
------------------------------  ----------  ------------  ------------ 
 
Buy to let and legacy 
------------------------------  ----------  ------------  ------------ 
Number of properties (000s)             45             1            37 
------------------------------  ----------  ------------  ------------ 
Balance (GBPm)                       5,968           208         5,037 
------------------------------  ----------  ------------  ------------ 
   Share of book, balance (%)          15%            1%           13% 
------------------------------  ----------  ------------  ------------ 
   Weighted average LTV (%)            59%           60%           61% 
------------------------------  ----------  ------------  ------------ 
 
Total Residential 
------------------------------  ----------  ------------  ------------ 
Number of properties (000s)            256             9           204 
------------------------------  ----------  ------------  ------------ 
Balance (GBPm)                      32,887         1,359        28,578 
------------------------------  ----------  ------------  ------------ 
   Share of book, balance (%)          17%            1%           15% 
------------------------------  ----------  ------------  ------------ 
   Weighted average LTV (%)            59%           61%           62% 
------------------------------  ----------  ------------  ------------ 
 

The outstanding balances of borrowers on a payment deferral have reduced to 1% (2020: 15%) of the total portfolio. The majority of the payment deferrals which have expired to date have resumed payments. For residential mortgages, a provision of GBP36 million (2020: GBP22 million) has been recognised in respect of Covid-19 payment deferrals; this includes payment deferrals taken during the period that have since expired but where risk is judged to remain elevated.

Credit risk - Consumer banking

Summary

The consumer banking portfolio comprises balances on unsecured retail banking products: overdrawn current accounts, personal loans and credit cards. Over the year, total balances across these portfolios have decreased by GBP590 million to GBP4,404 million (2020: GBP4,994 million), equating to a 12% reduction. The reduction in balances primarily reflects lower customer spending during the Covid-19 pandemic, as well as reduced customer demand for new borrowing and the implementation of controls that reduce new lending in response to the increased risk arising from Covid-19.

To date arrears remain low and credit quality is stable; however, this performance has benefited from the impact of government support schemes, payment deferrals and the low base rate environment.

 
Consumer banking gross balances 
                                2021        2020 
                             ----------  ---------- 
                              GBPm    %   GBPm    % 
---------------------------  -----  ---  -----  --- 
Overdrawn current accounts     233    5    280    5 
---------------------------  -----  ---  -----  --- 
Personal loans               2,797   64  3,030   61 
---------------------------  -----  ---  -----  --- 
Credit cards                 1,374   31  1,684   34 
---------------------------  -----  ---  -----  --- 
Total consumer banking       4,404  100  4,994  100 
---------------------------  -----  ---  -----  --- 
 

All consumer banking loans are classified and measured at amortised cost.

 
Impairment losses and write-offs for the year 
                                       2021   2020 
                                      -----  ----- 
                                       GBPm   GBPm 
------------------------------------  -----  ----- 
Overdrawn current accounts               19     21 
------------------------------------  -----  ----- 
Personal loans                           76     82 
------------------------------------  -----  ----- 
Credit cards                             30     56 
------------------------------------  -----  ----- 
Total impairment losses                 125    159 
------------------------------------  -----  ----- 
 
                                          %% 
------------------------------------  ----- ---- 
Impairment charge as a % of 
 average gross balance                 2.68   3.27 
------------------------------------  -----  ----- 
 
                                       GBPm   GBPm 
------------------------------------  -----  ----- 
Gross write-offs                        124     87 
------------------------------------  -----  ----- 
 

Impairment losses for the year include the impact of updating macroeconomic assumptions and weightings to reflect the impact of the Covid-19 pandemic; further details are included in note 8 of the financial statements. Updates to the severe downside scenario assumptions increased provisions by GBP20 million in the year, primarily in relation to personal loans. Another factor in the charge for impairment losses is the number of loans with payment deferrals and interest holidays granted in the year; provisions against these loans total GBP38 million (2020: GBP17 million). The performance of those loans where the concession has ended remains in line with our expectations. The prior year impairment losses included a GBP43 million charge reflecting the estimated impact of Covid-19 at 4 April 2020.

Credit risk - Consumer banking (continued)

The following table shows consumer banking balances by stage, with the corresponding impairment provisions and resulting provision coverage ratios:

 
 Consumer banking product and staging analysis 
                                            2021                            2020 
                                ----------------------------  --------------------------------  ------ 
                                 Stage  Stage  Stage   Total   Stage  Stage  Stage  Additional   Total 
                                     1      2      3               1      2      3   provision 
                                                                                         (note 
                                                                                            i) 
                                ------                ------  ------  -----  -----  ----------  ------ 
                                  GBPm   GBPm   GBPm    GBPm    GBPm   GBPm   GBPm        GBPm    GBPm 
------------------------------  ------  -----  -----  ------  ------  -----  -----  ----------  ------ 
 Gross balances 
------------------------------  ------  -----  -----  ------  ------  -----  -----  ----------  ------ 
   Overdrawn current accounts      121     78     34     233     149     89     42           -     280 
------------------------------  ------  -----  -----  ------  ------  -----  -----  ----------  ------ 
   Personal loans                2,144    521    132   2,797   2,597    296    137           -   3,030 
------------------------------  ------  -----  -----  ------  ------  -----  -----  ----------  ------ 
   Credit cards                    876    391    107   1,374   1,111    442    131           -   1,684 
------------------------------  ------  -----  -----  ------  ------  -----  -----  ----------  ------ 
Total                            3,141    990    273   4,404   3,857    827    310           -   4,994 
------------------------------  ------  -----  -----  ------  ------  -----  -----  ----------  ------ 
 
Provisions 
------------------------------  ------  -----  -----  ------  ------  -----  -----  ----------  ------ 
   Overdrawn current accounts        5     23     32      60       2     17     37           3      59 
------------------------------  ------  -----  -----  ------  ------  -----  -----  ----------  ------ 
   Personal loans                   25     77    118     220      15     33    119          23     190 
------------------------------  ------  -----  -----  ------  ------  -----  -----  ----------  ------ 
   Credit cards                     18    108     96     222      15     91    122          17     245 
------------------------------  ------  -----  -----  ------  ------  -----  -----  ----------  ------ 
Total                               48    208    246     502      32    141    278          43     494 
------------------------------  ------  -----  -----  ------  ------  -----  -----  ----------  ------ 
 
Provisions as a % of 
 total balance                       %%            %%              %%            %%                  % 
------------------------------  ------   ----  -----   -----  ------   ----  -----   ---------  ------ 
   Overdrawn current accounts     3.89  29.38  93.36   25.64    1.75  19.06  87.02-              21.21 
------------------------------  ------  -----  -----  ------  ------  -----  -----   ---------  ------ 
   Personal loans                 1.18  14.81  89.06    7.87    0.56  11.15  86.78-               6.27 
------------------------------  ------  -----  -----  ------  ------  -----  -----   ---------  ------ 
   Credit cards                   2.00  27.68  89.99   16.13    1.33  20.67  92.86-              14.55 
------------------------------  ------  -----  -----  ------  ------  -----  -----   ---------  ------ 
Total                             1.51  21.04  89.97   11.39    0.82  17.09  89.39-               9.90 
------------------------------  ------  -----  -----  ------  ------  -----  -----   ---------  ------ 
 
 

Note:

i. In recognition of the financial impact that Covid-19 may have on our borrowers, an additional provision of GBP43 million was included in the impairment provisions for consumer banking at 4 April 2020. This additional provision was not allocated to underlying loans and therefore was not been attributed to stages. During the reporting period this provision has been assigned across the stages and is reflected in the allocations for 4 April 2021 .

At 4 April 2021, 71% (2020: 77%) of the consumer banking portfolio is in stage 1. This reduction is largely the result of a change to our staging criteria from a multiple of 4 times origination PD to a multiple of 2, thus making the models more sensitive to relative PD changes over time. This change resulted in an increase in the proportion of stage 2 balances to 23% (2020: 17%), with no significant impact on provisions given the strong quality of the loans affected. The proportion of total balances in stage 3 is unchanged at 6% (2020: 6%), reflecting broadly stable underlying credit performance. The increase in provisions to GBP502 million (2020: GBP494 million) is due to the uncertain economic outlook and how the impact of the Covid-19 pandemic is reflected in the economic scenarios used to model expected credit losses.

Credit risk - Consumer banking (continued)

Consumer banking stage 3 gross balances and provisions include charged off balances. These are accounts which are closed to future transactions and are held on the balance sheet for an extended period (up to 36 months) whilst recovery activities take place. Excluding these charged off balances and related provisions, provisions amount to 7.2% (2020: 5.7%) of gross balances.

The table below summarises the movements in the Group's consumer banking balances held at amortised cost. The movements within the table are an aggregation of monthly movements over the year.

 
Reconciliation of movements in gross consumer banking balances and impairment provisions 
                                      Non-credit impaired                  Credit impaired 
                         ---------------------------------------------  ----------------------  ---------------------- 
                          Subject to 12-month    Subject to lifetime     Subject to lifetime            Total 
                                  ECL                     ECL                     ECL 
                         ---------------------  ----------------------  ----------------------  ---------------------- 
                                Stage 1                Stage 2                 Stage 3 
                         ---------------------  ----------------------  ----------------------  ---------------------- 
                             Gross  Provisions       Gross  Provisions       Gross  Provisions       Gross  Provisions 
                          balances                balances                balances                balances 
                         ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
                              GBPm        GBPm        GBPm        GBPm        GBPm        GBPm        GBPm        GBPm 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
At 5 April 2020 (note 
 i)                          3,857          32         827         141         310         278       4,994         494 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
 
Stage transfers: 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Transfers from Stage 1 
 to Stage 
 2                         (1,960)        (46)       1,960          46           -           -           -           - 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Transfers to Stage 3          (10)           -       (118)        (87)         128          87           -           - 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Transfers from Stage 2 
 to Stage 
 1                           1,506         219     (1,506)       (219)           -           -           -           - 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Transfers from Stage 3           2           2          17          13        (19)        (15)           -           - 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Net remeasurement of 
 ECL arising 
 from transfer of stage                  (161)                     230                       9                      78 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Net movement arising 
 from transfer 
 of stage                    (462)          14         353        (17)         109          81           -          78 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
 
New assets originated 
 or purchased                1,611          35           -           -           -           -       1,611          35 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Net impact of further 
 lending 
 and repayments            (1,210)        (50)        (29)        (29)        (17)        (19)     (1,256)        (98) 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Changes in risk 
 parameters 
 in relation to credit 
 quality                         -          17           -         118           -          31           -         166 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Other items impacting 
 income 
 statement 
 charge/(reversal) 
 (including recoveries)          -           -           -           -           -         (6)           -         (6) 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Redemptions                  (655)           -       (161)         (5)         (5)         (2)       (821)         (7) 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Removal of year-end 
 additional 
 provision for Covid-19 
 (note 
 i)                                                                                                               (43) 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Income statement charge 
 for 
 the year                                                                                                          125 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Decrease due to 
 write-offs                      -           -           -           -       (124)       (124)       (124)       (124) 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Other provision 
 movements                       -           -           -           -           -           7           -           7 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
4 April 2021                 3,141          48         990         208         273         246       4,404         502 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
Net carrying amount                      3,093                     782                      27                   3,902 
-----------------------  ---------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 
 

Credit risk - Consumer banking (continued)

 
Reconciliation of movements in gross consumer banking balances and impairment provisions 
                                     Non-credit impaired                  Credit impaired 
                         --------------------------------------------  ---------------------  ----------  ---------- 
                          Subject to 12-month    Subject to lifetime    Subject to lifetime           Total 
                                  ECL                    ECL                    ECL 
                         ---------------------  ---------------------  ---------------------  ---------------------- 
                                Stage 1                Stage 2                Stage 3 
                         ---------------------  ---------------------  ---------------------  ---------------------- 
                             Gross  Provisions      Gross  Provisions      Gross  Provisions       Gross  Provisions 
                          balances               balances               balances                balances 
                         ---------  ----------  ---------  ----------  ---------  ----------  ----------  ---------- 
                              GBPm        GBPm       GBPm        GBPm       GBPm        GBPm        GBPm        GBPm 
-----------------------  ---------  ----------  ---------  ----------  ---------  ----------  ----------  ---------- 
At 5 April 2019              3,538          27        761         132        287         259       4,586         418 
-----------------------  ---------  ----------  ---------  ----------  ---------  ----------  ----------  ---------- 
 
Stage transfers: 
-----------------------  ---------  ----------  ---------  ----------  ---------  ----------  ----------  ---------- 
Transfers from Stage 1 
 to Stage 
 2                         (1,505)        (25)      1,505          25          -           -           -           - 
-----------------------  ---------  ----------  ---------  ----------  ---------  ----------  ----------  ---------- 
Transfers to Stage 3          (15)           -      (141)        (79)        156          79           -           - 
-----------------------  ---------  ----------  ---------  ----------  ---------  ----------  ----------  ---------- 
Transfers from Stage 2 
 to Stage 
 1                           1,334         160    (1,334)       (160)          -           -           -           - 
-----------------------  ---------  ----------  ---------  ----------  ---------  ----------  ----------  ---------- 
Transfers from Stage 3           2           2         14          10       (16)        (12)           -           - 
-----------------------  ---------  ----------  ---------  ----------  ---------  ----------  ----------  ---------- 
Net remeasurement of 
 ECL arising 
 from transfer of stage                  (132)                    189                     29                      86 
-----------------------  ---------  ----------  ---------  ----------  ---------  ----------  ----------  ---------- 
Net movement arising 
 from transfer 
 of stage                    (184)           5         44        (15)        140          96           -          86 
-----------------------  ---------  ----------  ---------  ----------  ---------  ----------  ----------  ---------- 
 
New assets originated 
 or purchased                2,248          26          -           -          -           -       2,248          26 
-----------------------  ---------  ----------  ---------  ----------  ---------  ----------  ----------  ---------- 
Net impact of further 
 lending 
 and repayments            (1,123)        (23)         77        (11)       (27)        (16)     (1,073)        (50) 
-----------------------  ---------  ----------  ---------  ----------  ---------  ----------  ----------  ---------- 
Changes in risk 
 parameters 
 in relation to credit 
 quality                         -         (3)          -          38          -          28           -          63 
-----------------------  ---------  ----------  ---------  ----------  ---------  ----------  ----------  ---------- 
Other items impacting 
 income 
 statement 
 charge/(reversal) 
 (including recoveries)          1           -          -           -        (1)         (4)           -         (4) 
-----------------------  ---------  ----------  ---------  ----------  ---------  ----------  ----------  ---------- 
Redemptions                  (623)           -       (55)         (3)        (2)         (2)       (680)         (5) 
-----------------------  ---------  ----------  ---------  ----------  ---------  ----------  ----------  ---------- 
Income statement charge 
 for 
 the year                                                                                                         43 
-----------------------  ---------  ----------  ---------  ----------  ---------  ----------  ----------  ---------- 
Additional provision 
 for Covid-19 
 (note i)                                                                                                        159 
-----------------------  ---------  ----------  ---------  ----------  ---------  ----------  ----------  ---------- 
Decrease due to 
 write-offs                      -           -          -           -       (87)        (87)        (87)        (87) 
-----------------------  ---------  ----------  ---------  ----------  ---------  ----------  ----------  ---------- 
Other provision 
 movements                       -           -          -           -          -           4           -           4 
-----------------------  ---------  ----------  ---------  ----------  ---------  ----------  ----------  ---------- 
4 April 2020 (note i)        3,857          32        827         141        310         278       4,994         494 
-----------------------  ---------  ----------  ---------  ----------  ---------  ----------  ----------  ---------- 
Net carrying amount                      3,825                    686                     32                   4,500 
-----------------------  ---------  ----------  ---------  ----------  ---------  ----------  ----------  ---------- 
 
 

Note:

i. At 4 April 2020, an additional provision for credit losses of GBP43 million was recognised to reflect the estimated impact of the Covid-19 pandemic on ECLs. At 4 April 2020, this additional provision was not allocated to underlying loans and therefore was not attributed to stages. During the year, this provision has been allocated to underlying loans and is reflected in the movements within the table and the 4 April 2021 position.

The change to the staging criteria from a multiple of 4 times origination PD to a multiple of 2 drove the increase in the proportion of stage 2 balances to 23% (2020: 17%). As the staging of individual loans is assessed monthly, the gross movements between stages 1 and 2 include the cumulative impact of transfers caused by changes in PD leading to the loans breaching the criteria for transferring assets to stage 2 and vice versa.

Further information on movements in total gross loans and advances to customers and impairment provisions, including the methodology applied in preparing the table, is included in note 10 to the financial statements.

Credit risk - Consumer banking (continued)

 
Reason for consumer banking balances being included in stage 2 (note i) 
---------------------------------------------------------------------------------------------------------------------- 
2021                  Overdrawn current         Personal loans            Credit cards                 Total 
                           accounts 
-----------------  -----------------------  -----------------------  -----------------------  ------------------------ 
                         Gross  Provisions        Gross  Provisions        Gross  Provisions         Gross  Provisions 
                      balances                 balances                 balances                  balances 
-----------------  -----------  ----------  -----------  ----------  -----------  ----------  ------------  ---------- 
                          GBPm        GBPm         GBPm        GBPm         GBPm        GBPm          GBPm        GBPm 
-----------------  -----------  ----------  -----------  ----------  -----------  ----------  ------------  ---------- 
Quantitative 
criteria: 
-----------------  -----------  ----------  -----------  ----------  -----------  ----------  ------------  ---------- 
   Payment status 
    (greater than 
    30 DPD) (note 
    ii)                      3           2            6           5            4           3            13          10 
-----------------  -----------  ----------  -----------  ----------  -----------  ----------  ------------  ---------- 
   Increase in PD 
    since 
    origination 
    (less than 30 
    DPD)                    66          20          510          72          364         101           940         193 
-----------------  -----------  ----------  -----------  ----------  -----------  ----------  ------------  ---------- 
 
Qualitative 
criteria: 
-----------------  -----------  ----------  -----------  ----------  -----------  ----------  ------------  ---------- 
   Forbearance 
    (less than 30 
    DPD) 
    (note iii)               1           -            -           -            -           -             1           - 
-----------------  -----------  ----------  -----------  ----------  -----------  ----------  ------------  ---------- 
   Other 
    qualitative 
    criteria 
    (less than 30 
    DPD)                     8           1            5           -           23           4            36           5 
-----------------  -----------  ----------  -----------  ----------  -----------  ----------  ------------  ---------- 
 
Total Stage 2 
 gross balances             78          23          521          77          391         108           990         208 
-----------------  -----------  ----------  -----------  ----------  -----------  ----------  ------------  ---------- 
 
 
Reason for consumer banking balances being included in stage 2 
2020                  Overdrawn current         Personal loans            Credit cards                 Total 
                           accounts 
-----------------  -----------------------  -----------------------  -----------------------  ------------------------ 
                         Gross  Provisions        Gross  Provisions        Gross  Provisions         Gross  Provisions 
                      balances                 balances                 balances                  balances 
-----------------  -----------  ----------  -----------  ----------  -----------  ----------  ------------  ---------- 
                          GBPm        GBPm         GBPm        GBPm         GBPm        GBPm          GBPm        GBPm 
-----------------  -----------  ----------  -----------  ----------  -----------  ----------  ------------  ---------- 
Quantitative 
criteria: 
-----------------  -----------  ----------  -----------  ----------  -----------  ----------  ------------  ---------- 
   Payment status 
    (greater than 
    30 DPD) (note 
    ii)                      4           3           12           5            7           5            23          13 
-----------------  -----------  ----------  -----------  ----------  -----------  ----------  ------------  ---------- 
   Increase in PD 
    since 
    origination 
    (less than 30 
    DPD)                    74          13          278          28          399          78           751         119 
-----------------  -----------  ----------  -----------  ----------  -----------  ----------  ------------  ---------- 
 
Qualitative 
criteria: 
-----------------  -----------  ----------  -----------  ----------  -----------  ----------  ------------  ---------- 
   Forbearance 
    (less than 30 
    DPD) 
    (note iii)               2           -            -           -            -           -             2           - 
-----------------  -----------  ----------  -----------  ----------  -----------  ----------  ------------  ---------- 
   Other 
    qualitative 
    criteria 
    (less than 30 
    DPD)                     9           1            6           -           36           8            51           9 
-----------------  -----------  ----------  -----------  ----------  -----------  ----------  ------------  ---------- 
 
Total Stage 2 
 gross balances             89          17          296          33          442          91           827         141 
-----------------  -----------  ----------  -----------  ----------  -----------  ----------  ------------  ---------- 
 

Notes:

i. In recognition of the financial impact that Covid-19 may have on our borrowers, an additional provision of GBP43 million was included in the impairment provisions for consumer banking at 4 April 2020. This additional provision was not allocated to underlying loans and therefore was not attributed to stages. During the reporting period this provision has been assigned across the stages and is reflected in the allocations for 4 April 2021.

ii. This category includes all loans greater than 30 DPD, including those whose original reason for being classified as stage 2 was not arrears over 30 DPD.

iii. Stage 2 forbearance relates to cases where full repayment of principal and interest is still anticipated.

Balances reported within stage 2 are those which have experienced a significant increase in credit risk since origination. The significant increase is determined through both quantitative and qualitative indicators. Of the GBP990 million stage 2 balances (2020: GBP827 million), only 1% (2020: 3%) are in arrears by 30 days or more, with the majority of balances in stage 2 due to an increase in

Credit risk - Consumer banking (continued)

PD since origination. The increase in personal loans stage 2 balances is largely the result of a change to staging criteria from a multiple of 4 times origination PD to a multiple of 2, thus making the models more sensitive to relative PD changes over time. The reductions in credit cards and overdrawn current accounts are consistent with the reduction in total balances for these products in the year.

The table below outlines the main criteria used to determine whether a significant increase in credit risk since origination has occurred.

 
 Criteria      Detail 
Quantitative   The primary quantitative indicators are the outputs of internal credit risk assessments. 
                For consumer banking exposures, PDs are derived using scorecards, which use external information 
                such as that from credit reference agencies, as well as internal information such as known 
                instances of arrears or other financial difficulty. While different approaches are used 
                within each portfolio, current and historical data relating to the exposure are combined 
                with forward-looking macroeconomic information to determine the likelihood of default. 
                12-month and lifetime PDs are calculated for each loan. 
 
                The 12-month and lifetime PDs are compared to pre-determined benchmarks at each reporting 
                date to ascertain whether a relative or absolute increase in credit risk has occurred. 
                The indicators for a significant increase in credit risk are: 
 
                 *    Absolute measures: 
 
 
                 *    The 12-month PD exceeds the benchmark 12-month PD 
                      that is indicative, at the assessment date, of an 
                      account being in arrears. 
 
 
                 *    The residual lifetime PD exceeds the benchmark 
                      residual lifetime PD, set at inception, which 
                      represents the maximum credit risk that would have 
                      been accepted at that point. 
 
 
 
                 *    Relative measure: 
 
 
                 *    The residual lifetime PD has increased by at least 75 
                      basis points and a multiple of 2 (2020: 4x multiple). 
------------  -------------------------------------------------------------------------------------------------- 
Qualitative   Qualitative criteria include both forbearance events and, within the credit card portfolio, 
               recognition of the risk related to borrowers in persistent debt. 
------------  -------------------------------------------------------------------------------------------------- 
Backstop      In addition to the primary criteria for stage allocation described above, accounts that 
               are more than 30 days past due are also transferred to stage 2. 
------------  -------------------------------------------------------------------------------------------------- 
 

Credit risk - Consumer banking (continued)

Credit quality

Nationwide adopts robust credit management policies and processes designed to recognise and manage the risks arising from the portfolio.

The following table shows gross balances and provisions for consumer banking balances held at amortised cost, by PD range. The PD distributions shown are based on a 12-month IFRS 9 PDs at the reporting date.

 
Consumer banking gross balances and provisions by PD (note i) 
                         Gross balances                Provisions          Provision 
2021                                                                        coverage 
                   --------------------------  --------------------------  --------- 
                   Stage  Stage  Stage  Total  Stage  Stage  Stage  Total 
                       1      2      3             1      2      3 
                   -----                       -----  -----  -----  -----  --------- 
PD range            GBPm   GBPm   GBPm   GBPm   GBPm   GBPm   GBPm   GBPm          % 
-----------------  -----  -----  -----  -----  -----  -----  -----  -----  --------- 
0.00 to <0.15%       913      3      -    916      9      -      -      9       1.01 
-----------------  -----  -----  -----  -----  -----  -----  -----  -----  --------- 
0.15 to < 0.25%      361     21      -    382      4      1      -      5       1.30 
-----------------  -----  -----  -----  -----  -----  -----  -----  -----  --------- 
0.25 to < 0.50%      614     79      -    693      6      6      -     12       1.73 
-----------------  -----  -----  -----  -----  -----  -----  -----  -----  --------- 
0.50 to < 0.75%      303     84      -    387      4      6      -     10       2.66 
-----------------  -----  -----  -----  -----  -----  -----  -----  -----  --------- 
0.75 to < 2.50%      682    297      1    980     13     31      -     44       4.53 
-----------------  -----  -----  -----  -----  -----  -----  -----  -----  --------- 
2.50 to < 10.00%     261    302      3    566     11     54      -     65      11.54 
-----------------  -----  -----  -----  -----  -----  -----  -----  -----  --------- 
10.00 to < 100%        7    204     12    223      1    110      5    116      51.57 
-----------------  -----  -----  -----  -----  -----  -----  -----  -----  --------- 
100% (default)         -      -    257    257      -      -    241    241      93.57 
-----------------  -----  -----  -----  -----  -----  -----  -----  -----  --------- 
Total              3,141    990    273  4,404     48    208    246    502      11.39 
-----------------  -----  -----  -----  -----  -----  -----  -----  -----  --------- 
 
 
Consumer banking gross balances and provisions by PD 
2020                                                                       Provision 
                         Gross balances                Provisions           coverage 
                   --------------------------  --------------------------  --------- 
                   Stage  Stage  Stage  Total  Stage  Stage  Stage  Total 
                       1      2      3             1      2      3 
                   -----                       -----  -----  -----  -----  --------- 
PD range            GBPm   GBPm   GBPm   GBPm   GBPm   GBPm   GBPm   GBPm          % 
-----------------  -----  -----  -----  -----  -----  -----  -----  -----  --------- 
0.00 to <0.15%       934      4      -    938      3      -      -      3       0.36 
-----------------  -----  -----  -----  -----  -----  -----  -----  -----  --------- 
0.15 to < 0.25%      479      6      -    485      2      -      -      2       0.40 
-----------------  -----  -----  -----  -----  -----  -----  -----  -----  --------- 
0.25 to < 0.50%      719     19      -    738      3      1      -      4       0.61 
-----------------  -----  -----  -----  -----  -----  -----  -----  -----  --------- 
0.50 to < 0.75%      376     26      -    402      2      2      -      4       1.05 
-----------------  -----  -----  -----  -----  -----  -----  -----  -----  --------- 
0.75 to < 2.50%      970    205      -  1,175     11     18      -     29       2.44 
-----------------  -----  -----  -----  -----  -----  -----  -----  -----  --------- 
2.50 to < 10.00%     371    378      1    750     10     54      -     64       8.47 
-----------------  -----  -----  -----  -----  -----  -----  -----  -----  --------- 
10.00 to < 100%        8    189      4    201      1     66      3     70      34.51 
-----------------  -----  -----  -----  -----  -----  -----  -----  -----  --------- 
100% (default)         -      -    305    305      -      -    275    275      90.28 
-----------------  -----  -----  -----  -----  -----  -----  -----  -----  --------- 
Total              3,857    827    310  4,994     32    141    278    451       9.02 
-----------------  -----  -----  -----  -----  -----  -----  -----  -----  --------- 
 

Note:

i. In recognition of the financial impact that Covid-19 may have on our borrowers, an additional provision of GBP43 million was included in the impairment provisions for consumer banking at 4 April 2020. This additional provision was not allocated to underlying loans and therefore was not attributed to stages. During the reporting period this provision has been assigned across the stages and is reflected in the allocations for 4 April 2021.

The credit quality of the consumer banking portfolio has remained stable with 89% of the portfolio (2020: 90%) considered good quality with a PD of less than 10%.

Credit risk - Consumer banking (continued)

Consumer banking balances by payment due status

Credit risk in the consumer banking portfolios is primarily monitored and reported based on arrears status which is set out below.

 
Consumer banking gross balances by payment due status 
                                            2021                                       2020 
                          -----------------------------------------  ---------------------------------------- 
                          Overdrawn  Personal  Credit   Total        Overdrawn  Personal  Credit  Total 
                            current     loans   cards                  current     loans   cards 
                           accounts                                   accounts 
                          ---------                            ----  ---------  --------  ------  -----  ---- 
                               GBPm      GBPm    GBPm    GBPm     %       GBPm      GBPm    GBPm   GBPm     % 
------------------------  ---------  --------  ------  ------  ----  ---------  --------  ------  -----  ---- 
Not past due                    189     2,616   1,259   4,064  92.3        226     2,830   1,528  4,584  91.8 
------------------------  ---------  --------  ------  ------  ----  ---------  --------  ------  -----  ---- 
Past due 0 to 1 month             9        34      11      54   1.2         11        53      23     87   1.7 
------------------------  ---------  --------  ------  ------  ----  ---------  --------  ------  -----  ---- 
Past due 1 to 3 months            3        10       8      21   0.5          5        12      13     30   0.6 
------------------------  ---------  --------  ------  ------  ----  ---------  --------  ------  -----  ---- 
Past due 3 to 6 months            3        16       7      26   0.6          4        11       9     24   0.5 
------------------------  ---------  --------  ------  ------  ----  ---------  --------  ------  -----  ---- 
Past due 6 to 12 months           2        11       2      15   0.3          3        14       2     19   0.4 
------------------------  ---------  --------  ------  ------  ----  ---------  --------  ------  -----  ---- 
Past due over 12 months           3        12       -      15   0.3          3        12       -     15   0.3 
------------------------  ---------  --------  ------  ------  ----  ---------  --------  ------  -----  ---- 
Charged off (note i)             24        98      87     209   4.8         28        98     109    235   4.7 
------------------------  ---------  --------  ------  ------  ----  ---------  --------  ------  -----  ---- 
Total                           233     2,797   1,374   4,404   100        280     3,030   1,684  4,994   100 
------------------------  ---------  --------  ------  ------  ----  ---------  --------  ------  -----  ---- 
 

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 balances subject to arrears, excluding charged off balances, have reduced to GBP131 million (2020: GBP175 million), representing 3.1% (2020: 3.7%) of the total balance excluding charged off balances. The arrears performance has benefited from Covid-19 government support schemes and payment deferrals, as well as reduced spending on current account and credit cards. It is management's judgement that the arrears reduction is temporary and therefore this improvement in portfolio performance has not been reflected within the provisions at 4 April 2021.

Forbearance

Nationwide is committed to supporting customers facing financial difficulty, including those impacted by Covid-19, by working with them to find a solution through proactive arrears management and forbearance.

The Group applies the European Banking Authority definition of forbearance.

The following concession events are included within the forbearance reporting for consumer banking:

Payment concession

This concession consists of reduced monthly payments over an agreed period and may be offered to customers with an overdraft or credit card. For credit cards subject to such a concession, arrears do not increase provided the payments are made.

Credit risk - Consumer banking (continued)

Interest suppressed payment arrangement

This temporary interest payment concession results in reduced monthly payments and may be offered to customers with an overdraft, credit card or personal loan. Interest payments and fees are suppressed during the period of the concession and arrears do not increase. Cases subject to this concession are classified as impaired.

Balances re-aged/re-written

As customers repay their debt in line with the terms of their new arrangement, their accounts are re-aged, bringing them into an up-to-date and performing position. For personal loans we will

re-write the loan to extend the term and thus maintain a reduced monthly payment. For credit cards we re-age the account and set the payment status to 'up-to-date', at which point the customer is treated in the same way as any other performing account.

The table below provides details of consumer banking balances subject to forbearance. Accounts that are currently subject to a concession are all assessed as either stage 2, or stage 3 (credit-impaired) where full repayment of principal and interest is no longer anticipated.

 
Gross balances subject to forbearance (note i) 
                                                   2021                                2020 
                                    ----------------------------------  ---------------------------------- 
                                    Overdrawn  Personal  Credit  Total  Overdrawn  Personal  Credit  Total 
                                      current     loans   cards           current     loans   cards 
                                     accounts                            accounts 
                                    ---------                    -----  ---------  --------  ------  ----- 
                                         GBPm      GBPm    GBPm   GBPm       GBPm      GBPm    GBPm   GBPm 
----------------------------------  ---------  --------  ------  -----  ---------  --------  ------  ----- 
Payment concession                          7         -       1      8         14         -       1     15 
----------------------------------  ---------  --------  ------  -----  ---------  --------  ------  ----- 
Interest suppressed payment 
 concession                                 6        42      13     61          7        39      15     61 
----------------------------------  ---------  --------  ------  -----  ---------  --------  ------  ----- 
Balance re-aged/re-written                  -         1       2      3          -         1       3      4 
----------------------------------  ---------  --------  ------  -----  ---------  --------  ------  ----- 
Total forbearance                          13        43      16     72         21        40      19     80 
----------------------------------  ---------  --------  ------  -----  ---------  --------  ------  ----- 
 
Of which stage 2                            5         2       4     11         11         4       3     18 
----------------------------------  ---------  --------  ------  -----  ---------  --------  ------  ----- 
Of which stage 3                            7        41      12     60          9        31      15     55 
----------------------------------  ---------  --------  ------  -----  ---------  --------  ------  ----- 
 
Impairment provisions on forborne 
 loans                                      8        31      11     50         12        27      13     52 
----------------------------------  ---------  --------  ------  -----  ---------  --------  ------  ----- 
 

Note:

i. Where more than one concession event has occurred, balances are reported under the latest event.

Over the year, total balances subject to forbearance have reduced to GBP72 million (2020: GBP80 million), with forborne balances as a percentage of the total consumer banking lending remaining stable at 1.6% (2020: 1.6%). The balance reduction is likely to be temporary as borrowers have utilised payment deferrals as a method of support during the pandemic. These payment deferrals are not reported as forbearance. The forbearance position has not increased as most customers have not required immediate further support following the expiry of their payment deferral.

Credit risk - Consumer banking (continued)

Support for borrowers impacted by Covid-19

The ongoing impact of Covid-19 continues to be a concern for our consumer banking customers, and for those financially impacted we have offered additional help and continued support in these challenging times.

In response to Covid-19, and in accordance with regulatory guidance, Nationwide has been offering payment deferrals on credit cards and personal loans, as well as interest holidays on current accounts, since March 2020. For borrowers applying for an initial payment deferral, the deadline for applications was March 2021; payment deferrals can be taken beyond this point if they are consecutive, but all must end by July 2021.

In line with Financial Conduct Authority (FCA) guidance during the period, no arrears or forbearance will be reported on the customer's credit file as a result of these measures. In isolation these concessions are not reported as forbearance and do not automatically impact the reported stage allocation.

The following table shows the value of consumer credit products with a payment deferral or using an interest-free period related to Covid-19.

 
Gross balances subject to a payment deferral or interest holiday due to Covid-19 
                                            2021                                2020 
---------------------  ----------------------------------------------  ---------------------- 
                                                 Outstanding (note       Outstanding (note 
                          Granted to date                i)                      i) 
                       ----------------------  ----------------------  ---------------------- 
                                   Percentage              Percentage              Percentage 
                                           of                      of                      of 
                                gross balance           gross balance           gross balance 
                         GBPm               %    GBPm               %    GBPm               % 
---------------------  ------  --------------  ------  --------------  ------  -------------- 
Payment deferral 
---------------------  ------  --------------  ------  --------------  ------  -------------- 
   Personal Loans         301              11      20               1     225               7 
---------------------  ------  --------------  ------  --------------  ------  -------------- 
   Credit Cards            85               6       7               1      64               4 
---------------------  ------  --------------  ------  --------------  ------  -------------- 
Interest holiday 
---------------------  ------  --------------  ------  --------------  ------  -------------- 
   Current Accounts        20               9       -               -       8               3 
---------------------  ------  --------------  ------  --------------  ------  -------------- 
Total                     406               9      27               1     297               6 
---------------------  ------  --------------  ------  --------------  ------  -------------- 
 

Note:

i. Includes consumer credit products with a payment deferral or using an interest-free period related to Covid-19 as used in the calculation of expected credit losses.

The outstanding balances of borrowers on a payment deferral have reduced to 1% (2020: 6%). The majority of customers have not required immediate further support following the expiry of their payment deferral. For consumer banking, provisions include GBP38 million (2020: GBP17 million) in respect of Covid-19 payment deferrals and interest holidays.

Credit risk - Commercial

Summary

The commercial portfolio comprises loans which have been provided to meet the funding requirements of registered social landlords, commercial real estate investors and project finance initiatives. The commercial real estate and project finance portfolios are closed to new business.

Nationwide continues to support commercial borrowers where income has been disrupted through the impacts of Covid-19. Credit quality is stable, although portfolio performance has benefited from the impact of government support schemes, payment deferrals and the low interest rate environment.

 
Commercial gross balances 
                                          2021   2020 
                                                ----- 
                                          GBPm   GBPm 
---------------------------------------  -----  ----- 
Registered social landlords (note i)     4,828  5,425 
---------------------------------------  -----  ----- 
Commercial real estate (CRE)               769    996 
---------------------------------------  -----  ----- 
Project finance (note ii)                  670    712 
---------------------------------------  -----  ----- 
Commercial balances at amortised cost    6,267  7,133 
---------------------------------------  -----  ----- 
Fair value adjustment for micro hedged 
 risk (note iii)                           653    741 
---------------------------------------  -----  ----- 
Commercial balances - FVTPL                 52     57 
---------------------------------------  -----  ----- 
Total                                    6,972  7,931 
---------------------------------------  -----  ----- 
 

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 under the Private Finance Initiative.

iii. Micro hedged risk relates to loans hedged on an individual basis.

Over the year, total balances across the commercial portfolios continued to reduce, most significantly in the registered social landlords portfolio where loan amortisation and repayments exceeded drawdowns on new lending to this sector. The reduction in commercial real estate balances is driven by amortisation and early repayments, reflecting the closed book strategy.

 
Impairment reversals and write-offs for the year 
                                          2021   2020 
                                                ----- 
                                          GBPm   GBPm 
--------------------------------------  ------  ----- 
Total impairment reversals                 (6)    (3) 
--------------------------------------  ------  ----- 
 
Gross write-offs                             3      1 
--------------------------------------  ------  ----- 
 

The reduction in impairment is driven by improvements to the collateral value or anticipated cashflows for a small number of individually assessed exposures.

Credit risk - Commercial (continued)

The following table shows commercial balances carried at amortised cost on the balance sheet, with the stage allocation of the exposures, impairment provisions and resulting provision coverage ratios.

 
Commercial product and staging analysis 
                                            2021                              2020 
                                 Stage  Stage  Stage  Total  Stage  Stage  Stage  Additional  Total 
                                     1      2      3             1      2      3   provision 
                                                                                       (note 
                                                                                          i) 
                                                      ----- 
                                  GBPm   GBPm   GBPm   GBPm   GBPm   GBPm   GBPm        GBPm   GBPm 
-------------------------------  -----  -----  -----  -----  -----  -----  -----  ----------  ----- 
Gross balances 
-------------------------------  -----  -----  -----  -----  -----  -----  -----  ----------  ----- 
   Registered social landlords   4,782     46      -  4,828  5,385     40      --             5,425 
-------------------------------  -----  -----  -----  -----  -----  -----  -----   ---------  ----- 
   CRE                             574    120     75    769    791    155     50-               996 
-------------------------------  -----  -----  -----  -----  -----  -----  -----   ---------  ----- 
   Project finance                 595     53     22    670    616     73     23-               712 
-------------------------------  -----  -----  -----  -----  -----  -----  -----   ---------  ----- 
Total                            5,951    219     97  6,267  6,792    268     73-             7,133 
-------------------------------  -----  -----  -----  -----  -----  -----  -----   ---------  ----- 
 
Provisions 
-------------------------------  -----  -----  -----  -----  -----  -----  -----  ----------  ----- 
   Registered social landlords       1-            -1            1-            --                 1 
-------------------------------  -----   ----  -----   ----  -----   ----  -----   ---------  ----- 
   CRE                               12           23     26      22           187                29 
-------------------------------  -----   ----  -----  -----  -----   ----  -----   ---------  ----- 
   Project finance                   -2            46            -1            9-                10 
-------------------------------  -----   ----  -----   ----  -----   ----  -----   ---------  ----- 
Total                                24           27     33      33           277                40 
-------------------------------  -----   ----  -----  -----  -----   ----  -----   ---------  ----- 
 
Provisions as a % of                 %%            %%            %%            %%                 % 
 total balance 
-------------------------------  -----   ----  -----   ----  -----   ----  -----   ---------  ----- 
   Registered social landlords    0.01   0.13      -   0.01   0.02   0.12      --              0.02 
-------------------------------  -----  -----  -----  -----  -----  -----  -----   ---------  ----- 
   CRE                            0.19   1.89  29.81   3.34   0.25   1.29  36.00-              2.91 
-------------------------------  -----  -----  -----  -----  -----  -----  -----   ---------  ----- 
   Project finance                0.02   2.97  21.86   0.97   0.02   1.37  39.13-              1.40 
-------------------------------  -----  -----  -----  -----  -----  -----  -----   ---------  ----- 
Total                             0.03   1.78  28.01   0.52   0.04   1.12  36.99-              0.56 
-------------------------------  -----  -----  -----  -----  -----  -----  -----   ---------  ----- 
 

Note:

i. In recognition of the financial impact that Covid-19 may have on our borrowers, an additional provision of GBP7 million was included in the impairment provisions for the CRE portfolio at 4 April 2020. This additional provision was not allocated to underlying loans and therefore was not attributed to stages. At 4 April 2021 all provisions have been attributed to underlying loans and stages.

Over the year, the performance of the commercial portfolio has remained stable, with 95% (2020: 95%) of balances remaining in stage 1. Of the GBP219 million (2020: GBP268 million) stage 2 loans, which represent 3.5% (2020: 3.8%) of total balances, GBP6 million (2020: GBP1 million) were in arrears by 30 days or more, with the remainder in stage 2 due to a deterioration in risk profile.

A number of loans have been impacted by a disruption to rental income as a result of the impacts of Covid-19; some of this disruption is considered temporary in nature and short-term concessions have been applied. A small number of loans which are considered to have been adversely impacted in the longer term have contributed to an increase in stage 3 (credit-impaired) CRE loans to GBP75 million (2020: GBP50 million), equating to 10% (2020: 5%) of the total CRE exposure.

Within the registered social landlord portfolio, there are no stage 3 assets, and only 1% (2020: 1%) of the exposure is in stage 2.

Credit risk - Commercial (continued)

Loans in the project finance portfolio benefit from long-term cash flows, which typically emanate from the provision of assets such as schools, hospitals, police stations, government buildings and roads, procured under the Private Finance Initiative. 97% of these balances are in respect of fully developed assets. During the year, the project finance stage 3 provisions have reduced to GBP4 million (2020: GBP9 million).

Credit quality

Nationwide applies robust credit management policies and processes to identify and manage the risks arising from the portfolio.

The following table shows the CRE portfolio by risk grade and the provision coverage for each category. The table includes balances held at amortised cost only.

 
CRE gross balances by risk grade and provision coverage 
                               2021                                   2020 
-------------  -------------------------------------  ------------------------------------- 
               Stage  Stage  Stage  Total  Provision  Stage  Stage  Stage  Total  Provision 
                   1      2      3          coverage      1      2      3          coverage 
-------------  -----  -----  -----  -----  ---------  -----  -----  -----  -----  --------- 
                GBPm   GBPm   GBPm   GBPm          %   GBPm   GBPm   GBPm   GBPm          % 
-------------  -----  -----  -----  -----  ---------  -----  -----  -----  -----  --------- 
Strong           343      4      -    347        0.1    433     18      -    451        0.1 
-------------  -----  -----  -----  -----  ---------  -----  -----  -----  -----  --------- 
Good             192     37      -    229        0.2    289     67      -    356        0.6 
-------------  -----  -----  -----  -----  ---------  -----  -----  -----  -----  --------- 
Satisfactory      39     24      -     63        1.4     69     10      -     79        1.7 
-------------  -----  -----  -----  -----  ---------  -----  -----  -----  -----  --------- 
Weak               -     55      -     55        3.1      -     60      -     60        1.2 
-------------  -----  -----  -----  -----  ---------  -----  -----  -----  -----  --------- 
Impaired           -      -     75     75       31.1      -      -     50     50       36.2 
-------------  -----  -----  -----  -----  ---------  -----  -----  -----  -----  --------- 
Total            574    120     75    769        3.3    791    155     50    996        2.3 
-------------  -----  -----  -----  -----  ---------  -----  -----  -----  -----  --------- 
 

The risk grades in the table above are based upon the IRB supervisory slotting approach for specialised lending exposures, under which exposures are classified into categories depending on the underlying credit risk, with the assessment based upon financial strength, asset characteristics, strength of the sponsor and the security. The credit quality of the CRE portfolio has declined slightly with 83% (2020: 89%) of the portfolio rated as satisfactory or better. This reflects the run-off of the portfolio combined with limited migration to the weaker grades driven by cashflow volatility and reduced asset values.

Risk grades for the project finance portfolio are also based upon supervisory slotting approach for specialised lending, with 90% of the exposure rated strong or good.

The registered social landlord portfolio is risk rated using an internal PD rating model with the major drivers being financial strength, evaluations of the borrower's oversight and management, and their type and size. The distribution of exposures is weighted towards the stronger risk ratings and against a backdrop of zero defaults in the portfolio, the credit quality remains high, with an average 12-month PD of 0.04% across the portfolio.

In addition to the above, GBP52 million (2020: GBP57 million) of commercial lending balances are classified as FVTPL.

Credit risk - Commercial (continued)

CRE balances by LTV and region

The following table includes both amortised cost and FVTPL CRE balances.

 
CRE lending gross balances by LTV and region (note i) 
                                      2021                       2020 
                            -------------------------  ------------------------- 
                            London  Rest of UK  Total  London  Rest of UK  Total 
                            ------              -----  ------  ----------  ----- 
                              GBPm        GBPm   GBPm    GBPm        GBPm   GBPm 
--------------------------  ------  ----------  -----  ------  ----------  ----- 
Fully collateralised 
--------------------------  ------  ----------  -----  ------  ----------  ----- 
LTV ratio (note ii): 
--------------------------  ------  ----------  -----  ------  ----------  ----- 
   Less than 25%                56          45    101      62          59    121 
--------------------------  ------  ----------  -----  ------  ----------  ----- 
   25% to 50%                  214         154    368     315         254    569 
--------------------------  ------  ----------  -----  ------  ----------  ----- 
   51% to 75%                  141         104    245     167         115    282 
--------------------------  ------  ----------  -----  ------  ----------  ----- 
   76% to 90%                   15          20     35       3          43     46 
--------------------------  ------  ----------  -----  ------  ----------  ----- 
   91% to 100%                  20          11     31       -           -      - 
--------------------------  ------  ----------  -----  ------  ----------  ----- 
                               446         334    780     547         471  1,018 
--------------------------  ------  ----------  -----  ------  ----------  ----- 
Not fully collateralised: 
--------------------------  ------  ----------  -----  ------  ----------  ----- 
   Over 100% LTV                 -          38     38       -          32     32 
--------------------------  ------  ----------  -----  ------  ----------  ----- 
   Collateral value              -          25     25       -          19     19 
--------------------------  ------  ----------  -----  ------  ----------  ----- 
   Negative equity               -          13     13       -          13     13 
--------------------------  ------  ----------  -----  ------  ----------  ----- 
 
Total CRE loans                446         372    818     547         503  1,050 
--------------------------  ------  ----------  -----  ------  ----------  ----- 
 
Geographical concentration     55%         45%  100 %     52%         48%   100% 
--------------------------  ------  ----------  -----  ------  ----------  ----- 
 

Notes:

i. A CRE loan may be secured on assets located in different regions, with the allocation being based upon the value of the underlying assets in each region.

ii. The approach to revaluing assets charged as security is determined by the industry sector, the loan balance outstanding and the indexed value of the most recent independent external collateral valuation , with higher risk loans subject to more frequent revaluations to determine provision requirements. The LTV ratio is calculated using the on-balance sheet carrying amount of the loan divided by the indexed value. The Investment Property (IPD) monthly index is used.

Changes to the regional distribution of the CRE portfolio reflect the managed reduction of the portfolio, with 55% (2020: 52%) of the CRE exposure now being secured against assets located in London. The LTV distribution of CRE balances has also changed as a result of reduced CRE property values, with 87% (2020: 93%) of the portfolio now having an LTV of 75% or less, and 57% (2020: 66%) of the portfolio having an LTV of 50% or less.

Credit risk - Commercial (continued)

Credit risk concentration by industry sector

The following table includes balances held at amortised cost only.

 
CRE lending gross balances and provisions by industry sector (note i) 
                                      2021                        2020 
-------------------------  --------------------------  -------------------------- 
                           Gross balances  Provisions  Gross balances  Provisions 
-------------------------  --------------  ----------  --------------  ---------- 
                                     GBPm        GBPm            GBPm        GBPm 
-------------------------  --------------  ----------  --------------  ---------- 
Retail                                166           3             202           3 
-------------------------  --------------  ----------  --------------  ---------- 
Office                                148          19             222          12 
-------------------------  --------------  ----------  --------------  ---------- 
Residential                           331           1             419           1 
-------------------------  --------------  ----------  --------------  ---------- 
Industrial and warehouse               46           -              56           2 
-------------------------  --------------  ----------  --------------  ---------- 
Leisure and hotel                      66           1              84           - 
-------------------------  --------------  ----------  --------------  ---------- 
Other                                  12           2              13           4 
-------------------------  --------------  ----------  --------------  ---------- 
Total CRE lending                     769          26             996          22 
-------------------------  --------------  ----------  --------------  ---------- 
 

Note:

i. The GBP7 million additional Covid-19 provision at 4 April 2020 was not allocated to underlying loans and is therefore excluded from this table.

Credit risk exposure by industry sector is broadly unchanged from the prior year. Where a CRE loan is secured on assets crossing different sectors, the sector allocation is based upon the value of the underlying assets in each sector. For CRE exposures, excluding FVTPL balances, the largest exposure is to the residential sector, which represents 43% (2020: 42%) of the total CRE portfolio balance. The exposure to retail assets has reduced to GBP166 million (2020: GBP202 million), with a weighted average LTV of 63% (2020: 53%). Exposure to the leisure and hotel sector has reduced to GBP66 million (2020: GBP84 million), with a weighted average LTV of 55% (2020: 46%).

In addition to the amortised cost balances, there are GBP49 million (2020: GBP54 million) of FVTPL CRE commercial lending balances, of which GBP36 million (2020: GBP42 million) relates to the office sector and GBP13 million (2020: GBP12 million) relates to the retail sector.

CRE balances by payment due status

Of the GBP818 million (2020: GBP1,050 million) CRE exposure, including FVTPL balances, GBP61 million (2020: GBP14 million) relates to balances with arrears. Of these, GBP32 million (2020: GBP6 million) have arrears greater than 3 months. The increase in arrears balances is driven principally by a small number of loans that are being actively managed.

Forbearance

Nationwide is committed to supporting borrowers facing financial difficulty by working with them to find a solution through proactive arrears management and forbearance. In addition, we are supporting borrowers financially affected by the Covid-19 pandemic. Further details of this support are provided at the end of this forbearance section.

Forbearance is recorded and reported at borrower level and applies to all commercial lending, including impaired exposures and borrowers subject to enforcement and recovery action. The Group applies the European Banking Authority definition of forbearance.

For commercial customers in financial difficulty, the following concession events are included within forbearance reporting:

Credit risk - Commercial (continued)

Refinance

Debt restructuring, either mid-term or at maturity, will be considered where asset sales or external refinance cannot be secured to repay facilities in full and where a restructure is considered to provide the best debt recovery outcome for both the customer and Nationwide.

Interest concession

The temporary postponement of interest or a reduction to the interest rate charged, during which period the loans do not accrue arrears, may be considered where the customer is experiencing payment difficulties.

Capital concession

Capital concessions consist of temporary suspensions to capital repayments to allow the customer time to overcome payment difficulties, the full or partial consolidation of previous payment arrears or the partial write-off of debt.

Security amendment

Where a borrower seeks the release of assets charged to Nationwide as security for their commercial loan, this will be treated as forbearance where Nationwide's position is weakened in terms of either the loan to value of the remaining exposure or the level of interest cover available.

Extension at maturity

Borrowers who are unable to repay the loan at term expiry may be given short-term maturity extensions to allow them time to negotiate the repayment of facilities in full either via asset sales or external refinance.

Breach of covenant

Where a borrower is unable to comply with either financial or non-financial covenants, as specified in their loan agreement, a temporary waiver or amendment to the covenants will be considered, as appropriate .

The table below provides details of commercial loans that are currently subject to forbearance by concession event.

 
Gross balances subject to forbearance (note i) 
                                         2021  2020 
                                         ----  ---- 
                                         GBPm  GBPm 
---------------------------------------  ----  ---- 
Refinance                                   8    43 
---------------------------------------  ----  ---- 
Modifications: 
---------------------------------------  ----  ---- 
 Payment concession                       100    31 
---------------------------------------  ----  ---- 
 Security amendment                         6     8 
---------------------------------------  ----  ---- 
 Extension at maturity                      7    19 
---------------------------------------  ----  ---- 
 Breach of covenant                       123   126 
---------------------------------------  ----  ---- 
Total                                     244   227 
---------------------------------------  ----  ---- 
 
Total impairment provision on forborne 
 loans                                     29    14 
---------------------------------------  ----  ---- 
 

Note:

i. Loans where more than one concession event has occurred are reported under the latest event.

Credit risk - Commercial (continued)

The increase in payment concessions during the year reflects the measures put in place to support borrowers financially affected by the Covid-19 pandemic . The increase in the total impairment provision on forborne loans to GBP29 million (2020: GBP14 million) is reflective of a reduction in asset values and apportionment of the GBP7 million Covid-19 provision overlay at 4 April 2020 to individual borrowers where appropriate at 4 April 2021.

In addition to the amortised cost balances included in the table above, there are GBP52 million (2020: GBP57 million) of FVTPL commercial lending balances, none (2020: none) of which are forborne.

Support for borrowers impacted by Covid-19

Support continues to be offered to impacted borrowers via payment deferrals , interest only concessions and loan extensions.

No concessions have been applied for in the registered social landlord or project finance portfolios.

The following table shows the amortised cost balances of the CRE portfolio with a concession related to Covid-19 at the balance sheet date:

 
Gross CRE balances subject to a concession due to Covid-19 
                                                      2021                            2020 
---------------------------------------  ------------------------------  ------------------------------ 
                                             Loan  Percentage  Weighted      Loan  Percentage  Weighted 
                                          Balance     of book   Average   Balance     of book   Average 
                                             GBPm           %       LTV      GBPm           %       LTV 
                                                                      %                               % 
---------------------------------------  --------  ----------  --------  --------  ----------  -------- 
3 month capital and interest repayment 
 holiday                                       37         4.8        85       113        11.3        49 
---------------------------------------  --------  ----------  --------  --------  ----------  -------- 
6 month capital repayment holiday              58         7.6        59       100        10.1        41 
---------------------------------------  --------  ----------  --------  --------  ----------  -------- 
Extension at maturity                          84        10.8        47         1         0.1        29 
---------------------------------------  --------  ----------  --------  --------  ----------  -------- 
Total                                         179        23.2        59       214        21.5        45 
---------------------------------------  --------  ----------  --------  --------  ----------  -------- 
 

Balances subject to Covid-19 related temporary measures, at GBP179 million (2020: GBP214 million), represent 23.2% (2020: 21.5%) of the CRE portfolio balances and 9% (2020: 11%) of our CRE borrowers. The cases that have received these temporary concessions have a weighted average LTV of 59% (2020: 45%), and GBP61 million (2020: GBP2.2 million) of the loan balances have an LTV greater than 65%. Concessions have been agreed across all industry sectors, with a weighting towards the residential sector, which accounts for 42% (2020: 47%) of the balances subject to a concession due to Covid-19, reflecting the portfolio concentration to this industry sector. The increase in maturity extensions is driven by the closed book status of this portfolio requiring support for borrowers by allowing additional time to source an alternative lender or other means of repayment at a time of reduced market appetite for CRE lending.

Credit risk - Treasury assets

Summary

The treasury portfolio is held primarily for liquidity management and, in the case of derivatives, for market risk management. As at 4 April 2021 treasury assets represented 19.5% (2020: 17.0%) of total assets. There are no exposures to emerging markets, hedge funds or credit default swaps. The table below shows the classification of treasury asset balances.

 
Treasury asset balances 
                                                        2021    2020 
                                     ---------------  ------  ------ 
                                      Classification    GBPm    GBPm 
-----------------------------------  ---------------  ------  ------ 
                                           Amortised 
Cash                                            cost  16,693  13,748 
-----------------------------------  ---------------  ------  ------ 
Loans and advances to banks and            Amortised 
 similar institutions                           cost   3,660   3,636 
-----------------------------------  ---------------  ------  ------ 
Investment securities (note i)                 FVOCI  24,218  18,367 
-----------------------------------  ---------------  ------  ------ 
Investment securities (note i)                 FVTPL      12      12 
-----------------------------------  ---------------  ------  ------ 
                                           Amortised 
Investment securities                           cost   1,243   1,625 
-----------------------------------  ---------------  ------  ------ 
Liquidity and investment portfolio                    45,826  37,388 
----------------------------------------------------  ------  ------ 
Derivative instruments (note ii)               FVTPL   3,809   4,771 
-----------------------------------  ---------------  ------  ------ 
Treasury assets                                       49,635  42,159 
----------------------------------------------------  ------  ------ 
 

Notes :

i. Investment securities at FVOCI include GBP20 million (2020: GBP6 million) and investment securities at FVTPL include GBP12 million (2020: GBP12 million) which relate to investments not included within the Group's liquidity portfolio. These investments primarily relate to investments made in Fintech companies which are being held for long-term strategic purposes.

ii. Derivatives are classified as assets where their fair value is positive and liabilities where their fair value is negative. As at 4 April 2021, derivative liabilities were GBP1,622 million (2020: GBP1,924 million).

Investment activity remains focused on high quality liquid assets, including assets eligible for central bank operations. The size of the portfolio has increased predominantly in cash balances and government bond holdings. Derivatives are used to economically hedge financial risks inherent in core lending and funding activities and are not used for trading or speculative purposes.

Credit risk within the treasury portfolio arises from the instruments held and transacted by the Treasury function for operational, liquidity and investment purposes. In addition, counterparty credit risk arises from the use of derivatives to reduce exposure to market risks; these are only transacted with highly-rated organisations and are collateralised under market standard documentation.

There were no impairment losses for the year ended 4 April 2021 (2020: GBPnil). For financial assets held at amortised cost or at FVOCI, all exposures within the table below are classified as stage 1, reflecting the strong and stable credit quality of treasury assets.

 
Impairment provisions on treasury assets 
                                               2021                        2020 
                                    --------------------------  -------------------------- 
                                    Gross balances  Provisions  Gross balances  Provisions 
                                    --------------              --------------  ---------- 
                                              GBPm        GBPm            GBPm        GBPm 
----------------------------------  --------------  ----------  --------------  ---------- 
Loans and advances to banks 
 and similar institutions                    3,660           -           3,636           - 
----------------------------------  --------------  ----------  --------------  ---------- 
Investment securities - FVOCI               24,218           -          18,367           - 
----------------------------------  --------------  ----------  --------------  ---------- 
Investment securities - amortised 
 cost                                        1,243           -           1,625           - 
----------------------------------  --------------  ----------  --------------  ---------- 
 

Credit risk - Treasury assets (continued)

Liquidity and investment portfolio

The liquidity and investment portfolio of GBP45,826 million (2020: GBP37,388 million) comprises liquid assets and other securities as set out below.

 
Liquidity and investment portfolio by credit rating (note i) 
2021                                      AAA   AA   A  Other   UK  US  Europe  Japan  Other 
                                  ------  ---  ---      -----  ---      ------  -----  ----- 
                                    GBPm    %    %   %      %    %   %       %      %      % 
--------------------------------  ------  ---  ---      -----  ---      ------  -----  ----- 
Liquid assets: 
--------------------------------  ------  ---  ---      -----  ---      ------  -----  ----- 
Cash and reserves at central 
 banks                            16,693    -  100   --        100-          --            - 
--------------------------------  ------  ---  ---       ----  ---      ------   ----  ----- 
Government bonds (note ii)        20,310   28   60  12-         39  18      26     10      7 
--------------------------------  ------  ---  ---       ----  ---      ------  -----  ----- 
Supranational bonds                1,053   75   25   --          --          --          100 
--------------------------------  ------  ---  ---       ----  ---      ------   ----  ----- 
Covered bonds                      1,748  100-       --         62-         25-           13 
--------------------------------  ------  ---            ----  ---      ------   ----  ----- 
Residential mortgage backed 
 securities (RMBS)                   474  100-       --         72-         28-            - 
--------------------------------  ------  ---            ----  ---      ------   ----  ----- 
Asset backed securities (other)      301  100-       --         75-         25-            - 
--------------------------------  ------ 
Liquid assets total               40,579   22   72   6-         659         145            7 
--------------------------------  ------ 
Other securities (note iii): 
--------------------------------  ------  ---  ---      -----  ---      ------  -----  ----- 
RMBS FVOCI                           291  100-       --        100-          --            - 
--------------------------------  ------  ---            ----  ---      ------   ----  ----- 
RMBS amortised cost                1,243   83   14   3-        100-          --            - 
--------------------------------  ------  ---  ---       ----  ---      ------   ----  ----- 
Other investments (note iv)           53    -   38   -     62   62-         38-            - 
--------------------------------  ------ 
Other securities total             1,587   83   12   32         99-          1-            - 
--------------------------------  ------ 
Loans and advances to banks 
 and similar institutions          3,660    -   65  341         892          8-            1 
--------------------------------  ------ 
Total                             45,826   22   70   8-         688         135            6 
 
2020                                GBPm    %%       %%          %%          %%            % 
Liquid assets: 
Cash and reserves at central 
 banks                            13,748    -  100   --        100-          --            - 
Government bonds (note ii)        14,914   34   58   8-         47  25      167            5 
Supranational bonds                  983   87   13   --          --          --          100 
Covered bonds                      1,583  100-       --         68-         16-           16 
Residential mortgage backed 
 securities (RMBS)                   483  100-       --         72-         28-            - 
Asset backed securities (other)      351  100-       --         59-         41-            - 
Liquid assets total               32,062   26   70   4-         70  11       93            7 
Other securities (note iii): 
RMBS FVOCI                            17  100-       --        100-          --            - 
RMBS amortised cost                1,625   83   12   5-        100-          --            - 
Other investments (note iv)           48    -   62   -     38   38-         62-            - 
Other securities total             1,690   81   13   42         98-          2-            - 
Loans and advances to banks 
 and similar institutions          3,636    -   79  201         923          4-            1 
Total                             37,388   26   69   5-         73  10       93            5 
 

Notes:

i. Ratings used are obtained from Standard & Poor's (S&P) and from Moody's or Fitch if no S&P rating is available. For loans and advances to banks and similar institutions, internal ratings are used.

ii. Balances classified as government bonds include government guaranteed and agency bonds.

iii. Includes RMBS (UK buy to let and UK Non-conforming) not eligible for the Liquidity Coverage Ratio (LCR).

iv. Includes investment securities held at FVTPL of GBP12 million (2020: GBP12 million).

Credit risk - Treasury assets (continued)

Country exposures

This table summarises the exposure (shown at the balance sheet carrying value) to institutions outside the UK.

 
Country exposures 
2021                                                                           Loans and 
                   Government        Mortgage    Covered   Supranational        advances     Other 
                        Bonds          backed      bonds           bonds    to banks and    assets               Total 
                     (note i)      securities                                    similar 
                                                                            institutions 
                         GBPm            GBPm       GBPm            GBPm            GBPm      GBPm                GBPm 
Austria                   545               -          -               -               -         -                 545 
Belgium                   645               -          -               -               -         -                 645 
Finland                   606               -         24               -               -         -                 630 
France                  1,505               -        108               -             147        20               1,780 
Germany                 1,069               -         44               -             151        76               1,340 
Ireland                   154               -          -               -               -         -                 154 
Netherlands               503             133          -               -               -         -                 636 
Spain                       -               -          -               -               -         -                   - 
Total Eurozone          5,027             133        176               -             298        96               5,730 
USA                     3,722               -          -               -              80         -               3,802 
Japan                   2,116               -          -               -               -         -               2,116 
Rest of world 
 (note i)               1,510               -        494           1,053              28         -               3,085 
Total                  12,375             133        670           1,053             406        96              14,733 
 
2020                     GBPm            GBPm       GBPm            GBPm            GBPm      GBPm                GBPm 
Austria                   369               -          -               -               -         -                 369 
Belgium                   390               -          -               -               -         -                 390 
Finland                   381               -         25               -               -         -                 406 
France                    265               -         22               -               -        30                 317 
Germany                   639               -         31               -             162       144                 976 
Ireland                    44               -          -               -               -         -                  44 
Netherlands               194             133          -               -               -         -                 327 
Spain                       -               -          -               -               1         -                   1 
Total Eurozone          2,282             133         78               -             163       174               2,830 
USA                     3,703               -          -               -              94         -               3,797 
Japan                   1,024               -          -               -               -         -               1,024 
Rest of world 
 (note i)                 934               -        424             983              43         -               2,384 
Total                   7,943             133        502             983             300       174              10,035 
 

Note:

i. Rest of world exposure is to Canada, Denmark, Norway and Sweden (2020: Australia, Canada, Denmark, Norway and Sweden)

Credit risk - Treasury assets (continued)

Derivative financial instruments

Derivatives are used to manage exposure to market risks, and not for trading or speculative purposes, although the application of accounting rules can create volatility in the income statement in a given financial year. The fair value of derivative assets as at 4 April 2021 was GBP3.8 billion (2020: GBP4.8 billion) and the fair value of derivative liabilities was GBP1.6 billion (2020: GBP1.9 billion).

To comply with EU regulatory requirements, Nationwide, as a direct member of a central counterparty (CCP), has central clearing capability which it uses to clear standardised derivatives. Where derivatives are not cleared at a CCP they are transacted under the International Swaps and Derivatives Association (ISDA) Master Agreement. 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. CSAs are two-way agreements where both parties post collateral dependent on the exposure of the derivative. Collateral is paid or received on a regular basis (typically daily) to mitigate the mark to market exposures. Market standard CSA collateral allows GBP, EUR and USD cash, and in some cases, extends to high grade sovereign debt securities; both cash and securities are currently held as collateral by the Society.

Nationwide's CSA legal documentation for derivatives grants legal rights of set-off for transactions with the same counterparty. Accordingly, the credit risk associated with such positions is reduced to the extent that negative mark to market values offset positive mark to market values in the calculation of credit risk within each netting agreement.

Under the terms of CSA netting agreements, outstanding transactions with the same counterparty can be offset and settled on a net basis following a default, or another predetermined event. Under these arrangements, netting benefits of GBP1.4 billion (2020: GBP1.6 billion) were available and GBP2.4 billion (2020: GBP3.0 billion) of collateral was held.

This table shows the exposure to counterparty credit risk for derivative contracts after netting benefits and collateral.

 
Derivative credit exposure 
                                                     2021                           2020 
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 
 as reported on the balance sheet          742    3,052    15    3,809  1,470    3,291    10    4,771 
Netting benefits                         (249)  (1,187)   (4)  (1,440)  (481)  (1,157)  (10)  (1,648) 
Net current credit exposure                493    1,865    11    2,369    989    2,134     -    3,123 
Collateral (cash)                        (489)  (1,775)  (11)  (2,275)  (982)  (1,924)     -  (2,906) 
Collateral (securities)                      -     (84)     -     (84)      -     (91)     -     (91) 
Net derivative credit exposure               4        6     -       10      7      119     -      126 
 

Liquidity and funding risk

Summary

Liquidity risk is the risk that Nationwide is unable to meet its liabilities as they fall due and maintain member and external stakeholder confidence. Funding risk is the risk that Nationwide is unable to maintain diverse funding sources in wholesale and retail markets and manage excessive concentrations of funding types.

Liquidity and funding risks are managed within a comprehensive risk framework which includes policies, strategy, limit setting and monitoring, stress testing and robust governance controls. This framework ensures that Nationwide maintains stable and diverse funding sources and a sufficient holding of high-quality liquid assets such 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 throughout the year. This includes 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 average LCR over the 12 months ending 4 April 2021 increased to 159% (2020: 152%). The LCR as at 4 April 2021 was 165% (2020: 163%). Nationwide continues to manage its liquidity prudently, with its internal risk appetite well within regulatory requirements.

The position against the longer-term funding metric, the Net Stable Funding Ratio (NSFR) is also monitored. Based on current interpretations of expected regulatory requirements and guidance, the NSFR at 4 April 2021 was 141% (2020: 134%), well in excess of the expected 100% minimum future requirement.

Funding risk

Funding strategy

Nationwide's funding strategy is to remain predominantly retail funded, as set out below.

 
Funding profile 
Assets                                  2021   2020  Liabilities                      2021   2020 
                                       -----                                         ----- 
(note i)                               GBPbn  GBPbn                                  GBPbn  GBPbn 
                                                                                     ----- 
Retail mortgages                       190.7  188.6  Retail funding                  170.3  159.7 
Treasury assets (including liquidity 
 portfolio)                             45.8   37.4  Wholesale funding                59.5   62.3 
Commercial lending                       6.9    7.9  Other liabilities                 3.2    3.5 
Consumer lending                         3.9    4.5  Capital and reserves (note ii)   21.9   22.5 
Other assets                             7.6    9.6 
Total                                  254.9  248.0  Total                           254.9  248.0 
 

Notes:

i. Figures in the above table are stated net of impairment provisions where applicable.

ii. Includes all subordinated liabilities and subscribed capital.

At 4 April 2021, Nationwide's loan to deposit ratio, which represents loans and advances to customers divided by the total of shares and other deposits, was 115.3% (2020: 122.4%).

Liquidity and funding risk (continued)

Wholesale funding

The wholesale funding portfolio comprises a range of secured and unsecured instruments to ensure that a stable and diversified funding base is maintained across a range of instruments, currencies, maturities and investor types. Part of Nationwide's wholesale funding strategy is to remain active in core markets and currencies. A funding risk limit framework also ensures that a prudent funding mix and maturity concentration profile is maintained and limits the level of encumbrance to ensure enough contingent funding capacity is retained in the event of a stress.

Wholesale funding has decreased by GBP2.8 billion to GBP59.5 billion during the year. The decrease is primarily driven by GBP4.8 billion decrease in covered bonds, due to a debt buy-back exercise and maturities during the year, along with a decrease in short-term wholesale funding. This decrease was partially offset by increased repo activity. The wholesale funding ratio (on-balance sheet wholesale funding as a proportion of total funding liabilities) was 26.7% at 4 April 2021 (2020: 28.5%).

The table below sets out Nationwide's wholesale funding by currency.

 
Wholesale funding by currency 
                                                    2021                                       2020 
                                    GBP    EUR    USD  Other  Total    % of    GBP    EUR    USD  Other  Total    % of 
                                                                      total                                      total 
                                  GBPbn  GBPbn  GBPbn  GBPbn  GBPbn          GBPbn  GBPbn  GBPbn  GBPbn  GBPbn 
Repos                               4.2    0.8    2.9    0.2    8.1      14    0.5    0.1      -      -    0.6       1 
Deposits                            6.4    0.6      -      -    7.0      12    6.2    1.2    1.3      -    8.7      14 
Certificates of deposit             0.1      -      -      -    0.1       -    1.5    0.4    0.1      -    2.0       3 
Commercial paper                      -      -      -      -      -       -      -      -    1.6      -    1.6       3 
Covered bonds                       5.4    8.5    0.7    0.4   15.0      25    5.0   13.4    0.8    0.6   19.8      31 
Medium term notes                   2.0    3.2    3.4    0.6    9.2      15    1.9    2.5    2.2    0.6    7.2      12 
Securitisations                     2.0    0.5    0.4      -    2.9       5    2.2    0.9    1.1      -    4.2       7 
Term Funding Scheme with 
 additional 
 incentives for SMEs (TFSME)       16.4      -      -      -   16.4      28      -      -      -      -      -       - 
Term Funding Scheme (TFS)             -      -      -      -      -       -   17.0      -      -      -   17.0      27 
Other                               0.2    0.5    0.1      -    0.8       1    0.2    0.8    0.2      -    1.2       2 
Total                              36.7   14.1    7.5    1.2   59.5     100   34.5   19.3    7.3    1.2   62.3     100 
 

The residual maturity of wholesale funding, on a contractual maturity basis, is set out on the next page.

Liquidity and funding risk (continued)

 
Wholesale funding - residual maturity 
2021                       Not more    Over one   Over three    Over six    Subtotal    Over one  Over two  Total 
                           than one       month       months      months   less than    year but     years 
                              month     but not      but not     but not    one year    not more 
                                      more than    more than   more than                    than 
                                          three   six months    one year               two years 
                                         months 
                          ---------  ----------  -----------              ----------  ----------            ----- 
                              GBPbn       GBPbn        GBPbn       GBPbn       GBPbn       GBPbn     GBPbn  GBPbn 
------------------------ 
Repos                           7.9         0.2            -           -         8.1           -         -    8.1 
------------------------ 
Deposits                        4.6         0.7          1.6         0.1         7.0           -         -    7.0 
------------------------ 
Certificates of deposit         0.1           -            -           -         0.1           -         -    0.1 
------------------------ 
Commercial paper                  -           -            -           -           -           -         -      - 
------------------------ 
Covered bonds                     -           -            -         2.5         2.5         2.6       9.9   15.0 
------------------------ 
Medium term notes               0.2           -          0.6           -         0.8         2.0       6.4    9.2 
------------------------ 
Securitisations                 0.5           -            -         0.1         0.6         1.1       1.2    2.9 
------------------------ 
TFSME                             -           -            -           -           -           -      16.4   16.4 
------------------------ 
Other                             -           -            -         0.1         0.1         0.1       0.6    0.8 
Total                          13.3         0.9          2.2         2.8        19.2         5.8      34.5   59.5 
Of which secured                8.4         0.2            -         2.7        11.3         3.8      28.0   43.1 
------------------------ 
Of which unsecured              4.9         0.7          2.2         0.1         7.9         2.0       6.5   16.4 
% of total                     22.4         1.5          3.7         4.7        32.3         9.7      58.0  100.0 
------------------------ 
 
 
Wholesale funding - residual maturity 
2020                       Not more    Over one   Over three    Over six    Subtotal    Over one  Over two  Total 
                           than one       month       months      months   less than    year but     years 
                              month     but not      but not     but not    one year         not 
                                      more than    more than   more than               more than 
                                          three   six months    one year               two years 
                                         months 
                          ---------  ----------  -----------              ----------  ----------            ----- 
                              GBPbn       GBPbn        GBPbn       GBPbn       GBPbn       GBPbn     GBPbn  GBPbn 
------------------------ 
Repos                           0.6           -            -           -         0.6           -         -    0.6 
------------------------ 
Deposits                        5.2         1.6          1.9           -         8.7           -         -    8.7 
------------------------ 
Certificates of deposit         0.1         1.7          0.2           -         2.0           -         -    2.0 
------------------------ 
Commercial paper                  -         0.9          0.7           -         1.6           -         -    1.6 
------------------------ 
Covered bonds                     -           -          0.9         2.6         3.5         2.6      13.7   19.8 
------------------------ 
Medium term notes                 -           -            -         0.2         0.2         0.7       6.3    7.2 
------------------------ 
Securitisations                 0.3           -          0.5         0.4         1.2         0.7       2.3    4.2 
------------------------ 
TFS                               -           -            -         6.0         6.0        11.0         -   17.0 
------------------------ 
Other                             -           -            -           -           -         0.2       1.0    1.2 
Total                           6.2         4.2          4.2         9.2        23.8        15.2      23.3   62.3 
Of which secured                0.9         1.2          1.4         9.0        12.5        14.5      16.8   43.8 
------------------------ 
Of which unsecured              5.3         3.0          2.8         0.2        11.3         0.7       6.5   18.5 
% of total                     10.0         6.7          6.7        14.8        38.2        24.4      37.4  100.0 
------------------------ 
 

At 4 April 2021, cash, government bonds and supranational bonds included in the liquid asset buffer represented 157% of wholesale funding maturing in less than one year, assuming no rollovers (2020: 122%).

During the year, Nationwide fully repaid its GBP17.0 billion of TFS drawings and drew GBP16.4 billion from the TFSME, which has a four-year flexible maturity.

Liquidity and funding risk (continued)

Liquidity risk

Liquidity strategy

Sufficient liquid assets, both in terms of amount and quality, are held to meet daily cash flow needs as well as simulated stressed requirements driven by the Society's risk appetite and regulatory assessments. This includes prudent management of the currency mix of liquid assets to ensure there is no undue reliance on currencies not consistent with the profile of stressed outflows.

Liquid assets are held and managed centrally by the Treasury function. A high-quality liquidity portfolio is maintained, predominantly comprising reserves held at central banks and highly-rated debt securities issued by a restricted range of governments, central banks and supranationals.

The Society's risk appetite, as set by the Board, defines the size and mix of the liquid asset buffer, and is translated into a set of liquidity risk limits. The buffer composition is also influenced by other relevant considerations such as stress testing and regulatory requirements.

Liquid assets

The table below sets out the sterling equivalent fair value of the liquidity portfolio, by issuing currency. It includes off-balance sheet liquidity, such as securities received through reverse repurchase (repo) agreements, and excludes securities encumbered through repo agreements and for other purposes.

 
Liquid assets 
                                                  2021                                       2020 
                                  GBP    EUR    USD    JPY   Other  Total    GBP    EUR    USD    JPY   Other  Total 
                                                             (note                                      (note 
                                                                i)                                         i) 
                                GBPbn  GBPbn  GBPbn  GBPbn   GBPbn  GBPbn  GBPbn  GBPbn  GBPbn  GBPbn   GBPbn  GBPbn 
Cash and reserves at central 
 banks                           16.7      -      -      -       -   16.7   13.7      -      -      -       -   13.7 
Government bonds (note ii)        4.2    4.5    1.2    2.1     0.7   12.7    6.8    2.3    3.8    1.0     0.5   14.4 
Supranational bonds                 -    0.5    0.4      -       -    0.9    0.3    0.4    0.2      -       -    0.9 
Covered bonds                     0.5    1.1    0.1      -       -    1.7    0.5    1.0    0.1      -       -    1.6 
Residential mortgage backed 
 securities (RMBS) (note iii)     0.8    0.1      -      -       -    0.9    0.5    0.1    0.1      -       -    0.7 
Asset-backed securities and 
 other securities                 0.3    0.1      -      -       -    0.4    0.2    0.1      -      -       -    0.3 
Total                            22.5    6.3    1.7    2.1     0.7   33.3   22.0    3.9    4.2    1.0     0.5   31.6 
 

Notes:

i. Other currencies primarily consist of Canadian dollars.

ii. Balances classified as government bonds include government guaranteed and agency bonds.

iii. Balances include all RMBS held by the Society which can be monetised through sale or repo.

The average combined month end balance during the year of cash and reserves at central banks, and government and supranational bonds, was GBP42.1 billion (2020: GBP29.3 billion).

Nationwide also holds a portfolio of high quality, central bank eligible covered bonds, RMBS and asset-backed securities. Other securities are held that are not eligible for central bank operations but can be monetised through repurchase agreements with third parties or through sale.

During the year, Nationwide set its first Environmental, Social and Governance (ESG) Investment policy for treasury assets. This includes annual investment targets with the aim of holding GBP1.5 billion of ESG assets by 4 April 2023. Nationwide has met its 2021 target of GBP750 million. Nationwide's criteria for ESG assets are currently restricted to bonds issued by Multilateral Development Banks. ESG investment criteria are subject to ongoing review.

Liquidity and funding risk (continued)

Nationwide undertakes securities financing transactions in the form of repurchase agreements. This demonstrates the liquid nature of the assets held in its liquid asset buffer as well as satisfying regulatory requirements. Cash is borrowed in return for pledging assets as collateral and because settlement is on a simultaneous 'delivery versus payment' basis, the main credit risk arises from intra-day changes in the value of the collateral. This is largely mitigated by Nationwide's collateral management processes.

Repo market capacity is regularly assessed and tested to ensure there is sufficient capacity to monetise the liquid asset buffer rapidly in a stress.

For contingent purposes, Nationwide pre-positions unencumbered mortgage assets at the Bank of England which can be used in the Bank of England's liquidity operations if market liquidity is severely disrupted.

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 maturity (note i) 
2021             Due less         Due         Due         Due         Due         Due         Due   Due after    Total 
                     than     between     between     between     between     between     between        more 
                one month     one and       three     six and    nine and     one and     two and        than 
                    (note       three         and        nine      twelve   two years        five        five 
                      ii)      months  six months      months      months                   years       years 
               ----------  ----------  ----------  ----------              ----------  ----------  ---------- 
                     GBPm        GBPm        GBPm        GBPm        GBPm        GBPm        GBPm        GBPm     GBPm 
                                                   ----------              ----------  ----------  ---------- 
Financial 
assets 
               ----------  ----------  ----------  ----------              ----------  ----------  ---------- 
Cash               16,693           -           -           -           -           -           -           -   16,693 
               ----------  ----------  ----------  ----------              ----------  ----------  ---------- 
Loans and 
 advances to 
 banks 
 and similar 
 institutions       2,815           -           -           -           -           -           -         845    3,660 
               ----------  ----------  ----------  ----------              ----------  ----------  ---------- 
Investment 
 securities            39         136         197          47         137         938       8,101      15,878   25,473 
               ----------  ----------  ----------  ----------              ----------  ----------  ---------- 
Derivative 
 financial 
 instruments          119          26          39          62         475         331       1,183       1,574    3,809 
               ----------  ----------  ----------  ----------              ----------  ----------  ---------- 
Fair value 
 adjustment 
 for 
 portfolio 
 hedged risk            4          23          62          59          83         295         322          98      946 
               ----------  ----------  ----------  ----------              ----------  ----------  ---------- 
Loans and 
 advances to 
 customers          2,616       1,515       2,188       2,204       2,128       8,462      23,359     159,075  201,547 
Total 
 financial 
 assets            22,286       1,700       2,486       2,372       2,823      10,026      32,965     177,470  252,128 
 
Financial 
liabilities 
               ----------  ----------  ----------  ----------              ----------  ----------  ---------- 
Shares            149,985       1,976       2,501       2,085       2,312       6,864       3,495       1,095  170,313 
               ----------  ----------  ----------  ----------              ----------  ----------  ---------- 
Deposits from 
 banks and 
 similar 
 institutions      10,417         166           -           9           -           -      16,430           -   27,022 
Of which repo       7,984         165           -           -           -           -           -           -    8,149 
               ----------  ----------  ----------  ----------              ----------  ----------  ---------- 
Of which 
 TFSME                  -           -           -           -           -           -      16,430           -   16,430 
Other 
 deposits           2,234         642       1,568          34          24          15           5           -    4,522 
               ----------  ----------  ----------  ----------              ----------  ----------  ---------- 
Fair value 
 adjustment 
 for 
 portfolio 
 hedged risk            1           6           3           -           1           9           5           -       25 
               ----------  ----------  ----------  ----------              ----------  ----------  ---------- 
Secured 
 funding - 
 ABS and 
 covered 
 bonds                467          23          29         892       1,780       3,715       5,816       5,783   18,505 
               ----------  ----------  ----------  ----------              ----------  ----------  ---------- 
Senior 
 unsecured 
 funding              202          48         561           -           5       2,053       5,072       1,477    9,418 
               ----------  ----------  ----------  ----------              ----------  ----------  ---------- 
Derivative 
 financial 
 instruments           50           3          16          10          10         144         443         946    1,622 
               ----------  ----------  ----------  ----------              ----------  ----------  ---------- 
Subordinated 
 liabilities           29           -          29           3           -           -       3,114       4,400    7,575 
               ----------  ----------  ----------  ----------              ----------  ----------  ---------- 
Subscribed 
 capital 
 (note iii)             1           1           1           -           -           -           -         240      243 
Total 
 financial 
 liabilities      163,386       2,865       4,708       3,033       4,132      12,800      34,380      13,941  239,245 
Off-balance 
 sheet 
 commitments 
 (note iv)         13,259           -           -           -           -           -           -           -   13,259 
Net liquidity 
 difference     (154,359)     (1,165)     (2,222)       (661)     (1,309)     (2,774)     (1,415)     163,529    (376) 
Cumulative 
 liquidity 
 difference     (154,359)   (155,524)   (157,746)   (158,407)   (159,716)   (162,490)   (163,905)       (376) 
 

Liquidity and funding risk (continued)

 
Residual maturity (note i) 
2020             Due less         Due         Due         Due         Due         Due         Due   Due after    Total 
                     than     between     between     between     between     between     between        more 
                one month     one and       three     six and    nine and     one and     two and        than 
                    (note       three         and        nine      twelve   two years        five        five 
                      ii)      months  six months      months      months                   years       years 
               ----------  ----------  ----------                          ----------  ----------  ----------  ------- 
                     GBPm        GBPm        GBPm        GBPm        GBPm        GBPm        GBPm        GBPm     GBPm 
               ----------  ----------  ----------  ----------              ----------  ----------  ----------  ------- 
Financial 
assets 
               ----------  ----------  ----------  ----------              ----------  ----------  ----------  ------- 
Cash               13,748           -           -           -           -           -           -           -   13,748 
               ----------  ----------  ----------  ----------              ----------  ----------  ----------  ------- 
Loans and 
 advances to 
 banks 
 and similar 
 institutions       2,832           -           -           -           -           -           -         804    3,636 
               ----------  ----------  ----------  ----------              ----------  ----------  ----------  ------- 
Investment 
 securities            18         495         376         107         137         373       4,715      13,783   20,004 
               ----------  ----------  ----------  ----------              ----------  ----------  ----------  ------- 
Derivative 
 financial 
 instruments           33          77         347          35         212         862         978       2,227    4,771 
               ----------  ----------  ----------  ----------              ----------  ----------  ----------  ------- 
Fair value 
 adjustment 
 for 
 portfolio 
 hedged risk           25          65         124         150         122         388         554         346    1,774 
               ----------  ----------  ----------  ----------              ----------  ----------  ----------  ------- 
Loans and 
 advances to 
 customers          2,856       1,395       2,067       2,152       2,129       8,629      23,624     158,126  200,978 
Total 
 financial 
 assets            19,512       2,032       2,914       2,444       2,600      10,252      29,871     175,286  244,911 
 
Financial 
liabilities 
               ----------  ----------  ----------  ----------              ----------  ----------  ----------  ------- 
Shares            139,870       1,205       1,905       2,003       1,932       5,219       6,377       1,180  159,691 
               ----------  ----------  ----------  ----------              ----------  ----------  ----------  ------- 
Deposits from 
 banks and 
 similar 
 institutions       3,610       1,202           -       2,000       4,000      11,000           -           -   21,812 
Of which repo         638           -           -           -           -           -           -           -      638 
               ----------  ----------  ----------  ----------              ----------  ----------  ----------  ------- 
Of which TFS            -           -           -       2,000       4,000      11,000           -           -   17,000 
Other 
 deposits           2,164         377       1,881          17          23          10          10           -    4,482 
               ----------  ----------  ----------  ----------              ----------  ----------  ----------  ------- 
Fair value 
 adjustment 
 for 
 portfolio 
 hedged risk            5           2           1           2           -           7          12           -       29 
               ----------  ----------  ----------  ----------              ----------  ----------  ----------  ------- 
Secured 
 funding - 
 ABS and 
 covered 
 bonds                242          26       1,475         548       2,474       3,425      10,062       6,703   24,955 
               ----------  ----------  ----------  ----------              ----------  ----------  ----------  ------- 
Senior 
 unsecured 
 funding              150       2,673         824           -         117         750       3,866       2,628   11,008 
               ----------  ----------  ----------  ----------              ----------  ----------  ----------  ------- 
Derivative 
 financial 
 instruments          152          95          12          33          44          29         266       1,293    1,924 
               ----------  ----------  ----------  ----------              ----------  ----------  ----------  ------- 
Subordinated 
 liabilities           32           -         729           2           -           -       2,577       5,977    9,317 
               ----------  ----------  ----------  ----------              ----------  ----------  ----------  ------- 
Subscribed 
 capital 
 (note iii)             1           1           1           -           -           -           -         250      253 
Total 
 financial 
 liabilities      146,226       5,581       6,828       4,605       8,590      20,440      23,170      18,031  233,471 
Off-balance 
 sheet 
 commitments 
 (note iv)         11,416           -           -           -           -           -           -           -   11,416 
Net liquidity 
 difference     (138,130)     (3,549)     (3,914)     (2,161)     (5,990)    (10,188)       6,701     157,255       24 
Cumulative 
 liquidity 
 difference     (138,130)   (141,679)   (145,593)   (147,754)   (153,744)   (163,932)   (157,231)          24        - 
               ----------  ----------  ----------  ----------              ----------  ----------  ----------  ------- 
 

Notes:

i. The analysis excludes certain non-financial assets (including property, plant and equipment, intangible assets, other assets, deferred tax assets and accrued income and prepaid expenses) and non-financial liabilities (including provisions for liabilities and charges, accruals and deferred income, current tax liabilities and other liabilities). The retirement benefit surplus and lease liabilities have also been excluded.

ii. Due less than one month includes amounts repayable on demand.

iii. The principal amount for undated subscribed capital is included within the due after more than five years column.

iv. Off-balance sheet commitments include amounts payable on demand for undrawn loan commitments, customer overpayments on residential mortgages where the borrower can draw down the amount overpaid, and commitments to acquire financial assets.

In practice, customer behaviours mean that liabilities are often retained for longer than their contractual maturities and assets are repaid earlier. This gives rise to funding mismatches on the balance sheet. The balance sheet structure and risks are managed and monitored by Nationwide's Assets and Liabilities Committee (ALCO). Judgement and past behavioural performance of each asset and liability class are used to forecast likely cash flow requirements.

Liquidity and funding risk (continued)

The 4 April 2021 table above includes the impact of a debt buy-back exercise that involved the Society repurchasing seven outstanding series of covered bonds totalling GBP2 billion (GBP equivalent). This exercise followed the issuance of senior unsecured debt predominantly for the purpose of securing our credit rating with Moody's. The impact of unwinding associated derivative financial instruments is also reflected.

Financial liabilities - gross undiscounted contractual cash flows

The tables below provide an analysis of gross contractual cash flows. The totals differ from the analysis of residual maturity as they include estimated future interest payments, calculated using balances outstanding at the balance sheet date, contractual maturities and appropriate forward-looking interest rates.

Amounts are allocated to the relevant maturity band based on the timing of individual contractual cash flows.

 
Gross contractual cash flows 
2021                Due less        Due        Due        Due         Due         Due         Due  Due after     Total 
                        than    between    between    between     between     between     between       more 
                   one month    one and      three    six and    nine and     one and     two and       than 
                       (note      three        and       nine      twelve   two years        five       five 
                          i)     months        six     months      months                   years      years 
                                            months 
                  ----------  ---------  ---------  ---------              ----------  ----------  --------- 
                        GBPm       GBPm       GBPm       GBPm        GBPm        GBPm        GBPm       GBPm      GBPm 
                  ----------  ---------  ---------  ---------              ----------  ----------  --------- 
Shares               149,985      2,017      2,540      2,122       2,346       6,966       3,631      1,095   170,702 
Deposits from 
 banks and 
 similar 
 institutions         10,417        170          4         13           4          16      16,455          -    27,079 
Other deposits         2,234        643      1,568         34          24          15           5          -     4,523 
Secured funding 
 - ABS and 
 covered bonds           469         32         51        918       1,860       3,883       6,119      5,899    19,231 
Senior unsecured 
 funding                 203         51        588          3          64       2,172       5,298      1,528     9,907 
Subordinated 
 liabilities              32          -         91         39          86         248       3,606      4,765     8,867 
Subscribed 
 capital (note 
 ii)                       1          1          4          3           4          13          43        247       316 
Total 
 non-derivative 
 financial 
 liabilities         163,341      2,914      4,846      3,132       4,388      13,313      35,157     13,534   240,625 
 
Derivative 
financial 
liabilities: 
    Gross 
     settled 
     derivative 
     outflows        (2,803)      (337)      (416)      (199)       (571)     (3,584)     (8,449)    (6,752)  (23,111) 
    Gross 
     settled 
     derivative 
     inflows           2,798        333        385        178         553       3,371       8,136      6,461    22,215 
    Gross 
     settled 
     derivatives 
     - net flows         (5)        (4)       (31)       (21)        (18)       (213)       (313)      (291)     (896) 
    Net settled 
     derivative 
     liabilities       (104)      (175)      (183)      (189)       (222)       (583)     (1,037)      (798)   (3,291) 
Total derivative 
 financial 
 liabilities           (109)      (179)      (214)      (210)       (240)       (796)     (1,350)    (1,089)   (4,187) 
Total financial 
 liabilities         163,232      2,735      4,632      2,922       4,148      12,517      33,807     12,445   236,438 
 
Off-balance 
 sheet 
 commitments 
 (note iii)           13,259          -          -          -           -           -           -          -    13,259 
Total financial 
 liabilities 
 including 
 off-balance 
 sheet 
 commitments         176,491      2,735      4,632      2,922       4,148      12,517      33,807     12,445   249,697 
 

Liquidity and funding risk (continued)

 
Gross contractual cash flows 
2020                Due less        Due        Due        Due         Due         Due         Due  Due after     Total 
                        than    between    between    between     between     between     between       more 
                   one month    one and      three    six and    nine and     one and     two and       than 
                       (note      three        and       nine      twelve   two years        five       five 
                          i)     months        six     months      months                   years      years 
                                            months 
                  ----------  ---------  ---------                         ----------  ----------  ---------  -------- 
                        GBPm       GBPm       GBPm       GBPm        GBPm        GBPm        GBPm       GBPm      GBPm 
                                                    ---------              ----------  ----------  ---------  -------- 
Shares               139,870      1,260      1,958      2,052       1,977       5,358       6,597      1,180   160,252 
                  ----------  ---------  ---------  ---------              ----------  ----------  ---------  -------- 
Deposits from 
 banks and 
 similar 
 institutions          3,610      1,206          4      2,004       4,003      11,005           -          -    21,832 
                  ----------  ---------  ---------  ---------              ----------  ----------  ---------  -------- 
Other deposits         2,164        382      1,883         17          23          10          10          -     4,489 
                  ----------  ---------  ---------  ---------              ----------  ----------  ---------  -------- 
Secured funding 
 - ABS and 
 covered bonds           247         34      1,506        581       2,644       3,589      10,526      6,609    25,736 
                  ----------  ---------  ---------  ---------              ----------  ----------  ---------  -------- 
Senior unsecured 
 funding                 151      2,681        871          4         182         890       4,145      2,621    11,545 
                  ----------  ---------  ---------  ---------              ----------  ----------  ---------  -------- 
Subordinated 
 liabilities              36          -        806         43          96         276       3,188      6,304    10,749 
                  ----------  ---------  ---------  ---------              ----------  ----------  ---------  -------- 
Subscribed 
 capital (note 
 ii)                       1          1          4          3           4          13          40        255       321 
Total 
 non-derivative 
 financial 
 liabilities         146,079      5,564      7,032      4,704       8,929      21,141      24,506     16,969   234,924 
 
Derivative 
financial 
liabilities: 
                  ----------  ---------  ---------  ---------              ----------  ----------  ---------  -------- 
    Gross 
     settled 
     derivative 
     outflows        (1,124)      (967)      (791)      (165)       (665)       (427)     (6,495)    (5,915)  (16,549) 
                  ----------  ---------  ---------  ---------              ----------  ----------  ---------  -------- 
    Gross 
     settled 
     derivative 
     inflows           1,101        928        771        142         621         387       6,146      5,605    15,701 
    Gross 
     settled 
     derivatives 
     - net flows        (23)       (39)       (20)       (23)        (44)        (40)       (349)      (310)     (848) 
                  ----------  ---------  ---------  ---------              ----------  ----------  ---------  -------- 
    Net settled 
     derivative 
     liabilities        (70)      (175)      (174)      (258)       (300)       (865)     (1,373)    (1,224)   (4,439) 
Total derivative 
 financial 
 liabilities            (93)      (214)      (194)      (281)       (344)       (905)     (1,722)    (1,534)   (5,287) 
Total financial 
 liabilities         145,986      5,350      6,838      4,423       8,585      20,236      22,784     15,435   229,637 
 
Off-balance 
 sheet 
 commitments 
 (note iii)           11,416          -          -          -           -           -           -          -    11,416 
Total financial 
 liabilities 
 including 
 off-balance 
 sheet 
 commitments         157,402      5,350      6,838      4,423       8,585      20,236      22,784     15,435   241,053 
                  ----------  ---------  ---------  ---------              ----------  ----------  ---------  -------- 
 

Notes:

i. Due less than one month includes amounts repayable on demand.

ii. The principal amount for undated subscribed capital is included within the due more than five years column.

iii. Off-balance sheet commitments include amounts payable on demand for undrawn 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

Encumbrance arises where assets are pledged as collateral against secured funding and other collateralised obligations and therefore cannot be used for other purposes. The majority of asset encumbrance arises from the use of prime mortgage pools to collateralise the Covered Bond and securitisation programmes (further information is included in note 10 to the financial statements) and from participation in the Bank of England's TFS and TFSME.

Certain unencumbered assets are readily available to secure funding or meet collateral requirements. These include prime mortgages and cash and securities held in the liquid asset buffer. Other unencumbered assets, such as non-prime mortgages, are capable of being encumbered with a degree of further management action. Assets which do not fall into either of these categories are classified as not being capable of being encumbered.

Liquidity and funding risk (continued)

An analysis of Nationwide's encumbered and unencumbered on-balance sheet assets is set out below. This disclosure is not intended to identify assets that would be available in the event of a resolution or bankruptcy.

 
Asset encumbrance 
2021                  Assets encumbered as a result                    Other assets (comprising assets encumbered               Total 
                    of transactions with counterparties                                  at the 
                         other than central banks                         central bank and unencumbered assets) 
                                                                                         Assets not positioned 
                                                                                           at the central bank 
                                                             Assets 
                                                             positioned 
                                                             at 
                                                             the central                   Other 
                 As a                                        bank                          assets 
                 result                                      (i.e.           Readily       that are 
                 of        As a result                       prepositioned   available     capable      Cannot 
                 covered   of                                plus            for           of being     be 
                 bonds     securitisations   Other   Total   encumbered)     encumbrance   encumbered   encumbered     Total 
                    GBPm              GBPm    GBPm    GBPm            GBPm          GBPm         GBPm         GBPm      GBPm     GBPm 
Cash                 628               921       -   1,549               -        14,963            -          181    15,144   16,693 
Loans and 
 advances to 
 banks 
 and similar 
 institutions          -                 -   1,218   1,218           1,376             -            -        1,066     2,442    3,660 
Investment 
 securities            -                 -   8,621   8,621               -        15,676            -        1,176    16,852   25,473 
Derivative 
 financial 
 instruments           -                 -       -       -               -             -            -        3,809     3,809    3,809 
Loans and 
 advances to 
 customers        23,611            12,779       -  36,390          69,321        43,970       51,866            -   165,157  201,547 
Non-financial 
 assets                -                 -       -       -               -             -            -        2,786     2,786    2,786 
Other 
 financial 
 assets                -                 -       -       -               -             -            -          946       946      946 
Total             24,239            13,700   9,839  47,778          70,697        74,609       51,866        9,964   207,136  254,914 
 
 
2020                                 GBPm    GBPm   GBPm    GBPm    GBPm    GBPm    GBPm    GBPm     GBPm     GBPm 
Cash                                  600     657      -   1,257       -  12,193       -     298   12,491   13,748 
Loans and advances to banks 
 and similar institutions               -       -  1,555   1,555   1,355       -       -     726    2,081    3,636 
Investment securities                   -       -  2,506   2,506       -  16,006       -   1,492   17,498   20,004 
Derivative financial instruments        -       -      -       -       -       -       -   4,771    4,771    4,771 
Loans and advances to customers    28,003  15,177      -  43,180  42,217  65,687  49,894       -  157,798  200,978 
Non-financial assets                    -       -      -       -       -       -       -   3,130    3,130    3,130 
Other financial assets                  -       -      -       -       -       -       -   1,774    1,774    1,774 
Total                              28,603  15,834  4,061  48,498  43,572  93,886  49,894  12,191  199,543  248,041 
 

Liquidity and funding risk (continued)

External credit ratings

The Group's long-term and short-term credit ratings are shown in the table below. The long-term rating for both Standard & Poor's (S&P) and Moody's is the senior preferred rating. The long-term rating for Fitch is the senior non-preferred rating.

 
Credit ratings 
                       Senior  Short-term          Senior  Tier 2     Date of last   Outlook 
                    preferred               non-preferred            rating action 
                                                                    / confirmation 
Standard & Poor's           A         A-1            BBB+     BBB     January 2021    Stable 
Moody's                    A1         P-1            Baa2    Baa2        July 2020    Stable 
Fitch                      A+         F-1               A    BBB+    February 2021  Negative 
 

In January 2021, Standard & Poor's affirmed Nationwide's Issuer Credit Rating and stable outlook.

In July 2020, Moody's revised Nationwide's outlook to stable from negative, following Nationwide's EUR1 billion senior preferred issuance.

In September 2020 and February 2021, Fitch affirmed Nationwide's Long-Term Issuer Default Rating and negative outlook.

The table below sets out the amount of additional collateral Nationwide would need to provide in the event of a one and two notch downgrade by external credit rating agencies.

 
 
        Cumulative adjustment   Cumulative adjustment 
                          for                     for 
        a one notch downgrade   a two notch downgrade 
                        GBPbn                   GBPbn 
2021                      0.8                     2.3 
2020                      0.2                     3.8 
 

The contractually required cash outflow would not necessarily match the actual cash outflow as a result of management actions that could be taken to reduce the impact of the downg

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. Capital is held to protect members, cover inherent risks, provide a buffer for stress events and support the business strategy. In assessing the adequacy of capital resources, risk appetite is considered in the context of the material risks to which Nationwide is exposed and the appropriate strategies required to manage those risks.

Capital position

The capital disclosures included in this report are in line with CRD IV and on an end point basis with IFRS 9 transitional arrangements applied. This assumes that all CRD IV requirements are in force during the period, with no CRD IV transitional provisions permitted. In addition, the disclosures are on a consolidated Group basis, including all subsidiary entities, unless otherwise stated.

 
Capital ratios 
                                                 2021     2020 
Solvency                                            %        % 
                                    -----------------  ------- 
Common Equity Tier 1 (CET1) ratio                36.4     31.9 
                                    -----------------  ------- 
Total Tier 1 ratio                               40.5     33.7 
                                    -----------------  ------- 
Total regulatory capital ratio                   49.1     43.6 
                                    -----------------  ------- 
Leverage                                         GBPm     GBPm 
                                    -----------------  ------- 
UK leverage exposure                          248,402  240,707 
                                    -----------------  ------- 
CRR leverage exposure                         265,079  254,388 
                                    -----------------  ------- 
Tier 1 capital                                 13,343   11,258 
                                    -----------------  ------- 
                                                    %% 
                                    ----------------- ------ 
UK leverage ratio                                 5.4      4.7 
                                    -----------------  ------- 
CRR leverage ratio                                5.0      4.4 
                                    -----------------  ------- 
 

Risk-based capital ratios remain in excess of regulatory requirements with the CET1 ratio of 36.4% (2020: 31.9%) above Nationwide's CET1 capital requirement of 12.7%. This includes a minimum CET1 capital requirement of 9.2% (Pillar 1 and Pillar 2A) and the CRD IV combined buffer requirements of 3.5% of RWAs.

The increase in the CET1 ratio results from an increase in CET1 capital of GBP1.3 billion and a reduction in RWAs of GBP0.4 billion. The CET1 capital increase was driven by GBP0.6 billion profit after tax and a GBP0.1 billion increase in IFRS 9 transitional capital relief. In addition, GBP0.6 billion of software intangible assets are no longer deducted from capital due to a regulatory change; the PRA is expected to reverse this change in future as explained further below. The reduction in RWAs was driven by unsecured loan RWAs linked to decreasing total loan balance and reduced probability of default (PD). In addition, modifications were made to risk weights for small and medium-sized enterprises (SMEs) and infrastructure loans in line with EU Regulation 2020/873, culminating in a reduction of commercial loan RWAs. Further detail is included in the total regulatory capital table and risk weighted asset table on pages 75 and 76.

On 27 June 2020, EU Regulation 2020/873 came into force amending CRR and CRR II in a number of areas in response to the Covid-19 pandemic, including an extension to the IFRS 9 relief on increases in Stage 1 and Stage 2 expected credit losses from 1 January 2020 for two years. The Covid-19 package also brought forward the implementation date of the application of certain more favourable treatments that had previously been due to apply from June 2021. As noted above, this included a reduction in risk weights for exposures to SMEs and for infrastructure lending.

Also included in the package was the option to temporarily remove specific fair value gains or losses, accrued since 31 December 2019, from CET1 capital resources. This primarily relates to central government debt and is in place to neutralise any potential impact of fair value movements on capital ratios. Nationwide has opted to apply the temporary treatment, and as an unrealised gain was recognised in the period, a GBP41 million deduction to CET1 capital was applied.

Solvency risk (continued)

On 23 December 2020, EU Regulation 2020/2176 also came into force providing an amendment to the deduction of intangible assets from CET1 items for 'prudently valued software assets, the value of which is not negatively affected by resolution, insolvency or liquidation of the institution', and instead calculate a risk weighted asset value of 100% to those assets not deducted. The PRA confirmed as part of CP5/21 'Implementation of Basel standards' that they found no credible evidence that software assets would absorb losses effectively in a stress. Consequently, they have confirmed their intention to modify the applicable regulation and reverse this change by 1 January 2022. If the revised rules had not been applied, Nationwide's CET1 ratio and UK Leverage ratio at 4 April 2021 would have been 35.4% and 5.2% respectively.

CRD IV requires firms to calculate a leverage ratio, which is non-risked based, to supplement risk-based capital requirements. The UK leverage ratio increased to 5.4% (2020: 4.7%), with Tier 1 capital increasing by GBP2.1 billion as a result of the CET1 capital movements outlined above and the issuance of GBP0.7 billion of AT1 capital instruments in June 2020. Partially offsetting the impact of this, there was an increase in UK leverage exposure of GBP7.7 billion, primarily as a result of net retail lending and treasury investments in the period. This position remains in excess of Nationwide's capital requirement of 3.6%, which comprises a minimum Tier 1 capital requirement of 3.25% and buffer requirements of 0.35%. The buffer requirement reflects a 0% countercyclical leverage ratio buffer announced as part of the Bank of England responses to the impacts of Covid-19 made on 11 March 2020.

The CRR leverage ratio increased by 0.6%, closing at 5.0% (2020: 4.4%). The difference between the Capital Requirements Regulation (CRR) leverage ratio and the UK leverage ratio is driven by the exclusion of qualifying central bank claims from the UK leverage exposure measure as per the PRA Rulebook.

Leverage requirements continue to be Nationwide's binding capital constraint, as they are in excess of risk-based requirements, and it is expected that this will continue despite the impact of IRB mortgage model changes, proposed mortgage risk weight floors in 2022 and Basel III reforms on risk-based capital requirements in 2023 (see the 'regulatory developments' section below). Our internal assessment, however, is still subject to PRA IRB mortgage model approval and the forthcoming PRA consultation on the Basel III reforms. The expected impact of the reforms on Nationwide's UK leverage ratio is negligible. The risk of excessive leverage is managed through regular monitoring and reporting of the leverage ratio, which forms part of risk appetite.

Solvency risk (continued)

The table below shows how the components of members interest and equity contribute to total regulatory capital calculated on an end-point basis and so does not include non-qualifying instruments.

 
Total regulatory capital 
                                                              2021     2020 
                                                              GBPm     GBPm 
General reserve                                             11,140   10,749 
                                                           ------- 
Core capital deferred shares (CCDS)                          1,334    1,325 
                                                           ------- 
Revaluation reserve                                             44       48 
                                                           ------- 
Fair value through other comprehensive income (FVOCI) 
 reserve                                                       110     (17) 
                                                           ------- 
Cashflow hedge and other hedging reserves                      149      264 
                                                           ------- 
Regulatory adjustments and deductions: 
                                                           ------- 
   FVOCI reserve temporary relief (note i)                    (41)        - 
                                                           ------- 
   Cashflow hedge and other hedging reserves (note ii)       (149)    (264) 
                                                           ------- 
   Foreseeable distributions (note iii)                       (71)     (61) 
                                                           ------- 
   Prudent valuation adjustment (note iv)                     (39)     (54) 
                                                           ------- 
   Own credit and debit valuation adjustments (note v)         (3)      (3) 
                                                           ------- 
   Intangible assets (note vi)                               (525)  (1,200) 
                                                           ------- 
   Goodwill (note vi)                                         (12)     (12) 
                                                           ------- 
   Defined-benefit pension fund asset (note vi)              (112)    (190) 
                                                           ------- 
   Excess of regulatory expected losses over impairment 
    provisions (note vii)                                      (1)        - 
                                                           ------- 
   IFRS 9 transitional arrangements (note viii)                183       80 
                                                           ------- 
   Total regulatory adjustments and deductions               (770)  (1,704) 
                                                           ------- 
Common Equity Tier 1 capital                                12,007   10,665 
                                                           ------- 
Other equity instruments (Additional Tier 1)                 1,336      593 
                                                           ------- 
Total Tier 1 capital                                        13,343   11,258 
                                                           ------- 
Dated subordinated debt (note ix)                            2,833    3,265 
                                                           ------- 
Excess of impairment provisions over regulatory expected 
 losses (note vii)                                             144      113 
                                                           ------- 
IFRS 9 transitional arrangements (note viii)                 (144)     (58) 
                                                           ------- 
Tier 2 capital                                               2,833    3,320 
                                                           ------- 
 
Total regulatory capital                                    16,176   14,578 
                                                           ------- 
 

Notes:

i. Includes a temporary adjustment to mitigate the impact of volatility in central government debt on capital ratios, in line with the Covid-19 banking package.

ii. In accordance with CRR article 33, institutions shall not include the fair value reserves related to gains or losses on cash flow hedges of financial instruments that are not valued at fair value.

iii. Foreseeable distributions in respect of CCDS and AT1 securities are deducted from CET1 capital under CRD IV.

iv. A prudent valuation adjustment (PVA) is applied in respect of fair valued instruments as required under regulatory capital rules.

v. 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 our own credit standing and risk, as per CRD IV rules.

vi. Intangible, goodwill and defined-benefit pension fund asset (excluding applicable software assets) are deducted from capital resources after netting associated deferred tax liabilities.

vii. Where capital expected loss exceeds accounting provisions, the excess balance is removed from CET1 capital, gross of tax. In contrast, where provisions exceed capital expected loss, the excess amount is added to Tier 2 capital, gross of tax. This calculation is not performed for equity exposures, in line with Article 159 of CRR. The expected loss amounts for equity exposures are deducted from CET1 capital, gross of tax.

viii. The transitional adjustments to capital resources apply scaled relief due to the impact of the introduction of IFRS 9 and increases in expected credit losses due to the Covid-19 pandemic.

ix. 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.

Risk report (continued)

Solvency risk (continued)

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 minimum requirement for own funds and eligible liabilities (MREL) and provided firms with indicative MREL. From 1 January 2020, Nationwide is required to hold twice the minimum capital requirements (6.5% of UK leverage exposure), plus the applicable capital requirement buffers, which amount to 0.35% of UK leverage exposure.

At 4 April 2021, total MREL resources were equal to 8.5% (2020: 8.4%) of UK leverage ratio exposure, in excess of the 2021 loss-absorbing requirement of 6.85% described above.

Risk weighted assets

The table below shows the breakdown of risk weighted assets (RWAs) by risk type and business activity. Market risk has been set to zero as permitted by the CRR, as the exposure is below the threshold of 2% of own funds.

 
Risk weighted assets 
                                                 2021                                  2020 
                                 Credit Risk  Operational  Total Risk  Credit Risk  Operational  Total Risk 
                                    (note i)   Risk (note    Weighted     (note i)   Risk (note    Weighted 
                                                      ii)      Assets                       ii)      Assets 
                                        GBPm         GBPm        GBPm         GBPm         GBPm        GBPm 
Retail mortgages                      14,523        2,966      17,489       14,498        3,145      17,643 
Retail unsecured lending               5,503          965       6,468        6,029          887       6,916 
Commercial loans                       2,671          116       2,787        3,183          143       3,326 
Treasury                               1,588          327       1,915        1,541          304       1,845 
Counterparty credit risk (note 
 iii)                                  1,491            -       1,491        1,619            -       1,619 
Other (note iv)                        2,365          455       2,820        1,783          267       2,050 
Total                                 28,141        4,829      32,970       28,653        4,746      33,399 
 

Notes:

i. This column includes credit risk exposures, securitisations, counterparty credit risk exposures and exposures below the thresholds for deduction that are subject to a 250% risk weight.

ii. RWAs have been allocated according to the business lines within the standardised approach to operational risk, as per article 317 of CRR.

iii. Counterparty credit risk relates to derivative financial instruments, securities financing transactions (repurchase agreements) and exposures to central counterparties.

iv. Other relates to equity, fixed, intangible software and other assets.

RWAs reduced by GBP0.4 billion driven by unsecured loan RWAs linked to decreasing total loan size and reduced probability of default (PD). In addition, there was a reduction in commercial loan RWAs due to decreasing total loan size but also due to the application of more favourable treatments for SME and infrastructure lending in line with Regulation 2020/873. In contrast, RWAs for 'Other' assets increased due to the new application of risk weights to intangible software assets deducted from capital, as per EU Regulation 2020/2176.

Risk report (continued)

Solvency risk (continued)

Regulatory developments

Key areas of regulatory change are set out below. Nationwide will remain engaged in the development of the regulatory approach to ensure it is prepared for any resulting change.

New residential mortgage IRB models were submitted to the PRA for approval in 2021 with the expectation that these models will be implemented by 1 January 2022. This is in line with the revised deadline set by the Bank of England on 20 March 2020 which delays implementation by 1 year from the original January 2021 implementation date set out in PS13/17. The new models will also reflect the PRA's approach to implementing the European Banking Authority's (EBA's) recommendations relating to PD and LGD estimation, and the treatment of defaulted exposures. This is as part of the IRB approach to credit risk as set out in PS 11/20. The PRA is currently consulting on the application of risk weight floors to mortgage assets (7% for individual loans and 10% for all UK residential mortgages to which the firm applies the IRB approach), also to be implemented in January 2022. It is currently estimated that the impact of these new model changes, together with the 7% risk weight floor, will be to reduce the reported CET1 ratio by approximately one third from the current level, given the material increase in risk weighted assets. This is based on Nationwide's assessment of the consultation which is yet to be concluded by the PRA.

On 12 February 2021, the PRA published CP5/21 'Implementation of Basel standards'. The purpose of these rules is to implement the remaining Basel international standards. The consultation paper includes a revised standardised approach to counterparty credit risk (SA-CCR) and the revised Basel framework for exposures to central counterparties (CCPs) amongst other changes due for implementation on 1 January 2022.

The Basel Committee published their final reforms to the Basel III framework in December 2017, now denoted by the PRA as Basel 3.1. The amendments include changes to the standardised approaches for credit and operational risks and the introduction of a new RWA output floor. The rules are subject to a lengthy revised transitional period from 2023 to 2028 and will lead to a significant increase in Nationwide's RWAs relative to both the current position and that expected under the new mortgage IRB models, mainly due to the application of standardised floors for mortgages. Following the IRB model implementation and Basel III reforms, the total estimated impact on the reported CET1 ratio will be a reduction of approximately a half relative to the position at 4 April 2021. This impact is before organic earnings in the period to 2028 which will partly mitigate the reduction in the CET1 ratio. The Basel III reforms represent a re-calibration of regulatory requirements with no underlying change in the capital resources held or the risk profile of assets. Final impacts are uncertain as they are subject to future balance sheet size and mix, and because the final detail of some elements of the regulatory changes remain at the PRA's discretion. We are expecting the PRA to consult on the UK implementation of Basel 3.1 by autumn of 2021.

Consolidated financial statements

Contents

 
                                                            Page 
Consolidated income statement                                 79 
Consolidated statement of comprehensive income                80 
Consolidated balance sheet                                    81 
Consolidated statement of movements in members' interests 
 and equity                                                   82 
Notes to the consolidated financial statements                83 
 

Consolidated income statement

 
For the year ended 4 April 2021 
                                                              2021     2020 
                                                    Notes     GBPm     GBPm 
Interest receivable and similar income/(expense): 
   Calculated using the effective interest 
    rate method                                       3      4,122    5,157 
                                                           ------- 
   Other                                              3          2     (27) 
                                                           ------- 
Total interest receivable and similar 
 income                                               3      4,124    5,130 
                                                           ------- 
Interest expense and similar charges                  4      (978)  (2,320) 
                                                           ------- 
Net interest income                                          3,146    2,810 
                                                           ------- 
Fee and commission income                                      379      439 
                                                           ------- 
Fee and commission expense                                   (231)    (270) 
                                                           ------- 
Other operating (expense)/income                      5        (9)       67 
                                                           ------- 
Gains/(losses) from derivatives and 
 hedge accounting                                     6         34      (7) 
                                                           ------- 
Total income                                                 3,319    3,039 
                                                           ------- 
Administrative expenses                               7    (2,218)  (2,312) 
                                                           ------- 
Impairment losses on loans and advances 
 to customers                                         8      (190)    (209) 
                                                           ------- 
Provisions for liabilities and charges               12       (88)     (52) 
                                                           ------- 
Profit before tax                                              823      466 
                                                           ------- 
Taxation                                              9      (205)    (101) 
                                                           ------- 
Profit after tax                                               618      365 
                                                           ------- 
 

Consolidated statement of comprehensive income

 
For the year ended 4 April 2021 
                                                    2021  2020 
                                                    GBPm  GBPm 
Profit after tax                                     618   365 
 
Other comprehensive (expense)/income: 
 
Items that will not be reclassified 
 to the income statement 
Remeasurements of retirement benefit 
 obligations: 
   Retirement benefit remeasurements               (112)   195 
   Taxation                                           40  (76) 
                                                    (72)   119 
Revaluation of property: 
   Revaluation losses                                (9)  (13) 
   Taxation                                           11     2 
                                                       2  (11) 
Movements in fair value of equity shares 
 held at fair value through other comprehensive 
 income: 
   Fair value movements taken to members' 
    interests and equity                               4     - 
   Taxation                                          (1)     - 
                                                       3     - 
 
                                                    (67)   108 
Items that may subsequently be reclassified 
 to the income statement 
Cash flow hedge reserve 
   Fair value movements taken to members' 
    interests and equity                            (98)    56 
   Amount transferred to income statement           (54)  (65) 
   Taxation                                           41   (5) 
                                                   (111)  (14) 
Other hedging reserve 
   Fair value movements taken to members' 
    interests and equity                             (4)  (57) 
   Amount transferred to income statement            (2)     - 
   Taxation                                            2    15 
                                                     (4)  (42) 
Fair value through other comprehensive 
 income reserve: 
   Fair value movements taken to members' 
    interests and equity                             215  (51) 
   Amount transferred to income statement           (40)  (40) 
   Taxation                                         (47)    24 
                                                     128  (67) 
 
Other comprehensive (expense)/income                (54)  (15) 
 
Total comprehensive income                           564   350 
 

Consolidated balance sheet

 
At 4 April 2021 
                                                   2021     2020 
                                         Notes     GBPm     GBPm 
Assets 
Cash                                             16,693   13,748 
Loans and advances to banks 
 and similar institutions                         3,660    3,636 
Investment securities                            25,473   20,004 
Derivative financial instruments                  3,809    4,771 
Fair value adjustment for 
 portfolio hedged risk                              946    1,774 
Loans and advances to customers           10    201,547  200,978 
Intangible assets                                 1,101    1,239 
Property, plant and equipment                     1,018    1,172 
Accrued income and prepaid 
 expenses                                           213      205 
Deferred tax                                         72       76 
Current tax assets                                    -       65 
Other assets                                        210       79 
Retirement benefit assets                 14        172      294 
Total assets                                    254,914  248,041 
Liabilities 
Shares                                          170,313  159,691 
Deposits from banks and similar 
 institutions                                    27,022   21,812 
Other deposits                                    4,522    4,482 
Fair value adjustment for 
 portfolio hedged risk                               25       29 
Debt securities in issue                         27,923   35,963 
Derivative financial instruments                  1,622    1,924 
Other liabilities                                   933      915 
Provisions for liabilities 
 and charges (note i)                     12        159      146 
Accruals and deferred income 
 (note i)                                           307      340 
Subordinated liabilities                  11      7,575    9,317 
Subscribed capital                        11        243      253 
Deferred tax                                        150      207 
Current tax liabilities                               7        - 
Total liabilities                               240,801  235,079 
Members' interests and equity 
Core capital deferred shares              15      1,334    1,325 
Other equity instruments                  16      1,336      593 
General reserve                                  11,140   10,749 
Revaluation reserve                                  44       48 
Cash flow hedge reserve                             195      306 
Other hedging reserve                              (46)     (42) 
Fair value through other comprehensive 
 income reserve                                     110     (17) 
Total members' interests and 
 equity                                          14,113   12,962 
Total members' interests, 
 equity and liabilities                         254,914  248,041 
 
 

Note:

i. Comparatives have been restated as detailed in note 2.

Consolidated statement of movements in members' interests and equity

 
For the year ended 4 April 2021 
                              Core capital         Other   General  Revaluation  Cash flow     Other     FVOCI   Total 
                                  deferred        equity   reserve      reserve      hedge   hedging   reserve 
                                    shares   instruments                           reserve   reserve 
                              ------------                -------- 
                                      GBPm          GBPm      GBPm         GBPm       GBPm      GBPm      GBPm    GBPm 
At 5 April 2020                      1,325           593    10,749           48        306      (42)      (17)  12,962 
Profit for the year                      -             -       618            -          -         -         -     618 
Net remeasurements of 
 retirement 
 benefit obligations                     -             -      (72)            -          -         -         -    (72) 
Net revaluation of property              -             -         -            2          -         -         -       2 
Net movement in cash flow 
 hedge 
 reserve                                 -             -         -            -      (111)         -         -   (111) 
Net movement in other 
 hedging 
 reserve                                 -             -         -            -          -       (4)         -     (4) 
Net movement in FVOCI 
 reserve                                 -             -         -            -          -         -       131     131 
Total comprehensive income               -             -       546            2      (111)       (4)       131     564 
                                                          -------- 
Reserve transfer                         -             -        10          (6)          -         -       (4)       - 
                                                          -------- 
Issuance of core capital 
 deferred 
 shares                                  9             -         -            -          -         -         -       9 
Issuance of Additional Tier 
 1 
 capital                                 -           743         -            -          -         -         -     743 
                                                          -------- 
Distribution to the holders 
 of 
 core capital deferred 
 shares                                  -             -     (108)            -          -         -         -   (108) 
                                                          -------- 
Distribution to the holders 
 of 
 Additional Tier 1 capital               -             -      (57)            -          -         -         -    (57) 
                                                          -------- 
At 4 April 2021                      1,334         1,336    11,140           44        195      (46)       110  14,113 
                              ------------                -------- 
 
 
For the year ended 4 April 2020 
                             Core capital         Other   General  Revaluation  Cash flow     Other     FVOCI    Total 
                                 deferred        equity   reserve      reserve      hedge   hedging   reserve 
                                   shares   instruments                           reserve   reserve 
                                     GBPm          GBPm      GBPm         GBPm       GBPm      GBPm      GBPm     GBPm 
At 5 April 2019                     1,325           992    10,418           64        320         -        50   13,169 
Profit for the year                     -             -       365            -          -         -         -      365 
Net remeasurements of 
 retirement 
 benefit obligations                    -             -       119            -          -         -         -      119 
Net revaluation of property             -             -         -         (11)          -         -         -     (11) 
Net movement in cash flow 
 hedge 
 reserve                                -             -         -            -       (14)         -         -     (14) 
Net movement in other 
 hedging 
 reserve                                -             -         -            -          -      (42)         -     (42) 
Net movement in FVOCI 
 reserve                                -             -         -            -          -         -      (67)     (67) 
Total comprehensive income              -             -       484         (11)       (14)      (42)      (67)      350 
Reserve transfer                        -             -         5          (5)          -         -         -        - 
Issuance of Additional Tier 
 1 
 capital                                -           593         -            -          -         -         -      593 
Redemption of Additional 
 Tier 
 1 capital                              -         (992)       (8)            -          -         -         -  (1,000) 
Distribution to the holders 
 of 
 core capital deferred 
 shares                                 -             -     (108)            -          -         -         -    (108) 
Distribution to the holders 
 of 
 Additional Tier 1 capital              -             -      (42)            -          -         -         -     (42) 
At 4 April 2020                     1,325           593    10,749           48        306      (42)      (17)   12,962 
 

Notes to the consolidated financial statements

1. Reporting period

These results have been prepared as at 4 April 2021 and show the financial performance for the year from, and including, 5 April 2020 to this date.

2. Basis of preparation

These consolidated financial statements have been prepared in accordance with international accounting standards in conformity with the requirements of the Building Societies Act 1986 and with those parts of the Building Societies (Accounts and Related Provisions) Regulations 1998 (as amended) that are applicable. International accounting standards which have been adopted for use within the UK have also been applied in these consolidated financial statements.

These consolidated financial statements are also prepared in accordance with International Financial Reporting Standards (IFRS) adopted pursuant to Regulation (EC) No. 1606/2002 as it applies in the European Union.

The accounting policies adopted for use in the preparation of this Preliminary Results Announcement and which will be used in preparing the Annual Report and Accounts for the year ended 4 April 2021 were included in the 'Annual Report and Accounts 2020' document except as detailed below. Copies of these documents are available at nationwide.co.uk/about_nationwide/results_and_accounts

Adoption of new and revised IFRSs

With effect from 5 April 2020 the Group has adopted the Interest Rate Benchmark Reform - Phase 2 amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16. Further information on the impacts of adopting these amendments is set out below.

In addition, a number of amendments and improvements to accounting standards have been issued by the International Accounting Standards Board (IASB) with an effective date of 1 January 2020. Those relevant to these financial statements include minor amendments to IAS 1 'Presentation of Financial Statements', IAS 8 'Accounting Policies, Changes in Accounting Estimates and Errors', and the Conceptual Framework. The adoption of these amendments and interpretations had no significant impact on the Group.

Interest Rate Benchmark Reform - Phase 2 amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16

In August 2020, the IASB issued amendments arising from Phase 2 of its work on Interest Rate Benchmark Reform. The amendments focus on accounting for the replacement of existing benchmark interest rates, and provide relief allowing entities:

-- not to recognise significant modification gains or losses on financial instruments if a change results directly from IBOR reform and occurs on an 'economically equivalent' basis; and

-- to continue existing hedging relationships despite changes to hedge documentation for modifications required as a direct consequence of IBOR reform.

These amendments, which were endorsed by the EU and UK in January 2021, are applicable to the Group from 5 April 2021, with early adoption permitted. The Group has early adopted the amendments in these financial statements, with no significant impact.

Change in presentation of bank levy

To reflect better the nature of liabilities associated with the UK Bank Levy, a liability of GBP12 million at 4 April 2021 has been reclassified to be presented within accruals and deferred income on the consolidated balance sheet. Previously, this liability was included within provisions for liabilities and charges.

Comparatives at 4 April 2020 have been restated as shown below.

 
Consolidated balance sheet extract at 4 April 
 2020 
                               Previously  Adjustment  Restated 
                                published 
                                     GBPm        GBPm      GBPm 
Provisions for liabilities 
 and charges                          176        (30)       146 
Accruals and deferred income          310          30       340 
 

This change had no impact on the Group's net assets or members' interests and equity at 4 April 2020.

2. Basis of preparation (continued)

Future accounting developments

The IASB has issued a number of minor amendments to IFRSs that become effective from 1 January 2021 or subsequent years, some of which have not yet been endorsed for use in the UK. These amendments are not expected to have a significant impact for the Group.

IFRS 17 'Insurance Contracts' establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts within the scope of the standard. IFRS 17 is effective for accounting periods beginning on or after 1 January 2023 and has not yet been endorsed for use by the UK. The requirements of IFRS 17 are currently being assessed; however, it is not expected that the new standard will have a significant impact for the Group.

Judgements in applying accounting policies and critical accounting estimates

The preparation of the Group's consolidated financial statements in accordance with IFRS involves management making judgements and estimates when applying those accounting policies that affect the reported amounts of assets, liabilities, income and expense. Actual results may differ from those on which management's estimates are based. Estimates and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable. For the year ended 4 April 2021, this evaluation has considered the ongoing impacts of Covid-19.

The key areas involving a higher degree of judgement or areas involving significant sources of estimation uncertainty made by management in applying the Group's accounting policies are disclosed in the following notes, including any additional information relating to Covid-19 where relevant.

 
                                           Estimates  Judgements 
Impairment losses and provisions             Note 
 on loans and advances to customers            8        Note 8 
                                             Note 
Provisions for customer redress                12 
                                             Note 
Retirement benefit obligations (pensions)      14 
                                                      ---------- 
 

Going concern

The directors have assessed the Group's ability to continue as a going concern, with reference to current and anticipated market conditions. The directors confirm they are satisfied that the Group has adequate resources to continue in business for a period of not less than twelve months and that it is therefore appropriate to adopt the going concern basis in preparing this preliminary financial information.

3. Interest receivable and similar income

 
 
                                            2021   2020 
                                            GBPm   GBPm 
On financial assets measured at 
 amortised cost: 
   Residential mortgages                   4,246  4,553 
   Other loans                               557    655 
   Other liquid assets                        35    152 
   Investment securities                      16     27 
On investment securities measured 
 at FVOCI                                    137    172 
On financial instruments hedging 
 assets in a qualifying hedge accounting 
 relationship                              (869)  (402) 
Total interest receivable and similar 
 income calculated using the effective 
 interest rate method                      4,122  5,157 
Interest on net defined benefit 
 pension asset (note 14)                       7      3 
Other interest and similar expense 
 (note i)                                    (5)   (30) 
Total                                      4,124  5,130 
 

Note:

i. Includes interest on financial instruments hedging assets that are not in a qualifying hedge accounting relationship.

4. Interest expense and similar charges

 
 
                                       2021   2020 
                                       GBPm   GBPm 
On shares held by individuals           527  1,361 
On subscribed capital                    14     14 
On deposits and other borrowings: 
   Subordinated liabilities             281    309 
   Other                                 56    240 
On debt securities in issue             539    745 
Net income on financial instruments 
 hedging liabilities                  (439)  (349) 
Total                                   978  2,320 
 

5. Other operating expense/income

 
 
                             2021  2020 
                             GBPm  GBPm 
Gains on financial assets 
 measured at FVTPL              -    17 
Gains on disposal of FVOCI 
 investment securities         41    40 
Other (expense)/income       (50)    10 
Total                         (9)    67 
 

Other (expense)/income in the year ended 4 April 2021 includes losses of GBP37 million realised from the repurchase of GBP2.1 billion of covered bonds that were issued under the Nationwide Covered Bond programme. Other (expense)/income also includes fair value movements on balances relating to previous investment disposals, the net amount of 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. There were no gains or losses on disposal of financial assets measured at amortised cost in the year ended 4 April 2021 (2020: GBPnil).

6. Gains/losses from derivatives and hedge accounting

As a part of its risk management strategy, the Group uses derivatives to economically hedge financial assets and liabilities. Hedge accounting is employed by the Group to minimise the accounting volatility associated with the change in fair value of derivative financial instruments. This volatility does not reflect the economic reality of the Group's hedging strategy. 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 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.

 
 
                                         2021  2020 
                                         GBPm  GBPm 
Gains from fair value hedge accounting      -    61 
Losses from cash flow hedge accounting    (1)   (2) 
Fair value gains/(losses) from other 
 derivatives (note i)                      45  (74) 
Foreign exchange retranslation (note 
 ii)                                     (10)     8 
Total                                      34   (7) 
 

Notes:

i. This category includes derivatives used for economic hedging purposes, but which are not currently in a hedge accounting relationship, as well as valuation adjustments which are applied at a portfolio level and so are not allocated to individual hedge accounting relationships.

ii. Gains or losses arise from the retranslation of foreign currency monetary items not subject to effective hedge accounting.

Gains from fair value hedge accounting include gains of GBP50 million (2020: GBP53 million) from macro hedges, due to hedge ineffectiveness and the amortisation of existing balance sheet amounts, and losses of GBP50 million (2020: gains of GBP8 million) relating to micro hedges which arise due to a combination of hedge ineffectiveness, disposals and restructuring, and the amortisation of existing balance sheet amounts. Fair value gains from other derivatives include gains of GBP49 million (2020: losses of GBP51 million) caused by a narrowing of bid-offer spreads. These gains are largely a reversal of bid-offer spread losses reported in the Annual Report and Accounts 2020, which were caused by spreads widening at the end of the financial year as financial markets reacted to Covid-19.

7. Administrative expenses

 
 
                               2021   2020 
                               GBPm   GBPm 
Employee costs: 
   Wages and salaries           570    561 
   Bonuses                       30     21 
   Social security costs         72     65 
   Pension costs (note 
    i)                          180     15 
                                852    662 
Other administrative 
 expenses (note i):             742    929 
Bank levy                        27     55 
                              1,621  1,646 
Depreciation, amortisation 
 and impairment                 597    666 
Total                         2,218  2,312 
 

Note:

i. In the year ended 4 April 2020, pension costs are net of a gain of GBP164 million and other staff related costs include an expense of GBP60 million relating to the closure of the Nationwide Pension Fund to future accrual on 31 March 2021. Further information is included in note 14.

8. Impairment losses and provisions on loans and advances to customers

The following tables set out impairment losses and reversals during the year and the closing provision balances which are deducted from the relevant asset values in the consolidated balance sheet.

 
Impairment losses/(reversals) 
                        2021  2020 
----------------------  ---- 
                        GBPm  GBPm 
---------------------- 
Prime residential         39    13 
                        ---- 
Buy to let and legacy 
 residential              32    40 
                        ---- 
Consumer banking         125   159 
                        ---- 
Commercial and other 
 lending                 (6)   (3) 
                        ---- 
Total                    190   209 
                        ---- 
 
 
Impairment provisions 
                        4 April  4 April 
                           2021     2020 
                           GBPm     GBPm 
Prime residential            93       56 
                        ------- 
Buy to let and legacy 
 residential                224      196 
                        ------- 
Consumer banking            502      494 
                        ------- 
Commercial and other 
 lending                     33       40 
                        ------- 
Total                       852      786 
                        ------- 
 

8. Impairment losses and provisions on loans and advances to customers (continued)

Critical accounting estimates and judgements

Impairment is measured as the impact of credit risk on the present value of management's estimate of future cash flows. In determining the required level of impairment provisions, the Group uses outputs from statistical models, incorporating a number of estimates and judgements to determine the probability of default (PD), the exposure at default, and the loss given default (LGD) for each loan.

The most significant areas of estimation uncertainty are:

-- the impact on expected credit losses of Covid-19 (including government furlough and other support initiatives)

   --     the performance of interest only mortgages at maturity 
   --     the level of future recoveries for retail lending 
   --     the use of forward-looking economic information 

The most significant area of judgement is:

   --     the approach to identifying significant increases in credit risk and impairment. 

The table below shows the impact on impairment provisions at 4 April 2021 of the most significant areas of estimation uncertainty, with further details provided on the following pages.

 
Significant areas of estimation uncertainty 
                                              2021  2020 
                                              GBPm  GBPm 
Impact on expected credit losses of 
 Covid-19 (including government furlough 
 and other support initiatives) 
Economic impact of Covid-19 scenario 
 at 4 April 2020 (note i)                        -    62 
Relationship between GDP and expected 
 defaults                                       25     - 
Suppressed credit risk associated with 
 payment deferrals                              74    39 
Temporary reduction in arrears                  57     - 
 
Performance of interest only mortgages 
 at maturity                                    69    72 
 
Level of future recoveries for retail 
 lending 
Residential mortgages: collateral values        56     - 
Consumer banking: future recoveries             22    21 
 
Use of forward-looking economic information 
Impact of applying multiple economic 
 scenarios (note ii)                           159   123 
 

Notes:

i. The economic impact of Covid-19 as separately disclosed as at 4 April 2020; during the year ended 4 April 2021 this has been integrated into modelled provisions.

ii. GBP159 million is the total impact of applying multiple economic scenarios, GBP41 million of which is also included in the values disclosed for other key judgements in the table.

8. Impairment losses and provisions on loans and advances to customers (continued)

Critical accounting estimates and judgements (continued)

Impact on expected credit losses of Covid-19 (including government furlough and other support initiatives)

As at 4 April 2020, an additional provision for credit losses totalling GBP101 million was recognised to reflect the estimated impact of the Covid-19 pandemic on ECLs. This additional provision comprised GBP62 million for economic impacts (GBP55 million from revised economic assumptions and GBP7 million relating to commercial lending) and GBP39 million to reflect suppressed credit risk associated with payment deferrals. These risks have been integrated into the IFRS 9 provision process where required.

Relationship between GDP and expected defaults

The impact of Covid-19 on the UK economy is unprecedented, with the significant GDP fall, impact of government support and use of payment deferrals creating a unique combination of economic impacts. These factors have changed the relationships between economic variables, such as GDP and unemployment, and the subsequent expected defaults. GDP is an input into consumer banking ECL modelling, and the GDP fall during 2020 would ordinarily be expected to result in an increase in defaults in the short term. However, due to government intervention, the increase in defaults is expected to be delayed. A change has therefore been made to increase the assumed time lag between GDP changes and defaults within the IFRS 9 models and thus reflect the judgement that the consequent credit losses have been delayed but not avoided. Had this change not been made, the ECL on consumer banking portfolios would have been lower by GBP25 million.

Suppressed credit risk associated with payment deferrals

Payment deferrals or other similar concessions have been offered on all retail products as a result of Covid-19. The Group recognises that in some cases borrowers will experience longer-term financial difficulty as a result of the pandemic, and additional ECLs have therefore been recognised in respect of some borrowing with payment deferrals. Unlike other concessions granted to borrowers in financial difficulty, these payment deferrals have not been subject to detailed affordability assessments, and therefore the degree of financial difficulty experienced by the members and customers who apply for them requires estimation.

During the year, additional payment deferrals have been granted and the payment deferral schemes have been extended. For all retail portfolios the additional provision has been updated to reflect additional requests received during the year. Further analysis of the risk characteristics of the retail payment deferral population has been carried out using internal and external credit risk data, to estimate the proportion of loans judged to carry increased risk which may not be evident due to payment deferrals suppressing arrears. The probability of default has been increased where appropriate. These changes have increased the total provision for this risk across all lending portfolios to GBP74 million (2020: GBP39 million). The proportion of payment deferrals to which the adjustment was applied varied between 10% to 27%, depending on the portfolio; an increase in this proportion by 5 percentage points would have increased provisions by GBP27 million.

As a result of the recognition of increased probability of default in respect of payment deferrals, GBP2 billion of residential mortgages have transferred to stage 2.

Temporary reduction in arrears

Arrears balances across all products have reduced during the year, leading to a reduction in modelled provisions. Management has judged this to be a temporary position due to the availability of government support and payment deferral schemes, and an adjustment has therefore been made to recognise the underlying risk, retaining provisions of GBP57 million (residential mortgages GBP21 million, consumer banking GBP36 million) which would have otherwise been released. This adjustment is expected to reduce once government support schemes come to an end and arrears start to return to the levels associated with prevailing economic conditions. This adjustment has been allocated to stage 2 loans.

8. Impairment losses and provisions on loans and advances to customers (continued)

Critical accounting estimates and judgements (continued)

Performance of interest only mortgages at maturity

There is a risk that a proportion of interest only mortgages will not be redeemed at their contractual maturity date, because a borrower does not have a means of capital repayment or has been unable to refinance the loan. Buy to let mortgages are typically advanced on an interest only basis. Interest only balances for prime residential mortgages relate primarily to historical balances which were originally advanced as interest only mortgages or where a change in terms to an interest only basis has been agreed. The impact of the allowance for unredeemed interest only mortgages at contractual maturity in the central scenario amounts to GBP45 million (2020: GBP44 million), with an additional impact of GBP24 million (2020: GBP28 million) reflecting the impact of forward-looking economic information. Interest only loans which are judged to have a significantly increased risk of inability to refinance at maturity are transferred to stage 2. The ability of a borrower to refinance is calculated using current lending criteria which considers LTV and affordability assessments. If the interest rate used within the affordability assessment was increased by 1%, provisions would increase by GBP8 million.

Level of future recoveries for retail lending

Residential mortgages: collateral values

For residential mortgages, the estimate of future collateral values is a key source of estimation uncertainty. During the year ended 4 April 2021, two new model adjustments have been introduced to reflect risks which are not reflected in the modelled outputs.

Firstly, an adjustment has been introduced to reflect the risks associated with flats subject to fire safety risks such as unsuitable cladding. The current government funding available is anticipated to be below the amount required to remediate such properties, and the desirability of the properties is expected to be severely affected for several years. Due to limited data availability to identify affected properties individually, it is assumed that a proportion of the flats securing loans in the residential mortgage portfolios are affected, in line with UK market exposure estimates. Assumptions relating to property values have been applied based upon the height of the affected buildings. The ECL adjustment is GBP23 million, of which GBP6 million relates to buildings with six or more stories.

Secondly, an adjustment has been introduced to reflect the idiosyncratic risk relating to recovery values for repossessed properties over the next few years. The uncertainty has arisen from shifts in the housing market, partly due to Covid-19, with the expectation that future repossessed properties may be more difficult to sell and may not follow the modelled HPI recovery assumed for the wider market. This adjustment has been applied by reducing modelled property valuations, and also by increasing the expected variance in valuations achieved across the portfolio. The ECL adjustment totals GBP33 million, which equates to a 2% increase in the stage 3 provision coverage ratio.

Consumer banking: future recoveries

For consumer banking, the estimate of future recoveries is a key source of estimation uncertainty. The Group uses a combination of both historical data and management judgement in estimating the level and timing of future recoveries. It is management's judgement that the recovery experience over recent years is not sustainable in the future, and therefore additional provisions totalling GBP22 million (2020: GBP21 million) are held on charged off assets to reflect a future reduction in recovery rates. This represents 11% of total charged off balances.

8. Impairment losses and provisions on loans and advances to customers (continued)

Critical accounting estimates and judgements (continued)

Use of forward looking economic information

Management exercises judgement in estimating future economic conditions which are incorporated into provisions through modelling of multiple scenarios. The economic scenarios are reviewed and updated on a quarterly basis. The provision recognised is the probability-weighted sum of the provisions calculated under a range of economic scenarios. The scenarios and associated probability weights are derived using external data and statistical methodologies, together with management judgement, to determine scenarios which span an appropriately wide range of plausible economic conditions. The Group continues to model four economic scenarios, which together encompass an appropriate range of potential economic outcomes. The impact of applying multiple economic scenarios (MES) is to increase provisions by GBP159 million (2020: GBP123 million), compared with provisions based on the central economic scenario.

At 4 April 2021, the probability weightings for each scenario were reviewed and the probabilities allocated to the upside, central and downside scenarios remain unchanged from 30 September 2020. The increase in the upside weighting during the year reflects that this scenario now includes the impact of Covid-19, therefore incorporating more conservative economic assumptions than at 4 April 2020. The probabilities allocated to the central and downside scenarios reflect the uncertainty of the potential outcomes regarding Covid-19. The probability weightings applied to the scenarios are shown in the table below.

 
Scenario probability weighting (%) 
                       Upside    Central   Downside     Severe 
                     scenario   scenario   scenario   downside 
                                                      scenario 
4 April 2021               10         40         40         10 
30 September 2020          10         40         40         10 
4 April 2020                5         50         35         10 
 

All four economic scenarios reflect the potential impact of Covid-19 to differing degrees. There is continued uncertainty regarding the economic impacts that could arise from new variants of Covid-19, offset by the effectiveness of the vaccination programme, and also uncertainty over the extent to which government support schemes will have avoided or merely delayed the adverse credit consequences of the pandemic. The scenarios also reflect the fact that the UK reached a free trade agreement deal with the EU at the end of 2020, consistent with the assumptions incorporated in the prior year central scenario. In the central scenario at 4 April 2021, GDP recovers to levels slightly higher than those used in the central scenario at 4 April 2020. For unemployment the impacts are comparable to previous assumptions, albeit the adverse impacts are delayed and the peak of unemployment is slightly higher at 8.0%. The house price forecast reflects the 7% growth during 2020, with reductions expected in 2022 across the central and downside scenarios. The bank base rate is forecast to remain at 0.1% across all scenarios between 2020 and 2025, with the exception of the upside scenario, where an increase to 0.25% is forecast in 2024. The downside scenario reflects both a higher peak level of unemployment and a more gradual recovery in the economy. The severe downside scenario continues to be aligned with internal stress testing and reflects a severe and long-lasting impact on the UK economy.

During the year, the severe downside scenario has been incorporated into the core provision models. However, due to the severity of the scenario it is management's judgement that the modelled outputs do not reflect the non-linear impacts that would arise from the economic assumptions. Using information from internal and external stress testing exercises, management have derived adjustments to probability of default and loss given default at a portfolio level, which increased provisions by GBP102 million (2020: GBP77 million).

8. Impairment losses and provisions on loans and advances to customers (continued)

Critical accounting estimates and judgements (continued)

Graphs showing the historical and forecasted GDP level, average house price and unemployment rate for the Group's economic scenarios, including the previous central economic scenario, are included in the Preliminary Results 2020-21 on nationwide.co.uk

The tables below provide a summary of the values of the key UK economic variables used within the economic scenarios over the first five years of the scenario .

 
Economic variables 
                         Rate/annual growth rate at December         5-year    Dec-20      Dec-20 
                                      2020-2025                     average   to peak   to trough 
                                                                      (note    (notes      (notes 
                                                                         i)    ii and          ii 
                                                                                 iii)    and iii) 
                      Actual               Forecast 
                        2020    2021      2022   2023  2024  2025 
4 April 2021               %       %         %      %     %     %         %         %           % 
GDP growth 
Upside scenario        (7.8)    10.6       2.6    2.0   2.0   1.6       3.7      20.0       (3.2) 
                       (7.8) 
                       (7.8) 
                       (7.8) 
Central scenario                 7.2       2.9    2.0   1.8   1.2       3.0      16.0       (4.0) 
Downside scenario                2.0       4.6    2.8   2.0   1.6       2.6      13.6       (6.2) 
Severe downside 
 scenario                      (3.2)       3.9    2.0   2.0   1.6       1.2       6.3       (8.5) 
HPI growth 
Upside scenario          7.0     7.5       3.0    3.9   3.5   3.5       4.3      23.4         2.0 
Central scenario         7.0     1.9     (7.8)    6.9   4.9   4.7       2.0      10.2       (6.6) 
Downside scenario        7.0   (2.2)    (14.7)    8.0   4.7   3.5     (0.5)       1.9      (16.9) 
Severe downside 
 scenario                7.0   (5.9)    (22.8)  (3.5)   8.8   7.2     (4.0)       0.8      (29.9) 
Unemployment 
Upside scenario          5.1     5.3       4.3    3.9   3.9   3.9       4.4       5.7         3.9 
Central scenario         5.1     8.0       5.9    4.7   4.3   4.3       5.4       8.0         4.3 
Downside scenario        5.1     9.5       7.4    5.8   5.1   5.0       6.5       9.5         5.0 
Severe downside 
 scenario                5.1    12.0      10.0    8.6   7.0   5.7       8.5      12.0         5.7 
 
 

8. Impairment losses and provisions on loans and advances to customers (continued)

Critical accounting estimates and judgements (continued)

 
                        Rate/annual growth rate at December        5-year     Dec-19      Dec-19 
                                     2020-2024                    average    to peak   to trough 
                                                                    (note     (notes      (notes 
                                                                       i)         ii          ii 
                                                                            and iii)         and 
                                                                                            iii) 
                                     Forecast 
                         2020       2021     2022   2023   2024 
4 April 2020                %          %        %      %      %         %          %           % 
GDP growth 
Upside scenario           2.0        2.4      2.9    2.0    2.4       2.4       12.3         0.9 
Central scenario        (9.6)        6.1      4.1    2.0    1.8       0.7        3.7       (9.6) 
Downside scenario         0.4      (1.7)      1.2    1.6    1.7       0.7        3.4       (1.2) 
Severe downside 
 scenario               (4.7)        0.7      1.3    0.9    1.1     (0.2)      (0.4)       (4.7) 
HPI growth 
Upside scenario           5.0        5.5      6.0    4.6    4.1       5.0       27.9         0.5 
Central scenario       (10.0)        2.0      4.0    3.5    3.5       0.5        3.0      (13.8) 
Downside scenario       (1.0)      (5.0)    (4.0)    0.0    1.4     (1.7)      (0.6)      (10.7) 
Severe downside 
 scenario              (11.1)     (16.4)    (8.9)    5.5    5.7     (5.5)      (1.0)      (32.4) 
Unemployment 
Upside scenario           3.8        3.7      3.6    3.6    3.5       3.7        3.8         3.5 
Central scenario          6.9        5.6      4.9    4.7    4.6       5.3        7.4         3.9 
Downside scenario         4.4        5.7      6.0    5.8    5.7       5.4        6.0         3.8 
Severe downside 
 scenario                 7.2        9.2      8.7    8.1    7.4       7.8        9.2         3.8 
 

Notes:

i. The average rate for GDP and HPI is based on the cumulative annual growth rate over the forecast period. Average unemployment is calculated using a simple average using quarterly points.

ii. GDP growth and HPI are shown as the largest cumulative growth/fall from 31 December over the forecast period.

iii. The unemployment rate is shown as the highest/lowest rate over the forecast period from 31 December.

8. Impairment losses and provisions on loans and advances to customers (continued)

Critical accounting estimates and judgements (continued)

To give an indication of the sensitivity of ECLs to different economic scenarios, the table below shows the ECL and stage 2 balance proportion if 100% weighting is applied to each scenario.

 
Sensitivity analysis impact of multiple                           Proportion of balances in 
 economic scenarios                                                stage 2 
                Upside   Central  Downside     Severe   Reported    Upside   Central  Downside     Severe  Reported 
              scenario  scenario  scenario   downside  provision  scenario  scenario  scenario   downside 
                                             scenario                                            scenario 
                                                                                                    (note 
                                                                                                       i) 
4 April 2021      GBPm      GBPm      GBPm       GBPm       GBPm         %         %         %          %         % 
Residential 
 mortgages         158       212       261        998        317       5.9       5.4       5.9        6.4       5.6 
Consumer 
 banking           428       449       458        916        502      20.1      22.1      26.1       31.0      22.5 
Commercial 
 lending            29        32        34         38         33       3.5       3.5       3.7        3.9       3.5 
Total              615       693       753      1,952        852 
 
4 April 2020      GBPm      GBPm      GBPm       GBPm       GBPm 
Residential 
 mortgages         136       149       254        674        252 
Consumer 
 banking           432       438       466        736        494 
Commercial 
 lending            37        37        40         55         40 
Total              605       624       760      1,465        786 
 
 

Note:

i. The severe scenario stage 2 proportion reflects only the modelled output and not the additional ECL added on through judgement.

The ECL for each scenario multiplied by the scenario probability will not reconcile to the overall provision. Whilst the stage allocation of loans varies in each individual scenario, each loan is allocated to a single stage in the overall provision calculation; this is based on a weighted average PD which takes into account the economic scenarios. A probability weighted 12 month or lifetime ECL (which takes into account the economic scenarios) is then calculated based on the stage allocation.

The table below shows the sensitivity at 4 April 2021 to some of the key assumptions used within the ECL calculation.

 
Sensitivity to key forward looking information assumptions 
                                                                  Increase in 
                                                                    provision 
2021                                                                     GBPm 
Single-factor sensitivity to key economic variables (note 
 i) 
10% decrease in HPI at 4 April 2021 and throughout the forecast 
 period (note ii)                                                          36 
1% increase in unemployment at 4 April 2021 and throughout 
 the forecast period (note iii)                                            21 
Sensitivity to changes in scenario probability weightings 
10% increase in the probability of the downside scenario 
 (reducing the upside by a corresponding 10%)                              14 
5% increase in the probability of the severe downside scenario 
 (reducing the downside by a corresponding 5%)                             61 
 

Notes:

i. As these are single-factor sensitivities, they should not be extrapolated due to the likely non-linear effects.

ii. Central scenario impact on LGD.

iii. Central scenario impact on PD.

8. Impairment losses and provisions on loans and advances to customers (continued)

Critical accounting estimates and judgements (continued)

Identifying significant increases in credit risk (stage 2)

Loans are allocated to stage 1 or stage 2 according to whether there has been a significant increase in credit risk. The Group has used judgement to select both quantitative and qualitative criteria which are used to determine whether a significant increase in credit risk has taken place. These criteria have been detailed within the credit risk report. The primary quantitative indicators are the outputs of internal credit risk assessments. While different approaches are used within each portfolio, the intention is to combine current and historical data relating to the exposure with forward looking economic information to determine the probability of default (PD) at each reporting date. For retail loans, the main indicators of a significant increase in credit risk are either of the following:

-- the residual lifetime PD exceeds a benchmark determined by reference to the maximum credit risk that would have been accepted at origination

-- the residual lifetime PD has increased by at least 75bps and a 2x multiple of the original lifetime PD (2020: 4x multiple).

The change to the staging criteria from a multiple of 4 times origination PD to a multiple of 2 has made the models more sensitive to relative PD changes, and has therefore transferred GBP4 billion of residential mortgages and GBP0.3 billion of consumer banking balances from stage 1 to 2. The impact on provisions was an increase of GBP10 million (residential mortgages GBP7 million, consumer banking GBP3 million).

These complementary criteria have been reviewed through detailed back-testing, using management performance indicators and actual default experience, and found to be effective in capturing events which would constitute a significant increase in credit risk. The sensitivity of ECLs to stage allocation is such that a transfer of 1% of current stage 1 balances to stage 2 would increase provisions by GBP18 million for residential mortgages, and GBP5 million for consumer banking.

Identifying credit impaired loans (stage 3)

The identification of credit impaired loans is an important judgement within the IFRS 9 staging approach. A loan is credit impaired where it has an arrears status of more than 90 days past due, is considered to be in default or it is considered unlikely that the borrower will repay the outstanding balance in full, without recourse to actions such as realising security.

9. Taxation

 
Tax charge in the income statement 
 
                                               2021    2020 
                                               GBPm  GBPm 
Current tax: 
   UK corporation tax                           226   168 
   Adjustments in respect of prior years        (6)   (4) 
Total current tax                               220   164 
 
Deferred tax: 
   Current year credit                         (26)  (48) 
   Adjustments in respect of prior years         16     2 
Effect of deferred tax provided at different 
 tax rates                                      (5)  (17) 
Total deferred taxation                        (15)  (63) 
Tax charge                                      205   101 
 
 

9. Taxation (continued)

The actual tax charge differs from the theoretical amount that would arise using the standard rate of corporation tax in the UK as follows.

 
Reconciliation of tax charge 
 
                                                   2021    2020 
                                                   GBPm  GBPm 
Profit before tax:                                  823   466 
Tax calculated at a tax rate of 19%                 156    89 
Adjustments in respect of prior years                10   (2) 
Tax credit on distribution to the holders 
 of Additional Tier 1 capital                      (12)   (9) 
Banking surcharge                                    38    24 
Temporary differences where no deferred 
 tax is recognised                                    2     - 
Expenses not deductible for tax purposes/(income 
 not taxable): 
   Depreciation on non-qualifying assets              2     3 
   Bank levy                                          5    11 
   Customer redress                                   8     4 
   Other                                              1   (2) 
Effect of deferred tax provided at different 
 tax rates                                          (5)  (17) 
Tax charge                                          205   101 
 
 

10. Loans and advances to customers

 
 
                                     2021                                                 2020 
                    Loans held at amortised        Loans    Total        Loans held at amortised        Loans    Total 
                              cost                  held                           cost                  held 
                                                      at                                                   at 
                                                   FVTPL                                                FVTPL 
                Gross  Provisions  Other    Total                    Gross  Provisions  Other    Total 
                                   (note                                                (note 
                                      i)                                                   i) 
                 GBPm        GBPm   GBPm     GBPm   GBPm     GBPm     GBPm        GBPm   GBPm     GBPm   GBPm     GBPm 
Prime 
 residential 
 mortgages    149,706        (93)      -  149,613     68  149,681  151,069        (56)      -  151,013     71  151,084 
Buy to let 
 and legacy 
 residential 
 mortgages     41,249       (224)      -   41,025      -   41,025   37,699       (196)      -   37,503      -   37,503 
Consumer 
 banking        4,404       (502)      -    3,902      -    3,902    4,994       (494)      -    4,500      -    4,500 
Commercial 
 and other 
 lending        6,267        (33)    653    6,887     52    6,939    7,133        (40)    741    7,834     57    7,891 
Total         201,626       (852)    653  201,427    120  201,547  200,895       (786)    741  200,850    128  200,978 
 
 

Note:

i. 'Other' represents a fair value adjustment for micro hedged risk for commercial loans that were previously hedged on an individual basis.

10. Loans and advances to customers (continued)

The tables below summarise the movements in gross loans and advances to customers held at amortised cost, including the impact of ECL impairment provisions and excluding the fair value adjustment for micro hedged risk. The lines within the tables are an aggregation of monthly movements over the year. Residential mortgages represent the majority of the Group's loans and advances to customers. Additional tables summarising the movements for the Group's residential mortgages and consumer banking are presented in the Risk report.

The reasons for key movements shown in the table below are as follows:

-- The movement in gross balances is principally a result of GBP32,014 million of new lending, offset by a reduction of GBP31,138 million from repayments and redemptions. The majority of these movements relate to residential mortgages.

-- Of the GBP136 million of write-offs, GBP124 million relates to unsecured lending, GBP9 million to residential mortgages and GBP3 million to commercial and other lending.

-- Impairment provisions increased by GBP66 million in the period to GBP852 million. Further detail on the impairment provisions and losses by portfolio is shown in note 8.

 
Reconciliation of movements in gross balances and impairment provisions 
                                        Non-credit impaired                  Credit impaired 
                                                                                 (note i) 
                                Subject to 12       Subject to lifetime    Subject to lifetime           Total 
                                  month ECL                 ECL                    ECL 
                                   Stage 1                Stage 2           Stage 3 and POCI 
                                Gross  Provisions      Gross  Provisions      Gross  Provisions      Gross  Provisions 
                             balances               balances               balances               balances 
                                 GBPm        GBPm       GBPm        GBPm       GBPm        GBPm       GBPm        GBPm 
At 5 April 2020 (note ii)     188,403          75     10,690         269      1,802         341    200,895         786 
 
Stage transfers: 
Transfers from Stage 1 to 
 Stage 2                     (19,556)        (61)     19,556          61          -           -          -           - 
Transfers to Stage 3            (419)           -      (972)       (126)      1,391         126          -           - 
Transfers from Stage 2 to 
 Stage 1                       16,910         320   (16,910)       (320)          -           -          -           - 
Transfers from Stage 3            257           2        560          25      (817)        (27)          -           - 
Net remeasurement of ECL 
 arising from 
 transfer of stage                          (244)                    360                    (9)                    107 
Net movement arising from 
 transfer of 
 stage (note iii)             (2,808)          17      2,234           -        574          90          -         107 
 
New assets originated or 
 purchased (note 
 iv)                           32,014          45          -           -          -           -     32,014          45 
Net impact of further 
 lending and repayments 
 (note v)                    (10,100)        (52)      (162)        (26)       (58)        (21)   (10,320)        (99) 
Changes in risk parameters 
 in relation 
 to credit quality (note 
 vi)                                -          37          -         157          -          78          -         272 
Other items impacting 
 income statement 
 charge/(reversal) 
 including recoveries               -           -          -           -          -        (12)          -        (12) 
Redemptions (note vii)       (19,670)         (6)      (894)        (12)      (252)         (4)   (20,816)        (22) 
Reversal of additional 
 Covid-19 provision 
 (note ii)                                                                                                       (101) 
Income statement charge 
 for the year                                                                                                      190 
Decrease due to write-offs          -           -          -           -      (147)       (136)      (147)       (136) 
Other provision movements           -           -          -           -          -          12          -          12 
4 April 2021                  187,839         116     11,868         388      1,919         348    201,626         852 
Net carrying amount                       187,723                 11,480                  1,571                200,774 
 

10. Loans and advances to customers (continued)

 
Reconciliation of movements in gross balances and impairment provisions 
                                        Non-credit impaired                  Credit impaired 
                                                                                 (note i) 
                                Subject to 12       Subject to lifetime    Subject to lifetime           Total 
                                  month ECL                 ECL                    ECL 
                                   Stage 1                Stage 2           Stage 3 and POCI 
                                Gross  Provisions      Gross  Provisions      Gross  Provisions      Gross  Provisions 
                             balances               balances               balances               balances 
                                 GBPm        GBPm       GBPm        GBPm       GBPm        GBPm       GBPm        GBPm 
At 5 April 2019               187,368          68      9,539         261      1,797         336    198,704         665 
 
Stage transfers: 
Transfers from Stage 1 to 
 Stage 2                     (16,930)        (39)     16,930          39          -           -          -           - 
Transfers to Stage 3            (330)           -      (938)       (110)      1,268         110          -           - 
Transfers from Stage 2 to 
 Stage 1                       14,397         226   (14,397)       (226)          -           -          -           - 
Transfers from Stage 3            202           2        554          23      (756)        (25)          -           - 
Net remeasurement of ECL 
 arising from 
 transfer of stage                          (184)                    262                     18                     96 
Net movement arising from 
 transfer of 
 stage (note iii)             (2,661)           5      2,149        (12)        512         103          -          96 
 
New assets originated or 
 purchased (note 
 iv)                           34,049          31          -           -          -           -     34,049          31 
Net impact of further 
 lending and repayments 
 (note v)                     (9,947)        (24)       (77)        (10)       (81)        (21)   (10,105)        (55) 
Changes in risk parameters 
 in related 
 to credit quality (note 
 vi)                                -         (1)          -          42          -          26          -          67 
Other items impacting 
 income statement 
 charge/(reversal) 
 including recoveries               -           -          -           -        (1)        (11)        (1)        (11) 
Redemptions (note vii)       (20,406)         (4)      (921)        (12)      (302)         (4)   (21,629)        (20) 
Additional provision for 
 Covid-19 (note 
 ii)                                                                                                               101 
Income statement charge 
 for the year                                                                                                      209 
Decrease due to write-offs          -           -          -           -      (123)        (99)      (123)        (99) 
Other provision movements           -           -          -           -          -          11          -          11 
4 April 2020 (note ii)        188,403          75     10,690         269      1,802         341    200,895         786 
Net carrying amount (note 
 ii)                                      188,328                 10,421                  1,461                200,109 
 

Notes:

i. Group gross balances of credit impaired loans include GBP148 million (2020: GBP155 million) of purchased or originated credit impaired (POCI) loans, which are presented net of lifetime ECL impairment provisions of

GBP5 million (2020: GBP6 million).

ii. At 4 April 2020, an additional provision for credit losses of GBP101 million was recognised to reflect the estimated impact of the Covid-19 pandemic on ECLs. At 4 April 2020, this additional provision was not allocated to underlying loans nor was it attributed to stages. During the period, this provision has been allocated to underlying loans and is reflected in the movements within the table and the 4 April 2021 position.

iii. The remeasurement of provisions arising from a change in stage is reported within the stage to which the assets are transferred.

iv. If a new asset is generated in the month, the value included is the closing gross balance and provision for the month. All new business written is included in Stage 1.

v. This comprises further lending and capital repayments where the asset is not derecognised. The value for gross balances is calculated as the closing gross balance for the month less the opening gross balance for the month. The value for provisions is calculated as the change in exposure at default (EAD) multiplied by opening provision coverage for the month.

vi. This comprises changes in risk parameters, and changes to modelling inputs and methodology. The provision movement for the change in risk parameters is calculated for assets that do not move stage in the month.

vii. For any asset that is derecognised in the month, the value disclosed is the provision at the start of that month.

10. Loans and advances to customers (continued)

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) Term Funding Scheme with additional incentives for SMEs (TFSME) and other short-term liquidity facilities. The programmes have enabled the Group to obtain secured funding. Mortgages pledged and the carrying values of the notes in issue are as follows.

 
Mortgages pledged to asset backed funding programmes 
                                       2021                                                2020 
                                        Notes in issue                                     Notes in issue 
                                      Held by the Group                                  Held by the Group 
                             Held by                                            Held by 
                 Mortgages     third                                Mortgages     third 
                   pledged   parties     Drawn   Undrawn     Total    pledged   parties     Drawn   Undrawn      Total 
                     (note     (note     (note     (note     notes      (note     (note     (note     (note      notes 
                        i)       ii)      iii)       iv)  in issue         i)       ii)      iii)       iv)   in issue 
                      GBPm      GBPm      GBPm      GBPm      GBPm       GBPm      GBPm      GBPm      GBPm       GBPm 
Covered bond 
 programme          23,611    15,640         -         -    15,640     28,003    20,740         -         -     20,740 
                                                                               --------  --------  --------  --------- 
Securitisation 
 programme          12,779     2,865         -     2,505     5,370     15,177     4,215         -     2,533      6,748 
                                                                               --------  --------  --------  --------- 
Whole mortgage 
 loan 
 pools              21,479         -    16,430         -    16,430     23,570         -    18,183         -     18,183 
Total               57,869    18,505    16,430     2,505    37,440     66,750    24,955    18,183     2,533     45,671 
 

Notes:

i. Mortgages pledged include GBP13.9 billion (2020: GBP14.3 billion) in the covered bond and securitisation programmes that are in excess of the amount contractually required to support notes in issue.

   ii.   Notes in issue which are held by third parties are included within debt securities in issue. 

iii. Notes in issue, held by the Group and drawn are whole mortgage loan pools securing amounts drawn with the BoE under the TFSME and, in the prior year, the BoE's Term Funding Scheme (TFS) and US dollar (USD) funding operations. At 4 April 2021 the Group had outstanding TFSME drawings of GBP16.4 billion (2020: TFS GBP17.0 billion) and USD funding operations of GBPnil (2020: GBP1.2 billion).

iv. Notes in issue, held by the Group and undrawn, are debt securities issued by the programmes to the Group and mortgage loan pools that have been pledged to the BoE but not utilised.

Mortgages pledged under the Nationwide Covered Bond programme provide security for issues of covered bonds made by the Group. During the year ended 4 April 2021, GBP1.0 billion (sterling equivalent) of notes were issued, and GBP5.5 billion (sterling equivalent) of notes matured or were repurchased.

The securitisation programme notes are issued by Silverstone Master Issuer plc, which is fully consolidated into the accounts of the Group. 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 GBP7.2 billion (2020: GBP8.2 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 year ended 4 April 2021 GBP1.2 billion (sterling equivalent) of notes matured.

The whole mortgage loan pools are pledged at the BoE Single Collateral Pool. 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. At 4 April 2021, GBP21.5 billion (2020: GBP23.6 billion) of pledged collateral supported GBP16.4 billion of TFSME drawdowns (2020: TFS GBP17.0 billion) and GBPnil (2020: GBP1.2 billion) of USD Funding Operations.

In accordance with accounting standards, notes in issue and held by the Group are not recognised in the consolidated balance sheet. Mortgages pledged are not derecognised from the consolidated 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.

11. Subordinated liabilities and subscribed capital

 
 
                                            2021   2020 
                                            GBPm   GBPm 
Subordinated liabilities 
Senior non-preferred notes and Tier 
 2 eligible subordinated notes             7,292  8,712 
                                           ----- 
Fair value hedge accounting adjustments      305    635 
                                           ----- 
Unamortised premiums and issue costs        (22)   (30) 
                                           ----- 
Total                                      7,575  9,317 
                                           ----- 
Subscribed capital 
                                           ----- 
Permanent interest-bearing shares            212    212 
                                           ----- 
Fair value hedge accounting adjustments       33     43 
                                           ----- 
Unamortised premiums and discounts           (2)    (2) 
                                           ----- 
Total                                        243    253 
                                           ----- 
 
 

All of the Society's subordinated liabilities and permanent interest-bearing shares (PIBS) are unsecured. The Society may, with the prior consent of the Prudential Regulation Authority (PRA), repay the PIBS and redeem the Tier 2 eligible subordinated notes early. The redemption of senior non-preferred notes does not require regulatory consent.

Senior non-preferred notes are a class of subordinated liability which rank equally with each other and behind the claims against the Society of all depositors, creditors and investing members other than holders of Tier 2 eligible subordinated notes, PIBS, Additional Tier 1 (AT1) instruments and core capital deferred shares (CCDS). S enior non-preferred notes contribute to meeting the Society's minimum requirement for own funds and eligible liabilities (MREL) and loss absorbing requirements. The Tier 2 eligible subordinated notes rank equally with each other and ahead of claims against the Society of holders of PIBS, AT1 instruments and CCDS.

PIBS rank equally with each other and the Group's AT1 instruments. They are deferred shares of the Society and rank behind the claims against the Society of all noteholders, depositors, creditors and investing members of the Society, other than the holders of CCDS.

12. Provisions for liabilities and charges

 
 
                              Customer  Other provisions  Total 
                               redress 
                                  GBPm              GBPm   GBPm 
At 5 April 2020 (note i)           114                32    146 
Provisions utilised               (77)              (54)  (131) 
Charge for the year                100                63    163 
Release for the year              (13)               (6)   (19) 
Net income statement charge 
 (note ii)                          87                57    144 
At 4 April 2021                    124                35    159 
 

Notes:

i. Comparatives have been restated to reflect the change in presentation of the bank levy as detailed in note 2.

ii. The net income statement charge relating to customer redress is included in provisions for liabilities and charges. The net income statement charge relating to other provisions is recognised in administrative expenses, with the exception of GBP1 million in respect of obligations under the Financial Services Compensation Scheme which is included in provisions for liabilities and charges.

Customer redress

During the course of its business, the Group receives complaints from customers in relation to past sales or ongoing administration. The Group is also subject to enquiries from and discussions with its regulators and governmental and other public bodies, including the Financial Ombudsman Service (FOS), on a range of matters. Customer redress matters may also exist in relation to other aspects of past sales and administration of customer accounts, quality control issues and non-compliance with consumer credit legislation or other regulatory matters. Consideration of such customer redress matters may result in a provision, a contingent liability or both, depending upon relevant facts and circumstances. No provision is made where it is concluded that it is not probable that a quantifiable payment will be made; this will include circumstances where the facts are unclear or further time is required to reasonably quantify the expected payment.

At 4 April 2021, the Group holds provisions of GBP124 million (2020: GBP114 million) in respect of the potential costs of remediation and redress in relation to past sales of PPI, issues relating to administration of customer accounts, issues relating to historical quality control procedures, non-compliance with consumer credit legislation and other regulatory matters.

Within provisions for customer redress, GBP38 million is held as a result of the Group's investigations into its historical quality control procedures. The provision has been based on detailed reviews completed to date into specific areas of concern and represents the Group's best estimate of the liability. As further work is undertaken on these areas, it is possible that the ultimate liability may be higher or lower than the amount provided at 4 April 2021. An estimate of the potential impact of any contingent liabilities associated with the ongoing investigations has not been provided as it is not practicable to do so.

Other provisions

Other provisions primarily include amounts for severance costs, a number of property-related provisions and expected credit losses on irrevocable personal loan and mortgage lending commitments.

12. Provisions for liabilities and charges (continued)

Critical accounting estimates and judgements

There is significant estimation uncertainty in estimating the probability, timing and amount of any cash outflows associated with customer redress provisions.

Provisions are recognised for matters relating to customer redress where an outflow is probable and can be estimated reliably. Amounts provided are based on management's best estimate of the number of customers impacted and anticipated remediation. As any new matters emerge, an estimate is made of the outcome, although in some cases uncertainties remain as to the eventual costs given the inherent difficulties in determining the number of impacted customers and the amount of any redress applicable.

Provisions relating specifically to PPI mis-selling are no longer considered to contain significant estimation uncertainty due to the time elapsed since the PPI claims deadline in August 2019. Sources of significant estimation uncertainty in provisions for customer redress relate specifically to matters in respect of administration of customer accounts and quality control procedures. A number of assumptions are applied in estimating provisions relating to the past administration of customer accounts, including the identification and segmentation of customer groups expected to receive redress and the amount of redress payable for each customer group. If the total number of customers expected to receive redress changed by 10%, the provision would change by GBP3 million. If the amount of redress expected to be payable changed by 10%, the provision would change by GBP2 million. For provisions relating to quality control procedures, if the number of customers expected to receive redress changed by 10%, the provision would change by GBP5 million. Provisions will be adjusted in future periods as further information becomes available.

13. Contingent liabilities

During the ordinary course of business, the Group may be subject to complaints and threatened or actual legal proceedings brought by or on behalf of current or former employees, customers, investors or other third parties, as well as legal and regulatory reviews, challenges, investigations and enforcement actions. Any such material cases are periodically reassessed, with the assistance of external professional advisers where appropriate, to determine the likelihood of incurring a liability.

The Group does not disclose amounts in relation to contingent liabilities associated with such claims where the likelihood of any payment is remote. The Group also does not disclose an estimate of the potential financial impact or effect on the Group of contingent liabilities where it is not currently practicable to do so. The Group does not expect the ultimate resolution of any current complaints, threatened or actual legal proceedings, regulatory or other matters to have a material adverse impact on its financial position .

Contingent liabilities associated with redress provisions are discussed further in note 12.

14. Retirement benefit obligations

The Group operates two defined contribution pension schemes in the UK - the Nationwide Group Personal Pension Plan (GPP) and the Nationwide Temporary Workers Pension Scheme. New employees are automatically enrolled into one of these schemes. Outside of the UK, there is a defined contribution pension scheme for a small number of employees in the Isle of Man.

The Group also has funding obligations to several defined benefit pension schemes, which are administered by boards of trustees. Pension trustees are required by law to act in the interests of all relevant beneficiaries and are responsible for the investment policy of fund assets, as well as the day to day administration. The Group's largest pension scheme is the Nationwide Pension Fund (the Fund). This is a contributory defined benefit pension scheme, with both final salary and career average revalued earnings (CARE) sections. The Fund was closed to new entrants in 2007 and since that date employees have been able to join the GPP. In line with UK pensions legislation, a formal actuarial valuation ('Triennial Valuation') of the assets and liabilities of the Fund is carried out at least every three years by independent actuaries.

The Fund was closed to future accrual on 31 March 2021, with affected employees being moved to the GPP for future pension savings. From 1 April 2021, members moved from active to deferred status, with future indexation of deferred pensions before retirement measured by reference to the Consumer Price Index (CPI) . In the year ended 4 April 2020, a gain of GBP164 million was recognised as a past service credit within administrative expenses relating to the closure, and GBP60 million was accrued within 'other administrative expenses' for the cost of one-off payments to be made to affected members in the form of cash or as contributions to their pensions.

In November 2020, Nationwide and the Trustee of the Fund entered into an arrangement whereby Nationwide has agreed to provide GBP1.7 billion of collateral (a contingent asset) in the form of

self-issued Silverstone notes to provide additional security to the Fund. The Fund would have access to these notes in the case of certain events such as insolvency of Nationwide.

Further information on the Group's obligations to defined benefit pension schemes is set out below.

Defined benefit pension schemes

 
Retirement benefit obligations on the balance sheet 
                                           2021     2020 
                                           GBPm     GBPm 
Fair value of fund assets                 7,033    6,530 
Present value of funded obligations     (6,853)  (6,228) 
Present value of unfunded obligations       (8)      (8) 
Surplus at 4 April                          172      294 
 

Most members of the Fund can draw their pension when they reach the Fund's retirement age of 65. The methodology for calculating the level of pension benefits accrued before 1 April 2011 varies; however, most are based on 1/54th of final salary for each year of service. Pension benefits accrued after 1 April 2011 are usually based on 1/60th of average earnings, revalued to the age of retirement, for each year of service (also called CARE). As noted above, there will be no further accrual of benefits from 1 April 2021, and future indexation of previously accrued benefits will be valued on the basis of CPI.

On the death of a Fund member, benefits may be payable in the form of a spouse/dependant's pension, lump sum (paid within five years of a Fund member beginning to take their pension), or refund of Fund member contributions. Prior to 1 April 2021, Fund members were able to place redundancy severance into their pension.

14. Retirement benefit obligations (continued)

Approximately 68% of the Fund's pension obligations have been accrued in relation to deferred Fund members (current and former employees not yet drawing their pension) and 32% for current pensioners and dependants. The average duration of the Fund's pension obligation is approximately 22 years, reflecting the split of the obligation between deferred members (25 years) and current pensioners (14 years).

The Group's retirement benefit obligations also include GBP8 million (2020: GBP8 million) in respect of unfunded legacy defined benefit arrangements.

Changes in the present value of the net defined benefit asset/(liability), including unfunded obligations, are as follows:

 
Movements in net defined benefit asset/(liability) 
                                            2021   2020 
                                            GBPm   GBPm 
Surplus/(deficit) at 5 April                 294  (105) 
Current service cost                        (72)   (90) 
Past service (cost)/credit                   (5)    169 
Interest on net defined benefit asset          7      3 
Return on assets greater than discount 
 rate                                        467    141 
Contributions by employer                     66    127 
Administrative expenses                      (6)    (5) 
Actuarial (losses)/gains on defined 
 benefit obligations                       (579)     54 
Surplus at 4 April                           172    294 
 

Current service cost represents the increase in liabilities resulting from employees accruing service over the year. This includes salary sacrifice employee contributions.

Past service cost represents a GBP5 million (2020: GBP2 million) increase in liabilities arising from Fund members choosing to pay additional contributions (AVCs or pension credits). Included within the past service credit for the year ended 4 April 2020 is a gain of GBP164 million relating to the decision to close the Fund to future accrual on 31 March 2021 and a gain of GBP7 million in respect of Fund members made redundant during that year.

The interest on the net defined benefit asset represents the interest accruing on the liabilities over the year, offset by the interest income on assets. A net interest credit of GBP7 million was recognised in the year ended 4 April 2021 (2020: GBP3 million).

The GBP467 million gain relating to the return on assets greater than the discount rate (2020: GBP141 million) is driven by gains on equities and investments in unlisted asset classes.

During the year, Nationwide and the Trustee agreed to a new Deficit Recovery Plan and Schedule of Contributions following the finalisation of the Fund's 31 March 2019 actuarial valuation. As a consequence of entering into the contingent asset arrangement, no employer deficit contributions were required in the year ended 4 April 2021. Additionally, no employer deficit contributions will be required in the year ending 4 April 2022 or in future years under the terms of the new Deficit Recovery Plan. Employer contributions of GBP66 million in the year ended 4 April 2021 relate to the final contributions in respect of benefit accrual prior to the Fund closing to future accrual on 31 March 2021.

14. Retirement benefit obligations (continued)

The GBP579 million actuarial loss on defined benefit obligations (2020: GBP54 million actuarial gain) is due to:

-- An experience gain of GBP43 million (2020: GBP117 million gain) primarily reflecting the difference between estimates of long-term inflation and membership assumptions compared to actual

long-term inflation.

-- A GBP581 million loss (2020: GBP34 million loss) from changes in financial assumptions, driven by a 0.50% increase in assumed Retail Price Index (RPI) inflation and 0.75% increase in assumed Consumer Price Index (CPI) inflation (which increases the value of the liabilities), partially offset by a 0.05% increase in the discount rate (which decreases the value of liabilities).

-- A GBP41 million loss (2020: GBP29 million loss) arising from updates to reflect the Fund's new commutation factors, partially offset by the impact of updating to the latest industry standard actuarial model for projecting future longevity improvements.

The principal actuarial assumptions used are as follows:

 
Principal actuarial assumptions 
                                        2021  2020 
                                           %     % 
Discount rate                           2.00  1.95 
Future salary increases                    -  2.65 
Future pension increases (maximum 5%)   3.00  2.55 
Retail price index (RPI) inflation      3.10  2.60 
Consumer price index (CPI) inflation    2.40  1.65 
 

An assumption for future salary increases is no longer required due to the closure of the Fund to future accrual from 1 April 2021.

The assumptions for mortality rates are based on standard mortality tables which allow for future improvements in life expectancies and are adjusted to represent the Fund's membership. The assumptions made are illustrated in the table below, showing how long the Group would expect the average Fund member to live for after the age of 60, based on reaching that age at 4 April 2021 or in 20 years' time at 4 April 2041.

 
Life expectancy assumptions (years) 
                              2021  2020 
Age 60 at 4 April 2021 
   Males                      27.6  27.6 
   Females                    29.4  29.3 
Age 60 at 4 April 2041: 
   Males                      29.0  29.0 
   Females                    30.7  30.6 
 

14. Retirement benefit obligations (continued)

Critical accounting estimates and judgements

Retirement benefit obligations

The key assumptions used to calculate the defined benefit obligation which represent significant sources of estimation uncertainty are the discount rate, inflation assumptions and mortality assumptions. If different assumptions were used, this could have a material effect on the reported surplus. The sensitivity of the results to these assumptions is shown below.

 
Change in key assumptions at 4 April 
 2021 
                                        Increase/(decrease) 
                                            in surplus from 
                                          assumption change 
                                                       GBPm 
0.1% increase in discount rate                          145 
0.1% increase in inflation assumption                 (132) 
1 year increase in life expectancy at 
 age 60 in respect of all members                     (233) 
 

The above sensitivities apply to individual assumptions in isolation. The 0.1% sensitivity to the inflation assumption includes a corresponding 0.1% increase in the future pension increase assumptions.

15. Core capital deferred shares

 
 
                      Number  CCDS     Share  Total 
                   of shares         premium 
                              GBPm      GBPm   GBPm 
At 4 April 2021   10,555,500    11     1,323  1,334 
At 4 April 2020   10,500,000    11     1,314  1,325 
 

During the year ended 4 April 2021 , the Society issued 55,500 of GBP1 core capital deferred shares (CCDS). These CCDS form a single series together with previous issuances. The proceeds of the issuance were GBP9 million (gross and 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 equally 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.

15. Core capital deferred shares (continued)

In the event of a winding up or dissolution of the Society and if a surplus was available, the amount that the investor would receive for each CCDS held is limited to the average principal amount in issue, which is currently GBP126.39 per share.

There is a cap on the distributions that can be paid to holders of CCDS in any financial year. The cap is currently set at GBP16.73 per share and is adjusted annually in line with CPI. A final distribution of GBP54 million (GBP5.125 per share) for the financial year ended 4 April 2020 was paid on 22 June 2020 and an interim distribution of GBP54 million (GBP5.125 per share) in respect of the period to

30 September 2020 was paid on 21 December 2020. These distributions have 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 4 April 2021, amounting in aggregate to GBP54 million. This has not been reflected in these consolidated financial statements as it will be recognised in the year ending 4 April 2022, by reference to the date at which it was declared .

16. Other equity instruments

 
 
               2021   2020 
               GBPm   GBPm 
At 5 April      593    992 
Redemptions       -  (992) 
Issuances       743    593 
At 4 April    1,336    593 
 

Other equity instruments are Additional Tier 1 (AT1) capital instruments.

The Society issued GBP750 million (GBP743 million net of issuance costs) of new AT1 capital instruments on 10 June 2020. The AT1 instruments rank equally to each other and are junior to claims against the Society of all depositors, creditors and investing members, other than the holders of CCDS. The AT1 instruments pay a fully discretionary, non-cumulative fixed interest at an initial rate of 5.75% per annum. The rate will reset on 20 December 2027 and every five years thereafter to the benchmark gilt reset reference rate plus 5.625% per annum. Coupons are paid semi-annually in June and December.

The Society issued GBP600 million (GBP593 million net of issuance costs) of new AT1 capital instruments on 17 September 2019. The AT1 instruments rank equally to each other and are junior to claims against the Society of all depositors, creditors and investing members, other than the holders of CCDS. The AT1 instruments pay fully discretionary, non-cumulative fixed interest coupons at an initial rate of 5.875% per annum. The rate will reset on 20 June 2025 and every five years thereafter to the benchmark gilt reset reference rate plus 5.39% per annum. Coupons are paid semi-annually in June and December. The Society redeemed GBP1 billion (GBP992 million net of issuance costs) of AT1 capital instruments in full on 20 June 2019.

Interest payments totalling GBP57 million were made in the year ended 4 April 2021 (2020: GBP42 million), representing the maximum non-cumulative fixed coupon amounts. These payments have been recognised in the consolidated statement of movements in member's interest and equity. A coupon payment of GBP39 million is expected to be paid on 22 June 2021 and will be recognised in the consolidated statement of movements in members' interests and equity in the financial year ending 4 April 2022.

AT1 instruments have no maturity date but are repayable at the option of the Society from the first reset date, and on every fifth anniversary reset date thereafter. 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 GBP100 of AT1 holding.

Responsibility statement

The directors confirm that the consolidated financial statements, prepared in accordance with International Financial Reporting Standards adopted pursuant to Regulation (EC) No. 1606/2002 as it applies in the European Union (and endorsed by the UK), give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group as required by the Disclosure Guidance and Transparency Rules (DTR 4.1.12). The Chief Executive's review and the Financial review together include a fair review of the development and performance of the business of the Group, and taken together with the primary financial statements, supporting notes and the Risk report provide a description of the principal risks and uncertainties faced.

A full list of the board of directors will be disclosed in the Annual Report and Accounts 2021.

Signed on behalf of the Board by

Chris Rhodes

Chief Financial Officer

20 May 2021

Other information

The financial information set out in this announcement which was approved by the Board on 20 May 2021 does not constitute accounts within the meaning of section 73 of the Building Societies Act 1986.

The Annual Report and Accounts 2020 have been filed with the Financial Conduct Authority and the Prudential Regulation Authority. The Annual Report and Accounts 2021 will be published on the website of Nationwide Building Society, nationwide.co.uk The report of the auditor on those accounts is unqualified and did not draw attention to any matters by way of emphasis. The Annual Report and Accounts 2021 will be lodged with the Financial Conduct Authority and the Prudential Regulation Authority following publication.

A copy of this Preliminary report is placed on the website of Nationwide Building Society, nationwide.co.uk from 21 May 2021. 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                    Charles Wood 
 Mobile: +44 (0)7785 344 137       Mobile: +44 (0)7500 999 612 
 Sara.Batchelor@nationwide.co.uk   Charles.Wood@nationwide.co.uk 
 
 Eden Black                        Carly Thomas 
 Mobile: +44 (0)7793 596 317       Mobile: +44 (0)7464 491 600 
 Eden.Black@nationwide.co.uk       Carly.Thomas@nationwide.co.uk 
 

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