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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Nationwide Building Society | LSE:NBS | London | Ordinary Share | GB00BBQ33664 | CORE CAPITAL DEFERRED SHS (MIN 250 CCDS) |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 134.50 | 132.00 | 137.00 | 134.50 | 132.00 | 132.00 | 0.00 | 08:00:30 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Mortgage Bankers & Loan Corr | 4.68B | 1.66B | 157.6429 | 0.51 | 849.4M |
From Apr 2021 to Apr 2024
TIDMNBS TIDM34VG
RNS Number : 8941S
Nationwide Building Society
19 November 2021
Nationwide Building Society
Interim Results
for the period ended 30 September 2021
Contents
Hot Features
Premium
Page
Key highlights and quotes 4
Performance summary 5
Chief Executive's review 6
Financial review 9
Risk report 16
Consolidated interim financial statements 64
Notes to the consolidated interim financial statements 70
Responsibility statement 92
Independent review report to Nationwide Building Society 93
Other information 94
Contacts 94
Introduction
Unless otherwise stated, the income statement analysis compares the period from 5 April 2021 to 30 September 2021 to the corresponding six months of 2020 and balance sheet analysis compares the position at 30 September 2021 to the position at 4 April 2021.
Underlying profit
Profit before tax shown on a statutory and underlying basis is set out on page 10. 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, the impact of tax or other legislation and other regulations in the jurisdictions in which Nationwide operates. The economic outlook also remains unusually uncertain due to the impacts of the Covid-19 pandemic and the UK's exit from the EU. 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 its management as well as financial statements.
Nationwide's mutual model delivers leading service and strong financial performance, enabling continued investment in its membership and wider society
Headlines
-- Decisions we made early in the pandemic to protect long-term financial strength and to continue lending enabled us to deliver a very strong half year performance
-- Continuing strong demand for mortgages, savings and current accounts -- Total mortgage lending higher on a gross and net basis -- Grew total market share of deposits -- First for customer satisfaction among our peer group for over nine years(1) -- Supported members with prize draw, scam checker service and Helping Hand mortgage -- Committed to achieving net zero by 2050(2) and continued to develop green propositions
Numbers at a glance
Financial highlights
-- Underlying profit increased to GBP850m (H1 2020: GBP305m) and statutory profit increased to GBP853m (H1 2020: GBP361m), benefiting from:
o Growth in net interest income to GBP1,706m (H1 2020: GBP1,448m), with higher margins on mortgages as we continued to lend in the early stages of the pandemic
o Net release of GBP34m of credit provisions (H1 2020: charge of GBP139m) as the economic outlook improved, while retaining provisions to reflect current uncertainty
o GBP133m increase in other income, reflecting higher income from banking products and supported by gains from investments
-- Net interest margin improved to 1.24% (H1 2020: 1.15%) and is broadly stable against H2 2020; this is expected to moderate in future
-- Strong focus on efficiency kept costs flat, even as we invested in, and grew, the business
-- Strengthened capital ratios: UK leverage ratio of 5.5% and CET1 ratio of 37.7% (4 April 2021: 5.4% and 36.4%)
-- Member financial benefit broadly stable at GBP145m (H1 2020: GBP140m), but tracking below our annual target
Trading highlights
-- Gross mortgage lending grew by GBP5.5bn to GBP18.2bn (H1 2020: GBP12.7bn); our market share was 11.4% (H1 2020: 12.0%) in a buoyant and highly competitive market
-- Lent over GBP5bn to first time buyers, supported by our new Helping Hand mortgage and return to 95% loan to value lending
-- Deposit market share rose to 9.6% (4 April 2021: 9.4%) following strong deposit growth, supported by competitive products such as our Member Exclusive Fixed Rate ISA and Triple Access Online Saver, and growth in current account balances
-- Switching incentives helped grow current accounts to 8.7m (4 April 2021: 8.5m), increasing our market share to 10.3% (February 2021: 10.2%)(3)
(1) (c) Ipsos MORI 2021, Financial Research Survey (FRS), for the 12 months ending 31 March 2013 to the 12 months ending 30 September 2021. For more information, see footnote 7 on page 7.
(2) We recognise that Nationwide alone cannot improve the energy efficiency of UK homes and we are working with
Government and industry to achieve this.
(3) CACI's Current account and savings database stock volume (August 2021 and February 2021).
Joe Garner, Chief Executive, Nationwide Building Society, said:
"Early in the pandemic we made decisions to stand by our members and to protect our financial strength. This year we continued to support our members and have delivered a very strong half year performance, with capital reaching an all-time high. As a mutual, profits are retained to invest in the Society for the benefit of its members and wider society over the long term.
"Over the last six months we have focused on providing highly competitive products for our mortgage and savings members. These have been very popular, resulting in a successful ISA season, increased deposits, higher mortgage lending, and a larger share of the current account market. We continue to focus on providing the high-quality personal and digital service our members expect of us, and have led our peer group on satisfaction for over nine years(1) . We have delivered value to members through our member prize draw, the restarting of our current account switching incentive and the launch of a scam checker service.
"Our success is a testament to the strength of our mutual business model, to the hard work of our colleagues, and to the value we provide to our members. Given the level of uncertainty about the future, the strength of our finances gives us freedom to make choices, and confidence in continuing to support our members, colleagues and communities."
Chris Rhodes, Chief Financial Officer, Nationwide Building Society, said:
"During the last six months, the Society has delivered strong performance across our three main product areas of mortgages, savings and current accounts. During the pandemic, strong demand for mortgages, coupled with macro-economic uncertainty, led to higher margins on mortgage lending. This resulted in significantly higher income, and a very strong overall financial performance. Net interest margin improved, but is unlikely to be sustained at this level in future due to intense competition in the mortgage market.
"We have continued to focus on efficiency and our costs remain flat despite further investment and growth of our business. While the improving economic outlook led us to release some of the credit provisions taken during the pandemic, there still remains significant economic uncertainty. Our balance sheet strength, as evidenced by our very strong CET1 and UK leverage ratios, means we are well positioned for what remains an uncertain period ahead."
Performance summary
Half year Half year
to to
30 September 30 September
2021 2020
------------------- ---------------
Financial performance GBPm GBPm
---------------------------------------- ---------------
Total underlying income 1,894 1,503
---------------------------------------- ------------------- ---------------
Administrative expenses 1,025 1,033
---------------------------------------- ------------------- ---------------
Underlying profit before tax
(note i) 850 305
---------------------------------------- ------------------- ---------------
Statutory profit before tax 853 361
---------------------------------------- ------------------- ---------------
Mortgage Lending GBPbn % GBPbn %
---------------------------------------- ------------- ---- -------- -----
Group residential - gross/market
share 18.2 11.4 12.7 12.0
---------------------------------------- ------------- ---- -------- -----
Group residential - net/market
share 3.2 5.8 1.6 5.2
---------------------------------------- ------------- ---- -------- -----
Average loan to value of new
residential lending (by value) 70 70
---------------------------------------- ------------------- ---------------
Deposit balances GBPbn % GBPbn %
---------------------------------------- ------------- ---- -------- -----
Member deposits balance movement/market
share (note ii) 7.1 13.4 1.3 0.9
---------------------------------------- ------------- ---- -------- -----
Key ratios % %
---------------------------------------- ------------------- ---------------
Underlying cost income ratio
(note iii) 54.1 68.7
---------------------------------------- ------------------- ---------------
Statutory cost income ratio
(note iii) 54.0 66.3
---------------------------------------- ------------------- ---------------
Net interest margin 1.24 1.15
---------------------------------------- ------------------- ---------------
30 September 4 April
2021 2021
------------------- ---------------
Balance sheet GBPbn % GBPbn%
---------------------------------------- -------- ----
Total assets 285.4 254.9
---------------------------------------- ------------- ---- -------- -----
Loans and advances to customers 204.7 201.5
---------------------------------------- ------------- ---- -------- -----
Mortgage balances/market share 194.3 12.4 191.0 12.5
---------------------------------------- ------------- ---- -------- -----
Member deposits/market share
(note ii) 177.4 9.6 170.3 9.4
---------------------------------------- ------------- ---- -------- -----
Asset quality % %
----------------------------------------
Residential mortgages
---------------------------------------- ------------------- ---------------
Proportion of residential mortgage
accounts 3 months+ in arrears 0.37 0.43
---------------------------------------- ------------------- ---------------
Average indexed loan to value
(by value) 53 56
---------------------------------------- ------------------- ---------------
Consumer banking
---------------------------------------- ------------------- ---------------
Proportion of customer balances
with amounts past due more than
3 months (excluding charged off
balances) 1.12 1.33
---------------------------------------- ------------------- ---------------
Key ratios % %
----------------------------------------
Capital
---------------------------------------- ------------------- ---------------
Common Equity Tier 1 ratio 37.7 36.4
---------------------------------------- ------------------- ---------------
UK leverage ratio 5.5 5.4
---------------------------------------- ------------------- ---------------
Other balance sheet ratios
---------------------------------------- ------------------- ---------------
Liquidity coverage ratio (note
iv) 173 159
---------------------------------------- ------------------- ---------------
Wholesale funding ratio (note
v) 31.7 26.7
---------------------------------------- ------------------- ---------------
Notes:
i. Underlying profit represents management's view of underlying performance. The following items are excluded from statutory profit to arrive at underlying profit:
-- FSCS costs and refunds arising from institutional failures, which are included within provisions for liabilities and charges.
-- Gains or losses from derivatives and hedge accounting, which are presented separately within total income.
ii. 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 costs and refunds from institutional failures are excluded from the statutory cost income ratio to arrive at the underlying cost income ratio.
iv. The liquidity coverage ratio represents a simple average of the ratios reported for the prior 12 month-ends.
v. The wholesale funding ratio includes all balance sheet sources of funding (including securitisations).
Chief Executive's review
Building thriving membership - innovating to meet members' changing financial needs
As a mutual, Nationwide is owned by, and run for, our 16.3 million members. We continue to build a thriving membership by helping our millions of members manage and make more of their money, and at the period end had 3.6 million 'committed' members who have two or more products with us(4) , in line with our target.
The housing market was both incredibly buoyant and highly competitive during the last six months, due to pent-up demand and the stamp duty holiday. Our total gross mortgage lending rose strongly, by GBP5.5 billion, to GBP18.2 billion (H1 2020: GBP12.7 billion). Net lending was GBP3.2 billion (H1 2020: GBP1.6 billion). Our gross mortgage lending market share was 11.4% (H1 2020: 12.0%) in a larger market. We supported over 30,000 (H1 2020: 21,000) first time buyers, offering high loan to value (LTV) mortgages and introducing our Helping Hand mortgage, to help more people onto the housing ladder. We became the largest mortgage provider to reintroduce 95% LTV lending without government support, and in October we were the first major lender to sign up to Deposit Unlock, a proposition to help buyers with small deposits access higher LTV mortgages on new build homes.
Our buy to let subsidiary, The Mortgage Works, saw strong demand from landlords. We have been designing an online platform to improve rental standards by helping landlords manage their properties better, which we launched as The Landlord Works in October.
Many people accumulated savings during lockdown and Nationwide's deposits grew by GBP7.1 billion (H1 2020: GBP1.3 billion) during the half year, lifting our market stock share of deposits to 9.6% (4 April 2021: 9.4%). This growth reflected a very strong ISA season in which we took almost 30% of all ISA account openings among our peer group(5) due to our market-leading Member Exclusive Fixed Rate ISA, and competitive rates on accounts such as the Triple Access Online Saver. Our Start to Save account continues to encourage people to start building a nest egg. As people had less opportunity to spend during lockdown, higher current account balances also contributed to growth in deposits.
Last year, we paused our current account switching incentive so we could focus on supporting our existing members during the pandemic. Since reintroducing a switching incentive in August, we have seen significant growth in new current accounts, with total current accounts reaching 8.7 million. We continue to be a net gainer from the Current Account Switching Service, demonstrating the satisfaction of our existing members and our continued appeal to new joiners(6) .
(4) Committed members have at least two products with us including one of: their main personal current account, a mortgage of at least GBP5,000 or a savings account balance of at least GBP1,000.
(5) Volume of new ISA account openings from CACI's Current Account and Savings Database for the period April 2021 to August 2021. Peer group is defined as members of CACI's Current Account and Savings Database for 2021, comprising over 30 brands.
(6) Pay.UK quarterly CASS data, 3 months to June 2021.
Our members enjoy a range of benefits including automatic entry into our members-only monthly prize draw. For a year from September 2021, members will have a chance of winning a share of a GBP1 million prize fund each month.
Built to last - financially safe and secure for the long term
The strength of our trading over the last six months, along with decisions we made at the emergence of the pandemic to protect our financial strength, delivered a very strong financial performance for the Society. Underlying profit was higher at GBP850 million (H1 2020: GBP305 million) and statutory profit increased to GBP853 million (H1 2020: GBP361 million), while our capital and liquidity improved further.
Our profitability improved for several reasons. Net interest income increased significantly, driven by higher volumes in mortgages, deposits, and current accounts, and by mortgages taken out in 2020 with higher margins due to macro-economic uncertainty. Net interest margin improved compared to the same period last year, and is broadly stable compared with H2 2020/21; this is expected to moderate in future . Profitability also benefited from the improving economic outlook, leading to the release of GBP34 million in credit provisions, and from an increase in other income.
Cost efficiency remains an important area of focus, and our costs remained flat even as we continued to invest in and grow our business.
Member financial benefit - the value we offer members as a member-owned mutual through better incentives and pricing than the market average - remained broadly stable at GBP145 million for the half year, although tracking below our annual target of GBP400 million. Over the last five years, we have rewarded members with around GBP2.9 billion in additional value, demonstrating our commitment to delivering real, long-term financial value to members as a result of our mutuality. In the last six months, we have introduced new benefits for members such as the monthly prize draw.
Capital and liquidity improved, from an already strong base. Our UK leverage ratio improved to 5.5% (4 April 2021: 5.4%) and our Common Equity Tier 1 ratio improved to 37.7% (4 April 2021: 36.4%). The strength of our balance sheet means we are well-positioned for what remains an uncertain period ahead.
Chief Executive's review (continued)
Building legendary service - when and where members want it
We know that our members value high quality service and care, which is why we are pleased to have remained no. 1 for customer satisfaction among our peer group for over nine years(7) . Our latest customer satisfaction lead of 3.3%pts is significantly above our 2%pt target. We also track our performance in the all-sector UK Customer Satisfaction Index(8) . Our ranking (joint 19(th) ) is below our target of being in the top five but our satisfaction score of 82.4, is 5pts ahead of the all-sector average.
Members value both face-to-face interactions and the convenience of digital technologies and we are investing in both. We have now completed the upgrade of 245 branches over the last four years, introducing new technology, self-service options, and formal and informal meeting spaces. Our Branch Promise means that, while we may need to close a branch occasionally, we will remain in every town or city we are in today, until at least 2023. We are also introducing new ways of working, to make our network sustainable for the future. These include reduced branch opening hours and multi-skilled roles where branch staff can help members over the phone and online as well as in person. We hope this will help branches continue to play a key role in serving our members in the future.
Our digital services continue to grow in popularity. Over 3.9 million current account members use our mobile banking app, up from 3.7 million in April 2021, and we are always working to make it easier and more convenient to use. We have attached clearer names and logos to card transactions so members can see more easily where they've spent their money and we have incorporated Apple Pay into the app. We have enhanced security for digital payments and launched a scam checker service to protect members from fraud and give them peace of mind when making payments. We have introduced instant account opening with digital identification and signature capabilities, which is speeding up account opening and reducing the amount of paperwork our members need to deal with.
(7) (c) Ipsos MORI 2021, Financial Research Survey (FRS), for the 12 months ending 31 March 2013 to the 12 months ending 30 September 2021. Results based on a sample of around 46,000 adults (aged 16+). The survey contacts around 53,000 adults (aged 16+) a year in total across Great Britain. Interviews were face to face, over the phone and online, taking into account (and weighted to) the overall profile of the adult population. The results reflect the percentage of extremely satisfied and very satisfied customers minus the percentage of customers who were extremely or very or fairly dissatisfied across those customers with a main current account, mortgage or savings.
Those in our peer group are providers with more than 3.5% of the main current account market as of April 2021 - 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.
(8) Institute of Customer Service UK Customer Satisfaction Index (UKCSI) as at July 2021.
Building PRIDE - helping colleagues thrive at work
The future of work looks very different post-pandemic. We have learnt how much can be achieved when people have more choice over where, how, and when they work - and also some of the limitations of remote working. We also need to develop new capabilities to serve our members better, as the take-up of digital technologies accelerates. We are therefore reimagining how we use our workspaces, our working day and the skills we need for the future.
Through our Future of Work programme, we are embracing the flexible working practices that have proved so successful during the pandemic, helping colleagues achieve a better work-life balance. We are widening our recruitment talent pool by moving away from fixed location working for most of our non-branch roles. For colleagues who want or need to work in an office, social distancing measures enable them to do so safely. We are also helping colleagues develop the capabilities we need to serve our members better on-and-offline. We are retraining and redeploying colleagues and introducing multi-skilled roles in branches.
We have put in place mental health and wellbeing support to help our colleagues through the massive change we have seen over the last 18 months. We are pleased that eight out of 10 colleagues say they feel supported at work, and to have received the Mind Workplace Wellbeing Gold Award for the first time.
Inclusion and diversity are key areas of focus. We are challenging ourselves to achieve ambitious measures of gender, ethnicity, disability and LGBTQ+ diversity by 2028. We are embedding inclusion and diversity in everything we do; we have sponsorship and mentoring programmes in place, are supporting colleague-led networks which champion diversity, and are introducing diverse interview panels for recruitment. We are encouraged to see improvements in some areas. However, there is more to do, particularly on gender and ethnic diversity at senior levels. We believe that the policies and practices we are putting in place now will deliver a more inclusive and diverse Society in time, and are actively tracking our progress towards our 2028 measures.
Chief Executive's review (continued)
Building a national treasure - working for the mutual good of society
The building society movement was founded to help 'everyday people' own a decent home of their own. This aim, to ensure everyone has a place fit to call home, remains important to us, not just in our business activities, but in our broader contribution to society.
We remain committed to giving at least 1% of pre-tax profits to charity annually, which is largely spent on housing initiatives. We are in the fourth year of our Community Boards programme where members decide on local housing projects to receive grants of up to GBP50,000 each. We have received 375 grant applications for this financial year and will be awarding GBP4 million to the successful applicants later this year, taking the total grants awarded since the programme was founded to almost GBP18 million.
A large part of our donation goes to The Nationwide Foundation, an independent charity funded by Nationwide, which campaigns and supports initiatives for systemic changes to increase the availability of decent, affordable homes for people in housing need. An example of this is We Can Make, a community project in Bristol, which has successfully developed a new way to unlock publicly-owned land for the development of genuinely affordable homes.
We have made good progress with the Oakfield development we are funding in Swindon, which aims to create a blueprint for a better way of developing high-quality, sustainable homes. We are targeting an EPC A rating for all 239 homes, the first of which will be ready for occupation in early 2022. The development has recently been awarded the prestigious Building for a Healthy Life Housing Design Award.
We have committed to achieving net zero by 2050, recognising the need for Government and industry to work together to achieve this, and have joined the Net Zero Banking Alliance and the Glasgow Financial Alliance for Net Zero. Having already met net zero emissions for our internal operations, we are also mindful of the impact on the environment of housing on which we lend. Housing accounts for around 20% of UK emissions(9) , and we are actively supporting the greening of UK homes; we are offering green lending incentives, as well as working on a range of green propositions. For example, in October, we began to trial a retrofit initiative to simplify the installation of solar panels on homes. We have also worked with other industry leaders, including E.on, Federation of Master Builders, Igloo Regeneration, TrustMark, Switchd, Energiesprong UK and the Green Homes Action Group, to set out principles for a national retrofitting strategy.
(9) 2020 UK greenhouse gas emissions, provisional figures (publishing.service.gov.uk).
Beyond home and savings, we stand up for the core values of mutuality, including respect. Our partnerships with the Diana Trust and the FA champion the importance of mutual respect and nurture those values in young people. In addition, our Together Against Hate campaign has focused on protecting frontline workers across all industries from unacceptable behaviour, including campaigning for tougher sentencing guidelines for abuse of frontline colleagues.
Outlook
The UK economy has proved remarkably resilient in the face of the pandemic, thanks in large part to its inherent flexibility and to government support.
Unemployment has trended down in recent months and wages are growing faster than they were before Covid. Combined with record low mortgage rates, this has contributed to a buoyant mortgage market, despite the phased withdrawal of stamp duty relief since June. Pandemic-related shifts in housing preferences have continued to spur people to move home, creating strong demand. Meanwhile, the limited supply of homes coming onto the market has meant house price growth has been robust, with prices rising at an annual rate of 9.9% in October following five months of double-digit increases.
The outlook remains uncertain. It is unclear how the economy will respond to the winding down of government support, and how long it will take for bottlenecks in global supply chains and domestic capacity constraints to ease. If the jobs market weakens post-furlough, it is likely to have a knock-on effect on the housing market, especially as inflation is likely to remain high in the coming quarters, eating into households' disposable income.
If the recovery remains resilient, higher interest rates are likely to exert a moderating influence on the housing market, as well as dampening price pressures across the economy more generally. Households appear well-placed to withstand an increase in interest rates, given the significant proportion of borrowing on fixed rates, and the relatively low number of borrowers who spend a high proportion of their income on debt repayments.
While the outlook remains challenging, and net interest margins are unlikely to be sustained at current levels, the Society continues to demonstrate its resilience. Nationwide's financial strength and strong social purpose mean we can continue to support members, colleagues and communities.
Financial review
The results below are prepared in accordance with International Financial Reporting Standards (IFRSs). Underlying results are shown on page 10, together with a reconciliation to the statutory results.
In summary
Decisions we made early in the pandemic An increase in other income to GBP188 million Underlying
to protect Nationwide's financial strength (H1 2020/21: GBP55 million) reflects the profit:
enabled us to stand by our members and to higher income across banking products and GBP850m
deliver a very strong half year performance. gains from investments, and the prior period (H1 2020/21:
loss on the buyback of covered bond funding. GBP305m)
Underlying profit for the half year to 30
September 2021 has increased to GBP850 million Over the past two financial years, we have
(H1 2020/21: GBP305 million). This reflects recognised an elevated credit impairment
income growth, together with a release of charge compared to pre-pandemic levels,
credit impairment provisions as the reflecting the period of economic uncertainty,
macroeconomic although arrears rates have remained low.
outlook improved. Recent improvements in the macroeconomic
outlook have led to a net credit impairment
Total income increased by GBP391 million, release of GBP34 million for the half year
as net interest margin increased to 1.24% to 30 September 2021 (H1 2020/21: charge
(H1 2020/21: 1.15%). Mortgage income was of GBP139 million).
higher as a result of stronger new business
margins across the market during 2020, Total administrative expenses have remained
alongside broadly flat at GBP1,025 million (H1 2020/21:
robust levels of lending during the period. GBP1,033 million), despite higher investment
H1 2021/22 net interest margin is broadly and business growth, as we continued to
stable compared with H2 2020/21; this is drive efficiencies in business-as-usual
expected to moderate going forward. costs.
In a continued low interest rate environment, CET1 and UK leverage ratios increased to
it is challenging to provide member financial 37.7% and 5.5% (4 April 2021: 36.4% and
benefit at our target level of at least 5.4%) respectively, although this includes
GBP400 million per annum. Member financial the impact of a regulatory change in the
benefit has remained broadly stable at GBP145 treatment of intangible assets which the
million for the half-year (H1 2020/21: GBP140 PRA is proposing to reverse. Excluding this
million). However, we have continued to benefit, CET1 and UK leverage ratios were
offer competitive products such as our Member 36.9% and 5.3% (4 April 2021: 35.4% and
Exclusive Fixed Rate ISA and Triple Access 5.2%) respectively.
Online Saver which, along with growth in
current account balances, has led to net Nationwide's financial strength helps us
deposit growth of GBP7.1 billion (H1 2020/21: to face the future with confidence, as we
GBP1.3 billion). Our deposit stock market continue to support members through a highly
share has increased to 9.6% (4 April 2021: uncertain period.
9.4%).
---------------------------------------------- -----------------------------------------------
Statutory profit:
GBP853m
(H1 2020/21:
GBP361m)
-----------------
UK leverage
ratio:
5.5%
(4 April 2021:
5.4%)
-----------------
Income statement
Underlying and statutory results Net interest
margin:
1.24%
(H1 2020/21:
1.15%)
Half year Half year
to to
30 September 30 September
2021 2020
------------- -------------
GBPm GBPm
-------------------------------------------- ------------- -------------
Net interest income 1,706 1,448
-------------------------------------------- ------------- -------------
Underlying cost
income ratio
(note iii):
54.1%
(H1 2020/21:
Net other income 188 55 68.7%)
============================================ ============= ============= ---------------
Total underlying income 1,894 1,503
-------------------------------------------- ------------- ------------- ---------------
Administrative expenses (1,025) (1,033)
-------------------------------------------- ------------- -------------
Impairment reversals/(losses) 34 (139)
-------------------------------------------- ------------- -------------
Provisions for liabilities and charges (53) (26)
============================================ ============= ============= ---------------
Statutory cost
income ratio:
54.0%
(H1 2020/21:
Underlying profit before tax (note i) 850 305 66.3%)
-------------------------------------------- ------------- ------------- ---------------
Gains from derivatives and hedge accounting
(note ii) 3 56
============================================ ============= ============= ---------------
Statutory profit before tax 853 361
-------------------------------------------- ------------- -------------
Taxation (168) (80)
============================================ ============= =============
Profit after tax 685 281
-------------------------------------------- ------------- ------------- ---------------
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 and refunds from institutional failures (included within provisions for liabilities and charges) are excluded from statutory profit to arrive at underlying profit.
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 and FSCS costs and refunds from institutional failures 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 GBP258 million to GBP1,706 million (H1 2020/21: GBP1,448 million) and net interest margin increased to 1.24% (H1 2020/21: 1.15%). This is primarily driven by strong demand for mortgages coupled with macroeconomic uncertainty during much of 2020, leading to elevated mortgage new business margins. Lending was higher during the past six months, with GBP14.5 billion of prime mortgage gross lending (H1 2020/21: GBP9.6 billion) and GBP3.7 billion of buy to let gross lending (H1 2020/21: GBP3.1 billion).
Net other income has increased by GBP133 million to GBP188 million (H1 2020/21: GBP55 million), primarily due to higher income across our banking products during the period, gains from investments and the GBP35 million loss in H1 2020/21 arising from a buyback of covered bond funding.
Member financial benefit
As a building society, we seek to maintain our financial strength whilst providing value to our members through pricing, propositions and service. Through our member financial benefit, we measure the additional financial value for members from the 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.
More information on how we calculate member financial benefit can be found in our Annual Report and Accounts 2021. The components of member financial benefit have been updated since the Annual Report and Accounts 2021 to include the recently launched member prize draw, which contributed GBP1 million to member financial benefit in the period.
For the half year ended 30 September 2021, this measure shows we have provided our members with a financial benefit of GBP145 million (H1 2020/21: GBP140 million) which is broadly consistent with the value delivered in H1 2020/21. It remains low compared to historic periods primarily due to continued low interest rates on savings accounts. This period of exceptionally low interest rates means it is unlikely that we will meet our member financial benefit target of GBP400 million for this financial year.
Administrative expenses
Administrative expenses reduced by GBP8 million to GBP1,025 million (H1 2020/21: GBP1,033 million). The decrease is attributable to a GBP20 million reduction in business-as-usual costs, despite growth of our business, together with a GBP33 million decrease in restructuring costs. These have been largely offset by a GBP21 million net increase in investment spend and depreciation, and a GBP23 million charge relating to historic fraud cases.
Impairment (reversals)/losses on loans and advances to customers
Impairment (reversals)/losses (note i)
Half year Half year
to to
30 September 30 September
2021 2020
------------- -------------
GBPm GBPm
------------------------------------------- ------------- -------------
Residential lending (44) 53
------------------------------------------- ------------- -------------
Consumer banking 18 84
=========================================== ============= =============
Retail lending (26) 137
------------------------------------------- ------------- -------------
Commercial (8) 2
=========================================== ============= =============
Impairment (reversals)/losses on loans and
advances (34) 139
------------------------------------------- ------------- -------------
Note:
i. Impairment (reversals)/losses represent the net amount (credited)/charged through the income statement, rather than amounts written off during the period.
The net impairment release in the period of GBP34 million (H1 2020/21: charge of GBP139 million) is primarily due to house price growth and improvements in the economic outlook, which are reflected in the economic scenarios and associated weightings used to model expected credit losses. The underlying arrears performance of our portfolios has improved during the period, although this may be temporary, having benefited from government support schemes. More information regarding the critical accounting judgements, and the forward-looking economic information used in impairment calculations, is included in note 8 to the consolidated interim financial statements.
Provisions for liabilities and charges
We hold provisions 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 customer redress charge of GBP53 million (H1 2020/21: GBP26 million) includes a GBP29 million (H1 2020/21: GBP15 million) charge relating to historical quality control procedures. More information is included in note 13 to the consolidated interim financial statements.
Taxation
The tax charge for the period of GBP168 million (H1 2020/21: GBP80 million) represents an effective tax rate of 19.7% (H1 2020/21: 22.2%) which is higher than the statutory UK corporation tax rate of 19% (H1 2020/21: 19%). The effective tax rate is higher primarily due to the 8% banking surcharge of GBP38 million (H1 2020/21: GBP14 million). This is largely offset by adjustments in respect of prior years of GBP22m (H1 2020/21: GBPnil), the tax credit on the distribution to the holders of Additional Tier 1 capital instruments of GBP8 million (H1 2020/21: GBP9 million), and the reinstatement of deferred tax assets previously written off of GBP5 million (H1 2020/21: GBPnil). Further information is provided in note 9 to the consolidated interim financial statements.
In its March 2021 Budget, the UK Government announced that the UK rate of corporation tax will increase from 19% to 25% from 1 April 2023. This legislative change was enacted on 10 June 2021. Closing deferred tax assets and liabilities have therefore been recalculated taking into account this change of rate and the applicable period the deferred tax assets and liabilities are expected to crystalise. The impact of this change on deferred tax balances was an increase in the net deferred tax liability of GBP6 million, which was recognised in other comprehensive income.
It was further announced in the Budget on 27 October 2021 that the banking surcharge of 8% will decrease to 3% and the surcharge allowance will increase from GBP25 million to GBP100 million with effect from 1 April 2023. As this change was not substantively enacted prior to 30 September 2021, the impact has not been reflected in these interim financial statements. Upon enactment, this will require a further remeasurement of deferred tax assets and liabilities which is expected to substantially reverse the GBP6 million impact recognised above.
Balance sheet
Total assets have increased by 12% to reach GBP285.4 billion at 30 September 2021 (4 April 2021: GBP254.9 billion). This growth is predominantly due to higher holdings of cash and liquid assets, driven largely by an increase in short-term funding, an increase in member deposits and the drawdown of funds from the Bank of England's Term Funding Scheme with additional incentives for SMEs (TFSME).
Mortgage lending has been robust during the period, in part due to the temporary changes to stamp duty, with residential mortgage balances increasing to GBP194.3 billion (4 April 2021: GBP191.0 billion). Member deposit balances have increased by GBP7.1 billion to GBP177.4 billion (4 April 2021: GBP170.3 billion) as a result of strong inflows on savings, predominantly driven by competitive products such as the Member Exclusive Fixed Rate ISA and Triple Access Online Saver, and current account balance growth.
Assets Liquidity coverage
ratio (note ii):
173%
(2020/21: 159%)
----------------------------------------------------------------------------------
30 September 2021 4 April 2021
--------------
GBPm % GBPm %
--------------------------------------------- --------- ---
Cash 46,498 16,693
--------------------------------------------- ------------ ----- --------- ---
Residential mortgages (note i) 194,282 95 191,023 95
--------------------------------------------- ----- --------- ---
Commercial 6,556 3 6,972 3
--------------------------------------------- ----- --------- ---
Consumer banking 4,660 2 4,404 2
============================================= ============ ===== ========= ===
205,498 100 202,399 100
--------------------------------------------- ----- --------- ---
Impairment provisions (784) (852)
============================================= ============ ===== ========= ===
Loans and advances to customers 204,714 201,547
--------------------------------------------- ----- --------- ---
Other financial assets 31,362 33,888
--------------------------------------------- ----- --------- ---
Other non-financial assets 2,869 2,786
============================================= ============ ===== ========= ===
Total assets 285,443 254,914
--------------------------------------------- ------------ ----- --------- ---
Asset quality % %
--------------------------------------------- ----- -------- ---
Residential mortgages (note i):
--------------------------------------------- ----- --------- ---
Proportion of residential mortgage accounts
more than 3 months in arrears 0.37 0.43
--------------------------------------------- ----- --------- ---
Average indexed loan to value (by value) 53 56
--------------------------------------------- ----- --------- ---
Consumer banking:
--------------------------------------------- ----- --------- ---
Proportion of customer balances with amounts
past due more than
3 months (excluding charged off balances) 1.12 1.33
--------------------------------------------- ------------ ----- --------- ---
Notes:
i. Residential mortgages include prime, buy to let and legacy lending.
ii. This represents a simple average of the liquidity coverage ratio reported for the prior 12 month-ends.
Cash
Cash comprises liquidity held by our Treasury function amounting to GBP46.5 billion (4 April 2021: GBP16.7 billion). The GBP29.8 billion increase in cash is driven by higher levels of short-term funding, an increase in member deposits, the drawdown of funds from the Bank of England's TFSME , and increased repurchase agreement balances.
The average Liquidity Coverage Ratio of 173% (4 April 2021: 159%) remains well above regulatory requirements. Liquidity continues to be managed against internal risk appetite, which is more prudent than regulatory requirements. Further details are included in the Liquidity and funding risk section of the Risk report.
Residential mortgages
The lending market was substantially different from the prior period as a result of the changing pandemic restrictions and the effects of the stamp duty holiday that concluded in September 2021. Total gross mortgage lending in the period was higher at GBP18.2 billion (H1 2020/21: GBP12.7 billion), although market share of gross advances was slightly lower than the prior period at 11.4% (H1 2020/21: 12.0%). Lending continues to be supported by our focus on first time buyers; earlier this year we re-entered 95% LTV lending and we are also seeing balance growth of our Helping Hand product that supports affordability for first time buyers up to 90% LTV. Prime mortgage balances have increased to GBP151.6 billion (4 April 2021: GBP149.8 billion) and buy to let mortgage balances have increased to GBP42.7 billion (4 April 2021: GBP41.2 billion).
Arrears performance has improved during the period, with cases more than three months in arrears at 0.37% of the total portfolio (4 April 2021: 0.43%). This improvement is expected to be temporary, with levels likely to have been suppressed by government support measures. An increase in arrears from current levels is expected over the medium term. Impairment provision balances have decreased to GBP273 million (4 April 2021: GBP317 million) due to an improvement in the economic outlook reflected in the economic scenarios and changes to weightings used to model expected credit losses .
Commercial lending
During the period, commercial lending balances have decreased to GBP6.6 billion (4 April 2021: GBP7.0 billion). Continuing the deleveraging activity in previous financial periods, the overall portfolio remains weighted towards public sector lending. This includes registered social landlords, with balances of GBP4.6 billion (4 April 2021: GBP4.8 billion), and project finance balances of GBP0.6 billion (4 April 2021: GBP0.7 billion). With a smaller book, and fewer active borrowers requiring further lending, our commercial real estate balances decreased during the year to GBP0.7 billion (4 April 2021: GBP0.8 billion).
Impairment provision balances have decreased to GBP25 million (4 April 2021: GBP33 million) due to an improvement in the expected outcome of a small number of individual loans.
Consumer banking
Consumer banking balances have increased to GBP4.7 billion (4 April 2021: GBP4.4 billion). Consumer banking comprises personal loan balances of GBP3.0 billion (4 April 2021: GBP2.8 billion), credit card balances of GBP1.5 billion (4 April 2021: GBP1.4 billion) and overdrawn current account balances of GBP0.2 billion (4 April 2021: GBP0.2 billion). The increase in balances has been driven by the gradual lifting of pandemic restrictions across the period increasing the market demand for consumer credit.
Provision balances have decreased to GBP486 million (4 April 2021: GBP502 million) primarily due to an improved economic outlook, reflected in the economic scenarios and weightings used to model expected credit losses , with underlying performance remaining broadly stable.
Other financial assets
Other financial assets total GBP31.4 billion (4 April 2021: GBP33.9 billion) and comprise assets held by our Treasury function amounting to GBP27.2 billion (4 April 2021: GBP29.1 billion), derivatives with positive fair values of GBP4.1 billion (4 April 2021: GBP3.8 billion) and fair value adjustments and other assets of GBP0.1 billion (4 April 2021: GBP1.0 billion). Derivatives largely comprise interest rate and foreign exchange contracts which economically hedge financial risks inherent in core lending and funding activities.
Members' interests, equity and liabilities Wholesale funding
ratio:
31.7%
(4 April 2021:
26.7%)
30 September 4 April 2021
2021
------------ ------------
GBPm GBPm
------------------------------------------------- ------------ ------------
Member deposits 177,431 170,313
------------------------------------------------- ------------ ------------
Debt securities in issue 38,031 27,923
------------------------------------------------- ------------ ------------
Other financial liabilities 53,558 41,009
------------------------------------------------- ------------ ------------
Other liabilities 1,522 1,556
================================================= ============ ============
Total liabilities 270,542 240,801
------------------------------------------------- ------------ ------------
Members' interests and equity 14,901 14,113
================================================= ============ ============
Total members' interests, equity and liabilities 285,443 254,914
------------------------------------------------- ------------ ------------
Member deposits
Member deposit balance growth of GBP7.1 billion (H1 2020/21: GBP1.3 billion) to GBP177.4 billion (4 April 2021: GBP170.3 billion) represents growth in retail savings balances of GBP4.2 billion and current account credit balances of GBP2.9 billion. Balance growth has been supported by competitive products such as the Member Exclusive Fixed Rate ISA and Triple Access Online Saver and forced saving balances built up during the start of the period before pandemic related restrictions were eased. This has contributed to a strengthening of our deposit stock market share to 9.6% (4 April 2021: 9.4%).
Debt securities in issue and other financial liabilities
Debt securities in issue primarily comprise wholesale funding, excluding subordinated debt which is included within other financial liabilities. Balances have increased to GBP38.0 billion (4 April 2021: GBP27.9 billion) reflecting an increase in the short-term funding book, with Nationwide's wholesale funding ratio also increasing to 31.7% (4 April 2021: 26.7%) as a result. Other financial liabilities have increased to GBP53.6 billion (4 April 2021: GBP41.0 billion) primarily due to a drawdown of funds from the Bank of England's TFSME and increased repurchase agreement balances . Further details are included in the Liquidity and funding risk section of the Risk report.
Members' interests and equity
Members' interests and equity have increased to GBP14.9 billion (4 April 2021: GBP14.1 billion) largely as a result of retained profits.
Statement of comprehensive income
Statement of comprehensive income (note i)
Half year Half year
to to
30 September 30 September
2021 2020
------------- -------------
GBPm GBPm
------------------------------------------------------- ------------- -------------
Profit after tax 685 281
------------------------------------------------------- ------------- -------------
Net remeasurement of pension obligations 195 (35)
------------------------------------------------------- ------------- -------------
Net movement in revaluation reserve - (5)
------------------------------------------------------- ------------- -------------
Net movement in cash flow hedge reserve 6 (45)
------------------------------------------------------- ------------- -------------
Net movement in other hedging reserve 2 (1)
------------------------------------------------------- ------------- -------------
Net movement in fair value through other comprehensive
income reserve (7) 67
======================================================= ============= =============
Total comprehensive income 881 262
------------------------------------------------------- ------------- -------------
Note:
i. Movements are shown net of related taxation. Gross movements are set out in the consolidated interim financial statements on page 66.
Capital structure
Nationwide's capital position remains strong, with both the Common Equity Tier 1 (CET1) ratio and UK leverage ratio comfortably above regulatory capital requirements of 12.7% and 3.6% respectively. The CET1 ratio increased to 37.7% (4 April 2021: 36.4%) and the UK leverage ratio increased to 5.5% (4 April 2021: 5.4%). 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.
Capital structure
30 September 4 April 2021
2021
------------------------------------ ------------ ------------
GBPm GBPm
------------------------------------ ------------ ------------
Capital resources
------------------------------------ ------------ ------------
Common Equity Tier 1 (CET1) capital 12,428 12,007
------------------------------------ ------------ ------------
Total Tier 1 capital 13,764 13,343
------------------------------------ ------------ ------------
Total regulatory capital 16,642 16,176
------------------------------------ ------------ ------------
Capital requirements
------------------------------------ ------------ ------------
Risk weighted assets (RWAs) 32,982 32,970
------------------------------------ ------------ ------------
UK leverage exposure 251,197 248,402
------------------------------------ ------------ ------------
CRR leverage exposure 297,821 265,079
------------------------------------ ------------ ------------
UK CRD V capital ratios %%
------------------------------------ ------------ -----------
CET1 ratio 37.7 36.4
------------------------------------ ------------ ------------
UK leverage ratio (note i) 5.5 5.4
------------------------------------ ------------ ------------
CRR leverage ratio (note i) 4.6 5.0
------------------------------------ ------------ ------------
Note:
i. The UK leverage ratio differs from the Capital Requirements Regulation (CRR) leverage ratio, as it excludes eligible central bank claims per the PRA Rulebook. During the period, eligible central bank reserves increased by GBP30 billion, thereby reducing the CRR leverage ratio whilst having no impact on the UK leverage ratio.
The CET1 ratio increased to 37.7% (4 April 2021: 36.4%) as a result of an increase in CET1 capital of GBP0.4 billion with RWAs remaining relatively stable. The CET1 capital increase was driven by GBP0.6 billion profit after tax, net of distributions, partially offset by a GBP0.2 billion movement in deductible intangible assets, IFRS 9 transitional arrangements and prudent valuation adjustments. RWAs remained stable with a reduction in retail and commercial RWAs offset by growth in liquid assets.
On 23 December 2020, EU Regulation 2020/2176 came into force, removing the deduction of certain intangible assets from CET1 resources. The PRA indicated in CP5/21 'Implementation of Basel standards' that they found no credible evidence that software assets would absorb losses effectively in a stress. Subsequently, as part of PS17/21, they have confirmed the reversal of this amendment from 1 January 2022. If the revised rules had not been applied, Nationwide's CET1 ratio and UK leverage ratio at 30 September 2021 would have been 36.9% and 5.3% respectively.
Whilst the future economic impact of Covid-19 continues to be unclear, it could lead to some RWA inflation and therefore a lower CET1 ratio in the medium term. The government job retention scheme ended on 30 September 2021; in the coming months we will better understand how individual borrowers have been affected and the resulting impact on risk-based ratios. However, the current capital position and the published stress testing results show that Nationwide is well-capitalised and positioned to meet periods of financial stress.
The UK leverage ratio increased to 5.5% (4 April 2021: 5.4%), with Tier 1 capital increasing by GBP0.4 billion as a result of the CET1 capital movements referenced above. Partially offsetting the impact of this, there was an increase in UK leverage exposure of GBP2.8 billion primarily as a result of net retail lending in the period.
The CRR leverage ratio decreased to 4.6% (4 April 2021: 5.0%) due to an increase in central bank reserves. On 8 October 2021, as part of its policy statement PS21/21, the PRA confirmed its intention to simplify the leverage framework by applying a single Leverage Exposure Measure (LEM) for all purposes, from 1 January 2022. This measure would align to the current UK leverage exposure definition, which excludes central bank claims.
Further details of the capital position and future regulatory developments, including the result of policy statements in-force from 1 January 2022 which impact RWAs, are described in the Capital risk section of the Risk report.
Risk report
Contents
Page
Introduction 17
Top and emerging risks 17
Principal risks and uncertainties 18
Credit risk
- Overview 19
- Residential mortgages 22
- Consumer banking 35
- Commercial 42
- Treasury assets 46
Liquidity and funding risk 50
Capital risk 57
Market risk 61
Pension risk 62
Model risk 63
Operational and conduct risk 63
Introduction
This report provides information on developments during the period in relation to the risks Nationwide's business is exposed to, and how those risks are managed. This information supports, and should be read in conjunction with, the material found in the Risk report in the Annual Report and Accounts 2021. Where there has been no change to the approach to managing risks, or there has been no material change to the relevant risk environment from that disclosed at year end, this information has not been repeated in the 2021/22 Interim results.
Top and emerging risks
The top and emerging risks are managed through the process outlined in the 'Risk overview' section of the Annual Report and Accounts 2021 and remain broadly unchanged from those reported there. The external environment continues to present the most significant threats to the delivery of the Society's strategy in light of the Covid-19 pandemic, the UK's exit from the European Union and the resultant geopolitical and macroeconomic environment shifts. A description of material developments to the top and emerging risks in the period is provided below:
Risks Internal Trend
or External
Geopolitical and macroeconomic environment - As a UK-focused building society, Nationwide's External è
performance is naturally aligned to the UK's economic conditions, in particular household
income and the corresponding impact on the housing market. Whilst overall economic
conditions have improved over the first half of the year, the outlook remains uncertain
following the withdrawal of a number of Covid-19 related government support packages,
the ongoing economic adjustment from both the Covid-19 pandemic and the UK's exit from
the European Union (with consequential supply chain issues across the economy) and
forecast inflationary pressures. Nationwide continues to maintain strong capital and
liquidity levels and regularly undertakes robust internal and regulatory stress tests
to ensure these are sufficient under a range of severe scenarios. We remain ready to
support a potential increase in members facing financial difficulty.
------------ ------
Competitive environment - Competition in lending markets is intensifying further, External ì
fuelled by the growth in volumes of customer deposits and increasing consumer confidence.
This competition is expected to feed through into mortgage margins, impacting profitability.
We have also seen increasing activity from new entrants, competing primarily via digital
channels , driven by shifting customer behaviours and continued innovation.
------------ ------
Financial crime / cyber security - The threat to our members from financial crime, Internal è
and in particular Authorised Push Payment (APP) scams remains heightened. We continue
to develop our internal processes, systems, and structures to protect our members from
these threats. We are also evolving our approach to helping members protect themselves
from APP scams, and refunding victims.
------------ ------
The following internal and external risks, which were highlighted in the Annual Report and Accounts 2021, have not materially changed:
-- Regulatory change -- Climate change -- Libor transition -- Resilience -- People risk -- Third parties -- Data -- Model risk Key (change in level of risk to Nationwide in year)
ì Increased level of risk è Stable level of risk î Decreased level of risk
Principal risks and uncertainties
The Society operates an Enterprise Risk Management Framework (ERMF), which ensures Nationwide remains safe and secure for our members. The principal risk categories set out below have been defined to ensure the Society understands and manages its risks in a comprehensive and consistent way.
The principal risk categories remain unchanged from those set out in the Risk report in the Annual Report and Accounts 2021. During the first half of this year, the previous Solvency risk category has been renamed Capital risk, to align with wider financial services sector terminology. The principal risks are as follows:
-- Credit risk -- Liquidity and funding risk -- Capital risk -- Market risk -- Pension risk -- Model risk -- Business risk -- Operational and conduct risk
Information on key developments in relation to the principal risks above is included within this report, except for business risk where there have been no significant developments which have altered the Society's outlook or approach during the period.
Credit risk - Overview
Credit risk is the risk of loss as a result of a member, customer or counterparty failing to meet their financial obligations. Credit risk encompasses borrower/counterparty risk, security/collateral risk, concentration risk and refinance risk.
Nationwide manages credit risk for the following portfolios:
Portfolio Definition
Residential mortgages Loans secured on residential property
---------------------- -----------------------------------------------------------------------------------
Consumer banking Unsecured lending comprising current account overdrafts, personal loans and credit
cards
---------------------- -----------------------------------------------------------------------------------
Commercial and other Loans to registered social landlords, project finance loans made under the Private
lending Finance Initiative, commercial real estate lending and other balances due from
counterparties not covered by other categories
---------------------- -----------------------------------------------------------------------------------
Treasury Treasury liquidity, derivatives and discretionary investment portfolios
---------------------- -----------------------------------------------------------------------------------
Further detail on how Nationwide manages credit risk and what credit risk encompasses is included within the Annual Report and Accounts 2021. Information on the calculation of impairment provisions based on expected credit losses (ECLs) is also included in the Annual Report and Accounts 2021.
Performance overview
Following staged easing of national lockdown restrictions from March 2021, the UK economy has seen a period of recovery as social distancing controls relaxed, and businesses reopened.
A number of schemes available to support borrowers facing financial difficulty during the pandemic, including payment deferrals and furlough, have now come to an end. Residential mortgage and consumer banking payment deferrals, offered to affected borrowers to temporarily suspend their contractual payments in accordance with regulatory guidance, were closed to new applications in March 2021, with all payment deferrals ending in July 2021. At 30 September 2021 there were therefore no outstanding balances subject to a payment deferral (4 April 2021: GBP1,385 million), with 94% of borrowers with expired payment deferrals having resumed full payments. The 6% who have entered arrears or alternative forbearance arrangements include some borrowers who were in financial difficulty prior to the pandemic.
Help and support for members who remain impacted in these challenging times continue to be offered, with concessions granted based on consideration of their individual circumstance.
Observed credit quality and performance have remained broadly stable over the period, with residential mortgage and consumer banking arrears remaining at a relatively low level. It remains our judgement that arrears performance has benefited from the government measures, combined with the low bank base rate environment and reduced discretionary spending. It is expected that arrears levels will rise given the end of the furlough scheme and recent increases in consumer spending, with these anticipated arrears reflected in provisions at the period end.
The housing market has seen strong activity over the last 12 months supported by the stamp duty holiday, with the Nationwide House Price Index recording a 10% increase in house prices. Nationwide has continued to support borrowers looking to take out a mortgage throughout the period, with greater availability of products at higher loan to value. These products have been designed to support first time buyers, while taking careful consideration of risk.
Credit risk - Overview (continued)
Maximum exposure to credit risk
Nationwide's maximum exposure to credit risk has increased to GBP296 billion (4 April 2021: GBP265 billion), principally reflecting higher cash balances.
Credit risk largely arises from loans and advances to customers, which account for 74% (4 April 2021: 81%) of Nationwide's total credit risk exposure. Within this, the exposure relates primarily to residential mortgages, which account for 95% (4 April 2021: 94%) of total loans and advances to customers and comprise high quality assets with historically low occurrences of arrears and possessions.
In addition to loans and advances to customers, Nationwide is exposed to credit risk on all other financial assets. For all financial assets recognised on the balance sheet, the maximum exposure to credit risk represents the balance sheet carrying value after allowance for impairment, plus off-balance sheet commitments. For off-balance sheet commitments, the maximum exposure is the maximum amount that Nationwide would have to pay if the commitments were to be called upon. For loan commitments and other credit related commitments that are irrevocable over the life of the respective facilities, the maximum exposure is the full amount of the committed facilities.
Maximum exposure to credit risk
30 September 2021 Gross Impairment Carrying Commitments Maximum % of total
balances provisions value (note i) credit risk credit risk
exposure exposure
--------- ----------- -------- ----------- ------------ ------------
GBPm GBPm GBPm GBPm GBPm %
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Amortised cost loans and advances
to customers:
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Residential mortgages 194,218 (273) 193,945 11,982 205,927 70
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Consumer banking 4,660 (486) 4,174 38 4,212 2
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Commercial and other lending 5,911 (25) 5,886 1,213 7,099 2
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Fair value adjustment for micro
hedged risk (note ii) 593 - 593 - 593 -
======================================= ========= =========== ======== =========== ============ ============
205,382 (784) 204,598 13,233 217,831 74
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
FVTPL loans and advances to customers:
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Residential mortgages (note iii) 64 - 64 - 64 -
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Commercial 52 - 52 - 52 -
======================================= ========= =========== ======== =========== ============ ============
116 - 116 - 116 -
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Other items:
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Cash 46,498 - 46,498 - 46,498 16
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Loans and advances to banks and
similar institutions 3,275 - 3,275 - 3,275 1
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Investment securities - FVOCI 22,933 - 22,933 - 22,933 8
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Investment securities - Amortised
cost 913 - 913 - 913 -
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Investment securities - FVTPL 37 - 37 1 38 -
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Derivative financial instruments 4,111 - 4,111 - 4,111 1
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Fair value adjustment for portfolio
hedged risk (note ii) 93 - 93 - 93 -
======================================= ========= =========== ======== =========== ============ ============
77,860 - 77,860 1 77,861 26
======================================= ========= =========== ======== =========== ============ ============
Total 283,358 (784) 282,574 13,234 295,808 100
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Credit risk - Overview (continued)
Maximum exposure to credit risk
4 April 2021 Gross Impairment Carrying Commitments Maximum % of total
balances provisions value (note i) credit risk credit risk
exposure exposure
--------- ----------- -------- ----------- ------------ ------------
GBPm GBPm GBPm GBPm GBPm %
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Amortised cost loans and advances
to customers:
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Residential mortgages 190,955 (317) 190,638 12,039 202,677 76
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Consumer banking 4,404 (502) 3,902 43 3,945 2
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Commercial and other lending 6,267 (33) 6,234 1,176 7,410 3
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Fair value adjustment for micro
hedged risk (note ii) 653 - 653 - 653 -
======================================= ========= =========== ======== =========== ============ ============
202,279 (852) 201,427 13,258 214,685 81
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
FVTPL loans and advances to customers:
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Residential mortgages (note iii) 68 - 68 - 68 -
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Commercial 52 - 52 - 52 -
======================================= ========= =========== ======== =========== ============ ============
120 - 120 - 120 -
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Other items:
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Cash 16,693 - 16,693 - 16,693 6
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Loans and advances to banks and
similar institutions 3,660 - 3,660 - 3,660 1
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Investment securities - FVOCI 24,218 - 24,218 - 24,218 9
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Investment securities - Amortised
cost 1,243 - 1,243 - 1,243 1
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Investment securities - FVTPL 12 - 12 1 13 -
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Derivative financial instruments 3,809 - 3,809 - 3,809 2
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Fair value adjustment for portfolio
hedged risk (note ii) 946 - 946 - 946 -
======================================= ========= =========== ======== =========== ============ ============
50,581 - 50,581 1 50,582 19
======================================= ========= =========== ======== =========== ============ ============
Total 252,980 (852) 252,128 13,259 265,387 100
--------------------------------------- --------- ----------- -------- ----------- ------------ ------------
Notes:
i. In addition to the amounts shown above, Nationwide has revocable commitments of GBP10,563 million (4 April 2021: GBP10,624 million) in respect of credit card and overdraft facilities. These commitments represent agreements to lend in the future, subject to certain considerations. Such commitments are cancellable by Nationwide, subject to notice requirements, and given their nature are not expected to be drawn down to the full level of exposure.
ii. The fair value adjustment for portfolio hedged risk and the fair value adjustment for micro hedged risk (which relates to the commercial lending portfolio) represent hedge accounting adjustments. They are indirectly exposed to credit risk through the relationship with the underlying loans covered by Nationwide's hedging programmes.
iii. FVTPL residential mortgages include equity release and shared equity loans.
Commitments
Irrevocable undrawn commitments to lend are within the scope of provision requirements. The commitments in the table above consist of overpayment reserves and separately identifiable irrevocable commitments for the pipeline of residential mortgages, personal loans, commercial loans and investment securities. These commitments are not recognised on the balance sheet; the associated provision of GBP0.4 million (4 April 2021: GBP0.5 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 the branch network and intermediary channels. Buy to let mortgages are now only originated under The Mortgage Works (UK) plc (TMW) brand. Legacy mortgages are smaller portfolios in run-off.
As highlighted in the Credit risk overview section of this report the Covid-19 pandemic has had a significant impact on the residential mortgage market and, whilst house prices have increased and the economic outlook has improved, the impact of Covid-19 on future credit performance remains uncertain.
To date arrears remain low and credit quality continues to be strong; however, the performance over the period has been supported by government intervention, payment deferrals and the low bank base rate environment.
Residential mortgage gross balances
30 September 2021 4 April 2021
------------------- --------------
GBPm % GBPm %
---------------------------------- ------------ ----- --------- ---
Prime 151,560 78 149,706 78
---------------------------------- ------------ ----- --------- ---
Buy to let and legacy:
---------------------------------- ------------ ----- --------- ---
Buy to let (note i) 40,856 21 39,312 21
---------------------------------- ------------ ----- --------- ---
Legacy (note ii) 1,802 1 1,937 1
================================== ============ ===== ========= ===
42,658 22 41,249 22
---------------------------------- ------------ ----- --------- ---
Amortised cost loans and advances
to customers 194,218 100 190,955 100
---------------------------------- ------------ ----- --------- ---
FVTPL loans and advances to
customers 64 68
================================== ============ ===== ========= ===
Total residential mortgages 194,282 191,023
---------------------------------- ------------ ----- --------- ---
Notes:
i. Buy to let mortgages include GBP39,664 million (4 April 2021: GBP37,983 million) originated under the TMW brand.
ii. Legacy includes self-certified, near prime and sub-prime lending, all of which were discontinued in 2009.
Total balances across the residential mortgage portfolios have grown by 2% during the period to GBP194 billion (4 April 2021: GBP191 billion), in particular within the buy to let portfolio which saw 4% growth during the period.
Credit risk - Residential mortgages (continued)
Impairment (reversals)/losses and write-offs for the
period
Half year Half year
to to
30 September 30 September
2021 2020
------------- -------------
GBPm GBPm
------------------------------------ ------------- -------------
Prime (19) 23
------------------------------------ ------------- -------------
Buy to let and legacy (25) 30
==================================== ============= =============
Total impairment (reversals)/losses (44) 53
==================================== ============= =============
%%
------------------------------------ ------------- ------------
Impairment (reversals)/losses
as a % of average gross balance (0.02) 0.03
------------------------------------ ------------- -------------
GBPm GBPm
------------------------------------ ------------- -------------
Gross write-offs 24
------------------------------------ ------------- ------------
Impairment reversals for the period include the impact of updating macroeconomic assumptions and scenario weightings to reflect the improvement in economic outlook since 4 April 2021; further details are included in note 8 to the consolidated interim financial statements. Closing provisions have reduced to GBP273 million (4 April 2021: GBP317 million). The prior period impairment losses reflected an increase in provisions during a period of significant economic uncertainty.
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. Details of stages and the approach to the allocation of loans to stages are included in the Annual Report and Accounts 2021.
Residential mortgages staging analysis
30 September 2021 Stage 1 Stage 2 Stage 2 Stage 2 Stage 2 Stage 3 POCI Total
total Up to 1 - 30 >30 DPD (note
date DPD ii)
(note (note (note
i) i) i)
-------- ------- ------- -------- --------- ------- ------- --------
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------- -------- ------- ------- -------- --------- ------- ------- --------
Gross balances
----------------------------------- -------- ------- ------- -------- --------- ------- ------- --------
Prime 146,797 3,873 3,185 499 189 890 - 151,560
----------------------------------- -------- ------- ------- -------- --------- ------- ------- --------
Buy to let and legacy 37,071 4,991 4,681 194 116 456 140 42,658
=================================== ======== ======= ======= ======== ========= ======= ======= ========
Total 183,868 8,864 7,866 693 305 1,346 140 194,218
=================================== ======== ======= ======= ======== ========= ======= ======= ======== Provisions ----------------------------------- -------- ------- ------- -------- --------- ------- ------- -------- Prime 14 26 21 3 2 34 - 74 ----------------------------------- -------- ------- ------- -------- --------- ------- ------- -------- Buy to let and legacy 45 115 100 8 7 39 - 199 =================================== ======== ======= ======= ======== ========= ======= ======= ======== Total 59 141 121 11 9 73 - 273 =================================== ======== ======= ======= ======== ========= ======= ======= ======== Provisions as a % of total balance %% %% %% %% ----------------------------------- -------- ------ ------- ------- --------- ------ ------- ------- Prime 0.01 0.68 0.67 0.54 1.16 3.84 - 0.05 ----------------------------------- -------- ------- ------- -------- --------- ------- ------- -------- Buy to let and legacy 0.12 2.31 2.15 3.94 6.06 8.46 - 0.47 =================================== ======== ======= ======= ======== ========= ======= ======= ======== Total 0.03 1.59 1.55 1.49 3.02 5.40 - 0.14 ----------------------------------- -------- ------- ------- -------- --------- ------- ------- --------
Credit risk - Residential mortgages (continued)
Residential mortgages staging analysis
4 April 2021 Stage 1 Stage 2 Stage 2 Stage 2 Stage 2 Stage 3 POCI Total
total Up to 1 - 30 >30 DPD (note
date DPD ii)
(note (note (note
i) i) i)
------- ---------
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------- -------- ------- ------- -------- --------- ------- ------- --------
Gross balances
----------------------------------- -------- ------- ------- -------- --------- ------- ------- --------
Prime 143,500 5,313 4,606 505 202 893 - 149,706
----------------------------------- -------- ------- ------- -------- --------- ------- ------- --------
Buy to let and legacy 35,247 5,346 5,009 201 136 508 148 41,249
=================================== ======== ======= ======= ======== ========= ======= ======= ========
Total 178,747 10,659 9,615 706 338 1,401 148 190,955
=================================== ======== ======= ======= ======== ========= ======= ======= ========
Provisions
----------------------------------- -------- ------- ------- -------- --------- ------- ------- --------
Prime 17 39 33 3 3 37 - 93
----------------------------------- -------- ------- ------- -------- --------- ------- ------- --------
Buy to let and legacy 49 137 118 9 10 38 - 224
=================================== ======== ======= ======= ======== ========= ======= ======= ========
Total 66 176 151 12 13 75 - 317
=================================== ======== ======= ======= ======== ========= ======= ======= ========
Provisions as a % of total balance %% %% %% %%
----------------------------------- -------- ------ ------- ------- --------- ------ ------- -------
Prime 0.01 0.74 0.73 0.59 1.39 4.10 - 0.06
----------------------------------- -------- ------- ------- -------- --------- ------- ------- --------
Buy to let and legacy 0.14 2.58 2.38 4.28 7.18 7.46 - 0.54
=================================== ======== ======= ======= ======== ========= ======= ======= ========
Total 0.04 1.66 1.59 1.64 3.72 5.32 - 0.17
----------------------------------- -------- ------- ------- -------- --------- ------- ------- --------
Notes:
i. Days past due (DPD) is a measure of arrears status.
ii. Purchased or originated credit impaired (POCI) loans are those which were credit impaired on purchase or acquisition. The POCI loans shown in the table above were recognised on the balance sheet when the Derbyshire Building Society was acquired in December 2008. These balances, which are mainly interest only, were 90 days or more in arrears when they were acquired and so have been classified as credit impaired on acquisition. The gross balance for POCI is shown net of the lifetime ECL of GBP5 million (4 April 2021: GBP5 million).
At 30 September 2021, 95% (4 April 2021: 94%) of the residential mortgage portfolio is in stage 1, reflecting the portfolio's underlying strong credit quality. During the period there has been a decrease in stage 2 balances to GBP8,864 million (4 April 2021: GBP10,659 million). This reduction is largely the result of updating macroeconomic assumptions and scenario weightings to reflect the improvement in economic outlook since 4 April 2021 . This improvement, combined with the house price growth experienced during the period, has reduced residential mortgage provisions to GBP273 million (4 April 2021: GBP317 million). Further information regarding economic scenarios and associated weightings is provided in note 8 to the consolidated interim financial statements.
Stage 3 loans in the residential mortgage portfolio equate to 0.7% (4 April 2021: 0.7%) of the total residential mortgage exposure. Of the total GBP1,346 million (4 April 2021: GBP1,401 million) stage 3 loans, GBP604 million (4 April 2021: GBP690 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; GBP398 million
(4 April 2021: GBP242 million) of the stage 3 balances in forbearance are in this probation period.
Credit risk - Residential mortgages (continued)
The table below summarises the movements, including between stages, of residential mortgages held at amortised cost. The movements within the table are an aggregation of monthly movements over the period.
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 2021 178,747 66 10,659 176 1,549 75 190,955 317
----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Stage transfers:
----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Transfers from Stage 1
to Stage
2 (5,637) (6) 5,637 6 - - - -
----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Transfers to Stage 3 (131) - (333) (8) 464 8 - -
----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Transfers from Stage 2
to Stage
1 6,598 41 (6,598) (41) - - - - ----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Transfers from Stage 3 115 1 210 9 (325) (10) - - ----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net remeasurement of ECL arising from transfer of stage (32) 30 2 - ======================= ========= ========== ========== ========== ========== ========== ========== ========== Net movement arising from transfer of stage 945 4 (1,084) (4) 139 - - - ----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- New assets originated or purchased 17,805 3 - - - - 17,805 3 ----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net impact of further lending and repayments (3,490) (1) (128) (1) (26) - (3,644) (2) ----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Changes in risk parameters in relation to credit quality - (10) - (24) - 7 - (27) ----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Other items impacting income statement charge/(reversal) (including recoveries) - - - - 1 (2) 1 (2) ----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Redemptions (10,139) (3) (583) (6) (170) (7) (10,892) (16) ----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income statement reversal for the period ( 44) ----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Decrease due to write-offs - - - - (7) (2) (7) (2) ----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Other provision movements - - - - - 2 - 2 ======================= ========= ========== ========== ========== ========== ========== ========== ========== 30 September 2021 183,868 59 8,864 141 1,486 73 194,218 273 ======================= ========= ========== ========== ========== ========== ========== ========== ========== Net carrying amount 183,809 8,723 1,413 193,945 ----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Note:
i. Gross balances of credit impaired loans include GBP140 million (4 April 2021: GBP148 million) of POCI loans, which are presented net of lifetime ECL impairment provisions of GBP5 million (4 April 2021: 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 interim financial statements.
Credit risk - Residential mortgages (continued)
Reason for residential mortgages being included in stage 2 (note i)
30 September 2021 Prime Buy to let and legacy Total
---------------------------------- -------------------------- -------------------------- --------------------------
Gross balances Provisions Gross balances Provisions Gross balances Provisions
---------------------------------- -------------- ---------- -------------- ---------- -------------- ----------
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------- -------------- ---------- -------------- ---------- -------------- ----------
Quantitative criteria:
---------------------------------- -------------- ---------- -------------- ---------- -------------- ----------
Payment status (greater than 30
DPD) 189 2 116 7 305 9
---------------------------------- -------------- ---------- -------------- ---------- -------------- ----------
Increase in PD since
origination (less than
30 DPD) 3,502 24 3,134 68 6,636 92
---------------------------------- -------------- ---------- -------------- ---------- -------------- ----------
Qualitative criteria:
---------------------------------- -------------- ---------- -------------- ---------- -------------- ----------
Forbearance and other
concessions (less than
30 DPD) 137 - 4 - 141 -
---------------------------------- -------------- ---------- -------------- ---------- -------------- ----------
Interest only - significant
risk of inability
to refinance at maturity (less
than 30 DPD) - - 1,728 40 1,728 40
---------------------------------- -------------- ---------- -------------- ---------- -------------- ----------
Other qualitative criteria 45 - 9 - 54 -
---------------------------------- -------------- ---------- -------------- ---------- -------------- ----------
Total Stage 2 gross balances 3,873 26 4,991 115 8,864 141
---------------------------------- -------------- ---------- -------------- ---------- -------------- ----------
Reason for residential mortgages being included in stage 2 (note i)
4 April 2021 Prime Buy to let and legacy Total
---------------------------------- -------------------------- -------------------------- --------------------------
Gross balances Provisions Gross balances Provisions Gross balances Provisions
---------------------------------- -------------- ---------- -------------- ---------- -------------- ----------
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------- -------------- ---------- -------------- ---------- -------------- ----------
Quantitative criteria:
---------------------------------- -------------- ---------- -------------- ---------- -------------- ----------
Payment status (greater than 30
DPD) 202 3 136 10 338 13
---------------------------------- -------------- ---------- -------------- ---------- -------------- ----------
Increase in PD since
origination (less than
30 DPD) 5,067 36 3,288 70 8,355 106
---------------------------------- -------------- ---------- -------------- ---------- -------------- ----------
Qualitative criteria:
---------------------------------- -------------- ---------- -------------- ---------- -------------- ----------
Forbearance and other
concessions (less than
30 DPD) 6 - 3 - 9 -
---------------------------------- -------------- ---------- -------------- ---------- -------------- ----------
Interest only - significant
risk of inability
to refinance at maturity (less
than 30 DPD) - - 1,914 57 1,914 57
---------------------------------- -------------- ---------- -------------- ---------- -------------- ----------
Other qualitative criteria 38 - 5 - 43 -
---------------------------------- -------------- ---------- -------------- ---------- -------------- ----------
Total Stage 2 gross balances 5,313 39 5,346 137 10,659 176
---------------------------------- -------------- ---------- -------------- ---------- -------------- ----------
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.
Loans which are reported within stage 2 are those which have experienced a significant increase in credit risk since origination. The Annual Report and Accounts 2021 sets out the main criteria used to determine whether a significant increase in credit risk has occurred since origination. There have been no changes to the criteria during the period.
The value of loans reported within stage 2 as a result of being in arrears by 30 days or more has reduced to GBP305 million (4 April 2021: GBP338 million). Management has judged this to be a temporary position due to the availability of government support schemes and an adjustment to provisions has been made to recognise the underlying risk.
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 <0.1% (4 April 2021: <0.1%) of total stage 2 balances.
The significant stage 2 movements during the period are detailed beneath the residential mortgages staging analysis table on page 23.
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 probability of default (PD) range. The PD distributions shown are based on 12-month IFRS 9 PDs at the reporting date.
Loan balance and provisions by PD (note i)
30 September 2021 Gross balances Provisions
------------------------------------- ---------------------------------- ---------
Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total Provision
and POCI and POCI coverage
-------- ------- ------- ------- --------- ----- ---------
PD range GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm %
------------------ -------- ------- --------- ------- ------- ------- --------- ----- ---------
0.00 to < 0.15% 163,935 2,118 43 166,096 31 20 - 51 0.03
------------------ -------- ------- --------- ------- ------- ------- --------- ----- ---------
0.15 to < 0.25% 9,796 904 84 10,784 7 10 - 17 0.16
------------------ -------- ------- --------- ------- ------- ------- --------- ----- ---------
0.25 to < 0.50% 6,174 980 38 7,192 7 13 - 20 0.27
------------------ -------- ------- --------- ------- ------- ------- --------- ----- ---------
0.50 to < 0.75% 1,938 553 36 2,527 3 8 - 11 0.41
------------------ -------- ------- --------- ------- ------- ------- --------- ----- ---------
0.75 to < 2.50% 1,844 957 70 2,871 6 17 - 23 0.79
------------------ -------- ------- --------- ------- ------- ------- --------- ----- ---------
2.50 to < 10.00% 112 729 101 942 1 13 1 15 1.61
------------------ -------- ------- --------- ------- ------- ------- --------- ----- ---------
10.00 to < 100% 69 2,623 238 2,930 4 60 6 70 2.39
------------------ -------- ------- --------- ------- ------- ------- --------- ----- ---------
100% (default) - - 876 876 - - 66 66 7.58
------------------ -------- ------- --------- ------- ------- ------- --------- ----- ---------
Total 183,868 8,864 1,486 194,218 59 141 73 273 0.14
------------------ -------- ------- --------- ------- ------- ------- --------- ----- ---------
Loan balance and provisions by PD (note i)
4 April 2021 Gross balances Provisions
------------------------------------- ---------------------------------- ---------
Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total Provision
and POCI and POCI coverage
-------- ------- ------- ------- --------- ----- ---------
PD range GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm %
----------------- -------- ------- --------- ------- ------- ------- --------- ----- ---------
0.00 to < 0.15% 156,099 2,573 52 158,724 34 28 - 62 0.04
----------------- -------- ------- --------- ------- ------- ------- --------- ----- ---------
0.15 to < 0.25% 10,402 1,369 44 11,815 7 13 - 20 0.17
----------------- -------- ------- --------- ------- ------- ------- --------- ----- ---------
0.25 to < 0.50% 7,334 1,298 29 8,661 9 19 - 28 0.31
----------------- -------- ------- --------- ------- ------- ------- --------- ----- ---------
0.50 to < 0.75% 2,326 636 22 2,984 3 10 - 13 0.44
----------------- -------- ------- --------- ------- ------- ------- --------- ----- ---------
0.75 to < 2.50% 2,442 1,085 60 3,587 10 19 - 29 0.82
----------------- -------- ------- --------- ------- ------- ------- --------- ----- ---------
2.50 to < 10.00% 143 823 70 1,036 3 16 - 19 1.81
----------------- -------- ------- --------- ------- ------- ------- --------- ----- ---------
10.00 to < 100% 1 2,875 324 3,200 - 71 8 79 2.48
----------------- -------- ------- --------- ------- ------- ------- --------- ----- ---------
100% (default) - - 948 948 - - 67 67 7.07
----------------- -------- ------- --------- ------- ------- ------- --------- ----- ---------
Total 178,747 10,659 1,549 190,955 66 176 75 317 0.17
----------------- -------- ------- --------- ------- ------- ------- --------- ----- ---------
Note:
i. Includes POCI loans of GBP140 million (4 April 2021: GBP148 million).
At 30 September 2021, 98% (4 April 2021: 97%) of the portfolio had a PD of less than 2.5%, reflecting the high quality of the residential mortgage portfolios. The provisions allocated to the lowest PD range primarily reflect the fact that the majority of loans are in this range. The reduction in the stage 2 balances within the 0.00% to 0.50% bands is primarily the result of the improvement in economic outlook, where up to date accounts no longer breach the quantitative stage 2 criteria.
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)
Half year Half year
to to
30 September 30 September
2021 2020
-------------
% %
---------------------------- ------------- -------------
Prime:
---------------------------- ------------- -------------
First time buyers 29 27
---------------------------- ------------- -------------
Home movers 34 21
---------------------------- ------------- -------------
Remortgages 15 27
---------------------------- ------------- -------------
Other 1 1
---------------------------- ------------- -------------
Total prime 79 76
---------------------------- ------------- -------------
Buy to let:
---------------------------- ------------- -------------
Buy to let new purchases 10 6
---------------------------- ------------- -------------
Buy to let remortgages 11 18
---------------------------- ------------- -------------
Total buy to let 21 24
---------------------------- ------------- -------------
Total new business 100 100
---------------------------- ------------- -------------
Note:
i. All new business measures exclude further advances and product switches.
The proportion of lending by borrower type during the half year to September 2020 was impacted by the pandemic, with the house purchase market virtually closed during the initial lockdown. Since then, demand for mortgages has been boosted by the stamp duty holiday, and the proportion of prime home movers and first time buyers increased to 63% (30 September 2020: 48%). The proportion of new purchases within the buy to let portfolio has also increased.
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)
Half year Half year
to to
30 September 30 September
2021 2020
---------------
% %
------------ ---------------- ---------------
0% to 60% 26 27
------------ ---------------- ---------------
60% to 75% 35 36
------------ ---------------- ---------------
75% to 80% 12 6
------------ ---------------- ---------------
80% to 85% 15 13
------------ ---------------- ---------------
85% to 90% 11 15
------------ ---------------- ---------------
90% to 95% 1 3
------------ ---------------- ---------------
Over 95% - -
------------ ---------------- ---------------
Total 100 100
------------ ---------------- ---------------
Average LTV of new business (by value) (note
i)
Half year Half year
to to
30 September 30 September
2021 2020
----------------
% %
-------------- ---------------- ----------------
Prime 71 71
-------------- ---------------- ----------------
Buy to let 67 66
-------------- ---------------- ----------------
Group 70 70
-------------- ---------------- ----------------
Average LTV of loan stock (by value) (note ii)
30 September 4 April 2021
2021
------------
% %
----------------------- ------------ ------------
Prime 53 55
----------------------- ------------ ------------
Buy to let and legacy 56 57
----------------------- ------------ ------------
Group 53 56
----------------------- ------------ ------------
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 period.
Nationwide withdrew from 95% LTV lending in the wake of the pandemic whilst tighter controls were also employed at 85% to 90% LTV due to uncertainty regarding the immediate economic outlook, particularly house prices and levels of unemployment. This reduced the proportion of lending at 85% LTV and above to 12% (30 September 2020: 18%). However, the average has remained stable due to a higher concentration of lending at 75% to 85% LTV which increased to 27% (30 September 2020: 19%).
The housing market has been strong over the period with the Nationwide House Price Index showing a 10% increase in house prices year on year supported by the stamp duty holiday. Although this holiday has now ended demand continues to exceed supply, driving up prices and causing the Group average LTV to reduce to 53% (4 April 2021: 56%). To support first time buyers Nationwide re-entered the 95% LTV purchase market in May 2021, supported by controls to help mitigate the uncertainty regarding future credit performance.
Credit risk - Residential mortgages (continued)
Residential mortgage balances by LTV and region
Geographical concentration by stage
The following table shows residential mortgages, excluding FVTPL balances, by LTV and region across stages 1 and 2 (non-credit impaired) and stage 3 (credit impaired).
Residential mortgage gross balances by LTV and region
30 September Greater Central Northern South South Scotland Wales Northern Total Provision
2021 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% 26,110 14,032 10,592 9,520 7,582 4,142 2,400 1,130 75,508 0.05
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
50% to 60% 11,315 7,057 6,123 4,434 3,766 2,313 1,365 443 36,816 0.10
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
60% to 70% 11,978 7,363 6,654 4,671 3,868 2,614 1,371 483 39,002 0.12
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
70% to 80% 12,238 6,305 5,438 4,340 3,142 2,065 853 442 34,823 0.13
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
80% to 90% 2,267 1,195 1,125 584 419 305 148 128 6,171 0.24
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
90% to 100% 68 48 73 25 21 36 10 37 318 2.23
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
63,976 36,000 30,005 23,574 18,798 11,475 6,147 2,663 192,638 0.10
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
Not fully
collateralised
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
Over 100%
LTV 7 3 14 2 1 15 - 52 94 13.66
-------------- ======= ======== ======== ============ ============ ======== ===== ======== ======= ---------
Collateral
value 6 3 12 2 1 14 - 47 85
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
Negative
equity 1 - 2 - - 1 - 5 9
-------------- ======= ======== ======== ============ ============ ======== ===== ======== ======= ---------
Total stage 1
and 2
loans 63,983 36,003 30,019 23,576 18,799 11,490 6,147 2,715 192,732 0.10
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
Stage 3 and POCI loans
------ ------ ------ ------ ------ ------ ----- ----- ------- ------
Fully collateralised
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
LTV ratio:
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
Up to 50% 277 111 91 79 56 28 19 14 675 1.65
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
50% to 60% 103 58 50 32 33 18 10 6 310 3.22
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
60% to 70% 61 54 58 24 22 18 14 7 258 5.60
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
70% to 80% 48 26 39 16 12 12 5 3 161 8.32
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
80% to 90% 14 5 15 5 - 5 - 4 48 19.59
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
90% to 100% 1 - 7 - - 2 - 4 14 32.93
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
504 254 260 156 123 83 48 38 1,466 4.33
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------ Not fully collateralised --------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------ Over 100% LTV 1 - 4 1 1 1 - 12 20 54.13 --------------------------------- ====== ====== ====== ====== ====== ====== ===== ===== ======= ------ Collateral value 1 - 3 1 1 1 - 10 17 --------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------ Negative equity - - 1 - - - - 2 3 --------------------------------- ====== ====== ====== ====== ====== ====== ===== ===== ======= ------ Total stage 3 and POCI loans 505 254 264 157 124 84 48 50 1,486 4.87 --------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------ Total residential mortgages 64,488 36,257 30,283 23,733 18,923 11,574 6,195 2,765 194,218 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
4 April 2021 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% 24,487 12,484 9,340 8,930 6,454 3,526 1,944 995 68,160 0.06
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
50% to 60% 10,968 6,432 5,630 4,137 3,263 2,103 1,245 391 34,169 0.10
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
60% to 70% 11,326 7,119 6,351 4,653 3,653 2,427 1,311 446 37,286 0.13
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
70% to 80% 9,537 6,147 5,826 4,262 3,276 2,354 1,109 469 32,980 0.18
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
80% to 90% 6,129 2,828 1,914 2,132 1,741 974 359 237 16,314 0.20
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
90% to 100% 118 53 50 14 33 32 3 49 352 2.82
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
62,565 35,063 29,111 24,128 18,420 11,416 5,971 2,587 189,261 0.12
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
Not fully
collateralised
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
Over 100%
LTV 8 4 28 1 2 18 1 83 145 15.07
-------------- ======= ======== ======== ============ ============ ======== ===== ======== ======= ---------
Collateral
value 7 3 25 1 2 16 1 73 128
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
Negative
equity 1 1 3 - - 2 - 10 17
-------------- ======= ======== ======== ============ ============ ======== ===== ======== ======= ---------
Total stage 1
and 2
loans 62,573 35,067 29,139 24,129 18,422 11,434 5,972 2,670 189,406 0.13
-------------- ------- -------- -------- ------------ ------------ -------- ----- -------- ------- ---------
Stage 3 and POCI loans
-------
Fully collateralised
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
LTV ratio:
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
Up to 50% 264 100 86 77 44 24 16 13 624 1.72
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
50% to 60% 110 60 51 31 31 16 9 5 313 2.90
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
60% to 70% 67 61 58 28 30 17 12 6 279 4.60
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
70% to 80% 36 37 51 22 14 15 9 6 190 8.15
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
80% to 90% 32 11 25 10 7 8 3 5 101 12.49
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
90% to 100% 2 1 10 - - 2 - 3 18 26.42
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
511 270 281 168 126 82 49 38 1,525 4.31
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
Not fully collateralised
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
Over 100% LTV 1 1 5 1 - 2 - 14 24 41.07
--------------------------------- ====== ====== ====== ====== ====== ====== ===== ===== ======= ------
Collateral value 1 1 4 1 - 2 - 12 21
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
Negative equity - - 1 - - - - 2 3
--------------------------------- ====== ====== ====== ====== ====== ====== ===== ===== ======= ------
Total stage 3 and POCI
loans 512 271 286 169 126 84 49 52 1,549 4.80
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
Total residential mortgages 63,085 35,338 29,425 24,298 18,548 11,518 6,021 2,722 190,955 0.17
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
Total geographical concentrations 33% 19% 15% 13% 10% 6% 3% 1% 100%
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ------
Credit risk - Residential mortgages (continued)
Over the period, 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 of 30% and 46% (4 April 2021: 30% and 46%) respectively.
In addition to balances held at amortised cost shown in the table above, there are GBP64 million (4 April 2021: GBP68 million) of residential mortgages held at FVTPL which have an average LTV of 35% (4 April 2021: 38%). The largest geographical concentration within the FVTPL balances is also in Greater London, at 56% (4 April 2021: 54%).
Arrears
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)
30 September 4 April 2021
2021
------------ ------------
% %
-------------------------- ------------ ------------
Prime 0.32 0.35
-------------------------- ------------ ------------
Buy to let and legacy 0.57 0.72
-------------------------- ------------ ------------
Total 0.37 0.43
-------------------------- ------------ ------------
UK Finance (UKF) industry
average 0.78 0.85
-------------------------- ------------ ------------
Note:
i. The methodology for calculating mortgage arrears is based on the UKF definition of arrears, where months in arrears is determined by dividing the arrears balance outstanding by the latest monthly contractual payment.
In accordance with regulatory guidance payment deferrals ended in July 2021. Despite this the proportion of cases more than 3 months in arrears has decreased over the period to 0.37% (4 April 2021: 0.43%). When legacy portfolios are excluded, the proportion of buy to let cases which are more than 3 months in arrears has decreased to 0.19% (4 April 2021: 0.27%). Arrears levels are anticipated to increase following the end of the furlough scheme but to remain low relative to the industry average.
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
30 September 2021 4 April 2021
---------------------------------- ----------------------------------
Prime Buy to Total Prime Buy to Total
let and let and
legacy legacy
-------- ---- -------- -------- -------- ----
GBPm GBPm GBPm % GBPm GBPm GBPm %
---------------------------- -------- -------- -------- ---- -------- -------- -------- ----
Not past due 150,140 41,960 192,100 98.9 148,285 40,460 188,745 98.8
---------------------------- -------- -------- -------- ---- -------- -------- -------- ----
Past due 0 to 1 month 885 267 1,152 0.6 842 278 1,120 0.6
---------------------------- -------- -------- -------- ---- -------- -------- -------- ----
Past due 1 to 3 months 241 142 383 0.2 259 159 418 0.2
---------------------------- -------- -------- -------- ---- -------- -------- -------- ----
Past due 3 to 6 months 128 87 215 0.1 149 121 270 0.2
---------------------------- -------- -------- -------- ---- -------- -------- -------- ----
Past due 6 to 12 months 107 77 184 0.1 113 108 221 0.1
---------------------------- -------- -------- -------- ---- -------- -------- -------- ----
Past due over 12 months 118 110 228 0.1 123 113 236 0.1
---------------------------- -------- -------- -------- ---- -------- -------- -------- ----
Possessions 5 15 20 - 3 10 13 -
---------------------------- -------- -------- -------- ---- -------- -------- -------- ----
Total residential mortgages 151,624 42,658 194,282 100 149,774 41,249 191,023 100
---------------------------- -------- -------- -------- ---- -------- -------- -------- ----
The balance of cases past due by more than 3 months has reduced to GBP647 million (4 April 2021: GBP740 million). There was a relatively small increase in possessions to GBP20 million (4 April 2021: GBP13 million) as activity put on hold following the introduction of the home support package recommenced.
Interest only mortgages
Interest only balances for prime residential mortgages relate primarily to historical balances which were originally advanced as interest only mortgages or where a subsequent change in terms to an interest only basis was agreed. Maturities on interest only mortgages are managed closely, engaging regularly with borrowers to ensure the loan is redeemed or to agree a strategy for repayment.
Of the buy to let and legacy portfolio, GBP38,491 million (4 April 2021: GBP37,107 million) relate to interest only balances, representing 90% (4 April 2021: 90%) of balances, and buy to let remains open to new interest only lending under standard terms. Nationwide also re-entered the prime market for interest only lending under a newly established credit policy in April 2020. At 30 September 2021 interest only balances of GBP8,205 million (4 April 2021: GBP8,747 million) accounted for 5.4% (4 April 2021: 5.8%) of prime residential mortgages.
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.
Credit risk - Residential mortgages (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.
The Group applies the European Banking Authority (EBA) definition of forbearance in these disclosures. The Annual Report and Accounts 2021 sets out further details of concession events included within forbearance.
The table below provides details of residential mortgages held at amortised cost subject to forbearance. Accounts that are currently subject to forbearance are assessed as in either stage 2 or stage 3.
Gross balances subject to forbearance (note i)
30 September 2021 4 April 2021
------------------------ ------------------------
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) 116 142 258 126 123 249
--------------------------------------------------- ------ -------- ------ ------ -------- ------
Interest only concessions 694 36 730 725 41 766
--------------------------------------------------- ------ -------- ------ ------ -------- ------
Capitalisation 80 32 112 71 37 108
--------------------------------------------------- ------ -------- ------ ------ -------- ------
Capitalisation - notification of death of borrower 86 81 167 103 91 194
--------------------------------------------------- ------ -------- ------ ------ -------- ------
Term extensions (within term) 29 13 42 35 15 50
--------------------------------------------------- ------ -------- ------ ------ -------- ------
Permanent interest only conversions 2 36 38 2 41 43
--------------------------------------------------- ------ -------- ------ ------ -------- ------
Total forbearance 1,007 340 1,347 1,062 348 1,410
--------------------------------------------------- ------ -------- ------ ------ -------- ------
Of which stage 2 182 65 247 200 66 266
--------------------------------------------------- ------ -------- ------ ------ -------- ------
Of which stage 3 650 250 900 635 258 893
--------------------------------------------------- ------ -------- ------ ------ -------- ------
Impairment provisions on forborne loans 16 20 36 19 18 37
--------------------------------------------------- ------ -------- ------ ------ -------- ------
Notes:
i. Where more than one concession event has occurred, balances are reported under the latest event. 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
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.
During the period, total balances subject to forbearance have decreased to GBP1,347 million (4 April 2021: GBP1,410 million), which equates to 0.7% of the total residential mortgage exposure (4 April 2021: 0.7%).
The average LTV for forborne accounts is 48% (4 April 2021: 50%).
In addition to the amortised cost balances above, there are GBP64 million FVTPL balances (4 April 2021: GBP68 million), of which GBP5 million (4 April 2021: GBP8 million) are 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 period, total balances across these portfolios have increased by 6% to GBP4,660 million (4 April 2021: GBP4,404 million) as the easing of Covid-19 restrictions drove higher demand for personal loans and increased spending on credit cards.
To date arrears remain low and credit quality is stable; however, this performance continues to benefit from the impact of government support schemes and payment deferrals, and reduced discretionary spending earlier in the pandemic.
Consumer banking gross balances
30 September 2021 4 April 2021
------------------- --------------
GBPm % GBPm %
--------------------------- ----------- ------ -------- ----
Overdrawn current accounts 229 5 233 5
--------------------------- ----------- ------ -------- ----
Personal loans 2,917 63 2,797 64
--------------------------- ----------- ------ -------- ----
Credit cards 1,514 32 1,374 31
--------------------------- ----------- ------ -------- ----
Total consumer banking 4,660 100 4,404 100
--------------------------- ----------- ------ -------- ----
All consumer banking loans are classified and measured at amortised cost.
Impairment losses and write-offs for the period
Half year Half year
to to
30 September 30 September
2021 2020
------------- -------------
GBPm GBPm
---------------------------- ------------- -------------
Overdrawn current accounts 4 9
---------------------------- ------------- -------------
Personal loans 8 59
---------------------------- ------------- -------------
Credit cards 6 16
---------------------------- ------------- -------------
Total impairment losses 18 84
---------------------------- ------------- -------------
%%
---------------------------- ------------- ------------
Impairment losses as a % of
average gross balance 0.41 1.77
---------------------------- ------------- -------------
GBPm GBPm
---------------------------- ------------- -------------
Gross write-offs 39 49
---------------------------- ------------- -------------
The reduced impairment charge for the period is the result of stable credit quality, combined with a reduction in provisions from updating macroeconomic assumptions and weightings to reflect the improvement in economic outlook since 4 April 2021; further details are included in note 8 to the consolidated interim financial statements. Closing provisions have reduced to GBP486 million (4 April 2021: GBP502 million). The prior period impairment losses reflected an increase in provisions during a period of significant economic uncertainty.
Credit risk - Consumer banking (continued)
The table below shows consumer banking balances by stage, with the corresponding impairment provisions and resulting provision coverage ratios. Details of stages and the approach to the allocation of loans to stages are included in the Annual Report and Accounts 2021.
Consumer banking product and staging analysis
30 September 2021 4 April 2021
---------------------------- ----------------------------
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 105 89 35 229 121 78 34 233
------------------------------ ------ ----- ----- ------ ------ ----- ----- ------
Personal loans 2,398 378 141 2,917 2,144 521 132 2,797
------------------------------ ------ ----- ----- ------ ------ ----- ----- ------
Credit cards 999 414 101 1,514 876 391 107 1,374
------------------------------ ------ ----- ----- ------ ------ ----- ----- ------
Total 3,502 881 277 4,660 3,141 990 273 4,404
------------------------------ ------ ----- ----- ------ ------ ----- ----- ------
Provisions
------------------------------ ------ ----- ----- ------ ------ ----- ----- ------
Overdrawn current accounts 4 21 33 58 5 23 32 60
------------------------------ ------ ----- ----- ------ ------ ----- ----- ------
Personal loans 23 66 125 214 25 77 118 220
------------------------------ ------ ----- ----- ------ ------ ----- ----- ------
Credit cards 19 103 92 214 18 108 96 222
------------------------------ ------ ----- ----- ------ ------ ----- ----- ------
Total 46 190 250 486 48 208 246 502
------------------------------ ------ ----- ----- ------ ------ ----- ----- ------
Provisions as a % of %% %%
total balance %% %%
------------------------------ ------ ---- ----- ----- ------ ---- ----- -----
Overdrawn current accounts 3.95 23.91 92.77 25.33 3.89 29.38 93.36 25.64
------------------------------ ------ ----- ----- ------ ------ ----- ----- ------
Personal loans 0.98 17.36 88.72 7.34 1.18 14.81 89.06 7.87
------------------------------ ------ ----- ----- ------ ------ ----- ----- ------
Credit cards 1.89 24.99 90.65 14.14 2.00 27.68 89.99 16.13
------------------------------ ------ ----- ----- ------ ------ ----- ----- ------
Total 1.33 21.61 89.94 10.44 1.51 21.04 89.97 11.39
------------------------------ ------ ----- ----- ------ ------ ----- ----- ------
At 30 September 2021, 75% (4 April 2021: 71%) of the consumer banking portfolio is in stage 1. This increase has been driven by high quality lending during the period combined with the movement of up to date accounts from stage 2 to stage 1. The reduction in stage 2 balances to GBP881 million (4 April 2021: GBP990 million) is largely the result of updating macroeconomic assumptions and scenario weightings to reflect the improvement in economic outlook since 4 April 2021. This improvement has reduced provisions to GBP486 million (4 April 2021: GBP502 million). Further information regarding economic scenarios and associated weightings is provided in note 8 to the consolidated interim financial statements.
The proportion of total balances in stage 3 is unchanged at 6% (4 April 2021: 6%), reflecting broadly stable underlying credit performance. 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 6.3% (4 April 2021: 7.2%) of gross balances.
Credit risk - Consumer banking (continued)
The table below summarises the movements, including between stages, of consumer banking balances held at amortised cost. The movements within the table are an aggregation of monthly movements over the period.
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 2021 3,141 48 990 208 273 246 4,404 502
----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Stage transfers:
----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Transfers from Stage 1
to Stage
2 (867) (18) 867 18 - - - -
----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Transfers to Stage 3 (9) (2) (55) (44) 64 46 - -
----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Transfers from Stage 2
to Stage
1 903 92 (903) (92) - - - -
----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Transfers from Stage 3 2 1 6 4 (8) (5) - -
----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net remeasurement of
ECL arising
from transfer of stage (72) 95 (6) 17
----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net movement arising
from transfer
of stage 29 1 (85) (19) 56 35 - 17
----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
New assets originated
or purchased 980 19 - - - - 980 19
----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net impact of further
lending
and repayments (347) (17) 16 (14) (12) (10) (343) (41)
----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Changes in risk
parameters
in relation to credit
quality - (5) - 18 - 18 - 31
----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Other items impacting
income
statement
charge/(reversal)
(including recoveries) - - - - - (5) - (5)
----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Redemptions (301) - (40) (3) (1) - (342) (3)
----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income statement charge
for
the period 18
----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Decrease due to
write-offs - - - - (39) (39) (39) (39)
----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Other provision
movements - - - - - 5 - 5
----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
30 September 2021 3,502 46 881 190 277 250 4,660 486
----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net carrying amount 3,456 691 27 4,174
----------------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
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 interim financial statements.
Credit risk - Consumer banking (continued)
Reason for consumer banking balances being included in stage 2
----------------------------------------------------------------------------------------------------------------------
30 September 2021 Overdrawn current Personal loans Credit cards Total
accounts
----------------- ----------------------- ----------------------- ----------------------- ------------------------
Gross Provisions Gross Provisions Gross Provisions Gross Provisions
balances balances balances balances
----------------- ----------- ---------- ----------- ---------- ----------- ---------- ------------ ----------
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------- ----------- ---------- ----------- ---------- ----------- ---------- ------------ ----------
Quantitative
criteria:
----------------- ----------- ---------- ----------- ---------- ----------- ---------- ------------ ----------
Payment status
(greater than
30 DPD) (note
i) 3 2 7 7 4 4 14 13
----------------- ----------- ---------- ----------- ---------- ----------- ---------- ------------ ----------
Increase in PD
since
origination
(less than 30
DPD) 76 18 364 58 386 95 826 171
----------------- ----------- ---------- ----------- ---------- ----------- ---------- ------------ ----------
Qualitative
criteria:
----------------- ----------- ---------- ----------- ---------- ----------- ---------- ------------ ----------
Forbearance
(less than 30
DPD)
(note ii) 1 - - - - - 1 -
----------------- ----------- ---------- ----------- ---------- ----------- ---------- ------------ ----------
Other
qualitative
criteria
(less than 30
DPD) 9 1 7 1 24 4 40 6
----------------- ----------- ---------- ----------- ---------- ----------- ---------- ------------ ----------
Total Stage 2
gross balances 89 21 378 66 414 103 881 190
----------------- ----------- ---------- ----------- ---------- ----------- ---------- ------------ ----------
Reason for consumer banking balances being included in stage 2
4 April 2021 Overdrawn current Personal loans Credit cards Total
accounts
----------------- ----------------------- ----------------------- ----------------------- ------------------------
Gross Provisions Gross Provisions Gross Provisions Gross Provisions
balances balances balances balances
----------------- ----------- ---------- ----------- ---------- ----------- ---------- ------------ ----------
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------- ----------- ---------- ----------- ---------- ----------- ---------- ------------ ----------
Quantitative
criteria:
----------------- ----------- ---------- ----------- ---------- ----------- ---------- ------------ ----------
Payment status
(greater than
30 DPD) (note
i) 3 2 6 5 4 3 13 10
----------------- ----------- ---------- ----------- ---------- ----------- ---------- ------------ ----------
Increase in PD
since
origination
(less than 30
DPD) 66 20 510 72 364 101 940 193
----------------- ----------- ---------- ----------- ---------- ----------- ---------- ------------ ----------
Qualitative
criteria:
----------------- ----------- ---------- ----------- ---------- ----------- ---------- ------------ ----------
Forbearance
(less than 30
DPD)
(note ii) 1 - - - - - 1 -
----------------- ----------- ---------- ----------- ---------- ----------- ---------- ------------ ----------
Other
qualitative
criteria
(less than 30
DPD) 8 1 5 - 23 4 36 5
----------------- ----------- ---------- ----------- ---------- ----------- ---------- ------------ ----------
Total Stage 2
gross balances 78 23 521 77 391 108 990 208
----------------- ----------- ---------- ----------- ---------- ----------- ---------- ------------ ----------
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 are those which have experienced a significant increase in credit risk since origination. The significant increase is determined through both quantitative and qualitative indicators. Of the GBP881 million stage 2 balances (4 April 2021: GBP990 million), only 2% (4 April 2021: 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. The decrease in personal loans stage 2 balances is largely the result of updating macroeconomic assumptions and scenario weightings to reflect the improvement in economic outlook since 4 April 2021, which has resulted in up to date accounts no longer meeting the stage 2 quantitative PD criteria.
The Annual Report and Accounts 2021 sets out the main criteria used to determine whether a significant increase in credit risk has occurred since origination. There have been no changes to the criteria during the period.
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 12-month IFRS 9 PDs at the reporting date.
Consumer banking gross balances and provisions by PD
Gross balances Provisions Provision
30 September 2021 coverage
--------------------------- -------------------------- ---------
Stage Stage Stage Total Stage Stage Stage Total
1 2 3 1 2 3
------ ----- ----- ----- ----- ---------
PD range GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm %
------------------ ------ ----- ----- ----- ----- ----- ----- ----- ---------
0.00 to <0.15% 1,153 10 - 1,163 10 - - 10 0.90
------------------ ------ ----- ----- ----- ----- ----- ----- ----- ---------
0.15 to < 0.25% 508 31 - 539 4 1 - 5 0.96
------------------ ------ ----- ----- ----- ----- ----- ----- ----- ---------
0.25 to < 0.50% 678 106 - 784 7 3 - 10 1.28
------------------ ------ ----- ----- ----- ----- ----- ----- ----- ---------
0.50 to < 0.75% 328 70 - 398 4 4 - 8 1.94
------------------ ------ ----- ----- ----- ----- ----- ----- ----- ---------
0.75 to < 2.50% 637 235 4 876 12 23 - 35 4.08
------------------ ------ ----- ----- ----- ----- ----- ----- ----- ---------
2.50 to < 10.00% 190 255 10 455 8 50 2 60 13.24
------------------ ------ ----- ----- ----- ----- ----- ----- ----- ---------
10.00 to < 100% 8 174 13 195 1 109 6 116 59.05
------------------ ------ ----- ----- ----- ----- ----- ----- ----- ---------
100% (default) - - 250 250 - - 242 242 96.71
------------------ ------ ----- ----- ----- ----- ----- ----- ----- ---------
Total 3,502 881 277 4,660 46 190 250 486 10.44
------------------ ------ ----- ----- ----- ----- ----- ----- ----- ---------
Consumer banking gross balances and provisions by PD
4 April 2021 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% 913 3 - 916 9 - - 9 1.01
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ---------
0.15 to < 0.25% 361 21 - 382 4 1 - 5 1.30
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ---------
0.25 to < 0.50% 614 79 - 693 6 6 - 12 1.73
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ---------
0.50 to < 0.75% 303 84 - 387 4 6 - 10 2.66
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ---------
0.75 to < 2.50% 682 297 1 980 13 31 - 44 4.53
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ---------
2.50 to < 10.00% 261 302 3 566 11 54 - 65 11.54
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ---------
10.00 to < 100% 7 204 12 223 1 110 5 116 51.57
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ---------
100% (default) - - 257 257 - - 241 241 93.57
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ---------
Total 3,141 990 273 4,404 48 208 246 502 11.39
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ---------
The credit quality of the consumer banking portfolio has remained strong with 90% of the portfolio (4 April 2021: 89%) considered good quality, with a PD of less than 10%.
Credit risk - Consumer banking (continued)
Consumer banking balances by payment due status
Credit risk in the consumer banking portfolios is primarily monitored and reported based on arrears status which is set out below.
Consumer banking gross balances by payment due status
30 September 2021 4 April 2021
----------------------------------------- -----------------------------------------
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 181 2,737 1,400 4,318 92.7 189 2,616 1,259 4,064 92.3
------------------------ --------- -------- ------ ------ ---- --------- -------- ------ ------ ----
Past due 0 to 1 month 11 33 14 58 1.2 9 34 11 54 1.2
------------------------ --------- -------- ------ ------ ---- --------- -------- ------ ------ ----
Past due 1 to 3 months 4 11 9 24 0.5 3 10 8 21 0.5
------------------------ --------- -------- ------ ------ ---- --------- -------- ------ ------ ----
Past due 3 to 6 months 4 15 6 25 0.5 3 16 7 26 0.6
------------------------ --------- -------- ------ ------ ---- --------- -------- ------ ------ ----
Past due 6 to 12 months 2 9 1 12 0.3 2 11 2 15 0.3
------------------------ --------- -------- ------ ------ ---- --------- -------- ------ ------ ----
Past due over 12 months 3 10 - 13 0.3 3 12 - 15 0.3
------------------------ --------- -------- ------ ------ ---- --------- -------- ------ ------ ----
Charged off (note i) 24 102 84 210 4.5 24 98 87 209 4.8
------------------------ --------- -------- ------ ------ ---- --------- -------- ------ ------ ----
Total 229 2,917 1,514 4,660 100 233 2,797 1,374 4,404 100
------------------------ --------- -------- ------ ------ ---- --------- -------- ------ ------ ----
Note:
i. Charged off balances relate to accounts which are closed to future transactions and are held on the balance sheet for an extended period (up to 36 months, depending on the product) whilst recovery procedures take place .
Total balances subject to arrears, excluding charged off balances, have remained stable at GBP132 million (4 April 2021: GBP131 million), representing 3.0% (4 April 2021: 3.1%) of the total balance excluding charged off balances. The arrears performance has benefited from Covid-19 government support schemes and payment deferrals, as well as reduced spending on current account and credit cards through the pandemic, although spending on credit cards and demand for personal loans have increased during the reporting period.
Forbearance
Nationwide is committed to supporting customers facing financial difficulty, including those impacted by Covid-19, by working with them to find a solution through proactive arrears management and forbearance.
The Group applies the European Banking Authority definition of forbearance. The Annual Report and Accounts 2021 sets out further details of concession events included in forbearance.
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 where full repayment of principal and interest is no longer anticipated.
Credit risk - Consumer banking (continued)
Gross balances subject to forbearance (note i)
30 September 2021 4 April 2021
---------------------------------- ----------------------------------
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 5 - 1 6 7 - 1 8
---------------------------------- --------- -------- ------ ----- --------- -------- ------ -----
Interest suppressed payment
concession 6 39 12 57 6 42 13 61
---------------------------------- --------- -------- ------ ----- --------- -------- ------ -----
Balance re-aged/re-written - 1 2 3 - 1 2 3
---------------------------------- --------- -------- ------ ----- --------- -------- ------ -----
Total forbearance 11 40 15 66 13 43 16 72
---------------------------------- --------- -------- ------ ----- --------- -------- ------ -----
Of which stage 2 4 2 4 10 5 2 4 11
---------------------------------- --------- -------- ------ ----- --------- -------- ------ -----
Of which stage 3 7 37 11 55 7 41 12 60
---------------------------------- --------- -------- ------ ----- --------- -------- ------ -----
Impairment provisions on forborne
loans 7 34 15 56 8 31 11 50
---------------------------------- --------- -------- ------ ----- --------- -------- ------ -----
Note:
i. Where more than one concession event has occurred, balances are reported under the latest event.
Over the period, total balances subject to forbearance have reduced to GBP66 million (4 April 2021: GBP72 million), with forborne balances as a percentage of the total consumer lending improving to 1.4% (4 April 2021: 1.6%).
Credit risk - Commercial
Summary
The commercial portfolio comprises loans which have been provided to meet the funding requirements of registered social landlords, commercial real estate investors and project finance initiatives. The commercial real estate and project finance portfolios are closed to new business and remain in managed run-off. The credit quality of the portfolio remains stable.
Commercial gross balances
30 September 4 April 2021
2021
------------
GBPm GBPm
--------------------------------------- ------------ ------------
Registered social landlords (note i) 4,588 4,828
--------------------------------------- ------------ ------------
Commercial real estate (CRE) 686 769
--------------------------------------- ------------ ------------
Project finance (note ii) 637 670
--------------------------------------- ------------ ------------
Commercial balances at amortised cost 5,911 6,267
--------------------------------------- ------------ ------------
Fair value adjustment for micro hedged
risk (note iii) 593 653
--------------------------------------- ------------ ------------
Commercial balances - FVTPL 52 52
--------------------------------------- ------------ ------------
Total 6,556 6,972
--------------------------------------- ------------ ------------
Notes:
i. Loans to registered social landlords are secured on residential property.
ii. Loans advanced in relation to project finance are secured on cash flows from government or local authority backed contracts under the Private Finance Initiative.
iii. Micro hedged risk relates to loans hedged on an individual basis.
Over the period, total balances across the commercial portfolios continued to reduce. In the registered social landlords portfolio, loan amortisation and repayments exceeded drawdowns on new lending to this sector. Commercial real estate and project finance portfolios are closed to new business and are in run off. The balance reduction is driven by amortisation and redemptions.
Impairment (reversals)/losses and write-offs for the period
Half year Half year
to to
30 September 30 September
2021 2020
-------------
GBPm GBPm
------------------------------------ ------------- -------------
Total impairment (reversals)/losses (8) 2
------------------------------------ ------------- -------------
Gross write-offs - 2
------------------------------------ ------------- -------------
The reduction in impairment is driven by improvements to the collateral value or anticipated cash flows for a small number of individually assessed exposures.
Credit risk - Commercial (continued)
The table below 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. Details of stages and the approach to the allocation of loans to stages are included in the Annual Report and Accounts 2021.
Commercial product and staging analysis
30 September 2021 4 April 2021
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 4,542 46 - 4,588 4,782 46 - 4,828
------------------------------- ----- ----- ----- ----- ----- ----- ----- -----
CRE 494 105 87 686 574 120 75 769
------------------------------- ----- ----- ----- ----- ----- ----- ----- -----
Project finance 577 53 7 637 595 53 22 670
------------------------------- ----- ----- ----- ----- ----- ----- ----- -----
Total 5,613 204 94 5,911 5,951 219 97 6,267
------------------------------- ----- ----- ----- ----- ----- ----- ----- -----
Provisions
------------------------------- ----- ----- ----- ----- ----- ----- ----- -----
Registered social landlords -- -- 1- -1
------------------------------- ----- ---- ----- ---- ----- ---- ----- ----
CRE 11 17 19 12 23 26
------------------------------- ----- ---- ----- ----- ----- ---- ----- -----
Project finance -2 46 -2 46
------------------------------- ----- ---- ----- ---- ----- ---- ----- ----
Total 13 21 25 24 27 33
------------------------------- ----- ---- ----- ----- ----- ---- ----- ----- Provisions as a % of %% %% %% %% total balance ------------------------------- ----- ---- ----- ---- ----- ---- ----- ---- Registered social landlords 0.01 0.08 - 0.01 0.01 0.13 - 0.01 ------------------------------- ----- ----- ----- ----- ----- ----- ----- ----- CRE 0.16 1.03 19.61 2.76 0.19 1.89 29.81 3.34 ------------------------------- ----- ----- ----- ----- ----- ----- ----- ----- Project finance 0.02 3.06 61.45 0.90 0.02 2.97 21.86 0.97 ------------------------------- ----- ----- ----- ----- ----- ----- ----- ----- Total 0.03 1.34 22.50 0.43 0.03 1.78 28.01 0.52 ------------------------------- ----- ----- ----- ----- ----- ----- ----- -----
Over the period, the performance of the commercial portfolio has remained stable, with 95% (4 April 2021: 95%) of balances remaining in stage 1. Of the GBP204 million (4 April 2021: GBP219 million) stage 2 loans, which represent 3.5% (4 April 2021: 3.5%) of total balances, GBP0.5 million (4 April 2021: GBP6 million) were in arrears by 30 days or more, with the remainder in stage 2 due to a deterioration in risk profile.
A number of loans have been impacted by disruption to rental income as a result of Covid-19; some of this disruption was considered temporary in nature and short-term concessions were applied. A small number of loans which are considered to have been adversely impacted in the longer term have contributed to an increase in stage 3 (credit impaired) CRE loans to GBP87 million (4 April 2021: GBP75 million), equating to 13% (4 April 2021: 10%) of the total CRE exposure. The increase in provision associated with this increase in stage 3 balances has been more than offset by a decrease in provision in respect of a single exposure, resulting from an updated valuation of collateral where a sale is anticipated. Overall, the CRE Stage 3 provisions reduced to GBP17 million (April 2021 GBP23 million).
Within the registered social landlord portfolio, there are no stage 3 assets, and only 1% (4 April 2021: 1%) of the portfolio is in stage 2.
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. 99% of these balances are in respect of fully developed assets. During the period, the project finance stage 3 balances have reduced to GBP7 million (4 April 2021: GBP22 million) following debt restructure of a single case.
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 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
30 September 2021 4 April 2021
------------- ------------------------------------- -------------------------------------
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 296 9 - 305 0.1 343 4 - 347 0.1
------------- ----- ----- ----- ----- --------- ----- ----- ----- ----- ---------
Good 156 28 - 184 0.2 192 37 - 229 0.2
------------- ----- ----- ----- ----- --------- ----- ----- ----- ----- ---------
Satisfactory 42 38 - 80 0.8 39 24 - 63 1.4
------------- ----- ----- ----- ----- --------- ----- ----- ----- ----- ---------
Weak - 30 1 31 2.7 - 55 - 55 3.1
------------- ----- ----- ----- ----- --------- ----- ----- ----- ----- ---------
Impaired - - 86 86 19.8 - - 75 75 31.1
------------- ----- ----- ----- ----- --------- ----- ----- ----- ----- ---------
Total 494 105 87 686 2.8 574 120 75 769 3.3
------------- ----- ----- ----- ----- --------- ----- ----- ----- ----- ---------
The risk grades in the table above are based on the IRB supervisory slotting approach for specialised lending exposures, under which exposures are classified into categories according to the underlying credit risk, with the assessment determined by financial strength, asset characteristics, strength of the sponsor and the security. The credit quality of the CRE portfolio has remained stable with 83% (4 April 2021: 83%) of the portfolio rated as satisfactory or better.
Risk grades for the project finance portfolio are also based upon the supervisory slotting approach for specialised lending, with 92% of the exposure rated strong or good.
The registered social landlord portfolio is risk rated using an internal PD rating model with the major drivers being financial strength, evaluations of the borrower's oversight and management, and their type and size. The distribution of exposures is weighted towards the stronger risk ratings and against a backdrop of zero defaults in the portfolio, the credit quality remains high, with an average 12-month PD of 0.04% across the portfolio.
In addition to the above, GBP52 million (4 April 2021: GBP52 million) of commercial lending balances are classified as FVTPL.
CRE balances by LTV and region
The regional distribution of the portfolio remains unchanged with 55% (4 April 2021: 55%) of the CRE exposure being secured against assets located in London. The LTV distribution of CRE balances has remained stable with 87% (4 April 2021: 87%) of the portfolio having an LTV of 75% or less, and 55% (4 April 2021: 57%) of the portfolio having an LTV of 50% or less.
Credit risk concentration by industry sector
Credit risk exposure by industry sector is broadly unchanged from the year end, continuing 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 CRE exposures, excluding FVTPL balances, the largest exposure is to the residential sector, which represents 42% (4 April 2021: 43%) of the total CRE portfolio balance. The exposure to retail assets has reduced to GBP146 million (4 April 2021: GBP166 million), with a weighted average LTV of 57% (4 April 2021: 63%). Exposure to the leisure and hotel sector has remained stable at GBP66 million (4 April 2021: GBP66 million), with a weighted average LTV of 50% (4 April 2021: 55%).
Credit risk - Commercial (continued)
In addition to the CRE amortised cost balances, there are GBP49 million (4 April 2021: GBP49 million) of FVTPL CRE commercial lending balances, of which GBP36 million (4 April 2021: GBP36 million) relates to the office sector and GBP13 million (4 April 2021: GBP13 million) relates to the retail sector.
CRE balances by payment due status
Of the GBP735 million (4 April 2021: GBP818 million) CRE exposure, including FVTPL balances, GBP66 million (4 April 2021: GBP61 million) relates to balances with arrears. Of these, GBP57 million (4 April 2021: GBP32 million) have arrears greater than 3 months. The increase in arrears balances is driven principally by a small number of loans that are being actively managed.
Forbearance
Nationwide is committed to supporting borrowers facing financial difficulty by working with them to find a solution through proactive arrears management and forbearance.
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. The Annual Report and Accounts 2021 sets out further details of concession events included within forbearance.
Gross balances subject to forbearance (note i)
30 September 4 April 2021
2021
------------ ------------
GBPm GBPm
--------------------------------------- ------------ ------------
Refinance 8 8
--------------------------------------- ------------ ------------
Modifications:
--------------------------------------- ------------ ------------
Payment concession 142 100
--------------------------------------- ------------ ------------
Security amendment 10 6
--------------------------------------- ------------ ------------
Extension at maturity 19 7
--------------------------------------- ------------ ------------
Breach of covenant 49 123
--------------------------------------- ------------ ------------
Total 228 244
--------------------------------------- ------------ ------------ Total impairment provision on forborne loans 23 29 --------------------------------------- ------------ ------------
Note:
i. Loans where more than one concession event has occurred are reported under the latest event.
Nationwide continues to support commercial borrowers where income has been disrupted through the impacts of Covid-19.
Commercial balances subject to Covid-19 temporary concessions have reduced to GBP24 million (4 April 2021: GBP179 million), with exposures subject to forbearance included in the above table. The reduction is driven by borrowers returning to agreed repayment schedules and no further specific Covid-19 related maturity extensions being granted.
Total forborne balances have remained broadly stable, with migration between modification type.
The decrease in the total impairment provision on forborne loans to GBP23 million (4 April 2021: GBP29 million) reflects an improved asset valuation for an impaired loan, prior to anticipated sale.
In addition to the amortised cost balances included in the table above, there are GBP52 million (4 April 2021: GBP52 million) of FVTPL commercial lending balances, GBP36 million (4 April 2021: GBPnil) of which are forborne.
Credit risk - Treasury assets
Summary
The treasury portfolio is held primarily for liquidity management and, in the case of derivatives, for market risk management. At 30 September 2021 treasury assets represented 27.3% (4 April 2021: 19.5%) of total assets. There are no exposures to emerging markets, hedge funds or credit default swaps. The table below shows the classification of treasury asset balances.
Treasury asset balances
30 September 4 April 2021
2021
--------------- ------------ ------------
Classification GBPm GBPm
----------------------------------- --------------- ------------ ------------
Amortised
Cash cost 46,498 16,693
----------------------------------- --------------- ------------ ------------
Loans and advances to banks Amortised
and similar institutions cost 3,275 3,660
----------------------------------- --------------- ------------ ------------
Investment securities (note
i) FVOCI 22,933 24,218
----------------------------------- --------------- ------------ ------------
Investment securities (note
i) FVTPL 37 12
----------------------------------- --------------- ------------ ------------
Amortised
Investment securities cost 913 1,243
----------------------------------- --------------- ------------ ------------
Liquidity and investment portfolio 73,656 45,826
---------------------------------------------------- ------------ ------------
Derivative instruments (note
ii) FVTPL 4,111 3,809
----------------------------------- --------------- ------------ ------------
Treasury assets 77,767 49,635
---------------------------------------------------- ------------ ------------
Notes :
i. Investment securities at FVOCI include GBP56 million (4 April 2021: GBP20 million) and investment securities at FVTPL include GBP37 million (4 April 2021: GBP12 million) relating to investments not included within the Group's liquidity portfolio. These investments primarily relate to investments made in Fintech companies which are being held for long-term strategic purposes.
ii. Derivatives are classified as assets where their fair value is positive and liabilities where their fair value is negative. At 30 September 2021, derivative liabilities were GBP1,338 million (4 April 2021: GBP1,622 million).
Investment activity remains focused on high quality liquid assets, including assets eligible for central bank operations. Cash held in the treasury portfolio has increased to GBP46.5 billion (4 April 2021: GBP16.7 billion). The GBP29.8 billion increase was driven by growth in member deposit and current account balances, higher levels of short-term funding, drawdown of funds from the Bank of England's TFSME, and increased repurchase agreement balances to manage the composition of the liquidity portfolio. Derivatives are used to economically hedge financial risks inherent in core lending and funding activities and are not used for trading or speculative purposes.
Managing treasury credit risks
Credit risk within the treasury portfolio is managed and controlled by the Treasury Credit Risk function in accordance with Nationwide's risk governance frameworks, details of which are provided in the Annual Report and Accounts 2021. No changes in policy or risk appetite have been made or are proposed as a result of Covid-19.
A monthly review is undertaken of the current and expected future performance of treasury assets that determines expected credit loss (ECL) provision requirements. There were no impairment losses for the period ended 30 September 2021 (H1 2020/21: GBPnil). For financial assets held at amortised cost or at FVOCI, all exposures within the table below continue to be classified as stage 1, reflecting the strong and stable credit quality of treasury assets.
Impairment provisions on treasury assets
30 September 2021 4 April 2021
-------------------------- --------------------------
Gross balances Provisions Gross balances Provisions
-------------- -------------- ----------
GBPm GBPm GBPm GBPm
---------------------------------- -------------- ---------- -------------- ----------
Loans and advances to banks
and similar institutions 3,275 - 3,660 -
---------------------------------- -------------- ---------- -------------- ----------
Investment securities - FVOCI 22,933 - 24,218 -
---------------------------------- -------------- ---------- -------------- ----------
Investment securities - amortised
cost 913 - 1,243 -
---------------------------------- -------------- ---------- -------------- ----------
Credit risk - Treasury assets (continued)
Liquidity and investment portfolio
The liquidity and investment portfolio of GBP73,656 million (4 April 2021: GBP45,826 million) comprises liquid assets and other securities. An analysis of the on-balance sheet portfolios is set out below.
Liquidity and investment portfolio by credit rating (note i)
30 September 2021 AAA AA A Other UK US Europe Japan Other
------ --- --- ----- --- ------ ----- -----
GBPm % % % % % % % % %
-------------------------------- ------ --- --- ----- --- ------ ----- -----
Liquid assets:
-------------------------------- ------ --- --- ----- --- ------ ----- -----
Cash and reserves at central
banks 46,498 - 100 -- 100- -- -
-------------------------------- ------ --- --- ---- --- ------ ---- -----
Government bonds (note ii) 18,443 27 58 15- 34 20 25 13 8
-------------------------------- ------ --- --- ---- --- ------ ----- -----
Supranational bonds 1,213 70 30 -- -- -- 100
-------------------------------- ------ --- --- ---- --- ------ ---- -----
Covered bonds 1,960 991 -- 53- 26- 21
-------------------------------- ------ --- ---- --- ------ ---- -----
Residential mortgage backed
securities (RMBS) 524 100- -- 77- 23- -
-------------------------------- ------ --- ---- --- ------ ---- -----
Asset backed securities (other) 302 100- -- 84- 16- -
-------------------------------- ------ --- ---- --- ------ ---- -----
Liquid assets total 68,940 13 83 4- 795 84 4
-------------------------------- ------ --- --- ---- --- ------ ---- -----
Other securities (note iii):
-------------------------------- ------ --- --- ----- --- ------ ----- -----
RMBS FVOCI 418 100- -- 100- -- -
-------------------------------- ------ --- ---- --- ------ ---- -----
RMBS amortised cost 913 82 14 4- 100- -- -
-------------------------------- ------ --- --- ---- --- ------ ---- -----
Other investments (note iv) 110 - 15 - 85 85- 15- -
-------------------------------- ------ --- --- ----- --- ------ ---- -----
Other securities total 1,441 81 10 36 99- 1- -
-------------------------------- ------ --- --- ---- --- ------ ---- -----
Loans and advances to banks and similar institutions 3,275 - 66 259 903 6- 1 -------------------------------- ------ --- --- ---- --- ------ ---- ----- Total 73,656 13 81 51 805 83 4 -------------------------------- ------ --- --- ---- --- ------ ---- ----- 4 April 2021 GBPm %% %% %% %% % -------------------------------- ------ --- ---- --- ------ ---- ----- Liquid assets: -------------------------------- ------ --- --- ----- --- ------ ----- ----- Cash and reserves at central banks 16,693 - 100 -- 100- -- - -------------------------------- ------ --- --- ---- --- ------ ---- ----- Government bonds (note ii) 20,310 28 60 12- 39 18 26 10 7 -------------------------------- ------ --- --- ---- --- ------ ----- ----- Supranational bonds 1,053 75 25 -- -- -- 100 -------------------------------- ------ --- --- ---- --- ------ ---- ----- Covered bonds 1,748 100- -- 62- 25- 13 -------------------------------- ------ --- ---- --- ------ ---- ----- Residential mortgage backed securities (RMBS) 474 100- -- 72- 28- - -------------------------------- ------ --- ---- --- ------ ---- ----- Asset backed securities (other) 301 100- -- 75- 25- - -------------------------------- ------ --- ---- --- ------ ---- ----- Liquid assets total 40,579 22 72 6- 659 145 7 -------------------------------- ------ --- --- ---- --- ------ ---- ----- Other securities (note iii): -------------------------------- ------ --- --- ----- --- ------ ----- ----- RMBS FVOCI 291 100- -- 100- -- - -------------------------------- ------ --- ---- --- ------ ---- ----- RMBS amortised cost 1,243 83 14 3- 100- -- - -------------------------------- ------ --- --- ---- --- ------ ---- ----- Other investments (note iv) 53 - 38 - 62 62- 38- - -------------------------------- ------ --- --- ----- --- ------ ---- ----- Other securities total 1,587 83 12 32 99- 1- - -------------------------------- ------ --- --- ---- --- ------ ---- ----- Loans and advances to banks and similar institutions 3,660 - 65 341 892 8- 1 -------------------------------- ------ --- --- ---- --- ------ ---- ----- Total 45,826 22 70 8- 688 135 6 -------------------------------- ------ --- --- ---- --- ------ ---- -----
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 related entities and agency bonds.
iii. Includes RMBS (UK buy to let and UK non-conforming) not eligible for the Liquidity Coverage Ratio (LCR).
iv. Includes investment securities held at FVTPL of GBP37 million (4 April 2021: GBP12 million).
Credit risk - Treasury assets (continued)
Country exposures
This table summarises the exposure (shown at the balance sheet carrying value) to institutions outside the UK.
Country exposures
30 September Loans and
2021 Government Mortgage Covered Supranational advances Other
bonds backed bonds bonds to banks and assets Total
securities similar
institutions
-------------- --------- -------------- -------------- -------- ------------------
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------- ------------ -------------- --------- -------------- -------------- -------- ------------------
Austria 420 - - - - - 420
--------------- ------------ -------------- --------- -------------- -------------- -------- ------------------
Belgium 530 - - - - - 530
--------------- ------------ -------------- --------- -------------- -------------- -------- ------------------
Finland 580 - 24 - - - 604
--------------- ------------ -------------- --------- -------------- -------------- -------- ------------------
France 1,611 - 154 - 53 17 1,835
--------------- ------------ -------------- --------- -------------- -------------- -------- ------------------
Germany 739 - 44 - 137 50 970
--------------- ------------ -------------- --------- -------------- -------------- -------- ------------------
Ireland 85 - - - - - 85
--------------- ------------ -------------- --------- -------------- -------------- -------- ------------------
Netherlands 476 123 - - - - 599
--------------- ------------ -------------- --------- -------------- -------------- -------- ------------------
- - - - - - - -
--------------- ------------ -------------- --------- -------------- -------------- -------- ------------------
Total Eurozone 4,441 123 222 - 190 67 5,043
--------------- ------------ -------------- --------- -------------- -------------- -------- ------------------
USA 3,720 - - - 114 - 3,834
--------------- ------------ -------------- --------- -------------- -------------- -------- ------------------
Japan 2,473 - - - - - 2,473
--------------- ------------ -------------- --------- -------------- -------------- -------- ------------------
Rest of world
(note i) 1,517 - 709 1,213 32 - 3,471
--------------- ------------ -------------- --------- -------------- -------------- -------- ------------------
Total 12,151 123 931 1,213 336 67 14,821
4 April 2021 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------- ------------ -------------- --------- -------------- -------------- -------- ------------------
Austria 545 - - - - - 545
--------------- ------------ -------------- --------- -------------- -------------- -------- ------------------
Belgium 645 - - - - - 645
--------------- ------------ -------------- --------- -------------- -------------- -------- ------------------
Finland 606 - 24 - - - 630
--------------- ------------ -------------- --------- -------------- -------------- -------- ------------------
France 1,505 - 108 - 147 20 1,780
--------------- ------------ -------------- --------- -------------- -------------- -------- ------------------
Germany 1,069 - 44 - 151 76 1,340
--------------- ------------ -------------- --------- -------------- -------------- -------- ------------------
Ireland 154 - - - - 154
--------------- ------------ -------------- --------- -------------- -------------- -------- ------------------
Netherlands 503 133 - - - - 636
--------------- ------------ -------------- --------- -------------- -------------- -------- ------------------
Spain - - - - - - -
--------------- ------------ -------------- --------- -------------- -------------- -------- ------------------
Total Eurozone 5,027 133 176 - 298 96 5,730 --------------- ------------ -------------- --------- -------------- -------------- -------- ------------------ USA 3,722 - - - 80 - 3,802 --------------- ------------ -------------- --------- -------------- -------------- -------- ------------------ Japan 2,116 - - - - - 2,116 --------------- ------------ -------------- --------- -------------- -------------- -------- ------------------ Rest of world (note i) 1,510 - 494 1,053 28 - 3,085 --------------- ------------ -------------- --------- -------------- -------------- -------- ------------------ Total 12,375 133 670 1,053 406 96 14,733 --------------- ------------ -------------- --------- -------------- -------------- -------- ------------------
Note:
i. Rest of world exposure is to Australia, Canada, Denmark, Norway and Sweden.
Credit risk - Treasury assets (continued)
Derivative financial instruments
Derivatives are used to manage exposure to market risks, and not for trading or speculative purposes, although the application of accounting rules can create volatility in the income statement in a given financial period. The fair value of derivative assets at 30 September 2021 was GBP4.1 billion (4 April 2021: GBP3.8 billion) and the fair value of derivative liabilities was GBP1.3 billion (4 April 2021: GBP1.6 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. Market standard CSA collateral allows GBP, EUR and USD cash, and in some cases, extends to high grade sovereign debt securities; both cash and securities are currently held as collateral by the Society.
Nationwide's CSA legal documentation for derivatives grants legal rights of set-off for transactions with the same counterparty. Accordingly, the credit risk associated with such positions is reduced to the extent that negative mark to market values offset positive mark to market values in the calculation of credit risk within each netting agreement.
Under the terms of CSA netting agreements, outstanding transactions with the same counterparty can be offset and settled on a net basis following a default, or another predetermined event. Under these arrangements, netting benefits of GBP1.2 billion (4 April 2021: GBP1.4 billion) were available and GBP2.8 billion of collateral (4 April 2021: GBP2.4 billion) was held.
This table shows the exposure to counterparty credit risk for derivative contracts after netting benefits and collateral.
Derivative credit exposure
30 September 2021 4 April 2021
--------------------------------------- -----------------------------
AA A BBB Total AA A BBB Total
------- ---- ------- ----- ------- ---- -------
Counterparty credit quality GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------------- ----- ------- ---- ------- ----- ------- ---- -------
Gross positive fair value of contracts
as reported on the balance sheet 712 3,386 13 4,111 742 3,052 15 3,809
--------------------------------------- ----- ------- ---- ------- ----- ------- ---- -------
Netting benefits (207) (1,021) (4) (1,232) (249) (1,187) (4) (1,440)
--------------------------------------- ----- ------- ---- ------- ----- ------- ---- -------
Net current credit exposure 505 2,365 9 2,879 493 1,865 11 2,369
--------------------------------------- ----- ------- ---- ------- ----- ------- ---- -------
Collateral (cash) (486) (2,225) (9) (2,720) (489) (1,775) (11) (2,275)
--------------------------------------- ----- ------- ---- ------- ----- ------- ---- -------
Collateral (securities) - (88) - (88) - (84) - (84)
--------------------------------------- ----- ------- ---- ------- ----- ------- ---- -------
Net derivative credit exposure 19 52 - 71 4 6 - 10
--------------------------------------- ----- ------- ---- ------- ----- ------- ---- -------
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. Further details on how Nationwide manages liquidity and funding risks are included within the Annual Report and Accounts 2021.
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 173% for the 12 months ending 30 September 2021 ( 12 months average ending 4 April 2021: 159%). Liquidity continues to be managed against internal risk appetite, which is more prudent than regulatory requirements.
The position against the longer-term funding metric, the Net Stable Funding Ratio (NSFR) is also monitored. Based on current interpretations of future regulatory requirements and guidance, Nationwide's average NSFR for the four quarters ending 30 September 2021 was 143% (four quarters ending 4 April 2021: 137%).
Funding risk
Funding strategy
Nationwide's funding strategy is to remain predominantly retail funded, as set out below.
Funding profile
Assets (note i) 30 September 4 April 2021 Liabilities 30 September 4 April 2021
2021 2021
------------ ------------ ------------ ------------
GBPbn GBPbn GBPbn GBPbn
--------------------------- ------------ ------------ -------------------------- ------------ ------------
Retail mortgages 194.0 190.7 Retail funding 177.4 170.3
--------------------------- ------------ ------------ -------------------------- ------------ ------------
Treasury assets (including
liquidity portfolio) 73.7 45.8 Wholesale funding 82.3 59.5
--------------------------- ------------ ------------ -------------------------- ------------ ------------
Commercial lending 6.5 6.9 Other liabilities 2.9 3.2
--------------------------- ------------ ------------ -------------------------- ------------ ------------
Capital and reserves (note
Consumer lending 4.2 3.9 ii) 22.8 21.9
--------------------------- ------------ ------------ -------------------------- ------------ ------------
Other assets 7.0 7.6
--------------------------- ------------ ------------ -------------------------- ------------ ------------
Total 285.4 254.9 Total 285.4 254.9
--------------------------- ------------ ------------ -------------------------- ------------ ------------
Notes:
i. Figures in the table are stated net of impairment provisions where applicable.
ii. Includes all subordinated liabilities and subscribed capital.
At 30 September 2021 Nationwide's loan to deposit ratio, which represents loans and advances to customers divided by the total of shares and other deposits, was 110.5% (4 April 2021: 115.3%).
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 increased by GBP22.8 billion to GBP82.3 billion during the period. The increase is primarily driven by increased short-dated wholesale funding, additional drawings from the Term Funding Scheme with additional incentives for SMEs (TFSME) and increased repo activity. The wholesale funding ratio (on-balance sheet wholesale funding as a proportion of total funding liabilities) was 31.7% at 30 September 2021 (4 April 2021: 26.7%).
The table below sets out Nationwide's wholesale funding by currency.
Wholesale funding by currency
30 September 2021 4 April 2021
----------------------------------------- -----------------------------------------
GBP EUR USD Other Total % of GBP EUR USD Other Total % of
total total
----- ------ ----- ----- ----- ----- ----- ------
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
-------------------------------- ----- ----- ----- ----- ----- ------ ----- ----- ----- ----- ----- ------
Repos 4.5 3.0 3.9 0.5 11.9 15 4.2 0.8 2.9 0.2 8.1 14
-------------------------------- ----- ----- ----- ----- ----- ------ ----- ----- ----- ----- ----- ------
Deposits 10.0 0.6 - - 10.6 13 6.4 0.6 - - 7.0 12
-------------------------------- ----- ----- ----- ----- ----- ------ ----- ----- ----- ----- ----- ------
Certificates of deposit 2.4 - 1.0 - 3.4 4 0.1 - - - 0.1 -
-------------------------------- ----- ----- ----- ----- ----- ------ ----- ----- ----- ----- ----- ------
Commercial paper - - 6.8 - 6.8 8 - - - - - -
-------------------------------- ----- ----- ----- ----- ----- ------ ----- ----- ----- ----- ----- ------
Covered bonds 5.5 9.0 0.7 0.4 15.6 19 5.4 8.5 0.7 0.4 15.0 25
-------------------------------- ----- ----- ----- ----- ----- ------ ----- ----- ----- ----- ----- ------
Medium term notes 1.8 3.9 3.0 0.6 9.3 11 2.0 3.2 3.4 0.6 9.2 15
-------------------------------- ----- ----- ----- ----- ----- ------ ----- ----- ----- ----- ----- ------
Securitisations 2.0 - 0.4 - 2.4 3 2.0 0.5 0.4 - 2.9 5
-------------------------------- ----- ----- ----- ----- ----- ------ ----- ----- ----- ----- ----- ------
Term Funding Scheme with
additional
incentives for SMEs (TFSME) 21.7 - - - 21.7 26 16.4 - - - 16.4 28
-------------------------------- ----- ----- ----- ----- ----- ------ ----- ----- ----- ----- ----- ------
Other 0.1 0.4 0.1 - 0.6 1 0.2 0.5 0.1 - 0.8 1
-------------------------------- ----- ----- ----- ----- ----- ------ ----- ----- ----- ----- ----- ------
Total 48.0 16.9 15.9 1.5 82.3 100 36.7 14.1 7.5 1.2 59.5 100
-------------------------------- ----- ----- ----- ----- ----- ------ ----- ----- ----- ----- ----- ------
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
30 September 2021 Not more Over one Over three Over six Subtotal Over one Over two Total
than one month months months less than year but years
month but not but not but not one year not more
more than more than more than than
three six months one year two years
months
--------- ---------- ----------- ---------- ---------- ---------- -------- -----
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
------------------------ --------- ---------- ----------- ---------- ---------- ---------- -------- -----
Repos 11.8 0.1 - - 11.9 - - 11.9
------------------------ --------- ---------- ----------- ---------- ---------- ---------- -------- -----
Deposits 7.4 1.0 2.1 0.1 10.6 - - 10.6
------------------------ --------- ---------- ----------- ---------- ---------- ---------- -------- -----
Certificates of deposit 3.4 - - - 3.4 - - 3.4
------------------------ --------- ---------- ----------- ---------- ---------- ---------- -------- -----
Commercial paper 6.7 0.1 - - 6.8 - - 6.8
------------------------ --------- ---------- ----------- ---------- ---------- ---------- -------- -----
Covered bonds 0.8 - 1.8 0.9 3.5 2.5 9.6 15.6
------------------------ --------- ---------- ----------- ---------- ---------- ---------- -------- -----
Medium term notes - - - 0.9 0.9 1.9 6.5 9.3
------------------------ --------- ---------- ----------- ---------- ---------- ---------- -------- -----
Securitisations 0.1 - - 0.6 0.7 1.5 0.2 2.4
------------------------ --------- ---------- ----------- ---------- ---------- ---------- -------- -----
TFSME - - - - - - 21.7 21.7
------------------------ --------- ---------- ----------- ---------- ---------- ---------- -------- -----
Other - - - - - - 0.6 0.6
------------------------ --------- ---------- ----------- ---------- ---------- ---------- -------- -----
Total 30.2 1.2 3.9 2.5 37.8 5.9 38.6 82.3
------------------------ --------- ---------- ----------- ---------- ---------- ---------- -------- -----
Of which secured 12.7 0.1 1.8 1.5 16.1 4.0 32.0 52.1
------------------------ --------- ---------- ----------- ---------- ---------- ---------- -------- -----
Of which unsecured 17.5 1.1 2.1 1.0 21.7 1.9 6.6 30.2
------------------------ --------- ---------- ----------- ---------- ---------- ---------- -------- -----
% of total 36.7 1.5 4.7 3.0 45.9 7.2 46.9 100.0
------------------------ --------- ---------- ----------- ---------- ---------- ---------- -------- -----
Wholesale funding - residual maturity
4 April 2021 Not more Over one Over three Over six Subtotal Over one Over two Total
than one month months months less than year but years
month but not but not but not one year not more
more than more than more than than
three six months one year two years
months
--------- ---------- ----------- ---------- ---------- ---------- -------- -----
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
------------------------ --------- ---------- ----------- ---------- ---------- ---------- -------- -----
Repos 7.9 0.2 - - 8.1 - - 8.1
------------------------ --------- ---------- ----------- ---------- ---------- ---------- -------- -----
Deposits 4.6 0.7 1.6 0.1 7.0 - - 7.0
------------------------ --------- ---------- ----------- ---------- ---------- ---------- -------- -----
Certificates of deposit 0.1 - - - 0.1 - - 0.1
------------------------ --------- ---------- ----------- ---------- ---------- ---------- -------- -----
Commercial paper - - - - - - - -
------------------------ --------- ---------- ----------- ---------- ---------- ---------- -------- -----
Covered bonds - - - 2.5 2.5 2.6 9.9 15.0
------------------------ --------- ---------- ----------- ---------- ---------- ---------- -------- -----
Medium term notes 0.2 - 0.6 - 0.8 2.0 6.4 9.2
------------------------ --------- ---------- ----------- ---------- ---------- ---------- -------- ----- Securitisations 0.5 - - 0.1 0.6 1.1 1.2 2.9 ------------------------ --------- ---------- ----------- ---------- ---------- ---------- -------- ----- TFSME - - - - - - 16.4 16.4 ------------------------ --------- ---------- ----------- ---------- ---------- ---------- -------- ----- Other - - - 0.1 0.1 0.1 0.6 0.8 ------------------------ --------- ---------- ----------- ---------- ---------- ---------- -------- ----- Total 13.3 0.9 2.2 2.8 19.2 5.8 34.5 59.5 ------------------------ --------- ---------- ----------- ---------- ---------- ---------- -------- ----- Of which secured 8.4 0.2 - 2.7 11.3 3.8 28.0 43.1 ------------------------ --------- ---------- ----------- ---------- ---------- ---------- -------- ----- Of which unsecured 4.9 0.7 2.2 0.1 7.9 2.0 6.5 16.4 ------------------------ --------- ---------- ----------- ---------- ---------- ---------- -------- ----- % of total 22.4 1.5 3.7 4.7 32.3 9.7 58.0 100.0 ------------------------ --------- ---------- ----------- ---------- ---------- ---------- -------- -----
At 30 September 2021, cash, government bonds and supranational bonds included in the liquid asset buffer represented 143% of wholesale funding maturing in less than one year, assuming no rollovers (4 April 2021: 157%).
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 repurchase (repo) agreements, and excludes securities encumbered through repo agreements and for other purposes.
Liquid assets
30 September 2021 4 April 2021
----------------------------------------- -----------------------------------------
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 46.4 0.1 - - - 46.5 16.7 - - - - 16.7
------------------------------ ----- ----- ----- ----- ------ ----- ----- ----- ----- ----- ------ -----
Government bonds (note ii) 1.7 2.2 0.4 1.8 0.7 6.8 4.2 4.5 1.2 2.1 0.7 12.7
------------------------------ ----- ----- ----- ----- ------ ----- ----- ----- ----- ----- ------ -----
Supranational bonds 0.1 0.5 - - - 0.6 - 0.5 0.4 - - 0.9
------------------------------ ----- ----- ----- ----- ------ ----- ----- ----- ----- ----- ------ -----
Covered bonds 0.5 1.4 0.1 - - 2.0 0.5 1.1 0.1 - - 1.7
------------------------------ ----- ----- ----- ----- ------ ----- ----- ----- ----- ----- ------ -----
Residential mortgage backed
securities (RMBS) (note iii) 0.4 0.1 - - - 0.5 0.8 0.1 - - - 0.9
------------------------------ ----- ----- ----- ----- ------ ----- ----- ----- ----- ----- ------ -----
Asset-backed securities and
other securities 0.3 - - - - 0.3 0.3 0.1 - - - 0.4
------------------------------ ----- ----- ----- ----- ------ ----- ----- ----- ----- ----- ------ -----
Total 49.4 4.3 0.5 1.8 0.7 56.7 22.5 6.3 1.7 2.1 0.7 33.3
------------------------------ ----- ----- ----- ----- ------ ----- ----- ----- ----- ----- ------ -----
Notes:
i. Other currencies primarily consist of Canadian dollars.
ii. Balances classified as government bonds include government guaranteed and agency bonds.
iii. Balances include all RMBS held by Nationwide which can be monetised through sale or repo.
Nationwide continues to work towards its investment target for Environmental, Social and Governance (ESG) assets and is currently on track to meet its 2021/22 year-end target of GBP1 billion. Nationwide's criteria for ESG assets are currently restricted to bonds issued by multilateral development banks and green issuances from selected government issuers. Our ESG investment criteria are subject to ongoing review.
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)
30 September Due less Due Due Due Due Due Due Due after
2021 than between between between between between between more
one month one and three six and nine and one and two and than Total
(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 46,498 - - - - - - - 46,498
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Loans and
advances to
banks
and similar
institutions 2,393 - - - - - - 882 3,275
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Investment
securities - 35 79 77 67 653 6,760 16,212 23,883
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Derivative
financial
instruments 319 5 483 144 4 196 1,468 1,492 4,111
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Fair value
adjustment
for
portfolio
hedged risk - 7 9 2 6 - 37 32 93
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Loans and
advances to
customers 2,781 1,585 2,186 2,209 2,118 8,605 23,690 161,540 204,714
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Total
financial
assets 51,991 1,632 2,757 2,432 2,195 9,454 31,955 180,158 282,574
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Financial
liabilities
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Shares 154,554 1,325 2,075 3,838 5,341 6,889 2,400 1,009 177,431
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Deposits from
banks and
similar
institutions 14,634 101 - - - - 21,700 - 36,435
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Of which repo 11,825 91 - - - - - - 11,916
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Of which
TFSME 5 - - - - - 21,700 - 21,705
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Other
deposits 4,571 1,022 2,088 82 39 16 5 - 7,823 ------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ------- Fair value adjustment for portfolio hedged risk - - 1 7 4 6 2 - 20 ------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ------- Secured funding - ABS and covered bonds 915 9 1,834 369 1,241 3,898 4,192 6,031 18,489 ------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ------- Senior unsecured funding 10,070 76 52 798 3 1,941 4,963 1,639 19,542 ------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ------- Derivative financial instruments 30 - 4 28 14 66 325 871 1,338 ------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ------- Subordinated liabilities 32 3 23 - 2 749 3,388 3,513 7,710 ------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ------- Subscribed capital (note iii) 1 1 1 - - - - 229 232 ------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ------- Total financial liabilities 184,807 2,537 6,078 5,122 6,644 13,565 36,975 13,292 269,020 ------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ------- Off-balance sheet commitments (note iv) 13,234 - - - - - - - 13,234 ------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ------- Net liquidity difference (146,050) (905) (3,321) (2,690) (4,449) (4,111) (5,020) 166,866 320 ------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ------- Cumulative liquidity difference (146,050) (146,955) (150,276) (152,966) (157,415) (161,526) (166,546) 320 - ------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Liquidity and funding risk (continued)
Residual maturity (note i)
4 April 2021 Due less Due Due Due Due Due Due Due after
than between between between between between between more
one month one and three six and nine and one and two and than Total
(note three and nine twelve two years five five
ii) months six months months months years years
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Financial
assets
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Cash 16,693 - - - - - - - 16,693
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Loans and
advances to
banks
and similar
institutions 2,815 - - - - - - 845 3,660
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Investment
securities 39 136 197 47 137 938 8,101 15,878 25,473
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Derivative
financial
instruments 119 26 39 62 475 331 1,183 1,574 3,809
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Fair value
adjustment
for
portfolio
hedged risk 4 23 62 59 83 295 322 98 946
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Loans and
advances to
customers 2,616 1,515 2,188 2,204 2,128 8,462 23,359 159,075 201,547
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Total
financial
assets 22,286 1,700 2,486 2,372 2,823 10,026 32,965 177,470 252,128
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Financial
liabilities
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Shares 149,985 1,976 2,501 2,085 2,312 6,864 3,495 1,095 170,313
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Deposits from
banks and
similar
institutions 10,417 166 - 9 - - 16,430 - 27,022
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Of which repo 7,984 165 - - - - - - 8,149
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Of which
TFSME - - - - - - 16,430 - 16,430
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Other
deposits 2,234 642 1,568 34 24 15 5 - 4,522
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Fair value
adjustment
for
portfolio
hedged risk 1 6 3 - 1 9 5 - 25
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Secured
funding -
ABS and
covered
bonds 467 23 29 892 1,780 3,715 5,816 5,783 18,505
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Senior
unsecured
funding 202 48 561 - 5 2,053 5,072 1,477 9,418
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Derivative
financial
instruments 50 3 16 10 10 144 443 946 1,622
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Subordinated
liabilities 29 - 29 3 - - 3,114 4,400 7,575
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Subscribed
capital
(note iii) 1 1 1 - - - - 240 243
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Total
financial
liabilities 163,386 2,865 4,708 3,033 4,132 12,800 34,380 13,941 239,245
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Off-balance
sheet
commitments
(note iv) 13,259 - - - - - - - 13,259
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Net liquidity
difference (154,359) (1,165) (2,222) (661) (1,309) (2,774) (1,415) 163,529 (376)
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Cumulative
liquidity
difference (154,359) (155,524) (157,746) (158,407) (159,716) (162,490) (163,905) (376) -
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Notes:
i. The analysis excludes certain non-financial assets (including property, plant and equipment, intangible assets, other assets, deferred tax assets and accrued income and prepaid expenses) and non-financial liabilities (including provisions for liabilities and charges, accruals and deferred income, current tax liabilities and other liabilities). The retirement benefit surplus and lease liabilities have also been excluded.
ii. Due less than one month includes amounts repayable on demand.
iii. The principal amount for undated subscribed capital is included within the due after more than five years column.
iv. Off-balance sheet commitments include amounts payable on demand for undrawn loan commitments, customer overpayments on residential mortgages where the borrower can draw down the amount overpaid, and commitments to acquire financial assets.
In practice, customer behaviours mean that liabilities are often retained for longer than their contractual maturities and assets are repaid earlier. This gives rise to funding mismatches on the balance sheet. The balance sheet structure and risks are managed and monitored by Nationwide's Assets and Liabilities Committee (ALCO). Judgement and past behavioural performance of each asset and liability class are used to forecast likely cash flow requirements.
Liquidity and funding risk (continued)
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 set out in note 14 to the financial statements of the Annual Report and Accounts 2021) 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 with prime mortgage loan pools prepositioned (available to be pledged) at the Bank of England. 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.
At 30 September 2021, Nationwide had GBP46,896 million (4 April 2021: GBP47,778 million) of externally encumbered assets with counterparties other than central banks. In addition, GBP80,287 million (4 April 2021: GBP70,697 million) of prepositioned and encumbered assets were held at central banks and GBP148,230 million (4 April 2021: GBP126,475 million) of assets that were neither encumbered nor prepositioned but capable of being encumbered. The increase in assets prepositioned and encumbered at central banks provides Nationwide with future funding flexibility and ensures sufficient contingent funding capacity is retained in the event of a stress. The increase in assets that were neither encumbered nor prepositioned but capable of being encumbered reflects the increase in total assets. Further detail on asset encumbrance is set out in the Annual Report and Accounts 2021.
External credit ratings
Nationwide'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 October 2021 Stable
----------------- ---------- ---------- -------------- ------ --------------- -------
Moody's A1 P-1 Baa1 Baa2 July 2021 Stable
----------------- ---------- ---------- -------------- ------ --------------- -------
Fitch A+ F1 A BBB+ July 2021 Stable
----------------- ---------- ---------- -------------- ------ --------------- -------
In October 2021, S&P upgraded Nationwide's long term issuer credit rating and senior preferred rating to A+ and changed the outlook to stable; all other ratings were unchanged. This followed a change to a positive outlook in June 2021. S&P stated that the upgrade was due to Nationwide's performance in the last 12 months in reducing costs, writing profitable new business and maintaining strong asset quality.
In July 2021, Moody's upgraded Nationwide's senior non-preferred debt rating to Baa1 from Baa2 following the introduction of Moody's revised Advanced Loss Given Failure framework. All other ratings were affirmed.
In July 2021, Fitch revised the outlook on Nationwide to stable from negative and affirmed all ratings. The revision of the outlook primarily reflected the revision of Fitch's outlook on the UK's AA- rating to stable.
Capital risk
This section was titled Solvency risk in Nationwide's Annual Report and Accounts 2021. The risk has been renamed Capital risk within Nationwide's Enterprise Risk Management Framework (ERMF) to align with wider financial services sector terminology.
Capital risk is the risk that Nationwide fails to maintain sufficient capital to absorb losses throughout a full economic cycle and to maintain the confidence of current and prospective investors, members, the Board and regulators. Capital is held to protect members, cover inherent risks, provide a buffer for stress events and support the business strategy. In assessing the adequacy of capital resources, risk appetite is considered in the context of the material risks to which Nationwide is exposed and the appropriate strategies required to manage those risks.
Capital position
The capital disclosures included in this report are in line with 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
30 September 4 April
2021 2021
---------------------------------- ------------ --------
Risk Based % %
---------------------------------- ------------ --------
Common Equity Tier 1 (CET1) ratio 37.7 36.4
---------------------------------- ------------ --------
Total Tier 1 ratio 41.7 40.5
---------------------------------- ------------ --------
Total regulatory capital ratio 50.5 49.1
---------------------------------- ------------ --------
Leverage GBPm GBPm
---------------------------------- ------------ --------
UK leverage exposure 251,197 248,402
---------------------------------- ------------ --------
CRR leverage exposure 297,821 265,079
---------------------------------- ------------ --------
Tier 1 capital 13,764 13,343
---------------------------------- ------------ --------
%%
---------------------------------- ------------ -------
UK leverage ratio 5.5 5.4
---------------------------------- ------------ --------
CRR leverage ratio 4.6 5.0
---------------------------------- ------------ --------
Risk-based capital ratios remain in excess of regulatory requirements with the CET1 ratio of 37.7% (4 April 2021: 36.4%) above Nationwide's CET1 capital requirement of 12.7%. This includes a minimum CET1 capital requirement of 9.2% (Pillar 1 and Pillar 2A) and the CRD V combined buffer requirements of 3.5% of risk weighted assets (RWAs).
The increase in the CET1 ratio results from an increase in CET1 capital of GBP0.4 billion, with RWAs remaining relatively stable. The CET1 capital increase was driven by GBP0.6 billion profit after tax, net of distributions, partially offset by a GBP0.2 billion movement in deductible intangible assets, IFRS 9 transitional arrangements and prudent valuation adjustments. RWAs remained stable with a reduction in retail and commercial RWAs offset by growth in liquid assets.
Capital risk (continued)
On 23 December 2020, EU Regulation 2020/2176 came into force, removing the deduction of intangible assets from CET1 items for 'prudently valued software assets, the value of which is not negatively affected by resolution, insolvency or liquidation of the institution', and instead attributing a risk weighted asset value of 100% to those assets not deducted. The PRA indicated in CP5/21 'Implementation of Basel standards' that they found no credible evidence that software assets would absorb losses effectively in a stress. Subsequently, as part of PS17/21, they have confirmed the reversal of this amendment from 1 January 2022. If the revised rules had not been applied, Nationwide's CET1 ratio and UK leverage ratio at 30 September 2021 would have been 36.9% and 5.3% respectively.
UK CRD V requires firms to calculate a leverage ratio, which is non-risked based, to supplement risk-based capital requirements. The UK leverage ratio increased to 5.5% (4 April 2021: 5.4%), with Tier 1 capital increasing by GBP0.4 billion as a result of the CET1 capital movements outlined above. Partially offsetting the impact of this, there was an increase in UK leverage exposure of GBP2.8 billion, primarily as a result of net retail lending in the period. This position remains in excess of Nationwide's leverage capital requirement of 3.6%, which comprises a minimum Tier 1 capital requirement of 3.25% and buffer requirements of 0.35%. The buffer requirement reflects a 0% countercyclical leverage ratio buffer announced on 11 March 2020 as part of the Bank of England responses to the impacts of Covid-19.
The CRR leverage ratio reduced to 4.6% (4 April 2021: 5.0%). The difference between the Capital Requirements Regulation (CRR) leverage ratio and the UK leverage ratio is driven by the exclusion of qualifying central bank claims from the UK leverage exposure measure as per the PRA Rulebook. The reduction in the ratio was due to an increase in central bank reserves.
On 8 October 2021, as part of its policy statement PS21/21, the PRA confirmed its intention to simplify the leverage framework by applying a single Leverage Exposure Measure (LEM) for all purposes from 1 January 2022. This measure would align to the current UK leverage exposure definition, which excludes central bank claims.
UK leverage requirements continue to be Nationwide's binding capital constraint, as they are in excess of risk-based requirements, and it is expected that this will continue despite the impact of IRB mortgage model changes and Basel III reforms on risk-based capital requirements in 2023 (see the 'regulatory developments' section below). Nationwide's internal assessment, however, is still subject to PRA IRB mortgage model approval and the forthcoming PRA consultation on the Basel III reforms. The expected impact of the reforms on Nationwide's UK leverage ratio is negligible. The risk of excessive leverage is managed through regular monitoring and reporting of the leverage ratio, which forms part of risk appetite.
Further details on the leverage exposure can be found in the Group's Interim Pillar 3 Disclosure September 2021 at nationwide.co.uk
Capital risk (continued)
The table below shows how the components of members interest and equity contribute to total regulatory capital calculated on an end-point basis and so does not include non-qualifying instruments.
Total regulatory capital
30 September 4 April
2021 2021
------------ -------------
GBPm GBPm
--------------------------------------------------------- ------------ -------------
General reserve 11,928 11,140
--------------------------------------------------------- ------------ -------------
Core capital deferred shares (CCDS) 1,334 1,334
--------------------------------------------------------- ------------ -------------
Revaluation reserve 43 44
--------------------------------------------------------- ------------ -------------
Fair value through other comprehensive income (FVOCI)
reserve 103 110
--------------------------------------------------------- ------------ -------------
Cash flow hedge and other hedging reserves 157 149
--------------------------------------------------------- ------------ -------------
Regulatory adjustments and deductions:
--------------------------------------------------------- ------------ -------------
FVOCI reserve temporary relief (note i) (32) (41)
--------------------------------------------------------- ------------ -------------
Cash flow hedge and other hedging reserves (note ii) (157) (149)
--------------------------------------------------------- ------------ -------------
Foreseeable distributions (note iii) (70) (71)
--------------------------------------------------------- ------------ -------------
Prudent valuation adjustment (note iv) (74) (39)
--------------------------------------------------------- ------------ -------------
Own credit and debit valuation adjustments (note v) (3) (3)
--------------------------------------------------------- ------------ -------------
Intangible assets (note vi) (614) (525)
--------------------------------------------------------- ------------ -------------
Goodwill (note vi) (12) (12)
--------------------------------------------------------- ------------ -------------
Defined-benefit pension fund asset (note vi) (307) (112)
--------------------------------------------------------- ------------ -------------
Excess of regulatory expected losses over impairment
provisions (note vii) (2) (1)
--------------------------------------------------------- ------------ -------------
IFRS 9 transitional arrangements (note viii) 134 183
--------------------------------------------------------- ------------ -------------
Total regulatory adjustments and deductions (1,137) (770)
--------------------------------------------------------- ------------ -------------
Common Equity Tier 1 capital 12,428 12,007
--------------------------------------------------------- ------------ -------------
Other equity instruments (Additional Tier 1) 1,336 1,336
--------------------------------------------------------- ------------ -------------
Total Tier 1 capital 13,764 13,343
--------------------------------------------------------- ------------ -------------
Dated subordinated debt (note ix) 2,863 2,833
--------------------------------------------------------- ------------ -------------
Excess of impairment provisions over regulatory expected
losses (note vii) 144 144
--------------------------------------------------------- ------------ -------------
IFRS 9 transitional arrangements (note viii) (129) (144)
--------------------------------------------------------- ------------ -------------
Tier 2 capital 2,878 2,833
--------------------------------------------------------- ------------ -------------
Total regulatory capital 16,642 16,176
--------------------------------------------------------- -------------
Notes:
i. Includes a temporary adjustment to mitigate the impact of volatility in central government debt on capital ratios, in line with the Covid-19 banking package.
ii. In accordance with CRR article 33, institutions shall not include the fair value reserves related to gains or losses on cash flow hedges of financial instruments that are not valued at fair value.
iii. Foreseeable distributions in respect of CCDS and AT1 securities are deducted from CET1 capital under UK CRD V.
iv. A prudent valuation adjustment (PVA) is applied in respect of fair valued instruments as required under regulatory capital rules.
v. Own credit and debit valuation adjustments are applied to remove balance sheet gains or losses of fair valued liabilities and derivatives that result from changes in own credit standing and risk, as per UK CRD V rules.
vi. Intangible, goodwill and defined-benefit pension fund assets (excluding applicable software assets) are deducted from capital resources after netting associated deferred tax liabilities.
vii. Where capital expected loss exceeds accounting provisions, the excess balance is removed from CET1 capital, gross of tax. In contrast, where provisions exceed capital expected loss, the excess amount is added to Tier 2 capital, gross of tax. This calculation is not performed for equity exposures, in line with Article 159 of CRR. The expected loss amounts for equity exposures are deducted from CET1 capital, gross of tax.
viii. The transitional adjustments to capital resources apply scaled relief due to the impact of the introduction of IFRS 9 and increases in expected credit losses due to the Covid-19 pandemic. Further detail regarding these adjustments is provided in the Group's Interim Pillar 3 Disclosure September 2021 at nationwide.co.uk
ix. Subordinated debt includes fair value adjustments related to changes in market interest rates, adjustments for unamortised premiums and discounts that are included in the consolidated balance sheet, and any amortisation of the capital value of Tier 2 instruments required by regulatory rules for instruments with fewer than five years to maturity.
Capital risk (continued)
As part of the Bank Recovery and Resolution Directive (BRRD), the Bank of England, in its capacity as the UK resolution authority, has published its policy for setting the minimum requirement for own funds and eligible liabilities (MREL) and provided firms with interim MREL. From 1 January 2020, Nationwide is required to hold twice the minimum capital requirements (6.5% of UK leverage exposure), plus the applicable capital requirement buffers, which amount to 0.35% of UK leverage exposure.
At 30 September 2021, total MREL resources were equal to 8.6% (4 April 2021: 8.5%) of UK leverage ratio exposure, in excess of the 2021 loss-absorbing requirement of 6.85% described above.
Risk weighted assets
The table below shows the breakdown of risk weighted assets (RWAs) by risk type and business activity. Market risk has been set to zero as permitted by the UK CRR, as the exposure is below the threshold of 2% of own funds.
Risk weighted assets
30 September 2021 4 April 2021
Credit Risk Operational Total Risk Credit Risk Operational Total Risk
(note i) Risk (note Weighted (note i) Risk (note Weighted
ii) Assets ii) Assets
GBPm GBPm GBPm GBPm GBPm GBPm
-----------
Retail mortgages 14,444 2,966 17,410 14,523 2,966 17,489
Retail unsecured lending 5,498 965 6,463 5,503 965 6,468
Commercial loans 2,428 116 2,544 2,671 116 2,787
Treasury 1,992 327 2,319 1,588 327 1,915
Counterparty credit risk (note
iii) 1,504 - 1,504 1,491 - 1,491
Other (note iv) 2,287 455 2,742 2,365 455 2,820
Total 28,153 4,829 32,982 28,141 4,829 32,970
Notes:
i. This column includes credit risk exposures, securitisations, counterparty credit risk exposures and exposures below the thresholds for deduction that are subject to a 250% risk weight.
ii. RWAs have been allocated according to the business lines within the standardised approach to operational risk, as per article 317 of CRR.
iii. Counterparty credit risk relates to derivative financial instruments, securities financing transactions (repurchase agreements) and exposures to central counterparties.
iv. Other relates to equity, fixed, intangible software and other assets.
RWAs remained relatively stable in the period. An increase in Treasury liquid assets not risk weighted at 0% was partially offset by a reduction in commercial loan RWAs due to decreasing total loan size, but also improving risk characteristics. In conjunction with this, there was a reduction in risk weights of modelled buy to let loans.
More detailed analysis of RWAs is included in the Group's Interim Pillar 3 Disclosure September 2021 at nationwide.co.uk
Capital risk (continued)
Regulatory developments
Key areas of regulatory change are set out below. Nationwide will remain engaged in the development of the regulatory approach to ensure it is prepared for any resulting change.
From 1 January 2022 multiple policy statements impacting IRB risk weighted assets will come into effect. These include PS11/20 'Probability of Default and Loss given default estimation', PS13/17 'Residential mortgage risk weights', PS16/21 'Internal Ratings Based UK mortgage risk weights' and PS23/21 'The identification of the nature, severity, and duration of an economic downturn for the purposes of IRB models'. These changes are expected to increase risk weighted assets, resulting in the reported CET1 ratio reducing to the low- to mid- 20% range.
On 12 February 2021, the PRA published CP5/21 'Implementation of Basel standards'. The purpose of these rules is to implement the remaining Basel international standards. The consultation paper included a revised standardised approach to counterparty credit risk (SA-CCR) and the revised Basel framework for exposures to central counterparties (CCPs) amongst other changes. On 22 July 2021, the PRA published PS17/21 confirming the changes set out in CP5/21, which will also take effect on 1 January 2022. The changes will not materially impact capital requirements.
The Basel Committee published their final reforms to the Basel III framework in December 2017, now denoted by the PRA as Basel 3.1. The amendments include changes to the standardised approaches for credit and operational risks and the introduction of a new RWA output floor. The rules are subject to a lengthy revised transitional period, advised by the Basel Committee to run between 2023 and 2028, and will lead to a significant increase in Nationwide's RWAs relative to both the current position and that expected under the new mortgage IRB models, mainly due to the application of standardised floors for mortgages. Following the IRB model implementation and Basel 3.1 reforms, the total estimated impact on the reported CET1 ratio will be a reduction of approximately a half relative to the position at 30 September 2021. This impact is before organic earnings in the period to 2028 which will partly mitigate the reduction in the CET1 ratio. The Basel III reforms represent a re-calibration of regulatory requirements with no underlying change in the capital resources held or the risk profile of assets. Final impacts are uncertain as they are subject to future balance sheet size and mix, and because the final detail of some elements of the regulatory changes remain at the PRA's discretion. Following the equivalent European Commission consultation published on 27 October 2021, we are expecting the PRA to consult on the UK implementation of Basel 3.1 during the second half of 2022.
Market risk
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, currency rates or equity prices. 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 risks 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 and product option risk. Nationwide's market risk appetite, risk management and reporting measures, described in the Annual Report and Accounts 2021, are unchanged.
Libor transition
Nationwide continues to deliver on its transition plan across each of the three key areas of focus: retail mortgages, commercial lending and treasury instruments. The Society remains on target to meet the 31 December 2021 Libor cessation date. Additional information on Nationwide's approach to Libor transition is set out in the Market risk section and note 15 to the financial statements within the Annual Report and Accounts 2021.
Net Interest Income sensitivity (NII)
Earnings sensitivity assessments measure the risk that income is adversely affected by changes in interest rates. The sensitivity of earnings to changes in interest rates is measured monthly using a forecasting model and potential interest rate scenarios.
Market risk (continued)
The table below sets out the sensitivity of pre-tax future earnings over a one-year period to instantaneous parallel rises and falls in interest rates.
Potential favourable/(adverse) impact on annual
earnings
30 September 4 April 2021
2021
------------- ------------
GBPm GBPm
----------------------- ------------- ------------
+50 basis point shift 47 (note i)
----------------------- ------------- ------------
+25 basis point shift 26 8
----------------------- ------------- ------------
-25 basis point shift (118) (100)
----------------------- ------------- ------------
Note:
i. The +50 basis point shift was not reported at 4 April 2021 but has been presented at 30 September 2021 to better reflect the prevailing interest rate environment.
The following key judgements should be noted in respect of the table above:
-- The interest rate sensitivities are illustrative only and are based on a static balance sheet; all assets and liabilities maturing within the year are assumed to reinvest in like for like products;
-- The model assumes that changes in interest rates are fully passed through to managed rate variable products, unless a 0% floor is reached;
-- The shifts are applied to the prevailing interest rates at the reporting date;
-- The reported sensitivities will vary over time due to several factors, such as the timing of maturing assets and liabilities, product pricing, market conditions, and strategic changes to the balance sheet mix, and should not therefore be considered a guide to future performance;
-- The sensitivity analysis includes all financial assets and liabilities held; -- The sensitivities do not take account of any management actions; and -- The values above are reported on a pre-tax basis.
Pension risk
Nationwide Building Society has funding obligations to a number of defined benefit pension schemes, the largest of which is the Nationwide Pension Fund (the Fund) which represents over 99% of the Society's pension obligations. Further information is set out in the Annual Report and Accounts 2021.
The Fund's net defined benefit pension surplus, which appears within assets on the balance sheet, has increased from GBP172 million to GBP472 million since 4 April 2021. This was primarily driven by increases in the value of UK government bonds, listed equities and illiquid assets. This was partially offset by a rise in liabilities driven by an increase in the future inflation assumption. Further information is included in note 15 to the consolidated interim financial statements.
Over the long term, the Trustee intends to further reduce the Fund's risk. Nationwide actively engages with the Trustee to ensure broad alignment on risk management and investment objectives and their implementation.
The next Triennial Valuation has an effective date of 31 March 2022.
Model risk
The Society relies on models to support a broad range of business and risk management activities. Examples include the use of model outputs in the credit approval process, capital and liquidity assessments, stress testing, financial planning and loss provisioning. Further details on Model risk can be found in the Risk report section of the Annual Report and Accounts 2021.
During 2021, Nationwide's model estate has expanded, increasing the exposure to model risk. Nationwide participated in the Bank of England's Climate Biennial Exploratory Scenario (CBES) exercise which tests the resilience of the UK financial system to climate-related physical and transition risks across three possible paths to net zero carbon emissions. To support the exercise we developed and validated a new suite of physical and transition risk models to forecast provisions and risk weighted assets under each scenario.
Nationwide received regulatory approval to use its Internal Rating Based (IRB) models for the current account portfolio and implementation will be completed by December 2021. Changes in regulation have continued to drive model development activity during the year. Development of the retail capital models to meet new IRB Roadmap regulatory requirements is well progressed. However, in line with the broader industry, it is not expected that model changes will be approved and implemented by the date the new regulation takes effect. We are engaging closely with the PRA regarding approval and implementation timings. In addition, models impacted by the cessation of the Libor and transition to Sonia in 2022 have been redeveloped.
Operational and conduct risk
Nationwide's overall operational and conduct risk profile has remained relatively stable since 4 April 2021 and continues to be impacted by the adaptations we make to our ways of working and operational processes as a result of Covid-19. The main risks relate to IT operational resilience and cyber security. In line with other financial services organisations, we are seeing high volumes of attempted fraud and cyber activity (in particular phishing emails). Nationwide continues to meet the high standards expected by members in the management of these risks. There is a focus on being safe and secure in order to ensure both service availability and customer data are protected.
We continue to streamline and simplify our more complex processes to improve operational control and customer experience.
External fraud
As highlighted in the Annual Report and Accounts 2021 we are continually improving our approach to helping members protect themselves from Authorised Push Payment (APP) scams and have launched a scam checker service which allows our members to check a payment they are worried about in branch or by calling a 24/7 freephone number.
Covid 19
We continue to adapt the way we work and regularly assess our ways of working as guidance changes. We monitor and closely manage the impact on our people as we deliver the products, services and experience members want, to ensure the required levels of skill, knowledge and engagement are maintained.
While many of the restrictions imposed following the onset of Covid-19 have now been eased, we see an ongoing impact on the financial wellbeing of our members. We expect this to continue as support from government and regulatory schemes is reduced and removed. In this context, the fair treatment of members in financial difficulty remains a key focus.
Regulatory change
There continues to be a high volume of complex regulatory change impacting the financial services industry, and Nationwide will respond to these changes while actively engaging with our regulators. Through its proposed Consumer Duty, the Financial Conduct Authority (FCA) has recently set out proposals for a higher standard of consumer care beyond the current set of Principles and Rules, which would require firms to be more proactive in the delivery of fair outcomes. Regardless of the outcome of these proposals, Nationwide is committed to ensuring the right customer outcomes are achieved in all circumstances and will continue to provide a safe and secure variety of products and services which are designed to meet the needs of members and customers.
Consolidated interim financial statements
Contents
Page
Consolidated income statement 65
Consolidated statement of comprehensive income 66
Consolidated balance sheet 67
Consolidated statement of movements in members' interests
and equity 68
Consolidated cash flow statement 69
Notes to the consolidated interim financial statements 70
Consolidated income statement
(Unaudited)
Half year Half year
to to
30 September 30 September
2021 2020
Notes GBPm GBPm
Interest receivable and similar income/(expense):
Calculated using the effective interest
rate method 3 2,114 2,010
Other 3 6 (4)
Total interest receivable and similar
income 3 2,120 2,006
Interest expense and similar charges 4 (414) (558)
Net interest income 1,706 1,448
Fee and commission income 227 180
Fee and commission expense (108) (113)
Other operating income/(expense) 5 69 (12)
Gains from derivatives and hedge
accounting 6 3 56
Total income 1,897 1,559
Administrative expenses 7 (1,025) (1,033)
Impairment reversals/(losses) on
loans and advances to customers 8 34 (139)
Provisions for liabilities and charges 13 (53) (26)
Profit before tax 853 361
Taxation 9 (168) (80)
Profit after tax 685 281
The notes on pages 70 to 91 form part of these consolidated interim financial statements.
Consolidated statement of comprehensive income
(Unaudited)
Half year Half year
to to
30 September 30 September
2021 2020
Notes GBPm GBPm
Profit after tax 685 281
Other comprehensive income/(expense)
Items that will not be reclassified
to the income statement
Remeasurements of retirement benefit
obligations:
Retirement benefit remeasurements
before tax 15 300 (55)
Taxation (105) 20
195 (35)
Revaluation of property:
Revaluation before tax 1 (10)
Taxation (1) 5
- (5)
Movements in fair value of equity
shares held at fair value through
other comprehensive income:
Fair value movements taken to members'
interests and equity 15 -
Taxation (4) -
11 -
Items that may subsequently be reclassified
to the income statement
Cash flow hedge reserve:
Fair value movements taken to members'
interests and equity 27 (29)
Amount transferred to income statement (18) (32)
Taxation (3) 16
6 (45)
Other hedging reserve:
Fair value movements taken to members'
interests and equity 1 (1)
Amounts transferred to income statement (3) -
Taxation 4 -
2 (1)
Fair value through other comprehensive
income reserve:
Fair value movements taken to members'
interests and equity 27 132
Amount transferred to income statement (41) (40)
Taxation (4) (25)
(18) 67
Other comprehensive income/(expense) 196 (19)
Total comprehensive income 881 262
The notes on pages 70 to 91 form part of these consolidated interim financial statements.
Consolidated balance sheet
(Unaudited)
30 September 4 April
2021 2021
Notes GBPm GBPm
Assets
Cash 46,498 16,693
Loans and advances to banks
and similar institutions 3,275 3,660
Investment securities 23,883 25,473
Derivative financial instruments 4,111 3,809
Fair value adjustment for
portfolio hedged risk 93 946
Loans and advances to customers 10 204,714 201,547
Intangible assets 1,041 1,101
Property, plant and equipment 954 1,018
Accrued income and prepaid
expenses 241 213
Deferred tax 57 72
Other assets 104 210
Retirement benefit asset 15 472 172
Total assets 285,443 254,914
Liabilities
Shares 177,431 170,313
Deposits from banks and similar
institutions 36,435 27,022
Other deposits 7,823 4,522
Fair value adjustment for
portfolio hedged risk 20 25
Debt securities in issue 38,031 27,923
Derivative financial instruments 1,338 1,622
Other liabilities 826 933
Provisions for liabilities
and charges 13 190 159
Accruals and deferred income 234 307
Subordinated liabilities 7,710 7,575
Subscribed capital 232 243
Deferred tax 251 150
Current tax liabilities 21 7
Total liabilities 270,542 240,801
Members' interests and equity
Core capital deferred shares 1,334 1,334
Other equity instruments 1,336 1,336
General reserve 11,928 11,140
Revaluation reserve 43 44
Cash flow hedge reserve 201 195
Other hedging reserve (44) (46)
Fair value through other comprehensive
income reserve 103 110
Total members' interests and
equity 14,901 14,113
Total members' interests,
equity and liabilities 285,443 254,914
The notes on pages 70 to 91 form part of these consolidated interim financial statements.
Consolidated statement of movements in members' interests and equity
(Unaudited)
For the period ended 30 September 2021
Core capital Other General Revaluation Cash flow Other FVOCI Total
deferred equity reserve reserve hedge hedging reserve
shares instruments reserve reserve
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 5 April 2021 1,334 1,336 11,140 44 195 (46) 110 14,113
Profit for the period - - 685 - - - - 685
Net remeasurements of
retirement
benefit obligations - - 195 - - - - 195
Net revaluation of property - - - - - - - -
Net movement in cash flow
hedge
reserve - - - - 6 - - 6
Net movement in other
hedging reserve - - - - - 2 - 2
Net movement in FVOCI
reserve - - - - - - (7) (7)
Total comprehensive income - - 880 - 6 2 (7) 881
Reserve transfer - - 1 (1) - - - -
Distribution to the holders
of
core capital deferred
shares - - (54) - - - - (54)
Distribution to the holders
of
Additional Tier 1 capital - - (39) - - - - (39)
At 30 September 2021 1,334 1,336 11,928 43 201 (44) 103 14,901
For the period ended 30 September 2020
Core capital Other General Revaluation Cash flow Other FVOCI Total
deferred equity reserve reserve hedge hedging reserve
shares instruments reserve reserve
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 5 April 2020 1,325 593 10,749 48 306 (42) (17) 12,962
Profit for the period - - 281 - - - - 281
Net remeasurements of
retirement
benefit obligations - - (35) - - - - (35)
Net revaluation of property - - - (5) - - - (5)
Net movement in cash flow
hedge
reserve - - - - (45) - - (45)
Net movement in other
hedging reserve - - - - - (1) - (1)
Net movement in FVOCI
reserve - - - - - - 67 67
Total comprehensive income - - 246 (5) (45) (1) 67 262
Reserve transfer - - 13 (7) - - (6) -
Issuance of core capital
deferred
shares 4 - - - - - - 4
Issuance of Additional Tier
1 capital - 743 - - - - - 743
Distribution to the holders
of
core capital deferred
shares - - (54) - - - - (54)
Distribution to the holders
of
Additional Tier 1 capital - - (18) - - - - (18)
At 30 September 2020 1,329 1,336 10,936 36 261 (43) 44 13,899
The notes on pages 70 to 91 form part of these consolidated interim financial statements.
Consolidated cash flow statement
( Unaudited )
Half year Half year
to to
30 September 30 September
2021 2020
Notes GBPm GBPm
-------------
Cash flows generated from/(used in)
operating activities
Profit before tax 853 361
Adjustments for:
Non-cash items included in profit
before tax (note i) 17 196 477
Changes in operating assets and liabilities
(note i) 17 27,364 10,627
Taxation (150) (11)
Net cash flows generated from operating
activities 28,263 11,454
Cash flows generated from/(used in)
investing activities
Purchase of investment securities (3,841) (8,665)
Sale and maturity of investment securities 5,804 4,697
Purchase of property, plant and equipment (33) (68)
Sale of property, plant and equipment 6 10
Purchase of intangible assets (97) (104)
Net cash flows generated from/(used
in) investing activities 1,839 (4,130)
Cash flows generated from/(used in)
financing activities
Distributions paid to the holders
of core capital deferred shares (54) (54)
Distributions paid to the holders
of Additional Tier 1 capital (39) (18)
Issue of Additional Tier 1 capital - 743
Issue of core capital deferred shares - 4
Redemption of subordinated liabilities - (683)
Interest paid on subordinated liabilities (64) (96)
Redemption of subscribed capital (5) -
Interest paid on subscribed capital (2) (3)
Repayment of lease liabilities (13) (14)
Net cash flows used in financing
activities (177) (121)
Effect of exchange rate changes on
cash and cash equivalents 22 (8)
Net increase in cash and cash equivalents 29,947 7,195
Cash and cash equivalents at start
of period 17,705 14,474
Cash and cash equivalents at end
of period 17 47,652 21,669
-------------
Note:
i. Comparatives have been restated to reflect the change in presentation of the bank levy as detailed in note 17.
The notes on pages 70 to 91 form part of these consolidated interim financial statements.
Notes to the consolidated interim financial statements
1. General information and reporting period
Nationwide Building Society ('the Society') and its subsidiaries (together, 'the Group') provide financial services to retail and commercial customers within the United Kingdom.
Nationwide is a building society incorporated and domiciled in the United Kingdom. The address of its registered office is Nationwide Building Society, Nationwide House, Pipers Way, Swindon, SN38 1NW.
There were no material changes in the composition of the Group in the half year to 30 September 2021.
These condensed consolidated interim financial statements ('consolidated interim financial statements') have been prepared as at 30 September 2021 and show the financial performance for the period from, and including, 5 April 2021 to this date. They were approved for issue on 18 November 2021.
These consolidated interim financial statements have been reviewed, not audited.
2. Basis of preparation
The consolidated interim financial statements of the Group for the half year ended 30 September 2021 have been prepared in accordance with the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority and UK adopted International Accounting Standard (IAS) 34 'Interim Financial Reporting'. The consolidated interim financial statements should be read in conjunction with the Group's annual financial statements for the year ended 4 April 2021, which were prepared in accordance 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, UK adopted international accounting standards and International Financial Reporting Standards (IFRSs) adopted pursuant to Regulation (EC) No. 1606/2002 as it applies in the European Union .
Terminology used in these consolidated interim financial statements is consistent with that used in the Annual Report and Accounts 2021. Copies of the Annual Report and Accounts 2021 and Glossary are available on the Group's website at nationwide.co.uk
Accounting policies
The accounting policies adopted by the Group in the preparation of these consolidated interim financial statements and those which the Group currently expects to adopt in the Annual Report and Accounts 2022 are consistent with those disclosed in the Annual Report and Accounts 2021.
Judgements in applying accounting policies and critical accounting estimates
Judgements have to be made in applying the Group's accounting policies which affect the amounts recognised in these consolidated interim financial statements. In addition, estimates and assumptions are made that could affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates.
Details of the significant judgements and estimates which are relevant to the Group, including any changes from those disclosed in the Annual Report and Accounts 2021, are disclosed in the relevant notes as follows:
-- impairment provisions on loans and advances to customers (note 8) -- provisions for customer redress (note 13) -- retirement benefit obligations (pensions) (note 15).
Going concern
The Group's business activities and financial position, the factors likely to affect its future development and performance, its objectives and policies in managing the financial risks to which it is exposed, and its capital, funding and liquidity positions are set out in the Financial review and the Risk report.
The directors have assessed the Group's ability to continue as a going concern, with reference to current and anticipated market conditions including the ongoing impacts of Covid-19. 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 and that it is therefore appropriate to adopt the going concern basis in preparing these consolidated interim financial statements.
3. Interest receivable and similar income
Half year Half year
to to
30 September 30 September
2021 2020
GBPm GBPm
On financial assets measured at amortised
cost:
Residential mortgages 2,100 2,080
Other loans 260 278
Other liquid assets 29 16
Investment securities 5 9
On investment securities measured at
FVOCI 62 70
On financial instruments hedging assets
in a qualifying hedge accounting relationship (342) (443)
Total interest receivable and similar
income calculated using the effective
interest rate method 2,114 2,010
Interest on net defined benefit pension
surplus 2 3
Other interest and similar income/(expense)
(note i) 4 (7)
Total 2,120 2,006
Note:
i. Includes interest on financial instruments hedging assets that are not in a qualifying hedge accounting relationship.
4. Interest expense and similar charges
Half year Half year
to to
30 September 30 September
2021 2020
GBPm GBPm
On shares held by individuals 218 301
On subscribed capital 7 7
On deposits and other borrowings:
Subordinated liabilities 124 149
Other 29 27
On debt securities in issue 221 279
Net income on financial instruments
hedging liabilities (185) (205)
Total 414 558
5. Other operating income/expense
Half year Half year
to to
30 September 30 September
2021 2020
GBPm GBPm
Gains/(losses) on financial assets
measured at FVTPL 27 (1)
Gains on disposal of FVOCI investment
securities 41 38
Other income/(expense) 1 (49)
Total 69 (12)
Gains/(losses) on financial assets measured at FVTPL includes an unrealised gain of GBP25 million on an equity investment in the period to 30 September 2021.
Other income/(expense) in the period to 30 September 2020 includes losses of GBP35 million realised from the repurchase of GBP2.0 billion of covered bonds issued under the Nationwide Covered Bond programme. Other income/(expense) also includes fair value movements on balances relating to previous investment disposals, the net amounts of rental income, profits or losses on the sale of property, plant and equipment and increases or decreases in the valuations of branches and non-specialised buildings which are not recognised in other comprehensive income.
There were no gains or losses on disposal of financial assets measured at amortised cost in the period ended 30 September 2021 (H1 2020/21: GBPnil).
6. Gains 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 the management of 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. Derivatives are only used 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.
Half year Half year
to to
30 September 30 September
2021 2020
GBPm GBPm
(Losses)/gains from fair value hedge
accounting (5) 6
Gains from cash flow hedge accounting 1 -
Fair value gains from other derivatives
(note i) 5 50
Foreign exchange retranslation (note
ii) 2 -
Total 3 56
Notes:
i. Gains or losses arise from derivatives used for economic hedging purposes, but which are not currently in a hedge accounting relationship, and include valuation adjustments applied at a portfolio level and not allocated to individual hedge accounting relationships.
ii. Gains or losses arise from the retranslation of foreign currency monetary items not subject to effective hedge accounting.
7. Administrative expenses
Half year Half year
to to
30 September 30 September
2021 2020
GBPm GBPm
-------------
Employee costs:
Wages, salaries and bonuses 292 300
Social security costs 33 35
Pension costs 70 86
395 421
Other administrative expenses 378 336
773 757
Depreciation, amortisation and
impairment 252 276
Total 1,025 1,033
8. Impairment reversals/losses and provisions on loans and advances to customers
The following tables set out impairment reversals and losses during the period and the closing provision balances which are deducted from the relevant asset values in the balance sheet:
Impairment (reversals)/losses
Half year Half year
to to
30 September 30 September
2021 2020
GBPm GBPm
Prime residential (19) 23
Buy to let and legacy
residential (25) 30
Consumer banking 18 84
Commercial lending (8) 2
Total (34) 139
Impairment provisions
30 September 4 April
2021 2021
GBPm GBPm
Prime residential 74 93
Buy to let and legacy
residential 199 224
Consumer banking 486 502
Commercial lending 25 33
Total 784 852
8. Impairment reversals/losses and provisions on loans and advances to customers (continued)
Critical accounting estimates and judgements
Impairment is measured as the impact of credit risk on the present value of management's estimate of future cash flows. In determining the required level of impairment provisions, the Group uses outputs from statistical models, incorporating a number of estimates and judgements to determine the probability of default (PD), the exposure at default, and the loss given default (LGD) for each loan.
The most significant areas of estimation uncertainty are:
-- the impact on expected credit losses of Covid-19 (including government furlough and other support initiatives)
-- the performance of interest only mortgages at maturity -- the level of future recoveries for retail lending -- the use of forward-looking economic information using multiple economic scenarios
The most significant area of judgement is:
-- the approach to identifying significant increases in credit risk and impairment. There have been no changes to the approach disclosed in the Annual Report and Accounts 2021.
The table below shows the amounts included in provisions in relation to the significant areas of estimation uncertainty for the retail portfolios (residential mortgages and consumer banking), with further details provided on the following pages. There are no material impacts on impairment provisions for the commercial portfolio.
Significant areas of estimation uncertainty
30 September 2021 4 April 2021
Residential Consumer Total Residential Consumer Total
Mortgages Banking Mortgages Banking
GBPm GBPm GBPm GBPm GBPm GBPm
Impact on expected credit losses of
Covid-19 (including government furlough
and other support initiatives) 53 60 113 57 99 156
Performance of interest only mortgages
at maturity 48 - 48 69 - 69
Level of future recoveries for retail
lending 59 22 81 56 22 78
Impact of applying multiple economic
scenarios (note i) 76 46 122 105 53 158
Note:
i. The total impact of applying multiple economic scenarios is to increase provisions by GBP122 million (4 April 2021: GBP158 million), compared with provisions based on the central economic scenario. GBP22 million (4 April 2021: GBP41 million) of this total impact is also included in the values disclosed for the other areas of estimation uncertainty in the table, as these are calculated based on multiple economic scenarios.
8. Impairment reversals/losses and provisions on loans and advances to customers (continued)
Critical accounting estimates and judgements (continued)
Impact on expected credit losses of Covid-19 (including government furlough and other support initiatives)
Suppressed credit risk associated with payment deferrals
Payment deferrals or other similar concessions were offered on all retail products as a result of Covid-19. Although these payment deferrals ended on 31 July 2021, it is recognised that in some cases borrowers will experience longer-term financial difficulty as a result of the pandemic, and additional ECLs have therefore been recognised in respect of some borrowing where payment deferrals were granted. Unlike other concessions granted to borrowers in financial difficulty, these payment deferrals have not been subject to detailed affordability assessments, and therefore the degree of financial difficulty experienced by the members and customers who apply for them requires estimation.
A proportion of loans which were granted payment deferrals are judged to carry an increased risk which has not yet emerged due to payment deferrals and other government support schemes suppressing arrears. The PD applied to a higher risk proportion of these loans has been increased where appropriate. During the period, as economic conditions have improved and lending has been repaid, the total provision for this risk across all lending portfolios has reduced to GBP57 million (4 April 2021: GBP74 million). Of this provision, GBP24 million (4 April 2021: GBP36 million) relates to residential mortgages and GBP33 million (4 April 2021: GBP38 million) relates to consumer banking. The proportion of payment deferrals to which the adjustment was applied varied between 9% and 23% (4 April 2021: between 10% and 27%), depending on the portfolio; an increase in this proportion by 5 percentage points would have increased provisions by GBP23 million.
At 30 September 2021, GBP2 billion (4 April 2021: GBP2 billion) of residential mortgages are reported in stage 2 as a result of this increased risk.
Temporary reduction in arrears
Arrears balances across all products have reduced since the start of the Covid-19 pandemic, leading to a reduction in modelled provisions. Management has judged this to be a temporary position due to the availability of government support schemes and an adjustment of GBP73 million (4 April 2021: GBP57 million) has been made to provisions to recognise the underlying risk. Of this, GBP29 million (4 April 2021: GBP21 million) relates to residential mortgages and GBP44 million (4 April 2021: GBP36 million) relates to consumer banking.
This adjustment is expected to reduce as arrears start to return to the levels associated with prevailing economic conditions. This adjustment has been allocated to stage 2 loans.
Relationship between GDP and expected defaults
The impacts of Covid-19 and related support measures have changed the relationships between economic variables such as GDP and unemployment, and the subsequent expected defaults. GDP is an input into the consumer banking ECL models. A change has therefore been made to model inputs since 30 September 2020 to delay and smooth the impacts of the fluctuations in GDP over the past 18 months, in order to maintain provision levels consistent with a more comprehensive consideration of economic conditions. Had this change not been made, the ECL on consumer banking portfolios would have been higher at 30 September 2021 by GBP17 million (4 April 2021: lower by GBP25 million).
8. Impairment reversals/losses and provisions on loans and advances to customers (continued)
Critical accounting estimates and judgements (continued)
Performance of interest only mortgages at maturity
There is a risk that a proportion of interest only mortgages will not be redeemed at their contractual maturity date, because a borrower does not have a means of capital repayment or has been unable to refinance the loan. Buy to let mortgages are typically advanced on an interest only basis. Interest only balances for prime residential mortgages relate primarily to historical balances which were originally advanced as interest only mortgages or where a change in terms to an interest only basis has been agreed. Interest only loans which are judged to have a significantly increased risk of inability to refinance at maturity are transferred to stage 2. The ability of a borrower to refinance is calculated using current lending criteria which considers LTV and affordability assessments. The impact of recognising the risk of inability to refinance or repay at maturity is to increase ECLs by GBP48 million (4 April 2021: GBP69 million). If the interest rate used within the affordability assessment was increased by 1%, provisions would increase by GBP6 million.
Level of future recoveries for retail lending
Residential mortgages: collateral values
For residential mortgages, the estimate of future collateral values is a key source of estimation uncertainty, with two adjustments required to recognise the impact of risks which are not reflected in the modelled outputs.
Firstly, an adjustment is made to reflect the property valuation risk associated with flats subject to fire safety risks such as unsuitable cladding. Due to limited data availability to identify affected properties individually, it is assumed that a proportion of the flats securing loans in the residential mortgage portfolios are affected, in line with UK market exposure estimates. Assumptions relating to property values have been applied based upon the height of the affected buildings. The ECL adjustment is GBP29 million (4 April 2021: GBP23 million), of which GBP14 million relates to buildings with six or more storeys.
Secondly, an adjustment is made to reflect the idiosyncratic risk relating to recovery values for repossessed properties over the next few years. It is considered that proceeds from disposal of repossessed properties in the future are more uncertain than observed historically and may not reflect the HPI recovery assumed for the wider market. This adjustment has been applied by reducing modelled property valuations, and also by increasing the expected variance in valuations achieved across the portfolio. This adjustment totals GBP30 million (4 April 2021: GBP33 million), which equates to a 2% increase in the stage 3 provision coverage ratio.
Consumer banking: future recoveries
For consumer banking, the estimate of future recoveries is a key source of estimation uncertainty. The Group uses a combination of both historical data and management judgement in estimating the level and timing of future recoveries. It is management's judgement that the recovery experience over recent years is not sustainable in the future, and therefore additional provisions totalling GBP22 million (4 April 2021: GBP22 million) are held on charged off assets to reflect a future reduction in recovery rates. This represents 11% of total charged off balances.
8. Impairment reversals/losses and provisions on loans and advances to customers (continued)
Critical accounting estimates and judgements (continued)
Use of forward-looking economic information
Management exercises judgement in the selection of economic assumptions to be used in the modelling of multiple economic scenarios. The economic scenarios are reviewed and updated on a quarterly basis. The provision recognised is the probability-weighted sum of the provisions calculated under a range of economic scenarios. The scenarios and associated probability weights are derived using external data and statistical methodologies, together with management judgement, to determine scenarios which span an appropriately wide range of plausible economic conditions. The Group continues to model four economic scenarios, which together encompass an appropriate range of potential economic outcomes. The impact of applying multiple economic scenarios (MES) is to increase provisions at 30 September 2021 by GBP122 million (4 April 2021: GBP159 million), compared with provisions based on the central economic scenario.
At 30 September 2021, the probability weightings for each scenario were reviewed and the probabilities allocated to the upside and downside scenarios were updated. The changes in scenario weightings during the period reflect the improvement in economic outlook since 4 April 2021. The downside scenario, which features an 8% peak in unemployment and a 14.3% fall in house prices from December 2020 levels, is judged to be less likely, whilst the probability of upside (30%) versus downside/severe downside (together 30%) scenarios are judged to be more evenly balanced. The probability weightings applied to the scenarios are shown in the table below:
Scenario probability weighting (%)
Upside Central Downside Severe
scenario scenario scenario downside
scenario
30 September 2021 30 40 20 10
4 April 2021 10 40 40 10
All four economic scenarios reflect the removal of Covid-19 restrictions during the summer of 2021. The upside and central economic scenarios assume that these restrictions are not reintroduced, while both downside scenarios are consistent with restrictions being reintroduced towards the end of 2021. The downside scenarios are therefore consistent with vaccines proving to be less effective in preventing illness than anticipated. There also remains uncertainty over the extent to which government support schemes will have avoided or merely delayed the adverse credit consequences of the pandemic.
In the central scenario at 30 September 2021, GDP recovers in line with the assumptions used in the central scenario at 4 April 2021. The end of the government support schemes is expected to result in an increase in the unemployment rate; however, the resilience of the labour market to date has resulted in the forecast peak unemployment rate reducing to 6.0% in this scenario (4 April 2021: 8.0%). A reduction to the peak unemployment rate has been made in each of the economic scenarios, with this peak being delayed due to the extension of the furlough scheme until 30 September 2021. House price growth has been driven by both shifts in household preferences since the pandemic and by policy support, including the stamp duty holiday. The upside scenario assumes that this growth is sustained, whilst the central and downside scenarios assume that house prices fall from Q4 2021, driven by the stamp duty holiday ending and the labour market conditions beginning to deteriorate. The central scenario house prices are more favourable than those forecast at 4 April 2021 due to the more favourable labour market forecast. The bank base rate is forecast to remain at 0.1% across all scenarios between 2021 and 2025, with the exception of the upside scenario, where an increase to 1.25% is forecast by the end of 2025. The severe downside scenario continues to be aligned with internal stress testing and reflects a severe long-lasting impact on the UK economy.
Due to the severity of the severe downside scenario, it is management's judgement that the modelled outputs would not reflect the non-linear impacts that would arise in this scenario. A separate calculation is therefore performed using information from internal and external stress testing exercises, to derive adjustments to probability of default and loss given default at a portfolio level. This adjustment to reflect the weighted impact of the severe downside scenario increases provisions by GBP94 million (4 April 2021: GBP102 million).
8. Impairment reversals/losses and provisions on loans and advances to customers (continued)
Critical accounting estimates and judgements (continued)
Graphs showing the historical and forecasted GDP level, average house price and unemployment rate for the Group's economic scenarios, including the previous central economic scenario, are included in the Interim Results September 2021 on nationwide.co.uk
The tables below provide a summary of the values of the key UK economic variables used in the economic scenarios over the first five years of the scenario :
Economic variables
Rate/annual growth rate at December 5-year Dec-20 Dec-20
2020-2025 average to peak to trough
(note (notes (notes
ii) iii and iii
iv) and iv)
Actual Forecast
(note
i)
2020 2021 2022 2023 2024 2025
30 September 2021 % % % % % % % % %
GDP growth
Upside scenario (7.3) 10.0 2.6 2.0 2.0 2.0 3.7 19.9 (1.6)
Central scenario (7.3) 7.3 2.4 2.0 1.8 1.2 2.9 15.5 (1.6)
Downside scenario (7.3) 3.1 2.3 2.8 2.0 1.6 2.4 12.4 (1.6)
Severe downside
scenario (7.3) (0.2) 0.1 2.0 2.0 1.6 1.1 5.6 (2.2)
HPI growth
Upside scenario 6.4 7.7 3.5 3.7 4.0 3.8 4.5 24.7 0.8
Central scenario 6.4 4.9 (4.4) 3.4 4.1 3.7 2.3 11.9 0.3
Downside scenario 6.4 4.1 (16.4) 5.3 4.8 3.5 (0.1) 5.2 (14.3)
Severe downside
scenario 6.4 (1.7) (23.6) (2.5) 8.8 7.2 (3.1) 4.5 (26.8)
Unemployment
Upside scenario 5.2 4.6 3.6 3.7 3.9 3.9 4.0 4.9 3.6
Central scenario 5.2 5.6 5.0 4.8 4.4 4.3 4.8 6.0 4.3
Downside scenario 5.2 6.3 6.8 5.4 4.9 4.9 5.7 8.0 4.7
Severe downside
scenario 5.2 7.0 8.7 7.0 5.7 5.4 6.8 10.0 4.7
8. Impairment reversals/losses 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-20 Dec-20
2020-2025 average to peak to trough
(note (notes (notes
ii) iii and iii
iv) and iv)
Actual Forecast
(note
i)
2020 2021 2022 2023 2024 2025
4 April 2021 % % % % % % % % %
GDP growth
Upside scenario (7.8) 10.6 2.6 2.0 2.0 1.6 3.7 20.0 (3.2)
Central scenario (7.8) 7.2 2.9 2.0 1.8 1.2 3.0 16.0 (4.0)
Downside scenario (7.8) 2.0 4.6 2.8 2.0 1.6 2.6 13.6 (6.2)
Severe downside
scenario (7.8) (3.2) 3.9 2.0 2.0 1.6 1.2 6.3 (8.5)
HPI growth
Upside scenario 7.0 7.5 3.0 3.9 3.5 3.5 4.3 23.4 2.0
Central scenario 7.0 1.9 (7.8) 6.9 4.9 4.7 2.0 10.2 (6.6)
Downside scenario 7.0 (2.2) (14.7) 8.0 4.7 3.5 (0.5) 1.9 (16.9)
Severe downside
scenario 7.0 (5.9) (22.8) (3.5) 8.8 7.2 (4.0) 0.8 (29.9)
Unemployment
Upside scenario 5.1 5.3 4.3 3.9 3.9 3.9 4.4 5.7 3.9
Central scenario 5.1 8.0 5.9 4.7 4.3 4.3 5.4 8.0 4.3
Downside scenario 5.1 9.5 7.4 5.8 5.1 5.0 6.5 9.5 5.0
Severe downside
scenario 5.1 12.0 10.0 8.6 7.0 5.7 8.5 12.0 5.7
Notes:
i. The 2020 actual data as presented in the Annual Report and Accounts 2021 has been updated to reflect the most recent published economic data.
ii. The average rate for GDP and HPI is based on the cumulative annual growth rate over the forecast period. Average unemployment is calculated using a simple average using quarterly points.
iii. GDP growth and HPI are shown as the largest cumulative growth/fall from 31 December over the forecast period.
iv. The unemployment rate is shown as the highest/lowest rate over the forecast period from 31 December.
8. Impairment reversals/losses and provisions on loans and advances to customers (continued)
Critical accounting estimates and judgements (continued)
To give an indication of the sensitivity of ECLs to different economic scenarios, the table below shows the ECL if 100% weighting is applied to each scenario:
Sensitivity analysis impact of multiple
economic scenarios
Upside Central Downside Severe Reported
scenario scenario scenario downside provision
scenario
30 September GBPm GBPm GBPm GBPm GBPm
2021
Residential
mortgages 174 197 267 935 273
Consumer banking 429 440 457 911 486
Commercial
lending 24 25 27 29 25
Total 627 662 751 1,875 784
4 April 2021 GBPm GBPm GBPm GBPm GBPm
Residential
mortgages 158 212 261 998 317
Consumer banking 428 449 458 916 502
Commercial
lending 29 32 34 38 33
Total 615 693 753 1,952 852
The ECL for each scenario multiplied by the scenario probability will not reconcile to the overall provision. Whilst the stage allocation of loans varies in each individual scenario, each loan is allocated to a single stage in the overall provision calculation; this is based on a weighted average PD which takes into account the economic scenarios. A probability weighted 12 month or lifetime ECL (which takes into account the economic scenarios) is then calculated based on the stage allocation.
The table below shows the sensitivity at 30 September 2021 to some of the key assumptions used within the ECL calculation:
Sensitivity to key forward-looking information assumptions
Increase in
provision
2021 GBPm
Sensitivity to changes in scenario probability weightings
10% increase in the probability of the downside scenario
(reducing the upside by a corresponding 10%) 12
5% increase in the probability of the severe downside scenario
(reducing the downside by a corresponding 5%) 56
9. Taxation
The actual tax charge differs from the theoretical amount that would arise using the standard rate of corporation tax in the UK as follows:
Reconciliation of tax charge
Half year Half year
to to
30 September 30 September
2021 2020
GBPm GBPm
Profit before tax: 853 361
Tax calculated at a tax rate of 19% 162 69
Adjustments in respect of prior years (22) -
Tax credit on distribution to the holders
of Additional Tier 1 capital (8) (9)
Banking surcharge 38 14
Expenses not deductible for tax purposes 1 8
Effect of deferred tax provided at different
tax rates 2 (2)
Temporary differences not previously
recognised (5) -
Tax charge 168 80
It was announced in the Budget on 3 March 2021 that the main rate of corporation tax of 19% would be increased to 25% with effect from 1 April 2023. This legislative change was enacted on 10 June 2021. The impact of this change on deferred tax balances is an increase in the Group's net deferred tax liability of GBP6 million, all of which was recognised in other comprehensive income. On 27 October 2021 it was announced in the Budget that the banking surcharge would decrease from 8% to 3% and the surcharge allowance would increase from GBP25 million to GBP100 million, also from 1 April 2023. As this change was not substantively enacted at 30 September 2021, the impact has not been reflected in these consolidated interim financial statements. Upon enactment, this will require a further remeasurement of the Group's deferred tax assets and liabilities and is expected to substantially reverse the GBP6 million impact recognised in the period ended 30 September 2021.
10. Loans and advances to customers
30 September 2021 4 April 2021
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 151,560 (74) - 151,486 64 151,550 149,706 (93) - 149,613 68 149,681
Buy to let
and legacy
residential
mortgages 42,658 (199) - 42,459 - 42,459 41,249 (224) - 41,025 - 41,025
Consumer
banking 4,660 (486) - 4,174 - 4,174 4,404 (502) - 3,902 - 3,902
Commercial
lending 5,911 (25) 593 6,479 52 6,531 6,267 (33) 653 6,887 52 6,939
Total 204,789 (784) 593 204,598 116 204,714 201,626 (852) 653 201,427 120 201,547
Note:
i. 'Other' represents a fair value adjustment for micro hedged risk for commercial loans that were previously hedged on an individual basis.
10. Loans and advances to customers (continued)
The tables below summarise the movements in, 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 period. 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.
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 Gross Gross Gross
balances Provisions balances Provisions balances Provisions balances Provisions
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 (6,565) (25) 6,565 25 - - - -
Transfers to stage 3 (139) (2) (401) (53) 540 55 - -
Transfers from stage 2 to
stage 1 7,544 133 (7,544) (133) - - - -
Transfers from stage 3 117 2 217 14 (334) (16) - -
Net remeasurement of ECL
arising from
transfer of stage (105) 125 (4) 16
Net movement arising from
transfer
of stage (note ii) 957 3 (1,163) (22) 206 35 - 16
New assets originated or
purchased
(note iii) 19,293 22 - - - - 19,293 22
Net impact of further
lending and repayments
(note iv) (4,018) (18) (120) (16) (51) (10) (4,189) (44)
Changes in risk parameters
in relation
to credit quality (note
v) - (14) - (7) - 20 - (1)
Other items impacting
income statement
charge/(reversal)
including recoveries - - - - - (7) - (7)
Redemptions (note vi) (11,088) (3) (636) (9) (171) (8) (11,895) (20)
Income statement reversal
for the period (34)
Decrease due to write-offs - - - - (46) (41) (46) (41)
Other provision movements - - - - - 7 - 7
At 30 September 2021 192,983 106 9,949 334 1,857 344 204,789 784
Net carrying amount 192,877 9,615 1,513 204,005
10. Loans and advances to customers (continued)
Reconciliation of movements in gross balances and impairment provisions
Non-credit impaired Credit impaired
(note i)
Subject to 12 Subject to lifetime Subject to lifetime
month ECL ECL ECL Total
Stage 1 Stage 2 Stage 3 and POCI
Gross Gross Gross Gross
balances Provisions balances Provisions balances Provisions balances Provisions
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 5 April 2020 (note vii) 188,403 75 10,690 269 1,802 341 200,895 786
Stage transfers:
Transfers from Stage 1 to
Stage 2 (7,717) (30) 7,717 30 - - - -
Transfers to Stage 3 (121) - (374) (60) 495 60 - -
Transfers from Stage 2 to
Stage 1 9,031 148 (9,031) (148) - - - -
Transfers from Stage 3 118 - 258 15 (376) (15) - -
Net remeasurement of ECL
arising from
transfer of stage (114) 184 - 70
Net movement arising from
transfer
of stage (note ii) 1,311 4 (1,430) 21 119 45 - 70
New assets originated or
purchased
(note iii) 14,217 25 - - - - 14,217 25 Net impact of further lending and repayments (note iv) (4,040) (26) (43) (14) (16) (9) (4,099) (49) Changes in risk parameters in relation to credit quality (note v) - 40 - 89 - 32 - 161 Other items impacting income statement charge/(reversal) including recoveries - - - - - (5) - (5) Redemptions (note vi) (8,445) (2) (380) (5) (119) (2) (8,944) (9) Reversal of additional Covid-19 provision (note vii) (101) Additional management adjustment (note viii) 47 Income statement charge for the period 139 Decrease due to write-offs - - - - (59) (55) (59) (55) Other provision movements - - - - - 5 - 5 At 30 September 2020 (note viii) 191,446 116 8,837 360 1,727 352 202,010 875 Net carrying amount (note viii) 191,330 8,477 1,375 201,135
Notes:
i. Gross balances of credit impaired loans include GBP140 million (4 April 2021: GBP148 million) of purchased or originated credit impaired (POCI) loans, which are presented net of lifetime ECL impairment provisions of GBP5 million (4 April 2021: 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.
vii. At 4 April 2020, an additional provision for credit losses of GBP101 million was recognised to reflect the estimated impact of the Covid-19 pandemic on ECLs. At 4 April 2020, t his additional provision was not allocated to underlying loans nor was it attributed to stages. This provision was allocated to underlying loans and is reflected in the movements within the table and the 30 September 2020 position.
viii. At 30 September 2020, an additional provision adjustment of GBP47 million was recognised to reflect challenges in estimating ECLs during the Covid-19 pandemic. At 30 September 2020, this additional provision was not allocated to underlying loans nor was it attributable to stages. This provision has subsequently been allocated to underlying loans.
11. Fair value hierarchy of financial assets and liabilities held at fair value
IFRS 13 requires an entity to classify assets and liabilities held at fair value, and those not measured at fair value but for which the fair value is disclosed, according to a hierarchy that reflects the significance of observable market inputs in calculating those fair values. The three levels of the fair value hierarchy are defined in note 1 of the Annual Report and Accounts 2021.
Details of those financial assets and liabilities not measured at fair value are included in note 12.
The following table shows the Group's financial assets and liabilities that are held at fair value by fair value hierarchy, balance sheet classification and product type:
30 September 2021 4 April 2021
Fair values based Fair values based
on on
Level Level Level Total Level Level Level Total
1 2 3 1 2 3
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Government, government
related entities and
supranational investments 19,656 - - 19,656 21,363 - - 21,363
Other debt investment
securities 1,960 1,261 5 3,226 1,748 1,087 5 2,840
Investments in equity
shares - - 88 88 - - 27 27
Total investment securities
(note i) 21,616 1,261 93 22,970 23,111 1,087 32 24,230
Interest rate swaps - 1,855 - 1,855 - 1,569 - 1,569
Cross currency interest
rate swaps - 1,876 - 1,876 - 2,055 - 2,055
Foreign exchange swaps - 255 - 255 - 20 - 20
Inflation swaps - - 115 115 - - 112 112
Bond forwards and futures - 10 - 10 - 53 - 53
Total derivative financial
instruments - 3,996 115 4,111 - 3,697 112 3,809
Loans and advances to
customers - - 116 116 - - 120 120
Total financial assets 21,616 5,257 324 27,197 23,111 4,784 264 28,159
Financial liabilities
Interest rate swaps - (611) - (611) - (737) - (737)
Cross currency interest
rate swaps - (612) - (612) - (819) - (819)
Foreign exchange swaps - (5) - (5) - (12) - (12)
Inflation swaps - - (110) (110) - - (52) (52)
Bond forwards and futures - - - - - (2) - (2)
Total derivative financial
instruments - (1,228) (110) (1,338) - (1,570) (52) (1,622)
Total financial liabilities - (1,228) (110) (1,338) - (1,570) (52) (1,622)
Note:
i. Investment securities shown here exclude GBP913 million (4 April 2021: GBP1,243 million) of investment securities held at amortised cost.
11. Fair value hierarchy of financial assets and liabilities held at fair value (continued)
Transfers between fair value hierarchies
Instruments may move between fair value hierarchies primarily due to increases or decreases in market activity or changes to the significance of unobservable inputs to their valuation, and are recognised at the date of the event or change in circumstances which caused the transfer. There were no significant transfers between Level 1 and Level 2 during the period.
Level 1 and Level 2 portfolios
The Group's Level 1 portfolio comprises government and other highly rated securities for which traded prices are readily available.
Asset valuations for Level 2 investment securities are sourced from consensus pricing or other observable market prices. None of the Level 2 investment securities are valued from models. Level 2 derivative assets and liabilities are valued using observable market data for all significant valuation inputs.
Level 3 portfolio
The Group's Level 3 portfolio consists of:
-- certain loans and advances to customers, including a closed portfolio of residential mortgages and a small number of commercial loans;
-- certain investment securities, comprising primarily investments made in Fintech companies; and
-- inflation swaps.
The table below sets out movements in the Level 3 portfolio, including transfers in and out of Level 3:
Movements in Level 3 portfolio
Half year to 30 September 2021 Half year to 30 September 2020
Investment Derivative Derivative Loans Investment Derivative Derivative Loans
securities financial financial and securities financial financial and
assets liabilities advances assets liabilities advances
to to
customers customers
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 5 April 32 112 (52) 120 18 - - 128
Gains/(losses)
recognised in the
income statement,
within:
Net interest income - 23 (73) 1 - - - 2
(Losses)/gains from
derivatives
and hedge
accounting (note i) - (2) 12 - - - - -
Other operating
income/(expense) 25 3 (13) 1 - - - (1)
Gains recognised in
other comprehensive
income, within:
Fair value through
other comprehensive
income reserve 16 - - - - - - -
Additions 20 - - - 9 - - -
Disposals - (2) 12 - - - - -
Settlements/repayments - (19) 4 (6) - - - (3)
Transfers into Level 3
portfolio - - - - - 51 (116) -
At 30 September 93 115 (110) 116 27 51 (116) 126
Note:
i. Includes foreign exchange revaluation gains/losses.
11. Fair value hierarchy of financial assets and liabilities held at fair value (continued)
Level 3 portfolio sensitivity analysis of valuations using unobservable inputs
The fair value of financial instruments is, in certain circumstances, measured using valuation techniques based on market prices that are not observable in an active market or are significant unobservable market inputs. Reasonable alternative assumptions can be applied for the purposes of sensitivity analysis, taking account of the nature of valuation techniques used, as well as the availability and reliability of observable proxy and historic data. The following table shows the sensitivity of the Level 3 fair values to reasonable alternative assumptions (as set out in the table of significant unobservable inputs below) and the resultant impact of such changes in fair value on the income statement or members' interests and equity:
Sensitivity of Level 3 fair values
30 September 2021 4 April 2021
Income statement Other comprehensive Income statement
income
Favourable Unfavourable Favourable Unfavourable Fair Favourable Unfavourable
Fair value changes changes changes changes value changes changes
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Investment
securities 93 3 (4) 3 (2) 32 13 (6)
Derivative financial
instruments -
assets 115 11 (11) - - 112 21 (21)
Derivative financial
instruments -
liabilities (110) 51 (51) - - (52) 28 (28)
Loans and advances
to
customers 116 2 (2) - - 120 2 (3)
Total 214 67 (68) 3 (2) 212 64 (58)
Alternative assumptions are considered for each product and varied according to the quality of the data and variability of the underlying market. The following table discloses the significant unobservable inputs underlying the above alternative assumptions for assets and liabilities recognised at fair value and classified as Level 3, along with the range of values for those significant unobservable inputs. Where sensitivities are described the inverse relationship will also generally apply. Some of the significant unobservable inputs used in fair value measurement are interdependent. Where this is the case, a description of those interrelationships is included below:
Significant unobservable inputs
30 September 2021 4 April 2021
Total Total Valuation Significant Range Units Total Total Valuation Significant Range Units
assets liabilities technique unobservable (note i) assets liabilities technique unobservable (note i)
inputs inputs
GBPm GBPm GBPm GBPm
Discounted
Investment Internal Various cash Discount
securities 93 - assessment (note ii) - - GBP 32 - flows rate 10.00 15.00%
Discounted
cash Cash flow
flows projections 95.00 105.00%
Derivative
financial Discounted Discounted
instruments 115 (110) cash flows Seasonality 0.00 0.85% 112 (52) cash flows Seasonality 0.00 0.81%
Loans and
advances Discounted Discounted
to cash Discount cash Discount
customers 116 - flows rate 2.08 9.75% 120 - flows rate 2.09 9.75%
Notes:
i. The range represents the values of the highest and lowest levels used in the calculation of favourable and unfavourable changes as presented in the table of sensitivities above.
ii. Given the wide range of investments and variety of inputs to modelled values, which may include inputs such as observed market prices, discount rates, revenue multiples or probability weightings of expected outcomes, the Group does not disclose ranges as they are not meaningful without reference to individual underlying investments, which would be impracticable. Changes have been made to the valuation approach during the period to reference recent market transactions where available and to incorporate additional inputs.
12. Fair value of financial assets and liabilities measured at amortised cost
Valuation methodologies employed in calculating the fair value of financial assets and liabilities measured at amortised cost are consistent with those disclosed in the Annual Report and Accounts 2021.
The following table summarises the carrying value and fair value of financial assets and liabilities measured at amortised cost on the Group's balance sheet:
Fair value of financial assets and liabilities measured at amortised
cost (note i)
30 September 2021 4 April 2021
Carrying Fair Carrying Fair
value value value value
GBPm GBPm GBPm GBPm
Financial assets
Loans and advances to banks and similar
institutions 3,275 3,275 3,660 3,660
Investment securities 913 915 1,243 1,245
Loans and advances to customers:
Residential mortgages 193,945 195,887 190,638 193,645
Consumer banking 4,174 4,127 3,902 3,866
Commercial lending 6,479 6,406 6,887 6,638
Total 208,786 210,610 206,330 209,054
Financial liabilities
Shares 177,431 177,446 170,313 170,415
Deposits from banks and similar institutions 36,435 36,435 27,022 27,022
Other deposits 7,823 7,823 4,522 4,522
Debt securities in issue 38,031 38,737 27,923 28,633
Subordinated liabilities 7,710 7,974 7,575 7,833
Subscribed capital 232 232 243 233
Total 267,662 268,647 237,598 238,658
Note:
i. The table above excludes cash for which fair value approximates carrying value.
13. Provisions for liabilities and charges
Customer Other Total
redress provisions
GBPm GBPm GBPm
At 5 April 2021 124 35 159
Provisions utilised (36) (15) (51)
Charge for the period 78 8 86
Release for the period (2) (2) (4)
Net income statement charge
(note i) 76 6 82
At 30 September 2021 164 26 190
Note:
i. The net income statement charge relating to customer redress is included in provisions for liabilities and charges, with the exception of GBP23 million which is included in administrative expenses. The net income statement charge relating to other provisions is included in administrative expenses.
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 such customer redress matters may result in a provision, a contingent liability or both, depending upon relevant facts and circumstances. No provision is made where it is concluded that it is not probable that a quantifiable payment will be made; this will include circumstances where the facts are unclear or further time is required to reasonably quantify the expected payment.
At 30 September 2021, the Group held provisions of GBP164 million (4 April 2021: GBP124 million) in respect of the potential costs of remediation and redress relating to issues with historical quality control procedures, past sales and administration of customer accounts , and other regulatory matters.
Provisions for customer redress relating to historical quality control procedures and past administration of customer accounts have been based on detailed reviews completed to date into specific areas of concern and represent the Group's best estimate of the liabilities. As further work is undertaken on these areas, it is possible that the ultimate liabilities may be higher or lower than the amounts provided at 30 September 2021. An estimate of the potential impact of any contingent liabilities associated with the ongoing investigations has not been provided as it is not practicable to do so.
Critical accounting estimates and judgements
There is significant estimation uncertainty in determining the probability, timing and amount of any cash outflows associated with customer redress provisions.
Provisions are recognised for matters relating to customer redress where an outflow is probable and can be estimated reliably. Amounts provided are based on management's best estimate of the number of customers impacted and anticipated remediation. As any new matters emerge, an estimate is made of the outcome, although in some cases uncertainties remain as to the eventual costs given the inherent difficulties in determining the number of impacted customers and the amount of any redress applicable.
Other provisions
Other provisions primarily include amounts for severance costs, a number of property-related provisions and expected credit losses on irrevocable personal loan and mortgage lending commitments.
14. Contingent liabilities
During the ordinary course of business, the Group may be subject to complaints and threatened or actual legal proceedings brought by or on behalf of current or former employees, customers, investors or other third parties, as well as legal and regulatory reviews, challenges, investigations and enforcement actions. Any such material cases are periodically reassessed, with the assistance of external professional advisers where appropriate, to determine the likelihood of incurring a liability. The Group does not disclose amounts in relation to contingent liabilities associated with such claims where the likelihood of any payment is remote. The Group also does not disclose an estimate of the potential financial impact or effect on the Group of contingent liabilities where it is not currently practicable to do so. The Group does not expect the ultimate resolution of any current complaints, threatened or actual legal proceedings, regulatory or other matters to have a material adverse impact on its financial position .
Contingent liabilities associated with redress provisions are discussed further in note 13.
15. Retirement benefit obligations
The Group continues to operate two defined contribution schemes and a number of defined benefit pension arrangements, the most significant being the Nationwide Pension Fund (the Fund); further details are set out in note 30 of the Annual Report and Accounts 2021.
Defined benefit pension schemes
Retirement benefit obligations on the balance sheet
30 September 4 April
2021 2021
GBPm GBPm
------------ -------
Fair value of fund assets 7,401 7,033
Present value of funded obligations (6,921) (6,853)
Present value of unfunded obligations (8) (8)
Surplus 472 172
The principal actuarial assumptions used are as follows:
Principal actuarial assumptions
30 September 4 April
2021 2021
% %
------------ -------
Discount rate 2.05 2.00
Future pension increases (maximum 5%) 3.10 3.00
Retail price index (RPI) inflation 3.25 3.10
Consumer price index (CPI) inflation 2.60 2.40
Assumptions for mortality rates are based on standard mortality tables which allow for future improvements in life expectancies and are adapted to represent the Fund's membership.
15. Retirement benefit obligations (continued)
C hanges in the present value of the net defined benefit asset (including unfunded obligations) are as follows:
Movements in net defined benefit asset
Half year Half year
to to
30 September 30 September
2021 2020
GBPm GBPm
------------- -------------
Surplus at 5 April 172 294
Current service cost - (37)
Past service cost - (2)
Interest on net defined benefit asset 2 3
Return on assets greater than discount
rate (note i) 390 652
Contributions by employer 1 33
Administrative expenses (3) (3)
Actuarial losses on defined benefit
obligations (note i) (90) (707)
Surplus at 30 September 472 233
Note:
i. The net impact before tax on the surplus of actuarial losses and return on assets is an increase of GBP300 million (H1 2020/21: GBP55 million decrease) in other comprehensive income .
The GBP390 million gain relating to the return on assets greater than the discount rate (H1 2020/21: GBP652 million) is primarily driven by increases in the value of UK government bonds, listed equities, private equity, infrastructure and property investments.
Following the closure of the Fund to future accrual on 31 March 2021, there were no employer contributions made in respect of future benefit accrual (H1 2020/21: GBP33 million). There have also been no employer deficit contributions required into the Fund following the completion of the 31 March 2019 valuation (H1 2020/21: GBPnil). Employer deficit contributions of GBP1 million were made in respect of the Group's defined benefit scheme in its Nationwide (Isle of Man) Limited subsidiary.
The GBP90 million actuarial loss on defined benefit obligations (H1 2020/21: loss of GBP707 million) is primarily driven by a 0.15% increase in assumed RPI inflation which was partially offset by a 0.05% increase in the discount rate.
16. Related party transactions
There were no related party transactions during the period ended 30 September 2021 which were significant to the Group's financial position or performance. Full details of the Group's related party transactions for the year ended 4 April 2021 can be found in note 35 of the Annual Report and Accounts 2021.
17. Notes to the consolidated cash flow statement
Half year Half year
to to
30 September 30 September
2021 2020
GBPm GBPm
Non-cash items included in profit before tax
Net (decrease)/increase in impairment provisions (68) 89
Net increase in provisions for liabilities
and charges (note i) 31 10
Amortisation and (gains)/losses on investment
securities (82) 23
Depreciation, amortisation and impairment 252 276
Profit on sale of property, plant and equipment (2) (1)
Loss on the revaluation of property, plant
and equipment - 8
Net charge in respect of retirement benefit
obligations 1 39
Interest on subordinated liabilities 65 87
Interest on subscribed capital 2 2
Gains from derivatives and hedge accounting (3) (56)
Total 196 477 Changes in operating assets and liabilities Loans and advances to banks and similar institutions 474 (11) Net derivative financial instruments 506 (72) Loans and advances to customers (3,159) (1,113) Other operating assets 94 25 Shares 7,118 1,262 Deposits from banks and similar institutions, customers and others 12,653 9,689 Debt securities in issue 9,849 1,224 Contributions to defined benefit pension scheme (1) (33) Other operating liabilities (note i) (170) (344) Total 27,364 10,627 Cash and cash equivalents Cash 46,498 21,045 Loans and advances to banks and similar institutions repayable in 3 months or less 1,154 624 Total 47,652 21,669
Note:
i. Comparatives have been restated to better reflect the nature of liabilities associated with the UK Bank Levy, as further detailed in note 1 to the Annual Report and Accounts 2021. As a result, GBP29 million has been reclassified from 'Net (decrease)/increase in provisions for liabilities and charges' to 'Other operating liabilities'.
The Group is required to maintain balances with the Bank of England which, at 30 September 2021, amounted to GBP1,621 million (30 September 2020: GBP1,401 million). These balances are included within loans and advances to banks and similar institutions on the balance sheet and are not included in the cash and cash equivalents in the cash flow statement as they are not liquid in nature.
Responsibility statement
The directors listed below (being all the directors of Nationwide Building Society) confirm that, to the best of their knowledge:
-- the consolidated interim financial statements have been prepared in accordance with UK-adopted International Accounting Standard 34, 'Interim Financial Reporting',
-- the Interim Results include a fair review of the information required by Disclosure Guidance and Transparency Rules 4.2.7R and 4.2.8R, namely:
- An indication of important events that have occurred in the first six months of the financial year and their impact on the consolidated interim financial statements and a description of the principal risks and uncertainties for the remaining six months of the financial year; and
- Material related party transactions in the first six months of the financial year and any material changes in the related party transactions described in the Annual Report and Accounts 2021.
Signed on behalf of the Board by
Chris Rhodes
Chief Financial Officer
18 November 2021
Board of directors
Chairman
David Roberts
Executive directors
Joe Garner
Chris Rhodes
Non-executive directors
Mai Fyfield
Albert Hitchcock
Debbie Klein
Kevin Parry
Tamara Rajah
Phil Rivett
Tim Tookey
Gunn Waersted
Independent review report to Nationwide Building Society
Conclusion
We have been engaged by Nationwide Building Society ('the Society') and its subsidiaries (together, 'the Group') to review the consolidated interim financial statements in the Interim Results for the period ended 30 September 2021 which comprise the consolidated balance sheet as at 30 September 2021 and the related income statement, statement of comprehensive income, statement of changes in members' interests and equity and cash flow statement for the period then ended and explanatory notes. We have read the other information contained in the half yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the consolidated interim financial statements.
Based on our review, nothing has come to our attention that causes us to believe that the consolidated interim financial statements in the Interim Results for the period ended 30 September 2021 are not prepared, in all material respects, in accordance with UK-adopted International Accounting Standard (IAS) 34, "Interim Financial Reporting" and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.
Basis for conclusion
We conducted our review in accordance with International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
As disclosed in note 2, the annual financial statements of the Group will be prepared in accordance with UK adopted international accounting standards. The consolidated interim financial statements included in the Interim Results have been prepared in accordance with UK-adopted IAS 34.
Responsibilities of the directors
The directors are responsible for preparing the Interim Results in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.
Auditor's responsibilities for the review of the financial information
In reviewing the Interim Results, we are responsible for expressing to the Group a conclusion on the consolidated interim financial statements in the Interim Results. Our conclusion is based on procedures that are less extensive than audit procedures, as described in the basis for conclusion paragraph of this report.
Use of our report
This report is made solely to the Group in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Group, for our work, for this report, or for the conclusions we have formed.
Ernst & Young LLP
London
18 November 2021
Other information
The Interim Results are unaudited and do not constitute accounts within the meaning of Section 73 of the Building Societies Act 1986.
The financial information for the year ended 4 April 2021 has been extracted from the Annual Report and Accounts 2021. The Annual Report and Accounts 2021 has been filed with the Financial Conduct Authority and the Prudential Regulation Authority. The Independent Auditors' Report on the Annual Report and Accounts 2021 was unqualified.
Nationwide has continued to adopt the Code for Financial Reporting Disclosure ('the code') published by the British Bankers' Association and subsequently adopted by UK Finance in its Annual Report and Accounts 2021. The code sets out five disclosure principles together with supporting guidance. These principles have been applied, as appropriate, in the context of the Interim Results.
A copy of the Interim Results is placed on the website of Nationwide Building Society. The directors are responsible for the maintenance and integrity of information on the Society's website. Information published on the internet is accessible in many countries with different legal requirements. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Contacts
Media queries: Investor queries: Sara Batchelor Charles Wood Mobile: +44 (0)7785 344 137 Mobile: +44 (0)7500 999 612 Sara.Batchelor@nationwide.co.uk Charles.Wood@nationwide.co.uk Eden Black Vikas Sidhu Mobile: +44 (0)7793 596 317 Mobile: +44 (0)7501 093 181 Eden.Black@nationwide.co.uk Vikas.Sidhu@nationwide.co.uk
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