We could not find any results for:
Make sure your spelling is correct or try broadening your search.
Register for real-time alerts, custom portfolio, and market movers
| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Nationwide Building Society | LSE:NBS | London | Ordinary Share | GB00BBQ33664 | CORE CAPITAL DEFERRED SHS (MIN 250 CCDS) |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 134.50 | 132.00 | 137.00 | 134.50 | 134.50 | 134.50 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Mortgage Bankers & Loan Corr | 4.68B | 1.66B | 157.6429 | 0.51 | 849.4M |
From Apr 2023 to Apr 2024
TIDMNBS TIDM34VG
RNS Number : 9560Z
Nationwide Building Society
19 May 2023
Nationwide Building Society
Preliminary Results Announcement
for the year ended
4 April 2023
Contents
Review of the year 3 Chief Executive's review 4 Performance summary 5 Financial review 6 Risk report 14 Consolidated financial statements 69 Notes to the consolidated financial statements 74 Responsibility statement 98 Other information 98 Contacts 98
Underlying profit
Profit before tax shown on a statutory and underlying basis is set out on page 7. The purpose of the underlying profit 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, risks relating to sustainability and climate change, the policies and actions of regulatory authorities and the impact of tax or other legislation and other regulations in the jurisdictions in which Nationwide operates. The economic outlook remains unusually uncertain and, 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.
Review of the year
Strongest financial results at Nationwide enable the Society to launch the Nationwide Fairer Share Payment, returning GBP340m directly to eligible members
Hot Features
Premium
Kevin Parry, Chairman, Nationwide Building Society, "Our strategy is to increase value, offer simply
said: brilliant service, be good for society and to become
simpler and more efficient. This will ensure Nationwide's
"Our financial strength has allowed the Board to future strength and our ability to support customers
declare an inaugural distribution - the Nationwide and wider society today and for the long term."
Fairer Share Payment. Eligible members will receive
a GBP100 payment into their current accounts in Chris Rhodes, Chief Financial Officer, Nationwide
June 2023. Building Society, said:
"The Board intends to declare annual distributions "Strong underlying profits have improved capital,
provided they would not be detrimental to the financial with a leverage ratio of 6.0%. In addition, our
strength of the Society(1) ." strong deposit inflow of GBP9.1bn increased our
market share of deposits to 9.6% and further strengthened
Debbie Crosbie, Chief Executive, Nationwide Building our liquidity position.
Society, said:
"The sustained strength of our finances has allowed
"We have delivered a strong financial performance us to support our members through a highly uncertain
by providing banking that is fairer, more rewarding period and significant cost of living increases.
and for the good of society.
"We have continued to support our members' borrowing
"Our strongest financial performance means that and savings needs during the year, and as a result
we are able to launch the Nationwide Fairer Share have delivered growth in our mortgage and deposit
Payment, as well as the Nationwide Fairer Share balances."
Bond - with a highly competitive interest rate
on savings for our existing members. We can do
this because we're a building society, not a bank,
and our profit is reinvested for our members' benefit.
"Last year we delivered GBP1,055m of member financial
benefit through better pricing and incentives than
the market average and were number 1 for customer
satisfaction in our peer group for the eleventh
year running(2) .
--------------------------------------------------------- -----------------------------------------------------------
Business and trading highlights Financial highlights
* Deposit market share grew to 9.6% (2022: 9.4%) with * Our balance sheet remains strong, with Tier 1 capital
GBP9.1bn balance growth (2022: GBP7.7bn), reflecting resources increasing by GBP1.3bn, a leverage ratio of
a competitive savings offering 6.0% (2022: 5.4%) and CET1 ratio of 26.5% (2022:
24.1%)
* Continued growth in current accounts, increasing
stock market share to 10.4%(3) (February 2022: 10.3%) * Underlying profit increased to GBP2,233m (2022:
GBP1,604m) and statutory profit increased to
GBP2,229m (2022: GBP1,597m) driven by income growth
* Total gross mortgage lending reduced by GBP2.9bn to
GBP33.6bn (2022: GBP36.5bn), with net lending of
GBP3.3bn (2022: GBP7.1bn). Market share of balances * Rising interest rates supported growth in total
was 12.2% (2022: 12.4%) in a highly competitive underlying income to GBP4,673m (2022: GBP3,867m)
market
* Net interest margin improved to 1.57% (2022: 1.26%)
* First for customer satisfaction among our peer group
for eleven years running, with a current lead of
3.8%pts(2) . Ranked joint 28(th) (January 2022: joint * Credit impairment charges are higher at GBP126m
22(nd) )(4) in the all-sector UK Customer (2022: release of GBP27m). However, the credit
Satisfaction Index quality of our lending portfolios remains strong with
low levels of arrears
* Supported our customers through the launch of Member
Online Bond, current account cashback and Flex * Total costs have increased by 4% to GBP2,323m (2022:
Instant Saver products, and an enhanced Mortgage GBP2,234m), largely reflecting inflation
Manager tool
* Member financial benefit has increased to GBP1,055m
* Helped over 72,000 first time buyers into a home of (2022: GBP325m). This has been supported by our
their own (2022: 87,000) competitive mortgage and savings products; as we have
passed a greater proportion of interest rate rises to
savers than the market average
* Committed members continued to grow to 3.68m(5)
(2022: 3.62m)
* The strength of our finances has enabled the Society
to launch the Nationwide Fairer Share in May 2023.
* Continued to commit 1% 6 of pre-tax profits to good This includes Fairer Share payments to be made in
causes each year and also provided GBP1m cost of June 2023(1) , returning GBP340 million directly to
living support for charities our eligible members, as well as a Fairer Share Bond
available to members.
* Committed to helping the UK achieve net zero, having
set and disclosed challenging intermediate (by 2030)
science-based targets
Chief Executive's review
My reflections on 2022/23 And most notably, our financial strength has enabled
us to introduce the Nationwide Fairer Share Payment,
Last year, we started our modern mutual journey. which rewards our members who have the deepest banking
relationships with us, and the Nationwide Fairer
We are making good progress on our strategy, despite Share Bond, with a highly competitive interest rate
the macroeconomic challenges and market pressures on savings. It is a clear and positive way of
that impacted our costs and the cost of living demonstrating
for our customers. Throughout this, our colleagues our mutual difference and aligns with our purpose.
kept their focus on helping our customers in the You can find out more information about it on our
best way possible. website (7) .
Our financial performance last year was the strongest Simultaneously, we have demonstrated our mutual
on record. We also delivered our highest ever level good in the communities we serve, committing GBP9.6
of member financial benefit, through better pricing million over the year to charitable activities.
and incentives than the market average.
Outlook
As a mutual, we aim to reward our savings customers
with the highest savings rates we can, whilst ensuring The economic outlook remains highly uncertain, with
we remain financially sustainable over the longer continued increases in the cost of living and higher
term. Our average deposit rates over the year were interest rates for borrowers putting further pressure
65% higher than the market average. Combined with on household finances and restraining consumer
our attractive current account switching incentive confidence.
during October and November 2022, this increased This has led to reduced mortgage market activity
our market share of deposit balances to 9.6%. and lower house prices which are expected to remain
subdued in the second half of 2023.
We are here to support our customers today and
for the long term, which is why it is important A deterioration in the economic outlook during the
that we maintain our financial strength. Our leverage period, with expected future increases in arrears
ratio, which measures our ability to withstand due to affordability pressures, is fully reflected
economic shocks, continues to be well above our in the economic scenarios used within our credit
minimum regulatory threshold. loss provisions. The credit quality of our lending
portfolios remains strong with low current levels
This strength allowed us to support our customers of arrears.
and colleagues in new ways. We invested GBP100
million, which included the cost of providing cashback Overall, our borrowers are relatively well placed
to current account customers on their supermarket to withstand challenges in the medium term, given
shopping when they made purchases using their debit the significant proportion of borrowing on fixed
cards between February and April 2023. It also rates, and the relatively low number of borrowers
included cost of living payments for our colleagues who spend a high proportion of their income on debt
and support for customers facing cost of living repayments. However, the transition to higher interest
pressures, including practical support in our branches, payments is a challenge for households as they adjust
a dedicated telephone helpline and an online cost their expenditure priorities. We will continue to
of living hub. support those borrowers who face payment difficulties.
Nationwide remains well positioned to use its financial
strength to continue to support its customers through
the challenges ahead.
Debbie Crosbie
Chief Executive
(1) The GBP340 million payment will be recognised in the income statement in the year ending 4 April 2024. Any future payments through Nationwide Fairer Share will remain discretionary, subject to the Society's ongoing satisfactory financial performance and Board approval. Payments through Nationwide Fairer Share will only be considered after any payment of capital distributions, including those for Core Capital Deferred Shares and Additional Tier 1 instruments.
(2) Lead at March 2023: 3.8%pts, March 2022: 4.6%pts. (c) Ipsos 2023, Financial Research Survey (FRS), for the 12 months ending 31 March 2013 to 12 months ending 31 March 2023. Results based on a sample of around 47,000 adults (aged 16+). The survey contacts around 51,000 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 3.3% of the main current account market as of April 2022 - 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.
(3) CACI's Current Account and Savings Database, Stock (February 2023 and February 2022).
4 Institute of Customer Service UK Customer Satisfaction Index (UKCSI) as at January 2023 and January 2022.
5 The 3.68 million refers to 'committed members' who have their main personal current account with us or a mortgage of at least GBP5,000, or at least GBP1,000 in savings accounts, plus at least one other product.
6 The 1% is calculated based on average pre-tax profits over the previous three years.
7 The Nationwide Fairer Share, nationwide.co.uk/fairershare-payment
Performance summary
2023 2022
---------------- -------------
Financial performance GBPm GBPm
---------------------------------------- -------------
Total underlying income 4,673 3,867
---------------------------------------- ---------------- -------------
Administrative expenses 2,323 2,234
---------------------------------------- ---------------- -------------
Underlying profit before tax
(note i) 2,233 1,604
---------------------------------------- ---------------- -------------
Statutory profit before tax 2,229 1,597
---------------------------------------- ---------------- -------------
Mortgage lending GBPbn % GBPbn %
---------------------------------------- ---------- ---- ------- ----
Group residential - gross/market
share 33.6 10.8 36.5 11.8
---------------------------------------- ---------- ---- ------- ----
Group residential - net/market
share 3.3 4.9 7.1 9.4
---------------------------------------- ---------- ---- ------- ----
Average loan to value of new
residential lending (by value) 69 70
---------------------------------------- ---------------- -------------
Deposit balances GBPbn % GBPbn %
---------------------------------------- ---------- ---- ------- ----
Member deposits balance movement/market
share (note ii) 9.1 14.6 7.7 9.3
---------------------------------------- ---------- ---- ------- ----
Key ratios % %
---------------------------------------- ---------------- -------------
Underlying cost income ratio
(note iii) 49.7 57.8
---------------------------------------- ---------------- -------------
Statutory cost income ratio 49.8 57.9
---------------------------------------- ---------------- -------------
Net interest margin 1.57 1.26
---------------------------------------- ---------------- -------------
Other key performance indicators 2023 2023 Target
---------------------------------------- ---------------- -------------
Committed members (m) (note
iv) 3.68 3.75
---------------------------------------- ---------------- -------------
Member financial benefit ( GBPm)
(note v) 1,055 400
---------------------------------------- ---------------- -------------
Core products satisfaction lead 3.8%pts(8) 4%pts
(%pts)
---------------------------------------- ---------------- -------------
UK Customer Satisfaction Index Joint 5th
(rank) 28(th9)
---------------------------------------- ---------------- -------------
2023 2022
---------------- -------------
Balance sheet GBPbn % GBPbn %
---------------------------------------- ------- ----
Total assets 271.9 272.4
---------------------------------------- ---------- ---- ------- ----
Loans and advances to customers 210.8 208.1
---------------------------------------- ---------- ---- ------- ----
Mortgage balances/market share
(note vi) 201.7 12.2 198.1 12.4
---------------------------------------- ---------- ---- ------- ----
Member deposits/market share
(note ii) 187.1 9.6 178.0 9.4
---------------------------------------- ---------- ---- ------- ----
Asset quality % %
Residential mortgages
---------------------------------------- ---------------- -------------
Proportion of residential mortgage
accounts 3 months+ in arrears 0.32 0.34
---------------------------------------- ---------------- -------------
Impairment charge/(release) as
a % of average gross balance
(note vii) 0.05 (0.07)
---------------------------------------- ---------------- -------------
Average indexed loan to value
(by value) 55 52
---------------------------------------- ---------------- -------------
Consumer banking
---------------------------------------- ---------------- -------------
Proportion of customer balances
with amounts past due more than
3 months (excluding charged off
balances) 1.21 1.13
---------------------------------------- ---------------- -------------
Impairment charge as a % of average
gross balance
(note vii) 0.68 2.04
---------------------------------------- ---------------- -------------
Key ratios % %
Capital
---------------------------------------- ---------------- -------------
Common Equity Tier 1 ratio 26.5 24.1
---------------------------------------- ---------------- -------------
Leverage ratio (note viii) 6.0 5.4
---------------------------------------- ---------------- -------------
Other balance sheet ratios
---------------------------------------- ---------------- -------------
Liquidity Coverage Ratio (note
ix) 180 183
---------------------------------------- ---------------- -------------
Wholesale funding ratio (note
x) 25.0 28.8
---------------------------------------- ---------------- -------------
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 or 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 in the consolidated income statement.
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 and FSCS cost or refunds from institutional failures are excluded from the statutory cost income ratio to arrive at the underlying cost income ratio.
iv. Committed members have their main personal current account with us or a mortgage of at least GBP5,000, or at least GBP1,000 in savings accounts, plus at least one other product.
v. For more information on member financial benefit see page 8.
vi. Mortgage balances are presented gross of credit provisions.
vii. In the calculation of 'Impairment charge/(release) as a % of average gross balance', average gross balance is calculated as the average of balances at each month end date.
viii. Our target for 2023 was a leverage ratio of at least 4.5%.
ix. The Liquidity Coverage Ratio represents a simple average of the ratios for the last 12 month ends.
x. The wholesale funding ratio includes all balance sheet sources of funding (including securitisations).
(8) (c)Ipsos 2023, Financial Research Survey (FRS), for the 12 months ending 31 March 2023. For more information, see footnote 2 on page 4.
(9) Institute of Customer Service UK Customer Satisfaction Index (UKCSI) as at January 2023.
Financial review
Financial highlights
Underlying profit:
GBP2,233m
(2022: GBP1,604m)
Statutory profit:
GBP2,229m
(2022: GBP1,597m)
---------------------
Leverage ratio: 6.0%
(2022: 5.4%)
* Underlying profit for the year increased to GBP2,233
million (2022: GBP1,604 million) and statutory profit
increased to GBP2,229 million (2022: GBP1,597
million). This reflects income growth, partially
offset by higher costs and charges for credit
impairments.
* Total income increased by GBP806 million due to
rising interest rates, with net interest margin
increasing to 1.57% (2022: 1.26%).
* Member financial benefit increased to GBP1,055
million (2022: GBP325 million), supported by the
strength of our mortgage and savings rates relative
to the market average.
* Mortgage balances increased to GBP201.7 billion
(2022: GBP198.1 billion), resulting in a stock market
share of 12.2% (2022: 12.4%). Member deposit balances
increased by GBP9.1 billion to GBP187.1 billion
(2022: GBP178.0 billion) and our market share of
deposits increased to 9.6% (2022: 9.4%).
* Total administrative expenses increased by GBP89
million to GBP2,323 million (2022: GBP2,234 million),
reflecting higher inflation, including GBP40 million
relating to cost of living support to colleagues.
* The credit impairment charge of GBP126 million for
the year (2022: release of GBP27 million) reflects a
deterioration in the economic outlook during the year,
with expected future increases in arrears due to
affordability pressures. However, the credit quality
of our lending portfolios remains very strong with
low levels of arrears.
* CET1 and leverage ratios increased to 26.5% and 6.0%
(2022: 24.1% and 5.4%) respectively.
The results are prepared in accordance with International Financial Reporting Standards (IFRSs) as set out in note 2 to the consolidated financial statements. Underlying results are shown below, together with a reconciliation to the statutory results.
Income statement
Net interest
margin:
1.57%
(2022: 1.26%)
Underlying cost
income ratio:
49.7%
(2022: 57.8%,
note iii)
Statutory cost
income ratio:
49.8%
(2022: 57.9%,
note iii)
Return on assets
0.61%
(2022: 0.46%)
Underlying and statutory results
2023 2022
------- -------
GBPm GBPm
--------------------------------------------- ------- -------
Net interest income 4,498 3,562
--------------------------------------------- ------- -------
Net other income 175 305
--------------------------------------------- ------- -------
Total underlying income 4,673 3,867
--------------------------------------------- ------- -------
Administrative expenses (2,323) (2,234)
--------------------------------------------- ------- -------
Impairment (charge)/release (126) 27 --------------------------------------------- ------- ------- Provisions for liabilities and charges 9 (56) --------------------------------------------- ------- ------- Underlying profit before tax (note i) 2,233 1,604 --------------------------------------------- ------- ------- Losses from derivatives and hedge accounting (note ii) (4) (7) --------------------------------------------- ------- ------- Statutory profit before tax 2,229 1,597 --------------------------------------------- ------- ------- Taxation (565) (345) --------------------------------------------- ------- ------- Profit after tax 1,664 1,252 --------------------------------------------- ------- -------
Notes:
i. Underlying profit represents management's view of underlying performance. Gains or losses from derivatives and hedge accounting (presented separately within total income) and FSCS costs or refunds from institutional failures (included within provisions for liabilities and charges) are excluded from statutory profit to arrive at underlying profit. There are no FSCS costs or refunds from institutional failures for the financial years ended 4 April 2023 and 4 April 2022.
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 (NIM)
Net interest income increased by GBP936 million to GBP4,498 million (2022: GBP3,562 million) with the net interest margin increasing to 1.57% (2022: 1.26%). Increases in the Bank rate have led to an increase in net interest income, reflecting the timing and the level of pass through of interest rate changes to savings products, partially offset by a decline in mortgage net interest income. Member financial benefit has increased, as Nationwide has passed a greater proportion of interest rate rises to savers than the market average.
Net other income has reduced by GBP130 million to GBP175 million (2022: GBP305 million), with GBP57 million cashback provided to members with a personal current account as part of the Society's cost of living support. We have also observed higher costs of providing travel insurance to packaged current account holders in 2023.
Member financial benefit
As a building society, we seek to maintain Nationwide's financial strength whilst providing value to our members through pricing, products and service. Through member financial benefit, we measure the additional financial value for members from the competitive mortgage, savings and banking products that we offer compared to the market average. Member financial benefit is calculated by comparing, in aggregate, Nationwide's average interest rates and incentives 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.
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 year.
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.
-- 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 over the financial year of GBP20 is included in the member financial benefit measure.
-- Member Prize Draw: eligible members were automatically entered into monthly prize draws with a total prize pot of GBP1 million. The prize draw was launched in September 2021 and ran until August 2022.
For the year ended 4 April 2023, this measure shows we provided our members with a financial benefit of GBP1,055 million (2022: GBP325 million). The increase is due to our strong mortgage and savings products which seek to provide good value to members. As interest rates have risen, we have passed through a higher proportion of the increase to savers than the market average. The member financial benefit of GBP1,055 million does not include the Nationwide Fairer Share Payment to be made in June 2023.
Administrative expenses
Administrative expenses have increased by GBP89 million to GBP2,323 million (2022: GBP2,234 million) largely due to inflation. The costs in the year include GBP40 million cost of living support to employees. Costs also include incremental investment in financial crime controls of GBP16 million and in technology resilience, particularly GBP26 million relating to payment systems. Redundancy and associated costs have increased by GBP32 million as we create efficiencies within our support functions. These amounts were offset by the non-recurrence of 2022 charges relating to accelerated amortisation of specific intangible assets of GBP53 million and historical fraud cases of GBP16 million.
Impairment charge/(release) on loans and advances to customers
Impairment charge/(release) (note i)
2023 2022
---- -----
GBPm GBPm
----------------------------------------- ---- -----
Residential lending 94 (128)
----------------------------------------- ---- -----
Consumer banking 31 93
----------------------------------------- ---- -----
Retail lending 125 (35)
----------------------------------------- ---- -----
Commercial 1 8
----------------------------------------- ---- -----
Impairment charge/(release) on loans and
advances 126 (27)
----------------------------------------- ---- -----
Note:
i. Impairment charge/(release) represents the net amount charged/(credited) through the income statement, rather than amounts written off during the year.
The net impairment charge for the year of GBP126 million (2022: release of GBP27 million) includes the impact of higher expected interest rates on mortgage provisions. The prior year impairment release reflected a decrease in provisions during a year where the economic outlook had improved. The underlying arrears performance of our residential mortgage portfolio has improved slightly, with consumer lending arrears marginally deteriorating. An increase in arrears from current levels is expected due to affordability pressures. More information regarding critical accounting judgements, and the forward-looking economic information used in impairment calculations, is included in note 8 to the consolidated financial statements.
Provisions for liabilities and charges
Provisions are held to cover the costs of remediation and redress in relation to historical quality control procedures, past sales and administration of customer accounts, and other regulatory matters. The release of GBP9 million (2022: GBP56 million charge) is due to updates to judgements and estimates used in determining provisions relating to historical quality control procedures. More information is included in note 12 to the consolidated financial statements.
Taxation
The tax charge for the year of GBP565 million (2022: GBP345 million) represents an effective tax rate of 25.4% (2022: 21.6%) which is higher than the statutory UK corporation tax rate of 19% (2022: 19%). The effective tax rate is higher primarily due to the banking surcharge of GBP145 million (2022: GBP72 million). The effective tax rate in 2022 was also reduced by the impact of GBP23 million of non-recurring tax adjustments in respect of prior years. Further information is provided in note 9 to the consolidated financial statements.
Balance sheet
Total assets have decreased to GBP271.9 billion at 4 April 2023 (2022: GBP272.4 billion). This is predominantly due to reduced holdings of cash and liquid assets.
Mortgage lending has been robust, with residential mortgage balances increasing to GBP201.7 billion (2022: GBP198.1 billion). Member deposit balances have increased by GBP9.1 billion to GBP187.1 billion (2022: GBP178.0 billion) as a result of increases in savings balances following the launch of competitive new products.
Assets 12-month average
Liquidity Coverage
Ratio:
180%
(2022: 183%,
note ii)
-------------------------------------------------------------------------
2023 2022
------------
GBPm % GBPm %
--------------------------------------------- ------- ---
Cash 25,635 30,221
--------------------------------------------- ------- --- ------- ---
Residential mortgages (note i) 201,662 95 198,120 95
--------------------------------------------- --- ------- ---
Commercial 5,477 3 6,054 3
--------------------------------------------- --- ------- ---
Consumer banking 4,408 2 4,638 2
--------------------------------------------- ------- --- ------- ---
211,547 100 208,812 100
--------------------------------------------- --- ------- ---
Impairment provisions (765) (746)
--------------------------------------------- ------- --- ------- ---
Loans and advances to customers 210,782 208,066
--------------------------------------------- --- ------- ---
Other financial assets 32,387 30,816
--------------------------------------------- --- ------- ---
Other non-financial assets (note iii) 3,089 3,251
--------------------------------------------- ------- --- ------- ---
Total assets 271,893 272,354
--------------------------------------------- ------- --- ------- ---
Asset quality % %
--------------------------------------------- --- ------- ---
Residential mortgages (note i):
--------------------------------------------- --- ------- ---
Proportion of residential mortgage accounts
more than 3 months in arrears 0.32 0.34
--------------------------------------------- --- ------- ---
Average indexed loan to value (by value) 55 52
--------------------------------------------- --- ------- ---
Consumer banking:
--------------------------------------------- --- ------- ---
Proportion of customer balances with amounts
past due more than
3 months (excluding charged off balances) 1.21 1.13
--------------------------------------------- ------- --- ------- ---
Notes:
i. Residential mortgages include prime, buy to let and legacy lending.
ii. This represents a simple average of the Liquidity Coverage Ratio (LCR) for the last 12 month ends. The LCR ensures that sufficient high-quality liquid assets are held to survive a short-term severe but plausible liquidity stress.
iii. Included within other non-financial assets at 4 April 2023 is GBP24 million (2022: GBP18 million) of inventory in relation to the construction of houses at the Oakfield development in Swindon.
Cash
Cash is liquidity held by our Treasury function, with the GBP4.6 billion decrease predominantly due to a GBP4.5 billion repayment of the Bank of England's Term Funding Scheme with additional incentives for SMEs (TFSME).
The average Liquidity Coverage Ratio over the 12 months ended 4 April 2023 was 180% (12 months ended 4 April 2022: 183%). Liquidity continues to be managed against internal risk appetite, which is more prudent than regulatory requirements and, under the most severe internal 30 calendar day stress test, the average liquid asset buffer remains robust.
Residential mortgages
Total gross mortgage lending was lower than in the prior year at GBP33.6 billion (2022: GBP36.5 billion) and our market share of gross advances decreased to 10.8% (2022: 11.8%). Net lending in the year was supported by our continued focus on retention through highly competitive products provided to existing members, whilst also continuing to focus on first time buyers. Prime mortgage balances increased to GBP157.6 billion (2022: GBP154.4 billion) and buy to let and legacy mortgage balances increased to GBP44.1 billion (2022: GBP43.7 billion).
Arrears remain low and have improved slightly during the year, with cases more than three months in arrears representing 0.32% (2022: 0.34%) of the total portfolio. However, an increase in arrears from current levels is expected, due to rising inflation and increasing interest rates negatively impacting household finances. Impairment provision balances have increased to GBP280 million (2022: GBP187 million) primarily due to higher interest rate expectations. This has resulted in an increase in the provisions held to reflect mortgage affordability risks, as well as increased expected credit losses in the severe downside economic scenario.
Consumer banking
Consumer banking balances have decreased to GBP4.4 billion (2022: GBP4.6 billion). Consumer banking comprises personal loan balances of GBP2.6 billion (2022: GBP2.9 billion), credit card balances of GBP1.5 billion (2022: GBP1.5 billion) and overdrawn current account balances of GBP0.3 billion (2022: GBP0.3 billion).
Arrears performance has deteriorated slightly during the year, with balances more than three months in arrears (excluding charged off accounts) representing 1.21% (2022: 1.13%) of the total portfolio. Provision balances were GBP469 million (2022: GBP529 million), primarily due to revised impacts of affordability pressures on future credit performance.
Commercial lending
During the year, commercial lending balances decreased to GBP5.5 billion (2022: GBP6.1 billion). The overall portfolio includes registered social landlords with balances of GBP4.1 billion (2022: GBP4.3 billion), project finance with balances of GBP0.5 billion (2022: GBP0.6 billion) and commercial real estate balances of GBP0.4 billion (2022: GBP0.6 billion). Both project finance and commercial real estate books are closed to new lending.
Impairment provision balances decreased to GBP16 million (2022: GBP30 million) due to updates to a small number of individual loans.
Other financial assets
Other financial assets of GBP32.4 billion (2022: GBP30.8 billion) comprise investment assets held by Nationwide's Treasury function of GBP27.6 billion (2022: GBP25.5 billion), loans and advances to banks and similar institutions of GBP2.9 billion (2022: GBP3.0 billion), derivatives with positive fair values of GBP6.9 billion (2022: GBP4.7 billion) and fair value adjustments for portfolio hedged risk of GBP(5.0) billion (2022: GBP(2.4) billion). Derivatives largely comprise interest rate and foreign exchange contracts which economically hedge financial risks inherent in Nationwide's lending and funding activities.
Members' interests, equity and liabilities Wholesale funding
ratio:
25.0%
(2022: 28.8%)
2023 2022
------- -------
GBPm GBPm
------------------------------------------------- ------- -------
Member deposits 187,143 177,967
------------------------------------------------- ------- -------
Debt securities in issue 27,626 25,629
------------------------------------------------- ------- -------
Other financial liabilities 38,701 51,509
------------------------------------------------- ------- -------
Other liabilities 1,517 1,550
------------------------------------------------- ------- -------
Total liabilities 254,987 256,655
------------------------------------------------- ------- -------
Members' interests and equity 16,906 15,699
------------------------------------------------- ------- -------
Total members' interests, equity and liabilities 271,893 272,354
------------------------------------------------- ------- -------
Member deposits
Member deposit balances grew by GBP9.1 billion (2022: GBP7.7 billion) to GBP187.1 billion (2022: GBP178.0 billion). Nationwide's market share of deposit balances increased to 9.6% (4 April 2022: 9.4%). This increase is due to growth in savings balances of GBP11.1 billion (2022: GBP4.7 billion) supported by competitive fixed rate online bond products. Our market share of accounts increased to 10.4% (2022: 10.3%)(10) . Credit balances on current accounts reduced by GBP2.0 billion (2022: GBP3.0 billion growth).
Debt securities in issue and other financial liabilities
Debt securities in issue relate to wholesale funding, excluding subordinated debt which is included within other financial liabilities. Balances increased to GBP27.6 billion (2022: GBP25.6 billion) reflecting secured and unsecured wholesale funding issuances. Other financial liabilities decreased to GBP38.7 billion (2022: GBP51.5 billion) primarily due to a reduction in funding from sale and repurchase agreements and a repayment of some of our drawings from the Bank of England's Term Funding Scheme with additional incentives for SMEs (TFSME). Nationwide's wholesale funding ratio decreased to 25.0% (2022: 28.8%). 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 GBP16.9 billion (2022: GBP15.7 billion) largely as a result of retained profits.
Statement of comprehensive income
Statement of comprehensive income (note i)
2023 2022
----- -----
GBPm GBPm
------------------------------------------------------- ----- -----
Profit after tax 1,664 1,252
------------------------------------------------------- ----- -----
Net remeasurement of pension obligations (56) 543
------------------------------------------------------- ----- -----
Net movement in cash flow hedge reserve (8) (11)
------------------------------------------------------- ----- -----
Net movement in other hedging reserve (4) 3
------------------------------------------------------- ----- -----
Net movement in fair value through other comprehensive
income reserve (103) (20)
------------------------------------------------------- ----- -----
Net movement in revaluation reserve 1 5
------------------------------------------------------- ----- -----
Total comprehensive income 1,494 1,772
------------------------------------------------------- ----- -----
Note:
i. Movements are shown net of related taxation. Gross movements are set out in the consolidated statement of comprehensive income on page 71.
(10) CACI's Current Account and Savings Database, Stock (February 2023 and February 2022).
Capital structure
Nationwide's capital position remains strong, with both the Common Equity Tier 1 (CET1) ratio and leverage ratio comfortably above regulatory capital requirements of 11.5% and 4.0% respectively. The CET1 ratio increased to 26.5% (2022: 24.1%) and the leverage ratio increased to 6.0% (2022: 5.4%). The capital disclosures included in this report are in line with UK Capital Requirements Directive V (UK CRD V) with IFRS 9 transitional arrangements included.
Capital structure
2023 2022
---------------------------- -------- --------
GBPm GBPm
---------------------------- -------- --------
Capital resources
---------------------------- -------- --------
CET1 capital 13,733 12,471
---------------------------- -------- --------
Total Tier 1 capital 15,069 13,807
---------------------------- -------- --------
Total regulatory capital 16,908 16,466
---------------------------- -------- --------
Capital requirements
---------------------------- -------- --------
Risk weighted assets (RWAs) 51,731 51,823
---------------------------- -------- --------
Leverage exposure 249,299 255,407
---------------------------- -------- --------
UK CRD V capital ratios % %
---------------------------- -------- --------
CET1 ratio 26.5 24.1
---------------------------- -------- --------
Leverage ratio 6.0 5.4
---------------------------- -------- --------
The CET1 ratio increased to 26.5% (2022: 24.1%) as a result of an increase in CET1 capital of GBP1.3 billion, in conjunction with a reduction in RWAs of GBP0.1 billion. The CET1 capital resources increase was driven by GBP1.7 billion profit after tax, partially offset by GBP0.2 billion of capital distributions, a GBP0.1 billion CET1 deduction following the repurchase of Core Capital Deferred Shares (CCDS) in February 2023, and a GBP0.1 billion reduction in the fair value through other comprehensive income reserve. RWAs reduced, with an increase in residential mortgage lending being more than offset by a reduction in off-balance sheet commitments.
The leverage ratio increased to 6.0% (2022: 5.4%), with Tier 1 capital increasing by GBP1.3 billion as a result of the CET1 capital movements referenced above. In addition, there was a decrease in leverage exposure of GBP6.1 billion, driven by the same movements as described above for RWAs. Leverage requirements continue to be Nationwide's binding Tier 1 capital constraint, as the combination of minimum and regulatory buffer requirements are in excess of the risk-based equivalent.
Further details of the capital position and future regulatory developments are described in the Capital risk section of the Risk report.
Risk report
Contents
Page
Introduction 15
Top and emerging risks 15
Principal risks and uncertainties 17
Credit risk:
Credit risk overview 18
Residential mortgages 22
Consumer banking 37
Commercial 45
Treasury assets 49
Liquidity and funding risk 54
Capital risk 64
Market risk 67
Introduction
Effective risk management is critical to delivering our purpose and ensures that we keep our customers' money safe and secure. Nationwide adopts a prudent approach to risk management, taking only those risks which support our strategy and managing those risks rigorously through a consistent and robust methodology.
All business activities involve some degree of risk. Nationwide's risk management processes ensure the risks that arise from its activities are appropriately managed 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, or increase the potential for customer harm;
-- robust decision making, ensuring the right risks are taken, in a way that is considered and supports the strategy, maintaining a reputation for high standards of business conduct;
-- ensuring the risks taken are understood, controlled, and managed appropriately; and
-- maintaining an appropriate balance between delivering customer value and remaining a prudent and responsible lender.
Risks to Nationwide
The risks which Nationwide faces can be divided across two broad categories:
-- Top and emerging risks are specific current or future risks which have the potential to impact materially Nationwide's financial results and delivery of its strategic objectives, and often impact across a number of principal risks. The most significant of these are described below, together with key developments, a summary of actions we are taking to reduce the risk, and the strategic objectives which are most likely to be impacted by each risk.
-- Principal risks encompass all of the different types of risk to which Nationwide is exposed. Further information on these risks can be found on page 17.
Top and emerging risks
Risk How we mitigate this risk
Climate change è
The risks relating to climate change, including * We limit the impact our activities have on climate
both physical risks to UK housing stock and change by investing in sustainable business practices
property and the transitional risks as the and adjusting our lending criteria to minimise risk.
country
moves towards zero net emissions, continue to
evolve as government policy develops and * We continue to develop our processes to reflect
technologies potential changes in macroeconomic conditions and the
mature. housing market as we transition to a low carbon
economy, and complete robust internal and external
stress testing for climate change.
------------------------------------------------------------------
Cyber* è
The threat of cyber-attacks remains heightened * We continuously monitor the cyber threat level and
with ongoing geopolitical tensions posing a invest in our cyber defenses to ensure we are able to
threat to Nationwide, our staff and our respond appropriately.
customers.
------------------------------------------------------------------
Data è
Our customers trust us with their data so that * We continue to prioritise investment in our data
we can deliver the services and experience which architecture, technology and capabilities to utilise
they need and expect. Given that expectations, and protect our customers' personal data within a
data technologies, and industry practices constantly evolving operating environment.
continue
to evolve at pace, the risk of inappropriate
data management remains elevated. * We work proactively with our third-party suppliers to
ensure all data they are entrusted with is robustly
controlled.
------------------------------------------------------------------
Top and emerging risks (continued)
Risk How we mitigate this risk
Economic crime* è
The risk environment remains challenging due * We continue to enhance our economic crime
to the economic environment and ongoing conflict capabilities, with a structured programme underway to
in Ukraine. These increase the risk of economic improve our operating model and economic crime
crime, through greater sanctions imposed on control environment, including transaction
individuals and institutions relating to the monitoring.
conflict, or risks of customers falling prey
to fraud or scams.
------------------------------------------------------------------
Macroeconomic environment è
The economic environment remains challenging * We maintain strong capital and liquidity levels in
with the UK narrowly avoiding technical excess of regulatory minima and regularly undertake
recession, robust internal and regulatory stress tests to ensure
increasing living costs and rising interest our financial resources are sufficient under a range
rates impacting customer finances and the of severe but plausible scenarios.
long-term
impact of ongoing geopolitical tensions yet
to emerge. Recent bank failures in the US and * We continuously review and adjust our credit policies
Europe have the potential to cause further to ensure they remain appropriate for the prevailing
economic economic conditions and continue to support customers
deterioration or impact consumer confidence, who may experience financial difficulty.
in particular within the banking sector.
* Nationwide only has exposures to highly rated banking
counterparties; these consist primarily of fully
collateralised derivatives and covered bonds for
liquidity management.
------------------------------------------------------------------
People risk è
With increasing industrial action being seen * We continuously review and develop our employee
in the UK, cost of living pressures combined proposition to ensure we remain competitive and
with competition for talent in a number of key attract the right talent to deliver for our
areas continue to have the potential to impact customers.
recruitment and retention of colleagues with
the skills and capabilities required to support
the strategy and serve our customers. * We pro-actively engage with the Nationwide Group
Staff Union on our remuneration packages and
employment policies to ensure our employees are
represented and treated fairly.
------------------------------------------------------------------
Regulatory change ì
The regulatory environment continues to evolve * We have structured initiatives in place to deliver
with numerous material regulatory developments relevant regulatory changes promptly and
expected over the next year, including the proportionately.
recently
announced 'Edinburgh Reforms', changes to the
regulatory capital framework and the * We maintain continuous engagement with all our
implementation regulators to identify and appropriately respond to
of Consumer Duty. regulatory requirements.
------------------------------------------------------------------
Technology and resilience ì
Our customers rely upon our systems and services * We have prioritised strategic investment in our
being available when they need them. The risk systems and technology capability.
of outages and system failures is increased
both by the age and complexity of the Society's
technology estate, and the volume of system * We continue to strengthen our internal control
changes to improve it. environment to improve resilience, proactively
balancing continued service provision with the need
to update and develop our systems to meet customers'
current and future needs.
------------------------------------------------------------------
Key (change in underlying risk to Nationwide in year)
ì Increased level of risk è Stable level of risk î Decreased level of risk * Not reported as a separate Top and emerging risk in the Annual Report and Accounts 2022.
Principal risks and uncertainties
The principal risks set out in the table below are the key risks relevant to the Society's business model and achievement of its strategic objectives. Where under the control of Nationwide, these risks have a defined risk appetite consisting of statements supported by metrics, including rationale, limits and triggers. The principal risks are further sub-divided into more detailed categories of risk, for which management risk appetite is set in the context of the Board's risk appetite.
Principal Definition Risk Committee
Risk
Credit The risk of loss as a result of a customer or counterparty failing Credit Committee
risk 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.
============= ============================================================================ =========================
Capital The risk that Nationwide fails to maintain sufficient capital to absorb
risk losses throughout a full economic cycle and sufficient to maintain
the confidence of current and prospective investors, customers, the
Board and regulators.
============= ============================================================================ =========================
Market The risk that the net value of, or net income arising from, the Society's
risk assets and liabilities is impacted as a result of market price or
rate changes.
============= ============================================================================
Pension The risk that the value of the pension schemes' assets will be insufficient
risk to meet the estimated liabilities, creating a pension deficit.
============= ============================================================================ =========================
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.
============= ============================================================================ =========================
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, Risk Committee
risk or from external events. Economic Crime Risk
Committee
============= ============================================================================ =========================
Model The risk of an adverse outcome that occurs as a direct result of weaknesses Model Risk Committee
risk or failures 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.
============= ============================================================================ =========================
Information on key developments and updated quantitative disclosures for credit risk, liquidity and funding risk, and capital risk are included within this Risk report. Updated net interest income sensitivity analysis is included in the market risk section of this Risk report.
Credit risk - Overview
Credit risk is the risk of loss as a result of a 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 lending Loans to registered social landlords, project finance loans made under the Private
Finance Initiative and commercial real estate lending
---------------------- -----------------------------------------------------------------------------------
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.
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 provisions
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 repaid or 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 consolidated financial statements.
Governance and oversight of economic assumptions, weightings applied to economic scenarios and all key judgements relating to impairment provisions are 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
The UK economy has experienced a period of uncertainty, with rising energy prices driving an increase in the cost of living and contributing to a high inflationary environment throughout the year. Additionally, increases to the Bank rate have increased the cost of borrowing and put further pressure on household affordability. Provisions have increased to GBP765 million (2022: GBP746 million) which includes a modelled adjustment totalling GBP177 million (2022: GBP159 million) to reflect an increase to the probability of default to account for the combined risks of rising inflation, increasing interest rates and credit indicators which are judged to be temporary, such as reduced levels of arrears.
Despite this, observed credit quality and performance have remained broadly stable. Performance has benefited from the impact of government energy support schemes, with residential mortgages and consumer banking arrears remaining at a low level relative to recent years. Help and support continues to be provided for members who are struggling as a result of increases in their cost of living, with concessions granted based on consideration of their individual circumstances.
The combined pressure of high inflation and rising interest rates has also led to a reduction in housing market activity, with a reduction in house prices of 3.1% in the year to March 2023.
Outlook
Continued pressure on personal finances is expected, with the level of government energy support reducing and inflation forecasted to return to the Bank of England 2% target in the medium rather than short term. The Group's base case economic scenario assumes that house prices will fall by 4.5% during 2023.
Credit risk - Overview (continued)
Maximum exposure to credit risk
Nationwide's maximum exposure to credit risk at 4 April 2023 was GBP279 billion (2022: GBP284 billion).
Credit risk largely arises from loans and advances to customers, which account for 79% (2022: 78%) of Nationwide's total credit risk exposure. Within this, the exposure relates primarily to
residential mortgages, which account for 95% (2022: 95%) 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.
Maximum exposure to credit risk
2023 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 201,615 (280) 201,335 8,952 210,287 75
------------------------------------ --------- ----------- -------- ----------- ------------ ------------
Consumer banking 4,408 (469) 3,939 28 3,967 2
------------------------------------ --------- ----------- -------- ----------- ------------ ------------
Commercial and other lending 4,994 (16) 4,978 1,353 6,331 2
------------------------------------ --------- ----------- -------- ----------- ------------ ------------
Fair value adjustment for micro
hedged risk (note ii) 430 - 430 - 430 -
==================================== ========= =========== ======== =========== ============ ============
211,447 (765) 210,682 10,333 221,015 79
------------------------------------ --------- ----------- -------- ----------- ------------ ------------
FVTPL loans and advances to
customers:
------------------------------------ --------- ----------- -------- ----------- ------------ ------------
Residential mortgages (note iii) 47 - 47 - 47 -
------------------------------------ --------- ----------- -------- ----------- ------------ ------------
Commercial 53 - 53 - 53 -
==================================== ========= =========== ======== =========== ============ ============
100 - 100 - 100 -
------------------------------------ --------- ----------- -------- ----------- ------------ ------------
Other items:
------------------------------------ --------- ----------- -------- ----------- ------------ ------------
Cash 25,635 - 25,635 - 25,635 9
------------------------------------ --------- ----------- -------- ----------- ------------ ------------
Loans and advances to banks and
similar institutions 2,860 - 2,860 - 2,860 1
------------------------------------ --------- ----------- -------- ----------- ------------ ------------
Investment securities - FVOCI 27,562 - 27,562 - 27,562 10
------------------------------------ --------- ----------- -------- ----------- ------------ ------------
Investment securities - Amortised
cost 40 - 40 - 40 -
------------------------------------ --------- ----------- -------- ----------- ------------ ------------
Investment securities - FVTPL 13 - 13 - 13 -
------------------------------------ --------- ----------- -------- ----------- ------------ ------------
Derivative financial instruments 6,923 - 6,923 - 6,923 3
------------------------------------ --------- ----------- -------- ----------- ------------ ------------
Fair value adjustment for portfolio
hedged risk (note ii) (5,011) - (5,011) - (5,011) (2)
==================================== ========= =========== ======== =========== ============ ============
58,022 - 58,022 - 58,022 21
==================================== ========= =========== ======== =========== ============ ============
Total 269,569 (765) 268,804 10,333 279,137 100
------------------------------------ --------- ----------- -------- ----------- ------------ ------------
Credit risk - Overview (continued)
Maximum exposure to credit risk
2022 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 198,056 (187) 197,869 13,807 211,676 74
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Consumer banking 4,638 (529) 4,109 35 4,144 2
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Commercial and other lending 5,453 (30) 5,423 1,415 6,838 2
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Fair value adjustment for micro
hedged risk (note ii) 549 - 549 - 549 -
======================================= ========= =========== ======== =========== ============ ============
208,696 (746) 207,950 15,257 223,207 78
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
FVTPL loans and advances to customers:
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Residential mortgages (note iii) 64 - 64 - 64 -
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Commercial 52 - 52 - 52 -
======================================= ========= =========== ======== =========== ============ ============
116 - 116 - 116 -
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Other items:
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Cash 30,221 - 30,221 - 30,221 11
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Loans and advances to banks and
similar institutions 3,052 - 3,052 - 3,052 1
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Investment securities - FVOCI 25,349 - 25,349 - 25,349 9
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Investment securities - Amortised
cost 118 - 118 - 118 -
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Investment securities - FVTPL 17 - 17 1 18 -
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Derivative financial instruments 4,723 - 4,723 - 4,723 2
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Fair value adjustment for portfolio
hedged risk (note ii) (2,443) - (2,443) - (2,443) (1)
======================================= ========= =========== ======== =========== ============ ============
61,037 - 61,037 1 61,038 22
======================================= ========= =========== ======== =========== ============ ============
Total 269,849 (746) 269,103 15,258 284,361 100
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Notes:
i. In addition to the amounts shown above, Nationwide has revocable commitments of GBP10,444 million (2022: GBP10,622 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.
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; the
associated provision of GBP0.2 million (2022: GBP0.4 million) is included within provisions for liabilities and charges.
Revocable commitments relating to overdrafts and credit cards are included in the calculation of impairment provisions, with the allowance for future drawdowns included in the estimate of the
exposure at default.
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 intermediary channels and the branch network. Since 2008 buy to let mortgages have only been originated under The Mortgage Works (UK) plc (TMW) brand. Legacy mortgages are smaller portfolios in run-off.
Arrears rates on the residential mortgage portfolios remain low. However, higher inflation and rising interest rates are placing greater pressure on household finances, increasing the potential for future arrears.
There have been signs of a slowdown in activity in the housing market over the year with a reduction in house prices driving an increase in the average LTV of the residential portfolios to 55% (2022: 52%). Further information is included on page 30.
Residential mortgage gross balances
2023 2022
------------------ ------------
GBPm % GBPm %
---------------------------------- ------------- --- ------- ---
Prime 157,511 78 154,363 78
---------------------------------- ------------- --- ------- ---
Buy to let and legacy:
---------------------------------- ------------- --- ------- ---
Buy to let (note i) 42,704 21 42,014 21
---------------------------------- ------------- --- ------- ---
Legacy (note ii) 1,400 1 1, 679 1
================================== ============= === ======= ===
44,104 22 43,693 22
---------------------------------- ------------- --- ------- ---
Amortised cost loans and advances
to customers 201,615 100 198,056 100
---------------------------------- ------------- --- ------- ---
FVTPL loans and advances to
customers 47 64
================================== ============= === ======= ===
Total residential mortgages 201,662 198,120
---------------------------------- ------------- --- ------- ---
Notes:
i. Buy to let mortgages include GBP41,805 million (2022: GBP40,879 million) originated under the TMW brand, with other brands now closed to new originations.
ii. Legacy includes self-certified, near prime and sub-prime lending, all of which were discontinued in 2009.
Credit risk - Residential mortgages (continued)
Impairment charge for the year
Impairment charge/(release) and write-offs for the year
2023 2022
----- -------
GBPm GBPm
-------------------------------------------- ----- -------
Prime 11 (19)
-------------------------------------------- ----- -------
Buy to let and legacy 83 (109)
============================================ ===== =======
Total impairment charge/(release) 94 (128)
============================================ ===== =======
% %
-------------------------------------------- ----- -------
Impairment charge/(release) as
a % of average gross balance 0.05 (0.07)
-------------------------------------------- ----- -------
GBPm GBPm
-------------------------------------------- ----- -------
Gross write-offs 5 5
-------------------------------------------- ----- -------
Balance sheet provisions have increased to GBP280 million (2022: GBP187 million). This includes a modelled adjustment totalling GBP77 million (2022: GBP13 million) to reflect an increase to the probability of default to account for the combined risks of rising inflation, increasing interest rates and credit indicators which are judged to be temporary, such as reduced levels of arrears. The impairment charge for the year reflects the increase in this adjustment, primarily due to expectations that higher mortgage interest rates will reduce borrower affordability. Further information is included in note 8 to the consolidated financial statements . The impairment charge also reflects the impact of increased expected credit losses in the severe downside economic scenario, also as a result of higher interest rate assumptions. The prior year impairment release reflected a decrease in provisions during a year where the economic outlook had improved.
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
2023 Stage Stage Stage Stage Stage Stage POCI Total
1 2 2 2 2 3
total Up to 1 - 30 >30 DPD (note
date DPD ii)
(note (note
i) i)
-------- ------- ------- -------- --------- ------ ------- --------
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------- -------- ------- ------- -------- --------- ------ ------- --------
Gross balances
--------------------------- -------- ------- ------- -------- --------- ------ ------- --------
Prime 138,670 18,200 17,134 811 255 641 - 157,511
--------------------------- -------- ------- ------- -------- --------- ------ ------- --------
Buy to let and legacy 26,211 17,345 16,875 294 176 425 123 44,104
=========================== ======== ======= ======= ======== ========= ====== ======= ========
Total 164,881 35,545 34,009 1,105 431 1,066 123 201,615
=========================== ======== ======= ======= ======== ========= ====== ======= ========
Provisions
--------------------------- -------- ------- ------- -------- --------- ------ ------- --------
Prime 10 48 39 5 4 26 - 84
--------------------------- -------- ------- ------- -------- --------- ------ ------- --------
Buy to let and legacy 13 143 127 8 8 41 (1) 196
=========================== ======== ======= ======= ======== ========= ====== ======= ========
Total 23 191 166 13 12 67 (1) 280
=========================== ======== ======= ======= ======== ========= ====== ======= ========
Provisions as a % of total % % % % % % % %
balance
--------------------------- -------- ------- ------- -------- --------- ------ ------- --------
Prime 0.01 0.26 0.23 0.60 1.51 4.04 - 0.05
--------------------------- -------- ------- ------- -------- --------- ------ ------- --------
Buy to let and legacy 0.05 0.83 0.75 2.85 4.70 9.76 - 0.44
=========================== ======== ======= ======= ======== ========= ====== ======= ========
Total 0.01 0.54 0.49 1.20 2.81 6.30 - 0.14
--------------------------- -------- ------- ------- -------- --------- ------ ------- --------
Credit risk - Residential mortgages (continued)
Residential mortgages staging analysis
--------
2022 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
i) i)
-------- ------- ------- -------- --------- ------- ------- --------
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------- -------- ------- ------- -------- --------- ------- ------- --------
Gross balances
----------------------------------- -------- ------- ------- -------- --------- ------- ------- --------
Prime 146,786 6,782 6,057 535 190 795 - 154,363
----------------------------------- -------- ------- ------- -------- --------- ------- ------- --------
Buy to let and legacy 33,462 9,667 9,333 229 105 429 135 43,693
=================================== ======== ======= ======= ======== ========= ======= ======= ========
Total 180,248 16,449 15,390 764 295 1,224 135 198,056
=================================== ======== ======= ======= ======== ========= ======= ======= ========
Provisions
----------------------------------- -------- ------- ------- -------- --------- ------- ------- --------
Prime 6 41 20 12 9 26 - 73
----------------------------------- -------- ------- ------- -------- --------- ------- ------- --------
Buy to let and legacy 16 64 51 6 7 36 (2) 114
=================================== ======== ======= ======= ======== ========= ======= ======= ========
Total 22 105 71 18 16 62 (2) 187
=================================== ======== ======= ======= ======== ========= ======= ======= ========
Provisions as a % of total balance %% %% %% % %
----------------------------------- -------- ------ ------- ------- --------- ------ ------- --------
Prime - 0.61 0.34 2.33 4.49 3.29 - 0.05
----------------------------------- -------- ------- ------- -------- --------- ------- ------- --------
Buy to let and legacy 0.05 0.67 0.55 2.67 6.96 8.42 - 0.26
=================================== ======== ======= ======= ======== ========= ======= ======= ========
Total 0.01 0.64 0.46 2.43 5.37 5.09 - 0.09
----------------------------------- -------- ------- ------- -------- --------- ------- ------- --------
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 on transition to IFRS 9 of GBP5 million (2022: GBP5 million).
Total residential mortgage provisions have increased to GBP280 million (2022: GBP187 million), with GBP82 million of this increase relating to buy to let and legacy mortgages. This provision increase is largely the result of a deterioration in the economic outlo ok and increases to the provisions held for affordability risks in relation to rising inflation and higher interest rates .
Stage 2 loans total GBP35.5 billion (2022: GBP16.4 billion), which includes GBP16.6 billion (2022: GBP4.6 billion) of loans where the PD has been uplifted to recognise the increased risk of default in a period of economic uncertainty. The total stage 2 increase is largely due to increasing affordability risks because of higher mortgage interest rates, in addition to the implementation of models which are more responsive to the risks in the economic scenarios.
Credit performance continues to be strong. Stage 3 loans in the residential mortgage portfolio equate to 0.5% (2022: 0.6%) of the total residential mortgage exposure. Of the total GBP1,066 million (2022: GBP1,224 million) stage 3 loans, GBP562 million (2022: GBP552 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. 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; GBP179 million (2022: GBP346 million) of the stage 3 balances in forbearance are in this probation period.
Credit risk - Residential mortgages (continued)
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 2022 180,248 22 16,449 105 1,359 60 198,056 187
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Stage transfers:
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Transfers from stage 1 to
stage
2 (64,316) (15) 64,316 15 - - - -
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Transfers to stage 3 (190) - (714) (30) 904 30 - -
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Transfers from stage 2 to
stage
1 41,971 169 (41,971) (169) - - - -
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Transfers from stage 3 267 2 449 15 (716) (17) - -
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Net remeasurement of ECL
arising
from transfer of stage (162) 239 (5) 72
========================== ========= ========== ========= ========== ========= ========== ========= ==========
Net movement arising from
transfer of stage (22,268) (6) 22,080 70 188 8 - 72
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
New assets originated or
purchased 33,067 3 - - - - 33,067 3
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Net impact of further
lending
and repayments (8,858) (2) (660) (3) (38) - (9,556) (5)
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Changes in risk parameters
in relation to credit
quality - 9 - 35 - 20 - 64 -------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ---------- Other items impacting income statement charge/(release) (including recoveries) - - - - - (4) - (4) -------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ---------- Redemptions (17,308) (3) (2,324) (16) (295) (17) (19,927) (36) -------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ---------- Income statement charge for the year 94 -------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ---------- Decrease due to write-offs - - - - (25) (5) (25) (5) -------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ---------- Other provision movements - - - - - 4 - 4 ========================== ========= ========== ========= ========== ========= ========== ========= ========== 4 April 2023 164,881 23 35,545 191 1,189 66 201,615 280 ========================== ========= ========== ========= ========== ========= ========== ========= ========== Net carrying amount 164,858 35,354 1,123 201,335 -------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Note:
i. Gross balances of credit impaired loans include GBP123 million (2022: GBP135 million) of POCI loans, which are presented net of lifetime ECL on transition to IFRS 9 of GBP5 million (2022: GBP5 million).
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 consolidated financial statements.
Credit risk - Residential mortgages (continued)
Reason for residential mortgages being reported in stage 2 (note i)
2023 Prime Buy to let and legacy Total
----------------- -------------------------------- -------------------------------- --------------------------------
Gross Provisions Provisions Gross Provisions Provisions Gross Provisions Provisions
balances as a balances as a balances as a
% of % of % of
balance balance balance
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
GBPm GBPm % GBPm GBPm % GBPm GBPm %
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Quantitative
criteria:
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Payment status
(greater than
30 DPD) 255 4 1.51 176 8 4.70 431 12 2.81
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Increase in PD
since
origination
(less than
30 DPD) 17,769 44 0.25 15,952 105 0.66 33,721 149 0.44
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Qualitative
criteria:
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Forbearance
(less than 30
DPD) 137 - 0.17 5 - 0.21 142 - 0.02
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Interest only
- significant
risk of
inability
to refinance
at maturity
(less than 30
DPD) - - 1,203 30 2.46 1,203 30 2.46
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Other
qualitative
criteria 39 - 0.02 9 - 1.12 48 - 0.23
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Total stage 2
gross balances 18,200 48 0.26 17,345 143 0.83 35,545 191 0.54
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Reason for residential mortgages being reported in stage 2 (note i)
2022 Prime Buy to let and legacy Total
----------------- -------------------------------- -------------------------------- --------------------------------
Gross Provisions Provisions Gross Provisions Provisions Gross Provisions Provisions
balances as a balances as a balances as a
% of % of % of
balance balance balance
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
GBPm GBPm % GBPm GBPm % GBPm GBPm %
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Quantitative
criteria:
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Payment status
(greater than
30 DPD) 190 9 4.49 105 7 6.96 295 16 5.37
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Increase in PD
since
origination
(less than
30 DPD) 6,398 32 0.51 7,623 27 0.35 14,021 59 0.42
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Qualitative
criteria:
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Forbearance
(less than 30
DPD) 151 - 0.01 5 - 0.05 156 - 0.05
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Interest only
- significant
risk of
inability
to refinance
at maturity
(less than 30
DPD) - - 1,926 30 1.58 1,926 30 1.58
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Other
qualitative
criteria 43 - 0.40 8 - 0.44 51 - 0.11
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Total stage 2
gross balances 6,782 41 0.61 9,667 64 0.67 16,449 105 0.64
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Note:
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.
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 models, 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. 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 has at least doubled.
------------ --------------------------------------------------------------------------------------------------------
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.
------------ --------------------------------------------------------------------------------------------------------
At 4 April 2023, stage 2 balances were GBP35,545 million (2022: GBP16,449 million). Of these, only 1% (2022: 2%) are in arrears by 30 days or more, with the majority of balances in stage 2 due to an increase in PD since origination. This category includes GBP16.6 billion (2022: GBP4.6 billion) of loans where the modelled PD has been uplifted to recognise the increased risk of default in a period of economic uncertainty, including the impact of higher interest rates on borrower affordability. The impact of this uplift in PD has resulted in these loans breaching existing quantitative PD thresholds.
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% (2022: <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
2023 Gross balances (note i) Provisions
------------------------------------ ------------------------------ ---------
Stage Stage Stage Total Stage Stage Stage Total
1 2 3 1 2 3 Provision
and POCI and POCI coverage
-------- ------- ----- ----- --------- ----- ---------
PD Range GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm %
----------------- -------- ------ --------- ------- ----- ----- --------- ----- ---------
0.00 to < 0.15% 126,387 5,620 48 132,055 4 19 - 23 0.02
----------------- -------- ------ --------- ------- ----- ----- --------- ----- ---------
0.15 to < 0.25% 20,845 5,133 17 25,995 9 19 - 28 0.11
----------------- -------- ------ --------- ------- ----- ----- --------- ----- ---------
0.25 to < 0.50% 12,556 6,566 29 19,151 5 26 - 31 0.16
----------------- -------- ------ --------- ------- ----- ----- --------- ----- ---------
0.50 to < 0.75% 3,020 3,981 19 7,020 1 16 - 17 0.24
----------------- -------- ------ --------- ------- ----- ----- --------- ----- ---------
0.75 to < 2.50% 1,937 8,180 62 10,179 2 39 - 41 0.40
----------------- -------- ------ --------- ------- ----- ----- --------- ----- ---------
2.50 to < 10.00% 120 3,663 77 3,860 1 31 1 33 0.86
----------------- -------- ------ --------- ------- ----- ----- --------- ----- ---------
10.00 to < 100% 16 2,402 141 2,559 1 41 4 46 1.76
----------------- -------- ------ --------- ------- ----- ----- --------- ----- ---------
100% (default) - - 796 796 - - 61 61 7.61
----------------- -------- ------ --------- ------- ----- ----- --------- ----- ---------
Total 164,881 35,545 1,189 201,615 23 191 66 280 0.14
----------------- -------- ------ --------- ------- ----- ----- --------- ----- ---------
Loan balance and provisions by PD
2022 Gross balances (note i) 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% 150,439 4,594 124 155,157 11 11 - 22 0.01
----------------- ------- ------- --------- ------- ------- ------- --------- ----- ---------
0.15 to < 0.25% 13,639 1,863 35 15,537 3 4 - 7 0.05
----------------- ------- ------- --------- ------- ------- ------- --------- ----- ---------
0.25 to < 0.50% 9,507 2,381 52 11,940 3 9 - 12 0.10
----------------- ------- ------- --------- ------- ------- ------- --------- ----- ---------
0.50 to < 0.75% 2,852 743 31 3,626 1 4 - 5 0.15
----------------- ------- ------- --------- ------- ------- ------- --------- ----- ---------
0.75 to < 2.50% 3,637 2,292 89 6,018 3 16 - 19 0.32
----------------- ------- ------- --------- ------- ------- ------- --------- ----- ---------
2.50 to < 10.00% 173 2,097 108 2,378 1 18 1 20 0.84
----------------- ------- ------- --------- ------- ------- ------- --------- ----- ---------
10.00 to < 100% 1 2,479 125 2,605 - 43 3 46 1.74
----------------- ------- ------- --------- ------- ------- ------- --------- ----- ---------
100% (default) - - 795 795 - - 56 56 7.04
----------------- ------- ------- --------- ------- ------- ------- --------- ----- ---------
Total 180,248 16,449 1,359 198,056 22 105 60 187 0.09
----------------- ------- ------- --------- ------- ------- ------- --------- ----- ---------
Note:
i. Includes POCI loans of GBP123 million (2022: GBP135 million).
At 4 April 2023, 96% (2022: 97%) of the portfolio had a PD of less than 2.5%, reflecting the high quality of the residential mortgage portfolios.
Credit risk - Residential mortgages (continued)
Distribution of new business by borrower type (by value)
Distribution of new business by borrower type (by
value) (note i)
2023 2022
-----
% %
--------------------------------------- ------ -----
Prime:
--------------------------------------- ------ -----
First time buyers 29 29
--------------------------------------- ------ -----
Home movers 29 30
--------------------------------------- ------ -----
Remortgages 24 20
--------------------------------------- ------ -----
Other 1 1
--------------------------------------- ------ -----
Total prime 83 80
--------------------------------------- ------ -----
Buy to let:
--------------------------------------- ------ -----
Buy to let new purchases 7 8
--------------------------------------- ------ -----
Buy to let remortgages 10 12
--------------------------------------- ------ -----
Total buy to let 17 20
--------------------------------------- ------ -----
Total new business 100 100
--------------------------------------- ------ -----
Note:
i. All new business measures exclude further advances and product switches.
The proportion of prime new lending from remortgages has increased to 24% (2022: 20%), reflecting a slower house purchase market alongside some remortgage activity likely to have been brought forward due to the expected future path of interest rates. Buy to let lending reduced as a proportion of all new business to 17% (2022: 20%) as the volume of both house purchases and remortgages in the buy to let market reduced due to rising interest rates.
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)
2023 2022
---------
% %
------------------------ ---------- ---------
0% to 60% 28 27
------------------------ ---------- ---------
60% to 75% 35 35
------------------------ ---------- ---------
75% to 80% 9 11
------------------------ ---------- ---------
80% to 85% 13 14
------------------------ ---------- ---------
85% to 90% 12 11
------------------------ ---------- ---------
90% to 95% 3 2
------------------------ ---------- ---------
Over 95% - -
------------------------ ---------- ---------
Total 100 100
------------------------ ---------- ---------
Average LTV of new business (by value) (note
i)
2023 2022
----------
% %
-------------------------- ---------- ----------
Prime 70 71
-------------------------- ---------- ----------
Buy to let 66 67
-------------------------- ---------- ----------
Group 69 70
-------------------------- ---------- ----------
Average LTV of loan stock (by value) (note
ii)
2023 2022
-----
% %
-------------------------------- ------ -----
Prime 54 51
-------------------------------- ------ -----
Buy to let and legacy 56 54
-------------------------------- ------ -----
Group 55 52
-------------------------------- ------ -----
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.
House prices, measured through the Nationwide House Price Index, have reduced over the past 12 months by 3.1% (2022: increase of 14.3%). This has caused Group average stock LTV to increase to 55% (2022: 52%).
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). The LTV is calculated using the latest indexed valuation based on the Nationwide House Price Index.
Residential mortgage gross balances by LTV and region
2023 Greater Central Northern South South Scotland Wales Northern Total Provision
London England England East England West England Ireland Coverage
------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm %
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
Stage 1 and 2
loans
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
Fully
collateralised
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
LTV ratio:
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
Up to 50% 25,295 14,722 11,214 9,433 7,969 3,944 2,512 1,074 76,163 0.03
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
50% to 60% 11,743 7,396 6,162 4,572 3,882 2,127 1,338 421 37,641 0.08
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
60% to 70% 12,937 7,878 6,956 5,108 4,142 2,478 1,299 504 41,302 0.13
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
70% to 80% 11,411 4,977 4,601 3,406 2,239 1,875 791 345 29,645 0.21
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
80% to 90% 3,704 2,072 2,132 1,368 952 766 418 206 11,618 0.18
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
90% to 100% 866 718 817 551 351 330 175 86 3,894 0.26
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
65,956 37,763 31,882 24,438 19,535 11,520 6,533 2,636 200,263 0.10
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
Not fully
collateralised
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
Over 100%
LTV 7 23 21 20 21 36 5 30 163 6.90
-------------- ======= ======== ======== ============ ============ ======== ===== ======== ======= ---------
Collateral
value 6 22 20 20 20 32 5 28 153
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
Negative
equity 1 1 1 - 1 4 - 2 10
-------------- ======= ======== ======== ============ ============ ======== ===== ======== ======= ---------
Total stage 1
and 2
loans 65,963 37,786 31,903 24,458 19,556 11,556 6,538 2,666 200,426 0.11
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
Stage 3 and POCI loans
------ ------ ------ ------ ------ ------ ----- ----- ------- ------
Fully collateralised
--------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
LTV ratio:
--------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
Up to 50% 225 99 77 59 50 24 18 11 563 1.95
--------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
50% to 60% 82 51 48 29 25 12 11 3 261 3.30
--------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
60% to 70% 48 36 46 18 15 12 7 5 187 5.47
--------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
70% to 80% 29 18 29 12 4 11 3 4 110 11.53
--------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
80% to 90% 9 3 12 2 1 5 1 3 36 22.39
--------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
90% to 100% 3 1 5 - 1 1 - 3 14 31.00
--------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
396 208 217 120 96 65 40 29 1,171 4.67
--------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
Not fully collateralised
--------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
Over 100% LTV 1 1 5 1 - 2 - 8 18 71.68
--------------------------- ====== ====== ====== ====== ====== ====== ===== ===== ======= ------
Collateral value 1 1 3 1 - 2 - 7 15
--------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
Negative equity - - 2 - - - - 1 3
--------------------------- ====== ====== ====== ====== ====== ====== ===== ===== ======= ------
Total stage 3 and POCI
loans 397 209 222 121 96 67 40 37 1,189 5.53
--------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
Total residential mortgages 66,360 37,995 32,125 24,579 19,652 11,623 6,578 2,703 201,615 0.14
--------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
Total geographical
concentrations 33% 19% 16% 12% 10% 6% 3% 1% 100%
--------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
Credit risk - Residential mortgages (continued)
Residential mortgage gross balances by LTV and region
2022 Greater Central Northern South South Scotland Wales Northern Total Provision
London England England East West England Ireland Coverage
England
------- -------- -------- ----------- ------------ -------- ------ -------- ------- ---------
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm %
-------------- ------- -------- -------- ----------- ------------ -------- ------ -------- ------- ---------
Stage 1 and 2
loans
-------------- ------- -------- -------- ----------- ------------ -------- ------ -------- ------- ---------
Fully
collateralised
-------------- ------- -------- -------- ----------- ------------ -------- ------ -------- ------- ---------
LTV ratio:
-------------- ------- -------- -------- ----------- ------------ -------- ------ -------- ------- ---------
Up to 50% 28,062 15,543 12,035 10,334 8,257 4,483 2,682 1,136 82,532 0. 02
-------------- ------- -------- -------- ----------- ------------ -------- ------ -------- ------- ---------
50% to 60% 12,499 7,740 6,631 4, 887 4,074 2, 417 1, 430 449 40,127 0. 06
-------------- ------- -------- -------- ----------- ------------ -------- ------ -------- ------- ---------
60% to 70% 12,739 7, 959 7,272 5,246 4,230 2, 756 1, 373 518 42,093 0. 08
-------------- ------- -------- -------- ----------- ------------ -------- ------ -------- ------- ---------
70% to 80% 10,195 4,627 3,841 2,972 2,167 1,546 634 379 26,361 0. 11
-------------- ------- -------- -------- ----------- ------------ -------- ------ -------- ------- ---------
80% to 90% 1,534 952 1, 029 546 419 339 200 163 5,182 0.20
-------------- ------- -------- -------- ----------- ------------ -------- ------ -------- ------- ---------
90% to 100% 44 54 67 25 24 52 18 43 327 1.39
-------------- ------- -------- -------- ----------- ------------ -------- ------ -------- ------- ---------
65,073 36,875 30,875 24, 010 19,171 11, 593 6,337 2, 688 196,622 0. 06
-------------- ------- -------- -------- ----------- ------------ -------- ------ -------- ------- ---------
Not fully
collateralised
-------------- ------- -------- -------- ----------- ------------ -------- ------ -------- ------- ---------
Over 100%
LTV 5 3 9 1 3 13 - 41 75 9.27
-------------- ======= ======== ======== =========== ============ ======== ====== ======== ======= ---------
Collateral
value 4 2 8 1 2 12 - 38 67
-------------- ------- -------- -------- ----------- ------------ -------- ------ -------- ------- ---------
Negative
equity 1 1 1 - 1 1 - 3 8
-------------- ======= ======== ======== =========== ============ ======== ====== ======== ======= ---------
Total stage 1
and 2
loans 65,078 36,878 30,884 24, 011 19,174 11, 606 6,337 2, 729 196,697 0. 06
-------------- ------- -------- -------- ----------- ------------ -------- ------ -------- ------- ---------
Stage 3 and POCI loans
------ ------ ------ ------- ------ ------- ------ ------ ------- -----
Fully collateralised
--------------------------------- ------ ------ ------ ------- ------ ------- ------ ------ ------- -----
LTV ratio:
--------------------------------- ------ ------ ------ ------- ------ ------- ------ ------ ------- -----
Up to 50% 286 118 95 81 54 27 22 12 695 1. 32
--------------------------------- ------ ------ ------ ------- ------ ------- ------ ------ ------- -----
50% to 60% 88 54 55 32 28 19 11 4 291 2. 89
--------------------------------- ------ ------ ------ ------- ------ ------- ------ ------ ------- -----
60% to 70% 49 42 53 23 20 16 8 6 217 5.10
--------------------------------- ------ ------ ------ ------- ------ ------- ------ ------ ------- -----
70% to 80% 38 15 27 10 6 9 2 4 111 9.80
--------------------------------- ------ ------ ------ ------- ------ ------- ------ ------ ------- -----
80% to 90% 3 1 10 1 1 4 - 4 24 26.61
--------------------------------- ------ ------ ------ ------- ------ ------- ------ ------ ------- -----
90% to 100% - - 2 - - 2 - 3 7 50.19
--------------------------------- ------ ------ ------ ------- ------ ------- ------ ------ ------- -----
464 230 242 147 109 77 43 33 1, 345 3.71
--------------------------------- ------ ------ ------ ------- ------ ------- ------ ------ ------- -----
Not fully collateralised
--------------------------------- ------ ------ ------ ------- ------ ------- ------ ------ ------- -----
Over 100% LTV 1 - 3 1 - 1 - 8 14 84.71
--------------------------------- ====== ====== ====== ======= ====== ======= ====== ====== ======= -----
Collateral value 1 - 2 1 - 1 - 7 12
--------------------------------- ------ ------ ------ ------- ------ ------- ------ ------ ------- -----
Negative equity - - 1 - - - - 1 2
--------------------------------- ====== ====== ====== ======= ====== ======= ====== ====== ======= -----
Total stage 3 and POCI
loans 465 230 245 148 109 78 43 41 1, 359 4. 45
--------------------------------- ------ ------ ------ ------- ------ ------- ------ ------ ------- -----
Total residential mortgages 65,543 37,108 31,129 24, 159 19,283 11, 684 6, 380 2, 770 198,056 0. 09
--------------------------------- ------ ------ ------ ------- ------ ------- ------ ------ ------- -----
Total geographical concentrations 33% 19% 16% 12% 10% 6% 3% 1% 100%
--------------------------------- ------ ------ ------ ------- ------ ------- ------ ------ ------- -----
Credit risk - Residential mortgages (continued)
Over the year, the geographical distribution of residential mortgages across the UK has remained stable. The highest concentration for both prime and buy to let portfolios is in Greater London,
with proportions broadly stable at 29% and 46% (2022: 30% and 46%) respectively.
In addition to balances held at amortised cost shown in the table above, GBP47 million (2022: GBP64 million) of residential mortgages are held at FVTPL. These have an average LTV of 35% (2022: 33%). The largest geographical concentration within the FVTPL balances is also in Greater London, at 61% (2022: 57%) of total FVTPL balances.
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)
2023 2022
----- -----
% %
------------------------------------ ----- -----
Prime 0.29 0.30
------------------------------------ ----- -----
Buy to let and legacy 0.44 0.50
------------------------------------ ----- -----
Total 0.32 0.34
------------------------------------ ----- -----
UK Finance (UKF) industry
average (note ii) 0.71 0.77
------------------------------------ ----- -----
Number of properties in possession as % of total
book
2023 2022
-------------------- --------------------
Number % Number %
of properties of properties
---------------------- -------------- ---- -------------- ----
Prime 117 0.01 53 0.00
---------------------- -------------- ---- -------------- ----
Buy to let and legacy 129 0.04 106 0.03
---------------------- -------------- ---- -------------- ----
Total 246 0.02 159 0.01
---------------------- -------------- ---- -------------- ----
UKF industry average
(note ii) 0.02 0.01
---------------------- -------------- ---- -------------- ----
Notes:
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.
ii. The UKF data shown for 2023 is as at December 2022 and the 2022 data is as at March 2022.
The proportion of cases more than 3 months in arrears has decreased during the year to 0.32% (2022: 0.34%). Arrears levels are expected to increase as a result of the rising cost of living, including higher mortgage payments, but to remain low relative to the industry average.
The number of properties in possession has increased to 246 (2022: 159) as activity that was temporarily suspended during the pandemic has recommenced. The possession of a borrower's property is only undertaken where all reasonable attempts to resolve the situation have been unsuccessful.
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
2023 2022
---------------------------------- --------------------------------
Prime Buy to Total Prime Buy to Total
let and let and
legacy legacy
-------- ---- ------- -------- ------- ----
GBPm GBPm GBPm % GBPm GBPm GBPm %
---------------------------- -------- -------- -------- ---- ------- -------- ------- ----
Not past due 155,849 43,270 199,119 98.7 152,932 43,000 195,932 98.9
---------------------------- -------- -------- -------- ---- ------- -------- ------- ----
Past due 0 to 1 month 1,044 376 1,420 0.7 920 305 1,225 0.6
---------------------------- -------- -------- -------- ---- ------- -------- ------- ----
Past due 1 to 3 months 310 213 523 0.3 240 127 367 0.2
---------------------------- -------- -------- -------- ---- ------- -------- ------- ----
Past due 3 to 6 months 155 108 263 0.1 122 78 200 0.1
---------------------------- -------- -------- -------- ---- ------- -------- ------- ----
Past due 6 to 12 months 111 65 176 0.1 99 74 173 0.1
---------------------------- -------- -------- -------- ---- ------- -------- ------- ----
Past due over 12 months 76 50 126 0.1 109 95 204 0.1
---------------------------- -------- -------- -------- ---- ------- -------- ------- ----
Possessions 13 22 35 - 5 14 19 -
---------------------------- -------- -------- -------- ---- ------- -------- ------- ----
Total residential mortgages 157,558 44,104 201,662 100 154,427 43,693 198,120 100
---------------------------- -------- -------- -------- ---- ------- -------- ------- ----
The balance of cases past due by more than 3 months has remained broadly stable at GBP600 million (2022: GBP596 million).
As at 4 April 2023, the mortgage portfolios include 1,329 (2022: 1,924) mortgage accounts, including those in possession, where payments were more than 12 months in arrears. The total principal utstanding in these cases was GBP147 million (2022: GBP215 million), and the total value of arrears was GBP26 million (2022: GBP30 million).
Interest only mortgages
At 4 April 2023, interest only balances of GBP6,812 million (2022: GBP7,824 million) account for 4% (2022: 5%) of prime residential mortgages. Nationwide re-entered the prime market for interest only lending under a newly established credit policy in April 2020; however, 85% of current interest only mortgage balances relate to historical accounts 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, with regular engagement with borrowers to ensure the loan is redeemed or to agree a strategy for repayment.
Of the buy to let and legacy portfolio, GBP40,126 million (2022: GBP39,591 million) relates to interest only balances, representing 91% (2022: 91%) of balances. Buy to let remains open to new interest only lending under standard terms.
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. 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 consider LTV and affordability assessments. The impact of recognising this risk is to increase provisions by GBP45 million
(2022: GBP46 million).
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 one year one year two years more than book
open) and before and before five years
two years five years
------------ ---------- ----------- ----------- ----------- ------ -----
2023 GBPm GBPm GBPm GBPm GBPm GBPm %
---------------------- ------------ ---------- ----------- ----------- ----------- ------ -----
Prime 69 209 261 1,023 5,250 6,812 4.3
---------------------- ------------ ---------- ----------- ----------- ----------- ------ -----
Buy to let and legacy 190 195 269 1,729 37,743 40,126 91.0
---------------------- ------------ ---------- ----------- ----------- ----------- ------ -----
Total 259 404 530 2,752 42,993 46,938 23.3
---------------------- ------------ ---------- ----------- ----------- ----------- ------ -----
2022 GBPm GBPm GBPm GBPm GBPm GBPm %
---------------------- ------------ ---------- ----------- ----------- ----------- ------ -----
Prime 81 263 307 1,167 6,006 7,824 5.1
---------------------- ------------ ---------- ----------- ----------- ----------- ------ -----
Buy to let and legacy 201 256 276 1,607 37,251 39,591 90.6
---------------------- ------------ ---------- ----------- ----------- ----------- ------ -----
Total 282 519 583 2,774 43,257 47,415 23.9
---------------------- ------------ ---------- ----------- ----------- ----------- ------ -----
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.
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 granted forbearance are transferred to either stage 2 or stage 3. 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.
Gross balances subject to forbearance (note i)
2023 2022
----------------------- -----------------------
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) 101 149 250 113 141 254
--------------------------------------------------- ----- -------- ------ ----- -------- ------
Interest only concessions 503 25 528 639 32 671
--------------------------------------------------- ----- -------- ------ ----- -------- ------
Capitalisation 85 22 107 88 30 118
--------------------------------------------------- ----- -------- ------ ----- -------- ------
Capitalisation - notification of death of borrower 75 105 180 81 93 174
--------------------------------------------------- ----- -------- ------ ----- -------- ------
Term extensions (within term) 41 18 59 32 16 48
--------------------------------------------------- ----- -------- ------ ----- -------- ------
Permanent interest only conversions 1 29 30 2 32 34
--------------------------------------------------- ----- -------- ------ ----- -------- ------
Total forbearance 806 348 1,154 955 344 1,299
--------------------------------------------------- ----- -------- ------ ----- -------- ------
Of which stage 2 289 74 363 204 73 277
--------------------------------------------------- ----- -------- ------ ----- -------- ------
Of which stage 3 383 253 636 565 240 805
--------------------------------------------------- ----- -------- ------ ----- -------- ------
% % % %% %
--------------------------------------------------- ----- -------- ------ ----- ------- ------
Total forbearance as a % of total gross balances 0.5 0.8 0.6 0.6 0.8 0.7
--------------------------------------------------- ----- -------- ------ ----- -------- ------
GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------------------------- ----- -------- ------ ----- -------- ------
Impairment provisions on forborne loans 11 20 31 12 18 30
--------------------------------------------------- ----- -------- ------ ----- -------- ------
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.
The average LTV for forborne accounts is 47% (2022: 46%). In addition to the amortised cost balances above, GBP4 million of FVTPL balances (2022: GBP4 million) are also forborne.
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 reduced to GBP4,408 million (2022: GBP4,638 million) driven by reduced new business and a continued pay down of the existing book on personal loans.
Arrears levels have increased slightly during the year but remain low. High levels of inflation and rising interest rates will put pressure on household budgets, stretching affordability for some borrowers. As a result, arrears levels are expected to increase over the short to medium term.
Consumer banking gross balances
2023 2022
---------- ----------
GBPm % GBPm %
--------------------------- ----- --- ----- ---
Overdrawn current accounts 310 7 286 6
--------------------------- ----- --- ----- ---
Personal loans 2,574 58 2,864 62
--------------------------- ----- --- ----- ---
Credit cards 1,524 35 1,488 32
--------------------------- ----- --- ----- ---
Total consumer banking 4,408 100 4,638 100
--------------------------- ----- --- ----- ---
All consumer banking loans are classified and measured at amortised cost.
Impairment charge/(release) and write-offs for the
year
2023 2022
------ -----
GBPm GBPm
---------------------------------------- ------ -----
Overdrawn current accounts 9 23
---------------------------------------- ------ -----
Personal loans 28 4
---------------------------------------- ------ -----
Credit cards (6) 66
---------------------------------------- ------ -----
Total impairment charge 31 93
---------------------------------------- ------ -----
% %
---------------------------------------- ------ -----
Impairment charge as a % of
average gross balance 0.68 2.04
---------------------------------------- ------ -----
GBPm GBPm
---------------------------------------- ------ -----
Gross write-offs 97 83
---------------------------------------- ------ -----
The lower impairment charge for the year ended 4 April 2023 reflects a release of provisions, which reduced to GBP469 million (2022: GBP529 million). Provisions include a modelled uplift to the probability of default to reflect economic uncertainty. This adjustment increases provisions by GBP100 million (2022: GBP146 million), and reduced over the year due to a refinement to the estimated impact of affordability risks.
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
2023 2022
----------------------------- ---------------------------------
Stage Stage Stage Total Stage Stage Stage Total
1 2 3 1 2 3
------ ------ ------ ------ ------ -------
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------ ------ ------ ----- ------ ------ ------ ------ -------
Gross balances
------------------------------ ------ ------ ----- ------ ------ ------ ------ -------
Overdrawn current accounts 160 91 59 310 121 131 34 286
------------------------------ ------ ------ ----- ------ ------ ------ ------ -------
Personal loans 1,378 1,063 133 2,574 1,735 989 140 2, 864
------------------------------ ------ ------ ----- ------ ------ ------ ------ -------
Credit cards 845 591 88 1,524 790 600 98 1, 488
------------------------------ ------ ------ ----- ------ ------ ------ ------ -------
Total 2,383 1,745 280 4,408 2,646 1,720 272 4, 638
------------------------------ ------ ------ ----- ------ ------ ------ ------ -------
Provisions
------------------------------ ------ ------ ----- ------ ------ ------ ------ -------
Overdrawn current accounts 5 21 38 64 4 36 31 71
------------------------------ ------ ------ ----- ------ ------ ------ ------ -------
Personal loans 9 54 117 180 11 60 124 195
------------------------------ ------ ------ ----- ------ ------ ------ ------ -------
Credit cards 11 136 78 225 10 165 88 263
------------------------------ ------ ------ ----- ------ ------ ------ ------ -------
Total 25 211 233 469 25 261 243 529
------------------------------ ------ ------ ----- ------ ------ ------ ------ -------
Provisions as a % of %% %%
total balance % % % %
------------------------------ ------ ------ ----- ------ ------ ----- ------ ------
Overdrawn current accounts 3.10 22.90 64.80 20.57 3. 34 27.33 90.86 24.63
------------------------------ ------ ------ ----- ------ ------ ------ ------ -------
Personal loans 0.67 5.09 87.66 7.00 0.62 6.09 88.50 6.80
------------------------------ ------ ------ ----- ------ ------ ------ ------ -------
Credit cards 1.25 22.96 88.85 14.73 1.33 27. 51 89. 78 17.69
------------------------------ ------ ------ ----- ------ ------ ------ ------ -------
Total 1.04 12.07 83.25 10.63 0.95 15.18 89. 25 11. 40
------------------------------ ------ ------ ----- ------ ------ ------ ------ -------
Balance sheet provisions of GBP469 million (2022: GBP529 million) include a modelled adjustment of GBP100 million (2022: GBP146 million) to reflect an increase to the probability of default to account for the combined risks of rising inflation, increasing interest rates and credit indicators which are judged to be temporary, such as reduced levels of arrears. This has resulted in GBP585 million (2022: GBP700 million) of balances being moved to stage 2. Further information is included in note 8 to the consolidated financial statements.
Credit performance continues to be strong, with the proportion of total balances in stage 3 increasing slightly to 6.4% (2022: 5.9%). GBP25 million of overdrawn current account balances are included in stage 3 due to these borrowers being granted a six-month 0% interest concession to support them with increased costs of living. 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 6.9% (2022: 7.6%) of gross balances.
Credit risk - Consumer banking (continued)
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 2022 2,646 25 1,720 261 272 243 4,638 529
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Stage transfers:
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Transfers from stage 1 to
stage
2 (2,871) (38) 2,871 38 - - - -
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Transfers to stage 3 (12) (1) (151) (92) 163 93 - -
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Transfers from stage 2 to
stage
1 2,347 206 (2,347) (206) - - - -
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Transfers from stage 3 3 2 32 15 (35) (17) - -
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Net remeasurement of ECL
arising
from transfer of stage (174) 209 4 39
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Net movement arising from
transfer of stage (533) (5) 405 (36) 128 80 - 39
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
New assets originated or
purchased 1,344 33 - - - - 1,344 33
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Net impact of further
lending
and repayments (739) (23) (161) (35) (20) (15) (920) (73)
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Changes in risk parameters
in relation to credit
quality - (4) - 29 - 23 - 48
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Other items impacting
income
statement
charge/(release)
(including recoveries) - - - - - (6) - (6)
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Redemptions (335) (1) (219) (8) (3) (1) (557) (10) -------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ---------- Income statement charge for the year 31 -------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ---------- Decrease due to write-offs - - - - (97) (97) (97) (97) -------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ---------- Other provision movements - - - - - 6 - 6 -------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ---------- 4 April 2023 2,383 25 1,745 211 280 233 4,408 469 -------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ---------- Net carrying amount 2,358 1,534 47 3,939 -------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
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 consolidated financial statements.
Credit risk - Consumer banking (continued)
Reason for consumer banking balances being reported in stage 2
---------------------------------------------------------------------------------------------------------------------------------------------------------
2023 Overdrawn current Personal loans Credit cards Total
accounts
----------------- -------------------------------- -------------------------------- -------------------------------- --------------------------------
Gross Provisions Provisions Gross Provisions Provisions Gross Provisions Provisions Gross Provisions Provisions
balances as a balances as a balances as a balances as a
% of % of % of % of
balance balance balance balance
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
GBPm GBPm % GBPm GBPm % GBPm GBPm % GBPm GBPm %
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Quantitative
criteria:
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Payment status
(greater than
30 DPD) (note
i) 2 2 98 11 6 52 4 4 84 17 12 65
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Increase in PD
since
origination
(less than 30
DPD) 81 18 22 1,049 48 5 576 130 23 1,706 196 12
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Qualitative
criteria:
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Forbearance
(less than 30
DPD) (note
ii) - - 17 1 - 10 - - 19 1 - 13
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Other
qualitative
criteria
(less than 30
DPD) 8 1 10 2 - 4 11 2 18 21 3 13
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Total stage 2
gross balances 91 21 23 1,063 54 5 591 136 23 1,745 211 12
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Reason for consumer banking balances being reported in stage 2
2022 Overdrawn current Personal loans Credit cards Total
accounts
----------------- -------------------------------- -------------------------------- -------------------------------- --------------------------------
Gross Provisions Provisions Gross Provisions Provisions Gross Provisions Provisions Gross Provisions Provisions
balances as a balances as a balances as a balances as a
% of % of % of % of
balance balance balance balance
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
GBPm GBPm % GBPm GBPm % GBPm GBPm % GBPm GBPm %
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Quantitative
criteria:
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Payment status
(greater than
30 DPD) (note
i) 3 2 78 7 5 69 4 4 84 14 11 76
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Increase in PD
since
origination
(less than 30
DPD) 120 33 27 978 55 6 582 159 27 1,680 247 15
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Qualitative
criteria:
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Forbearance
(less than 30
DPD) (note
ii) - - 19 1 - 11 - - 27 1 - 15
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Other
qualitative
criteria
(less than 30
DPD) 8 1 11 3 - 3 14 2 17 25 3 13
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Total stage 2
gross balances 131 36 27 989 60 6 600 165 28 1,720 261 15
----------------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Notes:
i. 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.
ii. Stage 2 forbearance relates to cases where full repayment of principal and interest is still anticipated.
Balances reported within stage 2 represent loans which have experienced a significant increase in credit risk since origination. The significant increase is determined through both quantitative and qualitative indicators. Of the GBP1,745 million (2022: GBP1,720 million) stage 2 balances, only 1% (2022: 1%) are in arrears by 30 days or more, with the majority of balances in stage 2 due to an increase in PD since origination. This category includes GBP585 million (2022: GBP700 million) of loans where the modelled PD has been uplifted to recognise the increased risk of default in a high inflation and interest rate environment. The impact of this uplift in PD has resulted in these loans breaching existing quantitative PD thresholds.
Credit risk - Consumer banking (continued)
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 models, 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. 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 has at least doubled.
------------ ----------------------------------------------------------------------------------------------
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
Gross balances Provisions Provision
2023 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% 644 7 - 651 2 - - 2 0.30
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ---------
0.15 to < 0.25% 338 26 - 364 1 1 - 2 0.48
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ---------
0.25 to < 0.50% 397 136 - 533 2 2 - 4 0.77
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ---------
0.50 to < 0.75% 225 157 - 382 1 3 - 4 1.13
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ---------
0.75 to < 2.50% 482 554 3 1,039 6 21 - 27 2.60
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ---------
2.50 to < 10.00% 270 552 13 835 10 69 2 81 9.70
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ---------
10.00 to < 100% 27 313 9 349 3 115 4 122 34.79
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ---------
100% (default) - - 255 255 - - 227 227 89.38
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ---------
Total 2,383 1,745 280 4,408 25 211 233 469 10.63
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ---------
Consumer banking gross balances and provisions by PD
2022 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% 747 7 - 754 2 - - 2 0.25
----------------- ----- ----- ----- ------ ----- ----- ----- ----- ---------
0.15 to < 0.25% 386 36 - 422 1 1 - 2 0.44
----------------- ----- ----- ----- ------ ----- ----- ----- ----- ---------
0.25 to < 0.50% 546 136 - 682 2 3 - 5 0.75
----------------- ----- ----- ----- ------ ----- ----- ----- ----- ---------
0.50 to < 0.75% 255 164 - 419 2 4 - 6 1.33
----------------- ----- ----- ----- ------ ----- ----- ----- ----- ---------
0.75 to < 2.50% 450 507 1 958 6 24 - 30 3.19
----------------- ----- ----- ----- ------ ----- ----- ----- ----- ---------
2.50 to < 10.00% 238 537 2 777 9 80 - 89 11. 50
----------------- ----- ----- ----- ------ ----- ----- ----- ----- ---------
10.00 to < 100% 24 333 6 363 3 149 2 154 42.66
----------------- ----- ----- ----- ------ ----- ----- ----- ----- ---------
100% (default) - - 263 263 - - 241 241 91.29
----------------- ----- ----- ----- ------ ----- ----- ----- ----- ---------
Total 2,646 1,720 272 4, 638 25 261 243 529 11. 40
----------------- ----- ----- ----- ------ ----- ----- ----- ----- ---------
The credit quality of the consumer banking portfolio has remained strong. 86% (2022: 87%) of the portfolio has 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
2023 2022
------------------------------------------ ------------------------------------------
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 265 2,386 1,423 4,074 92.4 240 2,681 1,377 4,298 92.7
------------------------ --------- -------- ------ ------ ----- --------- -------- ------ ------ -----
Past due 0 to 1 month 8 49 14 71 1.6 11 35 14 60 1.3
------------------------ --------- -------- ------ ------ ----- --------- -------- ------ ------ -----
Past due 1 to 3 months 4 15 8 27 0.6 4 11 8 23 0.5
------------------------ --------- -------- ------ ------ ----- --------- -------- ------ ------ ----- Past due 3 to 6 months 5 11 6 22 0.5 4 16 6 26 0.6 ------------------------ --------- -------- ------ ------ ----- --------- -------- ------ ------ ----- Past due 6 to 12 months 4 11 1 16 0.4 3 8 1 12 0.2 ------------------------ --------- -------- ------ ------ ----- --------- -------- ------ ------ ----- Past due over 12 months 2 11 - 13 0.3 3 9 - 12 0.2 ------------------------ --------- -------- ------ ------ ----- --------- -------- ------ ------ ----- Charged off (note i) 22 91 72 185 4.2 21 104 82 207 4.5 ------------------------ --------- -------- ------ ------ ----- --------- -------- ------ ------ ----- Total 310 2,574 1,524 4,408 100.0 286 2,864 1,488 4,638 100.0 ------------------------ --------- -------- ------ ------ ----- --------- -------- ------ ------ -----
Note:
i. Charged off balances relate to accounts which are closed to future transactions and are held on the balance sheet for an extended period (up to 36 months, depending on the product) whilst recovery procedures take place .
Of total balances excluding charged off balances, GBP149 million (2022: GBP133 million) are subject to arrears, representing 3.5% (2022: 3.0%) of these balances. Arrears levels are expected to increase further due to the affordability pressures which borrowers may face, due to high inflation and increasing interest rates.
Forbearance
Nationwide is committed to supporting customers facing financial difficulty by working with them to find a solution through proactive arrears management and forbearance.
The 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.
During the year, total balances subject to forbearance have increased to GBP79 million (2022: GBP60 million). This increase is largely the result of GBP25 million (2022: GBPnil) of overdrawn current accounts being granted a six-month 0% interest rate concession to support borrowers with increased costs of living. This has been included in the interest suppressed payment concession line in the table below.
Gross balances subject to forbearance (note i)
2023 2022
---------------------------------- ----------------------------------
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 4 - 1 5 4 - 1 5
---------------------------------- --------- -------- ------ ----- --------- -------- ------ -----
Interest suppressed payment
concession 28 33 9 70 4 36 11 51
---------------------------------- --------- -------- ------ ----- --------- -------- ------ -----
Balance re-aged/re-written - 2 2 4 - 2 2 4
---------------------------------- --------- -------- ------ ----- --------- -------- ------ -----
Total forbearance (note ii) 32 35 12 79 8 38 14 60
---------------------------------- --------- -------- ------ ----- --------- -------- ------ -----
Of which stage 2 3 3 3 9 36 4 13
---------------------------------- --------- -------- ------ ----- --------- ------- ------ -----
Of which stage 3 29 31 9 69 5 30 10 45
---------------------------------- --------- -------- ------ ----- --------- -------- ------ -----
% % % % %% %%
---------------------------------- --------- -------- ------ ----- --------- ------- ------ ----
Total forbearance as a % of
total gross balances 10.3 1.4 0.8 1.8 2.8 1.3 0.9 1.3
---------------------------------- --------- -------- ------ ----- --------- -------- ------ -----
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------- --------- -------- ------ ----- --------- -------- ------ -----
Impairment provisions on forborne
loans 12 28 8 48 6 28 9 43
---------------------------------- --------- -------- ------ ----- --------- -------- ------ -----
Notes:
i. Where more than one concession event has occurred, balances are reported under the latest event.
ii. 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 - Commercial
Summary
The commercial portfolio comprises loans which have been provided to meet the funding requirements of registered social landlords, project finance initiatives and commercial real estate investors. The project finance and commercial real estate portfolios are closed to new business and are in run-off. Total balances have therefore continued to reduce. Overall credit quality has remained stable.
Commercial gross balances
2023 2022
-----
GBPm GBPm
--------------------------------------- ------ -----
Registered social landlords (note i) 4,131 4,329
--------------------------------------- ------ -----
Project finance (note ii) 537 611
--------------------------------------- ------ -----
Commercial real estate (CRE) 326 513
--------------------------------------- ------ -----
Commercial balances at amortised cost 4,994 5,453
--------------------------------------- ------ -----
Fair value adjustment for micro hedged
risk (note iii) 43 0 549
--------------------------------------- ------ -----
Commercial balances - FVTPL (note iv) 53 52
--------------------------------------- ------ -----
Total 5,4 77 6,054
--------------------------------------- ------ -----
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.
iv. FVTPL includes CRE balances of GBP51 million (2022: GBP50 million) and registered social landlord balances of GBP2 million (2022: GBP2 million).
Impairment charge and write-offs for the year
2023 2022
-----
GBPm GBPm
----------------------------------- ------ -----
Total impairment charge 1 8
----------------------------------- ------ -----
Gross write-offs 15 12
----------------------------------- ------ -----
Commercial provision charges and write-offs remain low and primarily reflect updates to 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
2023 2022
Stage Stage Stage Total Stage Stage Stage Total
1 2 3 1 2 3
-----
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------- ----- ----- ----- ----- ----- ----- ----- -----
Gross balances
------------------------------- ----- ----- ----- ----- ----- ----- ----- -----
Registered social landlords 4,061 70 - 4,131 4,292 37 - 4,329
------------------------------- ----- ----- ----- ----- ----- ----- ----- -----
Project finance 459 78 - 537 552 54 5 611
------------------------------- ----- ----- ----- ----- ----- ----- ----- -----
CRE 274 19 33 326 393 65 55 513
------------------------------- ----- ----- ----- ----- ----- ----- ----- -----
Total 4,794 167 33 4,994 5,237 156 60 5,453
------------------------------- ----- ----- ----- ----- ----- ----- ----- -----
Provisions
------------------------------- ----- ----- ----- ----- ----- ----- ----- -----
Registered social landlords 1 - - 1 1- -1
------------------------------- ----- ----- ----- ----- ----- ---- ----- ----
Project finance - 8 - 8 - 13 2 15
------------------------------- ----- ----- ----- ----- ----- ----- ----- -----
CRE 1 - 6 7 -1 13 14
------------------------------- ----- ----- ----- ----- ----- ---- ----- -----
Total 2 8 6 16 1 14 15 30
------------------------------- ----- ----- ----- ----- ----- ----- ----- -----
Provisions as a % of % % % % %% %%
total balance
------------------------------- ----- ----- ----- ----- ----- ---- ----- ----
Registered social landlords 0.01 0.26 - 0.02 0.01 0.16 - 0.01
------------------------------- ----- ----- ----- ----- ----- ----- ----- -----
Project finance 0.02 10.65 - 1.57 0.02 23.40 46.69 2.46
------------------------------- ----- ----- ----- ----- ----- ----- ----- -----
CRE 0.19 1.31 18.94 2.13 0.15 1.22 23.41 2.80
------------------------------- ----- ----- ----- ----- ----- ----- ----- -----
Total 0.02 5.26 18.94 0.32 0.02 8.62 25.35 0.55
------------------------------- ----- ----- ----- ----- ----- ----- ----- -----
Over the year, the performance of the commercial portfolio has remained stable, with 96% (2022: 96%) of balances in stage 1. Of the GBP167 million (2022: GBP156 million) stage 2 loans, which represent 3.3% (2022: 2.9%) of total balances, GBPnil (2022: GBP7 million) were in arrears by 30 days or more.
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 (PFI). The stage 2 balance reflects a small number of borrowers affected by issues relating to underlying assets.
Repayment of loans has resulted in the reduction in stage 2 CRE loan balances. Write-offs and a reduction in asset values for remaining impaired loans has resulted in an overall decrease to CRE stage 3 provisions to GBP6 million (2022: GBP13 million).
Credit risk - Commercial (continued)
Credit quality
Nationwide applies robust credit management policies and processes to identify and manage the risks arising from the portfolio.
The CRE portfolio continues to be spread across the retail, office, residential investment, industrial and leisure sectors. 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 the CRE portfolio the largest exposure is to the residential sector, which represents 39% (2022: 40%) of total CRE balances, with a weighted average LTV of 35% (2022: 34%). Exposure to office assets has reduced to 21% (2022: 23%) of total CRE balances, with a weighted average LTV of 64% (2022: 58%).
The LTV distribution of CRE balances has remained stable with 91% (2022: 91%) of the portfolio having an LTV of 75% or less, and 47% (2022: 61%) of the portfolio having an LTV of 50% or less.
CRE balances with arrears have reduced to GBP18 million (2022: GBP44 million). Of these, GBP10 million (2022: GBP24 million) have arrears greater than 3 months and relate to loans that are in recovery or are being actively managed.
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
2023 2022
------------- ------------------------------------- -------------------------------------
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 171 - - 171 0.0 258 5 - 263 0.0
------------- ----- ----- ----- ----- --------- ----- ----- ----- ----- ---------
Good 97 1 - 98 0.3 107 18 - 125 0.2
------------- ----- ----- ----- ----- --------- ----- ----- ----- ----- ---------
Satisfactory 6 2 - 8 2.8 26 16 - 42 0.8
------------- ----- ----- ----- ----- --------- ----- ----- ----- ----- ---------
Weak - 16 1 17 1.5 2 26 1 29 2.6
------------- ----- ----- ----- ----- --------- ----- ----- ----- ----- ---------
Impaired - - 32 32 19.1 - - 54 54 23.7
------------- ----- ----- ----- ----- --------- ----- ----- ----- ----- ---------
Total 274 19 33 326 2.1 393 65 55 513 2.8
------------- ----- ----- ----- ----- --------- ----- ----- ----- ----- ---------
The risk grades in the table above are based upon the IRB supervisory slotting approach for specialised lending exposures. Exposures are classified into categories depending on the underlying credit risk, with the assessment based upon financial strength, property characteristics, strength of sponsor and any other forms of security. The credit quality of the CRE portfolio has remained stable with 85% (2022: 84%) of the portfolio balances rated as strong, good or satisfactory.
Risk grades for the project finance portfolio use the same slotting approach as for CRE lending, with 85% (2022: 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% (2022: 0.03%) across the portfolio.
Credit risk - Commercial (continued)
Forbearance
Nationwide is committed to supporting borrowers facing financial difficulty by working with them to find a solution through proactive arrears management and forbearance.
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.
The table below provides details of commercial loans that are currently subject to forbearance by concession event.
Gross balances subject to forbearance (note i)
2023 2022
---- -----
GBPm GBPm
--------------------------------------- ---- -----
Modifications:
--------------------------------------- ---- -----
Payment concession 79 125
--------------------------------------- ---- -----
Extension at maturity 16 37
--------------------------------------- ---- -----
Breach of covenant 21 14
--------------------------------------- ---- -----
Security amendment - 2
--------------------------------------- ---- -----
Refinance - 7
--------------------------------------- ---- -----
Total 116 185
--------------------------------------- ---- -----
Total impairment provision on forborne
loans 14 27
--------------------------------------- ---- -----
Note:
i. Loans where more than one concession event has occurred are reported under the latest event.
Total forborne balances (excluding FVTPL) have reduced to GBP116 million (2022: GBP185 million), comprising CRE of GBP50 million (2022: GBP116 million) and project finance of GBP66 million
(2022: GBP69 million), following a reduction in CRE balances through redemption or write off.
In addition, there are GBP36 million (2022: GBP36 million) of FVTPL commercial lending balances which are forborne that relate to a single exposure.
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 2023 treasury assets represented 23.2% (2022: 23.3%) of total assets. There are no exposures to emerging markets, hedge funds or credit default swaps. The classification of treasury asset balances is set out below.
Treasury asset balances
2023 2022
--------------- ------ ------
Classification GBPm GBPm
----------------------------------- --------------- ------ ------
Amortised
Cash cost 25,635 30,221
----------------------------------- --------------- ------ ------
Loans and advances to banks and Amortised
similar institutions cost 2,860 3,052
----------------------------------- --------------- ------ ------
Investment securities (note i) FVOCI 27,562 25,349
----------------------------------- --------------- ------ ------
Investment securities (note i) FVTPL 13 17
----------------------------------- --------------- ------ ------
Amortised
Investment securities cost 40 118
----------------------------------- --------------- ------ ------
Liquidity and investment portfolio 56,110 58,757
---------------------------------------------------- ------ ------
Derivative instruments (note ii) FVTPL 6,923 4,723
----------------------------------- --------------- ------ ------
Treasury assets 63,033 63,480
---------------------------------------------------- ------ ------
Notes :
i. Investment securities at FVOCI include GBP44 million (2022: GBP46 million) and investment securities at FVTPL include GBP13 million (2022: GBP17 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 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 2023, derivative liabilities were GBP1,524 million (2022: GBP1,428 million).
Cash held in the treasury portfolio has decreased to GBP25.6 billion (2022: GBP30.2 billion) and reflects the early repayment of GBP4.5 billion of the Bank of England's Term Funding Scheme with additional incentives for SMEs (TFSME). Investment activity remains focused on high quality liquid assets, including assets eligible for central bank operations. Fixed rate investment securities are fully swapped to floating rate receipts for the duration of the holding. The increase in investment securities in the year of GBP2.2 billion is largely attributable to increased holdings of government and supranational bonds. The GBP40 million of investment securities classified as amortised cost are residential mortgage backed securities (RMBS), which are expected to have paid down fully by December 2024. 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 2023 (2022: 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
2023 2022
-------------------------- --------------------------
Gross balances Provisions Gross balances Provisions
-------------- -------------- ----------
GBPm GBPm GBPm GBPm
---------------------------------- -------------- ---------- -------------- ----------
Loans and advances to banks
and similar institutions 2,860 - 3,052 -
---------------------------------- -------------- ---------- -------------- ----------
Investment securities - FVOCI 27,562 - 25,349 -
---------------------------------- -------------- ---------- -------------- ----------
Investment securities - amortised
cost 40 - 118 -
---------------------------------- -------------- ---------- -------------- ----------
Credit risk - Treasury assets (continued)
Liquidity and investment portfolio
The liquidity and investment portfolio of GBP56,110 million (2022: GBP58,757 million) comprises liquid assets and other securities as set out below.
Liquidity and investment portfolio by credit rating (note i)
2023 AAA AA A Other UK US Europe Japan Other
------ --- ----- --- ------ ----- -----
GBPm % % % % % % % % %
------------------------------ ------ --- ----- --- ------ ----- -----
Liquid assets:
------------------------------ ------ --- ----- --- ------ ----- -----
Cash and reserves at central
banks 25,635 - 99 1- 99- 1- -
------------------------------ ------ --- ---- --- ------ ---- -----
Government bonds (note ii) 20,130 31 54 15- 37 24 14 12 13
------------------------------ ------ --- ---- --- ------ ----- -----
Supranational bonds 2,838 46 54 -- -- -- 100
------------------------------ ------ --- ---- --- ------ ---- -----
Covered bonds 2,843 100- -- 46- 16- 38
------------------------------ ------ --- ---- --- ------ ---- -----
Residential mortgage backed
securities (RMBS) 618 100- -- 69- 31- -
------------------------------ ------ --- ---- --- ------ ---- -----
Other asset backed securities 197 100- -- 94- 6- -
------------------------------ ------ --- ---- --- ------ ---- -----
Liquid assets total 52,261 22 72 6- 679 75 12
------------------------------ ------ --- ---- --- ------ ---- -----
Other securities (note iii):
------------------------------ ------ --- ----- --- ------ ----- -----
RMBS FVOCI 885 100- -- 100- -- -
------------------------------ ------ --- ---- --- ------ ---- -----
RMBS amortised cost 40 100- -- 100- -- -
------------------------------ ------ --- ---- --- ------ ---- -----
Other investments (note iv) 64 - 11 - 89 89- 11- -
------------------------------ ------ --- ----- --- ------ ---- -----
Other securities total 989 931 -6 99- 1- -
------------------------------ ------ --- ---- --- ------ ---- -----
Loans and advances to banks
and similar institutions 2,860 - 85 141 82 13 5- -
------------------------------ ------ --- ---- --- ------ ---- -----
Total 56,110 22 71 7- 689 74 12
------------------------------ ------ --- ---- --- ------ ---- -----
2022 GBPm %% %% %% %% %
------------------------------ ------ --- ---- --- ------ ---- -----
Liquid assets:
------------------------------ ------ --- ----- --- ------ ----- -----
Cash and reserves at central
banks 30,221 - 99 1- 100- -- -
------------------------------ ------ --- ---- --- ------ ---- -----
Government bonds (note ii) 19,579 30 55 15- 33 23 22 13 9
------------------------------ ------ --- ---- --- ------ ----- -----
Supranational bonds 1,318 58 42 -- -- -- 100
------------------------------ ------ --- ---- --- ------ ---- ----- Covered bonds 2,630 991 -- 48- 19- 33 ------------------------------ ------ --- ---- --- ------ ---- ----- Residential mortgage backed securities (RMBS) 584 100- -- 71- 29- - ------------------------------ ------ --- ---- --- ------ ---- ----- Other asset backed securities 289 100- -- 89- 11- - ------------------------------ ------ --- ---- --- ------ ---- ----- Liquid assets total 54,621 18 76 6- 718 95 7 ------------------------------ ------ --- ---- --- ------ ---- ----- Other securities (note iii): ------------------------------ ------ --- ----- --- ------ ----- ----- RMBS FVOCI 889 100- -- 100- -- - ------------------------------ ------ --- ---- --- ------ ---- ----- RMBS amortised cost 118 100- -- 100- -- - ------------------------------ ------ --- ---- --- ------ ---- ----- Other investments (note iv) 77 - 18 - 82 82- 18- - ------------------------------ ------ --- ----- --- ------ ---- ----- Other securities total 1,084 931 -6 99- 1- - ------------------------------ ------ --- ---- --- ------ ---- ----- Loans and advances to banks and similar institutions 3,052 - 77 212 83 11 5- 1 ------------------------------ ------ --- ---- --- ------ ---- ----- Total 58,757 19 75 6- 728 94 7 ============================== ====== === ==== === ====== ==== =====
Notes:
i. Ratings used are obtained from Standard & Poor's (S&P), Moody's or Fitch. For loans and advances to banks and similar institutions, internal ratings are used.
ii. Balances classified as government bonds include government guaranteed, agency and government sponsored 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 GBP13 million (2022: GBP17 million).
dit risk - Treasury assets (continued)
Country exposures
The following table summarises the exposure (shown at the balance sheet carrying value) to institutions outside the UK.
Country exposures (note i)
2023 Loans and
Government Mortgage Covered Supranational advances Other
Bonds (note backed bonds bonds to banks assets Total
ii) securities and
similar
institutions
-------------- --------- -------------- -------------- -------- ------------------
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- ------------- -------------- --------- -------------- -------------- -------- ------------------
Austria 418 - - - - - 418
-------------- ------------- -------------- --------- -------------- -------------- -------- ------------------
Belgium 360 - - - - - 360
-------------- ------------- -------------- --------- -------------- -------------- -------- ------------------
Denmark 105 - 9 - - - 114
-------------- ------------- -------------- --------- -------------- -------------- -------- ------------------
Finland 355 - 23 - - - 378
-------------- ------------- -------------- --------- -------------- -------------- -------- ------------------
France 939 - 139 - 60 7 1,145
-------------- ------------- -------------- --------- -------------- -------------- -------- ------------------
Germany 274 - 57 - 72 12 415
-------------- ------------- -------------- --------- -------------- -------------- -------- ------------------
Ireland - - - - - - -
-------------- ------------- -------------- --------- -------------- -------------- -------- ------------------
Netherlands 306 191 - - - - 497
-------------- ------------- -------------- --------- -------------- -------------- -------- ------------------
Norway - - 128 - - - 128
-------------- ------------- -------------- --------- -------------- -------------- -------- ------------------
Sweden 11 - 107 - - - 118
-------------- ------------- -------------- --------- -------------- -------------- -------- ------------------
Total Europe 2,768 191 463 - 132 19 3,573
-------------- ------------- -------------- --------- -------------- -------------- -------- ------------------
Australia 43 - 153 - - - 196
============== ============= ============== ========= ============== ============== ======== ==================
Canada 2,506 - 852 - 6 - 3,364
============== ============= ============== ========= ============== ============== ======== ==================
Japan 2,383 - - - - - 2,383
============== ============= ============== ========= ============== ============== ======== ==================
Singapore - - 76 - - - 76
============== ============= ============== ========= ============== ============== ======== ==================
USA 4,959 - - - 384 - 5,343
============== ============= ============== ========= ============== ============== ======== ==================
Supranational
entities
(note iii) - - - 2,838 - - 2,838
-------------- ------------- -------------- --------- -------------- -------------- -------- ------------------
Total 12,659 191 1,544 2,838 522 19 17,773
============== ============= ============== ========= ============== ============== ======== ==================
Credit risk - Treasury assets (continued)
Country exposures (continued)
Country exposures (note i)
2022 Loans and
Government Mortgage Covered Supranational advances Other
Bonds (note backed bonds bonds to banks and assets Total
ii) securities similar
institutions
-------------- --------- -------------- -------------- -------- ------------------
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- ------------- -------------- --------- -------------- -------------- -------- ------------------
Austria 373 - - - - - 373
-------------- ------------- -------------- --------- -------------- -------------- -------- ------------------
Belgium 571 - - - - - 571
-------------- ------------- -------------- --------- -------------- -------------- -------- ------------------
Denmark 115 - 10 - - - 125
-------------- ------------- -------------- --------- -------------- -------------- -------- ------------------
Finland 535 - 23 - - - 558
-------------- ------------- -------------- --------- -------------- -------------- -------- ------------------
France 1,533 - 143 - 23 14 1,713
-------------- ------------- -------------- --------- -------------- -------------- -------- ------------------
Germany 656 - 57 - 129 33 875
-------------- ------------- -------------- --------- -------------- -------------- -------- ------------------
Ireland 130 - - - - - 130
-------------- ------------- -------------- --------- -------------- -------------- -------- ------------------
Netherlands 440 170 - - - - 610
-------------- ------------- -------------- --------- -------------- -------------- -------- ------------------
Norway - - 150 - - - 150
-------------- ------------- -------------- --------- -------------- -------------- -------- ------------------
Sweden - - 108 - - - 108
-------------- ------------- -------------- --------- -------------- -------------- -------- ------------------
Total Europe 4,353 170 491 - 152 47 5,213
Australia - - 133 - 18 - 151
Canada 1,830 - 656 - 18 - 2,504
Japan 2,501 - - - - - 2,501
Singapore - - 70 - - - 70
USA 4,389 - - - 326 - 4,715
-------------- ------------- -------------- --------- -------------- -------------- -------- ------------------
Supranational
entities
(note iii) - - - 1,318 - - 1,318
Total 13,073 170 1,350 1,318 514 47 16,472
-------------- --------- -------------- -------------- -------- ------------------
Notes:
i. Nationwide has no exposure to credit risk arising from Russian or Ukrainian assets as it does not invest in liquid assets or other securities issued by Russian or Ukrainian entities.
ii. Balances classified as government bonds include government guaranteed, agency and government sponsored bonds.
iii. Exposures to Supranational entities are made up of bonds issued by highly rated multilateral development banks (MDBs) and international organisations (IOs).
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 2023 was GBP6.9 billion (2022: GBP4.7 billion) and the fair value of derivative liabilities was GBP1.5 billion (2022: GBP1.4 billion).
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 can be held as collateral by the Society.
Nationwide's CSA 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 GBP1.3 billion (2022: GBP1.3 billion) were available and GBP5.6 billion (2022: GBP3.5 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
2023 2022
Counterparty credit quality AA A BBB Total AA A BBB Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Derivative assets as per balance
sheet 636 6,287 - 6,923 541 4,177 5 4,723
Netting benefits (182) (1,104) - (1,286) (212) (1,050) (1) (1,263)
Net current credit exposure 454 5,183 - 5,637 329 3,127 4 3,460
Collateral (cash) (451) (5,183) - (5,634) (329) (3,127) (4) (3,460)
Net derivative credit exposure 3 - - 3 - - - -
Outlook
The treasury portfolio will continue to be held primarily for liquidity management and to hedge market risks taken in the normal course of business.
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.
Nationwide's Liquidity Coverage Ratio (LCR), which ensures that sufficient high-quality liquid assets are held to survive a short-term severe but plausible liquidity stress, averaged 180% over the 12 months ended 4 April 2023 (2022: 183%). Nationwide continues to manage its liquidity against internal risk appetite which is more prudent than regulatory requirements, and under the most severe internal 30 calendar day stress test, the average ratio of the liquid asset buffer to stressed net outflows over the 12 months ended 4 April 2023 equated to 155% (2022: 159%).
The position against the longer-term funding metric, the Net Stable Funding Ratio (NSFR), is also monitored. Nationwide's average NSFR for the four quarters ended 4 April 2023 was 147% (2022: 146%), well in excess of the 100% minimum requirement.
Nationwide has met its most recent investment target of holding GBP1.5 billion of Environmental, Social and Governance (ESG) assets and will maintain a minimum holding of GBP1.5 billion for 2023/24. The investment criteria for ESG assets remains restricted to bonds issued by multilateral development banks and green issuances from selected governments.
Funding risk
Funding strategy
Nationwide's funding strategy is to remain predominantly retail funded, as set out below.
Funding profile
Members' interests, equity
Assets 2023 2022 and liabilities 2023 2022
----- -----
(note i) GBPbn GBPbn GBPbn GBPbn
-----
Retail mortgages 201.4 197.9 Retail funding 187.1 178.0
Treasury assets (including liquidity
portfolio) 56.1 58.8 Wholesale funding 57.9 67.3
Commercial lending 5.5 6.0 Other liabilities 3.1 3.0
Consumer lending 3.9 4.1 Capital and reserves (note ii) 23.8 24.1
Other assets 5.0 5.6
Total 271.9 272.4 Total 271.9 272.4
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 2023, Nationwide's loan to deposit ratio, which represents loans and advances to customers divided by the total of shares and other deposits, was 109.6% (2022: 113.6%). Included within shares and other deposits, which are reported in the retail and wholesale funding categories above, is GBP29 billion of deposits (4 April 2022: GBP26 billion) that exceed the GBP85,000 per customer Financial Services Compensation Scheme (FSCS) limit.
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 GBP9.4 billion to GBP57.9 billion during the year. The decrease is primarily due to a reduction in balances relating to repurchase agreements (repo) and a GBP4.5 billion reduction in holdings from the Bank of England's Term Funding Scheme with additional incentives for SMEs (TFSME), which is partially offset by a GBP2.1 billion net increase in secured and unsecured funding issuances during the period. The wholesale funding ratio (on-balance sheet wholesale funding as a proportion of total funding liabilities) at 4 April 2023 was 25.0% (2022: 28.8%).
The table below sets out Nationwide's wholesale funding by currency.
Wholesale funding by currency
2023 2022
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 1.4 0.1 0.6 - 2.1 4 4.2 2.9 4.0 - 11.1 16
Deposits 11.0 - - - 11.0 19 8.8 0.1 - - 8.9 13
Certificates of deposit 1.0 - - - 1.0 2 - - - - - -
Covered bonds 6.0 7.2 - 1.2 14.4 25 5.4 6.4 0.7 0.4 12.9 19
Medium term notes 1.1 4.8 3.9 1.3 11.1 19 1.8 3.8 3.8 0.6 10.0 15
Securitisations 2.3 - 0.2 - 2.5 4 2.6 - 0.4 - 3.0 4
Term Funding Scheme with
additional
incentives for SMEs (TFSME) 17.2 - - - 17.2 29 21.7 - - - 21.7 33
Other (note i) - (1.1) (0.2) (0.1) (1.4) (2) - (0.2) (0.1) - (0.3) -
Total 40.0 11.0 4.5 2.4 57.9 100 44.5 13.0 8.8 1.0 67.3 100
Note:
i. Other consists of fair value adjustments to debt securities in issue for micro hedged risks.
Liquidity and funding risk (continued)
The table below sets out Nationwide's residual maturity of wholesale funding, on a contractual maturity basis.
Wholesale funding - residual maturity
2023 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 2.1 - - - 2.1 - - 2.1
------------------------
Deposits 7.6 1.6 1.4 0.3 10.9 0.1 - 11.0
------------------------
Certificates of deposit 1.0 - - - 1.0 - - 1.0
------------------------
Covered bonds 0.8 0.1 - 1.6 2.5 1.1 10.8 14.4
------------------------
Medium term notes 0.7 - - 1.4 2.1 0.8 8.2 11.1
------------------------
Securitisations 0.7 - 0.2 0.2 1.1 0.3 1.1 2.5
------------------------
TFSME - - - - - 11.9 5.3 17.2
------------------------
Other (note i) - - - - - (0.1) (1.3) (1.4)
Total 12.9 1.7 1.6 3.5 19.7 14.1 24.1 57.9
Of which secured 3.6 0.1 0.2 1.8 5.7 13.3 16.4 35.4
------------------------
Of which unsecured 9.3 1.6 1.4 1.7 14.0 0.8 7.7 22.5
% of total 22.3 2.9 2.8 6.0 34.0 24.4 41.6 100
------------------------
Wholesale funding - residual maturity
2022 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 11.1 - - - 11.1 - - 11.1
------------------------
Deposits 5.8 1.1 2.0 - 8.9 - - 8.9
------------------------
Certificates of deposit - - - - - - - -
------------------------
Covered bonds - - 1.0 1.7 2.7 2.3 7.9 12.9
------------------------
Medium term notes 0.2 0.6 - 1.3 2.1 1.9 6.0 10.0
------------------------
Securitisations 0.4 - 0.2 0.5 1.1 1.3 0.6 3.0
------------------------
TFSME - - - - - - 21.7 21.7
------------------------
Other (note i) - - - - - - (0.3) (0.3)
Total 17.5 1.7 3.2 3.5 25.9 5.5 35.9 67.3
Of which secured 11.5 - 1.2 2.2 14.9 3.6 30.1 48.6
------------------------
Of which unsecured 6.0 1.7 2.0 1.3 11.0 1.9 5.8 18.7
% of total 26.0 2.5 4.8 5.2 38.5 8.2 53.3 100.0
------------------------
Note:
i. Other consists of fair value adjustments to debt securities in issue for micro hedged risks.
At 4 April 2023, cash, government bonds and supranational bonds included in the liquid asset buffer represented 229% (2022: 153%) of wholesale funding maturing in less than one year, assuming no rollovers.
Liquidity and funding risk (continued)
Liquidity risk
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 repo agreements, and excludes securities encumbered through repo agreements and for other purposes.
Liquid assets
2023 2022
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 25.5 - 0.1 - - 25.6 30.0 0.2 - - - 30.2
Government bonds (note ii) 5.9 3.2 5.3 1.3 1.1 16.8 2.2 2.0 0.9 2.0 0.9 8.0
Supranational bonds 0.1 2.2 0.5 - - 2.8 0.1 0.8 0.4 - - 1.3
Covered bonds 1.1 1.6 0.1 - - 2.8 0.9 1.6 0.1 - - 2.6
Residential mortgage backed
securities (RMBS) (note iii) 1.3 0.2 - - - 1.5 0.1 0.1 - - - 0.2
Asset-backed securities and
other securities 0.2 - - - - 0.2 0.2 - - - - 0.2
Total 34.1 7.2 6.0 1.3 1.1 49.7 33.5 4.7 1.4 2.0 0.9 42.5
Notes:
i. Other currencies primarily consist of Canadian dollars.
ii. Balances classified as government bonds include government guaranteed, agency and government sponsored bonds.
iii. Balances include all RMBS held by the Society which can be monetised through sale or repo.
The table above primarily comprises LCR eligible high-quality liquid assets which averaged GBP53.3 billion for the 12 months ended 4 April 2023 (2022: GBP52.8 billion).
Liquidity and funding risk (continued)
Residual maturity of financial assets and liabilities
The table below segments the carrying value of financial assets and financial liabilities into relevant maturity groupings based on the final contractual maturity date (residual maturity):
Residual maturity (note i )
2023 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 25,635 - - - - - - - 25,635
---------- ---------- ---------- ---------- ---------- ---------- ----------
Loans and
advances to
banks
and similar
institutions 1,887 - - - - - - 973 2,860
---------- ---------- ---------- ---------- ---------- ---------- ----------
Investment
securities 81 151 41 68 402 772 8,880 17,220 27,615
---------- ---------- ---------- ---------- ---------- ---------- ----------
Derivative
financial
instruments 77 1 59 44 243 450 3,904 2,145 6,923
---------- ---------- ---------- ---------- ---------- ---------- ----------
Fair value
adjustment
for
portfolio
hedged risk (16) (31) (297) (26) (314) (1,118) (2,829) (380) (5,011)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Loans and
advances to
customers 2,784 1,371 2,127 2,053 2,076 7,957 23,489 168,925 210,782
Total
financial
assets 30,448 1,492 1,930 2,139 2,407 8,061 33,444 188,883 268,804
Financial
liabilities
---------- ---------- ---------- ---------- ---------- ---------- ----------
Shares 149,642 2,153 6,955 8,292 6,473 10,116 2,581 931 187,143
---------- ---------- ---------- ---------- ---------- ---------- ----------
Deposits from
banks and
similar
institutions 7,882 13 1 - - 11,890 5,270 - 25,056
Of which repo 2,075 - - - - - - - 2,075
---------- ---------- ---------- ---------- ---------- ---------- ----------
Of which
TFSME - 6 - - - 11,890 5,270 - 17,166
Other
deposits 1,806 1,559 1,374 224 103 116 9 - 5,191
---------- ---------- ---------- ---------- ---------- ---------- ----------
Fair value - 1 1 - - - - - 2
adjustment
for
portfolio
hedged risk
---------- ---------- ---------- ---------- ---------- ---------- ----------
Secured
funding -
ABS and
covered
bonds 1,501 41 264 233 1,592 1,328 5,930 5,142 16,031
---------- ---------- ---------- ---------- ---------- ---------- ----------
Senior
unsecured
funding 1,685 12 53 200 1,126 805 5,757 1,957 11,595
---------- ---------- ---------- ---------- ---------- ---------- ----------
Derivative
financial
instruments 56 - 2 1 24 134 405 902 1,524
---------- ---------- ---------- ---------- ---------- ---------- ----------
Subordinated
liabilities 8 2 31 14 - 795 3,225 2,680 6,755
---------- ---------- ---------- ---------- ---------- ---------- ----------
Subscribed
capital
(note iii) 1 - 1 - - - - 171 173
Total
financial
liabilities 162,581 3,781 8,682 8,964 9,318 25,184 23,177 11,783 253,470
Off-balance
sheet
commitments
(note iv) 10,333 - - - - - - - 10,333
Net liquidity
difference (142,466) (2,289) (6,752) (6,825) (6,911) (17,123) 10,267 177,100 5,001
Cumulative
liquidity
difference (142,466) (144,755) (151,507) (158,332) (165,243) (182,366) (172,099) 5,001 -
Liquidity and funding risk (continued)
Residual maturity (note i)
2022 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 30,221 - - - - - - - 30,221
---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Loans and
advances to
banks
and similar
institutions 2,031 - - - - - - 1,021 3,052
---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Investment
securities 61 17 68 50 279 784 7,419 16,806 25,484
---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Derivative
financial
instruments 90 119 5 118 43 255 2,609 1,484 4,723
---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Fair value
adjustment
for
portfolio
hedged risk 4 8 (134) (108) (93) (824) (1,140) (156) (2,443)
---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Loans and
advances to
customers 2,808 1,532 2,183 2,188 2,140 8,489 24,163 164,563 208,066
Total
financial
assets 35,215 1,676 2,122 2,248 2,369 8,704 33,051 183,718 269,103
Financial
liabilities
---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Shares 157,455 2,395 7,238 1,725 1,880 5,272 1,015 987 177,967
---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Deposits from
banks and
similar
institutions 14,712 2 - 11 - - 21,700 - 36,425
Of which repo 11,064 - - - - - - - 11,064
---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Of which
TFSME - 1 - - - - 21,700 - 21,701
Other
deposits 2,111 1,096 1,923 29 28 17 4 - 5,208
---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Fair value
adjustment
for
portfolio
hedged risk 1 3 2 - 1 3 1 - 11
---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Secured
funding -
ABS and
covered
bonds 387 26 1,247 1,079 1,061 3,607 3,225 5,201 15,833
---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Senior
unsecured
funding 239 555 21 40 1,262 1,885 4,257 1,537 9,796
---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Derivative
financial
instruments 52 5 23 1 15 35 367 930 1,428
---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Subordinated
liabilities 792 - 31 3 - 765 2,637 4,022 8,250
---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Subscribed
capital
(note iii) 1 - 1 - - - - 185 187
Total
financial
liabilities 175,750 4,082 10,486 2,888 4,247 11,584 33,206 12,862 255,105
Off-balance
sheet
commitments
(note iv) 15,258 - - - - - - - 15,258
Net liquidity
difference (155,793) (2,406) (8,364) (640) (1,878) (2,880) (155) 170,856 (1,260)
Cumulative
liquidity
difference (155,793) (158,199) (166,563) (167,203) (169,081) (171,961) (172,116) (1,260) -
---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Notes:
i. The analysis excludes certain financial assets and liabilities relating to accruals, trade receivables, trade payables and settlement balances which are generally short-term in nature and lease liabilities.
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)
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
2023 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 149,642 2,430 7,194 8,468 6,587 10,335 2,749 931 188,336
Deposits from
banks and
similar
institutions 7,882 195 183 182 182 12,437 5,280 - 26,341
Other deposits 1,806 1,573 1,380 226 104 117 9 - 5,215
Secured funding
- ABS and
covered bonds 1,516 56 346 322 1,777 1,741 6,748 6,568 19,074
Senior unsecured
funding 1,688 17 109 210 1,252 1,064 6,496 2,261 13,097
Subordinated
liabilities 9 - 94 59 90 1,040 3,957 3,072 8,321
Subscribed
capital (note
ii) 1 - 4 1 4 11 35 181 237
Total
non-derivative
financial
liabilities 162,544 4,271 9,310 9,468 9,996 26,745 25,274 13,013 260,621
Derivative
financial
liabilities:
Gross
settled
derivative
outflows (1,477) (106) (267) (232) (404) (3,634) (8,336) (10,934) (25,390)
Gross
settled
derivative
inflows 1,439 89 244 205 381 3,555 8,154 10,422 24,489
Gross
settled
derivatives
- net flows (38) (17) (23) (27) (23) (79) (182) (512) (901)
Net settled
derivative
liabilities (237) (370) (917) (918) (932) (3,039) (4,207) (3,842) (14,462)
Total derivative
financial
liabilities (275) (387) (940) (945) (955) (3,118) (4,389) (4,354) (15,363)
Total financial
liabilities 162,269 3,884 8,370 8,523 9,041 23,627 20,885 8,659 245,258
Off-balance
sheet
commitments
(note iii) 10,333 - - - - - - - 10,333
Total financial
liabilities
including
off-balance
sheet
commitments 172,602 3,884 8,370 8,523 9,041 23,627 20,885 8,659 255,591
Liquidity and funding risk (continued)
Gross contractual cash flows
2022 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 157,455 2,422 7,261 1,744 1,897 5,320 1,086 987 178,172
---------- --------- --------- --------- ---------- ---------- --------- --------
Deposits from
banks and
similar
institutions 14,712 43 41 52 41 163 21,804 - 36,856
---------- --------- --------- --------- ---------- ---------- --------- --------
Other deposits 2,111 1,099 1,923 29 28 17 4 - 5,211
---------- --------- --------- --------- ---------- ---------- --------- --------
Secured funding
- ABS and
covered bonds 388 35 1,284 1,118 1,156 3,845 3,626 5,765 17,217
---------- --------- --------- --------- ---------- ---------- --------- --------
Senior unsecured
funding 240 559 48 49 1,328 2,078 4,665 1,652 10,619
---------- --------- --------- --------- ---------- ---------- --------- --------
Subordinated
liabilities 796 1 104 29 101 990 3,235 4,570 9,826
---------- --------- --------- --------- ---------- ---------- --------- --------
Subscribed
capital (note
ii) 1 - 4 1 4 11 33 192 246
Total
non-derivative
financial
liabilities 175,703 4,159 10,665 3,022 4,555 12,424 34,453 13,166 258,147
Derivative
financial
liabilities:
---------- --------- --------- --------- ---------- ---------- --------- --------
Gross
settled
derivative
outflows (4,828) (49) (377) (97) (1,685) (1,690) (6,410) (8,823) (23,959)
---------- --------- --------- --------- ---------- ---------- --------- --------
Gross
settled
derivative
inflows 4,795 30 316 54 1,634 1,552 6,057 8,640 23,078
Gross
settled
derivatives
- net flows (33) (19) (61) (43) (51) (138) (353) (183) (881)
---------- --------- --------- --------- ---------- ---------- --------- --------
Net settled
derivative
liabilities (23) (70) (139) (219) (225) (1,497) (2,634) (1,728) (6,535)
Total derivative
financial
liabilities (56) (89) (200) (262) (276) (1,635) (2,987) (1,911) (7,416)
Total financial
liabilities 175,647 4,070 10,465 2,760 4,279 10,789 31,466 11,255 250,731
Off-balance
sheet
commitments
(note iii) 15,258 - - - - - - - 15,258
Total financial
liabilities
including
off-balance
sheet
commitments 190,905 4,070 10,465 2,760 4,279 10,789 31,466 11,255 265,989
---------- --------- --------- --------- ---------- ---------- --------- --------
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 consolidated financial statements) and from participation in the Bank of England's 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
2023 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 Readily Other
As a bank available assets
result As a (i.e. for that are
of result prepositioned encumbrance capable Cannot
covered of plus (note of being be
bonds securitisations Other Total encumbered) ii) encumbered encumbered Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Cash 522 637 - 1,159 - 23,972 - 504 24,476 25,635
Loans and
advances to
banks
and similar
institutions - - 589 589 1,944 - - 327 2,271 2,860
Investment
securities
(note
i) - - 4,508 4,508 - 23,050 - 57 23,107 27,615
Derivative
financial
instruments - - - - - - - 6,923 6,923 6,923
Loans and
advances to
customers 20,254 8,705 - 28,959 66,591 61,924 53,308 - 181,823 210,782
Non-financial
assets - - - - - - - 3,089 3,089 3,089
Fair value
adjustment
for
portfolio
hedged risk - - - - - - - (5,011) (5,011) (5,011)
Total 20,776 9,342 5,097 35,215 68,535 108,946 53,308 5,889 236,678 271,893
2022 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Cash 412 708 - 1,120 - 28,726 - 375 29,101 30,221
Loans and
advances to
banks
and similar
institutions - - 513 513 1,860 - - 679 2,539 3,052
Investment
securities
(note
i) - - 12,345 12,345 - 11,698 - 1,441 13,139 25,484
Derivative
financial
instruments - - - - - - - 4,723 4,723 4,723
Loans and
advances to
customers 20,190 10,644 - 30,834 72,187 51,333 53,712 - 177,232 208,066
Non-financial
assets - - - - - - - 3,251 3,251 3,251
Fair value
adjustment
for
portfolio
hedged risk - - - - - - - (2,443) (2,443) (2,443)
Total 20,602 11,352 12,858 44,812 74,047 91,757 53,712 8,026 227,542 272,354
Notes:
i. Encumbered investment securities primarily relate to repo transactions and collateral pledged for derivatives.
ii. Included within loans and advances to customers are newly originated prime mortgages which require a period of time to elapse before they are eligible to use in existing secured funding programmes or at the central bank.
Liquidity and funding risk (continued)
Under the most severe internal 30 calendar day stress test (a combined market-wide and Nationwide-specific stress scenario), the average ratio of the liquid asset buffer to stressed net outflows over the 12 months ended 4 April 2023 equated to 155% (2022: 159%).
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 2023 Stable
Moody's A1 P-1 A3 Baa1 March 2023 Stable
Fitch A+ F1 A BBB+ January 2023 Stable
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.
Collateral sensitivity
Cumulative adjustment Cumulative adjustment
for for
a one notch downgrade a two notch downgrade
GBPbn GBPbn
2023 - 0.6
2022 - 1.7
The contractually required cash outflow would not necessarily match the actual cash outflow as a result of management actions that could be taken to reduce the impact of the downgrades.
Outlook
Nationwide continues to hold a diversified high-quality liquid asset buffer which will evolve in line with Nationwide's liquidity requirements. Nationwide's funding plans include the refinancing of TFSME through a continued presence in wholesale funding markets.
Capital risk
Capital 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, customers, the Board and regulators. Capital is held to protect customers, 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 UK Capital Requirements Directive V (UK CRD V) and on an end point basis with IFRS 9 transitional arrangements applied. In addition, the disclosures are on a consolidated Group basis, including all subsidiary entities, unless otherwise stated.
Capital ratios and requirements
2023 2022
Capital ratios % %
-------- --------
CET1 ratio 26.5 24.1
-------- --------
Total Tier 1 ratio 29.1 26.6
-------- --------
Total regulatory capital ratio 32.7 31.8
-------- --------
Leverage ratio 6.0 5.4
-------- --------
Capital requirements GBPm GBPm
-------- --------
Risk weighted assets (RWAs) 51,731 51,823
-------- --------
Leverage exposure 249,299 255,407
-------- --------
Risk-based capital ratios remain in excess of regulatory requirements with the CET1 ratio at 26.5% (2022: 24.1%), above Nationwide's CET1 capital requirement of 11.5%. The CET1 capital requirement includes a 7.0% minimum Pillar 1 and Pillar 2 requirement and the UK CRD V combined buffer requirements of 4.5% of RWAs.
The CET1 ratio increased to 26.5% (2022: 24.1%) as a result of an increase in CET1 capital of GBP1.3 billion, in conjunction with a reduction in RWAs of GBP0.1 billion. The CET1 capital resources increase was driven by GBP1.7 billion profit after tax, partially offset by GBP0.2 billion of capital distributions, a GBP0.1 billion CET1 deduction following the repurchase of CCDS in February 2023, and a GBP0.1 billion reduction in the fair value through other comprehensive income reserve. RWAs reduced, with an increase in residential mortgage lending being more than offset by a reduction in off-balance sheet commitments.
UK CRD V requires firms to calculate a leverage ratio, which is non-risk based, to supplement risk-based capital requirements. Nationwide's leverage ratio is 6.0% (2022: 5.4%), with Tier 1 capital increasing by GBP1.3 billion as a result of the CET1 capital movements outlined above. In addition, there was a decrease in leverage exposure of GBP6.1 billion driven by the same movements as described above for RWAs.
The leverage ratio remains in excess of Nationwide's leverage capital requirement of 4.0%, which comprises a minimum Tier 1 capital requirement of 3.25% and buffer requirements of 0.75%. The buffer requirements include a 0.4% UK countercyclical leverage ratio buffer in-force from 13 December 2022, which will increase to 0.7% in July 2023.
Leverage requirements continue to be Nationwide's binding Tier 1 capital constraint, as the combination of minimum and regulatory buffer requirements are in excess of the risk-based equivalent. The risk of excessive leverage is managed through regular monitoring and reporting of the leverage ratio, which forms part of risk appetite.
Capital risk (continued)
The table below shows how the components of members' interests and equity contribute to total regulatory capital and does not include non-qualifying instruments.
Total regulatory capital
2023 2022
GBPm GBPm
General reserve 14,184 12,753
--------
Core capital deferred shares (CCDS) (note i) 1,334 1,334
--------
Revaluation reserve 38 46
--------
Fair value through other comprehensive income (FVOCI)
reserve (14) 89
--------
Cash flow hedge and other hedging reserves 129 142
--------
Regulatory adjustments and deductions:
--------
FVOCI reserve temporary relief (note ii) - (21)
--------
Cash flow hedge and other hedging reserves (note iii) (129) (142)
--------
Direct holdings of CET1 instruments (note i) (101) -
--------
Foreseeable distributions (note iv) (67) (71)
--------
Prudent valuation adjustment (note v) (119) (80)
--------
Own credit and debit valuation adjustments (note vi) (27) (12)
--------
Intangible assets (note vii) (839) (884)
--------
Goodwill (note vii) (12) (12)
--------
Defined-benefit pension fund asset (note vii) (614) (654)
--------
Excess of regulatory expected losses over impairment
provisions (note viii) (45) (48)
--------
IFRS 9 transitional arrangements (note ix) 15 31
--------
Insufficient coverage for non-performing exposures - -
(note x)
--------
Total regulatory adjustments and deductions (1,938) (1,893)
--------
CET1 capital 13,733 12,471
--------
Other equity instruments (Additional Tier 1) 1,336 1,336
--------
Total Tier 1 capital 15,069 13,807
--------
Dated subordinated debt (note xi) 1,835 2,643
--------
Excess of impairment provisions over regulatory expected
losses (note viii) 14 37
--------
IFRS 9 transitional arrangements (note ix) (10) (21)
--------
Tier 2 capital 1,839 2,659
--------
Total regulatory capital 16,908 16,466
--------
Notes:
i. The CCDS amount does not include the GBP101 million deduction for the Group's repurchase exercise completed in February 2023. This is presented separately as a regulatory adjustment in line with UK CRR article 42. Further information is included in note 15 to the consolidated financial statements.
ii. A temporary adjustment to mitigate the impact of volatility in central government debt on capital ratios, in line with the Covid-19 banking package. This temporary relief was no longer applicable from 1 January 2023.
iii. In accordance with UK CRR article 33, institutions do not include the fair value reserves related to gains or losses on cash flow and other hedges of financial instruments that are not valued at fair value.
iv. Foreseeable distributions in respect of CCDS and AT1 securities are deducted from CET1 capital under UK CRD V rules.
v. A prudent valuation adjustment (PVA) is applied in respect of fair valued instruments as required under regulatory capital rules.
vi. 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 own credit standing and risk, as per UK CRD V rules.
vii. Intangible, goodwill and defined benefit pension fund assets are deducted from capital resources after netting associated deferred tax liabilities.
viii. 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 UK CRR. The expected loss amounts for equity exposures are deducted from CET1 capital, gross of tax.
Capital risk (continued)
Notes (continued):
ix. The IFRS 9 transitional adjustments to capital resources apply scaled relief until 4 April 2023 due to the impact of the introduction of IFRS 9; the period for these adjustments was extended by the PRA for a further two years due to anticipated increases in expected credit losses as a result of the Covid-19 pandemic.
x. Where relevant provisions do not sufficiently cover non-performing exposures, the shortfall is deducted from CET1 capital, in line with Article 47c of the UK CRR.
xi. Subordinated debt includes fair value adjustments relating 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.
As part of the Bank Recovery and Resolution Directive, 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). From 1 January 2023, Nationwide's requirement is to hold twice the minimum capital requirements (6.5% of leverage exposure), plus the applicable capital requirement buffers, which amount to 0.7% of leverage exposure. This equals a total loss-absorbing requirement of 7.2%.
At 4 April 2023, total MREL resources were 8.8% (2022: 8.4%) of leverage exposure, in excess of the loss-absorbing requirement of 7.2% 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 UK CRR, as the exposure is below the threshold of 2% of own funds.
Risk weighted assets
2023 2022
Credit Operational Total risk Credit risk Operational Total risk
risk risk (note weighted (note i) risk (note weighted
(note i) ii) assets ii) assets
GBPm GBPm GBPm GBPm GBPm GBPm
Retail mortgages 34,609 2,991 37,600 34,935 3,054 37,989
Retail unsecured lending 5,145 1,114 6,259 4,694 1,045 5,739
Commercial loans 1,883 60 1,943 2,272 98 2,370
Treasury 1,559 290 1,849 1,865 409 2,274
Counterparty credit risk (note
iii) 989 - 989 1,052 - 1,052
Other (note iv) 1,715 1,376 3,091 1,798 601 2,399
Total 45,900 5,831 51,731 46,616 5,207 51,823
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 UK 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 GBP0.1 billion, partially due to a GBP0.3 billion decrease in retail mortgage credit risk RWAs. This was driven by a reduction in off-balance sheet commitments linked to a decrease in applications, which more than offset the impact of an increase in net mortgage lending. Commercial loan credit risk RWAs also reduced, primarily due to a decrease in the size of the commercial loan portfolio. Retail unsecured lending credit risk RWAs increased due to a six-month 0% interest rate concession provided to a number of overdrawn current accounts, to support borrowers through cost of living pressures. Operational risk RWAs increased due to rising average income in the previous three financial years.
Capital risk (continued)
In line with the prior year, a model adjustment continues to be included within RWAs to ensure outcomes are consistent with the revised IRB regulations in force from 1 January 2022. The impact of this is a GBP21.4 billion (2022: GBP21.8 billion) increase in risk weighted assets, predominantly in relation to retail mortgages. In line with other industry participants, Nationwide continues to engage with the PRA regarding approval and implementation timings.
Outlook - 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.
The Basel Committee published its 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, including the introduction of an RWA standardised output floor to restrict the use of internal models. On 30 November 2022, the Bank of England issued CP16/22 'Implementation of the Basel 3.1 standards'. The consultation paper, although materially similar to the original Basel reforms, includes interpretations and some divergences.
The reforms may lead to an increase in Nationwide's RWAs relative to the current position, mainly due to the application of the standardised RWA output floor. The expected implementation date is 1 January 2025, with a phased introduction of the standardised RWA output floor until fully implemented by 2030. Based on Nationwide's latest interpretation of the draft rules, there will not be a material day-one impact on Nationwide's CET1 ratio.
Nationwide's CET1 ratio would reduce to a low-to-mid 20% range compared to the 26.5% reported at 4 April 2023, if the 2030 fully implemented standardised RWA output floor was overlaid. However, final impacts are uncertain as they are subject to future balance sheet size and mix and the rules are currently at the consultation stage
On 13 December 2022 the FPC confirmed its intention to increase the UK countercyclical capital buffer (CCyB) rate to 2% from 5 July 2023. This will lead to an increase in Nationwide's risk-based capital requirements. Nationwide's leverage requirements will also increase as the countercyclical leverage ratio buffer is calculated as approximately 35% of the risk-based CCyB rate. Capital surpluses will reduce as a result of these changes; however, they will remain comfortably above Board risk appetite based on current forecasts.
Market risk
Summary
Market risk is the risk that the net value of, or net income arising from, assets and liabilities is impacted as a result of changes in market prices or rates, specifically interest rates or currency rates. Nationwide has limited appetite for market risk and does not have a trading book. Market risk is closely monitored and managed to ensure the level of risk remains within appetite. Market risk s are not taken unless they are essential to core business activities and they provide stability of earnings, minimise costs or enable operational efficiency .
The principal market risks linked to Nationwide's balance sheet assets and liabilities include interest rate risk, basis risk, swap spread risk, currency risk, product option risk and structural interest rate risk.
Global market conditions
Over the past year there has been heightened market volatility, fuelled by the war in Ukraine, lockdown in China, UK political instability and rising inflation. The Consumer Prices Index, on an annualised basis, rose from 9.0% in April 2022 to 11.1% by October, before reducing slightly to 10.1% at the end of March 2023. The increase in inflation has been driven by rising energy costs as an indirect impact of the war in Ukraine and supply side constraints in the first half of the year. The Bank of England has responded by increasing the Bank rate on eight separate occasions from 0.75% to 4.25% over the course of this year. Despite this, there is evidence that inflation is becoming entrenched within the economy, with average pay increasing by 6.6%, on an annualised basis, in March 2023. Nationwide has some inflation exposure (to UK, EU and US inflation indices) from investment securities; however, inflation risk is managed within tight limits and the financial impact from recent increases in inflation globally has therefore been limited. Since the year end, the Bank rate has increased further to 4.5%.
Market risk (continued)
Whilst the trend of higher inflation and interest rates was a world-wide phenomenon over the past year, volatility within the UK has been exacerbated by political instability. Fiscal policy announcements on 23 September 2022 triggered a lack of confidence in the UK economic outlook, causing the Sterling - US dollar exchange rate to fall to 1.04 and 10-year UK gilt yields to spike at 4.8%. Following the subsequent reversal of these policies and improved political stability, Sterling increased to 1.25 against the US dollar and UK gilt yields stabilised by the end of the year.
The failure of Silicon Valley Bank, Signature Bank and Credit Suisse during March 2023, and First Republic Bank in April 2023, raised concerns regarding the financial stability of the global banking sector. The immediate risk of widespread contagion across the banking sector has been contained by central banks; however, the longer-term outlook remains uncertain.
Whilst economic conditions within the UK have an impact on the Group, market risk is managed prudently. This is demonstrated by the Society's very low level of exposure to interest rate risk.
Net Interest Income sensitivity (NII)
The sensitivities presented below measure the extent to which Nationwide's pre-tax earnings are exposed to changes in interest rates over a one-year period based on instantaneous parallel rises and falls in interest rates, with the shifts applied to the prevailing interest rates at the reporting date.
The sensitivities are prepared based on a static balance sheet, with all assets and liabilities maturing within the year replaced with like-for-like products, and changes in interest rates being fully passed through to variable rate retail products, unless a 0% floor is reached when rates fall. No management actions are included in the sensitivities.
The purpose of these sensitivities is to assess Nationwide's exposure to interest rate risk and therefore the sensitivities should not be considered as a guide to future earnings performance, with actual future earnings influenced by the extent to which changes in interest rates are passed through to product pricing, the timing of maturing assets and liabilities and changes to the balance sheet mix. In practice, earnings changes from actual interest rate movements will differ from those shown below because interest rate changes may not be passed through in full to those assets and liabilities that do not have a contractual link to Bank rate.
Potential (adverse)/favourable impact on
annual pre-tax future earnings
2023 2022
GBPm GBPm
+100 basis points shift (30) (note
i)
+25 basis points shift (6) 5
-25 basis points shift (5) (76)
-100 basis points shift (32) (note
i)
Note:
i. +/-100 basis point shifts were not reported at 4 April 2022 but have been presented at 4 April 2023 to better reflect the prevailing interest rate environment.
The low levels of NII sensitivity reflect Nationwide's prudent management of interest rate risk. The sensitivities also reflect that changes in rates are fully passed through in these scenarios, and product margins are held static. The impact of take-up risk in the mortgage pipeline is included within the sensitivities, which contributes to the small negative sensitivities in the +25 and +100 basis point shifts.
Outlook
Nationwide will continue to have a limited appetite for market risk, which will only be taken if essential to core business activities and provides stability of earnings, minimises costs or enables operational efficiency .
Consolidated financial statements
Contents
Page
Consolidated income statement 70
Consolidated statement of comprehensive income 71
Consolidated balance sheet 72
Consolidated statement of movements in members' interests and equity 73
Notes to the consolidated financial statements 74
Consolidated income statement
For the year ended 4 April 2023
2023 2022
Notes GBPm GBPm
Interest receivable and similar income:
Calculated using the effective interest
rate method 3 8,776 4,501
Other 3 49 11
Total interest receivable and similar
income 3 8,825 4,512
Interest expense and similar charges 4 (4,327) (950)
Net interest income 4,498 3,562
Fee and commission income 432 475
Fee and commission expense (311) (218)
Other operating income 5 54 48
Losses from derivatives and hedge
accounting 6 (4) (7)
Total income 4,669 3,860
Administrative expenses 7 (2,323) (2,234)
Impairment (charge)/release on loans
and advances to customers 8 (126) 27
Provisions for liabilities and charges 12 9 (56)
Profit before tax 2,229 1,597
Taxation 9 (565) (345)
Profit after tax 1,664 1,252
Consolidated statement of comprehensive income
For the year ended 4 April 2023
2023 2022
GBPm GBPm
Profit after tax 1,664 1,252
Other comprehensive (expense)/income:
Items that will not be reclassified
to the income statement
Retirement benefit obligations:
Remeasurement of net retirement benefit
asset (85) 836
Taxation 29 (293)
(56) 543
Revaluation reserve:
Revaluation of property 2 7
Taxation (1) (2)
1 5
Fair value through other comprehensive
income reserve:
Revaluation (losses)/gains on equity
instruments at fair value through other
comprehensive income (3) 10
Taxation 1 (2)
(2) 8
(57) 556
Items that may subsequently be reclassified
to the income statement
Cash flow hedge reserve:
Hedging net gains arising during the
year 40 27
Amount transferred to income statement (50) (42)
Taxation 2 4
(8) (11)
Other hedging reserve:
Hedging net gains arising during the
year 16 8
Amount transferred to income statement (23) (4)
Taxation 3 (1)
(4) 3
Fair value through other comprehensive
income reserve:
Revaluation (losses)/gains on debt
instruments at fair value through other
comprehensive income (66) 12
Amount transferred to income statement (74) (48)
Taxation 39 8
(101) (28)
Other comprehensive (expense)/income (170) 520
Total comprehensive income 1,494 1,772
Consolidated balance sheet
At 4 April 2023
2023 2022
Notes GBPm GBPm
Assets
Cash 25,635 30,221
Loans and advances to banks
and similar institutions 2,860 3,052
Investment securities 27,615 25,484
Derivative financial instruments 6,923 4,723
Fair value adjustment for
portfolio hedged risk (5,011) (2,443)
Loans and advances to customers 10 210,782 208,066
Intangible assets 862 913
Property, plant and equipment 744 880
Accrued income and prepaid
expenses 302 252
Deferred tax 119 59
Current tax assets 15 33
Other assets 101 106
Retirement benefit asset 14 946 1,008
Total assets 271,893 272,354
Liabilities
Shares 187,143 177,967
Deposits from banks and similar
institutions 25,056 36,425
Other deposits 5,191 5,208
Fair value adjustment for
portfolio hedged risk 2 11
Debt securities in issue 27,626 25,629
Derivative financial instruments 1,524 1,428
Other liabilities 695 668
Provisions for liabilities
and charges 12 82 153
Accruals and deferred income 334 299
Subordinated liabilities 11 6,755 8,250
Subscribed capital 11 173 187
Deferred tax 406 430
Total liabilities 254,987 256,655
Members' interests and equity
Core capital deferred shares 15 1,233 1,334
Other equity instruments 16 1,336 1,336
General reserve 14,184 12,753
Revaluation reserve 38 46
Cash flow hedge reserve 176 184 Other hedging reserve (47) (43) Fair value through other comprehensive income reserve (14) 89 Total members' interests and equity 16,906 15,699 Total members' interests, equity and liabilities 271,893 272,354
Consolidated statement of movements in members' interests and equity
For the year ended 4 April 2023
Core Other General Revaluation Cash Other FVOCI Total
capital equity reserve reserve flow hedge hedging reserve
deferred instruments reserve reserve
shares
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 5 April 2022 1,334 1,336 12,753 46 184 (43) 89 15,699
========= ========
Profit for the year - - 1,664 - - - - 1,664
Net remeasurements of
retirement
benefit obligations - - (56) - - - - (56)
Net revaluation of property - - - 1 - - - 1
Net movement in cash flow
hedge
reserve - - - - (8) - - (8)
Net movement in other hedging
reserve - - - - - (4) - (4)
Net movement in FVOCI reserve - - - - - - (103) (103)
Total comprehensive income - - 1,608 1 (8) (4) (103) 1,494
--------
Reserve transfer - - 9 (9) - - - -
--------
Repurchase of core capital
deferred
shares (101) - - - - - - (101)
--------
Distribution to the holders
of
core capital deferred shares - - (108) - - - - (108)
--------
Distribution to the holders
of
Additional Tier 1 capital - - (78) - - - - (78)
--------
At 4 April 2023 1,233 1,336 14,184 38 176 (47) (14) 16,906
--------- --------
For the year ended 4 April 2022
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 2021 1,334 1,336 11,140 44 195 (46) 110 14,113
Profit for the year - - 1252 - - - - 1,252
Net remeasurements of
retirement
benefit obligations - - 543 - - - - 543
Net revaluation of property - - - 5 - - - 5
Net movement in cash flow
hedge
reserve - - - - (11) - - (11)
Net movement in other
hedging
reserve - - - - - 3 - 3
Net movement in FVOCI
reserve - - - - - - (20) (20)
Total comprehensive income - - 1,795 5 (11) 3 (20) 1,772
Reserve transfer - - 4 (3) - - (1) -
Distribution to the holders
of
core capital deferred
shares - - (108) - - - - (108)
Distribution to the holders
of
Additional Tier 1 capital - - (78) - - - - (78)
At 4 April 2022 1,334 1,336 12,753 46 184 (43) 89 15,699
Notes to the consolidated financial statements
1. Reporting period
These results have been prepared as at 4 April 2023 and show the financial performance for the year from, and including, 5 April 2022 to this date.
2. Basis of preparation
These consolidated financial statements are 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 by 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 2023 were included in the 'Annual Report and Accounts 2022' document except as detailed below. Copies of these documents are available at nationwide.co.uk
Adoption of new and revised IFRSs
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 2022. Those relevant to these financial statements include minor amendments to IFRS 9 'Financial Instruments' and the Conceptual Framework. The adoption of these amendments had no significant impact on the Group.
Future accounting developments
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. The new standard is not expected to have a significant impact for the Group.
The IASB has also issued a number of minor amendments to IFRSs that become effective from 1 January 2023 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.
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 2023, this evaluation has considered the impact of climate-related risks on the Group's financial position and performance. While the effects of climate change represent a source of uncertainty, the Group does not consider there to be a material impact on its judgements and estimates from physical and transition risks of climate change in the short to medium term.
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.
Estimates Judgements
Impairment charge/release and provisions Note 8 Note 8
on loans and advances to customers
Retirement benefit obligations Note 14
(pensions)
Going concern
The directors have assessed the Group's ability to continue as a going concern, with reference to current and anticipated market conditions including the impact of climate-related matters. The directors confirm they are satisfied that the Group has adequate resources to continue in business for a period of not less than 12 months from the date of approval of these consolidated financial statements and that it is therefore appropriate to adopt the going concern basis in preparing this preliminary financial information.
3. Interest receivable and similar income
2023 2022
GBPm GBPm
On financial assets measured at
amortised cost:
Residential mortgages 4,904 4,278
Other loans 602 531
Other liquid assets (note i) 1,002 109
Investment securities 2 10
On investment securities measured
at FVOCI 310 134
Net income/(expense) on financial
instruments hedging assets in a
qualifying hedge accounting relationship 1,956 (561)
Total interest receivable and
similar income calculated using
the effective interest rate method 8,776 4,501
Interest on net defined benefit
pension surplus (note 14) 26 4
Other interest and similar income
(note ii) 23 7
Total 8,825 4,512
Notes:
i. Includes interest on amounts deposited with the Bank of England (BoE).
ii. Includes interest on financial instruments hedging assets that are not in a qualifying hedge accounting relationship.
4. Interest expense and similar charges
2023 2022
GBPm GBPm
On shares held by individuals 1,915 456
On subscribed capital 11 13
On deposits and other borrowings:
Subordinated liabilities 272 258
Other (note i) 1,070 99
On debt securities in issue 769 449
Net expense/(income) on financial
instruments hedging liabilities 290 (325)
Total 4,327 950
Note:
i. Includes interest on amounts drawn down under the BoE's Term Funding Scheme with additional incentives for SMEs (TFSME) , as well as interest on other deposits and short-term borrowing.
5. Other operating income
2023 2022
GBPm GBPm
(Losses)/gains on financial assets
measured at fair value through profit
and loss (FVTPL) (10) 9
Gains on disposal of fair value through
other comprehensive income (FVOCI)
investment securities 74 47
Other expense (10) (8)
Total 54 48
There were no gains or losses on disposal of financial assets measured at amortised cost in the year ended 4 April 2023 (2022: GBPnil).
6. 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. More information on how the Group manages market risk can be found in the Risk report. 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.
2023 2022
GBPm GBPm
Losses from fair value hedge accounting (62) (21)
Gains from cash flow hedge accounting 1 2
Fair value gains from other derivatives
(note i) 56 13
Foreign exchange retranslation (note
ii) 1 (1)
Total (4) (7)
Notes:
i. Gains or losses arise from derivatives used for economic hedging purposes but which are not currently in a hedge accounting relationship, valuation adjustments applied at a portfolio level which are not allocated to individual hedge accounting relationships, and fair value gains or losses on derivatives economically hedging fixed rate mortgages not yet on the balance sheet.
ii. Gains or losses arise from the retranslation of foreign currency monetary items not subject to effective hedge accounting.
7. Administrative expenses
2023 2022
GBPm GBPm
Employee costs:
Wages and salaries 597 542
-----
Bonuses 78 64
-----
Social security costs 90 71
-----
Pension costs 153 145
-----
918 822
-----
Other administrative expenses 862 801
-----
Bank levy 20 16
-----
Depreciation, amortisation and
impairment 523 595
-----
Total 2,323 2,234
-----
8. Impairment charge/release and provisions on loans and advances to customers
The following tables set out the impairment charges and releases during the year and the closing provision balances which are deducted from the relevant asset values in the balance sheet:
Impairment charge/(release)
2023 2022
---------------------- ----------
GBPm GBPm
----------------------
Prime residential 11 (19)
----------
Buy to let and legacy
residential 83 (109)
----------
Consumer banking 31 93
----------
Commercial and other
lending 1 8
----------
Total 126 (27)
----------
Impairment provisions
2023 2022
GBPm GBPm
Prime residential 84 73
Buy to let and legacy
residential 196 114
Consumer banking 469 529
Commercial and other
lending 16 30
Total 765 746
8. Impairment charge/release 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, outputs from statistical models are used, and judgements incorporated to determine the probability of default (PD), the exposure at default (EAD), and the loss given default (LGD) for each loan. Provisions represent a probability weighted average of these calculations under multiple economic scenarios. Adjustments are made in modelling provisions, applying further judgements to reflect model limitations, or to deal with instances where insufficient data exists to fully reflect credit risks in the models.
The most significant areas of judgement are:
-- The approach to identifying significant increases in credit risk; and -- The approach to identifying credit impaired loans.
The most significant areas of estimation uncertainty are:
-- The use of forward-looking economic information using multiple economic scenarios; and
-- The additional judgements made in modelling expected credit losses (ECL) - these currently include PD uplifts relating to the current economic uncertainty and property valuation risk arising from fire safety issues.
The Group has considered the potential impact of climate change on impairment provisions beyond their impact on economic assumptions and has concluded that an adjustment to modelled provisions is not currently appropriate. The expected physical risks are likely to be longer term in nature and, therefore, are likely to have a limited impact on the Group's existing lending due to the impact of loan amortisation and redemptions. Future transition policies and the Group's response to these policies is still highly uncertain. Therefore, the Group cannot yet reliably measure the impacts on impairment provisions. The Group will continue to monitor this risk.
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. Judgement has been used to select both quantitative and qualitative criteria which are used to determine whether a significant increase in credit risk has taken place. These criteria are detailed within the Credit risk section of the 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 residential mortgage and consumer banking lending, 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; or
-- The residual lifetime PD is at least 75 basis points more than, and at least double, the original lifetime PD.
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.
8. Impairment charge/release and provisions on loans and advances to customers (continued)
Critical accounting estimates and judgements (continued)
Identifying credit impaired loans (stage 3)
The identification of credit impaired loans is an important judgement within the staging approach. A loan is credit impaired either if it has an arrears status of more than 90 days past due, or 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.
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. The Group continues to model four economic scenarios, which together encompass an appropriate range of potential economic outcomes. The base case scenario is aligned to the Group's financial planning process. The upside and downside scenarios are reasonably likely favourable and adverse alternatives to the base case, and the severe downside scenario is aligned with the Group's internal stress testing. The impact of applying multiple economic scenarios (MES) is to increase provisions at 4 April 2023 by GBP125 million (2022: GBP98 million), compared with provisions based on the base case economic scenario.
Probability weightings for each scenario are reviewed quarterly and updated to reflect economic conditions as they evolve. The changes in scenario weightings during the period primarily reflect a deterioration in the economic outlook. The base case and downside scenario weightings increased (and upside scenario weighting decreased) to reflect increased risks associated with rising inflation, increases in Bank rate and the ongoing economic consequences of the conflict in Ukraine. The probability weightings applied to the scenarios are shown in the table below.
Scenario probability weighting (%)
Upside Base case Downside Severe
scenario scenario scenario downside
scenario
4 April 2023 10 45 30 15
4 April 2022 20 40 25 15
8. Impairment charge/release and provisions on loans and advances to customers (continued)
Critical accounting estimates and judgements (continued)
In the base case scenario at 4 April 2023, a modest recession is forecast, with a fall in GDP of 1.1% expected in 2023. This contraction in the economy is expected to result in an increase in the forecast peak unemployment rate to 5.0% (2022: 4.2%) in this scenario. The peak unemployment in the downside scenario of 7.0% is unchanged from 4 April 2022 and reflects a significant economic downturn. The peak unemployment in the severe downside scenario of 10.0% is also unchanged from 4 April 2022, reflecting a severe long-lasting impact on the UK economy.
House prices are expected to fall in the short term in the base case scenario. This is the result of ongoing affordability pressures due to increasing borrowing costs and inflation. The downside scenario assumes more significant house price falls during both 2023 and 2024, driven by a deterioration in economic conditions including an increase in unemployment, whilst the severe downside scenario includes a fall in house prices of 34% from December 2022 to the trough. As a result, the weighted average of all scenarios represents a fall in house prices by 12% between December 2022 and December 2024.
The Bank rate is assumed to remain at 4.25% during 2023 in the base case scenario. Inflation in this scenario is expected to reduce during 2023 to 4%; however, the severe downside scenario includes a sustained high level of inflation throughout 2023. In the downside scenario the Bank rate is low from 2024 onwards, reflecting the risk that there is a significant economic downturn, with a reduction in the Bank rate required to stimulate economic demand.
Graphs showing the historical and forecasted GDP level, average house price and unemployment rate for the Group's economic scenarios, including the previous base case economic scenario, are included in the 2023 Preliminary Results on nationwide.co.uk
8. Impairment charge/release and provisions on loans and advances to customers (continued)
Critical accounting estimates and judgements (continued)
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-22 Dec-22
2022-2027 average to peak to trough
( note (notes ( notes
i) ii and ii
iii) and iii)
Actual Forecast
2022 2023 2024 2025 2026 2027
4 April 2023 % % % % % % % % %
GDP growth
Upside scenario 0.4 1.3 2.0 1.8 1.6 1.6 1.7 8.6 0.2
Base case scenario 0.4 (1.1) 1.2 1.8 2.9 2.0 1.4 7.0 (1.1)
Downside scenario 0.4 (2.9) 0.8 2.4 2.3 2.0 0.9 4.7 (3.2)
Severe downside
scenario 0.4 (5.2) 2.2 3.0 2.1 1.7 0.7 3.7 (5.7)
HPI growth
Upside scenario 6.0 0.4 3.7 3.8 3.8 3.8 3.1 16.2 (1.0)
Base case scenario 6.0 (4.5) 0.7 3.0 3.2 3.2 1.1 5.6 (4.5)
Downside scenario 6.0 (8.6) (11.4) 2.0 6.8 4.3 (1.7) (1.7) (19.5)
Severe downside
scenario 6.0 (21.0) (15.8) 2.2 7.7 5.1 (5.1) (1.7) (33.8)
Unemployment
Upside scenario 3.7 3.9 4.0 4.0 4.0 4.0 3.9 4.0 3.7
Base case scenario 3.7 4.6 5.0 4.5 4.3 4.2 4.5 5.0 3.9
Downside scenario 3.7 5.8 6.5 5.7 5.3 5.1 5.6 7.0 3.9
Severe downside
scenario 3.7 6.6 9.4 8.0 7.0 6.4 7.5 10.0 4.2
Bank rate
Upside scenario 3.5 4.0 3.0 3.0 3.0 3.0 3.3 4.3 3.0
Base case scenario 3.5 4.3 3.8 2.8 2.3 2.0 3.1 4.3 2.0
Downside scenario 3.5 5.0 0.5 0.1 0.1 0.5 1.5 5.0 0.1
Severe downside
scenario 3.5 7.0 3.0 2.5 2.5 2.5 3.5 7.0 2.5
Consumer price
inflation
Upside scenario 10.5 1.2 1.8 2.0 2.0 2.0 2.3 8.5 1.2
Base case scenario 10.5 4.0 2.0 2.0 2.0 2.0 2.9 9.0 2.0
Downside scenario 10.5 5.0 1.5 0.5 1.5 1.9 3.0 13.0 0.3
Severe downside
scenario 10.5 14.0 3.5 2.0 2.0 2.0 5.3 16.0 2.0
8. Impairment charge/release and provisions on loans and advances to customers (continued)
Critical accounting estimates and judgements (continued)
Economic variables
Rate/annual growth rate at December 5-year Dec-21 Dec-21
2021-2026 average to peak to trough
(note (notes (notes
i) ii ii
and iii) and iii)
Actual Forecast
(note
iv)
2021 2022 2023 2024 2025 2026
4 April 2022 % % % % % % % % %
GDP growth
Upside scenario 8.9 4.2 2.5 2.0 2.0 2.0 2.5 13.4 1.5
Base case scenario 8.9 2.3 1.7 1.5 1.4 1.4 1.7 8.6 0.7
Downside scenario 8.9 2.5 (3.9) 1.7 2.2 2.2 0.9 4.6 (1.5)
Severe downside
scenario 8.9 (4.5) 2.6 2.0 1.9 1.6 0.7 3.6 (4.5)
HPI growth
Upside scenario 10.1 6.1 3.7 4.0 3.8 3.8 4.3 23.2 2.0
Base case scenario 10.1 3.5 2.4 2.8 3.2 3.2 3.1 16.2 1.5
Downside scenario 10.1 1.5 (10.6) (8.4) 5.6 5.0 (1.6) 2.0 (16.9)
Severe downside
scenario 10.1 (1.8) (23.6) (5.5) 3.7 7.7 (4.6) 1.2 (29.2)
Unemployment
Upside scenario 4.0 3.5 3.6 3.9 3.9 3.9 3.8 3.9 3.5
Base case scenario 4.0 4.2 4.2 4.2 4.2 4.2 4.2 4.2 4.0 Downside scenario 4.0 4.7 6.9 5.3 5.0 4.9 5.3 7.0 3.6 Severe downside scenario 4.0 9.4 8.2 6.2 5.5 5.3 6.7 10.0 4.1 Bank rate Upside scenario 0.3 2.3 2.5 2.5 2.5 2.5 2.3 2.5 0.8 Base case scenario 0.3 1.0 1.3 1.3 1.3 1.3 1.2 1.3 0.8 Downside scenario 0.3 4.0 0.1 0.1 0.8 1.0 1.0 4.0 0.1 Severe downside scenario 0.3 (0.1) (0.3) (0.3) (0.3) (0.3) (0.1) 0.8 (0.3) Consumer price inflation (CPI) Upside scenario 5.4 5.0 1.6 1.9 2.0 2.0 2.9 7.5 1.3 Base case scenario 5.4 5.0 1.8 1.7 2.0 2.0 2.9 7.5 1.6 Downside scenario 5.4 10.0 1.0 0.3 0.3 1.2 3.1 10.0 0.3 Severe downside scenario 5.4 3.0 (0.2) 0.0 0.0 0.1 1.2 7.0 (0.4)
Notes:
i. The average rate for GDP and HPI is based on the cumulative annual growth rate over the forecast period. Average unemployment and CPI 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 and CPI is shown as the highest/lowest rate over the forecast period from 31 December.
iv. The 2021 actual data as presented in the Annual Report and Accounts 2022 has been updated to reflect the most recent published economic data.
8. Impairment charge/release 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 if 100% weighting is applied to each scenario:
Expected credit losses Proportion of balances
under 100% weighted scenarios in stage 2
under 100% weighted scenarios
Upside Base Downside Severe Reported Upside Base Downside Severe Reported Reported
scenario case scenario downside provision scenario case scenario downside stage stage
scenario scenario scenario scenario 2 3 (note
i)
4 April 2023 GBPm GBPm GBPm GBPm GBPm % % % % % %
Residential
mortgages 160 179 236 789 280 14.6 13.9 13.5 35.7 17.6 0.5
Consumer
banking
- credit
cards 213 212 228 264 225 37.8 37.8 39.0 40.2 38.8 5.8
Consumer
banking
- personal
loans
and
overdrafts 227 233 247 281 244 34.6 37.5 41.4 46.5 40.0 6.7
Commercial
lending 16 16 16 17 16 3.3 3.3 3.3 3.3 3.3 0.7
Total 616 640 727 1,351 765
4 April 2022 GBPm GBPm GBPm GBPm GBPm %% %% %%
Residential
mortgages 134 131 184 465 187 8.9 8.0 8.8 23.9 8.3 0.6
Consumer
banking
- credit
cards 237 240 260 376 263 40.0 40.2 41.4 49.9 40.3 6.6
Consumer
banking
- personal
loans
and
overdrafts 239 247 265 364 266 31.7 34.4 42.9 62.8 35.6 5.5
Commercial
lending 29 30 30 31 30 2.9 2.9 2.9 2.9 2.9 1.1
Total 639 648 739 1,236 746
Note:
i. The staging of stage 3 assets is not sensitive to economic scenarios. The reported stage 3 proportion is the same as it would be in any of the 100% weighted scenarios.
The ECL in the severe downside scenario has increased over the year reflecting increased losses in the mortgage portfolios. This primarily reflects that the scenario now includes a high Bank rate forecast, with a peak of 7% (2022: peak 0.75%).
The ECL for each scenario multiplied by the scenario probability will not reconcile to the reported provision. Whilst the stage allocation of loans varies in each individual scenario, each loan is allocated to a single stage in the reported 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 2023 to some of the key assumptions used within the ECL calculation:
Sensitivity to key forward-looking information assumptions
Increase
in provision
2023 GBPm
Single-factor sensitivity to key economic variables
10% decrease in house prices (HPI) at 4 April 2023 and throughout
the forecast period (note i) 29
Sensitivity to changes in scenario probability weightings
10% increase in the probability of the downside scenario
(reducing the upside by a corresponding 10%) 11
5% increase in the probability of the severe downside scenario
(reducing the downside by a corresponding 5%) 31
Note:
i. As this is a single-factor sensitivity, it should not be extrapolated due to the likely non-linear effects. The provision impact is calculated using the base case scenario and only includes the impact of a 10% decrease of house prices on LGD.
8. Impairment charge/release and provisions on loans and advances to customers (continued)
Critical accounting estimates and judgements (continued)
The table below shows key adjustments made in modelling provisions in relation to the significant areas of estimation uncertainty for the retail portfolios (residential mortgages and consumer banking), with further details on each provided below. There are no significant areas of estimation uncertainty for the commercial portfolio.
Significant adjustments made in modelling provisions
2023 2022
Residential Consumer Total Residential Consumer Total
mortgages banking mortgages banking
GBPm GBPm GBPm GBPm GBPm GBPm
PD uplift for economic uncertainty 77 100 177 13 146 159
LGD uplift for property valuation
risks 22 - 22 25 - 25
Total 99 100 199 38 146 184
Of which:
Stage 1 5 8 13 8 15 23
Stage 2 89 90 179 26 131 157
Stage 3 5 2 7 4 - 4
PD uplift for economic uncertainty
Household disposable income is forecast to decrease in each of the four economic scenarios, increasing the risk that borrowers will not be able to meet their contractual repayments. At 4 April 2022 the main driver of this reduction was the impact of rising inflation, which particularly affected consumer banking portfolios. Since 4 April 2022 there has also been a significant increase in interest rates, which will again reduce household disposable income but with a greater impact on residential mortgage affordability. In addition, model inputs relating to borrower credit quality are still benefitting from credit indicators which are judged to be temporary, such as reduced levels of arrears.
This adjustment reflects the cumulative effect of increasing the probability of default to reflect management's judgements for all of these risks. At 4 April 2023 this has increased provisions by GBP177 million (2022: GBP159 million). The adjustment also results in approximately GBP16.6 billion (2022: GBP4.6 billion) of residential mortgages and GBP585 million (2022: GBP700 million) of consumer banking balances moving from stage 1 to stage 2. The most significant judgement within this adjustment is the assumed increase in both fixed and variable mortgage rates faced by borrowers over the next two years. A 1% increase in assumed mortgage rates would increase residential mortgage provisions by GBP32 million.
LGD uplift for property valuation risks
An adjustment is made to reflect the property valuation risk associated with flats subject to fire safety issues such as unsuitable cladding. Due to limited data available to identify affected properties individually, it is assumed that a proportion of the flats securing loans in the residential mortgage portfolios is 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 provision adjustment is GBP22 million (2022: GBP25 million). Although initiatives to support remediation of affected properties have made progress over the past year, we continue to hold an adjustment to provisions whilst there is insufficient evidence of a recovery in the value of affected properties.
9. Taxation
Tax charge in the income statement
2023 2022
GBPm GBPm
Current tax:
UK corporation tax 565 368
Adjustments in respect of prior years 17 (19)
Total current tax 582 349
Deferred tax:
Current year (credit)/charge (4) (1)
Adjustments in respect of prior years (13) (4)
Effect of deferred tax provided at different
tax rates - 1
Total deferred taxation (17) (4)
Tax charge 565 345
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
2023 2022
GBPm GBPm
Profit before tax: 2,229 1,597
-----
Tax calculated at a tax rate of 19% 424 303
-----
Adjustments in respect of prior years 4 (23)
-----
Tax credit on distribution to the holders
of Additional Tier 1 capital (15) (15)
-----
Banking surcharge 145 72
-----
Temporary differences where no deferred
tax is recognised 1 1
-----
Expenses not deductible for tax purposes/(income
not taxable):
-----
Depreciation on non-qualifying assets 2 2
-----
Bank levy 4 3
-----
Customer redress (2) 4
-----
Other - (3)
-----
Effect of deferred tax provided at different
tax rates 2 1
-----
Tax charge 565 345
-----
10. Loans and advances to customers
2023 2022
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 157,511 (84) - 157,427 47 157,474 154,363 (73) - 154,290 64 154,354
Buy to let
and legacy
residential
mortgages 44,104 (196) - 43,908 - 43,908 43,693 (114) - 43,579 - 43,579
Consumer
banking 4,408 (469) - 3,939 - 3,939 4,638 (529) - 4,109 - 4,109
Commercial
and other
lending 4,994 (16) 430 5,408 53 5,461 5,453 (30) 549 5,972 52 6,024
Total 211,017 (765) 430 210,682 100 210,782 208,147 (746) 549 207,950 116 208,066
Note:
i. 'Other' represents a fair value adjustment for micro hedged risk for commercial loans that were previously hedged on an individual basis. The hedge relationships have been discontinued and the balances are being amortised over the remaining life of the loans.
The tables on the following pages summarise the movements in, and stage allocations of, 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 Credit risk section of the Risk report.
The key movements shown in the table on the next page are as follows:
-- The movement in gross balances is principally a result of GBP35,327 million of new lending, offset by a reduction of GBP32,314 million from repayments and redemptions. The majority of these movements relate to residential mortgages.
-- Of the GBP143 million of write-offs, GBP97 million relates to consumer banking, GBP25 million to residential mortgages and GBP21 million to commercial and other lending.
-- Impairment provisions increased by GBP19 million in the period to GBP765 million. Further detail on the impairment provision release or charge by portfolio is shown in note 8.
-- Gross balance transfers between stages 1 and 2 are principally driven by residential mortgage movements. There has been a net transfer of loans from stage 1 to stage 2, primarily due to an increased PD uplift for economic uncertainty, in addition to the implementation of models which are more responsive to the risks in the economic scenarios. This has also led to an increase in gross movements between stages 1 and 2.
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-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 2022 188,130 48 18,326 380 1,691 318 208,147 746
Stage transfers:
Transfers from stage 1 to
stage 2 (67,275) (53) 67,275 53 - - - -
Transfers to stage 3 (202) (1) (878) (122) 1,080 123 - -
Transfers from stage 2 to
stage 1 44,341 375 (44,341) (375) - - - -
Transfers from stage 3 270 3 484 30 (754) (33) - -
Net remeasurement of ECL
arising from
transfer of stage (336) 448 - 112
Net movement arising from
transfer of
stage (note ii) (22,866) (12) 22,540 34 326 90 - 112
New assets originated or
purchased (note
iii) 35,327 37 - - - - 35,327 37
Net impact of further
lending and repayments
(note iv) (9,851) (25) (826) (38) (65) (18) (10,742) (81)
Changes in risk parameters
in relation
to credit quality (note
v) - 6 - 58 - 50 - 114
Other items impacting
income statement
(including recoveries) - - - - - (10) - (10)
Redemptions (note vi) (18,682) (4) (2,583) (24) (307) (18) (21,572) (46)
Income statement charge for the year 126 Decrease due to write-offs - - - - (143) (117) (143) (117) Other provision movements - - - - - 10 - 10 At 4 April 2023 172,058 50 37,457 410 1,502 305 211,017 765 Net carrying amount 172,008 37,047 1,197 210,252
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-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 2021 187,839 116 11,868 388 1,919 348 201,626 852
Stage transfers:
Transfers from stage 1 to
stage 2 (26,307) (70) 26,307 70 - - - -
Transfers to stage 3 (271) (2) (766) (104) 1,037 106 - -
Transfers from stage 2 to
stage 1 18,108 287 (18,108) (287) - - - -
Transfers from stage 3 283 4 440 30 (723) (34) - -
Net remeasurement of ECL
arising from
transfer of stage (250) 316 2 68
Net movement arising from
transfer of
stage (note ii) (8,187) (31) 7,873 25 314 74 - 68
New assets originated or
purchased (note
iii) 37,853 47 - - - - 37,853 47
Net impact of further
lending and repayments
(note iv) (8,832) (32) (257) (29) (89) (21) (9,178) (82)
Changes in risk parameters
in relation
to credit quality (note
v) - (47) - 14 - 30 - (3)
Other items impacting
income statement
(including recoveries) - - - - - (21) - (21)
Redemptions (note vi) (20,543) (5) (1,158) (18) (327) (13) (22,028) (36)
Income statement release
for the year (27)
Decrease due to write-offs - - - - (126) (100) (126) (100)
Other provision movements - - - - - 21 - 21
At 4 April 2022 188,130 48 18,326 380 1,691 318 208,147 746
Net carrying amount 188,082 17,946 1,373 207,401
Notes:
i. Group gross balances of credit impaired loans include GBP123 million (2022: GBP135 million) of purchased or originated credit impaired (POCI) loans, which are presented net of lifetime ECL on transition to IFRS9 of
GBP5 million (2022: GBP5 million).
ii. The remeasurement of provisions arising from a change in stage is reported within the stage to which the assets are transferred.
iii. 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.
iv. 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.
v. 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.
vi. 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 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
2023 2022
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 20,253 13,496 - - 13,496 20,189 12,879 - - 12,879
-------- --------- -------- -------- -------- ---------
Securitisation
programme 8,705 2,535 - 2,632 5,167 10,644 2,954 - 2,655 5,609
-------- --------- -------- -------- -------- ---------
Whole mortgage
loan
pools 23,045 - 17,166 - 17,166 29,511 - 21,701 - 21,701
Total 52,003 16,031 17,166 2,632 35,829 60,344 15,833 21,701 2,655 40,189
-------- --------- -------- -------- -------- ---------
Notes:
i. Mortgages pledged include GBP6.6 billion (2022: GBP9.7 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. At 4 April 2023 the Group had outstanding TFSME drawings of GBP17.2 billion (2022: GBP21.7 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 2023, GBP3.8 billion (sterling equivalent) of notes were issued, and GBP2.8 billion (sterling equivalent) of notes matured.
The securitisation programme notes are issued by Silverstone Master Issuer plc and are not included in the accounts of the Group. Silverstone Master Issuer plc 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 GBP3.4 billion (2022: GBP4.8 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 2023, GBP0.8 billion (sterling equivalent) of notes were issued, and GBP1.2 billion (sterling equivalent) of notes matured or were repurchased.
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 2023, GBP23.0 billion (2022: GBP29.5 billion) of pledged collateral supported GBP17.2 billion (2022: GBP21.7 billion) of TFSME drawdowns.
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
2023 2022
GBPm GBPm
Subordinated liabilities
Senior non-preferred notes and Tier
2 eligible subordinated notes (note
i) 7,052 8,351
Fair value hedge accounting adjustments (281) (81)
Unamortised premiums and issue costs (16) (20)
Total 6,755 8,250
Subscribed capital
Permanent interest-bearing shares 173 173
Fair value hedge accounting adjustments 1 15
Unamortised premiums and issue costs (1) (1)
Total 173 187
Note:
i. On 9 June 2022, the Society repurchased GBP701 million of Tier 2 eligible notes.
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, permanent interest-bearing shares (PIBS), Additional Tier 1 (AT1) instruments and core capital deferred shares (CCDS). Senior 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 Group of holders of PIBS, AT1 instruments and CCDS.
All of the Group's subordinated liabilities and permanent interest-bearing shares (PIBS) are unsecured. The Group may, with the prior consent of the Prudential Regulation Authority (PRA), repay the PIBS and redeem the Tier 2 eligible subordinated notes early. The redemption of senior non-preferred notes does not require regulatory consent.
PIBS rank equally with each other. 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 AT1 and CCDS instruments.
12. Provisions for liabilities and charges
Group
Customer Other Total
redress provisions
GBPm GBPm GBPm
At 5 April 2022 127 26 153
Provisions utilised (74) (21) (95)
Charge for the year 21 44 65
Release for the year (34) (7) (41)
Net income statement (release)/charge
(note i) (13) 37 24
At 4 April 2023 40 42 82
Note:
i. The net income statement release relating to customer redress is included in provisions for liabilities and charges, with the exception of a GBP3 million release which is included in administrative expenses. The net income statement charge relating to other provisions is included in administrative expenses, with the exception of GBP1 million which is included in provisions for liabilities and charges.
Whilst there is uncertainty as to the timing of the utilisation of provisions, the Group expects the majority to have been utilised by 4 April 2025.
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. Consideration of 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 2023, the Group holds provisions of GBP40 million (2022: GBP127 million) in respect of the potential costs of remediation and redress in relation to issues with historical quality control procedures, past sales and administration of customer accounts , and other regulatory matters.
Other provisions
Other provisions primarily include amounts for a number of property-related provisions, severance costs and expected credit losses on irrevocable personal loan and mortgage lending commitments.
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. The Group may also be subject to legal and regulatory reviews, challenges, investigations and enforcement actions which may result in, among other things, actions being taken by governmental and regulatory authorities, increased costs being incurred in relation to remediation of systems and controls, or fines. Any such material cases are periodically reassessed, with the assistance of external professional advisers where appropriate, to determine the likelihood of incurring a liability.
In those instances where it is concluded that it is not yet probable that a quantifiable payment will be made, for example because the facts are unclear or further time is required to fully assess the merits of the case or to reasonably quantify the expected payment, no provision is made.
The Group does not disclose amounts in relation to contingent liabilities associated with such claims where the likelihood of any payment is remote or where, in the case of matters subject to active legal proceedings, such disclosure could be seriously prejudicial to the conduct of the claims.
The FCA has commenced an investigation of the Society's compliance with UK money laundering regulations and the FCA's rules and Principles for Businesses in an enquiry focused on aspects of the Society's anti-money laundering control framework. The Society is co-operating with the investigation, which is at an early stage. The Group has not disclosed an estimate of the potential financial impact arising from this matter as it is not currently practicable to do so.
Apart from the matters disclosed, 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. However, in light of the uncertainties involved in such matters there can be no assurance that the outcome of a particular matter or matters may not ultimately be material to the Group's results.
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 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. The Fund was closed to future accrual on 31 March 2021.
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. During the year, Nationwide and the Trustee completed the Fund's 31 March 2022 Triennial Valuation, which showed a funding surplus. The main differences between the assumptions used for assessing defined benefit liabilities for purposes of the actuarial funding valuation and those used for accounting under IAS 19 'Employee Benefits' are that the financial and demographic assumptions used for the funding valuation are generally more prudent than those used for the IAS 19 valuation. As the Triennial Valuation indicated a funding surplus, a recovery plan requiring employer deficit contributions was not needed.
In November 2020, Nationwide and the Trustee of the Fund entered into an arrangement whereby Nationwide 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.
On 14 October 2022, the Group provided two uncollateralised loans totalling GBP400 million to the Fund. This temporary support allowed the Fund to manage its ongoing liquidity requirements during a period of high market volatility. These two loan balances, including accrued interest of GBP4 million, were fully repaid in November 2022 and January 2023, respectively.
14. Retirement benefit obligations (continued)
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
2023 2022
GBPm GBPm
Fair value of fund assets 5,281 7,411
Present value of funded obligations (4,331) (6,396)
Present value of unfunded obligations (4) (7)
Surplus at 4 April 946 1,008
Most members of the Fund can draw their pension when they reach the Fund's retirement age of 65. The methodologies for calculating the level of pension benefits accrued before 1 April 2011 varied; however, most were based on 1/54th of final salary for each year of service. Pension benefits accrued after 1 April 2011 until 31 March 2021 were usually based on 1/60th of average earnings, revalued to the age of retirement, for each year of service (also called CARE). 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). 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.
Approximately 57% (2022: 68%) of the Fund's pension obligations relate to deferred Fund members (current and former employees not yet drawing their pension) and 43% (2022: 32%) to current pensioners and dependants. The weighted average duration of the Fund's overall pension obligation is approximately 16 years (2022: 21 years), reflecting an average duration of 20 years for deferred members and 12 years for current pensioners.
The Group's retirement benefit obligations include a deficit of GBP1 million (2022: surplus of less than GBP1 million) recognised in a subsidiary company, Nationwide (Isle of Man) Limited. This obligation relates to a defined benefit scheme providing benefits based on both final salary and CARE, which was closed to new entrants in 2009. The Group's retirement benefit obligations also include GBP4 million (2022: GBP7 million) in respect of unfunded legacy defined benefit arrangements.
14. Retirement benefit obligations (continued)
Changes in the present value of the net defined benefit asset, including unfunded obligations, are as follows:
Movements in net defined benefit asset
2O23 2022
GBPm GBPm
Surplus at 5 April 1,008 172
-----
Interest on net defined benefit asset 26 4
-----
Return on assets (less than)/greater
than discount rate (2,144) 432
-----
Contributions by employer 1 1
-----
Administrative expenses (4) (5)
-----
Actuarial gains on defined benefit
obligations 2,059 404
-----
Surplus at 4 April 946 1,008
-----
As the Fund is closed to future accrual, there have been no current service costs, past service costs or employer contributions made in respect of future benefit accrual during the year (2022: GBPnil). Additionally, there have been no employer deficit contributions required into the Fund (2022: GBPnil) and there are no such contributions scheduled in the year ending 4 April 2024 or future years under the current Schedule of Contributions. Employer deficit contributions of GBP1 million (2022: GBP1 million) were made in respect of the Group's defined benefit scheme in its Nationwide (Isle of Man) Limited subsidiary.
The GBP2,144 million loss (2022: GBP432 million gain) relating to the return on assets (less than)/greater than the discount rate is driven by decreases in value of the Fund's liability matching assets.
The GBP2,059 million actuarial gain (2022: GBP404 million) on defined benefit obligations is due to:
-- A GBP2,175 million gain (2022: GBP390 million) from changes in financial assumptions, driven by a 2.1% increase in the discount rate (which decreases the value of liabilities), in addition to a 0.3% decrease in assumed Retail Price Index (RPI) inflation and a 0.3% decrease in assumed Consumer Price Index (CPI) inflation (which also decreases the value of the liabilities).
-- A GBP22 million gain (2022: GBP73 million) arising from the impacts of updates to demographic assumptions and applying the latest industry views for projecting future longevity improvements.
-- An experience loss of GBP138 million (2022: GBP59 million) primarily reflecting the difference between estimates of long-term inflation compared to actual inflation.
14. Retirement benefit obligations (continued)
The principal actuarial assumptions used are as follows:
Financial assumptions
2023 2022
% %
Discount rate 4.65 2.55
Future pension increases (maximum 5%) 3.05 3.25
Retail price index (RPI) inflation 3.15 3.45
Consumer price index (CPI) inflation 2.50 2.80
Life expectancy assumptions
2023 2022
years years
Age 60 at 4 April 2023:
Males 27.1 27.4
Females 28.7 29.2
Age 60 at 4 April 2043:
Males 28.1 28.5
Females 30.0 30.2
The assumptions for mortality rates are based on standard mortality tables which allow for future improvements in life expectancy and are adjusted to represent the Fund's membership. The assumptions made are illustrated in the table above, 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 2023 or in 20 years' time at 4 April 2043.
Critical accounting estimates and judgements
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 2023
Increase/(decrease)
in defined benefit
obligation
GBPm
1.0% decrease in discount rate 784
0.1% increase in inflation assumption 38
1 year increase in life expectancy
at age 60 in respect of all members 100
The above sensitivities apply to individual assumptions in isolation. In practice, changes to individual assumptions in isolation are unlikely to occur, and changes in some of the assumptions may be correlated. The inflation assumption sensitivity includes the impact on the rate of increases to pensions, both before and after retirement. Following the large increases in corporate bond yields the discount rate sensitivity has been updated to 1.0% at 4 April 2023 (2022: 0.1%), to better represent potential movements in the discount rate assumption.
15. Core capital deferred shares
Number CCDS Share Treasury Total
of shares premium share reserve
GBPm GBPm GBPm GBPm
At 4 April 2022 10,555,500 11 1,323 - 1,334
CCDS repurchased and retained (775,608) - - (101) (101)
At 4 April 2023 (note
i) 9,779,892 11 1,323 (101) 1,233
Note :
i. The total number of shares outstanding at 4 April 2023 is 10,555,500, which includes the 775,608 shares repurchased and retained by the Group.
Core capital deferred shares (CCDS) are a form of Common Equity Tier 1 (CET1) capital which has been developed to enable the Group to raise capital from the capital markets. 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.
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 GBP19.71 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 2022 was paid on 20 June 2022 and an interim distribution of GBP54 million (GBP5.125 per share) in respect of the period to 30 September 2022 was paid on 20 December 2022. These distributions have been recognised in the statement of movements in members' interests and equity.
In the financial year ended 4 April 2023, the Group repurchased 775,608 (7.3%) of GBP1 CCDS at prices ranging from GBP130.79 to GBP130.87 per share. The repurchased CCDS were not cancelled, instead being retained by the Group. The gross cost of the repurchase of GBP101 million has been presented within the treasury share reserve in the table above.
Since the balance sheet date, the directors have declared a distribution of GBP5.125 per share in respect of the period to 4 April 2023, amounting in aggregate to GBP50 million. This has not been reflected in these financial statements as it will be recognised in the year ending 4 April 2024, by reference to the date at which it was declared .
16. Other equity instruments
2023 2022
Issuance date Next reset Reset rate GBPm GBPm
date
17 September Benchmark gilts
5.875% Additional Tier 1 2019 20 June 2025 + 5.39% 600 600
20 December Benchmark gilts
5.75% Additional Tier 1 10 June 2020 2027 + 5.625% 750 750
1,350 1,350
Issuance costs (14) (14)
Total 1,336 1,336
Other equity instruments are Additional Tier 1 (AT1) capital instruments. 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 rate of interest. Coupons are paid semi-annually in June and December. AT1 instruments have no maturity date but are repayable at the option of the Society from the first reset date, and on every fifth reset date anniversary thereafter. If they are not repaid the interest rate resets at the rates shown in the table above.
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.
Interest payments totalling GBP78 million were made in the year ended 4 April 2023 (2022: GBP78 million), representing the maximum non-cumulative fixed coupon amounts. These payments have been recognised in the statement of movements in member's interest and equity. A coupon payment of GBP39 million is expected to be paid on 20 June 2023 and will be recognised in the statement of movements in members' interests and equity in the year ending 4 April 2024.
17. Events after the balance sheet date
On 18 May 2023, the Board of directors approved payments to certain eligible members, referred to as the Nationwide Fairer Share Payment, totalling GBP340 million, to be made in June 2023. This has not been reflected in these financial statements as it will be recognised in the year ending 4 April 2024, by reference to the date at which it was announced.
Responsibility statement
The directors confirm that the consolidated financial statements, prepared in accordance with international accounting standards which have been adopted for use within 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 2023.
Signed on behalf of the Board by
Chris Rhodes
Chief Financial Officer
18 May 2023
Other information
The financial information set out in this announcement which was approved by the Board on 18 May 2023 does not constitute accounts within the meaning of section 73 of the Building Societies Act 1986.
The Annual Report and Accounts 2022 have been filed with the Financial Conduct Authority and the Prudential Regulation Authority. The Annual Report and Accounts 2023 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 2023 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 19 May 2023. 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
Mobile: +44 (0)7785 344 137 Sarah Abercrombie
Sara.Batchelor@nationwide.co.uk Mobile: +44 (0)7587 886 500
Sarah.Abercrombie@nationwide.co.uk
Eden Black
Mobile: +44 (0)7793 596 317 Vikas Sidhu
Eden.Black@nationwide.co.uk Mobile: +44 (0)7501 093 181
Vikas.Sidhu@nationwide.co.uk
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
RNS may use your IP address to confirm compliance with the terms and conditions, to analyse how you engage with the information contained in this communication, and to share such analysis on an anonymised basis with others as part of our commercial services. For further information about how RNS and the London Stock Exchange use the personal data you provide us, please see our Privacy Policy.
END
FR EAPSPFEXDEFA
(END) Dow Jones Newswires
May 19, 2023 02:00 ET (06:00 GMT)
1 Year Nationwide Building Soci... Chart |
1 Month Nationwide Building Soci... Chart |
It looks like you are not logged in. Click the button below to log in and keep track of your recent history.
Support: +44 (0) 203 8794 460 | support@advfn.com
By accessing the services available at ADVFN you are agreeing to be bound by ADVFN's Terms & Conditions
