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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Nationwide Building Society | LSE:NBS | London | Ordinary Share | GB00BBQ33664 | CORE CAPITAL DEFERRED SHS (MIN 250 CCDS) |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 133.00 | 130.00 | 136.00 | 133.00 | 131.00 | 131.00 | 0.00 | 08:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Mortgage Bankers & Loan Corr | 4.68B | 1.66B | 157.6429 | 0.51 | 849.4M |
From Apr 2019 to Apr 2024
TIDMNBS TIDM96MN
RNS Number : 7940O
Nationwide Building Society
22 May 2018
Nationwide Building Society
Preliminary Results Announcement
For the year ended
4 April 2018
CONTENTS
Hot Features
Premium
Page
Key highlights and quotes 3
Financial summary 5
CEO review 6
Financial review 11
Business and risk report 19
Consolidated financial statements 61
Notes to the consolidated financial statements 66
Responsibility statement 79
Other information 79
Contacts 79
Underlying profit
Profit before tax shown on a statutory and underlying basis is set out on page 11. Statutory profit before tax of GBP977 million has been adjusted for a number of items to derive an underlying profit before tax of GBP1,022 million. The purpose of this measure is to reflect management's view of the Group's underlying performance and to assist with like for like comparisons of performance across years. Underlying profit is not designed to measure sustainable levels of profitability as it potentially requires exclusion of non-recurring items even though they are closely related to (or even a direct consequence of) the Group's core business activities.
Nationwide has developed a financial performance framework based on the fundamental principle of maintaining its capital at a prudent level in excess of regulatory requirements. The framework provides parameters which allow it to calibrate future performance and help ensure that it achieves the right balance between distributing value to members, investing in the business and maintaining financial strength. The most important of these parameters is underlying profit which is a key component of Nationwide's capital. We believe that a level of underlying profit of approximately GBP0.9 billion to GBP1.3 billion per annum over the cycle would meet the Board's objective for sustainable capital strength. This range will vary from time to time, and whether our profitability falls within or outside this range in any given financial year or period will depend on a number of external and internal factors, including conscious decisions to return value to members or to make investments in the business. It should not be construed as a forecast of the likely level of Nationwide's underlying profit for any financial year or period within a financial year.
Forward looking statements
Certain statements in this document are forward looking with respect to plans, goals and expectations relating to the future financial position, business performance and results of Nationwide. Although Nationwide believes that the expectations reflected in these forward looking statements are reasonable, Nationwide can give no assurance that these expectations will prove to be an accurate reflection of actual results. By their nature, all forward looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond the control of Nationwide including, amongst other things, UK domestic and global economic and business conditions, market related risks such as fluctuation in interest rates and exchange rates, inflation/deflation, the impact of competition, changes in customer preferences, risks concerning borrower credit quality, delays in implementing proposals, the timing, impact and other uncertainties of future acquisitions or other combinations within relevant industries, the policies and actions of regulatory authorities, the impact of tax or other legislation and other regulations in the jurisdictions in which Nationwide operates. As a result, Nationwide's actual future financial condition, business performance and results may differ materially from the plans, goals and expectations expressed or implied in these forward looking statements. Due to such risks and uncertainties Nationwide cautions readers not to place undue reliance on such forward looking statements.
Nationwide undertakes no obligation to update any forward looking statements whether as a result of new information, future events or otherwise.
This document does not constitute or form part of an offer of securities for sale in the United States. Securities may not be offered or sold in the United States absent registration or an exemption from registration. Any public offering to be made in the United States will be made by means of a prospectus that may be obtained from Nationwide and will contain detailed information about Nationwide and management as well as financial statements.
SERVICE LEADERSHIP(1) , RECORD LING AND CURRENT ACCOUNT OPENINGS DRIVE STRONG PROFITS AND GBP560 MILLION IN MEMBER FINANCIAL BENEFIT(2)
Service - No 1 for service(3) , trust(4) and main current account satisfaction(5) against our high street peer group
Value - Rewarded members with GBP560m in member financial benefit
Strength - Financial strength enhanced by keeping costs flat and all--time high capital
Strong profitability, plus record capital ratios
-- Underlying profit of GBP1,022m (2017: GBP1,030m), within our financial performance framework -- Statutory profit of GBP977m (2017: GBP1,054m)
-- Profits include a GBP116m cost of debt buy--back (2017: GBP100m one--off gain from Visa Europe disposal)
-- UK leverage ratio improved to 4.9% (2017: 4.4%) and CET1 to a record high of 30.5% (2017: 25.4%)
-- Efficiency programme kept costs flat at GBP1,979m (2017: GBP1,979m) -- Total underlying provision charges of GBP131m (2017: GBP276m) driven by lower PPI charges
Our mutual pricing delivers member financial benefit of GBP560m (2017: GBP505m)
-- Protected depositors by holding rates on average more than 50% higher than the market average(6)
-- Rewarded 100,000 members through 'Recommend a Friend', driving 1 in 9 account openings
-- Ensured fairness and value for members and loyal borrowers with one of the industry's lowest SVRs
No 1 for service and trust
-- UK's most trusted financial organisation, with a lead of 3.8%(4)
-- No 1 for customer satisfaction for 6th year running; 4.6% ahead of our high street peer group(7)
-- Continued leadership of main current account satisfaction, more than 10 percentage points over our nearest high street peer group competitor(8)
Highest number of current account openings in the UK, making a real difference to current account market
-- UK's top choice for current accounts(9) , opening more than with any other brand(10) ; 816,000 (2017: 795,000)
-- Record market share of 7.9% (2017: 7.6%) for main standard and packaged accounts, and 9.4% for all current accounts (2017: 8.9%)
Helping 400,000 borrowers onto or up the housing ladder
-- Record gross prime mortgage lending of GBP29.4bn (2017: GBP29.1bn) -- Mortgage net lending of GBP5.8bn (2017: GBP8.8bn) reflecting high levels of competition
-- Helped around 1 in 5 UK first time buyers finance a home; a record 76,000 borrowers (2017: 75,000)
-- Championing home buyers by refusing to lend on new-builds with escalating ground rents
Rewarding the loyalty of our 11.6m saver members
-- Gave loyal members GBP435m in extra interest on their deposits compared with market average(6)
-- Increased member deposit balances by GBP3.5bn (2017: GBP5.8bn) -- Maintained our deposit market share of 10% (2017: 10.1%) in a highly competitive market
Using our knowledge and experience to contribute to the UK housing market
-- Committed GBP50m to innovative housing project in Swindon -- Started a five-year programme to invest GBP20m in member-directed community grants -- Giving members a say about local housing issues through new Community Boards
Forecast subdued but steady UK growth
-- Resilient UK economy, though growth expected to be modest at 1% to 1.5% over next two years -- Squeeze on household incomes likely to gradually fade as inflation falls back
-- Expect housing market to remain subdued with house price growth slowing to 1% over the next year
Joe Garner, Chief Executive, Nationwide Building Society, said:
"Nationwide's defining difference is that we're owned by our members. This informs how we operate and the decisions we make. So we continue to focus on delivering what members tell us matters most - outstanding service and great value, backed by record capital strength.
"Being member led means we're the UK's most trusted financial institution(4) , and we have led our high street peer group for customer satisfaction for the last six years(7) .
"As a mutual, without shareholders to reward, we were able to deliver GBP560 million in extra value to members during the year, as a result of the better rates, fees and incentives we can offer compared to the market average(6) .
"Leading service and value added up to an all--time membership high of 15.5 million. Our 'engaged' members - those who have a current account, a mortgage or a savings balance over GBP5,000 with us - also reached a record high of 8.1 million.
"In an industry notorious for customer inertia, Nationwide is making a real difference to the current account market. We had our best ever year for current accounts with more people opening an account with the Society than with any other brand(10) , a record 816,000 new accounts, and continue to perform well on switching. We also enjoy a greater than 10 percentage point lead on main current account satisfaction over our high street peer group(5) .
"We believe Nationwide could transform choice for the UK's small businesses in the way we have become top choice for personal current accounts(9) . So, if we are successful in our application for funding from the money the government has asked RBS to set aside, we intend to roll out a mutual business alternative to the big five banks, nationwide.
"In the meantime, we face the future from a platform of strength. Strength in our service, the value we offer and our finances means we can continue to support our members, and our mission of building society, nationwide."
Mark Rennison, Chief Financial Officer, Nationwide Building Society, said:
"Nationwide continues to trade strongly in spite of intense competition in our core markets, in a number of cases choosing to protect value for members through more competitive pricing rather than taking the opportunity to enhance margin.
"While growing our business, we delivered on our commitment to hold costs flat, thanks to our Society--wide efficiency programme.
"This strong trading has translated into stronger than ever finances for the Society. Our core capital ratio is at an all--time high of 30.5%, and we improved our already conservative UK leverage ratio to 4.9%, well ahead of regulatory requirements.
"After investing in our business and in the value we offer to members, our pre--tax underlying profits were broadly flat at GBP1,022 million - and within our financial performance framework.
"We expect technology innovation to accelerate, driven by digital adoption, mobile service take-up and Open Banking. We are reviewing our operations and technology to ensure Nationwide can take the opportunities ahead and meet the challenges posed by increasing dependence on technology and growing cyber threats. We do so having achieved a position of financial strength, good trading performance and demonstrable cost discipline. We will update on these plans and the investment required later in the year."
1 (c) GfK 2018, Financial Research Survey (FRS), 12 months ending 31 March 2018, proportion of extremely/very satisfied customers minus proportion of extremely/very/fairly dissatisfied customers summed across current account, mortgage and savings. High street peer group defined as providers with main current account market share >4% (Barclays, Halifax, HSBC, Lloyds Bank (inc C&G), NatWest, Santander and TSB).
2 More information on member financial benefit is included on page 12 in the Financial review.
3 (c) GfK 2018, Financial Research Survey (FRS), 12 months ending 31 March 2018, proportion of extremely/very satisfied customers minus proportion of extremely/very/fairly dissatisfied customers summed across current account, mortgage and savings. High street peer group defined as providers with main current account market share >4% (Barclays, Halifax, HSBC, Lloyds Bank (inc C&G), NatWest, Santander and TSB).
4 Source: Nationwide Brand and Advertising tracker - compiled by Independent Research Agency, based on all consumer responses, 3 months ending March 2018. Financial brands included Nationwide, Barclays, Co-operative Bank, First Direct, Halifax, HSBC, Lloyds, NatWest, TSB and Santander.
5 (c) GfK 2018, Financial Research Survey (FRS), 12 months ending 31 March 2018, proportion of extremely/very satisfied main current account customers minus proportion of extremely/very/fairly dissatisfied main current account customers. High street peer group defined as providers with main current account market share >4% (Barclays, Halifax, HSBC, Lloyds Bank, NatWest, Santander and TSB).
6 Market interest rates are based on Bank of England whole of market average interest rates over the period, adjusted to exclude Nationwide's balances.
7 (c) GfK 2018, Financial Research Survey (FRS), 6 year lead held over period 12 months ending 31 March 2013 to 12 months ending 31 March 2018. Each monthly data point contains customer feedback referring to previous 12 months. Proportion of extremely/very satisfied customers minus proportion of extremely/very/fairly dissatisfied customers summed across current account, mortgage and savings. High street peer group defined as providers with main current account market share >4% (Barclays, Halifax, HSBC, Lloyds Bank (inc C&G), NatWest, Santander and TSB). Prior to April 2017, high street peer group defined as providers with main current account market share >6% (Barclays, Halifax, HSBC, Lloyds Bank inc C&G (Lloyds TSB prior to Apr 15), NatWest and Santander).
8 (c) GfK 2018, Financial Research Survey (FRS), 12 months ending 31 March 2018 vs 31 March 2017, proportion of extremely/very satisfied main current account customers minus proportion of extremely/very/fairly dissatisfied main current account customers. High street peer group defined as providers with main current account market share >4% (Barclays, Halifax, HSBC, Lloyds Bank, NatWest, Santander and TSB).
9 Source: Nationwide Brand and Advertising tracker - compiled by Independent Research Agency. Top Choice is considered ie 'first choice' or 'seriously considered' current account provider amongst non-customers, based on responses from non-customers of each brand, 3 months ending March 2018. Financial brands included Nationwide, Barclays, Co-operative Bank, First Direct, Halifax, HSBC, Lloyds, NatWest, TSB and Santander.
10 Source: eBenchmarkers April 2017 to March 2018, CACI April 2017 to March 2018, BACS Payments Schemes monthly CASS switching market data and internal sources.
FINANCIAL SUMMARY
Year to Year to
4 April 2018 4 April 2017
------------------------------------------------- --------------- ---------------
Financial performance GBPm GBPm
Total underlying income 3,132 3,285
Underlying profit before tax 1,022 1,030
Statutory profit before tax 977 1,054
------------------------------------------------- -------- ----- -------- -----
Mortgage lending GBPbn % GBPbn%
Group residential - gross/gross market share 33.0 12.8 33.7 14.0
Group residential - net/net market share 5.8 13.0 8.8 25.4
% %
Average indexed loan to value of new residential
mortgages business 71 71
------------------------------------------------- -------- ----- -------- -----
Deposit balances GBPbn % GBPbn%
Member deposits balance movement/market share
(note i) 3.5 7.5 5.8 8.2
Net receipts (note ii) 0.4 0.7
------------------------------------------------- -------- ----- -------- -----
Key ratios % %
Cost income ratio - underlying basis 63.2 60.2
Cost income ratio - statutory basis 64.6 60.3
Net interest margin 1.31 1.33
------------------------------------------------- -------- ----- -------- -----
4 April 2018 4 April 2017
--------------------------------------------------- -------------- --------------
Balance sheet GBPbn % GBPbn %
Total assets 229.1 221.7
Loans and advances to customers 191.7 187.4
Member deposits balance/market share (note i) 148.0 10.0 144.5 10.1
--------------------------------------------------- ------- ----- ------- -----
Asset quality % %
Residential mortgages
Proportion of residential mortgage accounts 3
months+ in arrears 0.43 0.45
Average indexed loan to value of residential
mortgage book (by value) 56 55
Total provisions as % of non-performing balances 5.3 5.3
Consumer banking
Non-performing loans as % of total (excluding
charged off balances) 4 4
Total provisions as a % of non-performing loans
(including charged off balances) 89 86
--------------------------------------------------- ------- ----- ------- -----
Key ratios % %
Capital
Common Equity Tier 1 ratio (note iii) 30.5 25.4
UK leverage ratio (note iv) 4.9 4.4
CRR leverage ratio (note iii) 4.6 4.2
Other balance sheet ratios
Liquidity coverage ratio 130.3 124.0
Wholesale funding ratio (note v) 28.2 27.1
--------------------------------------------------- ------- ----- ------- -----
Notes:
i. Member deposits include current account credit balances.
ii. Net receipts include outflows of non-member deposits relating to the closure of off-shore operations in the Isle of Man and Republic of Ireland.
iii. Reported under CRD IV on an end point basis. The CRR leverage ratio is calculated using the Capital Requirements Regulation (CRR) definition of Tier 1 for the capital amount and the Delegated Act definition of the exposure measure.
iv. The UK leverage ratio is shown on the basis of measurement announced by the Prudential Regulation Authority and excludes eligible central bank reserves from the leverage exposure measure.
v. The wholesale funding ratio includes all balance sheet sources of funding (including securitisations) but excludes Funding for Lending Scheme (FLS) drawings which, as asset swaps, are not included on Nationwide's balance sheet, reflecting the substance of the arrangement. Off-balance sheet FLS drawings totalled GBPnil (4 April 2017: GBP4.8 billion).
CEO REVIEW
Nationwide is a membership business. As a mutual without shareholders to reward, we are free to focus on our stated purpose - building society, nationwide. That means helping members to finance their goals and contributing to making society a better place. Our approach is simple by design - to concentrate on service, value, and financial strength.
We never forget that we manage members' life savings and are an economically important business so it's essential we have exceptionally strong finances. We finished the year with capital at an all-time high, and strong underlying profits of over GBP1 billion, within our financial performance framework.
On service, Nationwide is the UK's most trusted financial institution(1) and we led our high street peer group on customer satisfaction for the 6th year(2) , ending the year with a lead of 4.6% over our nearest competitor. Satisfaction with our main current account was higher still, at more than 10 percentage points ahead of our nearest high street peer group competitor(3) , and we attracted a record number of new current accounts.
We also deliver extra value to members through fair and better pricing. This 'member financial benefit' added up to GBP560 million last year(4) , including around 100,000 members who earned 'Recommend a Friend' rewards.
We and our members thrive together thanks to the support of our 18,000 colleagues. I'd like to thank them for their enormous contribution and the care they show our members.
All this adds up to operating from a platform of strength. This gives us confidence that we can continue to deliver against our ambitions, underpinned by five strategic cornerstones.
Built to last
We finished the year financially stronger than ever, with an improved CET1 ratio of 30.5% and a more conservative UK leverage ratio of 4.9%, well in excess of regulatory requirements. This was supported by issuing a second tranche of CCDS, a form of Common Equity Tier 1 capital specific to building societies demonstrating capacity and liquidity in the CCDS market.
We also held our costs flat while significantly growing the business thanks to the success of the efficiency programme we put in place last year. Our 'Right First Time' programme helped to reduce errors. Simplifying our management structure gave people the space to lead. And the 'Arthur Webb Challenge Cup' saw many of our people suggest how to spend our members' money more wisely.
An important part of being built to last is investing in our business. This means building on earlier investments that have enabled our very rapid current account growth, increased mobile adoption by members, and underpinned our service distinction.
Looking ahead, it's clear that the pace of change is accelerating. Technology is changing how people live and work, and Nationwide will continue to respond to member expectations. Today's consumer lives in an 'always on' world and naturally expects the same from their financial provider. Service availability, in particular for internet and mobile banking, plus cash machines and payments, has become a key utility that members depend on. Meanwhile, no business is immune to growing cyber threats.
So, digital innovation and systems resilience are increasingly fundamental aspects of our member service experience and the trust consumers have in their financial providers. At the same time, recognising that all businesses have room to improve, we will ensure the Society has the capacity to meet the demands of its strong business growth. We are therefore reviewing our operations and technology to keep Nationwide well ahead of future needs. This will include the opportunities presented by integrated platforms, cloud technology and automation. We will refine our technology strategy accordingly, and the investment plan this might require. Importantly, we do so having achieved a position of considerable financial strength, good trading performance and demonstrable cost discipline. We will update members on our plans later in the year.
1 Source: Nationwide Brand and Advertising tracker - compiled by Independent research Agency, based on all consumer responses, 3 months ending March 2018. Financial brands included Nationwide, Barclays, Co-operative Bank, First Direct, Halifax, HSBC, Lloyds, Natwest, TSB and Santander.
2 (c) GfK 2018, Financial Research Survey (FRS), 6 year lead held over period 12 months ending 31 March 2013 to 12 months ending 31 March 2018. Each monthly data point contains customer feedback referring to previous 12 months. Proportion of extremely/very satisfied customers minus proportion of extremely/very/fairly dissatisfied customers summed across current account, mortgage and savings. High street peer group defined as providers with main current account market share >4% (Barclays, Halifax, HSBC, Lloyds Bank (inc C&G), NatWest, Santander and TSB). Prior to April 2017, high street peer group defined as providers with main current account market share >6% (Barclays, Halifax, HSBC, Lloyds Bank inc C&G (Lloyds TSB prior to Apr 15), NatWest and Santander).
3 (c) GfK 2018, Financial Research Survey (FRS), 12 months ending 31 March 2018 vs 31 March 2017, proportion of extremely/very satisfied main current account customers minus proportion of extremely/very/fairly dissatisfied main current account customers. High street peer group defined as providers with main current account market share >4% (Barclays, Halifax, HSBC, Lloyds Bank, NatWest, Santander and TSB).
4 More information on member financial benefit is included on page 12 in the Financial review.
CEO review (continued)
Building thriving membership
We're proud to help members own a home, save for the future, and manage their everyday finances. The more members we serve and the more we do with them, the bigger our contribution. And we are thriving, with a new high of 15.5 million members. Engaged members - those who hold a main current account, or a balance of at least GBP5,000 in savings or a mortgage with us - grew by 330,000 to 8.1 million.
As a mutual, our goal is not to pursue profits but to serve our members and run a safe and sustainable Society. Unlike some institutions, we therefore aim to give members the fairest fees and the highest rates we can afford. So, for example, our deposit rates were on average more than 50% higher than the market average(1) over the last year. Combined with better fees and incentives - such as Recommend a Friend - our member financial benefit for 2017/18 totalled GBP560 million (2017: GBP505 million).
A place to call home
We were true to our goal of supporting members into homes of their own, helping a record 76,000 first time buyers (2017: 75,000) and almost 400,000 (2017: 326,000) homeowners in all.
Overall, we had our strongest ever year for gross prime lending at GBP29.4 billion (2017: GBP29.1 billion). Net lending was down on the previous year, in line with our decision to reduce our buy to let lending through The Mortgage Works, along with increased prime mortgage redemptions as we managed margins in the long-term interests of the Society in a fiercely competitive market.
Member needs change in later life, so we expanded our mortgage range with a lifetime mortgage which will allow people to access equity in their home in later life. Next, we plan to launch a retirement interest only mortgage, giving members more choice in managing their finances as they get older.
Supporting savers
With interest rates still at historic lows, people are saving less. We've done our best to encourage a savings habit and protect depositors with highly competitive rates and by offering a range of loyalty rewards.
We launched a range of loyalty bonds and fixed rate ISAs for members with at least one year's membership; we doubled the maximum balance allowed in our Loyalty Saver account to GBP100,000; and in March, we launched a Single Access ISA paying 1.40%, which attracted GBP8.5 billion in deposits by the end of April 2018.
Rewarding loyalty helped grow our overall savings members to 11.6 million. Our deposit balances increased by GBP3.5 billion in the year, thanks mainly to higher current account balances and the success of our Single Access ISAs. In a highly competitive market, deposits grew more slowly than last year, but overall, Nationwide continues to provide a safe home for GBP1 in every GBP10 saved in the UK.
First choice for everyday finances
We attracted record new current accounts for the fourth year running, opening 816,000 accounts in all (2017: 795,000), more than any other brand in the last year(2) . Our share of main standard and packaged accounts grew to 7.9% (2017: 7.6%), a new high, and our share of all accounts to 9.4% (2017: 8.9%). We improved our student account, and doubled account openings to 21,000. Focusing on the features that members value most, we extended travel and mobile phone insurance on our FlexPlus account and reduced fees for transactions and unauthorised overdrafts on our FlexAccount. We also introduced text alerts for unauthorised overdrafts to help members manage their finances.
We also began to move our credit cards, personal loans and insurance products to a 'just for members' proposition. It meant we issued fewer credit cards, in line with our expectations, at 160,000 (2017: 206,000), but overall balances were higher, as were balances on our personal loans. We're making good progress with the transition of our existing home insurance policies to RSA and have successfully launched our new home insurance product in response to member feedback.
1 Market interest rates are based on Bank of England whole of market average interest rates over the period, adjusted to exclude Nationwide's balances
2 Source: eBenchmarkers April 2017 to March 2018, CACI April 2017 to March 2018, BACS Payments Schemes monthly CASS switching market data and internal sources.
CEO review (continued)
Transforming choice for UK small firms
Around a million of our members run their own business, and many have asked if we can provide a business account. The costs of market entry have been prohibitive in the past but thanks to the Alternative Remedies Fund, financed by RBS to boost competition in banking, we are applying for up to GBP50 million to launch a business current account. If successful, we'll launch an account targeted at small and micro-businesses, providing a mutual business alternative to the big five banks, who hold 85% of business accounts.
Building legendary service
Our service leadership
The quality of our service matters to us because it matters to our members. We believe it's a key part of why Nationwide remains the UK's most trusted financial institution(1) , and no. 1 for satisfaction for the 6(th) year running compared with our high street peer group competitors(2) .
We're in a strong position, but if we want to be truly legendary, we need to be among the best in the UK, not just in financial services. That's why we will start to measure our success with the all-sector UK Customer Satisfaction Index, published by The Institute of Customer Service. Today we're ranked no. 7, in a top 10 that includes Amazon and John Lewis(3) .
Digital convenience with a human touch
Members want to use traditional and digital channels seamlessly - to manage their finances on the move, while also being able to speak to us when they need to.
We've extended what members can do on our banking app, including instant registration, reporting lost and stolen cards, setting up new payees and viewing pending transactions. More improvements are in hand; including the ability to freeze or unfreeze your card if you have mislaid it; a MoneyWatch service to put members in control of their spending; and an auto-investment advice service.
As a result, more members are choosing digital as their first point of call - mobile active current account members grew 44% to 2 million. We launched a 'Discover Mobile' campaign to promote our mobile services.
Branches for the future
We appreciate that customers still value a personal service in our branches, and we invested GBP73 million in our branch network this year. Of course, the way members choose to use our branches is changing and we've designed a new concept '4C' branch which we'll use as the model to update our branch network over the next four years. These will cater for convenience, conversation, consultation and community.
PRIDE
PRIDE is about our people, culture and values. We want to be one of the country's best places to work because we care about our people, and by caring for them they care for our members.
In January, we were proud to live our values by taking on 297 Carillion contractors after the company collapsed, securing their jobs and the services our members rely on.
We measure employee engagement and enablement through an independent survey each year. Nationwide compares extremely well with most organisations, although we didn't hit our stretching global high performing benchmark target this year. That said, engagement remains extremely high, at 74%, and we are 9 percentage points above the financial services norm.
1 Source: Nationwide Brand and Advertising tracker - compiled by Independent Research Agency, based on all consumer responses, 3 months ending March 2018. Financial brands included Nationwide, Barclays, Co-operative Bank, First Direct, Halifax, HSBC, Lloyds, NatWest, TSB and Santander.
2 (c) GfK 2018, Financial Research Survey (FRS), 6 year lead held over period 12 months ending 31 March 2013 to 12 months ending 31 March 2018. Each monthly data point contains customer feedback referring to previous 12 months. Proportion of extremely/very satisfied customers minus proportion of extremely/very/fairly dissatisfied customers summed across current account, mortgage and savings. High street peer group defined as providers with main current account market share >4% (Barclays, Halifax, HSBC, Lloyds Bank (inc C&G), NatWest, Santander and TSB). Prior to April 2017, high street peer group defined as providers with main current account market share >6% (Barclays, Halifax, HSBC, Lloyds Bank inc C&G (Lloyds TSB prior to Apr 15), NatWest and Santander).
3 UK Customer Satisfaction Index, January 2018.
CEO review (continued)
PRIDE is also about developing our people. We're investing in our leadership capabilities from a Leadership 200 group - including 20 'People's Choice' leaders chosen by an all-employee vote - to a business-wide 'Developing My Leadership' programme for all our people to expand their capabilities and leadership skills.
We issued our first gender pay gap report in March 2018. Our mean gender pay gap - the difference in average hourly pay between all men and women - is 29% and is on a par with the rest of the UK retail banking sector. This is very much a function of the nature of our business and our resulting employee profile. The gender pay gap for our senior population of approximately 300 managers is just 4%. This gap could be closed by moving only a handful of people. Our overall gender pay gap is therefore driven by having far fewer men in our junior roles - for example, only one in five of our junior branch roles is occupied by a man. To reduce our gender pay gap to zero would require us to change approximately 4,000 of these junior positions to be held by a man. Nevertheless, we remain committed to identifying opportunities to help women to progress to senior roles. We have already made good progress on our Board with 38% female representation.
Building a national treasure
Social purpose has been part of our founding DNA for over 130 years, and we would like to use our trusted status to become a driving force for good in society. Of course, this cornerstone ambition will not be judged by us, but by our members and the wider world.
We take our responsibilities seriously. The Society is the 11th highest UK business taxpayer in PwC's annual Total Tax Contribution survey of the 100 Group, we pay fair wages, treat suppliers with respect and work hard to improve our sustainability. We will continue to invest at least 1% of our pre-tax profits to support good causes, of which 0.25% is donated to The Nationwide Foundation.
But we want to do more. With decent homes to buy or rent increasingly out of reach for more and more people, we're using our knowledge and experience to make a contribution to Britain's housing market with a new, five-year community programme that will invest tens of millions of pounds in housing initiatives.
We will make some GBP20 million available in grants for housing-related charities and organisations over the next five years. Support for local projects will be driven by local needs and chosen by local members.
In Swindon, where we're headquartered, we're partnering with the borough council, and engaging local people, to turn a housing development into a living community.
With more people renting, and our members including both renters and small landlords, we wanted to help raise standards across the rental market. We've put together a cross-industry Partnership Board to stay close to tenant needs and help deliver high quality properties for rent.
CEO review (continued)
Outlook
The UK economy has proved considerably more resilient than some people feared immediately after the Brexit referendum, though the pace of growth is likely to remain relatively subdued, reflecting ongoing Brexit uncertainties.
With economic growth expected to be modest over the next two years, inflation is likely to moderate, gradually reducing the squeeze on household budgets. Subdued growth may mean a small rise in the unemployment rate from recent 43-year lows and only gradual, limited interest rate increases by the Bank of England.
Turning to the outlook for our own business, we anticipate modest growth in our core product markets, reflecting the outlook for the economy as a whole. With employment growth expected to slow and pressure on household budgets fading only gradually, mortgage lending is likely to rise at a fairly pedestrian pace. While demand in the housing market looks set to remain subdued, lack of supply will provide support for prices. We expect the mortgage market to remain extremely competitive.
Consumers have been saving less, but we expect household deposit growth to pick up a little, to around 4% a year. We will continue to focus on providing the attractive rates that have helped us maintain our deposit share at 10% in an extremely competitive market.
More generally, consumers continue to switch rapidly to digital services, and the new era of Open Banking presents both challenges to established providers, and opportunities for a trusted brand like Nationwide to bring the benefits of mutuality to a wider community.
We look to the future from a position of strength and will continue to seek to deliver the outstanding service, mutual value and financial security our members deserve from us. We will support our members at all life-stages, introducing new services to meet their developing needs. We'll reward our members by offering compelling value loyalty products to deepen our relationships with them. And we will look to invest to ensure the Society is financially strong and able to meet the future needs of our members.
Financial review
In summary
Our financial performance for the year demonstrates UK Leverage our continued focus on delivering long-term value to ratio: 4.9% our members whilst ensuring we maintain capital strength. (2017: 4.4%) Statutory profit before tax was GBP977 million (2017: Underlying GBP1,054 million) and underlying profit before tax profit: GBP1,022m was GBP1,022 million (2017: GBP1,030 million). Our (2017: GBP1,030m) 2017/18 financial performance includes the impact of Statutory profit: our debt buy-back exercise (GBP116 million charge within GBP977m (2017: net income) which will deliver increased capital strength GBP1,054m) and reduced funding costs in the future, whilst the prior year included a one-off gain of GBP100 million from the sale of our investment in Visa Europe. Our focus on efficiency has resulted in a flat cost base year on year and we remain committed to maintaining a low trajectory of cost growth in the future. Provisions for liabilities and charges have reduced during the year reflecting the higher charge for PPI and Plevin customer redress in the prior year, following the confirmation of the FCA's time bar for complaints. Our robust financial performance and the successful issuance of Core Capital Deferred Shares (CCDS) have resulted in a further improvement of our capital ratios, which remain comfortably above regulatory requirements and demonstrate our financial strength.
Income statement
Underlying and statutory results Year to Year to Net interest
4 April 2018 4 April 2017 margin: 1.31%
(2017: 1.33%)
Underlying
cost income
ratio: 63.2%
(2017: 60.2%)
Statutory Cost:Income
Ratio 64.6%
(2017: 60.3%)
GBPm GBPm
-------------------------------------- ------------- -------------
Net interest income 3,011 2,960
Net other income 121 325
-------------------------------------- ------------- -------------
Total underlying income 3,132 3,285
Underlying administrative expenses (1,979) (1,979)
Impairment losses (105) (140)
Underlying provisions for liabilities
and charges (26) (136)
-------------------------------------- ------------- -------------
Underlying profit before tax (note
i) 1,022 1,030
Bank levy (note ii) (45) (42)
Financial Services Compensation
Scheme (FSCS) (note ii) 1 -
(Losses) / Gains from derivatives
and hedge accounting
(notes ii and iii) (1) 66
-------------------------------------- ------------- -------------
Statutory profit before tax 977 1,054
-------------------------------------- ------------- -------------
Taxation (232) (297)
-------------------------------------- ------------- -------------
Profit after tax 745 757
-------------------------------------- ------------- -------------
Notes:
i. Underlying profit represents management's view of underlying performance and is presented to aid comparability across reporting periods.
ii. Within the statutory results presented in the financial statements: a. bank levy is included within administrative expenses b. FSCS costs are included within provisions for liabilities and charges c. gains from derivatives and hedge accounting are presented separately within total income.
iii. Although we only use derivatives to hedge market risks, income statement volatility can still arise due to hedge accounting ineffectiveness or because hedge accounting is either not 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.
Total income and margin
Net interest income has increased marginally during the year to GBP3,011 million (2017: GBP2,960 million), with the benefit of lower funding costs being largely offset by a decrease in mortgage income, reflecting sustained competition in retail lending markets. Net interest margin (NIM) of 1.31% is therefore slightly lower than the prior year (2017: 1.33%).
The impact on mortgage pricing of competition in the retail lending markets, and our continued focus on delivering long-term value to our members, has meant that GBP24 billion of member balances have switched across all prime mortgages during the year. This includes the continued run-off of our legacy base mortgage rate (BMR) balances which reduced by GBP6.6 billion to GBP22.7 billion. We expect our reported margin to trend lower in the year ahead as market conditions remain highly competitive.
Financial review (continued)
The negative impact to NIM from the decline in mortgage margins has been partly offset by savings rates which remain low across the industry. In line with our mutual principles, we continue to resist lowering savings rates where possible and seek to offer long-term value to our members wherever possible. We were the first in the industry to pass on the full benefit of the recent base rate rise (in November 2017) to those members whose savings rates fell by 0.25% following the last base rate reduction in August 2016. During the year our member deposit balances increased and our market share of deposits was maintained at 10.0% (4 April 2017: 10.1%).
Other underlying income has decreased during the year to GBP121 million (2017: GBP325 million), predominantly due to a GBP116 million charge relating to our debt buy-back exercise during the year and the prior year impact of a one-off gain of GBP100 million from the sale of our investment in Visa Europe. The debt buy-back exercise involved the Society issuing circa GBP2.1 billion of new bonds, which we consider to be MREL eligible, and the repurchase of older bonds. This has resulted in an increase in our capital strength and a reduction in our future cost of wholesale funding.
Member financial benefit
As a building society, we seek to maintain our financial strength whilst returning value to our members through pricing, propositions and service. We measure the value provided to our members through the highly competitive mortgage, savings and banking products that we offer as our member financial benefit, which we quantify as:
Our interest rate differential + incentives and reduced fees
Interest rate differential
We measure how our average interest rates across our member balances in total compare against the market over the period.
For our two largest member segments, mortgages and retail deposits, we compare the average member interest rate for these portfolios against relevant industry benchmarks. A market benchmark based upon data from CACI is used for mortgages and a Bank of England benchmark is used for retail deposits, both adjusted to exclude Nationwide balances. The differentials derived in this way are then applied to member balances for mortgages and deposits.
For unsecured lending, a similar comparison is made. We calculate an interest rate differential based on available market data from the Bank of England and apply this to the total interest-bearing balances of credit cards and personal loans.
Member incentives and reduced fees
Our member financial benefit measure also includes amounts in relation to higher incentives and reduced fees to members, and includes annual amounts provided for the following:
-- Mortgages: the differential on incentives for members compared to the market
-- 'Recommend a friend': the amount paid to existing members, when they recommend a new current account member to the Society
-- FlexPlus account: this current account is considered market leading against major banking competitors, with a high level of benefits for a relatively smaller fee. The difference between the monthly account fee, which was increased from GBP10 to GBP13 during the year, and the market average of GBP16 is included in the member financial benefit measure.
For the year ended 4 April 2018, this measure shows we have provided our members with a financial benefit of GBP560 million (2017: GBP505 million). This reflects our ongoing commitment to delivering long-term value to our members despite strong levels of competition in our core markets.
Member financial benefit is derived with reference to available market or industry level data. No adjustment is made to take account of factors such as customer mix, risk appetite and product strategy, due to both limitations in availability of data and to avoid bias from segments in which Nationwide may be under or over-represented. Going forward, we will continue to develop our methodology to ensure it captures all the key elements of financial benefits where data is available.
Financial review (continued)
Administrative expenses
As a result of our significant focus on efficiency underlying administrative expenses have remained flat year on year at GBP1,979 million (2017: GBP1,979 million). During the year we have made good progress with our efficiency programme, successfully embedding GBP105 million of sustainable savings, meaning that we are on course to achieve our target of realising GBP300 million of sustainable savings by 2022. As the programme develops we will evolve our target of cost savings with a current expectation that this will increase; we will provide an update in this regard later in 2018/19. Sustainable savings have been achieved through process simplification, targeted reductions in third-party spend and organisational simplification, including the closure of operations that are not aligned to our core markets. Over the course of the year the number of permanent employees, on a full time equivalent basis, has decreased by 3% (2017: 2% increase).
Savings achieved during the year have helped to mitigate the impact of increases in underlying costs which were primarily driven by:
-- higher pension costs (GBP36 million) largely as a result of market conditions impacting defined benefit costs
-- annual pay award and other inflationary increases (GBP37 million)
-- rising variable costs (GBP20 million) following further significant business growth, with mortgage balances increasing 4% over the year and with 12% more main current accounts than we had a year ago
-- spend on initiatives to support longer-term efficiency was GBP27 million higher than in the previous year, resulting in total efficiency investment of GBP70 million during 2017/18. Initiatives include the redesign of member processes, organisational simplification and improvements to the way we deliver change.
We continue to invest to support the long-term interests of our members, including improvements to our branches, continued updates to our digital channels and preparations for Open Banking. During the year we have also continued investment in IT resilience to ensure that our systems remain safe and secure for our members, and to ensure compliance with UK and EU regulatory requirements.
Whilst we have made good progress towards achieving our sustainable savings targets, the reduction in total income has caused our underlying CIR to increase to 63.2% (2017: 60.2%).
Achieving more sustainable cost savings and embedding further efficiencies into our business remains a priority for the Society and we remain committed to maintaining a low trajectory of cost growth in the future.
Impairment losses
Year to Year to
4 April 2018 4 April 2017
GBPm GBPm
-------------------------------------------- ------------- -------------
Residential lending 11 58
Consumer banking 97 78
-------------------------------------------- ------------- -------------
Retail lending 108 136
Commercial lending and other lending (1) (5)
Impairment losses on loans and advances 107 131
Impairment (reversals)/losses on investment
securities (2) 9
-------------------------------------------- ------------- -------------
Total 105 140
-------------------------------------------- ------------- -------------
Impairment losses have decreased by GBP35 million to GBP105 million (2017: GBP140 million). This reduction reflects a prior year charge of GBP52 million in relation to enhancements to our provisioning methodology, primarily in relation to the credit risks associated with maturing interest only loans. This has been partially offset by the impact of updating provision assumptions to reflect current economic conditions. Delinquency levels have remained low across portfolios during the period, although there is some limited evidence of affordability pressures increasing after a period when inflation has exceeded wage growth.
Financial review (continued)
Underlying provisions for liabilities and charges
We hold provisions for customer redress to cover the costs of remediation and redress in relation to past sales of financial products and post sales administration, including compliance with consumer credit legislation and other regulatory requirements. The charge for the period primarily relates to customer redress provisions recognised in respect of PPI and Plevin, including the cost of administering these claims. More information on customer redress and FSCS provisions is included in note 12 to the financial statements.
Taxation
The tax charge for the year of GBP232 million (2017: GBP297 million) represents an effective tax rate of 24% (2017: 28%) which is higher than the statutory UK corporation tax rate of 19% (2017: 20%). The effective tax rate is higher due to the 8% banking surcharge, equivalent to GBP43 million (2017: GBP62 million), and due to the tax effect of disallowable bank levy and customer redress costs of GBP8 million and GBPnil (2017: GBP8 million and GBP19 million) respectively. Further information is provided in note 9 to the financial statements.
Balance sheet
Total assets have increased by GBP7 billion year on year to GBP229 billion (4 April 2017: GBP222 billion). This growth has been driven by a GBP6 billion increase in residential mortgage balances due to strong trading in prime mortgages during the period.
Despite sustained competition in the savings market, alongside slower market growth, we have maintained our market share of deposits at 10.0% (4 April 2017: 10.1%) reflecting the highly competitive products that we offer to our members. In addition, we have had significant success in growing the number of members who bank with us, opening 816,000 new current accounts during the year (2017: 795,000), with our market share of standard and packaged accounts now 7.9% (2017: 7.6%).
Assets 4 April 2018 4 April 2017 Return on
Assets: 0.33%
(2017: 0.34%)
Liquidity
coverage
ratio: 130.3%
(2017: 124.0%)
-----------------------------------------------
GBPm % GBPm %
----------------------------------------------- --------- --- --------- ---
Residential mortgages (note i) 177,299 92 171,263 91
Commercial and other lending 10,716 6 12,597 7
Consumer banking 4,107 2 3,949 2
192,122 100 187,809 100
Impairment provisions (458) (438)
----------------------------------------------- --------- --- --------- ---
Loans and advances to customers 191,664 187,371
Other financial assets 34,841 31,231
Other non-financial assets 2,593 3,068
----------------------------------------------- --------- --- --------- ---
Total assets 229,098 221,670
----------------------------------------------- --------- --- --------- ---
Asset quality
Residential mortgages (note i): % %
Proportion of residential mortgage accounts
3 months+ in arrears 0.43 0.45
Average indexed loan to value of residential
mortgage book (by value) 56 55
Average indexed loan to value of new
residential mortgages business 71 71
Impairment provisions as a percentage
of non-performing balances 5.3 5.3
Consumer banking:
Non-performing loans as percentage of
total balances (excluding charged off
balances) (note ii) 4 4
Impairment provisions as a percentage
of non-performing balances (including
charged off balances) (note ii) 89 86
----------------------------------------------- --------- --- --------- ---
Notes:
i. Residential mortgages include prime and specialist loans, with the specialist portfolio primarily comprising buy to let (BTL) lending.
ii. Charged off balances relate to accounts which are closed to future transactions and are held on the balance sheet for an extended period (up to 36 months, depending on the product) whilst recovery procedures take place.
Financial review (continued)
Residential mortgages
This financial year was our strongest ever for gross prime mortgage lending at GBP29.4 billion (2017: GBP29.1 billion) reflecting the competitively priced products and good long-term value that we offer our members. Total gross mortgage lending was GBP33.0 billion (2017: GBP33.7 billion) and represented a market share of 12.8% (2017: 14.0%). Our total net mortgage lending reduced by GBP3.0 billion to GBP5.8 billion (2017: GBP8.8 billion) due to a reduction in gross buy to let (BTL) lending following the affordability criteria changes we made last year and increased prime mortgage redemptions from ongoing market competition driving highly competitive new business rates.
The impairment provision balance is broadly unchanged at GBP145 million (4 April 2017: GBP144 million). Arrears performance improved marginally during the year, with cases more than three months in arrears improving to 0.43% of the total portfolio (4 April 2017: 0.45%), despite some evidence of a greater strain on affordability given higher inflation and low wage growth.
Commercial and other lending
During the year, our commercial and other lending balances decreased by GBP1.9 billion to GBP10.7 billion following our strategic decision in 2016/17 to reduce our commercial real estate (CRE) portfolio through managed run-off. As a result, our overall commercial lending portfolio is increasingly weighted towards registered social landlords, with balances of GBP6.8 billion (4 April 2017: GBP7.5 billion). The registered social landlords' portfolio is fully performing, reflecting its low risk nature. The impairment provision held against CRE balances is GBP15 million (4 April 2017: GBP25 million).
Consumer banking
Consumer banking comprises personal loans of GBP2.0 billion (4 April 2017: GBP2.0 billion), credit cards of GBP1.8 billion (4 April 2017: GBP1.7 billion) and current account overdrafts of GBP0.3 billion (4 April 2017: GBP0.2 billion).
The asset quality of the portfolio remains strong. Impairment provisions have increased to GBP298 million (4 April 2017: GBP269 million), reflecting both book growth and the impact of updating provision assumptions to reflect current economic conditions.
Other financial assets
Other financial assets total GBP34.8 billion (4 April 2017: GBP31.2 billion), primarily comprising liquidity and investment assets held by our Treasury function of GBP30.8 billion (4 April 2017: GBP25.4 billion) and derivatives with positive fair values of GBP4.1 billion (4 April 2017: GBP5.0 billion). Derivatives relate primarily to interest rate and foreign exchange contracts which economically hedge financial risks inherent in our core lending and funding activities.
Growth in on-balance sheet liquid assets is predominantly due to the replacement of off-balance sheet Funding for Lending scheme (FLS) liquidity with on-balance sheet Term Funding Scheme (TFS) drawdowns. Our Liquidity Coverage Ratio (LCR) has increased to 130.3% (4 April 2017: 124.0%). At 4 April 2017, our LCR was impacted by an agreement to purchase GBP1.2 billion of residential mortgage backed securities (RMBS) under a programme to securitise Bradford & Bingley residential mortgages. Excluding this item our 2018 and 2017 LCR would have been broadly consistent.
Members' interests, equity and 4 April 4 April Wholesale
liabilities 2018 2017 funding
ratio
(note i) (note ii)
GBPm GBPm 28.2%
(2017:
27.1%)
--------------------------------- ------- --------- -----------
Member deposits 148,003 144,542
-----------
Debt securities in issue 34,118 40,339
Other financial liabilities 33,173 23,978
Other liabilities 1,401 1,678
--------------------------------- ------- ---------
Total liabilities 216,695 210,537
Members' interests and equity 12,403 11,133
--------------------------------- ------- ---------
Total members' interests, equity
and liabilities 229,098 221,670
--------------------------------- ------- --------- -----------
Notes:
i. Comparatives have been restated as detailed in note 2 of the financial statements.
ii. The wholesale funding ratio includes all balance sheet sources of funding (including securitisations).
Financial review (continued)
Member deposits
Member deposits have increased reflecting both an increase in current account credit balances from GBP17.5 billion to GBP19.8 billion and a growth in savings balances due to the success of our competitively priced products; on average our member deposit rates are more than 50% higher than the market average(1) . In a highly competitive market, our market share of UK household deposits remained relatively stable at 10.0% (2017: 10.1%).
Debt securities in issue and other financial liabilities
Other financial liabilities have increased by GBP9.2 billion driven by an increase in bank deposits (which includes TFS drawdowns) and subordinated liabilities, which have been issued during the period to finance core activities and to fund the bond buy back exercise. Correspondingly, debt securities in issue have reduced by GBP6.2 billion primarily due to lower wholesale funding balances following the debt buy back exercise.
The growth in other financial liabilities has been partly offset by a decrease in Nationwide International balances which have now fully run off following our strategic decision in 2016/17 to exit the business. This outflow was managed in an orderly manner, with the funding replaced by additional member deposits and the use of wholesale funding where appropriate.
The wholesale funding ratio has increased to 28.2% (4 April 2017: 27.1%), predominantly due to TFS drawdowns during the period to support core activities and replace off-balance sheet Funding for Lending Scheme maturities.
Members' interests and equity
Movements in the year reflect the retained profit after tax and the issuance of CCDS, details of which are included in the Capital structure section below.
Year to Year to
Statement of comprehensive income 4 April 2018 4 April 2017
(Movements shown net of related taxation) GBPm GBPm
Profit after tax 745 757
Net remeasurement of pension obligations 22 (255)
Net movement in cash flow hedge reserve (191) (247)
Net movement in available for sale reserve 31 52
Other items 1 2
-------------------------------------------- ------------- -------------
Total comprehensive income 608 309
-------------------------------------------- ------------- -------------
Further information on gross movements in the pension obligation is included in note 14 to the financial statements. Further information relating to movements in the cash flow hedge reserve is included in note 6 to the financial statements.
1 Market interest rates are based on Bank of England whole of market average interest rates over the period, adjusted to exclude Nationwide's balances.
Financial review (continued)
Capital structure
Our capital position has strengthened during the period with our CET1 and UK leverage ratios increasing to 30.5% and 4.9% respectively (4 April 2017: 25.4% and 4.4%), comfortably in excess of the regulatory capital requirements.
Capital structure 4 April 2018 4 April 2017 (note i) GBPm GBPm ------------------------------------- ------------- ------------- Capital resources Common Equity Tier 1 (CET1) capital 9,925 8,555 Total Tier 1 capital 10,917 9,547 Total regulatory capital (note ii) 13,936 12,154 Risk weighted assets (RWAs) 32,509 33,641 UK leverage exposure 221,992 215,894 CRR leverage exposure 236,468 228,428 CRD IV capital ratios: % % CET1 ratio 30.5 25.4 UK leverage ratio (note iii) 4.9 4.4 CRR leverage ratio (note iv) 4.6 4.2 ------------------------------------- ------------- -------------
Notes:
i. Data in the table is reported under CRD IV on an end point basis.
ii. Total regulatory capital was restated as at 4 April 2017 to include accrued interest on subordinated liabilities and subordinated capital. Further information is provided in note 2 to the financial statements.
iii. The UK leverage ratio is shown on the basis of measurement announced by the Prudential Regulation Authority (PRA) and excludes eligible central bank reserves from the leverage exposure measure.
iv. The Capital Requirements Regulation (CRR) leverage ratio is calculated using the CRR definition of Tier 1 for the capital amount and the Delegated Act definition of the exposure measure and is reported on an end point basis.
The maintenance of strong capital ratios is a core requirement of the Society's strategic objective to be 'Built to Last'. In September 2017, five million CCDS were issued raising GBP0.8 billion of CET1 capital. The issuance enhanced the liquidity and relevance of the CCDS instrument, while also helping to maintain broad access to capital markets. These CCDS form a single series together with those previously issued in December 2013. Further information can be found in note 15 to the financial statements.
CET1 capital resources have increased over the year by GBP1.4 billion, mainly due to the CCDS issuance (GBP0.8 billion), and profit after tax for the period of GBP0.7 billion. Risk weighted assets (RWAs) have reduced over the year by approximately GBP1.1 billion, primarily due to the continued run-off of the commercial book. These movements have resulted in an increase in the CET1 ratio, to 30.5%.
The UK leverage ratio increased to 4.9% at 4 April 2018, as a result of the CCDS issuance and profits for the period. The CRR leverage ratio also increased to 4.6%.
The Basel Committee published their final reforms to the Basel III framework in December 2017. 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 transitional period from 2022 to 2027. In addition, the PRA's revised expectations for IRB models for residential mortgages will be effective from the end of 2020. These reforms will lead to a significant increase in our risk weights over time and we currently expect the consequential impact on our reported CET1 ratio to ultimately be a reduction of the order of 45-50% relative to our current methodology. We note however that organic earnings through the transition will mitigate this impact such that our reported CET1 ratio will in practice remain well in excess of the proforma levels implied by this change, and leverage requirements will remain our binding constraint based on latest projections. These reforms represent a re-calibration of regulatory requirements with no underlying change in the capital resources we hold or the risk profile of our assets. Final impacts are subject to uncertainty for future balance sheet size and mix, and because the final detail of some elements of the regulatory changes remain at the PRA's discretion.
Financial review (continued)
IFRS 9
IFRS 9 will be implemented in the financial statements for the year ending 4 April 2019. It is estimated that the new IFRS 9 expected credit loss (ECL) provisioning approach results in an increase in provisions of GBP172 million. The reclassification and measurement of financial assets results in a reduction in carrying value of GBP36 million. The resulting impact on members' interests and equity, net of deferred tax, is GBP162 million. The CET1 ratio impact of IFRS 9 is a reduction of 31 basis points before taking regulatory transitional relief into account, and a reduction of 10 basis points once this relief is included. The equivalent UK leverage ratio impact is estimated as a reduction of 3 basis points before regulatory transitional relief and no reduction once this relief is included. As a result, IFRS 9 is not expected to have a significant impact on the Group's capital position.
Financial performance framework (FPF)
As a mutual, we aim to optimise, rather than maximise, profit and retain sufficient earnings to support future growth, sustain a strong capital position and allow us to invest in the business to provide the products and services that our members demand. We have used the most recent guidance from regulators regarding the maximum expected capital requirement for Nationwide to develop our financial performance framework. This framework provides parameters which will allow us to calibrate future performance and help ensure that we achieve the right balance between distributing value to members, investing in our business and maintaining our financial strength.
The most important of these parameters is underlying profit which is a key component of Nationwide's capital. We believe that a level of underlying profit of approximately GBP0.9 billion to GBP1.3 billion per annum over the cycle would meet the Board's objective for sustainable capital strength. This range will vary from time to time, and whether our profitability falls within or outside this range in any given financial year or period will depend on a number of external and internal factors, including conscious decisions to return value to members or to make investments in the business. It should not be construed as a forecast of the likely level of Nationwide's underlying profit for any financial year or period within a financial year.
Business and risk report
Contents
Page
Principal risks 20
Managing risk 25
Top and emerging risks 27
Credit risk 29
Residential mortgages 32
Consumer banking 39
Commercial and other lending 42
Treasury assets 47
Liquidity and funding risk 50
Solvency risk 57
Principal risks
Effective risk management is fundamental to the success of Nationwide's business and has an important part to play in delivering our purpose of building society, nationwide by making sure we are safe and secure for the future. Whilst it is accepted that all business activities involve some degree of risk, Nationwide seeks to protect its members by appropriately managing the risks that arise from its activities. Nationwide's risk management processes ensure the Society is built to last by:
-- contributing to better decision making, ensuring we take the right risks, in a way that is considered and supports the strategy
-- ensuring the risks we do take are appropriately understood, controlled and managed
-- maintaining an appropriate balance between delivering member value and remaining a prudent and responsible lender.
Nationwide is exposed to the principal risks as set out below, which are managed through the Society's Enterprise Risk Management Framework as described on page 25. The Society's description of principal risks have been restructured to better align with how the risks are managed. However, the underlying risks to Nationwide remain the same.
Credit risk
The risk of loss as a result of a member, customer or counterparty failing to meet their financial obligations.
Why this risk is important for Nationwide
Borrowers may be unable to repay loans for a number of reasons, such as changes to the economic and market environment or in their individual circumstances. This may lead to:
-- Financial difficulty or other detriment to borrowers who are unable to afford repayments on existing products and services, either with Nationwide or other providers
-- Credit losses which adversely impact the Society's profitability, ability to generate sufficient capital and sustainability.
How Nationwide manages this risk on behalf of members
Nationwide seeks to minimise unaffordable lending and credit losses through:
-- Stringent affordability checks and controls, ensuring lending is responsible and will not cause financial difficulty for members and customers
-- Prudent lending policies, operated across specific market segments, which ensure lending remains within the Board's risk appetite
-- Continuous monitoring of credit portfolios to identify potential risks, through stress testing, modelling and ongoing reporting to senior management and the Board.
Solvency risk
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 members, investors, the Board and regulators.
Why this risk is important for Nationwide
A sudden stress or series of unexpected losses may result in Nationwide's capital reserves being depleted. This may lead to:
-- Threats to the ongoing viability of the Society should capital resources be exhausted
-- An inability to offer new products to members as capital is not available to support these offerings
-- Reputational damage to the Society as members, regulators, investors and counterparties lose trust in Nationwide's ability to operate.
How Nationwide manages this risk on behalf of members
Nationwide ensures it maintains sufficient capital resources through:
-- Defining a minimum level of capital, including leverage, which the Society is willing to tolerate through Board risk appetite, which is maintained and monitored by the Board and other risk committees.
-- Structuring capital to meet key regulatory minimums, stakeholder expectations and the requirements of the strategy.
Principal risks (continued)
Market risk
The risk that the net value of, or net income arising from, the Society's assets and liabilities is impacted as a result of market price or rate changes. As Nationwide does not have a trading book, market risk only arises in the banking book.
Why this risk is important for Nationwide
Nationwide's income or the value of its assets may be altered by changes in interest rates, currency rates and equity prices. This may lead to:
-- Lower than expected income, adversely affecting the Society's profitability and ability to generate capital
-- Capital and liquidity resources which are worth less than expected, impacting the Society's ability to meet its financial commitments and its ongoing viability.
How Nationwide manages this risk on behalf of members
Nationwide seeks to minimise its exposure to fluctuations in market prices and rates through:
-- Fully hedging market risks where possible and appropriate and taking market risks only when these are essential to core business activities, or are designed to provide stability of earnings.
-- Continuous monitoring through a variety of techniques including sensitivity analysis, earnings sensitivity, Value at Risk and stress analysis.
Business risk
The risk that volumes decline or margins shrink relative to the cost base, affecting the sustainability of the business and the ability to deliver the strategy due to macro-economic, geopolitical, industry, regulatory or other external events.
Why this risk is important for Nationwide
Nationwide may fail to respond appropriately to changes in the external environment including new technology, consumer behaviour, regulation or market conditions. This may lead to:
-- Products and services which fail to meet members' needs, adversely affecting both the Society's relationship with members and the ability to generate income
-- A weakening of our relationships with members as they increasingly conduct their business through third parties
-- Degradation of profitability through increased costs or decreased income.
How Nationwide manages this risk on behalf of members
Whilst changes in Nationwide's operating environment pose risks, they also present opportunities to provide new, innovative products and services to members. Nationwide ensures it is able to adapt to new conditions and continues to meet members' needs whilst remaining safe and secure for the future through:
-- Considering the potential for disruption to the market and operating environment from a range of factors, including technology and consumer trends, through regular Board and senior management reporting
-- Continuing to develop new products and services based on member engagement, emerging trends, and technological innovation
-- Identifying and monitoring potential risks to its business model through dedicated horizon scanning processes.
Principal risks (continued)
Liquidity and funding risk
Liquidity risk is the risk that Nationwide is unable to meet its liabilities as they fall due and maintain member and other stakeholder confidence.
Funding risk is the risk that Nationwide is unable to maintain diverse funding sources in wholesale and retail markets and manage retail funding risk that can arise from excessive concentrations of higher risk deposits.
Why this risk is important for Nationwide
In the event of a downturn in the macroeconomic environment, sudden withdrawals of member deposits or other potential shocks, Nationwide could have insufficient financial resources to meet its commitments. This may lead to:
-- Members being unable to access their money or other products and services -- Disruption to other organisations or the market
-- Damage to the Society's reputation, decreased member and stakeholder confidence and increased funding costs.
How Nationwide manages this risk on behalf of members
Nationwide ensures it is able to meet its liabilities as they fall due and maintain appropriate funding through:
-- Operating a comprehensive suite of policies, limits, stress testing, monitoring and robust governance controls to ensure a stable and diverse funding base and sufficient holdings of high quality liquid assets
-- Continuously monitoring liabilities against internal and regulatory requirements, and management of liquidity resources to meet these as they fall due
-- Maintaining a contingency funding plan which details the actions available to the Society in a stress situation.
Pension risk
The risk that the value of the pension schemes' assets will be insufficient to meet the estimated liabilities, creating a pension deficit.
Why this risk is important for Nationwide
Nationwide has funding obligations to defined benefit pension schemes. The value of the schemes' assets could become insufficient to meet estimated liabilities as a result of volatility in the value of schemes' assets and liabilities, driven by market interest rates, inflation and longevity. This may lead to:
-- Insecurity of employee pension arrangements -- A requirement to increase cash funding into these schemes -- An adverse impact on Nationwide's capital position.
How Nationwide manages this risk on behalf of members
The assets of Nationwide's defined benefit schemes are held in legally separate trusts, each administered by a board of trustees, in accordance with UK legislation. Nationwide minimises the impact of pension risk on both the Society and pension scheme members through:
-- Maintaining effective engagement with the trustees to manage the long-term impact of pension risk on the Society's capital and financial position
-- Balancing risk, return and relevant employee considerations.
Principal risks (continued)
Model risk
The risk of weaknesses or failures in models used to support key decisions including in relation to the amount of capital and liquidity resources required, lending and pricing, resourcing and earnings.
Why this risk is important for Nationwide
Model outputs could be inaccurate as a result of inappropriate design or operation. This may affect decision making and lead to:
-- Members being inappropriately offered or refused access to products and services -- Financial loss or insufficient financial resources -- Regulatory censure.
How Nationwide manages this risk on behalf of members
Models play an ever more important part in supporting the strategy as decision making becomes more sophisticated. This risk is mitigated through:
-- A well governed model development process, operated by expert modelling teams and independently validated by specialists in the second line.
-- Regular monitoring of model performance and maintenance, supported by independent review.
Operational risk
The risk of loss resulting from failures of internal processes, people and systems, or from external events.
Why this risk is important for Nationwide
Process, people or system failures or external events could lead to:
-- Disruption either to the services provided to members or to internal processes
-- The loss of customer data, assets, or other form of detriment due to external parties (e.g. cyber attack, fraud) or poor internal controls
-- Financial loss, through a loss of income, increase in costs, or direct loss.
How Nationwide manages this risk on behalf of members
Nationwide seeks to minimise detriment and loss to members, customers and the Society through:
-- Regularly identifying and assessing the key operational risks to its strategy, ensuring appropriate controls are in place to mitigate these risks
-- Considering the extreme but plausible events which could affect the Society
-- Continuing to invest in enhanced controls in key areas including cyber, resilience and data.
Principal risks (continued)
Conduct and compliance risk
The risk that Nationwide exercises inappropriate judgement or makes errors in the execution of its business activities, leading to:
-- Non-compliance with regulation or legislation -- Market integrity being undermined, or -- An unfair outcome being created for customers.
Why this risk is important for Nationwide
In an evolving regulatory and consumer environment, Nationwide could provide products and services which are misaligned to the needs of customers or market conditions due to the pace of change in customer behaviour, regulation, or the external environment. This may lead to:
-- Unfair customer outcomes, with customers being sold products which are not wanted or needed -- Non-compliance with the letter or spirit of legislation or regulation -- Disruption to the market -- Regulatory censure.
How Nationwide manages this risk on behalf of members
Nationwide seeks to minimise its conduct and compliance exposure through:
-- Rigorous testing of products and services both before and after providing them to members to ensure they are designed and performing appropriately
-- Continually assessing new and existing risks in the conduct and compliance environment (e.g. technology, cyber-crime, changes in consumer or market behaviour and regulatory changes), and ensuring that risk exposures are appropriately managed.
Managing risk
Effective risk management is at the heart of the business, ensuring that decisions are made having considered any associated risks to delivery of Nationwide's strategy and our goal to protect members' interests.
The Society manages its risk through an enterprise-wide risk management framework, which sets out the minimum standards, and associated processes, for successful risk management, connecting the Society's strategy with day-to-day risk management activities.
Enterprise risk management framework (ERMF)
Over the past year, Nationwide has evolved the ERMF in response to industry developments, best practice and the shifting risk landscape, to simplify the Society's processes and improve their effectiveness and efficiency. Whilst the visualisation below presents a simplified articulation of how Nationwide manages its risk, the approach to risk management remains fundamentally unchanged.
The diagram below outlines how Nationwide's ERMF is structured to manage the risks to which the Society is exposed.
Nationwide Strategy
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=========================== ====================================================
Risk appetite Risk appetite articulates how much risk the
Society is prepared to take in the pursuit
of its objectives
=========================== ====================================================
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=========================== ====================================================
Risk strategy Risk strategy sets out how the Society will
manage its material risks within risk appetite
over the five years of the Plan
=========================== ====================================================
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=========================== ====================================================
Control environment Control environment encompasses all the policies
and controls we operate on a day-to-day basis
to control our material risks within risk appetite
=========================== ====================================================
ê
=========================== ====================================================
Risk and control management Risk and control management and governance
and governance defines the processes, tools, structures and
systems we used to identify, assess and manage
our risks on a day-to-day basis
=========================== ====================================================
ê
=========================== ====================================================
Risk, incident and control Risk, incident and control reporting ensures
reporting the appropriate monitoring, aggregation, and
escalation of relevant risk and control information
to the Board, risk committees, and management
to enable effective risk decision making.
=========================== ====================================================
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=========================== ====================================================
Better Business Decisions
=========================== ====================================================
The ERMF ensures that risks are managed through robust and consistent processes, supported by appropriate tools and guidance, enabling better business decisions for delivery of Nationwide's strategy.
The Board monitors the Society's risk management and internal control systems and carries out an annual review of their effectiveness. During the year, the Society's risk management and internal control systems have been reviewed and, on the basis of this review, the Board is satisfied that Nationwide has an adequate system of risk management and internal control.
Managing risk (continued)
Risk appetite
Board risk appetite articulates how much risk the Board is willing to accept on behalf of its members in the delivery of the strategy. The following statements articulate Nationwide's approach to taking risk responsibly in the interests of our members. The Society's ambitions are to:
-- Lend in a responsible, affordable and sustainable way to ensure we safeguard members and the financial strength of the Society throughout the credit cycle
-- Maintain sufficient capital and liquidity resources to support current business activity and planned growth and to remain resilient to significant stress
-- Minimise customer disruption, financial loss, reputational damage and regulatory non-compliance, especially those caused by failures of people, processes and systems
-- Provide sustainable customer services over resilient systems -- Treat customers fairly before, during and after the sales process
-- Offer products and services which meet customer needs and expectations, perform as represented and provide value for money
-- Operate a mutual business model which is sustainable and remains within the requirements of the Building Societies Act in a stress
-- Only incur market risks that are required for operational efficiency, stability of earnings or cost minimisation in supporting core business activities.
Top and emerging risks
Nationwide accepts that all business activities involve some degree of risk; therefore, steps are taken to protect members by ensuring that these activities are managed appropriately. The Built to Last strategic cornerstone focuses on Nationwide being sustainable, efficient and resilient for members.
Top and emerging risks are identified through the process outlined in the 'Managing Risk' section of this report and are closely tracked throughout the governance structure. They are specific instances of one or more of our principal risks which are particularly relevant in the current environment and which the Society will keep under close observation through risk reporting. The top and emerging risks to Nationwide's' strategy are detailed in the table below.
Risk Overview of Risk Mitigating Actions
Cyber security Nationwide and other organisations Nationwide is:
across financial and non-financial * Continuing to invest in cyber security, focusing on
sectors continue to be targeted the development of robust preventative controls,
by increasingly sophisticated intrusion detection systems and response plans to
and frequent cyber attacks protect services and member data
including ransomware, malware
and Distributed Denial of
Service (DDoS) attacks. These * Collaborating with industry bodies and law
attacks can disrupt the provision enforcement agencies, to develop a better
of services to members or understanding of, and response to, evolving cyber
lead to a loss of member data. threats.
The threat from cyber attacks
is expected to remain high,
with heightened geopolitical
tensions, potentially increasing
the threat to the UK, and
the development of ever more
sophisticated threats. This
becomes more significant as
services continue to be accessed
online.
==================================== =============================================================
Operational Over recent years there has Nationwide is:
resilience been a dramatic increase in * Ensuring focus on maintenance of service provision,
demand for digital services with oversight through the dedicated Board IT and
available at all times. Ever Resilience Committee
increasing volumes of data
must be managed securely and
reliably, to avoid disruption * Continuing to invest in the resilience of its systems
to member services. and implementing robust controls to minimise
The rate of increase in demand disruption.
for digital services shows
no signs of slowing down,
and delivering technological
change to match this demand,
without impacting system security
or stability, remains a challenge
across the sector.
==================================== =============================================================
Regulatory The regulatory environment Nationwide is:
change continues to evolve, with * Managing implementation of regulatory changes through
several key pieces of regulation dedicated programmes which are closely monitored by
coming into force in 2018, the Board
including the General Data
Protection Regulation (GDPR),
the Payment Services Directive * Working closely with regulators to ensure compliance
II (PSD II), Competition and with both the letter and the spirit of regulation.
Markets Authority (CMA) remedies
and BCBS 239. Each of these
requires complex changes to
implement and the combined
effect is resulting in significant
industry-wide challenges for
firms to demonstrate and maintain
compliance.
Nationwide is well placed
to respond to new requirements
with work already underway
to ensure compliance.
==================================== =============================================================
Top and emerging risks (continued)
Risk Overview of Risk Mitigating Actions
Competitive Competition continues to evolve Nationwide is:
environment in Nationwide's core markets * Continuously monitoring the competitive environment
driven by changes to regulation, and reviewing the ability of the Society's business
technological innovation, model to respond to potential risks and opportunities
and increasing demand for
digital products and services
due to the convenience that * Continuing to identify and invest in new and
they can bring. Whilst these innovative product offerings and technology to
provide opportunities to build deliver on our commitment to provide legendary
new and deeper relationships service to members.
with members, and better meet
customer needs through new
product offerings, they may
also pose challenges to Nationwide's
products, systems and pricing,
and disrupt how financial
services currently operate.
Changes in the competitive
environment are expected to
continue as existing or new
competitors launch propositions
utilising Open Banking technologies
and enhance existing service
offerings through artificial
intelligence, machine learning
and other product innovation.
=========================================================== ============================================================
Geopolitical Nationwide is inherently exposed Nationwide is:
and to a downturn in macro-economic * Monitoring key economic factors for signs of
macro-economic conditions which can impact increasing risk or environmental developments
environment customer affordability, credit
losses and the availability
and cost of financial resources. * Undertaking regular assessments of how economic
stresses may impact its business model
Numerous factors are expected
to impact the geopolitical
and macro-economic environment * Continuing Board review of key developments including
over the coming year. These Brexit, geopolitical tensions, European and domestic
include: political changes.
* Brexit - whilst the basis of a transition deal is in
place, uncertainty remains over the terms of the UK'
s
exit from the EU. Whilst Nationwide's business model
means the Society has limited direct exposure to the
EU, depending upon the shape of the deal, Nationwide
may be exposed to secondary impacts
* Economic conditions and policy - when adjusted for
inflation, wages growth is negligible and
productivity remains persistently low. When coupled
with the withdrawal of some monetary stimulus,
customer affordability could be affected
* Geopolitical tensions - there remain significant
tensions in the geopolitical environment which have
the potential to create headwinds for the UK economy
.
=========================================================== ============================================================
Credit risk
Credit risk is the risk of loss as a result of a member, customer or counterparty failing to meet their financial obligations. Credit risk also encompasses refinance risk and concentration risk. Refinance risk is the risk of loss arising when a repayment of a loan or other financial product occurs later than originally anticipated.
Nationwide manages credit risk for each of the following portfolios:
Portfolio Definition
Residential mortgages Loans secured on residential property
============================================================
Consumer banking Unsecured lending including current account overdrafts,
personal loans and credit cards
============================================================
Commercial and Loans to registered social landlords, loans made
other lending under the Private Finance Initiative and commercial
real estate lending. Also includes deferred consideration
and collateral balances to support repurchase transactions.
============================================================
Treasury Treasury liquidity, derivatives and discretionary
portfolios
============================================================
Maximum exposure to credit risk
Credit risk largely arises from exposure to loans and advances to customers, which account for 85.2% (2017: 85.9%) of Nationwide's total credit risk exposure. Within this, exposure relates primarily to residential mortgages, which account for 92.5% (2017: 91.4%) of total loans and advances to customers and which comprise high quality assets with low occurrences of arrears and possessions. Residential mortgage exposures have increased during the year, driven by Nationwide's continued support for first time buyers which has contributed to the GBP6 billion growth in prime mortgage balances in the year.
In addition to loans and advances to customers, Nationwide is exposed to credit risk on all other financial assets. For financial assets recognised on the balance sheet, the maximum exposure to credit risk represents the balance sheet carrying value after allowance for impairment. For off-balance sheet guarantees, the maximum exposure is the maximum amount that Nationwide would have to pay if the guarantees 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.
Nationwide's maximum exposure to credit risk has risen from GBP234 billion to GBP240 billion, reflecting the growth in residential mortgage loans.
Maximum exposure to 2018
credit risk
Gross Less: Impairment Carrying Commitments Maximum % of total
balances provisions value (note i) credit credit
risk exposure risk exposure
(Audited) GBPm GBPm GBPm GBPm GBPm %
------------------------ --------- ---------------- -------- ----------- -------------- --------------
Cash 14,361 - 14,361 - 14,361 6
Loans and advances to
banks 3,422 - 3,422 101 3,523 1
Investment securities
- Available for sale 11,926 - 11,926 - 11,926 5
Investment securities
- Held to maturity 1,120 - 1,120 700 1,820 1
Derivative financial
instruments 4,121 - 4,121 - 4,121 2
Fair value adjustment
for portfolio hedged
risk (note ii) (109) - (109) - (109) -
34,841 - 34,841 801 35,642 15
Loans and advances to
customers:
Residential mortgages 177,299 (145) 177,154 12,204 189,358 79
Consumer banking 4,107 (298) 3,809 42 3,851 1
Commercial and other
lending
(notes ii and iii) 10,716 (15) 10,701 842 11,543 5
192,122 (458) 191,664 13,088 204,752 85
Total 226,963 (458) 226,505 13,889 240,394 100
------------------------ --------- ---------------- -------- ----------- -------------- --------------
Credit risk (continued)
Maximum exposure to credit 2017
risk
Gross Less: Impairment Carrying Commitments Maximum % of
balances provisions value (note i) credit total
risk exposure credit
risk
exposure
(Audited) GBPm GBPm GBPm GBPm GBPm %
--------------------------- --------- ---------------- -------- ----------- -------------- ---------
Cash 13,017 - 13,017 - 13,017 6
Loans and advances to
banks 2,587 - 2,587 115 2,702 1
Investment securities
- Available for sale
(note iv) 9,831 - 9,831 - 9,831 4
Investment securities
- Held to maturity - - - 1,774 1,774 1
Derivative financial
instruments 5,043 - 5,043 - 5,043 2
Fair value adjustment
for portfolio hedged
risk (note ii) 746 - 746 - 746 -
31,224 - 31,224 1,889 33,113 14
Loans and advances to
customers:
Residential mortgages 171,263 (144) 171,119 12,589 183,708 78
Consumer banking 3,949 (269) 3,680 26 3,706 2
Commercial and other
lending
(notes ii and iii) 12,597 (25) 12,572 926 13,498 6
187,809 (438) 187,371 13,541 200,912 86
Total 219,033 (438) 218,595 15,430 234,025 100
--------------------------- --------- ---------------- -------- ----------- -------------- ---------
Notes:
i. In addition to the amounts shown above, Nationwide has, as part of its retail operations, revocable commitments of GBP9,517 million (2017: GBP9,202 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 (included within the carrying value of loans for 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. Commercial and other lending includes deferred consideration relating to an investment in Visa Inc and collateral balances to support repurchase transactions.
iv. Comparatives have been restated as detailed in note 2 of the financial statements.
Credit risk (continued)
Movements in impaired loans by credit risk segment
The table below shows the movements during the year of all loans classified as impaired. The balance shown represents the entire financial asset rather than just the overdue elements.
Movements in impaired Prime Specialist Consumer Commercial Total
loan balances mortgages mortgages banking and other
lending
(Audited) GBPm GBPm GBPm GBPm GBPm
-------------------------- ---------- ---------- -------- ---------- -----
At 5 April 2017 372 401 233 45 1,051
Classified as impaired
during the year 310 343 125 24 802
Transferred from impaired
to unimpaired (285) (337) (23) (5) (650)
Amounts written off (17) (38) (78) (22) (155)
Repayments (7) - (11) (12) (30)
-------------------------- ---------- ---------- -------- ---------- -----
At 4 April 2018 373 369 246 30 1,018
-------------------------- ---------- ---------- -------- ---------- -----
Movements in impaired Prime Specialist Consumer Commercial Total
loan balances mortgages mortgages banking and other
lending
(Audited) GBPm GBPm GBPm GBPm GBPm
-------------------------- ---------- ---------- -------- ---------- -----
At 5 April 2016 366 412 260 176 1,214
Classified as impaired
during the year 323 358 110 6 797
Transferred from impaired
to unimpaired (298) (333) (44) (29) (704)
Amounts written off (14) (37) (92) (105) (248)
Repayments (5) 1 (1) (3) (8)
-------------------------- ---------- ---------- -------- ---------- -----
At 4 April 2017 372 401 233 45 1,051
-------------------------- ---------- ---------- -------- ---------- -----
Note:
Loans that were classified as impaired and loans that have transferred into or out of the impaired classification are based on the relevant status at each month end, when compared to the previous month end.
Credit risk - Residential mortgages
Summary
Nationwide's residential mortgages include both prime and specialist loans. Prime residential mortgages are mainly Nationwide-branded advances made through the branch network and intermediary channels. Specialist lending consists of buy to let mortgages originated under The Mortgage Works (UK) plc (TMW) brand.
Nationwide is committed to helping people become homeowners and continues to actively support first time buyers. New lending in the prime portfolio has seen the residential mortgage exposure grow from GBP171 billion to GBP177 billion over the year, with new lending to first time buyers, at GBP11.8 billion, increasing to 38% (2017: 36%) of all new lending. Nationwide continues to operate with a commitment to responsible lending with a focus on championing good conduct and fair outcomes.
Whilst the average LTV of new lending has remained stable at 71%, increased new lending to first time buyers, at higher LTVs, has resulted in a rise in the proportion of the portfolio with an LTV above 80% to 11.2% (2017: 9.6%). The average indexed LTV across the combined residential mortgage portfolio has increased slightly from 55% to 56%.
The proportion of lending made to the buy to let segment reduced over the year to 11% (2017: 14%). TMW remains a top tier BTL lender and uses this presence and influence in the market to drive improving standards across the industry, providing expertise, opinion and innovation for the benefit of the private rental sector, supporting both landlords and tenants. Through TMW, Nationwide is supporting portfolio landlords, with four or more properties, has expanded into 80% LTV lending and is piloting lending to limited companies.
The proportion of loans in arrears has reduced slightly to 1.5% (2017: 1.6%) and arrears levels remain low across prime and specialist lending, reflecting the favourable economic conditions and low interest rate environment, supported by robust credit assessment and affordability controls at the point of lending, and proactive engagement with borrowers. The proportion of loans more than three months in arrears reduced slightly to 0.43% and is significantly below the UK Finance (UKF) average of 0.81%. Whilst there are no signs of deterioration in the portfolio, with the immediate outlook for the UK being less certain and the buy to let market facing increased costs and potentially less investor demand, the expectation is for a gradual rise in arrears from these low levels.
The provision balance for residential mortgages has remained broadly stable at GBP145 million (2017: GBP144 million) and provision coverage on non-performing balances is unchanged at 5.3%.
Lending and new business
The table below summarises the residential mortgages portfolios:
Residential mortgage lending 2018 2017
(Audited) GBPm % GBPm %
----------------------------- ------- --- ------- ---
Prime 144,049 81 138,004 81
Specialist:
Buy to let 30,438 18 30,087 18
Self-certified 1,823 1 2,071 1
Near prime 705 - 784 -
Sub prime 284 - 317 -
----------------------------- ------- --- ------- ---
33,250 19 33,259 19
Total residential mortgages 177,299 100 171,263 100
----------------------------- ------- --- ------- ---
Note:
Self-certified, near prime and sub prime lending were discontinued in 2009.
Credit risk - Residential mortgages (continued)
Distribution of new business by borrower type 2018 2017
(by value)
% %
---------------------------------------------- ---- ----
Prime:
Home movers 29 30
First time buyers 38 36
Remortgagers 21 19
Other 1 1
---------------------------------------------- ---- ----
Total prime 89 86
Specialist:
Buy to let new purchases 2 3
Buy to let remortgagers 9 11
---------------------------------------------- ---- ----
Total specialist 11 14
Total new business 100 100
---------------------------------------------- ---- ----
Note:
All new business measures exclude further advances and product switchers.
In October 2014, the Financial Policy Committee (FPC) introduced a 15% limit on the proportion of new lending for residential mortgages, excluding buy to let, that may be written at income multiples of 4.5 and above. The proportion of new lending at income multiples of 4.5 or higher was 8.3% in the year (2017: 10.6%). This is closely monitored and controlled to remain within risk appetite.
Credit risk
Residential mortgage lending continues to have a low risk profile as demonstrated by a low level of arrears compared to the industry average. The residential mortgages portfolio comprises many relatively small loans which are broadly homogenous, have low volatility of credit risk outcomes and are diversified in terms of the UK market and geographic segments.
LTV and credit risk concentration
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 most appropriately reflect the exposure at risk.
Average LTV of loan stock 2018 2017
--------------------------
% %
-------------------------- ---- ----
Prime 55 54
Specialist 58 59
-------------------------- ---- ----
Group 56 55
-------------------------- ---- ----
Average LTV of new business 2018 2017
----------------------------
% %
---------------------------- ---- ----
Prime 72 72
Specialist (buy to let) 61 62
---------------------------- ---- ----
Group 71 71
---------------------------- ---- ----
Note:
The LTV of new business excludes further advances and product switchers.
Credit risk - Residential mortgages (continued)
LTV distribution of new business 2018 2017
--------------------------------
% %
-------------------------------- ---- ----
0% to 60% 26 26
60% to 75% 30 31
75% to 80% 9 9
80% to 85% 14 14
85% to 90% 18 17
90% to 95% 3 3
Over 95% - -
-------------------------------- ---- ----
Total 100 100
-------------------------------- ---- ----
The maximum LTV for new prime residential customers is 95%. The proportion of new lending greater than 80% LTV has increased to 35% (2017: 34%) in part as a result of the strategy to continue to support first time buyers.
Geographical concentration
Residential Greater Central Northern South South Scotland Wales Northern Total
mortgage balances London England England East West Ireland
by LTV and region England England
(Audited)
2018 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm %
------------------------ ------- -------- -------- -------- -------- -------- ----- -------- ------- -----
Performing loans
Fully collateralised
LTV ratio:
Up to 50% 26,771 10,392 6,896 8,727 5,820 2,895 1,383 925 63,809
50% to 60% 11,496 5,932 4,101 4,502 3,240 1,612 799 389 32,071
60% to 70% 9,006 6,807 6,136 3,678 3,304 2,375 1,271 392 32,969
70% to 80% 6,441 4,944 5,568 2,809 2,414 2,495 1,098 403 26,172
80% to 90% 4,987 2,817 3,386 1,974 1,592 1,453 675 274 17,158
90% to 100% 506 319 452 306 172 283 63 83 2,184
------- -------- -------- -------- -------- -------- ----- -------- -------
59,207 31,211 26,539 21,996 16,542 11,113 5,289 2,466 174,363 98.4
Not fully collateralised
Over 100% LTV
(A) 4 4 20 2 3 11 2 169 215 0.1
Collateral value
on A 3 3 17 2 2 11 2 144 184
Negative equity
on A 1 1 3 - 1 - - 25 31
------- -------- -------- -------- -------- -------- ----- -------- -------
Total performing
loans 59,211 31,215 26,559 21,998 16,545 11,124 5,291 2,635 174,578 98.5
------------------------ ------- -------- -------- -------- -------- -------- ----- -------- ------- -----
Non-performing
loans
Fully collateralised
LTV ratio:
Up to 50% 489 162 112 122 70 39 23 28 1,045
50% to 60% 199 100 82 70 44 31 15 11 552
60% to 70% 78 109 116 60 52 37 22 11 485
70% to 80% 30 79 100 26 31 39 19 10 334
80% to 90% 13 32 84 8 6 21 16 8 188
90% to 100% 4 3 36 3 1 9 7 8 71
813 485 530 289 204 176 102 76 2,675 1.5
Not fully collateralised
Over 100% LTV
(B) - 1 8 - - 2 - 35 46 -
Collateral value
on B - 1 8 - - 2 - 28 39
Negative equity
on B - - - - - - - 7 7
------- -------- -------- -------- -------- -------- ----- -------- -------
Total non-performing
loans 813 486 538 289 204 178 102 111 2,721 1.5
------------------------ ------- -------- -------- -------- -------- -------- ----- -------- ------- -----
Total residential
mortgages 60,024 31,701 27,097 22,287 16,749 11,302 5,393 2,746 177,299 100.0
------------------------ ------- -------- -------- -------- -------- -------- ----- -------- ------- -----
Geographical
concentrations 34% 18% 15% 13% 9% 6% 3% 2% 100%
------------------------ ------- -------- -------- -------- -------- -------- ----- -------- ------- -----
Credit risk - Residential mortgages (continued)
Residential Greater Central Northern South South Scotland Wales Northern Total
mortgage balances London England England East West Ireland
by LTV and region England England
(Audited)
2017 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm %
------------------------ ------- -------- -------- -------- -------- -------- ----- -------- ------- -----
Performing loans
Fully collateralised
LTV ratio:
Up to 50% 28,493 9,737 6,361 8,783 5,630 2,915 1,208 833 63,960
50% to 60% 11,822 5,612 3,748 4,637 3,141 1,649 681 357 31,647
60% to 70% 8,659 6,888 5,737 3,852 3,426 2,366 972 395 32,295
70% to 80% 5,169 4,905 5,897 2,216 2,198 2,619 1,296 352 24,652
80% to 90% 3,084 2,483 3,304 1,314 1,207 1,285 707 324 13,708
90% to 100% 288 237 699 132 102 157 233 140 1,988
------- -------- -------- -------- -------- -------- ----- -------- -------
57,515 29,862 25,746 20,934 15,704 10,991 5,097 2,401 168,250 98.2
Not fully collateralised
LTV more than
100% (A) 5 6 40 2 3 16 8 239 319 0.2
------- -------- -------- -------- -------- -------- ----- -------- -------
Collateral value
on A 4 5 35 1 2 15 8 199 269
Negative equity
on A 1 1 5 1 1 1 - 40 50
------- -------- -------- -------- -------- -------- ----- -------- -------
Total performing
loans 57,520 29,868 25,786 20,936 15,707 11,007 5,105 2,640 168,569 98.4
------------------------ ------- -------- -------- -------- -------- -------- ----- -------- ------- -----
Non-performing
loans
Fully collateralised
LTV ratio:
Up to 50% 504 153 100 120 66 40 20 25 1,028
50% to 60% 192 98 69 69 41 28 12 11 520
60% to 70% 69 105 107 58 49 42 17 12 459
70% to 80% 17 94 105 21 32 36 24 10 339
80% to 90% 8 42 86 6 6 18 15 11 192
90% to 100% 1 7 53 - 1 7 14 7 90
------- -------- -------- -------- -------- -------- ----- -------- -------
791 499 520 274 195 171 102 76 2,628 1.6
Not fully collateralised
LTV more than
100% (B) - 1 12 - - 2 3 48 66 -
------- -------- -------- -------- -------- -------- ----- -------- -------
Collateral value
on B - 1 11 - - 2 3 38 55
Negative equity
on B - - 1 - - - - 10 11
------- -------- -------- -------- -------- -------- ----- -------- -------
Total non-performing
loans 791 500 532 274 195 173 105 124 2,694 1.6
------------------------ ------- -------- -------- -------- -------- -------- ----- -------- ------- -----
Total residential
mortgages 58,311 30,368 26,318 21,210 15,902 11,180 5,210 2,764 171,263 100.0
------------------------ ------- -------- -------- -------- -------- -------- ----- -------- ------- -----
Geographical
concentrations 34% 18% 15% 12% 9% 7% 3% 2% 100%
------------------------ ------- -------- -------- -------- -------- -------- ----- -------- ------- -----
Over the year, the geographical distribution across the UK has remained stable.
The value of partially collateralised non-performing loans has reduced to GBP46 million (2017: GBP66 million), primarily reflecting the growth in house prices.
During the year the proportion of loan balances with an LTV greater than 80% has increased to 11.2% (2017: 9.6%) reflecting the new lending and support for first time buyers.
Credit risk - Residential mortgages (continued)
Arrears
The methodology for calculating mortgage arrears is based on the UK Finance (UKF) definition of arrears, where months in arrears is determined by dividing the arrears balance outstanding by the latest contractual payment.
Number of cases more than 3 months in arrears 2018 2017
as % of total book
----------------------------------------------
% %
---------------------------------------------- ---- ----
Prime 0.34 0.36
Specialist 0.83 0.89
---------------------------------------------- ---- ----
Total 0.43 0.45
---------------------------------------------- ---- ----
UKF industry average 0.81 0.91
---------------------------------------------- ---- ----
Favourable economic conditions, including a continued low interest rate environment, have resulted in the arrears performance of both the prime and specialist mortgage portfolios reaching a level where any future changes are more likely to be gradual upward movements rather than further falls. The combined arrears rate of 0.43% was approximately half of the UKF industry average rate of 0.81%.
Impaired loans
Impaired and non-performing loans are identified primarily by arrears status. Impaired accounts are defined as those greater than three months in arrears and include accounts subject to possession. Non-performing accounts include:
-- all impaired loans;
-- loans which are past due but not impaired, including any loan where a payment due is received late or missed; and
-- past term interest only loans which have gone into litigation.
The non-performing loan amount represents the entire loan balance rather than just the payment overdue.
Impairment provisions are held in relation to both the performing and non-performing segments of the residential mortgage portfolio. Provisions reflect losses which have been incurred at the balance sheet date, based on objective evidence. Individual impairment provisions are assigned to accounts in possession and a collective provision is assigned to all other accounts. For currently performing loans, the provision reflects losses arising from impairment events that have occurred within the portfolio but are not identifiable at the reporting date.
Credit risk - Residential mortgages (continued)
Residential mortgages by payment status 2018
Prime Specialist Total
(Audited) GBPm GBPm GBPm %
----------------------------------------------- ------- ---------- ------- ----
Performing:
Neither past due nor impaired 142,382 32,196 174,578 98.5
Non-performing:
Past due up to 3 months 1,294 685 1,979 1.1
Impaired:
Past due 3 to 6 months 162 159 321 0.2
Past due 6 to 12 months 113 110 223 0.1
Past due over 12 months 89 76 165 0.1
Litigations (past term interest only) 1 1 2 -
Possessions 8 23 31 -
----------------------------------------------- ------- ---------- ------- ----
Total non-performing loans 1,667 1,054 2,721 1.5
Total residential mortgages 144,049 33,250 177,299 100
----------------------------------------------- ------- ---------- ------- ----
Non-performing loans as a % of total
residential mortgages 1.2% 3.2% 1.5%
Impairment provisions (GBPm) 36 109 145
Impairment provisions as a % of non-performing
balances 2.2% 10.3% 5.3%
Impairment provisions as a % of total
residential mortgages 0.02% 0.33% 0.08%
----------------------------------------------- ------- ---------- ------- ----
Residential mortgages by payment status 2017
Prime Specialist Total
(Audited) GBPm GBPm GBPm %
----------------------------------------------- ------- ---------- ------- -----
Performing:
Neither past due nor impaired 136,374 32,195 168,569 98.4
Non-performing:
Past due up to 3 months 1,258 663 1,921 1.1
Impaired:
Past due 3 to 6 months 156 173 329 0.2
Past due 6 to 12 months 117 118 235 0.2
Past due over 12 months 91 91 182 0.1
Litigations (past term interest only) - 1 1 -
Possessions 8 18 26 -
----------------------------------------------- ------- ---------- ------- -----
Total non-performing loans 1,630 1,064 2,694 1.6
Total residential mortgages 138,004 33,259 171,263 100.0
----------------------------------------------- ------- ---------- ------- -----
Non-performing loans as a % of total
residential mortgages 1.2% 3.2% 1.6%
Impairment provisions (GBPm) 34 110 144
Impairment provisions as a % of non-performing
balances 2.1% 10.3% 5.3%
Impairment provisions as a % of total
residential mortgages 0.02% 0.33% 0.08%
----------------------------------------------- ------- ---------- ------- -----
Mortgage portfolios at 4 April 2018 included 1,634 mortgage accounts (2017: 1,674), including those in possession, where payments were more than 12 months in arrears. The total principal outstanding in these cases was GBP182 million (2017: GBP195 million). The total value of arrears in these cases was GBP22 million (2017: GBP20 million) or 0.01% (2017: 0.01%) of total mortgage balances.
Credit risk - Residential mortgages (continued)
Impairment losses for the year 2018 2017 (Audited) GBPm GBPm ------------------------------- ---- ---- Prime 3 11 Specialist 8 47 Total 11 58 ------------------------------- ---- ----
Note:
Impairment losses represent the amount charged through the profit and loss account, rather than amounts written off during the year.
Possessions
Number of properties in possession 2018 2017
as % of total book
-----------------------------------
Number % Number %
of properties of properties
----------------------------------- -------------- ---- -------------- ----
Prime 108 0.01 89 0.01
Specialist 150 0.05 136 0.05
----------------------------------- -------------- ---- -------------- ----
Total 258 0.02 225 0.01
----------------------------------- -------------- ---- -------------- ----
UKF industry average 0.03 0.03
----------------------------------- -------------- ---- -------------- ----
Repossessions as a percentage of the total book have remained stable.
Interest only mortgages
Nationwide does not offer any new advances for prime residential mortgages on an interest only basis. However, there are historical balances which were originally advanced as interest only mortgages or where a change in terms to an interest only basis was agreed (this option was withdrawn in 2012). Maturities on interest only mortgages are managed closely, engaging regularly with borrowers to ensure the loan is redeemed or to agree a strategy for repayment.
The majority of the specialist portfolio comprises buy to let loans, of which approximately 80% are advanced on an interest only basis.
Interest only Term expired Due within Due after Due after Due after Total % of
mortgages - (still one year one year two years more than total
term to maturity open) and before and before five years book
two years five years
2018 GBPm GBPm GBPm GBPm GBPm GBPm %
------------------ ------------ ---------- ----------- ----------- ----------- ------ ------
Prime 54 331 366 1,577 11,271 13,599 9.4
Specialist 126 173 213 1,305 27,795 29,612 89.1
------------------ ------------ ---------- ----------- ----------- ----------- ------ ------
Total 180 504 579 2,882 39,066 43,211 24.4
------------------ ------------ ---------- ----------- ----------- ----------- ------ ------
Interest only Term Due within Due after Due after Due after Total % of
mortgages expired one year one year two years more than total
- term to maturity (still and before and before five years book
open) two years five years
2017 GBPm GBPm GBPm GBPm GBPm GBPm %
-------------------- -------- ---------- ----------- ----------- ----------- ------ ------
Prime 64 337 444 1,636 13,604 16,085 11.7
Specialist 104 202 216 1,173 28,037 29,732 89.4
-------------------- -------- ---------- ----------- ----------- ----------- ------ ------
Total 168 539 660 2,809 41,641 45,817 26.8
-------------------- -------- ---------- ----------- ----------- ----------- ------ ------
Interest only loans that are 'term expired (still open)' are, unless otherwise in arrears, considered to be performing for six months, pending renegotiation of the facility. After six months, if not in litigation, the loans are classified as forborne.
Credit risk - Consumer banking
Summary
The consumer banking portfolio comprises balances on unsecured retail banking products, specifically overdrawn current accounts, personal loans and credit cards. Total balances across these portfolios have grown by 4 % to GBP4,107 million during the period (2017: GBP3,949 million).
Nationwide is aware of the pressure that some of our members will be under, with increasing levels of household debt. We continue to operate with a commitment to responsible lending and a focus on championing good conduct and fair outcomes.
The quality of the unsecured portfolios has remained strong, benefiting from proactive risk management practices and continued low interest rates. Total non-performing balances (excluding charged off accounts) as a proportion of total balances have remained stable over the year at 4%.
Impairment provisions are held against both performing and non-performing segments of the consumer banking portfolio. Provision balances have increased in the year, largely due to updates to provision assumptions to reflect the current economic conditions. Across the consumer banking portfolios this has led to a 3% increase in provision coverage as a percentage of total non-performing balances from 86% to 89%.
Consumer banking balances 2018 2017 (Audited) GBPm % GBPm % --------------------------- ----- --- ----- --- Overdrawn current accounts 277 7 261 7 Personal loans 2,031 49 1,957 49 Credit cards 1,799 44 1,731 44 --------------------------- ----- --- ----- --- Total consumer banking 4,107 100 3,949 100 --------------------------- ----- --- ----- ---
Credit risk
Impaired accounts
Credit risk on the consumer banking portfolios is primarily monitored and reported based on arrears status. Impaired accounts are those greater than three months in arrears or which have individual provisions raised against them. Non-performing accounts comprise all impaired accounts as well as accounts where a payment due is received late or missed. This includes overdrawn accounts with balances in excess of the agreed limit. The non-performing loan amount represents the entire loan rather than just the payment overdue.
The performance of the portfolios is closely monitored, with impairment provisions held for both the performing and non-performing segments of the consumer banking portfolio. Impairment provisions reflect estimated losses which have been incurred at the balance sheet date, based on objective evidence. For performing loans, the impairment provision reflects the assessment of losses arising from events that have occurred but which have not been specifically identified at the reporting date.
Credit risk - Consumer banking (continued)
Consumer banking by payment due 2018
status
Overdrawn Personal Credit Total
current loans cards
accounts
(Audited) GBPm GBPm GBPm GBPm %
----------------------------------- --------- -------- ------ ----- ---
Performing:
Neither past due nor impaired 235 1,882 1,656 3,773 92
Non-performing:
Past due up to 3 months 12 43 33 88
Impaired:
Past due 3 to 6 months 4 13 11 28
Past due 6 to 12 months 3 12 2 17
Past due over 12 months 3 13 - 16
----------------------------------- --------- -------- ------ -----
22 81 46 149 4
Charged off (note i) 20 68 97 185 4
----------------------------------- --------- -------- ------ -----
Total non-performing 42 149 143 334
Total consumer banking lending 277 2,031 1,799 4,107 100
----------------------------------- --------- -------- ------ ----- ---
Non-performing loans as % of total
(excluding charged off balances) 9% 4% 3% 4%
Impairment provisions excluding
charged off balances (GBPm) 17 56 50 123
Impairment provisions on charged
off balances (GBPm) 19 65 91 175
----------------------------------- --------- -------- ------ -----
Total impairment provisions 36 121 141 298
Impairment provisions as a % of
non-performing loans (including
charged off balances) 86% 81% 99% 89%
Impairment provisions as % of
total balances 13% 6% 8% 7%
----------------------------------- --------- -------- ------ ----- ---
Credit risk - Consumer banking (continued)
Consumer banking by payment due 2017
status
Overdrawn Personal Credit Total
current loans cards
accounts
(Audited) GBPm GBPm GBPm GBPm %
------------------------------------ --------- -------- ------ ----- ---
Performing:
Neither past due nor impaired 225 1,822 1,591 3,638 92
Non-performing:
Past due up to 3 months 12 38 28 78
Impaired:
Past due 3 to 6 months 4 10 12 26
Past due 6 to 12 months 3 11 2 16
Past due over 12 months 3 14 - 17
------------------------------------ --------- -------- ------ -----
22 73 42 137 4
Charged off (note i) 14 62 98 174 4
------------------------------------ --------- -------- ------ -----
Total non-performing 36 135 140 311
Total consumer banking lending 261 1,957 1,731 3,949 100
------------------------------------ --------- -------- ------ ----- ---
Non-performing loans as % of
total (excluding charged off
balances) 9% 4% 3% 4%
Impairment provisions excluding
charged off balances 15 48 42 105
Impairment provisions on charged
off balances 13 60 91 164
------------------------------------ --------- -------- ------ -----
Total impairment provisions 28 108 133 269
Impairment provisions as a %
of non-performing loans (including
charged off balances) 78% 80% 95% 86%
Impairment provisions as % of
total balances 11% 6% 8% 7%
------------------------------------ --------- -------- ------ ----- ---
Note:
i. Charged off balances relate to accounts which are closed to future transactions and are held on the balance sheet for an extended period (up to 36 months, depending on the product) whilst recovery procedures take place.
Total non-performing balances (excluding charged off accounts) have increased by 9% to GBP149 million (2017: GBP137 million), driven by small increases in early arrears (past due up to three months) on the personal loan and credit card portfolios. However, as the portfolios have continued to grow over recent periods, the non-performing balances, as a percentage of the total consumer banking lending, have remained stable at 4%.
Impairment losses for the year Overdrawn Personal Credit Total
current loans cards
accounts
(Audited) GBPm GBPm GBPm GBPm
------------------------------- --------- -------- ------ -----
Year to 4 April 2018 15 36 46 97
Year to 4 April 2017 12 28 38 78
------------------------------- --------- -------- ------ -----
Note:
Impairment losses represent the amount charged through the profit and loss account, rather than amounts written off during the year.
Impairment losses have increased in the year, driven by both growth in balances and updated provision assumptions to reflect the current economic climate.
Credit risk - Commercial and other lending
Summary
The commercial and other lending portfolio comprises the following:
Commercial and other lending balances 2018 2017
---------------------------------------
GBPm % GBPm %
--------------------------------------- ------ --- ------ ---
Registered social landlords (note
i) 6,820 71 7,546 67
Commercial real estate (CRE) 1,868 20 2,568 23
Project Finance (note ii) 906 9 1,096 10
--------------------------------------- ------ --- ------ ---
Total commercial lending 9,594 100 11,210 100
Fair value adjustment for micro hedged
risk (note iii) 1,043 1,370
--------------------------------------- ------ --- ------ ---
Other lending 79 17
--------------------------------------- ------ --- ------ ---
Total 10,716 12,597
--------------------------------------- ------ --- ------ ---
Notes:
i. Loans to registered social landlords are secured on residential property.
ii. Loans advanced in relation to project finance are secured on cash flows from government or local authority backed contracts.
iii. Micro hedged risk relates to loans hedged on an individual basis.
The strategy for the commercial lending portfolio continues to be to hold and actively manage to maturity in line with contractual terms.
The registered social landlord and project finance portfolios now amount to 80% (4 April 2017: 77%) of the commercial lending portfolio. This increase is due to the run-off of the CRE portfolio, which is subject to shorter maturity dates. Notwithstanding the reduction in CRE lending balances, the exposure remains well spread across sectors and geographic regions. The registered social landlord and project finance assets are fully performing, reflecting their long-term, lower risk nature.
Other lending comprises GBP71 million of collateral to support repurchase transactions with a central counterparty and GBP8 million of deferred consideration relating to an investment in Visa Inc.
Credit risk
Credit risk in the commercial loan portfolio is linked to arrears, the level of collateral to cover any loan balances and the availability of credit to refinance loans at contractual maturity. Nationwide adopts robust credit management policies and processes designed to recognise and manage the risks arising, or likely to arise, from the portfolio.
Credit risk in the CRE portfolio continues to reduce as the managed exit of this business continues.
The registered social landlord portfolio is risk rated using internal rating models with the major drivers being financial strength, independent viability assessment ratings provided by Homes England, and the type and size of the registered social landlord. The distribution of exposures is weighted more towards the stronger risk ratings and, against a backdrop of a long history of zero defaults, the risk profile of the portfolio remains low.
The project finance portfolio is secured against contractual cash flows from projects procured under the Private Finance Initiative rather than physical assets. The majority of loans are secured on projects which are now operational and benefiting from secure long-term cash flows, with one case, with a balance of GBP25 million, which has reverted to the construction phase.
Credit risk - Commercial and other lending (continued)
Loan to value
The following table shows the CRE portfolio split by LTV and region:
CRE lending balances by London Rest of Total
LTV and region UK
(note i)
2018 GBPm GBPm GBPm %
---------------------------- ------ --------- ----- ---
Performing loans
Fully collateralised
LTV ratio (note ii):
Less than 25% 257 54 311
25% to 50% 691 241 932
51% to 75% 297 222 519
76% to 90% 9 40 49
91% to 100% - 4 4
------ --------- -----
1,254 561 1,815 97
Not fully collateralised:
Over 100% LTV (A) - 1 1 -
------ --------- -----
Collateral value on A - - -
Negative equity on A - 1 1
------ --------- -----
Total performing loans 1,254 562 1,816 97
---------------------------- ------ --------- ----- ---
Non-performing loans
Fully collateralised (note
iii)
LTV ratio:
Less than 25% 1 2 3
25% to 50% 14 1 15
51% to 75% 4 11 15
76% to 90% - 6 6
91% to 100% - - -
------ --------- -----
19 20 39 2
Not fully collateralised
Over 100% LTV (B) - 13 13 1
------ --------- -----
Collateral value on B - 7 7
Negative equity on B (note
iv) - 6 6
------ --------- -----
Total non-performing loans 19 33 52 3
---------------------------- ------ --------- ----- ---
Total CRE loans 1,273 595 1,868 100
---------------------------- ------ --------- ----- ---
Geographical concentration 68% 32% 100%
---------------------------- ------ --------- ----- ---
Credit risk - Commercial and other lending (continued)
CRE lending balances by London Rest of Total
LTV and region UK
(note i)
2017 GBPm GBPm GBPm %
---------------------------- ------ --------- ----- ---
Performing loans
Fully collateralised
LTV ratio (note ii)
Less than 25% 217 57 274
25% to 50% 702 537 1,239
51% to 75% 466 427 893
76% to 90% 8 63 71
91% to 100% 1 9 10
------ --------- -----
1,394 1,093 2,487 97
Not fully collateralised
Over 100% LTV (A) 2 5 7 -
------ --------- -----
Collateral value on A - 4 4
Negative equity on A 2 1 3
------ --------- -----
Total performing loans 1,396 1,098 2,494 97
---------------------------- ------ --------- ----- ---
Non-performing loans (note
iii)
Fully collateralised
LTV ratio:
Less than 25% 1 - 1
25% to 50% 9 5 14
51% to 75% 8 5 13
76% to 90% - 3 3
91% to 100% 3 7 10
------ --------- -----
21 20 41 2
Not fully collateralised
Over 100% LTV (B) 1 32 33 1
------ --------- -----
Collateral value on B - 20 20
Negative equity on B (note
iv) 1 12 13
------ --------- -----
Total non-performing loans 22 52 74 3
---------------------------- ------ --------- ----- ---
Total CRE loans 1,418 1,150 2,568 100
---------------------------- ------ --------- ----- ---
Geographical concentration 55% 45% 100%
---------------------------- ------ --------- ----- ---
Notes:
i. Includes lending against collateral based in the Channel Islands.
ii. The LTV ratio is calculated using the on-balance sheet carrying amount of the loan divided by the indexed value of the most recent independent external collateral valuation. The Investment Property Databank (IPD) monthly index is used.
iii. Non-performing loans include impaired loans and loans with arrears of less than three months which are not impaired.
iv. All non-performing loans with negative equity are impaired.
Non-performing loans represent 3% of CRE balances (2017: 3%). The value of partially collateralised non-performing loans and the negative equity on collateral for non-performing loans have reduced, reflecting the improving book performance and managed exit activity.
Credit risk - Commercial and other lending (continued)
Credit risk concentrations
The geographic concentration for CRE lending balances is shown in the Loan to value tables above. The concentration to London has increased to 68% (2017 55%).
The CRE portfolio remains well spread across sectors as shown below:
CRE lending balances and impairment 2018 2017
provisions by type (note i)
GBPm GBPm
------------------------------------ ----- -----
Retail 400 812
Office 376 472
Residential 837 986
Industrial and warehouse 115 157
Leisure and hotel 120 127
Other 20 14
------------------------------------ ----- -----
Total CRE lending 1,868 2,568
------------------------------------ ----- -----
Impairment provision:
Retail 2 7
Office 1 3
Residential 5 6
Industrial and warehouse - 1
Leisure and hotel - 6
Other 7 2
------------------------------------ ----- -----
Total impairment provisions 15 25
------------------------------------ ----- -----
Note:
i. A CRE loan may be secured on assets crossing different sectors; the balances are therefore attributed to the sector where the majority of the exposure arises. This can lead to recategorisations occurring between periods if the asset mix changes.
Arrears and impairment
Impairment provisions are held in relation to both the performing and non-performing segments of commercial lending and other lending. Provisions reflect estimated losses which have been incurred at the balance sheet date, based on objective evidence. Individual impairment provisions are assigned to facilities exhibiting signs of financial difficulty and a collective provision is assigned to all other accounts. For currently performing loans, the collective provision reflects losses arising from impairment events that have occurred within the portfolio but are not identifiable at the reporting date.
No losses have been experienced on the registered social landlord or project finance portfolios and there is no non-performance within these portfolios. As a result, impairment provisions are required only against the CRE portfolio.
The table below sets out the payment due status and impairment provisions for the CRE portfolio and other lending.
Credit risk - Commercial and other lending (continued)
CRE balances by payment due status 2018 2017
-------------------------------------------
GBPm % GBPm %
------------------------------------------- ----- --- ----- ---
Performing:
Neither past due nor impaired 1,816 97 2,494 97
Non-performing:
Past due up to 3 months but not impaired
(note i) 22 1 29 1
Impaired (note ii):
Past due up to 3 months 6 - 24 1
Past due 3 to 6 months 11 1 1 -
Past due 6 to 12 months 1 - 3 -
Past due over 12 months 12 1 17 1
Possessions (note iii) - - - -
----- --- ----- ---
Total non-performing balances 52 3 74 3
Total 1,868 100 2,568 100
------------------------------------------- ----- --- ----- ---
Impairment provisions
Individual 11 73 20 80
Collective 4 27 5 20
------------------------------------------- ----- --- ----- ---
Total impairment provisions 15 100 25 100
------------------------------------------- ----- --- ----- ---
Provision coverage ratios
Individual provisions as % of impaired
balances 37 44
Total provisions as % of non-performing
balances 29 34
Total provisions as % of total gross
balances 1 1
Estimated collateral:
Against loans past due but not impaired 22 100 29 100
Against impaired loans 23 77 32 71
------------------------------------------- ----- --- ----- ---
Total collateral 45 87 61 82
------------------------------------------- ----- --- ----- ---
Notes:
i. The status 'past due up to 3 months but not impaired' includes any asset where a payment due under strict contractual terms is received late or missed. The amount included is the entire financial asset rather than just the payment overdue.
ii. Impaired loans include those balances which are more than three months in arrears, or against which an individual provision is held.
iii. Possession balances represent loans for which Nationwide has taken ownership of security pending sale. Assets in possession are realised to derive the maximum benefit for all interested parties. Nationwide does not occupy or otherwise use for any purposes the repossessed assets.
Impairment reversal for the year for commercial 2018 2017
and other lending portfolio
------------------------------------------------
GBPm GBPm
------------------------------------------------ ---- ----
Total (1) (5)
------------------------------------------------ ---- ----
Note:
Impairment reversals represent the amount recognised through the profit and loss account, rather than amounts written off during the year.
Credit risk - Treasury assets
Summary
The treasury portfolio is held primarily for liquidity management and, in the case of derivatives, for market risk management. As at 4 April 2018 treasury assets represented 15.3% (2017: 13.7%) of total assets.
The net increase in the portfolio compared to the previous year is predominantly due to increased government bond holdings, and cash balances received under the Bank of England's Term Funding Scheme (TFS).
Treasury asset balances 2018 2017 (Audited) GBPm GBPm ----------------------------------- ------ ------ Cash 14,361 13,017 Loans and advances to banks 3,422 2,587 Investment securities 13,046 9,831 ----------------------------------- ------ ------ Liquidity and investment portfolio 30,829 25,435 Derivative assets 4,121 5,043 ----------------------------------- ------ ------ Total treasury portfolio 34,950 30,478 ----------------------------------- ------ ------
Note:
Derivatives are classified as assets where their fair value is positive and liabilities where their fair value is negative. At 4 April 2018 derivative liabilities were GBP2,337 million (2017: GBP3,182 million).
In line with the Board's liquidity risk appetite, investment activity is restricted to high quality liquid securities comprising central bank reserves and highly rated debt securities issued by a limited range of governments, multilateral development banks ('supranationals') and government guaranteed agencies. In addition, cash is invested in highly rated liquid assets that are eligible for accessing central bank funding operations.
Liquidity portfolio assets are generally unsecured; however, reverse repos, asset-backed securities and similar instruments are secured by pools of financial assets. During the year, Nationwide disposed of its residual out of policy legacy assets (2017: GBP172 million). There are no exposures to emerging markets, hedge funds or credit default swaps.
Derivatives are used to reduce exposure to market risks but are not used for trading or speculative purposes.
Liquidity and investment portfolio
The liquidity and investment portfolio of GBP30,829 million (2017: GBP25,435 million) comprises liquid assets and other securities. The size of the portfolio reflects fluctuations in market prices, Nationwide's operational and strategic liquidity requirements and legacy asset disposals. An analysis of the balance sheet portfolios by asset class, credit rating and geographical location of the issuers is set out below.
Liquidity and investment portfolio AAA AA A Other UK US Europe Other by credit rating (note i) 2018 GBPm % % % % % % % % (Audited) ----------------------------------- ------ --- --- ----- --- ------ ----- Liquid assets: Cash and reserves at central banks 14,361 - 100 - - 100 - - - Government bonds 8,937 15 85 - - 80 5 15 - Supranational bonds 655 96 4 - - - - - 100 Covered bonds 1,007 100 - - - 51 - 27 22 Residential mortgage backed securities (RMBS) available for sale 738 100 - - - 64 - 36 - Asset backed securities (other) 302 100 - - - 56 - 44 - Liquid assets total 26,000 16 84 - - 87 2 8 3 ----------------------------------- --- --- --- ------ ----- Other securities (note ii): RMBS available for sale 188 21 19 60 - 100 - - - RMBS held to maturity 1,120 85 5 7 3 100 - - - Other investments 99 - 36 42 22 22 42 36 - ----------------------------------- ------ --- --- ----- --- ------ ----- Other securities total 1,407 71 9 16 4 95 3 2 - ----------------------------------- ------ --- --- ----- --- ------ ----- Loans and advances to banks (note iii) 3,422 - 47 50 3 84 6 8 2 Total 30,829 16 77 6 1 87 2 8 3 ----------------------------------- ------ --- --- ----- --- ------ -----
Credit risk - Treasury assets (continued)
Liquidity and investment portfolio AAA AA A Other UK US Europe Other by credit rating (note i) 2017 (Audited) GBPm % % % % % % % % ----------------------------------- ------ --- ----- --- ------ ----- Liquid assets: Cash and reserves at central banks 13,017 - 90 - 10 90 - 10 - Government bonds 6,438 10 90 - - 78 9 13 - Supranational bonds 459 88 12 - - - - - 100 Covered bonds 931 100 - - - 51 - 33 16 Residential mortgage backed securities (RMBS) available for sale 922 100 - - - 61 - 39 - Asset backed securities (other) 285 100 - - - 83 - 17 - Liquid assets total 22,052 14 80 - 6 81 3 13 3 ----------------------------------- --- --- ------ ----- Other securities (note ii): RMBS available for sale 288 27 3 70 - 98 - 2 - Commercial mortgage backed securities (CMBS) 11 - 38 24 38 38 62 - - Collateralised loan obligations 226 86 14 - - 88 12 - - Student loans 120 48 52 - - - 100 - - Other investments 151 - 32 28 40 44 24 32 - ----------------------------------- ------ --- ----- --- ------ ----- Other securities total 796 42 19 31 8 69 24 7 - ----------------------------------- ------ --- ----- --- ------ ----- Loans and advances to banks (note iii) 2,587 - 47 51 2 70 18 10 2 Total 25,435 14 74 6 6 80 5 12 3 ----------------------------------- ------ --- ----- --- ------ -----
Notes:
i. Ratings used are obtained from Standard & Poor's (S&P), and from Moody's if no S&P rating is available. Internal ratings are used if neither is available.
ii. Includes RMBS (UK Buy to Let and UK Non-Conforming) not eligible for the Liquidity Coverage Ratio (LCR).
iii. Loans and advances to banks includes derivative collateral and reverse repo balances.
Of the total GBP30,829 million (2017: GBP25,435 million) liquidity and investment portfolio, GBP11,926 million (2017: GBP9,831 million) is classified as available for sale (AFS). This includes all assets except for 'Cash and reserves at central banks', 'Loans and advances to banks' and 'RMBS held to maturity'.
Country exposures
The following table summarises the exposure to institutions outside the UK. The exposures are shown at their balance sheet carrying values.
Country exposures Cash Government Mortgage Covered Supra-national Loans Other Other Total
(Audited) bonds backed bonds bonds to banks corporate assets
securities
2018 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ---- ---------- ----------- ------- -------------- --------- ---------- ------- -----
Austria - 66 - - - - - - 66
Belgium - 44 - - - - - - 44
Finland - 267 - 24 - - - - 291
France - - - - - 156 - 36 192
Germany - 627 - - - 119 - 132 878
Ireland - - - - - 1 - - 1
Netherlands - 335 263 - - - - - 598
Total Eurozone - 1,339 263 24 - 276 - 168 2,070
------------------ ---- ---------- ----------- ------- -------------- --------- ---------- ------- -----
USA - 441 - - - 215 - 41 697
Rest of world
(note i) - - - 472 656 63 - - 1,191
------------------ ---- ---------- ----------- ------- -------------- --------- ---------- ------- -----
Total - 1,780 263 496 656 554 - 209 3,958
------------------ ---- ---------- ----------- ------- -------------- --------- ---------- ------- -----
Credit risk - Treasury assets (continued)
Country exposures Cash Government Mortgage Covered Supra-national Loans Other Other Total
(Audited) bonds backed bonds bonds to banks corporate assets
securities
2017 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ----- ---------- ----------- ------- -------------- --------- ---------- ------- -----
Finland - 218 - 24 - - - - 242
France - - - 31 - - 1 54 86
Germany - 484 - - - 44 - 43 571
Ireland 1,258 - - - - 27 - - 1,285
Italy - - - - - - 3 - 3
Netherlands - 153 366 - - - - - 519
Total Eurozone 1,258 855 366 55 - 71 4 97 2,706
------------------ ----- ---------- ----------- ------- -------------- --------- ---------- ------- -----
USA 16 600 7 - - 474 - 182 1,279
Rest of world
(note i) - - - 400 459 232 - - 1,091
------------------ ----- ---------- ----------- ------- -------------- --------- ---------- ------- -----
Total 1,274 1,455 373 455 459 777 4 279 5,076
------------------ ----- ---------- ----------- ------- -------------- --------- ---------- ------- -----
Note:
i. Rest of world exposure is to Australia, Canada, Denmark, Norway, Sweden and Switzerland.
None of the exposures detailed in the table above were in default at 4 April 2018 (2017: GBPnil), and no impairment was incurred on these assets in the year (2017: GBPnil).
Derivative financial instruments
Derivatives are used to reduce exposure to market risks, although the application of accounting rules can create volatility in the income statement in a financial year. The fair value of derivative assets at 4 April 2018 was GBP4.1 billion (2017: GBP5.0 billion) and the fair value of derivative liabilities was GBP2.3 billion (2017: GBP3.2 billion).
The International Swaps and Derivatives Association (ISDA) Master Agreement is Nationwide's preferred agreement for documenting derivative transactions. A Credit Support Annex (CSA) is always executed in conjunction with the ISDA Master Agreement. Under the terms of a CSA, collateral is passed between parties to mitigate the market-contingent counterparty risk inherent in the outstanding positions. CSAs are two-way agreements where both parties post collateral dependent on the exposure of the derivative. Collateral is paid or received on a regular basis (typically daily) to mitigate the mark to market exposures.
Nationwide's CSA legal documentation for derivatives grants legal rights of set off for transactions with the same overall 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 arrangements, outstanding transactions with the same counterparty can be offset and settled net following a default, or another predetermined event. Under CSA arrangements, netting benefits of GBP2.0 billion (2017: GBP2.2 billion) were available and GBP2.2 billion of collateral (2017: GBP2.8 billion) was held. Only cash is held as collateral.
To comply with EU regulatory requirements, Nationwide has indirect clearing arrangements with a central counterparty (CCP) which it uses to clear standardised derivatives.
The following table shows the exposure to counterparty credit risk for derivative contracts after netting benefits and collateral:
Derivative credit exposure 2018 2017 Counterparty credit quality AA A BBB Total AA A BBB Total (Audited) GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm ---------------------------- ------- ------- ----- ------- ------- ------- ----- ------- Gross positive fair value of contracts 1,584 2,266 271 4,121 2,077 2,576 390 5,043 Netting benefits (532) (1,156) (271) (1,959) (797) (1,030) (389) (2,216) ---------------------------- ------- ------- ----- ------- ------- ------- ----- ------- Net current credit exposure 1,052 1,110 - 2,162 1,280 1,546 1 2,827 Collateral (cash) (1,051) (1,106) - (2,157) (1,261) (1,537) (1) (2,799) ---------------------------- ------- ------- ----- ------- ------- ------- ----- ------- Net derivative credit exposure 1 4 - 5 19 9 - 28 ---------------------------- ------- ------- ----- ------- ------- ------- ----- -------
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 other stakeholder confidence. Funding risk is the risk that Nationwide is unable to maintain diverse funding sources in wholesale and retail markets and manage retail funding risk that can arise from excessive concentrations of higher risk deposits.
Nationwide manages liquidity and funding risks within a comprehensive risk framework which includes its policy, strategy, limit setting and monitoring, stress testing and robust governance controls.
This framework ensures that Nationwide maintains stable and diverse funding sources and sufficient holdings of high quality liquid assets so that there is no significant risk that liabilities cannot be met as they fall due.
Liquidity and funding levels continued to be within Board risk appetite and regulatory requirements at all times during the year. This includes the LCR, which ensures that sufficient high quality liquid assets are held to survive a short term severe but plausible liquidity stress. Nationwide's LCR at 4 April 2018 increased to 130.3% (4 April 2017: 124.0%). At 4 April 2017, the LCR was impacted by an agreement to purchase GBP1.2 billion of residential mortgage backed securities (RMBS) under a programme to securitise Bradford & Bingley residential mortgages. Excluding this item our 2018 and 2017 LCR would have been broadly consistent.
Nationwide also monitors its position against the longer term funding metric, the Net Stable Funding Ratio (NSFR). Based on current interpretations of regulatory requirements and guidance, the NSFR at 4 April 2018 was 131.0% (4 April 2017: 132.6%) which exceeds the expected 100% minimum future requirement.
Funding risk
Funding strategy
Nationwide's funding strategy is to remain predominantly retail funded; retail customer loans and advances are largely funded by customer deposits. Non-retail lending, including treasury assets and commercial customer loans, are largely funded by wholesale debt, as set out below.
Funding profile
Assets 2018 2017 Liabilities 2018 2017
GBPbn GBPbn GBPbn GBPbn
--------------------------- ------ ------ -------------------- ------ ------
Retail mortgages 177.2 171.1 Retail funding 148.4 146.9
Treasury assets (including
liquidity portfolio) 30.8 25.4 Wholesale funding 58.8 55.5
Other retail lending 3.8 3.7 Capital and reserves 18.2 14.3
Commercial/Other lending 10.7 12.6 Other liabilities 3.7 5.0
Other assets 6.6 8.9
--------------------------- ------ ------ -------------------- ------ ------
229.1 221.7 229.1 221.7
--------------------------- ------ ------ -------------------- ------ ------
Note:
The figures in the above table are stated net of impairment provisions where applicable.
Nationwide's loan to deposit ratio(1) at 4 April 2018 was 125.5% (4 April 2017: 122.6%).
1 The loan to deposit ratio represents loans and advances to customers divided by shares + other deposits + amounts due to customers (excluding repurchase agreements and collateral received).
Liquidity and funding risk (continued)
Wholesale funding
The wholesale funding portfolio is made up of a range of secured and unsecured instruments to ensure Nationwide has a diversified funding base across a range of instruments, currencies, maturities and investor types. Nationwide's wholesale funding strategy is to remain active in core markets and currencies. A funding risk limit framework also ensures a prudent funding mix and maturity concentration profile is maintained, and limits levels of encumbrance to ensure sufficient contingent funding capacity is retained.
Wholesale funding has increased by GBP3.3 billion to GBP58.8 billion. This is due to GBP11.0 billion of drawings from the Bank of England's Term Funding Scheme (TFS) during the year, to support core activities, refinance maturing wholesale funding, and replace off-balance sheet Funding for Lending Scheme (FLS) maturities. This additional funding is reflected in Nationwide's wholesale funding ratio (on-balance sheet wholesale funding as a proportion of total funding liabilities) which was 28.2% at 4 April 2018 (4 April 2017: 27.1%).
The table below sets out an analysis by currency of Nationwide's wholesale funding.
Wholesale funding 2018 2017
currency
GBP EUR USD Other Total % of GBP EUR USD Other Total % of
GBPbn GBPbn GBPbn GBPbn GBPbn total GBPbn GBPbn GBPbn GBPbn GBPbn total
------------------------ ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Repos 0.7 0.2 - - 0.9 2 - - - - - -
----- ----- ----- ----- ----- -----
Deposits (note i) 5.4 1.4 - - 6.8 12 7.7 1.4 0.1 - 9.2 16
Certificates of deposit 4.0 0.1 0.2 - 4.3 7 5.3 - - - 5.3 10
Commercial paper - - 1.0 - 1.0 2 - - 1.8 - 1.8 3
Covered bonds 2.5 12.6 - 0.2 15.3 26 3.3 11.4 - 0.2 14.9 27
Medium term notes 2.0 4.6 1.8 0.6 9.0 15 3.1 6.2 3.6 0.8 13.7 25
Securitisations 1.1 1.3 1.3 - 3.7 6 0.9 1.2 1.4 - 3.5 6
TFS 17.0 - - - 17.0 29 6.0 - - - 6.0 11
Other 0.2 0.6 - - 0.8 1 0.3 0.8 - - 1.1 2
------------------------ ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total 32.9 20.8 4.3 0.8 58.8 100 26.6 21.0 6.9 1.0 55.5 100
------------------------ ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Note:
i. 2017 included GBP0.8 billion of protected equity balances (PEBs), all of which had matured by 4 April 2018.
The residual maturity of the wholesale funding book, on a contractual maturity basis, is set out below.
Wholesale funding Not more Over one Over three Over six Subtotal Over one Over two Total
- residual than one month months months less than year but years
maturity month but not but not but not one year not more
more than more than more than than two
three six months one year years
months
2018 GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
------------------- --------- ---------- ----------- ---------- ---------- --------- -------- -----
Repos 0.9 - - - 0.9 - - 0.9
Deposits (note
i) 4.5 0.5 1.4 0.4 6.8 - - 6.8
Certificates
of deposit - 3.6 0.5 0.2 4.3 - - 4.3
Commercial
paper 0.1 0.9 - - 1.0 - - 1.0
Covered bonds 0.8 0.1 - - 0.9 1.6 12.8 15.3
Medium term
notes 0.1 0.1 0.1 1.4 1.7 1.8 5.5 9.0
Securitisations 0.1 - 0.3 0.4 0.8 0.9 2.0 3.7
TFS - - - - - - 17.0 17.0
Other - - - - - - 0.8 0.8
------------------- --------- ---------- ----------- ---------- ---------- --------- -------- -----
Total 6.5 5.2 2.3 2.4 16.4 4.3 38.1 58.8
------------------- --------- ---------- ----------- ---------- ---------- --------- -------- -----
Of which secured 1.8 0.1 0.3 0.4 2.6 2.5 32.6 37.7
Of which unsecured 4.7 5.1 2.0 2.0 13.8 1.8 5.5 21.1
------------------- --------- ---------- ----------- ---------- ---------- --------- -------- -----
% of total 11.1 8.8 3.9 4.1 27.9 7.3 64.8 100.0
------------------- --------- ---------- ----------- ---------- ---------- --------- -------- -----
Liquidity and funding risk (continued)
Wholesale funding Not more Over one Over three Over six Subtotal Over one Over two Total
- residual than one month months months less than year but years
maturity month but not but not but not one year not more
more than more than more than than two
three six months one year years
months
2017 GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
------------------- --------- ---------- ----------- ---------- ---------- --------- -------- -----
Repos - - - - - - - -
Deposits (note
i) 5.3 1.3 2.0 0.6 9.2 - - 9.2
Certificates
of deposit 0.4 1.7 2.4 0.8 5.3 - - 5.3
Commercial
paper 0.5 0.6 0.6 0.1 1.8 - - 1.8
Covered bonds - - 0.8 - 0.8 0.8 13.3 14.9
Medium term
notes - - 0.1 1.2 1.3 1.8 10.6 13.7
Securitisations 0.3 - 0.3 0.1 0.7 0.6 2.2 3.5
TFS - - - - - - 6.0 6.0
Other - - - - - - 1.1 1.1
------------------- --------- ---------- ----------- ---------- ---------- --------- -------- -----
Total 6.5 3.6 6.2 2.8 19.1 3.2 33.2 55.5
------------------- --------- ---------- ----------- ---------- ---------- --------- -------- -----
Of which secured 0.3 - 1.1 0.1 1.5 1.4 22.4 25.3
Of which unsecured 6.2 3.6 5.1 2.7 17.6 1.8 10.8 30.2
------------------- --------- ---------- ----------- ---------- ---------- --------- -------- -----
% of total 11.7 6.5 11.2 5.0 34.4 5.8 59.8 100.0
------------------- --------- ---------- ----------- ---------- ---------- --------- -------- -----
Note:
i. 2017 included GBP0.8 billion of protected equity balances (PEBs), all of which had matured by 4 April 2018.
At 4 April 2018, cash, government bonds and supranational bonds included in the liquid asset buffer represented 142% (4 April 2017: 129%) of wholesale funding maturing in less than one year, assuming no rollovers.
Liquidity risk
Liquid assets
Nationwide ensures it has sufficient liquid assets, both in terms of amount and quality, to meet daily cash flow needs as well as simulated stressed requirements driven by the Society's risk appetite and regulatory assessments. This includes ensuring the currency composition of the liquid asset buffer is consistent with the currency profile of stressed outflows.
The table below sets out the sterling equivalent fair value of the liquidity portfolio, categorised by issuing currency. It includes off-balance sheet liquidity such as bonds received through reverse repurchase (repo) agreements and excludes bonds encumbered through repo agreements.
Liquid assets 2018 2017
GBP EUR USD Total GBP EUR USD Total
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
------------------------ ----- ----- ----- ----- ----- ----- ----- -----
Cash and reserves at
central banks 14.4 - - 14.4 11.8 1.2 - 13.0
Government bonds (note
i) 6.8 0.8 0.6 8.2 10.0 0.5 0.7 11.2
Supranational bonds 0.4 - 0.3 0.7 0.2 - 0.3 0.5
Covered bonds 0.6 0.6 - 1.2 0.4 0.5 - 0.9
RMBS (note ii) 1.7 0.3 - 2.0 0.5 0.4 - 0.9
Asset-backed securities 0.2 0.1 - 0.3 0.3 - - 0.3
Other securities - - - - 0.3 0.2 0.2 0.7
Total 24.1 1.8 0.9 26.8 23.5 2.8 1.2 27.5
------------------------ ----- ----- ----- ----- ----- ----- ----- -----
Notes:
i. 2017 includes GBP4.8 billion of FLS, all of which had matured by 4 April 2018. ii. Balances include all RMBS held by the Society which can be monetised through sale or repo.
Nationwide's liquid assets are held and managed centrally by its Treasury function. Nationwide maintains a high quality liquidity portfolio, predominantly comprising:
-- reserves held at central banks -- highly rated debt securities issued by a restricted range of governments, central banks and supranationals.
Liquidity and funding risk (continued)
The size and mix of the liquid asset buffer is defined by the Society's risk appetite as set by the Board, which is translated into a set of liquidity risk limits; it is also influenced by other relevant considerations such as stress testing and regulatory requirements.
The average combined month end balance of cash and reserves at central banks, and government and supranational bonds during the year was GBP27.2 billion (2017: GBP29.5 billion).
Nationwide also holds a portfolio of high quality, central bank eligible covered bonds, RMBS and asset-backed securities. Other securities are held that are not eligible for central bank operations but can be monetised through repurchase agreements with third parties or through sale.
Nationwide undertakes securities financing transactions in the form of repurchase agreements. This demonstrates the liquid nature of the assets held in its liquid asset buffer and also satisfies regulatory requirements. Cash is borrowed in return for pledging assets as collateral and because settlement is on a simultaneous 'delivery versus payment' basis, the main credit risk arises from intra-day changes in the value of the collateral. This is largely mitigated by Nationwide's collateral management processes.
Repo market capacity is assessed and tested regularly to ensure there is sufficient capacity to rapidly monetise the liquid asset buffer in a stress.
For contingent purposes, Nationwide pre-positions unencumbered mortgage assets at the Bank of England which can be used in the Bank of England's liquidity operations if market liquidity is severely disrupted.
Residual maturity of financial assets and liabilities
The table below segments the carrying value of financial assets and financial liabilities into relevant maturity groupings based on the final contractual maturity date (residual maturity).
Residual Due less Due Due Due Due between Due between Due between Due Total
maturity than between between between nine one and two and after
(note i) one month one and three six and and twelve two years five more
(note three and six nine months years than
ii) months months months five
years
2018 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------- -------
Financial
assets
Cash 14,361 - - - - - - - 14,361
Loans and
advances
to banks 3,078 - - - - - - 344 3,422
Investment
securities 76 64 17 141 89 387 2,498 9,774 13,046
Loans and
advances
to customers 3,041 1,318 1,925 1,886 1,908 7,564 22,961 151,061 191,664
Derivative
financial
instruments 12 17 6 231 52 381 1,966 1,456 4,121
Fair value
adjustment
for
portfolio
hedged risk - (16) (30) (19) (30) (90) (53) 129 (109)
Total
financial
assets 20,568 1,383 1,918 2,239 2,019 8,242 27,372 162,764 226,505
------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------- -------
Financial
liabilities
Shares 120,617 2,892 4,403 4,430 3,248 6,593 4,499 1,321 148,003
Deposits from
banks 2,343 9 47 5 - - 17,000 - 19,404
------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------- -------
Of which repo 266 - - - - - - - 266
Of which TFS - 1 - - - - 17,000 - 17,001
------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------- -------
Other
deposits 3,123 481 1,343 315 50 11 - - 5,323
------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------- -------
Of which repo 680 - - - - - - - 680
------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------- -------
Due to
customers 402 - - - - - - - 402
Secured
funding
- ABS and
covered
bonds 872 65 273 211 224 2,491 9,266 6,288 19,690
Senior
unsecured
funding 229 4,644 595 980 553 1,845 1,589 3,993 14,428
Derivative
financial
instruments 39 25 11 6 11 64 305 1,876 2,337
Fair value
adjustment
for
portfolio
hedged risk - (6) (6) (4) (4) (8) (25) - (53)
Subordinated
liabilities 17 - 49 - - - 690 4,741 5,497
Subscribed
capital
(note iii) 1 1 1 - - - - 260 263
------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------- -------
Total
financial
liabilities 127,643 8,111 6,716 5,943 4,082 10,996 33,324 18,479 215,294
------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------- -------
Off-balance
sheet
commitments
(note iv) 13,890 - - - - - - - 13,890
------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------- -------
Net liquidity
difference (120,965) (6,728) (4,798) (3,704) (2,063) (2,754) (5,952) 144,285 (2,679)
------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------- -------
Cumulative
liquidity
difference (120,965) (127,693) (132,491) (136,195) (138,258) (141,012) (146,964) (2,679) -
------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------- -------
Liquidity and funding risk (continued)
Residual Due less Due Due Due Due Due Due Due after Total
maturity than between between between between between between more
(note i) one month one and three six and nine one and two and than
(note three and six nine and twelve two years five five
ii) months months months months years years
2017 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------- -------
Financial
assets
Cash 13,017 - - - - - - - 13,017
Loans and
advances
to banks 2,226 - - - - - - 361 2,587
Investment
securities
(note v) 40 13 116 66 57 216 2,002 7,321 9,831
Loans and
advances
to customers 2,890 1,309 1,937 1,877 1,910 7,259 22,057 148,132 187,371
Derivative
financial
instruments 11 94 130 30 121 324 2,317 2,016 5,043
Other financial
assets (note v
and vi) 36 22 15 28 10 60 265 317 753
Total financial
assets 18,220 1,438 2,198 2,001 2,098 7,859 26,641 158,147 218,602
--------------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------- -------
Financial
liabilities
Shares 112,403 1,666 6,169 4,905 4,513 9,842 3,870 1,174 144,542
Deposits from
banks 2,499 123 20 48 16 28 6,000 - 8,734 --------------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------- ------- Of which repo - - - - - - - - - Of which TFS - - - - - - 6,000 - 6,000 --------------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------- ------- Other deposits 2,882 1,075 1,885 336 255 15 11 - 6,459 --------------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------- ------- Of which repo - - - - - - - - - --------------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------- ------- Due to customers 1,818 130 305 45 67 11 - - 2,376 Secured funding - ABS and covered bonds 341 20 1,086 128 90 1,394 10,137 6,280 19,476 Senior unsecured funding 894 2,339 3,126 657 1,431 1,765 5,022 5,629 20,863 Derivative financial instruments 37 11 35 41 57 135 505 2,361 3,182 Fair value adjustment for portfolio hedge risk - - (2) - 1 8 1 - 8 Subordinated liabilities (note v) - 35 - - 103 - 700 2,102 2,940 Subscribed capital (notes iii and v) 3 - - - - - - 276 279 --------------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------- ------- Total financial liabilities (note v) 120,877 5,399 12,624 6,160 6,533 13,198 26,246 17,822 208,859 --------------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------- ------- Off-balance sheet commitments (note iv) 15,784 - - - - - - - 15,784 --------------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------- ------- Net liquidity difference (118,441) (3,961) (10,426) (4,159) (4,435) (5,339) 395 140,325 (6,041) --------------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------- ------- Cumulative liquidity difference (118,441) (122,402) (132,828) (136,987) (141,422) (146,761) (146,366) (6,041) - --------------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------- -------
Notes:
i. The analysis excludes certain non-financial assets (including property, plant and equipment, intangible assets, investment property, other assets, deferred tax assets and accrued income and expenses prepaid) and non-financial liabilities (including provisions for liabilities and charges, accruals and deferred income, current tax liabilities, other liabilities and retirement benefit obligations).
ii. Due less than one month includes amounts repayable on demand.
iii. 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 unrecognised loan commitments, customer overpayments on residential mortgages where the borrower is able to draw down the amount overpaid, and commitments to acquire financial assets.
v. Comparatives have been restated as detailed in note 2 of the financial statements.
vi. Other financial assets and liabilities include the fair value adjustments for portfolio hedged risk and the fair value of certain mortgage commitments.
In practice, customer behaviours mean that liabilities are often retained for longer than their contractual maturities and assets are repaid faster. This gives rise to funding mismatches on Nationwide's balance sheet. The balance sheet structure and risks are managed and monitored by ALCO. Nationwide uses judgement and past behavioural performance of each asset and liability class to forecast likely cash flow requirements.
The 2018 table above includes the impact of a debt buy-back exercise that involved the Society issuing GBP2.1 billion of new MREL compliant bonds to partly fund the repurchase of older bonds, resulting in an increase in our capital strength and a reduction in our future cost of wholesale funding. A total of GBP4.0 billion of senior unsecured funding was repurchased, with the impact of cancelling associated derivative financial instruments also reflected.
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 Silverstone secured funding programmes (note 10 to the financial statements) and from participation in the TFS and previously FLS.
Certain unencumbered assets are readily available to secure funding or meet collateral requirements. These include prime mortgages and cash and securities held in the liquidity buffer. Other unencumbered assets, such as non-prime mortgages, are capable of being encumbered with a degree of further management action. Assets which do not fall into either of these categories are classified as not being capable of being encumbered.
An analysis of Nationwide's encumbered and unencumbered on-balance sheet assets is set out below. This disclosure is not intended to identify assets that would be available in the event of a resolution or bankruptcy.
Asset Assets encumbered as a result of transactions Other assets (comprising assets Total
encumbrance with counterparties other than central banks encumbered at the central bank
(note i) and unencumbered assets)
--------------------------------------------- ---------------------------------------------------------------
As a As a result of Other Total Assets Assets not positioned Total
result securitisations positioned at the central bank
of at the
covered central bank
bonds (i.e.
prepositioned
plus
encumbered)
--------------------------------------
Readily Other Cannot be
available assets encumbered
for that are
encumbrance capable of
being
encumbered
2018 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- -------- ---------------- ------ --------- -------------- ------------ ----------- ----------- ------- -------
Cash 381 376 - 757 - 13,389 - 215 13,604 14,361
Loans and
advances to
banks - - 1,220 1,220 1,124 - - 1,078 2,202 3,422
Investment
securities - - 944 944 30 12,027 - 45 12,102 13,046
Loans and
advances to
customers 21,000 8,712 - 29,712 37,732 76,791 47,429 - 161,952 191,664
Derivative
financial
instruments - - - - - - - 4,121 4,121 4,121
Other
financial
assets - - - - - - - (109) (109) (109)
Non-financial
assets - - - - - - - 2,593 2,593 2,593
-------------- -------- ---------------- ------ --------- -------------- ------------ ----------- ----------- ------- -------
Total 21,381 9,088 2,164 32,633 38,886 102,207 47,429 7,943 196,465 229,098
-------------- -------- ---------------- ------ --------- -------------- ------------ ----------- ----------- ------- -------
Asset Assets encumbered as a result of transactions Other assets (comprising assets Total
encumbrance with counterparties other than central banks encumbered at the central bank
and unencumbered assets)
--------------------------------------------- ---------------------------------------------------------------
As a As a result of Other Total Assets Assets not positioned Total
result securitisations positioned at the central bank
of at the
covered central bank
bonds (i.e.
prepositioned
plus
encumbered)
--------------------------------------
Readily Other Cannot be
available assets encumbered
for that are
encumbrance capable of
being
encumbered
2017 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- -------- ---------------- ------ --------- -------------- ------------ ----------- ----------- ------- -------
Cash 1,538 567 - 2,105 - 10,697 - 215 10,912 13,017
Loans and
advances to
banks - - 1,393 1,393 927 - - 267 1,194 2,587
Investment
securities
(note i) - - - - 32 9,732 - 67 9,831 9,831
Loans and
advances to
customers 19,322 10,412 - 29,734 33,376 75,032 49,229 - 157,637 187,371
Derivative
financial
instruments - - - - - - - 5,043 5,043 5,043
Other
financial
assets (note
i) - - - - - - - 753 753 753
Non-financial
assets - - - - - - - 3,068 3,068 3,068
-------------- -------- ---------------- ------ --------- -------------- ------------ ----------- ----------- ------- -------
Total (note i) 20,860 10,979 1,393 33,232 34,335 95,461 49,229 9,413 188,438 221,670
-------------- -------- ---------------- ------ --------- -------------- ------------ ----------- ----------- ------- -------
Note:
i. Comparatives have been restated as detailed in note 2 of the financial statements.
Liquidity and funding risk (continued)
External credit ratings
The Group's long-term and short-term credit ratings are shown in the table below. The long-term rating for both Standard & Poor's and Moody's is the senior preferred rating. The long-term rating for Fitch is the senior non-preferred rating.
Credit ratings Senior preferred Short-term Senior Tier Date of last Outlook
non-preferred 2 rating
action / confirmation
----------------- ---------------- ---------- -------------- ---- ---------------------- --------
Standard & Poor's A A-1 BBB+ BBB February 2018 Positive
---------------- ---------- -------------- ---- ---------------------- --------
Moody's Aa3 P-1 Baa1 Baa1 March 2018 Stable
---------------- ---------- -------------- ---- ---------------------- --------
Fitch A+ F1 A A- February 2018 Stable
----------------- ---------------- ---------- -------------- ---- ---------------------- --------
In August 2017, Standard & Poor's affirmed Nationwide's A/A-1 long- and short-term ratings, with a negative outlook. This reflected their view on a negative trend for economic risk in the UK following the outcome of the EU referendum. In November 2017, Standard & Poor's revised the trend on economic risk for the UK banking sector to stable and revised Nationwide's outlook to stable. Nationwide's outlook was then revised to positive in February 2018 reflecting Standard & Poor's expectation that Nationwide's buffer of bail-in instruments could exceed their threshold for two notches of Additional Loss Absorbing Capacity (ALAC) uplift over their 18-24 month forecast horizon following Nationwide's inaugural issuance of senior non-preferred debt.
In addition, Moody's changed the outlook on Nationwide's deposits and senior unsecured debt to stable from negative in August 2017, reflecting its expectation of a moderate deterioration in the operating environment in the UK, to which Nationwide is now more resilient.
In February 2018 Fitch downgraded Nationwide's Long-Term Issuer Default Rating (IDR) to 'A' from 'A+' with a stable outlook. The senior preferred unsecured debt rating was unchanged at A+. The downgrade follows the Society's issue of senior non-preferred debt which, in accordance with Fitch's methodology, becomes the reference obligation for Nationwide's IDR.
The table below sets out the amount of additional collateral Nationwide would need to provide in the event of a one and two notch downgrade by external credit rating agencies.
Cumulative adjustment Cumulative adjustment
for a one notch downgrade for a two notch downgrade
GBPbn GBPbn
----- -------------------------- --------------------------
2018 3.1 3.3
2017 3.3 3.7
----- -------------------------- --------------------------
The contractually required cash outflow would not necessarily match the actual cash outflow as a result of management actions that could be taken to reduce the impact of the downgrades.
Solvency risk
Solvency risk is the risk that Nationwide fails to maintain sufficient capital to absorb losses throughout a full economic cycle and sufficient to maintain the confidence of current and prospective investors, members, the Board and regulators. Capital is held to protect members, cover inherent risks, provide a buffer for stress events and support the business strategy. In assessing the adequacy of capital resources, risk appetite is considered in the context of the material risks to which Nationwide is exposed and the appropriate strategies required to manage those risks.
Capital position
Capital ratios 2018 2017
Solvency % %
Common Equity Tier 1 (CET1) ratio 30.5 25.4
Total Tier 1 ratio 33.6 28.4
Total regulatory capital ratio 42.9 36.1
---------------------------------- -------- -------
Leverage GBPm GBPm
UK leverage exposure (note i) 221,992 215,894
CRR leverage exposure (note ii) 236,468 228,428
Tier 1 capital 10,917 9,547
%%
UK leverage ratio 4.9 4.4
CRR leverage ratio 4.6 4.2
---------------------------------- -------- -------
Notes:
i. The UK leverage ratio is shown on the basis of measurement announced by the Prudential Regulation Authority (PRA) and excludes eligible central bank reserves from the leverage exposure measure.
ii. The Capital Requirements Regulation (CRR) leverage ratio is calculated using the CRR definition of Tier 1 for the capital amount and the Delegated Act definition of the exposure measure.
The capital disclosures included in this report are on a Capital Requirements Directive IV (CRD IV) end point basis. This assumes that all CRD IV requirements are in force during the period, with no transitional provisions permitted. In addition, the disclosures are on a consolidated Group basis, including all subsidiary entities, unless otherwise stated.
Capital and leverage ratios have remained well in excess of regulatory requirements with a CET1 ratio of 30.5% (4 April 2017: 25.4%) and a UK leverage ratio of 4.9% (4 April 2017: 4.4%).
In September 2017, five million CCDS were issued raising GBP0.8 billion of CET1 capital. The issuance enhanced the liquidity and relevance of the CCDS instrument, while also helping to maintain broad access to capital markets and further strengthening Nationwide's capital position. These CCDS form a single series together with those previously issued in December 2013. Further information can be found in note 15 to the financial statements.
The CET1 ratio has improved following an increase in CET1 capital resources and a reduction in RWAs. CET1 capital resources have increased over the year by GBP1.4 billion mainly due to the CCDS issuance (GBP0.8 billion), and profit after tax for the year of GBP0.7 billion. Risk weighted assets (RWAs) have reduced over the period by approximately GBP1.1 billion, primarily due to the continued run-off of the commercial book. These movements have resulted in the CET1 ratio increasing to 30.5%.
Total regulatory capital ratio has increased to 42.9% (4 April 2017: 36.1%), due to the CET1 capital increases and the net issuance of GBP0.6 billion of qualifying Tier 2 subordinated debt, in line with plans to meet the pending Minimum Requirement for Own Funds and Eligible Liabilities (MREL).
CRD IV requires firms to calculate a non-risk-based leverage ratio, to supplement risk-based capital requirements. The current regulatory threshold is set at 3.25%. The risk of excessive leverage is managed through regular monitoring and reporting of the leverage ratio, which forms part of risk appetite.
Nationwide has been granted permission to report a UK leverage ratio on the basis of measurement announced by the PRA in August 2016. Minimum leverage requirements are monitored by the PRA on this basis. It is calculated using the Capital Requirements Regulation (CRR) definition of Tier 1 for the capital amount and the Delegated Act definition of the exposure measure, excluding eligible central bank reserves.
Solvency risk (continued)
The UK leverage ratio has increased to 4.9% at 4 April 2018 (4 April 2017: 4.4%), predominantly due to an increase in Tier 1 capital resources resulting from profits in the year and the issuance of CCDS. The CRR leverage ratio increased at a slower rate to 4.6% (4 April 2017: 4.2%), following an GBP8 billion increase in exposure during the year, primarily driven by a GBP5 billion increase in mortgage balances and a GBP4 billion increase in liquid assets. The difference in exposure measure is caused by the CRR leverage ratio using the Delegated Act definition.
Nationwide's latest Pillar 2A Individual Capital Guidance (ICG) was received in August 2017. It equates to circa GBP2.3 billion, of which at least circa GBP1.3 billion must be met by CET1 capital, and was broadly in line with the previous ICG. This amount is equivalent to 7.1% of RWAs as at 4 April 2018 (4 April 2017: 6.6%), reflecting the low average risk weight, given that approximately 78% (4 April 2017: 75%) of total assets are in the form of secured residential mortgages, of which 82% (4 April 2017: 81%) are prime mortgages, based on the regulatory exposure amounts.
The table below reconciles the general reserves to total regulatory capital on an end-point basis and so does not include non-qualifying instruments.
Total regulatory capital 2018 2017
(Audited) GBPm GBPm
--------------------------------------------- ------- -------
General reserve 9,951 9,316
Core capital deferred shares (CCDS) 1,325 531
Revaluation reserve 68 67
Available for sale reserve 75 44
Regulatory adjustments and deductions:
------- -------
Foreseeable distributions (note i) (68) (43)
Prudent valuation adjustment (note ii) (32) (23)
Own credit and debit valuation adjustments
(note iii) (1) -
Intangible assets (note iv) (1,286) (1,174)
Goodwill (note iv) (12) (12)
Excess of regulatory expected losses
over impairment provisions (note v) (95) (151)
------- -------
Total regulatory adjustments and deductions (1,494) (1,403)
--------------------------------------------- ------- -------
Common Equity Tier 1 capital 9,925 8,555
--------------------------------------------- ------- -------
Additional Tier 1 capital securities
(AT1) 992 992
Total Tier 1 capital 10,917 9,547
--------------------------------------------- ------- -------
Dated subordinated debt (notes vi and
vii) 3,019 2,580
Collectively assessed impairment allowances - 27
--------------------------------------------- ------- -------
Tier 2 capital (note vii) 3,019 2,607
--------------------------------------------- ------- -------
Total regulatory capital (note vii) 13,936 12,154
--------------------------------------------- ------- -------
Notes:
i. Foreseeable distributions in respect of CCDS and AT1 securities are deducted from CET1 capital under CRD IV.
ii. A prudent valuation adjustment (PVA) is applied in respect of fair valued instruments as required under regulatory capital rules.
iii. Own credit and debit valuation adjustments are applied to remove balance sheet gains or losses of fair valued liabilities and derivatives that result from changes in Nationwide's own credit standing and risk, in accordance with CRD IV rules.
iv. Intangible assets and goodwill do not qualify as capital for regulatory purposes.
v. The net regulatory capital expected loss in excess of accounting impairment provisions is deducted from CET1 capital, gross of tax.
vi. Subordinated debt includes fair value adjustments related to changes in market interest rates, adjustments for unamortised premiums and discounts that are included in the consolidated balance sheet, and any amortisation of the capital value of Tier 2 instruments required by regulatory rules for instruments with fewer than five years to maturity.
vii. Subordinated debt was restated as at 4 April 2017, due to a change in the presentation of accrued interest. Further information is provided in note 2 of the financial statements.
Solvency risk (continued)
As part of the Bank Recovery and Resolution Directive (BRRD), the Bank of England, in its capacity as the UK resolution authority, has published its policy for setting the MREL and provided firms with indicative MREL. From 1 January 2020, it is anticipated that Nationwide will be subject to a requirement to hold twice the minimum capital requirements (i.e. 6.5% of UK leverage exposure), plus the applicable buffers, which are subject to change but are currently expected to amount to 0.75% of leverage exposure from 1 January 2019. In order to meet this pending requirement, Tier 2 capital has increased by GBP0.4 billion, following issuance of GBP1.8 billion and redemption of GBP1.2 billion of qualifying Tier 2 subordinated debt during the year. In addition, Nationwide issued GBP2.1 billion of senior non-preferred notes in March 2018, which we consider to be MREL eligible.
At 4 April 2018 total MREL resources were equal to circa 7.5% (4 April 2017: 5.9%) of UK leverage ratio exposure. Nationwide has a strong foundation from which to meet MREL requirements by 2020 through further issuance of senior non-preferred debt.
Risk weighted assets
The table below shows the breakdown of risk weighted assets (RWAs) by risk type and business activity. Market risk has been set to zero as permitted by the CRR, as the exposure is below the threshold of 2% of own funds.
Risk weighted assets Credit Risk Operational Total Risk
(note i) Risk (note Weighted
ii) Assets
2018 GBPm GBPm GBPm
------------------------------------ ----------- ----------- ----------
Retail mortgages 13,764 3,564 17,328
Retail unsecured lending 5,805 725 6,530
Commercial loans 4,634 210 4,844
Treasury 540 87 627
Counterparty credit risk (note iii) 1,184 - 1,184
Other 1,681 315 1,996
------------------------------------ ----------- ----------- ----------
Total 27,608 4,901 32,509
------------------------------------ ----------- ----------- ----------
Credit Risk Operational Total Risk
(note i) Risk (note Weighted
ii) Assets
2017 GBPm GBPm GBPm
------------------------------------ ----------- ----------- ----------
Retail mortgages 13,863 3,502 17,365
Retail unsecured lending 5,641 763 6,404
Commercial loans 5,636 100 5,736
Treasury 849 13 862
Counterparty credit risk (note iii) 1,221 - 1,221
Other 1,566 487 2,053
------------------------------------ ----------- ----------- ----------
Total 28,776 4,865 33,641
------------------------------------ ----------- ----------- ----------
Notes:
i. This column includes credit risk exposures, 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 and repurchase agreements.
RWAs have reduced by GBP1.1 billion to GBP32.5 billion. This was predominantly driven by a GBP1 billion reduction in commercial RWAs, due to continued run-off of the portfolio.
Solvency risk (continued)
Regulatory developments
Highlighted below are a number of areas where regulatory requirements are yet to be finalised. Nationwide will remain engaged in the development of the regulatory approach to ensure it is prepared for any change.
Nationwide is currently required to maintain a minimum leverage ratio of 3.25% following the recalibration to adjust for the impact of excluding central bank holdings from the exposure measure. There is a supplementary leverage ratio buffer of 0.35% to be implemented in 2019. Following the Financial Policy Committee's (FPC) announcement on the countercyclical buffer (June 2018: 0.5%, November 2018: 1%), the equivalent countercyclical leverage ratio buffer will be 0.2% from June 2018, increasing to 0.4% from November 2018. Therefore, the minimum leverage ratio requirement is expected to be 4% by January 2019. Nationwide is confident it is in a strong position to meet the minimum requirements.
The Basel Committee published their final reforms to the Basel III framework in December 2017. 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 transitional period from 2022 to 2027. In addition, the PRA's revised expectations for IRB models for residential mortgages will be effective from the end of 2020. These reforms will lead to a significant increase in our risk weights over time and we currently expect the consequential impact on our reported CET1 ratio to ultimately be a reduction of the order of 45-50% relative to our current methodology. We note however that organic earnings through the transition will mitigate this impact such that our reported CET1 ratio will in practice remain well in excess of the proforma levels implied by this change, and leverage requirements will remain our binding constraint based on latest projections. These reforms represent a re-calibration of regulatory requirements with no underlying change in the capital resources we hold or the risk profile of our assets. Final impacts are subject to uncertainty for future balance sheet size and mix, and because the final detail of some elements of the regulatory changes remain at the PRA's discretion.
Consolidated financial statements
Contents
Audited statutory information
Page
Consolidated income statement 62
Consolidated statement of comprehensive income 63
Consolidated balance sheet 64
Consolidated statement of movements in members' interests
and equity 65
Notes to the consolidated financial statements 66
Consolidated income statement
For the year ended 4 April 2018
2018 2017
Notes GBPm GBPm
--------------------------------------------- ----- ------- -------
Interest receivable and similar income 3 4,818 5,050
Interest expense and similar charges 4 (1,807) (2,090)
--------------------------------------------- ----- ------- -------
Net interest income 3,011 2,960
Fee and commission income 449 446
Fee and commission expense (244) (221)
Other operating (expense)/income 5 (84) 100
(Losses)/gains from derivatives and hedge
accounting 6 (1) 66
Total income 3,131 3,351
Administrative expenses 7 (2,024) (2,021)
Impairment losses on loans and advances
to customers 8 (107) (131)
Impairment recoveries/(losses) on investment
securities 2 (9)
Provisions for liabilities and charges 12 (25) (136)
Profit before tax 977 1,054
Taxation 9 (232) (297)
--------------------------------------------- ----- ------- -------
Profit after tax 745 757
--------------------------------------------- ----- ------- -------
Consolidated statement of comprehensive income
For the year ended 4 April 2018
2018 2017
GBPm GBPm
Profit after tax 745 757
Other comprehensive (expense)/income
Items that will not be reclassified to the
income statement
Remeasurements of retirement benefit obligations:
-------- --------
Retirement benefit remeasurements before
tax 29 (347)
Taxation (7) 92
-------- --------
22 (255)
Revaluation of property:
-------- --------
Revaluation before tax 2 1
Taxation (1) 2
-------- --------
1 3
Effect of tax rate change on other items
through the general reserve - (1)
23 (253)
Items that may subsequently be reclassified
to the income statement
Cash flow hedge reserve:
-------- --------
Fair value movements taken to members' interests
and equity (2,316) 1,671
Amount transferred to income statement 2,057 (2,019)
Taxation 68 101
-------- --------
(191) (247)
Available for sale reserve:
-------- --------
Fair value movements taken to members' interests
and equity 50 176
Amount transferred to income statement (8) (106)
Taxation (11) (18)
-------- --------
31 52
Other comprehensive (expense)/income (137) (448)
Total comprehensive income 608 309
--------------------------------------------------------- -------- --------
Consolidated balance sheet
At 4 April 2018
2018 2017*
Notes GBPm GBPm
Assets
Cash 14,361 13,017
Loans and advances to banks 3,422 2,587
Investment securities 13,046 9,831
Derivative financial instruments 4,121 5,043
Fair value adjustment for portfolio hedged
risk (109) 746
Loans and advances to customers 10 191,664 187,371
Intangible assets 1,342 1,230
Property, plant and equipment 887 859
Accrued income and expenses prepaid 164 191
Deferred tax 98 103
Other assets 102 692
-------------------------------------------- ------ -------- -------
Total assets 229,098 221,670
-------------------------------------------- ------ -------- -------
Liabilities
Shares 148,003 144,542
Deposits from banks 19,404 8,734
Other deposits 5,323 6,459
Due to customers 402 2,376
Fair value adjustment for portfolio hedged
risk (53) 8
Debt securities in issue 34,118 40,339
Derivative financial instruments 2,337 3,182
Other liabilities 345 391
Provisions for liabilities and charges 12 273 387 Accruals and deferred income 336 295 Subordinated liabilities 11 5,497 2,940 Subscribed capital 11 263 279 Deferred tax 49 100 Current tax liabilities 53 82 Retirement benefit obligations 14 345 423 -------------------------------------------- ------ -------- ------- Total liabilities 216,695 210,537 -------------------------------------------- ------ -------- ------- Members' interests and equity Core capital deferred shares 15 1,325 531 Other equity instruments 16 992 992 General reserve 9,951 9,316 Revaluation reserve 68 67 Cash flow hedge reserve (8) 183 Available for sale reserve 75 44 -------------------------------------------- ------ -------- ------- Total members' interests and equity 12,403 11,133 -------------------------------------------- ------ -------- ------- Total members' interests, equity and liabilities 229,098 221,670 ---------------------------------------------------- -------- -------
*Comparatives have been restated as detailed in note 2.
Consolidated statement of movements in members' interests and equity
For the year ended 4 April 2018
Core capital Other equity General Revaluation Cash Available Total
deferred instruments reserve reserve flow for sale
shares hedge reserve
reserve
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- ------------ ------------ -------- ----------- -------- --------- ------
At 5 April 2017 531 992 9,316 67 183 44 11,133
------------ ------------ -------- ----------- -------- --------- ------
Profit for the
year - - 745 - - - 745
Net remeasurements
of retirement benefit
obligations - - 22 - - - 22
Net revaluation
of property - - - 1 - - 1
Effect of tax rate
change on other
items through the
general reserve - - - - - - -
Net movement in
cash flow hedge
reserve - - - - (191) - (191)
Net movement in
available for sale
reserve - - - - - 31 31
Total comprehensive
income - - 767 1 (191) 31 608
Issue of core capital
deferred shares 794 - - - - - 794
Distribution to
the holders of
core capital deferred
shares - - (82) - - - (82)
Distribution to
the holders of
Additional Tier
1 capital (note
i) - - (50) - - - (50)
At 4 April 2018 1,325 992 9,951 68 (8) 75 12,403
------------------------ ------------ ------------ -------- ----------- -------- --------- ------
For the year ended 4 April 2017
Core capital Other equity General Revaluation Cash Available Total
deferred instruments reserve reserve flow for sale
shares hedge reserve
reserve
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- ------------ ------------ -------- ----------- -------- --------- ------
At 5 April 2016 531 992 8,921 64 430 (8) 10,930
------------ ------------ -------- ----------- -------- --------- ------
Profit for the
year - - 757 - - - 757
Net remeasurements
of retirement benefit
obligations - - (255) - - - (255)
Net revaluation
of property - - - 3 - - 3
Effect of tax rate
change on other
items through the
general reserve - - (1) - - - (1)
Net movement in
cash flow hedge
reserve - - - - (247) - (247)
Net movement in
available for sale
reserve - - - - - 52 52
Total comprehensive
income - - 501 3 (247) 52 309
Distribution to
the holders of
core capital deferred
shares - - (56) - - - (56)
Distribution to
the holders of
Additional Tier
1 capital (note
i) - - (50) - - - (50)
At 4 April 2017 531 992 9,316 67 183 44 11,133
Note:
i. The distribution to the holders of Additional Tier 1 capital is shown net of an associated tax credit of GBP18 million (2017: GBP18 million).
Notes to the consolidated financial statements
1 Reporting period
These results have been prepared as at 4 April 2018 and show the financial performance for the year from, and including, 5 April 2017 to this date.
2 Basis of preparation
The 2018 preliminary results have been prepared in accordance with International Financial Reporting Standards (IFRS) as published by the International Accounting Standards Board (IASB), and interpretations issued by the IFRS Interpretations Committee of the IASB as adopted by the European Union. The accounting policies adopted for use in the preparation of this Preliminary Results Announcement and which will be used in preparing the Annual Report and Accounts for the year ended 4 April 2018 were included in the 'Annual Report and Accounts 2017' document except as detailed below. Copies of this document are available at
nationwide.co.uk/about_nationwide/results_and_accounts
Adoption of new and revised IFRSs
The Group has adopted the amendments to IAS 7 Statement of Cash Flows with effect from 5 April 2017, which has resulted in additional disclosures of changes in liabilities arising from financing activities.
Minor amendments to IAS 12 Income Taxes have also been adopted, together with amendments from the annual improvements to IFRS Standards 2014-2016 cycle. The adoption of these amendments and improvements had no significant impact for the Group.
Change to accounting policies
Following the Group's decision to wind down its commercial lending business, and the strategic review outlined in the Annual Report and Accounts 2017, the segmental reporting policy has been updated to better reflect the way in which the Executive Committee, as chief operating decision maker, now manages the business. As a result, no segmental disclosure is provided.
Adjustments to comparative information
Balance sheet presentation
Following the disposal of certain investments, the value of the Group's investments in equity shares is no longer material. As a result, this balance sheet line is no longer separately presented. Instead, the remaining balance has been combined with 'Investment securities'. At the same time, and also due to materiality considerations, the decision was taken to combine the Group's investment properties, valued at GBP9 million at 4 April 2018 (2017: GBP8 million), with 'Property, plant and equipment'. Accordingly, the 'Investment properties' balance sheet line item is no longer separately presented.
Accrued interest on subordinated liabilities and subscribed capital
The Group carries subordinated liabilities and subscribed capital at amortised cost. Accrued interest on these liabilities was previously included in 'Accruals and deferred income'. Accrued interest is now presented within 'Subordinated liabilities' and 'Subscribed capital' to provide a consistent presentation with other financial instruments held at amortised cost.
Comparatives have been restated as shown below:
Previously Adjustment Restated
Consolidated balance sheet extract published
At 4 April 2017 Notes GBPm GBPm GBPm
Investment securities 9,764 67 9,831
Investments in equity shares 67 (67) -
Property, plant and equipment 851 8 859
Investment properties 8 (8) -
Accruals and deferred income 333 (38) 295
Subordinated liabilities 11 2,905 35 2,940
Subscribed capital 11 276 3 279
These restatements had no impact on the Group's net assets or members' interests and equity at 4 April 2017.
Notes to the consolidated financial statements (continued)
2 Basis of preparation (continued)
Judgements in applying accounting policies and critical accounting estimates
The Group has to make judgements in applying its accounting policies which affect the amounts recognised in the accounts. 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 differ from those estimates.
Going concern
The Directors have assessed the Group's ability to continue as a going concern. The Directors confirm they are satisfied that the Group has adequate resources to continue in business for the foreseeable future and that therefore, it is appropriate to adopt the going concern basis in preparing this preliminary financial information.
3 Interest receivable and similar income
2018 2017
GBPm GBPm
On residential mortgages 4,532 4,843
On other loans 798 774
On investment securities 201 372
On other liquid assets 95 59
Net expense on financial instruments hedging
assets (808) (998)
Total 4,818 5,050
Included within interest receivable and similar income is interest income on impaired financial assets of GBP30 million (2017: GBP33 million).
4 Interest expense and similar charges
2018 2017
GBPm GBPm
On shares held by individuals 1,140 1,390
On subscribed capital 15 34
On deposits and other borrowings:
Subordinated liabilities 175 128
Other 320 450
On debt securities in issue 712 767
Net income on financial instruments hedging
liabilities (563) (684)
Interest on net defined benefit pension liability
(note 14) 8 5
Total 1,807 2,090
Interest on deposits and other borrowings includes an expense of GBP210 million (2017: GBP327 million) in relation to the redemption and maturity of Protected Equity Bond (PEB) deposits which have returns linked to the performance of specified stock market indices. The PEBs, all of which had matured at 4 April 2018, were economically hedged using equity-linked derivatives. Net income on financial instruments hedging liabilities includes income of GBP206 million (2017: GBP308 million) in relation to the associated derivatives.
Notes to the consolidated financial statements (continued)
5 Other operating expense/income
2018 2017
GBPm GBPm
Gains on disposal of investments 26 100
Other expense (110) -
Total (84) 100
On 28 April 2017, the Group disposed of shares in VocaLink Holdings Limited, resulting in a gain on disposal of GBP26 million. On 21 June 2016, the Group disposed of its share in Visa Europe Limited, resulting in a gain on disposal of GBP100 million.
Other expense includes a GBP116 million loss from a debt buy-back exercise during the year, together with the net amount of rental income, profits or losses on the sale of property, plant and equipment and increases or decreases in the valuations of branches and non-specialised buildings which are not recognised in other comprehensive income.
6 Losses/gains from derivatives and hedge accounting
The Group only uses derivatives for the hedging of risks; however, income statement volatility can still arise due to hedge accounting ineffectiveness or because hedge accounting is either not applied or is not achievable. The overall impact of derivatives will remain volatile from period to period as new derivative transactions replace those which mature to ensure that interest rate and other market risks are continually managed. This volatility does not reflect the economic reality of the Group's hedging strategy.
2018 2017
GBPm GBPm
(Losses)/gains from fair value hedge accounting
(note i) (86) 61
Ineffectiveness from cash flow hedge accounting
(note ii) 17 (4)
Net gain from mortgage pipeline (note iii) 50 8
Fair value gains/(losses) from other derivatives
(note iv) 5 (19)
Foreign exchange differences (note v) 13 20
Total (1) 66
Notes:
i. Gains or losses from fair value hedges can arise where there is an IFRS hedge accounting relationship in place and either:
-- the relationship passed all the monthly effectiveness tests but the fair value movement of the derivative was not exactly offset by the change in fair value of the asset or liability being hedged (referred to as hedge ineffectiveness); or
-- the relationship failed a monthly effectiveness test which, for that month, disallows recognition of the change in fair value of the underlying asset or liability being hedged and in following months leads to the amortisation of existing balance sheet positions.
ii. In cash flow hedge accounting the effective portion of the fair value movement of designated derivatives is deferred to the cash flow hedge reserve. The fair value movement is subsequently recycled to the income statement when amounts relating to the underlying hedged asset or liability are recognised in the income statement. The ineffective portion of the fair value movement is recognised immediately in the income statement.
iii. The mortgage pipeline in the above table includes interest rate swaps used to economically hedge expected new mortgage business, as well as some firm mortgage commitments which the Group has elected to fair value in order to reduce the accounting mismatch.
iv. Other derivatives are those used for economic hedging but which are not in an IAS 39 hedge accounting relationship because hedge accounting is not currently in place.
v. Gains or losses arise from the retranslation of foreign currency monetary items not subject to effective hedge accounting.
Losses of GBP86 million (2017: gains of GBP61 million) from fair value hedge accounting include losses of GBP42 million (2017: gains of GBP47 million) from macro hedges, due to hedge ineffectiveness and the amortisation of existing balance sheet amounts, and losses of GBP44 million relating to micro hedges (2017: gains of GBP14 million) which arise due to a combination of hedge ineffectiveness, disposals and restructuring, and the amortisation of existing balance sheet amounts.
For the mortgage pipeline the income statement includes the full fair value movement of forward starting interest rate swaps economically hedging the pipeline. To alleviate an accounting mismatch, the Group only elects to fair value certain underlying mortgage business within the pipeline.
The deferral of fair value movements to the cash flow hedge reserve, and the transfer of amounts from the cash flow hedge reserve to the income statement, are shown in the consolidated statement of comprehensive income.
Notes to the consolidated financial statements (continued)
7 Administrative expenses
2018 2017
GBPm GBPm
Employee costs:
Wages and salaries 524 517
Bonuses 61 75
Social security costs 66 64
Pension costs 173 137
824 793
Other administrative expenses 758 790
Bank levy (note 12) 45 42
1,627 1,625
Depreciation, amortisation and impairment 397 396
Total 2,024 2,021
8 Impairment provisions on loans and advances to customers
The following provisions have been deducted from the appropriate asset values in the Group balance sheet:
2018 2017
GBPm GBPm
Impairment charge for the year
Prime residential 3 11
Specialist residential 8 47
Consumer banking 97 78
Commercial and other lending (1) (5)
Total 107 131
Impairment provision at the end of the year
Prime residential 36 34
Specialist residential 109 110
Consumer banking 298 269
Commercial and other lending 15 25
At 4 April 458 438
The Group impairment provision of GBP458 million at 4 April 2018 (2017: GBP438 million) comprises individual provisions of GBP31 million (2017: GBP45 million) and collective provisions of GBP427 million (2017: GBP393 million).
Notes to the consolidated financial statements (continued)
9 Taxation
Tax charge in the income statement 2018 2017
GBPm GBPm
Current tax:
UK corporation tax 246 300
Corporation tax - adjustments in respect of
prior years (12) (3)
Total current tax 234 297
Deferred tax:
Current year credit (7) (1)
Adjustments in respect of prior years 9 3
Effect of corporation tax rate change - (2)
Effect of deferred tax provided at different
tax rates (4) -
Total deferred taxation (2) -
Tax charge 232 297
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 2018 2017
GBPm GBPm
Profit before tax 977 1,054
Tax calculated at a tax rate of 19% (2017:
20%) 186 211
Adjustments in respect of prior years (3) -
Banking surcharge 43 62
Expenses not deductible for tax purposes/(income
not taxable):
Depreciation on non-qualifying assets 1 -
Bank levy 8 8
Customer redress - 19
Other 1 (1)
Effect of corporation tax rate change - (2)
Effect of deferred tax provided at different
tax rates (4) -
Tax charge 232 297
10 Loans and advances to customers
2018 2017
GBPm GBPm
Prime residential mortgages 144,013 137,970
Specialist residential mortgages 33,141 33,149
Consumer banking 3,809 3,680
Commercial and other lending 9,658 11,202
190,621 186,001
Fair value adjustment for micro hedged risk 1,043 1,370
Total 191,664 187,371
Loans and advances to customers in the table above are shown net of impairment provisions held against them. The fair value adjustment for micro hedged risk relates to commercial lending.
Asset backed funding
Certain prime residential mortgages have been pledged to the Group's asset backed funding programmes or utilised as whole mortgage loan pools for the Bank of England's (BoE) Funding for Lending Scheme (FLS) and Term Funding Scheme (TFS). The programmes have enabled the Group to obtain secured funding or to create additional collateral which could be used to source additional funding.
Notes to the consolidated financial statements (continued)
10 Loans and advances to customers (continued)
Mortgages pledged and the nominal values of the notes in issue are as follows:
Mortgages pledged Mortgages 2018
to pledged Notes in issue
asset backed funding
programmes
Held by third Held by the Group Total notes
parties in issue
Drawn Undrawn
Group GBPm GBPm GBPm GBPm GBPm
Covered bond programme 21,000 15,322 - - 15,322
Securitisation programme 8,711 3,659 - 337 3,996
Whole mortgage loan
pools 22,831 - 17,000 - 17,000
Total 52,542 18,981 17,000 337 36,318
Mortgages pledged Mortgages 2017
to pledged Notes in issue
asset backed funding
programmes
Held by third Held by the Group Total notes
parties in issue
Drawn Undrawn
Group GBPm GBPm GBPm GBPm GBPm
Covered bond programme 19,322 14,927 - - 14,927
Securitisation programme 10,412 3,622 - 448 4,070
Whole mortgage loan
pools 16,136 - 10,747 2,101 12,848
Total 45,870 18,549 10,747 2,549 31,845
Note:
The prior year values for notes in issue for whole mortgage loan pools have been restated to show the nominal amounts on a consistent basis with the current year presentation.
The securitisation programme notes are issued by Silverstone Master Issuer plc. Silverstone Master Issuer plc is fully consolidated into the accounts of the Group.
At 4 April 2018 the whole mortgage loan pools are pledged at the BoE under the TFS. In the prior year, whole mortgage loan pools were pledged at the BoE under the TFS and Funding for Lending Scheme (FLS). Notes are not issued when pledging the mortgage loan pools at the BoE. Instead, the whole loan pool is pledged to the BoE and drawings are made directly against the eligible collateral, subject to a haircut. At 4 April 2018, GBP22.8 billion (2017: GBP16.1 billion) of pledged collateral provided a post-haircut drawdown capacity of GBP17.5 billion (2017: GBP12.8 billion), of which GBP17.0 billion (2017: GBP10.7 billion) of drawdowns were made. At 4 April 2018 there are no amounts undrawn following the closure of the BoE TFS and FLS.
Mortgages pledged include GBP8.7 billion (2017: GBP9.1 billion) in the covered bond and securitisation programmes that are in excess of the amount contractually required to support notes in issue.
Mortgages pledged are not derecognised from the Group balance sheet as the Group has retained substantially all the risks and rewards of ownership. The Group continues to be exposed to the liquidity risk, interest rate risk and credit risk of the mortgages. No gain or loss has been recognised on pledging the mortgages to the programmes.
Notes in issue which are held by third parties are included within debt securities in issue. Notes in issue, held by the Group and drawn are whole mortgage loan pools securing amounts drawn under the TFS. At 4 April 2018 the Group had outstanding TFS drawings of GBP17.0 billion (2017: GBP6.0 billion).
Notes in issue, held by the Group and undrawn, are debt securities issued by the programmes to the Group and mortgage loan pools that have been pledged to the BoE but not utilised.
In accordance with accounting standards, notes in issue and held by the Group are not recognised in the Group's balance sheet.
The Group established the Nationwide Covered Bond programme in November 2005. Mortgages pledged provide security for issues of covered bonds made by the Group. During the year ended 4 April 2018, EUR1.1 billion (GBP0.9 billion sterling equivalent) of notes were issued, and GBP0.8 billion sterling equivalent of notes matured.
Notes to the consolidated financial statements (continued)
10 Loans and advances to customers (continued)
The Group established the Silverstone Master Trust securitisation programme in July 2008. Notes are issued under the programme and the issuance proceeds are used to purchase, for the benefit of note holders, a share of the beneficial interest in the mortgages pledged by the Group. The remaining beneficial interest in the pledged mortgages of GBP5.2 billion (2017: GBP7.0 billion) stays with the Group and includes its required minimum seller share in accordance with the rules of the programme. The Group is under no obligation to support losses incurred by the programme or holders of the notes and does not intend to provide such further support. The entitlement of note holders is restricted to payment of principal and interest to the extent that the resources of the programme are sufficient to support such payment and the holders of the notes have agreed not to seek recourse in any other form. During the year ended 4 April 2018 a total of GBP0.8 billion sterling equivalent of notes matured. During the year ended 4 April 2018 GBP0.9 billion sterling equivalent
notes were issued across sterling and US dollars.
11 Subordinated liabilities and subscribed capital
2018 2017
(note i)
GBPm GBPm
Subordinated liabilities
Subordinated notes 5,487 2,906
Fair value hedge accounting adjustments 42 45
Unamortised premiums and issue costs (32) (11)
Total 5,497 2,940
Subscribed capital
Permanent interest-bearing shares 225 225
Fair value hedge accounting adjustments 40 57
Unamortised premiums and issue costs (2) (3)
Total 263 279
Note:
i. Comparatives have been restated to include accrued interest as detailed in note 2.
All of the Society's subordinated notes and permanent interest-bearing shares (PIBS) are unsecured. The Society may, with the prior consent of the Prudential Regulation Authority (PRA), repay the PIBS and redeem the subordinated notes early.
On 8 March 2018, to help meet forthcoming minimum requirements for own funds and eligible liabilities (MREL), the Group issued senior non-preferred notes, which are a class of subordinated liability that are senior to the existing Tier 2 eligible notes.
The senior non-preferred notes rank pari passu with each other and behind the claims against the Society of all depositors, creditors and investing members other than holders of Tier 2 subordinated notes, permanent interest-bearing shares (PIBS), Additional Tier 1 (AT1) capital and core capital deferred shares (CCDS) of the Society.
The Tier 2 subordinated notes rank pari passu with each other and behind the claims against the Society of all depositors, creditors and investing members other than holders of PIBS, AT1 capital and CCDS of the Society.
The PIBS rank pari passu with each other and the AT1 instruments, behind claims against the Society of the subordinated note holders but ahead of claims by the holders of CCDS.
Notes to the consolidated financial statements (continued)
12 Provisions for liabilities and charges
Bank FSCS Customer Other Total
levy redress provisions
GBPm GBPm GBPm GBPm GBPm
At 5 April 2017 16 42 305 24 387
Provisions utilised (37) (26) (110) (14) (187)
Charge for the year 45 - 34 6 85
Release for the year - (1) (8) (3) (12)
Net income statement charge 45 (1) 26 3 73
At 4 April 2018 24 15 221 13 273
At 5 April 2016 22 84 227 10 343
Provisions utilised (48) (42) (58) (5) (153)
--------
Charge for the year 42 15 152 21 230
Release for the year - (15) (16) (2) (33)
--------
Net income statement charge 42 - 136 19 197
--------
At 4 April 2017 16 42 305 24 387
--------
The income statement charge for provisions for liabilities and charges of GBP25 million (2017: GBP136 million) includes the customer redress net income statement charge of GBP26 million (2017: GBP136 million), and the FSCS release of GBP1 million (2017: GBPnil).
The income statement charge for bank levy of GBP45 million (2017: GBP42 million) and other provisions charge of GBP3 million
(2017: GBP19 million) are included within administrative expenses in the income statement.
Financial Services Compensation Scheme (FSCS)
The FSCS, the UK's independent statutory compensation fund for customers of authorised financial services firms, pays compensation if a firm is unable to pay claims against it.
Following the default of a number of deposit takers, the FSCS borrowed funds from HM Treasury, approximately GBP5 billion of which remains outstanding at 4 April 2018 (2017: GBP16 billion). This balance relates solely to the failure of Bradford & Bingley plc. The FSCS recovers the interest costs associated with this loan, together with ongoing management expenses, by way of annual levies on member firms.
UK Asset Resolution (UKAR) oversees the management of the closed books of Bradford & Bingley plc. In order to repay the funds borrowed from HM Treasury, on 25 April 2017 UKAR completed the first of two separate sales of Bradford & Bingley plc portfolios. It is anticipated that the second sale transaction will be completed by September 2018.
The balance sheet amount provided by the Group of GBP15 million (2017: GBP42 million) comprises GBP12 million of levies relating to the 2017/18 FSCS scheme year and GBP3 million relating to the 2018/19 scheme year.
Customer redress
During the course of its business, the Group receives complaints from customers in relation to past sales or conduct. The Group is also subject to enquiries from and discussions with its regulators, governmental and other public bodies, including the Financial Ombudsman Service (FOS), on a range of matters. Customer redress provisions are recognised where the Group considers it is probable that payments will be made as a result of such complaints and other matters.
The Group holds provisions of GBP221 million (2017: GBP305 million) in respect of the potential costs of remediation and redress in relation to historic sales of financial products and post sales administration. This includes amounts for past sales of PPI, non-compliance with consumer credit legislation and other regulatory matters.
The net income statement charge for the year mainly reflects updated assumptions for provisions previously recognised. This includes a GBP28 million charge in relation to PPI, driven primarily by an increase in the anticipated total number of complaints expected to be received in light of the Financial Conduct Authority (FCA) media campaign and complaints deadline of August 2019.
Notes to the consolidated financial statements (continued)
12 Provisions for liabilities and charges (continued)
It is considered appropriate for the Group to provide for the estimated total amount required to deal with all ongoing and future PPI complaints. The amount provided at 4 April 2018 therefore reflects the compensation and administrative costs associated with cases that the Group expects to uphold and the cost of processing invalid claims which the Group expects to receive. This estimate will be re-assessed on an ongoing basis in the light of actual claims levels observed.
Other provisions
Other provisions include provisions for severance costs and a number of property related provisions. Provisions are made for the expected severance costs in relation to the Group's restructuring activities where there is a present obligation and it is probable that the expenditure will be made.
13 Contingent liabilities
During the ordinary course of business, the Group receives complaints, is subject to threatened or actual legal proceedings, and manages regulatory enquiries, reviews, challenges and investigations. It also receives and reviews allegations of wrongdoing raised by employees and others and provides support and assistance, when it is appropriate to do so, to relevant Law Enforcement Agencies in connection with investigations they may undertake. All such material matters are periodically reassessed, with the assistance of external professional advisers where appropriate, to determine the likelihood of incurring a liability. Where it is concluded that it is more likely than not that a payment will be made a provision is recognised based on management's best estimate of the amount that will be payable. For other matters no provision is recognised but disclosure is made of items which are potentially material, either individually or in aggregate, except in cases where the likelihood of a liability crystallising is considered to be remote. Currently the Group does not expect the ultimate resolution of any such matters to have a material adverse impact on its financial position.
14 Retirement benefit obligations
Group
Retirement benefit obligations on the balance sheet 2018 2017
GBPm GBPm
Present value of funded obligations 6,108 6,039
Present value of unfunded obligations 12 12
6,120 6,051
Fair value of fund assets (5,775) (5,628)
Deficit at 4 April 345 423
Defined contribution pension schemes
The Group operates two defined contribution pension schemes in the UK - the Nationwide Group Personal Pension Plan (GPP) and the Nationwide Temporary Workers Pension Scheme. New employees are automatically enrolled into one of these schemes, with both schemes being administered by Aviva.
Outside of the UK, there are defined contribution pension schemes for a small number of employees in the Isle of Man and Ireland.
Defined benefit pension schemes
The Group has funding obligations to several defined benefit pension schemes, which are administered by boards of trustees. Pension trustees are required by law to act in the interests of all relevant beneficiaries and are responsible for the investment policy of fund assets, as well as the day to day administration.
The Group's largest pension scheme is the Nationwide Pension Fund (the Fund). This is a contributory defined benefit pension scheme, with both final salary and career average revalued earnings (CARE) sections. The Fund was closed to new entrants in 2007 and since that date employees have been able to join the GPP.
Notes to the consolidated financial statements (continued)
14 Retirement benefit obligations (continued)
Most members of the Fund can draw their pension when they reach the Fund's retirement age of 65. Pension benefits accrued before 1 April 2011 vary in methodology; however most are based on 1/54th of final salary for each year of service. Pension benefits accrued after 1 April 2011 are usually based on 1/60th of average earnings, revalued to age of retirement, for each year of service (also called CARE).
In the event that a Fund member passes away, benefits may be payable in the form of a spouse/dependant's pension, lump sum (paid within 5 years of a Fund member beginning to take their pension), or as a refund of Fund member contributions. Fund members are also able to place redundancy severance into their pension.
Approximately 31% of the Fund's retirement benefit obligations have been accrued by current employees (active Fund members), 37% by former employees (deferred Fund members) and 32% by current pensioners and dependants. The average duration of the Fund's pension obligation is approximately 22 years reflecting the split of the obligation between current employees (27 years), deferred Fund members (25 years) and current pensioners (15 years).
The Group's retirement benefit obligations include GBP2 million (2017: GBP4 million) recognised in a subsidiary company, Nationwide (Isle of Man) Limited. This obligation relates to a defined benefit scheme providing benefits based on both final salary and CARE which was closed to new entrants in 2009.
The Group's retirement benefit obligations also include GBP12 million (2017: GBP12 million) in respect of unfunded legacy defined benefit arrangements.
The principal actuarial assumptions used are as follows:
Principal actuarial assumptions 2018 2017
% %
Discount rate 2.45 2.40
Future salary increases 3.10 3.20
Future pension increases (maximum 5%) 2.90 2.95
Retail price index (RPI) inflation 3.10 3.20
Consumer price index (CPI) inflation 2.10 2.20
The assumptions for mortality rates are based on standard mortality tables which allow for future improvements in life expectancies. The assumptions made are illustrated in the table below:
2018 2017
(note i)
Life expectancy assumptions years years
Age 60 at 4 April 2018:
Males 28.0 27.9
Females 29.3 29.1
Age 60 at 4 April 2038:
Males 29.2 28.8
Females 30.8 29.9
------
Note:
i. Comparatives have been restated to present life expectancy assumptions on a consistent basis with estimation methodology as at 4 April 2018. This does not impact the calculation of the defined benefit obligation.
Notes to the consolidated financial statements (continued)
14 Retirement benefit obligations (continued)
Changes in the present value of the net defined benefit liability (including unfunded obligations) are as follows:
Movements in the net defined benefit liability 2018 2017
GBPm GBPm
Deficit at 5 April 423 213
Current service cost 95 60
Past service cost 5 4
Curtailment gains (9) (4)
Interest on net defined benefit liability 8 5
Return on assets less/(greater) than discount rate 1 (951)
Contributions by employer (152) (206)
Administrative expenses 4 4
Actuarial (gains)/losses on defined benefit obligations (30) 1,298
Deficit at 4 April 345 423
Current service cost represents the increase in liabilities resulting from employees accruing service over the year. This includes salary sacrifice employee contributions.
Past service cost represents the increase in liabilities of the Fund arising from Fund members choosing to pay additional contributions (AVC's, pension credits) to boost their pension benefits.
Curtailment gains are in respect of Fund members made redundant during the year. Liabilities reduce as deferred Fund member pension benefits are linked to the Consumer Price Index (CPI), rather than the Retail Prices Index (RPI) which is used for the pension benefits for active Fund members.
The interest on the net defined benefit liability represents the annual interest accruing on the liabilities over the year, offset by the interest income on assets.
The GBP1 million relating to the return on assets less than the discount rate (2017: GBP951 million return greater than the discount rate), is driven by a reduction in long-term expected inflation over the year, partially offset by positive equity returns.
The GBP152 million of employer contributions includes deficit contributions of GBP86 million (2017: GBP149 million), with the remainder relating to employer contributions in respect of future benefit accrual. The Group estimates that its contributions to the defined benefit pension schemes (including deficit contributions under the current deficit recovery plan) during the year ending 4 April 2019 will be GBP127 million.
The GBP30 million actuarial gain (2017: GBP1,298 million loss) on the liabilities shown above is driven by:
-- A GBP153 million gain (2017: GBP1,441 million loss) from changes in financial assumptions, including a 0.05% increase in the discount rate and a 0.10% decrease in assumed Retail Prices Index inflation, both of which decrease the value of the liabilities.
-- A GBP97 million loss (2017: GBP144 million gain) due to updating to the latest industry standard actuarial model for projecting future longevity improvements, updating the long-term longevity improvement assumption from 1.25% to 1.50% per annum, and a Trustee decision to amend specific actuarial factors of the Fund as of 1 April 2018. The specific factors allow Fund members to take tax free cash lump sums when they retire on more favourable terms than previously.
-- An experience loss on the assumptions of GBP26 million (2017: GBP1 million loss) reflecting the difference between the estimated long-term assumptions and the actual observed pension increases and deferred pension revaluations during the year ended 4 April 2018.
Notes to the consolidated financial statements (continued)
15 Core capital deferred shares (CCDS)
Number of CCDS Share premium Total
shares
GBPm GBPm GBPm
At 4 April 2017 5,500,000 6 525 531
Issuance 5,000,000 5 802 807
Issue costs (13) (13)
At 4 April 2018 10,500,000 11 1,314 1,325
In September 2017, the Group issued 5,000,000 of GBP1 core capital deferred shares (CCDS). These CCDS form a single series along with the CCDS previously issued in December 2013. The gross proceeds of the issuance were GBP807 million (GBP794 million net of issuance costs).
CCDS are a form of Common Equity Tier 1 (CET1) capital which have been developed to enable the Group to raise capital from the capital markets. Previously issued Tier 1 capital instruments, PIBS, no longer meet the regulatory capital requirements of CRD IV and are being gradually phased out of the calculation of capital resources under transitional rules.
CCDS are perpetual instruments. They rank pari passu to each other and are junior to claims against the Society of all depositors, creditors and investing members. Each holder of CCDS has one vote, regardless of the number of CCDS held.
In the event of a winding up or dissolution of the Society and if there were surplus available, the amount that the investor would receive for each CCDS held is limited to the average principal amount in issue, which is currently GBP129.24 per share.
There is a cap on the distributions that can be paid to holders of CCDS in any financial year. The cap is currently set at GBP16.06 per share and is adjusted annually in line with CPI.
A final distribution of GBP28 million (GBP5.125 per share) for the financial year ended 4 April 2017 was paid on 20 June 2017 and an interim distribution of GBP54 million (GBP5.125 per share) in respect of the period to 30 September 2017 was paid on 20 December 2017. These distributions have been recognised in the statement of movements in members' interests and equity.
Since the balance sheet date the directors have declared a distribution of GBP5.125 per share in respect of the period to 4 April 2018, amounting in aggregate to GBP54 million. This has not been reflected in these financial statements as it is recognised in the year ending 4 April 2019, by reference to the date at which it was declared.
Notes to the consolidated financial statements (continued)
16 Other equity instruments
Total
GBPm
At 4 April 2018 992
At 4 April 2017 992
Other equity instruments are Additional Tier 1 (AT1) capital instruments. AT1 instruments rank pari passu to each other and to PIBS. They are junior to claims against the Society of all depositors, creditors and investing members, other than the holders of CCDS.
AT1 instruments pay a fully discretionary, non-cumulative fixed coupon at an initial rate of 6.875% per annum. The rate will reset on 20 June 2019 and every five years thereafter to the five year mid swap rate plus 4.88%. Coupons are paid semi-annually in June and December.
A coupon of GBP34 million, covering the period to 19 June 2017, was paid on 20 June 2017 and a coupon of GBP34 million, covering the period to 19 December 2017, was paid on 20 December 2017. These payments have been recognised in the statement of movements in members' interests and equity.
A coupon payment of GBP34 million, covering the period to 19 June 2018, is expected to be paid on 20 June 2018 and will be recognised in the statement of movements in members' interests and equity in the financial year ending 4 April 2019.
The coupons paid and declared represent the maximum non-cumulative fixed coupon of 6.875%.
AT1 instruments have no maturity date. They are repayable at the option of the Society on 20 June 2019 and on every fifth anniversary thereafter. AT1 instruments are only repayable with the consent of the PRA.
If the end point CET1 ratio for the Society, on either a consolidated or unconsolidated basis, falls below 7% the AT1 instruments convert to CCDS instruments at the rate of one CCDS share for every GBP80 of AT1 holding.
RESPONSIBILITY STATEMENT
The Directors confirm that the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and income and expenditure of the Group as required by the Disclosure and Transparency rules (DTR 4.1.12). The Chief Executive's Review and the Financial Review together include a fair review of the development and performance of the business and the Group, and taken together with the primary financial statements, supporting notes and the Business and Risk Report provide a description of the principal risks and uncertainties faced.
A full list of the board of directors will be disclosed in the Annual Report and Accounts 2018.
Signed on behalf of the Board by
Mark Rennison
Chief Financial Officer
21 May 2018
OTHER INFORMATION
The financial information set out in this announcement which was approved by the Board on 21 May 2018 does not constitute accounts within the meaning of section 73 of the Building Societies Act 1986.
The Annual Report and Accounts 2017 have been filed with the Financial Conduct Authority and the Prudential Regulation Authority. The Annual Report and Accounts 2018 will be published on the website of Nationwide Building Society, nationwide.co.uk. The report of the auditor on those accounts is unqualified and did not draw attention to any matters by way of emphasis. The Annual Report and Accounts 2018 will be lodged with the Financial Conduct Authority and the Prudential Regulation Authority following publication.
A copy of this Preliminary report is placed on the website of Nationwide Building Society, nationwide.co.uk, from 22 May 2018. 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: Tanya Joseph Alex Wall Tel: 020 7261 6503 Tel: 020 7261 6568 Mobile: 07826 922102 Mobile: 07917 093632 tanya.Josephjoseph@nationwide.co.uk alexander.wall@nationwide.co.uk Sara Batchelor Tel: 01793 657770 Mobile: 07785 344137 sara.batchelor@nationwide.co.uk
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
END
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