TIDMNBS TIDM96MN
RNS Number : 6206Z
Nationwide Building Society
21 May 2019
Nationwide Building Society
Preliminary Results Announcement
For the year ended
4 April 2019
CONTENTS
Key highlights and quotes 3
Financial summary 4
Chief Executive's review 5
Financial review 7
Business and Risk Report 15
Consolidated Financial Statements 63
Notes to the consolidated financial statements 68
Responsibility statement 85
Other information 85
Contacts 85
Underlying profit
Profit before tax shown on a statutory and underlying basis is
set out on page 4. Statutory profit before tax of GBP833 million
has been adjusted to derive an underlying profit before tax of
GBP788 million. The purpose of this measure is to reflect
management's view of the Group's underlying performance and to
assist with like for like comparisons of performance across
periods. Underlying profit is not designed to measure sustainable
levels of profitability as that potentially requires exclusion of
non-recurring items even though they are closely related to (or
even a direct consequence of) the Group's core business activities.
The components of underlying profit have changed in the period to
more accurately reflect underlying performance. For more
information see page 8 of the Financial review.
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
growth. 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 provide 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. The economic outlook
also remains unusually uncertain due to Brexit. 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.
Record lending, strong deposit growth and 1 in 5 current account
switchers drive record membership at Nationwide Building
Society
Leading service(1) at UK's most trusted(2) financial brand
- No. 1 for customer satisfaction among our peer group, with
lead of 4.8% (March 2018: 4.6%)(1) ; joint 5th in all-sector UK
Customer Satisfaction Index(3) ;
- UK's most trusted financial brand, 2.3% ahead of nearest
competitor (March 2018: 1.4%)(2) ;
- Support for high streets includes promise that every town and
city with a branch will still have one until at least May 2021;
- Awarded GBP50m from the Capability and Innovation Fund,
enhancing our entry into business banking market.
Membership reaches record high as Nationwide helps more people
into a home, save for the future or manage their finances
- A record 15.9m members trust Nationwide with their money (2018: 15.5m);
- Loyalty rates on Single Access and Loyalty ISAs attracted
higher member deposits(4) , which grew by GBP6.0bn (2018:
GBP3.5bn);
- Helped a record 77,000 first-time buyers into their own homes
(2018: 76,000), and increased gross and net mortgage lending to
GBP36.4bn (2018: GBP33.0bn) and GBP8.6bn (2018: GBP5.8bn)
respectively;
- More than one in five switchers chose Nationwide(5) , and
current account openings were robust at 794,000 (2018:
816,000).
Profitability in line with expectations as Society increases
investment for the future
- Members benefited from GBP705m in member financial benefit
(2018: GBP560m), well above our aim of at least GBP400m;
- Underlying profit of GBP788m (2018: GBP977m)(6) and statutory
profit of GBP833m (2018: GBP977m);
- Profits are after a charge of GBP227m from asset write-offs
and additional technology spend as a result of the Society's
GBP1.3bn investment over five years, to ensure we continue to excel
at service;
- CET1 ratio improved to 32.4% (4 April 2018: 30.5%) and UK
leverage ratio stable at 4.9% (4 April 2018: 4.9%).
Joe Garner, Chief Executive, Nationwide Building Society,
said:
"2018/19 was a strong year for Nationwide. More people have
chosen us for their mortgages, savings or current accounts.
"I believe that the combination of excellent service and great
long-term value is driving our growth. We remain ahead of our peer
group on service(1) and trust(2) . Our strong performance has meant
we have provided extra value to members, with member financial
benefit of GBP705m, well above our aim of at least GBP400m.
"During the year, we also announced a significant boost in our
technology investment over five years to ensure we continue to
excel on service.
"These were conscious decisions we were able to make as a
building society. As we expected, they have had an impact on
profits in the short term, but these choices are in the long-term
interests of our members.
"We have also taken two other decisions to serve our members
better. The first is a pledge to keep a branch in every town or
city that has one currently for at least the next two years. And
the second is to launch a current account for small businesses,
offering everyday great service and value.
"Our financial strength means we will be able to continue to
support our members now and in the future as we have done for the
last 135 years."
Mark Rennison, Chief Financial Officer, Nationwide Building
Society, said:
"We are a secure home for our members' money during a time of
political and economic uncertainty.
"Our capital position remains well ahead of regulatory
requirements. This, combined with another strong performance this
year, means we can invest with confidence. We announced in
September a GBP1.3bn additional investment over five years in new
technologies to help serve our members better today and in the
future. Our underlying profits of GBP788m are after a charge of
GBP227m for asset write offs and additional technology spend.
Excluding this charge, our profitability was broadly consistent
with the level reported a year ago.
"We continue to offer our members competitive mortgage and
savings rates, rewarding them with better value. In line with our
expectations and previous statements, our net interest margin
narrowed reflecting conscious pricing decisions and competition for
lending. We expect this trend to continue during the coming
financial year."
1 (c) Ipsos MORI 2019, Financial Research Survey (FRS), 12
months ending 31 March 2019 and 12 months ending 31 March 2018,
c.60,000 adults surveyed per annum, proportion of extremely/very
satisfied customers minus proportion of extremely/very/fairly
dissatisfied customers summed across main current account, mortgage
and savings. Peer group defined as providers with main current
account market share >4% (Barclays, Halifax, HSBC, Lloyds Bank,
NatWest, Santander and TSB).
2 Source: Nationwide Brand and Advertising tracker compiled by
Independent Research Agency, 12 months ending 31 March 2019 vs 12
months ended 31 March 2018. Financial brands included Nationwide,
Barclays, Co-operative Bank, First Direct, Halifax, HSBC, Lloyds
Bank, NatWest, Santander and TSB.
3 Institute of Customer Service's UK Customer Satisfaction
Index, January 2019.
4 Member deposits include current account deposits.
5 Source: Pay.UK current account switching data, 12 months to
March 2019.
(6) The components of underlying profit have been changed during
the year to reflect more appropriately ongoing business
performance. 2018 underlying profit has been restated to reflect
this change.
Financial Summary
Year to Year to
4 April 4 April
2019 2018
----------- -----------
Financial performance GBPm GBPm
----------------------------------------- ----- ----
Total underlying income 3,170 3,132
----------------------------------------- ----- ---- ----- ----
Underlying profit before tax (note i) 788 977
----------------------------------------- ----- ---- ----- ----
Statutory profit before tax 833 977
----------------------------------------- ----- ---- ----- ----
Mortgage Lending GBPbn % GBPbn%
----------------------------------------- ----- ---- ----- ---
Group residential - gross/market share
(note ii) 36.4 13.4 33.0 12.8
----------------------------------------- ----- ---- ----- ----
Group residential - net/market share
(note ii) 8.6 18.7 5.8 13.2
----------------------------------------- ----- ---- ----- ----
Average loan to value of new residential
lending (by value) 71 71
----------------------------------------- ----------- -----------
Deposit balances GBPbn % GBPbn%
----------------------------------------- ----- ---- ----- ---
Member deposits balance movement/market
share (notes ii and iii) 6.0 12.2 3.5 6.8
----------------------------------------- ----- ---- ----- ----
Key ratios % %
----------------------------------------- ----------- -----------
Cost income ratio - underlying basis
(note i) 71.1 64.6
----------------------------------------- ----------- -----------
Cost income ratio - statutory basis 70.3 64.6
----------------------------------------- ----------- -----------
Net interest margin (note iv) 1.22 1.31
----------------------------------------- ----------- -----------
4 April 5 April 4 April
2019 2018 2018
(note
v)
----------- ----------- -----------
Balance sheet GBPbn % GBPbn % GBPbn %
---------------------- ----- ---- ----- ----
Total assets 238.3 228.9 229.1
---------------------- ----- ---- ----- ---- ----- ----
Loans and advances to
customers 199.1 191.4 191.6
---------------------- ----- ---- ----- ---- ----- ----
Member deposits/market
share (notes
ii and iii) 154.0 10.1 148.0 10.0 148.0 10.0
---------------------- ----- ---- ----- ---- ----- ----
Asset quality % %
---------------------- ----------- ----------- -----------
Residential mortgages
---------------------- ----------- ----------- -----------
Proportion of
residential
mortgage accounts
3 months+ in
arrears 0.43 0.43
---------------------- ----------- ----------- -----------
Average indexed
loan to value (by
value) 58 56
---------------------- ----------- ----------- -----------
Consumer banking
---------------------- ----------- ----------- -----------
Proportion of
customer balances
with
amounts past due
more than 3 months
(excluding charged
off balances) 1.35 1.56
---------------------- ----------- ----------- -----------
Key ratios % % %
---------------------- ----------- ----------- -----------
Capital
---------------------- ----------- ----------- -----------
Common Equity Tier
1 ratio (note vi) 32.4 30.4 30.5
---------------------- ----------- ----------- -----------
UK leverage ratio
(note vii) 4.9 4.9 4.9
---------------------- ----------- ----------- -----------
CRR leverage ratio
(note viii) 4.6 4.6 4.6
---------------------- ----------- ----------- -----------
Other balance sheet
ratios
---------------------- ----------- ----------- -----------
Liquidity coverage
ratio 150.2 130.3
---------------------- ----------- ----------- -----------
Wholesale funding
ratio (note ix) 28.6 28.2
---------------------- ----------- ----------- -----------
Notes:
i. Underlying profit represents management's
view of underlying performance.
In order to provide a more meaningful
presentation of performance the following
items are excluded from statutory profit
to arrive at underlying profit:
* FSCS costs arising from institutional failures
* Gains from derivatives and hedge accounting.
The components of underlying profit
have been changed during the year and
comparatives have been restated. Further
information can be found in the Financial
review on page 8.
ii. The calculation of market share
for mortgage lending and deposit balances
has been refined to better reflect
the position at the reporting date,
with comparatives being restated accordingly.
Market data is available at calendar
month ends and therefore market share
is for the period 1 April 2018 to 31
March 2019.
iii. Member deposits include current
account credit balances.
iv. The opportunity has been taken
to reclassify certain items previously
included within net interest income
to reflect better the nature of the
transactions. As a result, gains and
losses recognised on the disposal of
investment securities classified as
FVOCI (2018: available for sale) are
now presented within net other income.
v. Balances as at 5 April 2018 reflect
the impact of applying IFRS 9: Financial
Instruments.
vi. The Common Equity Tier 1 (CET1)
ratio has been calculated under CRD
IV on an end point basis. From 5 April
2018, IFRS 9 transitional adjustments
have been applied.
vii. 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. From 5 April 2018, IFRS 9
transitional adjustments have been
applied.
viii. 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.
From 5 April 2018, IFRS 9 transitional
adjustments have been applied.
ix. The wholesale funding ratio includes
all balance sheet sources of funding
(including securitisations).
Chief Executive's review
As a building society, Nationwide is owned by its members. We
have a deep and true member focus: we are here to serve our
members' needs today and tomorrow.
We are committed to delivering great service, long-term value
and a financially secure Society, run in the best interests of our
members.
We have led our peer group on service for seven years running(7)
. We are now also comparing our service against the best in the UK,
not just in financial services, tracking our place in the
all-sector UK Customer Satisfaction Index. We have achieved our
long-term goal of breaking into the top five, being ranked joint
fifth in 2019, up from joint seventh in 2018(8) . A key part of our
service proposition is our branch network which is why we are
investing in our branches and have pledged to keep a branch in
every town or city we are in today until at least 2021.
Being member-owned means we can balance giving value to members,
investing in our Society and maintaining our financial
strength.
This year members benefited from GBP705 million (2018: GBP560
million) through better rates, fees and incentives compared with
the market average. We kept our commitment to offer competitive
mortgages and rewarded our loyal savers with special rates. Our
leading service(7) and long-term value products have, I believe,
helped us to another year of record membership as more people chose
Nationwide for their mortgages, savings and current accounts.
Financially, we are strong. Our key measure of financial
strength, our leverage ratio, is above our target at 4.9% (2018:
4.9%). We continue to manage our risks very carefully in an
uncertain environment.
Our Society is in good health today. However, we must also look
to the future and ensure we are best able to serve the needs of our
members in a world where technology is changing how people manage
their money. That's why we announced in September an investment of
an extra GBP1.3 billion in technology, taking our total strategic
investment, including investment in our branches, to GBP4.1 billion
over five years. Our investment will make us more efficient,
innovative and responsive, and help us address our members' needs
today and in the future. In addition, we have committed to launch a
business current account for small firms.
As a building society, we were able to increase our investment
in technology to meet the long-term needs of our members, even
though this reduces profit in the short term. Our underlying profit
is in line with expectations, reducing to GBP788 million (2018:
GBP977 million) after recognising a charge from technology asset
write-offs and additional technology investment made during the
year.
Our success is thanks to the hard work and commitment of our
people, and I would like to thank them for their care and support
for our members. I would also like to thank our loyal and growing
membership, for their continued support for Nationwide.
Despite the economic uncertainties in the UK today, people still
want to buy homes, save and manage their money, and we remain
determined to support and serve our membership better every
day.
Building thriving membership - helping more members make more of
their money
We are owned by the 15.9 million members who we're helping into
a home, to save for the future, or to manage their everyday
finances.
Our membership grew to its highest level in 2018/19 and we are
doing more with our members. Our committed membership(9) - members
who have two or more of our products - grew from 3.2 million to 3.4
million.
Members trusted Nationwide with more of their savings and this
helped us grow deposits strongly by
GBP6.0 billion (2018: GBP3.5 billion). We kept average deposit
rates more than 50% above the market average, and launched
attractive new rates on loyalty accounts. However, in an
environment where mortgage rates are low, there are limits to how
much we can pay to our savings members.
Despite economic uncertainties, mortgage volumes remained strong
and our competitive mortgage pricing meant we lent more to
homebuyers and landlords on both a gross and net basis.
We relaunched our home insurance proposition which was well
received by members who took out 97,000 policies, almost 30% more
than in 2018, and helped us become the top-placed insurance
provider in the Institute of Customer Service's UK Customer
Satisfaction Index(8) .
More people are choosing Nationwide to manage their everyday
finances; 794,000 new current accounts were opened this year (2018:
816,000) and our market share of main current accounts(10) has
reached 8% for the first time. We hope to replicate this success in
the small business market, with the launch of a business current
account.
Built to last - keeping our Society and our members' money
safe
We are committed to running a financially secure Society,
providing a safe home for our members' money. As a building
society, we are able to make decisions in the long-term interest of
our members. Our financial performance framework helps the Society
achieve the right balance between giving value to members,
investing in our business and maintaining our financial
strength.
Our capital - the funds that are a cushion against unexpected
economic events - is above our own targets and regulatory
requirements. At 4.9% our UK leverage ratio, a key measure of our
financial strength, is also above our target. Following the
announcement in April 2019 of our intention to redeem our
Additional Tier 1 capital instrument in full, our UK leverage ratio
will reduce but will remain above regulatory requirements. We are
managing our risks conservatively, although slowing house price
growth resulted in a slightly higher loan to value ratio on total
lending of 58% (2018: 56%).
We chose to provide extra value to members by competing in a
crowded savings and mortgage market. Our competitive rates, fees
and incentives meant members benefited from GBP705 million in
member financial benefit, well above our aim of at least GBP400
million. We also decided to invest an extra GBP1.3 billion in
technology over five years so that we can meet members' changing
needs.
7 (c) Ipsos MORI 2019, Financial Research Survey (FRS), lead
held over seven-year period covering 12 months ending 31 March 2013
to 12 months ending 31 March 2019, c.60,000 adults surveyed per
annum, proportion of extremely/very satisfied customers minus
proportion of extremely/very/fairly dissatisfied customers summed
across main current account, mortgage and savings. Peer group
defined as providers with main current account market share >4%
(Barclays, Halifax, HSBC, Lloyds Bank, NatWest and Santander and
TSB). Prior to April 2017, peer group defined as providers with
main current account market share >6% (Barclays, Halifax, HSBC,
Lloyds Bank (Lloyds TSB prior to 2015), NatWest and Santander).
8 Institute for Customer Service's UK Customer Satisfaction
Index, January 2019 and January 2018.
9 Committed members have at least two of our products, at least
one of which is their main personal current account, a mortgage
with a balance greater than GBP5,000, or a savings account with a
balance greater than GBP1,000.
(10) Source: CACI (February 2019) and internal calculations.
'Main accounts' refers to main standard and packaged accounts.
Chief Executive's review (continued)
Underlying profit was down to GBP788 million (2018: GBP977
million), largely due to the impact of asset write-offs and our
additional investment in technology, in line with expectations.
Statutory profit was GBP833 million (2018: GBP977 million). As a
building society, we were able to make these choices knowing it
would impact profitability in the short term. We remain committed
to our financial performance framework, and our current performance
is consistent with this framework which enables us to make
conscious decisions to increase our investment at a time when
members' needs are changing rapidly and technology advancement is
offering new opportunities.
We have continued to manage costs and have delivered over GBP100
million in sustainable cost savings in each of the last two
years.
Building legendary service - striving to serve our members
better every day
We all know what good service feels like. When we're in a hurry,
it's quick and efficient. When we're facing a dilemma, it's
unhurried and personal. Good service is not 'one-size-fits-all' but
combines the best of human and digital interaction to serve our
members well however they choose to interact with us.
We start from a strong base. For seven years running, we've been
no. 1 for service among our peer group(11) . We've moved up to
joint fifth(12) in the all-industry UK Customer Satisfaction Index,
achieving our target of being in the top five. Our current account
satisfaction is also ahead of our peer group, with a lead of over
10%(13) , and we were named Which? Banking Brand of the Year for
the second year running.
Service expectations continue to grow, and we continue to work
hard to improve our member experience. We are investing GBP350
million in transforming our branch network, while pledging that
every town and city with a Nationwide branch will continue to have
one until at least May 2021. Simultaneously, with mobile users up
by 33% last year, we are investing in our digital services,
bringing new levels of speed, convenience and security to our
members.
Building PRIDE - creating the right culture to do the best for
our members
PRIDE is a statement of the culture, values and principles we
strive to live by. It's about how we treat our members and each
other.
We've worked hard to create a working environment where people
are valued, teamwork is celebrated, and everyone can grow and
develop their careers.
We have a strong culture and committed colleagues. This is
evident from this year's employee engagement score, which at 79%
(March 2018: 78%)(14) , continues to be above the high-performing
benchmark(14) of 77%. However, our rapidly changing world demands
new skills and behaviours from our people: we need to be more
innovative and able to work at pace. To help us achieve this, we
developed a new people strategy last year. Our goal is to develop
leaders at every level of our business to inspire and empower our
people, and to help them learn new skills and capabilities. In the
coming year, we will also be actively recruiting up to 1,000
technology specialists to support our technology investment. We
have an approach to reward and recognition that recognises every
colleague's contribution based on the Society's overall
performance.
Building a national treasure - supporting communities and making
a difference
Building a national treasure is perhaps our most ambitious
cornerstone. It's not about how we see ourselves, but about how
others see us: how well we are trusted, recognised as a brand, and
seen as a force for good in society.
We're pleased to be no 1 for trust in our peer group, and joint
top for brand consideration(15) - a measure of how many consumers
would consider Nationwide for their financial needs. As a building
society, we are guided by a social rather than a commercial purpose
and aim to make our communities better places to live and work.
Last year, we aligned our social investment with our goal of
helping people into better homes and now direct most of our
community investment into housing initiatives. In the second year
of our social investment strategy, built on the idea that everyone
should have a place fit to call home, we've awarded Community
Grants totalling GBP3.9 million to more than 100 housing-related
projects. We're also working with Swindon Borough Council to
develop a multi-generational community of 239 homes.
Financial capability is also important to us. We are funding a
GBP3 million Open Banking for Good challenge, to motivate
technology firms to use Open Banking standards to develop apps and
services that put people in control of their money.
Outlook
While the UK economy has slowed over the last few years, it has
proved more resilient than many expected, with continued healthy
gains in employment and a gradual rise in earnings contributing to
solid rates of household spending.
We expect economic activity to continue to rise at a modest pace
in the near term, which may mean a small rise in the unemployment
rate from recent 43-year lows, with interest rates remaining close
to current levels over the next few years. We anticipate that
economic activity will then pick up once Brexit uncertainties fade
and the UK's trading relationship with the EU becomes clearer.
We expect demand in the housing market to remain fairly subdued,
close to recent levels, before strengthening once the wider economy
gains momentum. Deposit growth is likely to rise by around 4% per
year, a little stronger than that recorded over the past two
years.
In our own business, we will continue to make balanced decisions
in the long-term interests of members and the Society as a whole.
We expect our core mortgage and savings markets to remain
competitive, with a continued narrowing of our net interest margin,
and will continue our focus on delivering good long-term value for
borrowers and savers. Our financial strength has enabled us to
commit to ongoing investment in technology with the confidence that
we can continue to support our members now and in the future as we
have done for the last 135 years.
11 (c) Ipsos MORI 2019, Financial Research Survey (FRS), lead
held over seven-year period covering 12 months ending 31 March 2013
to 12 months ending 31 March 2019, c.60,000 adults surveyed per
annum, proportion of extremely/very satisfied customers minus
proportion of extremely/very/fairly dissatisfied customers summed
across main current account, mortgage and savings. Peer group
defined as providers with main current account market share >4%
(Barclays, Halifax, HSBC, Lloyds Bank, NatWest and Santander and
TSB). Prior to April 2017, peer group defined as providers with
main current account market share >6% (Barclays, Halifax, HSBC,
Lloyds Bank (Lloyds TSB prior to 2015), NatWest and Santander).
12 Institute for Customer Service UK Customer Satisfaction
Index, January 2019 and January 2018.
13 (c) Ipsos MORI 2019, Financial Research Survey (FRS), 12
months ending 31 March 2019, c.60,000 adults surveyed per annum,
proportion of extremely/very satisfied main current account
customers minus proportion of extremely/very/fairly dissatisfied
main current account customers. Peer group defined as providers
with main current account market share >4% (Barclays, Halifax,
HSBC, Lloyds Bank, NatWest, Santander and TSB).
14 The comparative for Nationwide's employee engagement score in
2018 has been restated based on updated information. The
high-performing benchmark is based on data from more than 35
companies around the world across a range of industries. It covers
more than 450,000 employees.
15 Source: Nationwide Brand and Advertising tracker compiled by
Independent Research Agency, based on all consumer responses, 12
months ended 31 March 2019. Financial brands included Nationwide,
Barclays, Co-operative Bank, First Direct, Halifax, HSBC, Lloyds
Bank, NatWest, Santander and TSB. Joint top with Halifax.
Financial review
"Nationwide concluded 2018/19 in a position of financial
strength with demonstrable momentum in trading performance. This
reflects our continued commitment and focus on offering good value
products, and better service for our members, whilst maintaining
capital strength."
In summary
An advantage of being a building society is that we can choose how we utilise Underlying profit:
our resources in order to deliver more long-term value and better services GBP788m
to our members. During the year we have continued to be guided by our Financial (2018: GBP977m)
Performance Framework on how we distribute value to members, invest in the
Society and retain profits. As signalled by our technology investment announcement
in September 2018, a programme of investment has been initiated which will
target the simplification of our IT estate, together with enhancement of our
digital service and data capabilities, over the next five years. During the
year we have recognised a charge of GBP227 million from asset write-offs and
additional technology investment.
As a mutual we continue to aim to optimise, not maximise, profit and offer
good long-term value to our members. For the year ended 4 April 2019, we delivered
a member financial benefit of GBP705 million (2018: GBP560 million), demonstrating
the competitive products and services that we offer our members. In line with
expectations, underlying profit reduced by 19% to GBP788 million (2018: GBP977
million) and statutory profit before tax reduced by 15% to GBP833 million (2018:
GBP977 million), largely due to the impact of asset write-offs and our investment
in technology. This level of profitability maintained our capital strength,
with our UK leverage ratio remaining at 4.9% (2018: 4.9%), well in excess of
current and anticipated regulatory requirements.
Notwithstanding the continued uncertainty in the external environment and competitive
market conditions, trading performance for the year has been robust with our
strongest ever gross lending at GBP36.4 billion (2018: GBP33.0 billion), and
a growth in member deposits of GBP6.0 billion (2018: GBP3.5 billion), reflecting
the success of our Single Access ISA, Loyalty ISA and an increase in current
account credit balances.
Achieving sustainable cost savings and embedding efficiencies remains a priority
for the Society. We continue to make good progress with our efficiency programme,
with a further GBP103 million of in-year sustainable saves being delivered
during the year. On a cumulative basis, including the full year benefit of
sustainable saves delivered over the last two years, we have now delivered
approximately half of our target of GBP500 million of sustainable saves by
2023.
On 5 April 2018 we implemented IFRS 9 'Financial Instruments'. The total impact
on members' interests and equity, net of deferred tax, was a reduction of GBP162
million. There has been no restatement of comparatives following adoption of
IFRS 9. Where useful for the interpretation of balances or movements, we have
highlighted the impact on the Group's balance sheet and members' interests
and equity at 5 April 2018.
Statutory profit:
GBP833m
(2018: GBP977m)
------------------
UK leverage ratio:
4.9%
(2018: 4.9%)
------------------
Income statement
Underlying profit represents management's view of underlying
performance. The components of underlying profit have been changed
during the year to reflect more appropriately ongoing business
performance. As a result, underlying profit now includes the bank
levy and FSCS management expenses, which were previously excluded.
For the year ended 4 April 2019 this decreased underlying profit by
GBP45 million (2018: GBP46 million). Comparatives have been
restated. Underlying profit continues to exclude FSCS costs arising
from institutional failures, and gains or losses from derivatives
and hedge accounting.
Underlying and statutory results (note i) Net Interest Margin:
1.22%
(2018: 1.31%, note
ii)
Year to Year to
4 April 4 April
2019 2018
-------- --------
GBPm GBPm
-------------------------------------- -------- --------
Net interest income (note ii) 2,915 3,004
-------------------------------------- -------- -------- ----------------------
Underlying Cost Income
Net other income (note ii) 255 128 Ratio:
71.1%
(2018: 64.6%)
-------------------------------------- -------- -------- ----------------------
Total underlying income 3,170 3,132
-------------------------------------- -------- -------- ----------------------
Underlying administrative expenses (2,254) (2,024)
-------------------------------------- -------- --------
Impairment losses (113) (105)
-------------------------------------- -------- --------
Underlying provisions for liabilities (15) (26)
-------------------------------------- -------- -------- ----------------------
Underlying profit before tax 788 977
-------------------------------------- -------- --------
Financial Services Compensation Statutory Cost Income
Scheme (FSCS) (note iii) 9 1 Ratio:
70.3%
(2018: 64.6%)
-------------------------------------- -------- --------
Gains / (losses) from derivatives
and hedging accounting (notes iii,
iv) 36 (1)
-------------------------------------- -------- --------
Statutory profit before tax 833 977
-------------------------------------- -------- --------
Taxation (215) (232)
-------------------------------------- -------- --------
Profit after tax 618 745
-------------------------------------- -------- --------
Notes:
i. Under IFRS 9, the recognition and measurement of expected
credit losses differs from under IAS 39. As prior period amounts
have not been restated, impairment losses on loans and advances in
the comparative period remain in accordance with IAS 39 and are
therefore not directly comparable with impairment losses recorded
for the current period.
ii. The opportunity has been taken to reclassify certain items
previously included within net interest income to reflect better
the nature of the transactions. As a result, gains and losses
recognised on the disposal of investment securities classified as
FVOCI (2018: available for sale) are now presented within net other
income.
iii. Within statutory profit:
-- FSCS costs arising from institutional failures, are included
within provisions for liabilities and charges.
-- Gains from derivatives and hedge accounting, are presented separately within total income.
iv. 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
As anticipated, net interest income has decreased, reducing by
3% to GBP2,915 million (2018: GBP3,004 million) due to lower
mortgage income, reflecting sustained market competition and
ongoing attrition of base mortgage rate (BMR) balances. Net
interest margin (NIM) has therefore reduced to 1.22% (2018: 1.31%).
We have continued to make conscious choices to deliver value to our
borrowing members through attractive rates, with the average rate
paid by our prime mortgage members reducing during the year to
2.34% (2018: 2.45%). The availability of low rates on new mortgages
has encouraged product switching and refinancing, with GBP26.5
billion of prime mortgage customer balances having switched to a
new Nationwide product in the year (2018: GBP24 billion). Our
legacy BMR balances have continued to run off during the period and
as at 4 April 2019 were GBP18.1 billion (4 April 2018: GBP22.7
billion).
The negative impact to NIM from declining mortgage margins has
been partially offset by low savings rates. We have continued to
manage savings pricing in line with our commitment to provide good
long-term value for members. During the year depositors have
continued to earn average rates more than 50% higher than the
market average(16) . We expect market conditions to remain
competitive, and product switching and BMR balance attrition to
continue in line with recent experience. We anticipate therefore
that our reported NIM will continue to trend lower in the year
ahead.
Net other income has increased to GBP255 million during the year
(2018: GBP128 million), predominantly due to the prior year
including a GBP116 million charge in relation to a debt buy back
exercise.
(16) Market average interest rates are based on Bank of England
whole of market average interest rates, adjusted to exclude
Nationwide's balances
Member financial benefit
As a building society, we seek to maintain our financial strength whilst providing
value to our members through pricing, propositions and service. Through our
member financial benefit, we measure the additional financial value for members
from the highly competitive mortgage, savings and banking products that we
offer compared to the market. Member financial benefit is calculated by comparing,
in aggregate, Nationwide's average interest rates and incentives across mortgages,
savings, current accounts, personal loans and credit cards to the market, predominantly
using market data provided by the Bank of England and CACI. The value for individual
members will depend on their circumstances and product choices.
We quantify member financial benefit as:
Our interest rate differential + incentives and lower fees
Interest rate differential
We measure how our average interest rates across our member balances in total
compare against the market over the period.
For our two largest member segments, mortgages and retail deposits, we compare
the average member interest rate for these portfolios against Bank of England
and CACI industry data. A market benchmark based upon the data from CACI 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 lower fees
Our member financial benefit measure also includes amounts in relation to higher
incentives and lower fees that Nationwide offers to members. Our calculation
includes annual amounts for the following:
* Mortgages: the differential on incentives for members
compared to the market
* 'Recommend a friend': the amount paid to existing
members, when they recommend a new current account
member to the Society
* FlexPlus account: this current account is considered
market leading against major banking competitors,
with a high level of benefits for a relatively
smaller fee. The difference between the monthly
account fee of GBP13 and the market average of GBP17
is included in the member financial benefit measure.
For the year ended 4 April 2019, this measure shows we have provided our members
with a financial benefit of GBP705 million (2018: GBP560 million). This demonstrates
that we continue to offer good long-term value products to our members in both
the mortgage and deposit markets, despite strong levels of competition.
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 the availability
of data and to avoid bias from segments in which Nationwide may be under or
over-represented. On an ongoing basis we will continue to review our methodology
to ensure it captures all the key elements of the financial benefits we provide
to our members, where data is available.
Administrative expenses
Administrative expenses include the impact of technology asset
write-offs and incremental expenditure associated with our
technology investment announced in September 2018. The investment
programme incorporates GBP1.3 billion of incremental expenditure to
be incurred over five years, targeting the enhancement of our
digital services and data capabilities, together with a
simplification of our technology estate. During the year we have
recognised a charge of
GBP227 million, comprising asset write-offs and impairments of
GBP115 million, combined with expenditure which relates directly to
our technology investment of GBP112 million.
Excluding this charge, our cost base is broadly flat. Our
continued focus on efficiency has allowed us to absorb inflation,
volume growth and the impact of prior year investment. Beyond our
additional technology investment programme, we continue to make
ongoing investments in supporting the long-term interests of our
members, including improving member service and propositions, both
in branch and through digital channels, and meeting regulatory
requirements.
Achieving sustainable cost savings and embedding efficiencies
remain a priority for the Society. We have delivered a further
GBP103 million of new in-year sustainable saves during the year. On
a cumulative basis, including the full year benefit of sustainable
saves delivered over the last two years, we have now delivered
approximately half of our target of GBP500 million of sustainable
saves by 2023. This has been achieved through a range of
initiatives that are focused on the development of digital
capabilities, organisational design, third party savings, process
improvements, simplification and elimination.
Our underlying cost income ratio has increased to 71.1% (2018:
64.6%) largely due to the impact of the asset write-offs and
expenditure directly related to our technology investment
programme.
Impairment losses/(reversals) on loans and advances to
customers
Impairment losses/(reversals)
Year to Year to
4 April 2019 4 April 2018
------------- -------------
GBPm GBPm
------------------------------------------- ------------- -------------
Residential lending (17) 11
------------------------------------------- ------------- -------------
Consumer Banking 114 97
------------------------------------------- ------------- -------------
Retail Lending 97 108
------------------------------------------- ------------- -------------
Commercial and other lending 16 (1)
------------------------------------------- ------------- -------------
Impairment losses on loans and advances 113 107
------------------------------------------- ------------- -------------
Impairment losses on investment securities - (2)
------------------------------------------- ------------- -------------
Total 113 105
------------------------------------------- ------------- -------------
Note:
Under IFRS 9, the recognition and measurement of expected credit
losses differs from under IAS 39. As prior period amounts have not
been restated, impairment losses in the comparative period are not
comparable to impairment losses recorded for the current
period.
Impairment losses have increased by GBP8 million to GBP113
million (2018: GBP105 million). Despite this increase in
impairments the underlying portfolio performance remains
strong.
Retail lending impairment losses remain at historically low
levels with the GBP17 million reversal (2018: GBP11 million charge)
for the residential lending book resulting from improvements to the
modelling of refinance risk on interest only loans and updated
economic assumptions. The increase in the consumer banking
impairment charge to GBP114 million (2018: GBP97 million) includes
additional provisions against the credit card portfolio relating to
borrowers considered to be in persistent debt (explained in the
Credit risk - Consumer banking section of the Business and Risk
Report). Notwithstanding this increase, delinquency levels on the
consumer banking portfolio have remained low during the year.
During the year commercial loan impairments were GBP16 million
(2018: GBP1 million reversal) due to increased credit risk
associated with two individual loans, with the overall portfolio
performance remaining robust.
Provisions for liabilities and charges
We hold provisions for customer redress to cover the costs of
remediation and redress in relation to past sales of financial
products and ongoing administration, including non-compliance with
consumer credit legislation and other regulatory requirements. The
net charge of GBP15 million (2018: GBP26 million) reflects our
latest estimate of our customer redress liabilities. More
information is included in note 13.
Taxation
The tax charge for the year of GBP215 million (2018: GBP232
million) represents an effective tax rate of 25.8% (2018: 23.7%)
which is higher than the statutory UK corporation tax rate of 19%
(2018: 19%). The effective tax rate is higher due to the 8% banking
surcharge of GBP37 million (2018: GBP43 million) and the tax effect
of disallowable bank levy and customer redress costs. More
information is included in note 9.
Balance sheet
Total assets have increased 4% year on year to reach GBP238.3 billion (5 April Liquidity Coverage
2018: GBP228.9 billion) with a robust trading performance driving GBP8.6 billion Ratio:
of net mortgage lending (2018: GBP5.8 billion). This has been supported by strong
growth in retail funding flows, with member deposits growing by GBP6.0 billion
to GBP154.0 billion (5 April 2018: GBP148.0 billion) and our market share of UK
deposits increasing slightly to 10.1% (31 March 2018: 10.0%). Of the growth in
member deposits, GBP4.6 billion is attributable to an increase in savings balances
largely reflecting the success during the year of accounts such as our Single
Access ISA and Loyalty ISA.
150.2%
(2018: 130.3%)
Assets
-----------------------------------------------------------------------------------------
4 April 2019 5 April 2018 (note 4 April 2018
i)
-------------------- --------------
GBPm % GBPm % GBPm %
----------------------------------- ------------- ----- --------- ---
Residential mortgages (note
ii) 186,012 93 177,303 92 177,299 92
----------------------------------- --- ------------- ----- --------- ---
Commercial and other lending
(note iii) 9,118 5 10,640 6 10,645 6
----------------------------------- --- ------------- ----- --------- ---
Consumer banking 4,586 2 4,107 2 4,107 2
----------------------------------- --------- --- ------------- ----- --------- ---
199,716 100 192,050 100 192,051 100
----------------------------------- --- ------------- ----- --------- ---
Impairment provisions (665) (629) (458)
----------------------------------- --------- --- ------------- ----- --------- ---
Loans and advances to customers 199,051 191,421 191,593
----------------------------------- --- ------------- ----- --------- ---
Other financial assets 36,709 34,877 34,912
----------------------------------- --- ------------- ----- --------- ---
Other non-financial assets 2,541 2,639 2,593
----------------------------------- --------- --- ------------- ----- --------- ---
Total assets 238,301 228,937 229,098
----------------------------------- --------- --- ------------- ----- --------- ---
Asset quality % %
----------------------------------- --- ------------- ----- -------- ---
Residential mortgages (note
ii):
----------------------------------- --- ------------- ----- --------- ---
Proportion of residential mortgage
accounts more than 3 months
in arrears 0.43 0.43
----------------------------------- --- ------------- ----- --------- ---
Average indexed loan to value
(by value) 58 56
----------------------------------- --- ------------- ----- --------- ---
Consumer banking:
----------------------------------- --- ------------- ----- --------- ---
Proportion of customer balances
with amounts past due more
than
3 months (excluding charged
off balances) (note iv) 1.35 1.56
----------------------------------- --------- --- ------------- ----- --------- ---
Notes:
i. Balances as at 5 April 2018 reflect the impact of applying IFRS 9 'Financial Instruments'.
ii. Residential mortgages include prime and specialist loans,
with the specialist portfolio primarily comprising buy to let
lending.
iii. Commercial and other lending now exclude balances held with
counterparties which are institutions similar to banks. These
balances are now reported in Loans and advances to banks and
similar institutions (Other financial assets line), and
comparatives have been restated to disclose information on the same
basis. Further details are included in note 2 to the financial
statements.
iv. 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.
Residential mortgages
Despite competitive market conditions, total gross mortgage
lending for the year was GBP36.4 billion (2018: GBP33.0 billion)
representing our strongest ever year of gross mortgage lending and
reflecting the competitively priced products and good long-term
value that we continue to offer. Our market share of prime mortgage
gross lending as at March 2019 has grown to 13.4% (2018: 12.8%). As
a result, total net mortgage lending for the year increased by
GBP2.8 billion to GBP8.6 billion (2018: GBP5.8 billion).
Arrears performance has remained stable during the year, with
cases more than three months in arrears at 0.43% of the total
portfolio (4 April 2018: 0.43%). The average LTV of the portfolio
has increased during the year to 58% (4 April 2018: 56%),
reflecting new lending, offset to a lesser degree this year by
house price growth across the whole portfolio. Impairment
provisions have decreased to GBP206 million (5 April 2018: GBP235
million) largely due to continued run-off of legacy, higher risk
portfolios combined with refinements to our provisioning
methodology.
Commercial and other lending
During the year commercial balances have decreased by GBP1.5
billion to GBP9.1 billion (5 April 2018: GBP10.6 billion). As
previously reported, our commercial real estate (CRE) portfolio is
closed to new business and is currently in run-off. As a result,
CRE balances have reduced during the year by GBP0.4 billion to
GBP1.4 billion (5 April 2018: GBP1.8 billion). Impairment
provisions have increased to GBP41 million (5 April 2018: GBP29
million) due to increased credit risks associated with two
individual loan exposures. Notwithstanding this increase in
provisions, the overall book performance remains strong and our
exit from the commercial real estate market continues to be
carefully managed.
Given deleveraging activity in previous financial years, the
overall portfolio is increasingly weighted towards registered
social landlords with balances of GBP6.0 billion (5 April 2018:
GBP6.8 billion) and project finance with balances of GBP0.8 billion
(5 April 2018: GBP0.9 billion). The reduction in our registered
social landlord book largely reflects early redemptions of loans by
housing associations.
Consumer banking
Consumer banking balances have grown by GBP0.5 billion to GBP4.6
billion (5 April 2018: GBP4.1 billion). This balance growth was
driven by a record GBP1.8 billion of personal loan lending during
the year (2018: GBP1.3 billion) following the reduction in headline
rates in March 2018 and changes to extend our lowest pricing to
more members from January 2019.
Other financial assets
Other financial assets total GBP36.7 billion (5 April 2018:
GBP34.8 billion), primarily comprising liquidity and investment
assets held by our Treasury function of GBP32.7 billion (5 April
2018: GBP30.8 billion) and derivatives with positive fair values of
GBP3.6 billion (5 April 2018: GBP4.0 billion). Derivatives relate
primarily to interest rate and foreign exchange contracts which
economically hedge financial risks inherent in core lending and
funding activities.
Our Liquidity Coverage Ratio has increased during the year to
150.2% (4 April 2018: 130.3%) largely due to the pre-funding of
future wholesale funding maturities combined with a reduction in
stressed collateral requirements. We continue to manage our
liquidity in accordance with our risk appetite, which is more
prudent than regulatory requirements. Further details are included
in the Liquidity and funding risk section of the Business and risk
report.
Members' interests, equity and liabilities Wholesale funding
ratio:
28.6%
(2018: 28.2%)
4 April 5 April 4 April
2019 2018 (note 2018
i)
------- ----------- -------
GBPm GBPm GBPm
--------------------------------- ------- ----------- -------
Member deposits 153,969 148,003 148,003
--------------------------------- ------- ----------- -------
Debt securities in issue 35,942 34,118 34,118
--------------------------------- ------- ----------- -------
Other financial liabilities 33,755 33,173 33,173
--------------------------------- ------- ----------- -------
Other liabilities 1,466 1,402 1,401
--------------------------------- ------- ----------- -------
Total liabilities 225,132 216,696 216,695
--------------------------------- ------- ----------- -------
Members' interests and equity 13,169 12,241 12,403
--------------------------------- ------- ----------- -------
Total members' interests, equity
and liabilities 238,301 228,937 229,098
--------------------------------- ------- ----------- -------
Note:
i. Balances as at 5 April 2018 reflect the impact of applying IFRS 9.
Member deposits
Member deposits have increased by GBP6.0 billion to GBP154.0
billion (4 April 2018: GBP148.0 billion) largely reflecting the
success of our Single Access and Loyalty ISAs, combined with higher
current account credit balances. In a competitive market, we have
slightly increased our market share of deposits as at March 2019 to
10.1% (2018: 10.0%). Our market share of main standard and packaged
current accounts grew to 8.0% (2018: 7.9%), with our market share
of new current account openings increasing during the year to 16.2%
(2018: 15.8%).
Debt securities in issue and other financial liabilities
Debt securities in issue have increased during the year by
GBP1.8 billion to GBP35.9 billion (5 April 2018: GBP34.1 billion)
largely due to wholesale funding issued in order to finance our
core activities. Other financial liabilities have increased by
GBP0.6 billion to GBP33.8 billion (5 April 2018: GBP33.2 billion)
primarily due to issuances of debt during the year in order to meet
the minimum requirement for own funds and eligible liabilities.
Further details are included in the Liquidity and funding risk
section of the Business and risk report.
Members' interests and equity
Members' interests and equity has increased by GBP1.0 billion to
GBP13.2 billion (5 April 2018: GBP12.2 billion) largely reflecting
additional retained profits and an increase in the cash flow hedge
reserve.
Statement of comprehensive income
Statement of comprehensive income
Year to Year to
4 April 4 April
2019 2018
-------- --------
(note i) GBPm GBPm
----------------------------------------- -------- --------
Profit after tax 618 745
----------------------------------------- -------- --------
Net remeasurement of pension obligations 153 22
----------------------------------------- -------- --------
Net movement in cash flow hedge
reserve 328 (191)
----------------------------------------- -------- --------
Net movement in fair value through
other comprehensive income reserve (12) -
----------------------------------------- -------- --------
Net movement in available for sale
reserve - 31
----------------------------------------- -------- --------
Other Items (1) 1
----------------------------------------- -------- --------
Total comprehensive income 1,086 608
----------------------------------------- -------- --------
Note:
i. Movements are shown net of related taxation.
Further information on gross movements in the pension obligation
are included in note 15.
Financial Performance Framework
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.
One of the most important of these parameters is profit,
management of which is a key component in maintaining Nationwide's
capital strength. We believe that a level of underlying profit of
approximately GBP0.9 billion to GBP1.3 billion per annum over the
medium term 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 provide
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.
We remain committed to our Financial Performance Framework. Our
profit for the year ended 4 April 2019 reflects conscious decisions
to increase investment at a time when members needs are changing
rapidly and technology advancement is offering new opportunities.
We are satisfied that this performance is in line with the
framework.
Capital structure
Our capital position has strengthened during the period with our
CET1 ratio increasing to 32.4% (5 April 2018: 30.4%) whilst our UK
leverage ratio remained stable at 4.9% (5 April 2018: 4.9%). Both
remain in excess of the regulatory capital requirements of 13.2%
and 4.0% respectively, which include CRD IV buffers applicable from
August 2019.
Capital structure (note i)
4 April 5 April 4 April
2019 2018 (note 2018
ii)
-------- ----------- -------
GBPm GBPm GBPm
------------------------------------ -------- ----------- -------
Capital resources
------------------------------------ -------- ----------- -------
Common Equity Tier 1 (CET1) capital 10,517 9,915 9,925
------------------------------------ -------- ----------- -------
Total Tier 1 capital 11,509 10,907 10,917
------------------------------------ -------- ----------- -------
Total regulatory capital 14,485 13,930 13,936
------------------------------------ -------- ----------- -------
Risk weighted assets (RWAs) 32,506 32,579 32,509
------------------------------------ -------- ----------- -------
UK leverage exposure 235,147 221,982 221,992
------------------------------------ -------- ----------- -------
CRR leverage exposure 247,586 236,458 236,468
------------------------------------ -------- ----------- -------
CRD IV capital ratios: %% %
------------------------------------ -------- ---------- -------
CET1 ratio 32.4 30.4 30.5
------------------------------------ -------- ----------- -------
UK leverage ratio (note iii) 4.9 4.9 4.9
------------------------------------ -------- ----------- -------
CRR leverage ratio (note iv) 4.6 4.6 4.6
------------------------------------ -------- ----------- -------
Notes:
i. Data in the table is reported under CRD IV on an end point
basis with IFRS 9 transitional arrangements applied.
ii. Figures have been adjusted to reflect the impact of applying
IFRS 9 from 5 April 2018. Further information is provided in note
18 and in our 'Report on Transition to IFRS 9: Financial
Instruments', which can be found at nationwide.co.uk.
iii. The UK leverage ratio (as defined in the PRA rulebook) 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.
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 CET1 ratio increased to 32.4% (5 April 2018: 30.4%) as a
result of an increase in CET1 capital resources, with RWAs
remaining relatively stable. CET1 capital resources have increased
by GBP0.6 billion, primarily due to the profit after tax for the
year of GBP0.6 billion. RWAs remained stable with increased retail
lending and treasury related RWAs offset by run-off in the
commercial book and the implementation of a new credit card IRB
model.
The UK leverage ratio remained stable at 4.9% (5 April 2018:
4.9%), with an increase in Tier 1 capital driven by profit after
tax of GBP0.6 billion offset by an increase in UK leverage exposure
of GBP13 billion resulting from an increase in net retail lending
of GBP9 billion, an increase in treasury exposures (including
counterparty credit risk) of GBP5 billion, and an increase in other
assets of GBP1 billion, offset by run-off in the commercial book of
GBP2 billion. The CRR leverage ratio is based on the Delegated Act
definition and therefore exposures include central bank reserves.
This also remained stable at 4.6% (5 April 2018: 4.6%). On 24 April
2019, Nationwide notified investors of its intention to redeem its
outstanding Additional Tier 1 capital instrument in full, on 20
June 2019. This will reduce Tier 1 capital resources by GBP992
million, resulting in a 0.4 percentage points reduction in the UK
leverage ratio, to 4.5%, and a 0.4 percentage points reduction in
CRR leverage ratio to 4.2%, based on the year end balance
sheet.
Nationwide expects to implement new residential mortgage IRB
models in 2020, incorporating the changes required by the June 2017
update to supervisory statement 11/13. This is anticipated to
increase RWAs, leading to an estimated reduction in the CET1 ratio
of approximately one third, based on our reported ratio at 4 April
2019. We expect the CET1 ratio to be impacted further by the Basel
III reforms which come into effect progressively between 2022 and
2027. The impact of this legislation will supersede the effect of
the new IRB models, with an expected reduction in the reported CET1
ratio of approximately 45% to 50%, relative to the 4 April 2019
position; however organic earnings through the transition will
mitigate this impact and we expect leverage requirements to remain
our binding constraint based on latest projections.
Further details of the capital position and regulatory
developments are included in the Solvency risk section of the
Business and Risk Report.
Business and Risk Report
Contents
Page
Introduction 16
--------
Top and emerging risks 16
--------
Principal risks and uncertainties 17
--------
Credit risk: 20
--------
Overview 20
--------
Residential mortgages 25
--------
Consumer banking 37
--------
Commercial and other lending 42
--------
Treasury assets 46
--------
Liquidity and funding risk 50
--------
Solvency risk 60
--------
Business and Risk Report
Introduction
Risk management is at the heart of our business and has an
important part to play in delivering our shared purpose
of building society, nationwide by making sure we are safe and
secure for the future.
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:
-- identification of risks through a robust assessment of
principal risks and uncertainties facing the Society, including
those that would threaten its business model, future performance,
solvency or liquidity
-- 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.
Top and emerging risks
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
below.
Political and Economic Environment Competition ì Technology è
ì
Nationwide is inherently exposed The competitive environment Increasingly our members demand
to a downturn in macro-economic continues an always-on, constantly evolving
conditions which can impact customer to evolve as rapid technological and improving digital service.
affordability, credit losses advancement and societal change This means systems need to be
and the availability and cost revolutionise how members use managed to avoid disruption to
of financial resources. Numerous and access existing products member services whilst also
factors are expected to impact and services. These trends are delivering
the external political and economic also changing the kinds of technological change to match
environment over the coming year, products demand and improve our services.
including uncertainty surrounding and services required by members. In addition, ever increasing
the UK's exit from the European We continue to identify new and volumes of data must be managed
Union, trade wars, and ongoing innovative products, technology securely and reliably.
geopolitical tensions. and service propositions to We continue to invest in the
We maintain strong capital and better resilience of systems,
liquidity surpluses over regulatory meet customer needs. We are implementing
minimums, operate strong credit investing robust controls to minimise
controls, and conduct regular in our technology and branches, disruption.
stress tests to identify and as well as diversifying our
manage our exposure to economic product
shocks. offerings.
----------------------------------------------------- --------------------------------- ---------------------------------
Key principal risks impacted Key principal risks impacted Key principal risks impacted
* Business Risk * Liquidity and Funding Risk * Business Risk * Operational Risk
* Credit Risk * Market Risk * Operational Risk * Conduct and Compliance Risk
* Solvency Risk * Pension Risk * Conduct and Compliance Risk
------------------- -------------------------------- --------------------------------- ---------------------------------
Key (level of risk to Nationwide)
ì Increasing level of risk è Stable level of risk î Decreasing level of risk
Top and emerging risks (continued)
Regulation è Managing Change ì Cyber Security è
The regulatory environment is The Society's investment in technology The threat of disruption to customer
evolving as regulators continue has increased the scale of services or a loss of customer
to drive an agenda committed the Society's change agenda. data as a result of cyber crime
to maintaining trust and confidence Whilst this will lower risk over remains heightened as cyber attacks
in UK financial services and the long-term, it increases the become ever more sophisticated
a number of complex regulatory immediate risk to service provision and as Nationwide and our
changes continue to be embedded. and costs members become more connected
We continue to work closely both as change is delivered. and embrace new technology.
with regulators and the industry We continue to manage the change We continue to invest in cyber
to deliver fair outcomes to agenda to minimise the risk of security, evolving our controls
our members, and ensure we meet service disruption and maximise across both new and existing
all regulatory obligations. return on investment for our technologies to protect our systems
members. and customer data from more complex
attacks whilst collaborating
with industry bodies and law
enforcement agencies to respond
to emerging cyber threats.
------------------------------------ -------------------------------------- ------------------------------------
Key principal risks impacted Key principal risk impacted Key principal risk impacted
* Conduct and Compliance Risk * Business Risk * Operational Risk
* Business Risk * Operational Risk
* Operational Risk * Conduct and Compliance Risk
------------------------------------ -------------------------------------- ------------------------------------
Key (level of risk to Nationwide)
ì Increasing level of risk è Stable level of risk î Decreasing level of risk
Principal risks and uncertainties
The principal risks described below represent the most
significant risks to successful delivery of our strategic
objectives. These risks remain largely unchanged from last year and
are managed through the Society's Enterprise Risk Management
Framework.
Why this risk is important for Nationwide How Nationwide manages this risk on
Credit risk behalf of members
The risk of Borrowers may be unable to repay loans Nationwide seeks to minimise unaffordable
loss as a for a number of reasons, such as changes lending and credit losses through:
result of a to the economic and market environment * Stringent affordability checks and controls, ensurin
member, or in their individual circumstances. g
customer or This may lead to: lending is responsible and will not cause financial
counterparty * Financial difficulty or other detriment to borrowers difficulty for members and customers.
failing to who are unable to afford repayments on existing
meet their products and services, either with Nationwide or
financial other providers. * Prudent lending policies, operated across specific
obligations. market segments, which ensure lending remains within
the Board's risk appetite.
* Credit losses which adversely impact the Society's
profitability, ability to generate sufficient capita
l * Continuous monitoring of credit portfolios to
or sustainability. identify potential risks, through stress testing,
modelling and ongoing reporting to senior management
and the Board.
------------- ----------------------------------------------------------- -----------------------------------------------------------
Find out more on pages 20 to 49.
Principal risks and uncertainties (continued)
Liquidity and Why this risk is important for Nationwide How Nationwide manages this risk on
funding behalf of members
risk
Liquidity risk In the event of a downturn in the Nationwide ensures it is able to meet
is the macroeconomic environment, sudden its liabilities as they fall due and
risk that withdrawals of member deposits or maintain appropriate funding through:
Nationwide other potential shocks, Nationwide * Operating a comprehensive suite of policies, limits,
is unable to could have insufficient financial stress testing, monitoring and robust governance
meet its resources to meet its commitments. controls to ensure a stable and diverse funding base
liabilities as This may lead to: and sufficient holdings of high quality liquid
they fall * Members being unable to access their money or other assets.
due and products and services.
maintain
member * Continuously monitoring liabilities against internal
and other * Disruption to other organisations or the market. and regulatory requirements, and management of
stakeholder liquidity resources to meet these as they fall due.
confidence.
Funding risk * Damage to the Society's reputation, decreased membe
is the risk r * Maintaining a contingency funding plan which details
that and stakeholder confidence and increased funding the actions available to the Society in a stress
Nationwide is costs. situation.
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.
--------------- ---------------------------------------------------------- -----------------------------------------------------------
Find out more on pages 50 to 59.
Solvency Why this risk is important for Nationwide How Nationwide manages this risk on
risk behalf of members
The risk A sudden stress or series of unexpected Nationwide ensures it maintains sufficient
that losses may result in Nationwide's capital resources through:
Nationwide capital reserves being depleted. This * Defining a minimum level of capital, including
fails to may lead to: leverage, which the Society is willing to accept
maintain * Threats to the ongoing viability of the Society through Board risk appetite, which is maintained and
sufficient should capital resources be exhausted. monitored by the Board and other risk committees.
capital to
absorb
losses * An inability to offer new products to members as * Structuring capital to meet key regulatory minimums,
throughout capital is not available to support these offerings. stakeholder expectations and the requirements of the
a full strategy.
economic
cycle * Reputational damage to the Society as members,
and to regulators, investors and counterparties lose trust
maintain in Nationwide's ability to operate.
the
confidence
of current
and
prospective
members,
investors,
the
Board and
regulators.
------------ ----------------------------------------------------------- -----------------------------------------------------------
Find out more on pages 60 to 62.
Why this risk is important for Nationwide How Nationwide manages this risk on
Market risk behalf of members
The risk Nationwide's income or the value of Nationwide seeks to minimise its exposure
that the its assets may be altered by changes to fluctuations in market prices and
net in interest rates, currency rates rates through:
value of, and equity prices. This may lead to: * Fully hedging market risks where possible and
or net * Lower than expected income, adversely affecting appropriate and taking market risks only when these
income the are essential to core business activities, or are
arising Society's profitability and ability to generate designed to provide stability of earnings.
from, the capital.
Society's
assets and * Continuous monitoring through a variety of techniques
liabilities * Assets and investments which are worth less than including sensitivity analysis, earnings sensitivity,
is impacted expected, impacting the Society's ability to mee Value at Risk and stress analysis.
as a result t its
of market financial commitments and its ongoing viability.
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 How Nationwide manages this risk on
Pension risk behalf of members
The risk Nationwide has funding obligations The assets of Nationwide's defined
that the to defined benefit pension schemes. benefit schemes are held in legally
value The value of the schemes' assets could separate trusts, each administered
of the become insufficient to meet estimated by a board of trustees, in accordance
pension liabilities as a result of volatility with UK legislation. Nationwide minimises
schemes' in the value of schemes' assets and the impact of pension risk on both
assets will liabilities, driven by market interest the Society and pension scheme members
be rates, inflation and longevity. This through:
insufficient may lead to: * Maintaining effective engagement with trustees to
to meet the * Insecurity of employee pension arrangements. ensure that the investment strategy balances risk
estimated ,
liabilities, return, and employee considerations appropriately
creating * A requirement to increase cash funding into these .
a pension schemes.
deficit.
* An adverse impact on Nationwide's capital position.
------------- ---------------------------------------------------------- --------------------------------------------------------
Principal risks and uncertainties (continued)
Why this risk is important for Nationwide How Nationwide manages this risk on
Business risk behalf of members
The risk that Nationwide may fail to respond appropriately Whilst changes in Nationwide's operating
volumes to changes in the external environment environment pose risks, they also
decline or including new technology, consumer present opportunities to provide new,
margins shrink behaviour, regulation or market conditions. innovative products and services to
relative to This may lead to: members. Nationwide ensures it is
the cost * Products and services which fail to meet members' able to adapt to new conditions and
base, needs, adversely affecting both the Society's continues to meet members' needs whilst
affecting the relationship with members and the ability to generate remaining safe and secure for the
sustainability income. future through:
of the * Considering the potential for disruption to the
business and market and operating environment from a range of
the * A weakening of our relationships with members as they factors, including technology and consumer trends,
ability to increasingly conduct their business through third through regular Board and senior management
deliver the parties. reporting.
strategy due
to
macro-economic * Degradation of profitability through increased costs * Continuing to develop new products and services based
, or decreased income. on member engagement, emerging trends, and
geopolitical, technological innovation.
industry,
regulatory or
other external * Identifying and monitoring potential risks to its
events. business model through dedicated horizon scanning
processes.
--------------- ------------------------------------------------------------ ------------------------------------------------------------
Why this risk is important for Nationwide How Nationwide manages this risk on
Model risk behalf of members
The risk Model outputs could be inaccurate Models play an ever more important
of as a result of inappropriate design part in supporting the strategy as
weaknesses or operation, leading to: decision making becomes more sophisticated.
or * Members being inappropriately offered or refused This risk is mitigated through:
failures access to products and services. * A well governed model development process, operated
in models by expert modelling teams and independently validated
used to by specialists in the second line.
support * Financial loss or insufficient financial resources.
key
decisions * Regular monitoring of model performance and
including * Regulatory censure. maintenance, supported by independent review.
in
relation
to the
amount
of capital
and
liquidity
resources
required,
lending
and
pricing,
resourcing
and
earnings.
----------- ---------------------------------------------------------- ------------------------------------------------------------
Operational Why this risk is important for Nationwide How Nationwide manages this risk on
risk behalf of members
The risk of Process, people or system failures Nationwide seeks to minimise detriment
loss or external events could lead to: and loss to members, customers and
resulting * Disruption either to the services provided to members the Society through:
from or to internal processes, resulting in unfair * Regularly identifying and assessing the key
inadequate customer outcomes. operational risks to its strategy, ensuring
or failed appropriate controls are in place to mitigate these
internal risks.
processes, * The loss of customer data, assets, or other form of
people and detriment due to external parties (e.g. cyber-attack,
systems, or fraud) or poor internal controls. * Considering and planning for extreme but plausible
from events which could affect the Society.
external
events. * Financial loss, through a loss of income, increase in
costs, or direct loss. * Continuing to invest in enhanced controls in key
areas including cyber, resilience and data.
------------ ------------------------------------------------------------ ----------------------------------------------------------
Conduct and compliance Why this risk is important for Nationwide How Nationwide manages this risk on
risk behalf of members
The risk that Nationwide In an evolving regulatory and consumer Nationwide seeks to minimise its conduct
exercises inappropriate environment, Nationwide could provide and compliance exposure through:
judgement or makes errors products and services which are misaligned * Rigorous testing of products and services both before
in the execution of its to the needs of customers or market and after providing them to members to ensure they
business activities, conditions due to the pace of change are designed and performing appropriately.
leading to: in customer behaviour, regulation,
* non-compliance with regulation or legislation or the external environment. This
may lead to: * Continually assessing new and existing risks in the
* Unfair customer outcomes, with customers be conduct and compliance environment (e.g. technology,
* market integrity being undermined, or ing sold cyber-crime, changes in consumer or market behaviour
products which are not wanted or needed. and regulatory changes) and ensuring that risk
exposures are appropriately managed.
* an unfair outcome being created for customers
. * Non-compliance with the letter or spirit of
legislation or regulation.
* Disruption to the market.
* Regulatory censure.
----------------------------------------------------- -------------------------------------------------- ------------------------------------------------------------
Credit risk - Overview
Credit risk is the risk of loss as a result of a member,
customer or counterparty failing to meet their financial
obligations. Credit risk encompasses:
-- borrower/counterparty risk - the risk of loss arising from a
borrower or counterparty failing to pay, or becoming increasingly
likely not to pay the interest or principal on a loan, financial
product, or service on time;
-- security/collateral risk - the risk of loss arising from
deteriorating security/collateral quality;
-- concentration risk - the risk of loss arising from insufficient diversification;
-- refinance risk - the risk of loss arising when a repayment of
a loan or other financial product occurs later than originally
anticipated.
Nationwide manages credit risk for the following portfolios:
Portfolio Definition
Residential mortgages Loans secured on residential property
--------------------- --------------------------------------------------------
Consumer banking Unsecured lending comprising current account overdrafts,
personal loans and credit cards
--------------------- --------------------------------------------------------
Commercial and Loans to registered social landlords, loans made under
other lending the Private Finance Initiative, commercial real estate
lending
and other balances due from counterparties not covered
by other categories
--------------------- --------------------------------------------------------
Treasury Treasury liquidity, derivatives and discretionary
investment portfolios
--------------------- --------------------------------------------------------
Management of credit risk
At Nationwide, we lend in a responsible, affordable and
sustainable way to ensure we safeguard members and the financial
strength of the Society throughout the credit cycle. To this end,
the Board Risk Committee sets the level of risk appetite it is
willing to take in pursuit of the Society's strategy, which is
articulated as Board risk appetite statements and underlying
principles:
We safeguard our members by lending responsibly
-- We will only lend to members, customers or counterparties who
demonstrate that they can afford to borrow.
-- We will support members and customers buying houses of wide-ranging types and qualities.
-- We will work with members, customers and counterparties to
recover their financial position should there be a delay, or risk
of delay, in meeting their financial obligations.
We safeguard the Society's financial performance, strength and
reputation
-- We will manage asset quality so that losses through an
economic cycle will not undermine profitability, financial strength
and our standing with internal/external stakeholders.
-- We will ensure that no material segment of our lending
exposes the Society to excessive loss.
-- We will proactively manage credit risk and comply with regulation.
We operate with a commitment to responsible lending and a focus
on championing good conduct and fair outcomes. In this respect, we
formulate appropriate credit criteria and policies which are aimed
at mitigating risk against individual transactions and ensuring
that the Society's credit risk exposure remains within risk
appetite. The Board Risk Committee and, under a governed delegated
mandate structure, the Credit Committee, the Executive Sanctioning
Committee and Material Risk Takers make credit decisions, based on
a thorough credit risk assessment, to ensure that customers are
able to meet their obligations.
At a portfolio level, we measure and manage our risk profile and
the performance of our credit portfolios on an ongoing basis,
through a formal governance structure. Compliance with Board risk
appetite is measured against absolute limits and risk metrics and
is reported to the Society's Credit Committee monthly, with adverse
trends being investigated and corrective action taken to mitigate
the risk and bring performance back on track.
Nationwide is committed to helping customers who may anticipate
or find themselves experiencing a period of financial difficulty,
offering a range of forbearance options tailored to their
individual circumstances. This is the case for residential
mortgages, consumer banking and commercial lending. Accounts in
financial difficulty/arrears are managed by specialist teams within
Nationwide to ensure an optimal outcome for our members, customers
and the Society.
Forbearance
Forbearance occurs when concessions are made to the contractual
terms of a loan when the customer is facing or about to face
difficulties in meeting their financial commitments. A concession
is where the customer receives assistance, which could be a
modification to the previous terms and conditions of a facility or
a total or partial refinancing of debt, either mid-term or at
maturity. Requests for concessions are principally attributable
to:
-- temporary cash flow problems;
-- breaches of financial covenants; or
-- an inability to repay at contractual maturity.
Credit risk - Overview (continued)
IFRS 9 Transition
With effect from 5 April 2018 Nationwide adopted IFRS 9
'Financial Instruments', which replaces IAS 39 'Financial
Instruments: Recognition and Measurement'. Under IFRS 9, impairment
provisions on financial assets are calculated on an expected credit
loss (ECL) basis for assets held at amortised cost and at fair
value through other comprehensive income (FVOCI). ECL impairment
provisions are based on an assessment of the probability of default
(PD), exposure at default and loss given default, discounted to
give a net present value. The Credit risk section of this report
summarises for the individual portfolios:
-- the maximum exposure to credit risk;
-- the stage distribution of loans and provisions (explained below);
-- credit quality;
-- other risk factors and concentrations, including loan to
value ratios, regional exposures, arrears and forbearance.
Further information on the impact of implementing IFRS 9 is
provided in note 18 to the financial statements and in our 'Report
on Transition to IFRS 9: Financial Instruments', which can be found
at nationwide.co.uk
In accordance with IFRS 9, in the consolidated financial
statements there has been no restatement of comparative information
for the year ended 4 April 2018, which is reported on an IAS 39
basis. However, to support the understanding of the current year
IFRS 9 disclosures, certain comparative balances within the Credit
risk section of this Business and risk report are shown as at 5
April 2018 (the effective date of the adoption of IFRS 9). These 5
April 2018 comparatives include financial asset balance sheet
carrying values that have changed as a result of adopting IFRS 9,
and the stage distribution of gross lending and ECL provisions.
The table below shows the classification of assets on the
Group's balance sheet following the adoption of IFRS 9:
Classification and measurement
----------------------------------------------------------------------
4 April 5 April 4 April
2019 2018 2018
(IFRS (IFRS (IAS 39
9 basis) 9 basis) basis)
---------- --------
(Audited) GBPm GBPm GBPm
------------------------------------ ---------- ---------- --------
Cash - Amortised cost 12,493 14,361 14,361
------------------------------------ ---------- ---------- --------
Loans and advances to customers
- Amortised cost (notes i and
ii) 198,922 191,174 191,593
------------------------------------ ---------- ---------- --------
Loans and advances to customers
- FVTPL 129 247 -
------------------------------------ ---------- ---------- --------
Investment securities - FVOCI 14,500 11,881 11,926
------------------------------------ ---------- ---------- --------
Investment securities - Amortised
cost (note i) 1,656 1,120 1,120
------------------------------------ ---------- ---------- --------
Investment securities - FVTPL 78 45 -
------------------------------------ ---------- ---------- --------
Fair value adjustment for portfolio
hedged risk 411 (144) (109)
------------------------------------ ---------- ---------- --------
Notes:
i. Balances are stated net of impairment provisions.
ii. Loans and advances to customers exclude balances held with
counterparties which are institutions similar to banks. These
balances are now reported in loans and advances to banks and
similar institutions, and comparatives for the prior period have
been restated to disclose information on the same basis. Further
details are included in note 2 to the financial statements.
The stage distribution of gross lending and provisions for loans
and advances to customers is presented for assets held at amortised
cost. Certain tables below exclude loans and advances to customers
classified as fair value through profit or loss (FVTPL), since
these are not subject to the impairment requirements of IFRS 9.
Stage distribution
Impairment provisions are calculated using a three stage
approach depending on changes in credit risk since original
recognition of the assets:
-- an asset which is not credit impaired on initial recognition
and has not subsequently experienced a significant increase in
credit risk is categorised as being within stage 1, with a
provision equal to a 12 month ECL (losses arising on default events
expected to occur within 12 months);
-- where a loan's credit risk increases significantly, it is
moved to stage 2. The provision recognised is equal to the lifetime
ECL (losses on default events expected to occur at any point during
the life of the asset);
-- if a loan meets the definition of credit impaired, it is
moved to stage 3 with a provision equal to its lifetime ECL.
Credit risk - Overview (continued)
For loans and advances held at amortised cost, the stage
distribution and the provision coverage ratios are shown in this
report for each individual portfolio. The provision coverage ratio
is calculated by dividing the provisions by the gross balances for
each main lending portfolio. Loans remain on the balance sheet, net
of associated provisions, until they are deemed no longer
recoverable, when such loans are written off. The definition,
assumptions and timing for write-off of loans have not changed with
the adoption of IFRS 9.
Maximum exposure to credit risk
Nationwide's maximum exposure to credit risk has risen to GBP249
billion (5 April 2018: GBP240 billion), principally reflecting the
growth in residential mortgages.
Credit risk largely arises from exposure to loans and advances
to customers, which account for 85% (5 April 2018: 85%) of
Nationwide's total credit risk exposure. Within this, the exposure
relates primarily to residential mortgages, which account for 93%
(5 April 2018: 93%) of total loans and advances to customers and
which comprise high quality assets with low occurrences of arrears
and possessions.
In addition to loans and advances to customers, Nationwide is
exposed to credit risk on all other financial assets. For all
financial assets recognised on the balance sheet, the maximum
exposure to credit risk represents the balance sheet carrying value
after allowance for impairment plus off-balance sheet commitments.
For off-balance sheet commitments, the maximum exposure is the
maximum amount that Nationwide would have to pay if the commitments
were to be called upon. For loan commitments and other credit
related commitments that are irrevocable over the life of the
respective facilities, the maximum exposure is the full amount of
the committed facilities.
Maximum exposure to risk
4 April 2019 Gross Less: Carrying Commitments Maximum % of total
balances impairment value (note credit credit
provisions i) risk exposure risk exposure
--------- ----------- -------- ----------- -------------- --------------
(Audited) GBPm GBPm GBPm GBPm GBPm %
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Amortised cost loans and advances
to customers:
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Residential mortgages 185,940 (206) 185,734 12,051 197,785 79
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Consumer banking 4,586 (418) 4,168 33 4,201 2
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Commercial and other lending
(note ii) 8,178 (41) 8,137 872 9,009 4
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Fair value adjustment for micro
hedged risk (note iii) 883 - 883 - 883 -
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
199,587 (665) 198,922 12,956 211,878 85
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
FVTPL loans and advances to
customers:
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Residential mortgages (note
iv) 72 - 72 - 72 -
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Commercial and other lending 57 - 57 - 57 -
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
129 - 129 - 129 -
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Other items:
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Cash 12,493 - 12,493 - 12,493 5
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Loans and advances to banks
and similar institutions (note
ii) 4,009 - 4,009 - 4,009 2
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Investment securities - FVOCI 14,500 - 14,500 - 14,500 6
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Investment securities - Amortised
cost 1,656 - 1,656 - 1,656 1
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Investment securities - FVTPL 78 - 78 - 78 -
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Derivative financial instruments 3,562 - 3,562 - 3,562 1
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Fair value adjustment for portfolio
hedged risk (note iii) 411 - 411 - 411 -
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
36,709 - 36,709 - 36,709 15
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Total 236,425 (665) 235,760 12,956 248,716 100
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Credit risk - Overview (continued)
Maximum exposure to credit risk
5 April 2018 Gross Less: Carrying Commitments Maximum % of total
balances impairment value (note credit credit
provisions i) risk exposure risk exposure
--------- ----------- -------- ----------- -------------- --------------
(Audited) GBPm GBPm GBPm GBPm GBPm %
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Amortised cost loans and advances
to customers:
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Residential mortgages 177,114 (235) 176,879 12,205 189,084 79
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Consumer banking 4,107 (365) 3,742 42 3,784 2
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Commercial and other lending
(note ii) 9,540 (29) 9,511 943 10,454 4
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Fair value adjustment for micro
hedged risk (note iii) 1,042 - 1,042 - 1,042 -
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
191,803 (629) 191,174 13,190 204,364 85
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
FVTPL loans and advances to
customers:
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Residential mortgages (note
iv) 189 - 189 - 189 -
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Commercial and other lending 58 - 58 - 58 -
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
247 - 247 - 247 -
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Other items:
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Cash 14,361 - 14,361 - 14,361 6
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Loans and advances to banks
and similar institutions (note
ii) 3,493 - 3,493 - 3,493 1
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Investment securities - FVOCI 11,881 - 11,881 - 11,881 5
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Investment securities - Amortised
cost 1,120 - 1,120 700 1,820 1
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Investment securities - FVTPL 45 - 45 - 45 -
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Derivative financial instruments 4,121 - 4,121 - 4,121 2
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Fair value adjustment for portfolio
hedged risk (note iii) (144) - (144) - (144) -
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
34,877 - 34,877 700 35,577 15
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Total 226,927 (629) 226,298 13,890 240,188 100
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Credit risk - Overview (continued)
Maximum exposure to credit risk
4 April 2018 Gross Less: Carrying Commitments Maximum % of total
balances impairment value (note credit credit
provisions i) risk exposure risk exposure
--------- ----------- -------- ----------- -------------- --------------
(Audited) GBPm GBPm GBPm GBPm GBPm %
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Cash 14,361 - 14,361 - 14,361 6
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Loans and advances to banks
and similar institutions (note
ii) 3,493 - 3,493 101 3,594 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 iii) (109) - (109) - (109) -
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
34,912 - 34,912 801 35,713 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) 10,645 (15) 10,630 842 11,472 5
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
192,051 (458) 191,593 13,088 204,681 85
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Total 226,963 (458) 226,505 13,889 240,394 100
------------------------------------ --------- ----------- -------- ----------- -------------- --------------
Notes:
i. In addition to the amounts shown above, Nationwide has, as
part of its retail operations, revocable commitments of GBP9,475
million (4 and 5 April 2018: GBP9,517 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. Commercial and other lending excludes balances held with
counterparties which are institutions similar to banks. These
balances are now reported in loans and advances to banks and
similar institutions, and comparatives for the prior period have
been restated to disclose information on the same basis. Further
details are included in note 2 to the financial statements.
iii. The fair value adjustment for portfolio hedged risk and the
fair value adjustment for micro hedged risk (which relates to the
commercial lending portfolio) represent hedge accounting
adjustments. They are indirectly exposed to credit risk through the
relationship with the underlying loans covered by Nationwide's
hedging programmes.
iv. FVTPL residential mortgages include equity release loans,
the balance of which has reduced following a disposal during the
year.
Commitments
Irrevocable undrawn commitments to lend are within the scope of
IFRS 9 provision requirements. The commitments in the table above
consist of overpayment reserves and separately identifiable
irrevocable commitments for the pipeline of residential mortgages,
personal loans, commercial loans and investment securities. These
commitments are not recognised on the balance sheet, and the total
associated provision of GBP0.4 million (5 April 2018: GBP0.6
million) is included within provisions for liabilities and
charges.
Revocable commitments relating to overdrafts and credit cards
are included in ECL-based provisions, with the allowance for future
drawdowns made as part of the exposure at default element of the
ECL calculation.
Credit risk - Residential mortgages
Summary
Nationwide's residential mortgages comprise both prime and
specialist loans. Prime residential mortgages are mainly
Nationwide-branded advances made through the branch network and
intermediary channels. Specialist lending consists principally of
buy to let (BTL) mortgages originated under The Mortgage Works (UK)
plc (TMW) brand, together with smaller legacy portfolios in
run-off. Over the year, as we continued to grow our lending in line
with established credit criteria, the credit performance of our
residential mortgages has remained stable and credit quality
continues to be strong.
Residential mortgage gross balances
----------------------------------------------------------------------------------
4 April 2019 5 April 2018 4 April 2018
-------------- --------------
(Audited) GBPm % GBPm % GBPm %
---------------------------------- --------- --- --------- --- --------- ---
Prime 151,445 82 143,869 81 144,049 81
---------------------------------- --------- --- --------- --- --------- ---
Specialist:
---------------------------------- --------- --- --------- --- --------- ---
Buy to let 32,012 17 30,439 17 30,438 17
---------------------------------- --------- --- --------- --- --------- ---
Other (note i) 2,483 1 2,806 2 2,812 2
---------------------------------- --------- --- --------- --- --------- ---
34,495 18 33,245 19 33,250 19
---------------------------------- --------- --- --------- --- --------- ---
Amortised cost loans and advances
to customers 185,940 100 177,114 100 177,299 100
---------------------------------- --------- --- --------- --- --------- ---
FVTPL loans and advances to
customers (note ii) 72 189
---------------------------------- --------- --- --------- --- --------- ---
Total residential mortgages 186,012 177,303 177,299
---------------------------------- --------- --- --------- --- --------- ---
Notes:
i. Other includes self-certified, near prime and sub prime
lending, all of which were discontinued in 2009.
ii. As a result of their contractual cash flow characteristics,
certain residential mortgages (including equity release loans) were
reclassified from amortised cost to FVTPL on transition to IFRS 9
on 5 April 2018 and remeasured at fair value as disclosed in the
above table.
Total balances across the residential mortgage portfolios have
grown by 5% during the year to GBP186 billion (4 April 2018: GBP177
billion) as we continue to help people buy a home of their own and
support the BTL sector. The reduction in FVTPL balances reflects a
disposal of equity release loans.
Credit risk - Residential mortgages (continued)
Impairment losses for the year
Impairment (reversals)/losses for the year
-----------------------------------------------
2019 2018
(IFRS (IAS 39
9 basis) basis)
------------
(Audited) GBPm GBPm
---------------- --------------- ------------
Prime (1) 3
---------------- --------------- ------------
Specialist (16) 8
---------------- --------------- ------------
Total (17) 11
---------------- --------------- ------------
Note:
Impairment losses/(reversals) represent the net amount
charged/(credited) through the profit and loss account, rather than
amounts written off during the year.
Due to the high quality of residential mortgage portfolios and
continued low levels of arrears, impairment losses remain low. The
provision reversals above are principally attributable to
improvements in the modelling of refinance risk on interest only
loans and updated economic assumptions used in calculating ECLs. As
impairment provisions are calculated on a different basis under
IFRS 9 from IAS 39, the losses shown above are not comparable
between 2018 and 2019.
The following table shows residential mortgage lending balances
carried at amortised cost, the stage allocation of the loans,
impairment provisions and the resulting provision coverage
ratios:
Residential mortgages staging analysis
4 April 2019 Stage Stage Stage Stage Stage POCI Total
1 2 2 2 3 (note
total <30 DPD >30 DPD ii)
(note (note
i) i)
------- ------ -------- -------- ----- ------ -------
(Audited) GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------- ------- ------ -------- -------- ----- ------ -------
Gross balances
--------------------- ------- ------ -------- -------- ----- ------ -------
Prime 148,639 2,048 1,781 267 758- 151,445
--------------------- ------- ------ -------- -------- ----- ----- -------
Specialist 27,384 6,431 6,218 213 513 167 34,495
--------------------- ------- ------ -------- -------- ----- ------ -------
Total 176,023 8,479 7,999 480 1,271 167 185,940
--------------------- ------- ------ -------- -------- ----- ------ -------
Provisions
--------------------- ------- ------ -------- -------- ----- ------ -------
Prime 22 12 93 10- 44
--------------------- ------- ------ -------- ------- ----- ----- -------
Specialist 15 115 101 14 32- 162
--------------------- ------- ------ -------- -------- ----- ----- -------
Total 37 127 110 17 42- 206
--------------------- ------- ------ -------- -------- ----- ----- -------
Provisions as a % of %% %% %% %
total balance
--------------------- ------- ----- -------- ------- ----- ----- -------
Prime 0.01 0.57 0.48 1.19 1.38- 0.03
--------------------- ------- ------ -------- -------- ----- ----- -------
Specialist 0.06 1.80 1.63 6.78 6.15- 0.47
--------------------- ------- ------ -------- -------- ----- ----- -------
Total 0.02 1.50 1.37 3.65 3.31- 0.11
--------------------- ------- ------ -------- -------- ----- ----- -------
Credit risk - Residential mortgages (continued)
Residential mortgages staging analysis
5 April 2018 Stage Stage Stage Stage Stage POCI Total
1 2 2 2 3 (note
total <30 DPD >30 DPD ii)
(note (note
i) i)
------- ------ -------- -------- ----- ------ -------
(Audited) GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------- ------- ------ -------- -------- ----- ------ -------
Gross balances
--------------------- ------- ------ -------- -------- ----- ------ -------
Prime 134,864 8,289 8,035 254 716- 143,869
--------------------- ------- ------ -------- -------- ----- ----- -------
Specialist 21,783 10,783 10,574 209 499 180 33,245
--------------------- ------- ------ -------- -------- ----- ------ -------
Total 156,647 19,072 18,609 463 1,215 180 177,114
--------------------- ------- ------ -------- -------- ----- ------ -------
Provisions
--------------------- ------- ------ -------- -------- ----- ------ -------
Prime 6 29 254 12- 47
--------------------- ------- ------ -------- ------- ----- ----- -------
Specialist 11 142 131 11 35- 188
--------------------- ------- ------ -------- -------- ----- ----- -------
Total 17 171 156 15 47- 235
--------------------- ------- ------ -------- -------- ----- ----- -------
Provisions as a % of
total balance %% %% %% %
--------------------- ------- ----- -------- ------- ----- ----- -------
Prime 0.00 0.35 0.31 1.53 1.67- 0.03
--------------------- ------- ------ -------- -------- ----- ----- -------
Specialist 0.05 1.32 1.24 5.33 7.01- 0.57
--------------------- ------- ------ -------- -------- ----- ----- -------
Total 0.01 0.90 0.84 3.25 3.84- 0.13
--------------------- ------- ------ -------- -------- ----- ----- -------
Notes:
i. Days past due, a measure of arrears status.
ii. POCI loans are those which were credit-impaired on purchase
or acquisition. The POCI loans shown in the table above were
recognised on the balance sheet when the Derbyshire Building
Society was acquired in December 2008. These balances, which are
mainly interest-only, were 90 days or more in arrears when they
were acquired and so have been classified as credit-impaired on
acquisition. The gross balance for POCI is net of the lifetime ECL
of GBP6 million (GBP7 million at 5 April 2018).
At 4 April 2019, 95% (5 April 2018: 88%) of the residential
mortgage portfolio is in stage 1, reflecting the portfolio's strong
credit quality. In addition to new mortgages originated during the
year, the stage 1 balances have increased as a result of transfers
from stage 2. Explanations of the transfer of assets between stages
are provided on page 28.
Stage 3 loans in the residential mortgage portfolio equate to 1%
(5 April 2018: 1%) of the total residential mortgage exposure. Of
the total GBP1,271 million (5 April 2018: GBP1,215 million) stage 3
loans, GBP705 million (5 April 2018: GBP686 million) is in respect
of balances which are more than 90 days past due, with the
remainder being impaired due to other indicators of unlikeness to
pay such as distressed restructures or the bankruptcy of the
borrower.
Credit risk - Residential mortgages (continued)
The table below summarises the movements in the Group's
residential mortgages held at amortised cost, including the impact
of ECL impairment provisions. The movements within the table are an
aggregation of monthly movements over the year.
Reconciliation of movements in gross residential mortgage balances and impairment provisions
Non-credit impaired Credit impaired
(note i)
-------------------------------------------- --------------------- ---------------------
Subject to 12 Subject to lifetime Subject to lifetime Total
month ECL ECL ECL
--------------------- --------------------- --------------------- ---------------------
Stage 1 Stage 2 Stage 3 and POCI
--------------------- --------------------- --------------------- ---------------------
Gross Provisions Gross Provisions Gross Provisions Gross Provisions
balances balances balances balances
--------- ---------- --------- ---------- --------- ---------- --------- ----------
(Audited) GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
At 5 April 2018 156,647 17 19,072 171 1,395 47 177,114 235
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Stage transfers:
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Transfers from Stage 1 to
Stage 2 (27,661) (8) 27,661 8 - - - -
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Transfers to Stage 3 (294) - (837) (30) 1,131 30 - -
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Transfers from Stage 2 to
Stage 1 35,956 141 (35,956) (141) - - - -
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Transfers from Stage 3 185 1 547 13 (732) (14) - -
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Net remeasurement of ECL
arising from
transfer of stage (131) 120 (8) (19)
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Net movement arising from
transfer
of stage 8,186 3 (8,585) (30) 399 8 - (19)
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
New assets originated or
purchased 35,279 6 - - - - 35,279 6
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Repayments and changes in
risk parameters (7,459) 13 (293) - (43) 4 (7,795) 17
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Other items impacting
income statement
charge/(reversal)
(including recoveries) 1 - - - 1 (4) 2 (4)
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Redemptions (16,631) (2) (1,715) (14) (273) (1) (18,619) (17)
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Income statement charge
for the year (17)
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Decrease due to write-offs - - - - (41) (16) (41) (16)
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Other provision movements - - - - - 4 - 4
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
4 April 2019 176,023 37 8,479 127 1,438 42 185,940 206
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Net carrying amount 175,986 8,352 1,396 185,734
-------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Note:
i. Gross balances of credit impaired loans include GBP167
million (5 April 2018: GBP180 million) of purchased or originated
credit impaired (POCI) loans, which are presented net of lifetime
ECL impairment provisions of GBP6 million (5 April 2018: GBP7
million).
Gross balances increased by GBP8,826 million over the year as a
result of positive net lending. The stage 2 balance reduced by
GBP10,593 million, primarily due to net transfers from stage 2 to
stage 1 for both prime and specialist residential mortgages. As the
stage of individual loans is assessed monthly, the gross movements
between stages 1 and 2 include transfers caused by relatively small
changes in PD breaching the threshold for transferring assets to
stage 2 and vice versa.
During the year there has been a net decrease of GBP8,585
million of residential mortgage balances in stage 2, the majority
of which moved to stage 1. The reasons for this movement are:
-- Prime mortgages - ECL models are subject to ongoing review to
ensure they continue to reflect actual experience as it evolves.
Consequential model updates during the year reduced PDs, resulting
in a shift in loans from stage 2 to stage 1. This movement was
partly offset by a decision to change one of our staging criteria
from a multiple of 8 times origination PD to a multiple of 4, thus
making the models more sensitive to relative PD changes over time.
There was no significant impact on provisions given the strong
quality of the loans affected.
-- Specialist mortgages - Staging movements during the year were
affected by the same updates and criterion change described above
for prime mortgages. In addition, we have changed assumptions for
income growth on BTL loans to be correlated to wage growth, rather
than CPI, to align more closely with other aspects of our risk
assessment on these loans. This change reduced the number of stage
2 loans with a consequent reduction in provisions of GBP11
million.
Total impairment provisions decreased by GBP29 million. The main
drivers of this reduction are the movement of assets from stage 2
to stage 1, combined with the run-off of legacy portfolios which
represent the majority of write-offs.
Further information on movements in total gross loans and
advances to customers and impairment provisions, including the
methodology applied in preparing the table, is included in note 11
to the financial statements.
Credit risk - Residential mortgages (continued)
Reason for residential mortgages being included in stage 2
4 April 2019 Prime Specialist Total
---------- ------------ ----------
GBPm % GBPm % GBPm %
------------------------------------ ----- --- ------- --- ----- ---
Quantitative criteria:
------------------------------------ --- ------- --- ----- ---
Payment status (greater than
30 DPD) (note i) 267 13 213 3 480 6
------------------------------------ ----- --- ------- --- ----- ---
Increase in PD since origination
(less than 30 DPD) 1,613 79 2,186 34 3,799 45
------------------------------------ ----- --- ------- --- ----- ---
Qualitative criteria:
------------------------------------ ----- --- ------- --- ----- ---
Forbearance (less than 30
DPD) 148 7 7 - 155 2
------------------------------------ ----- --- ------- --- ----- ---
Interest only - significant
risk of inability to refinance
at maturity (less than 30
DPD) - - 4,018 63 4,018 47
------------------------------------ ----- --- ------- --- ----- ---
Other qualitative criteria 20 1 7 - 27 -
------------------------------------ ----- --- ------- --- ----- ---
Total Stage 2 gross balances 2,048 100 6,431 100 8,479 100
------------------------------------ ----- --- ------- --- ----- ---
Note:
i. This category includes all loans greater than 30 DPD,
including those where the original reason for being classified as
stage 2 was not arrears over 30 DPD.
Loans reported within stage 2 are those which have experienced a
significant increase in credit risk since origination. The
significant increase is determined through both quantitative and
qualitative indicators. Of the GBP8,479 million stage 2 balances,
only 6% are in arrears by 30 days or more.
The primary quantitative indicators are the outputs of internal
credit risk assessments. For retail exposures, PDs are derived
using modelled scorecards, which use external information such as
that from credit reference agencies, as well as internal
information such as known instances of arrears or other financial
difficulty. While different approaches are used within each
portfolio, current and historical data relating to the exposure are
combined with forward-looking macroeconomic information to
determine the likelihood of default.
The credit risk of each loan is evaluated at each reporting date
by calculating the residual lifetime PD of each loan. For retail
loans, the main indicators of a significant increase in credit risk
are either of the following:
-- the residual lifetime probability of default (PD) exceeds a
benchmark determined by reference to the maximum credit risk that
would have been accepted at origination
-- the residual lifetime PD has increased by both at least 75bps
and a 4x multiple of the original lifetime PD (5 April 2018: 8x
multiple).
Qualitative indicators are also used to complement the above.
These indicators include the increased risk associated with
interest only loans which may not be able to refinance at maturity.
Also included are forbearance events where full repayment of
principal and interest is still anticipated, on a discounted basis.
In addition, loans will be moved to stage 2 when certain "backstop"
events occur, including arrears of greater than 30 days past
due.
Credit risk - Residential mortgages (continued)
Credit quality
The residential mortgages portfolio comprises many relatively
small loans which are broadly homogenous, have low volatility of
credit risk outcomes and are geographically diversified. The table
below shows the loan balances and provisions for residential
mortgages held at amortised cost, by PD range. The PD distributions
shown are based on a 12 month PD under IFRS 9 at the reporting
date.
Loan balance and provisions by PD (note i)
4 April 2019 Gross balances Provisions Provision
coverage
(Audited)
------------------------------------ ------------------------------ ---------
Stage Stage Stage Total Stage Stage Stage Total
1 2 3 1 2 3
and POCI and POCI
-------- ----- ----- --------- ----- ---------
PD Range GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm %
----------------- -------- ------ --------- ------- ----- ----- --------- ----- ---------
0.00 to < 0.15% 165,949 4,278 88 170,315 30 43 - 73 0.04
----------------- -------- ------ --------- ------- ----- ----- --------- ----- ---------
0.15 to < 0.25% 4,631 731 23 5,385 3 9 - 12 0.23
----------------- -------- ------ --------- ------- ----- ----- --------- ----- ---------
0.25 to < 0.50% 2,471 490 34 2,995 2 8 - 10 0.33
----------------- -------- ------ --------- ------- ----- ----- --------- ----- ---------
0.50 to < 0.75% 1,689 270 16 1,975 1 5 - 6 0.29
----------------- -------- ------ --------- ------- ----- ----- --------- ----- ---------
0.75 to < 2.50% 1,157 879 57 2,093 1 18 - 19 0.93
----------------- -------- ------ --------- ------- ----- ----- --------- ----- ---------
2.50 to < 10.00% 126 1,057 129 1,312 - 18 1 19 1.45
----------------- -------- ------ --------- ------- ----- ----- --------- ----- ---------
10.00 to < 100% - 774 189 963 - 26 3 29 3.00
----------------- -------- ------ --------- ------- ----- ----- --------- ----- ---------
100% (default) - - 902 902 - - 38 38 4.18
----------------- -------- ------ --------- ------- ----- ----- --------- ----- ---------
Total 176,023 8,479 1,438 185,940 37 127 42 206 0.11
----------------- -------- ------ --------- ------- ----- ----- --------- ----- ---------
Loan balance and provisions by PD (note i)
5 April 2018 Gross balances Provisions Provision
coverage
(Audited)
----------------------------------- ------------------------------ ---------
Stage Stage Stage Total Stage Stage Stage Total
1 2 3 1 2 3
and POCI and POCI
------- ----- ----- --------- ----- ---------
PD Range GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm %
----------------- ------- ------ --------- ------- ----- ----- --------- ----- ---------
0.00 to < 0.15% 147,728 10,781 81 158,590 13 63 - 76 0.05
----------------- ------- ------ --------- ------- ----- ----- --------- ----- ---------
0.15 to < 0.25% 4,969 1,733 22 6,724 2 14 - 16 0.24
----------------- ------- ------ --------- ------- ----- ----- --------- ----- ---------
0.25 to < 0.50% 2,317 1,461 38 3,816 1 11 - 12 0.31
----------------- ------- ------ --------- ------- ----- ----- --------- ----- ---------
0.50 to < 0.75% 1,014 1,205 16 2,235 - 9 - 9 0.43
----------------- ------- ------ --------- ------- ----- ----- --------- ----- ---------
0.75 to < 2.50% 619 1,719 57 2,395 1 21 - 22 0.90
----------------- ------- ------ --------- ------- ----- ----- --------- ----- ---------
2.50 to < 10.00% - 1,332 125 1,457 - 26 1 27 1.82
----------------- ------- ------ --------- ------- ----- ----- --------- ----- ---------
10.00 to < 100% - 841 166 1,007 - 27 2 29 2.87
----------------- ------- ------ --------- ------- ----- ----- --------- ----- ---------
100% (default) - - 890 890 - - 44 44 4.93
----------------- ------- ------ --------- ------- ----- ----- --------- ----- ---------
Total 156,647 19,072 1,395 177,114 17 171 47 235 0.13
----------------- ------- ------ --------- ------- ----- ----- --------- ----- ---------
Note:
i. Includes POCI loans of GBP167 million (5 April 2018: GBP180 million).
Over the year, the PD distribution has remained broadly stable,
reflecting the high quality of the residential mortgage portfolios
and benign economic conditions. At year end, 98% of the portfolio
had a PD of less than 2.5% (5 April 2018: 98%). The provisions
allocated to the lowest PD range primarily reflect the fact that
the majority of loans are in this range. Changes in provision
coverage for loans in different PD ranges are principally due to
the continued run-off of balances in specialist legacy lending
portfolios, together with the impact of updating economic
assumptions.
Credit risk - Residential mortgages (continued)
Distribution of new business by borrower type (by value)
Distribution of new business by borrower type
(by value)
--------------------------------------------------
(note i) 2019 2018
-----
% %
------------------------------------ ----- -----
Prime:
------------------------------------ ----- -----
First time buyers 35 38
------------------------------------ ----- -----
Home movers 25 29
------------------------------------ ----- -----
Remortgagers 25 21
------------------------------------ ----- -----
Other 1 1
------------------------------------ ----- -----
Total prime 86 89
------------------------------------ ----- -----
Specialist:
------------------------------------ ----- -----
Buy to let new purchases 3 2
------------------------------------ ----- -----
Buy to let remortgagers 11 9
------------------------------------ ----- -----
Total specialist 14 11
------------------------------------ ----- -----
Total new business 100 100
------------------------------------ ----- -----
Note:
i. All new business measures exclude further advances and product switches.
New business by borrower type remains diversified. During the
year there has been a shift in the distribution of new business
from prime to specialist lending, reflecting an increase in buy to
let low LTV remortgage business and, following a successful pilot,
the embedding of our lending to limited companies, recognising that
landlords are increasingly using these as a vehicle for their
investment.
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 7.7% in the year (2018: 8.3%). This
is closely monitored and controlled to remain within risk appetite
and FPC limits.
Credit risk - Residential mortgages (continued)
LTV and credit risk concentration
Loan to value (LTV) is calculated by weighting the borrower
level LTV by the individual loan balance to arrive at an average
LTV. This approach is considered to reflect most appropriately the
exposure at risk.
LTV distribution of new business
------------------------------------
2019 2018
-------
% %
------------------ ------- -------
0% to 60% 25 26
------------------ ------- -------
60% to 75% 33 30
------------------ ------- -------
75% to 80% 7 9
------------------ ------- -------
80% to 85% 10 14
------------------ ------- -------
85% to 90% 22 18
------------------ ------- -------
90% to 95% 3 3
------------------ ------- -------
Over 95% - -
------------------ ------- -------
Total 100 100
------------------ ------- -------
Average LTV of new business
------------------------------------
(note i) 2019 2018
----
% %
------------------------ ---- ----
Prime 73 72
------------------------ ---- ----
Specialist (buy to let) 60 61
------------------------ ---- ----
Group 71 71
------------------------ ---- ----
Average LTV of loan stock
------------------------------
(note ii) 4 April 4 April
2019 2018
-------
% %
------------ ------- -------
Prime 57 55
------------ ------- -------
Specialist 58 58
------------ ------- -------
Group 58 56
------------ ------- -------
Notes:
i. The LTV of new business excludes further advances and product switches.
ii. The average LTV of loan stock includes both amortised cost
and FVTPL balances. There have been no new FVTPL advances during
the year.
The maximum LTV for new prime residential borrowers remains at
95%. Nationwide continues to support first time buyers. All of this
lending meets Nationwide underwriting criteria and our risk
appetite for lending. The proportion of new business with an LTV
above 80% remained stable at 35% (4 April 2018: 35%). The average
LTV of loan stock has increased to 58% (4 April 2018: 56%), with
the increase reflecting our new lending; in the prior year this was
offset to a greater degree by house price growth impacting the
whole portfolio. Whilst there are no signs of deterioration in the
residential mortgage portfolio, with the immediate outlook for the
UK and the HPI being less certain, the expectation is for a gradual
rise in LTV from current low levels.
Credit risk - Residential mortgages (continued)
Residential mortgage balances by LTV and region
Geographical concentration by stage
The following table shows residential mortgages, excluding FVTPL
balances, by LTV and region across stages 1 and 2 (non-credit
impaired) and stage 3 (credit impaired):
Residential mortgage gross balances by LTV and region
4 April 2019 Greater Central Northern South South Scotland Wales Northern Total
London England England East England West England Ireland
------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
(Audited) GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm %
----------------- ------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
Stage 1 and 2
loans
----------------- ------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
Fully
collateralised
----------------- ------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
LTV ratio:
----------------- ------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
Up to 50% 24,171 10,927 7,408 8,286 5,833 3,104 1,439 970 62,138
----------------- ------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
50% to 60% 11,296 6,122 4,382 4,221 3,143 1,714 814 382 32,074
----------------- ------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
60% to 70% 10,060 6,743 6,434 3,928 3,385 2,458 1,285 413 34,706
----------------- ------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
70% to 80% 8,078 5,498 5,682 3,480 2,757 2,516 1,172 428 29,611
----------------- ------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
80% to 90% 5,876 3,331 3,679 2,595 2,019 1,488 744 282 20,014
----------------- ------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
90% to 100% 2,645 705 543 916 517 208 167 84 5,785
----------------- ------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
62,126 33,326 28,128 23,426 17,654 11,488 5,621 2,559 184,328 99.1
----------------- ------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
Not fully
collateralised
----------------- ------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
Over 100% LTV 5 3 17 1 2 6 2 138 174 0.1
----------------- ------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
Collateral
value 4 3 14 1 1 6 1 118 148
----------------- ------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
Negative
equity 1 - 3 - 1 - 1 20 26
----------------- ------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
Total stage 1 and
2
loans 62,131 33,329 28,145 23,427 17,656 11,494 5,623 2,697 184,502 99.2
----------------- ------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
Stage 3 and POCI loans
------ ------ ------ ------ ------ ------ ----- ----- ------- ---
Fully collateralised
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ---
LTV ratio:
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ---
Up to 50% 233 83 61 61 39 23 11 11 522
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ---
50% to 60% 115 50 39 35 25 15 9 5 293
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ---
60% to 70% 54 58 56 31 25 20 9 5 258
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ---
70% to 80% 15 48 57 17 21 17 11 4 190
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ---
80% to 90% 9 14 50 4 3 13 10 4 107
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ---
90% to 100% 3 1 22 1 1 3 3 5 39
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ---
429 254 285 149 114 91 53 34 1,409 0.8
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ---
Not fully collateralised
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ---
Over 100% LTV - 1 6 - - 1 1 20 29 -
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ---
Collateral value - 1 5 - - 1 1 17 25
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ---
Negative equity - - 1 - - - - 3 4
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ---
Total stage 3 and POCI
loans 429 255 291 149 114 92 54 54 1,438 0.8
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ---
Total residential mortgages 62,560 33,584 28,436 23,576 17,770 11,586 5,677 2,751 185,940 100
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ---
Total geographical concentrations 34% 18% 15% 13% 10% 6% 3% 1% 100%
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ---
Credit risk - Residential mortgages (continued)
Residential mortgage gross balances by LTV and region
5 April 2018 Greater Central Northern South South Scotland Wales Northern Total
(note i) London England England East England West England Ireland
------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
(Audited) GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm %
----------------- ------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
Stage 1 and 2
loans
----------------- ------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
Fully
collateralised
----------------- ------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
LTV ratio:
----------------- ------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
Up to 50% 27,017 10,490 6,962 8,789 5,846 2,911 1,396 943 64,354
----------------- ------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
50% to 60% 11,577 5,968 4,133 4,527 3,250 1,624 803 393 32,275
----------------- ------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
60% to 70% 9,030 6,848 6,182 3,698 3,326 2,388 1,279 397 33,148
----------------- ------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
70% to 80% 6,453 4,974 5,604 2,820 2,423 2,511 1,105 409 26,299
----------------- ------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
80% to 90% 4,989 2,824 3,411 1,977 1,594 1,461 679 276 17,211
----------------- ------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
90% to 100% 508 318 458 308 172 286 67 87 2,204
----------------- ------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
59,574 31,422 26,750 22,119 16,611 11,181 5,329 2,505 175,491 99.1
----------------- ------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
Not fully
collateralised
----------------- ------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
Over 100% LTV 4 4 24 2 2 12 1 179 228 0.1
----------------- ------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
Collateral
value 3 3 20 2 2 11 1 153 195
----------------- ------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
Negative
equity 1 1 4 - - 1 - 26 33
----------------- ------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
Total stage 1 and
2
loans 59,578 31,426 26,774 22,121 16,613 11,193 5,330 2,684 175,719 99.2
----------------- ------- -------- -------- ------------- ------------- -------- ----- -------- ------- ----
Stage 3 and POCI loans
------ ------ ------ ------ ------ ------ ----- ----- ------- ---
Fully collateralised
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ---
LTV ratio:
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ---
Up to 50% 257 76 59 65 38 17 11 12 535
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ---
50% to 60% 98 47 36 36 25 15 9 6 272
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ---
60% to 70% 39 55 55 33 23 20 11 5 241
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ---
70% to 80% 7 41 53 11 18 19 10 4 163
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ---
80% to 90% 4 20 53 2 2 10 10 6 107
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ---
90% to 100% 1 2 28 - 1 5 4 4 45
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ---
406 241 284 147 107 86 55 37 1,363 0.8
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ---
Not fully collateralised
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ---
Over 100% LTV - 1 5 - - 1 1 24 32 -
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ---
Collateral value - 1 5 - - 1 1 19 27
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ---
Negative equity - - - - - - - 5 5
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ---
Total stage 3 and POCI
loans 406 242 289 147 107 87 56 61 1,395 0.8
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ---
Total residential mortgages 59,984 31,668 27,063 22,268 16,720 11,280 5,386 2,745 177,114 100
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ---
Total geographical concentrations 34% 18% 15% 13% 9% 6% 3% 2% 100%
--------------------------------- ------ ------ ------ ------ ------ ------ ----- ----- ------- ---
Note:
i. The distribution of the portfolio by geography and LTV ratios
at 4 April 2018 is the same as that disclosed for 5 April 2018.
Over the year, the geographical distribution of residential
mortgages across the UK has remained stable, with the highest
concentration continuing to be in Greater London, at 34% of the
total.
Credit risk - Residential mortgages (continued)
In addition to balances held at amortised cost shown in the
table above, there are GBP72 million (5 April 2018: GBP189 million)
of residential mortgages held at FVTPL which have an average LTV of
40% (5 April 2018: 40%). The largest geographical concentration
within the FVTPL balances is in Greater London, at 44% (5 April
2018: 33%).
Arrears and possessions
Residential mortgage lending continues to have a low risk
profile as demonstrated by the low level of arrears compared to the
industry average:
Number of cases more than 3 months in arrears
as % of total book
4 April 4 April
2019 2018
-------- --------
% %
------------------------------ -------- --------
Prime 0.35 0.34
------------------------------ -------- --------
Specialist 0.82 0.83
------------------------------ -------- --------
Total 0.43 0.43
------------------------------ -------- --------
UK Finance (UKF) industry
average 0.78 0.81
------------------------------ -------- --------
Note: The methodology for calculating mortgage arrears is based
on the UKF definition of arrears, where months in arrears is
determined by dividing the arrears balance outstanding by the
latest contractual payment.
Number of properties in possession as % of total book
4 April 2019 4 April 2018
-------------------- --------------------
Number % Number %
of properties of properties
--------------------- -------------- ---- -------------- ----
Prime 78 0.01 108 0.01
--------------------- -------------- ---- -------------- ----
Specialist 153 0.05 150 0.05
===================== ============== ==== ============== ====
Total 231 0.01 258 0.02
--------------------- -------------- ---- -------------- ----
UKF industry average 0.02 0.03
--------------------- -------------- ---- -------------- ----
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, a gradual rise in arrears from current low levels
is expected over the medium term.
Credit risk - Residential mortgages (continued)
Residential mortgages by payment status
The following table shows the payment status of all residential
mortgages.
Residential mortgages gross balances by payment status
4 April 2019 4 April 2018
---------------------------------- ----------------------------------
Prime Specialist Total Prime Specialist Total
------- ------- ---------- ------- ----
(Audited) GBPm GBPm GBPm % GBPm GBPm GBPm %
---------------------------- ------- ---------- ------- ---- ------- ---------- ------- ----
Not past due 149,771 33,468 183,239 98.5 142,383 32,197 174,580 98.5
---------------------------- ------- ---------- ------- ---- ------- ---------- ------- ----
Past due up to 3 months 1,356 657 2,013 1.1 1,294 685 1,979 1.1
---------------------------- ------- ---------- ------- ---- ------- ---------- ------- ----
Past due 3 to 6 months 177 159 336 0.2 162 159 321 0.2
---------------------------- ------- ---------- ------- ---- ------- ---------- ------- ----
Past due 6 to 12 months 122 121 243 0.1 113 110 223 0.1
---------------------------- ------- ---------- ------- ---- ------- ---------- ------- ----
Past due over 12 months 84 69 153 0.1 89 76 165 0.1
---------------------------- ------- ---------- ------- ---- ------- ---------- ------- ----
Possessions 7 21 28 - 8 23 31 -
---------------------------- ------- ---------- ------- ---- ------- ---------- ------- ----
Total residential mortgages 151,517 34,495 186,012 100 144,049 33,250 177,299 100
---------------------------- ------- ---------- ------- ---- ------- ---------- ------- ----
The proportion of loans in arrears has remained stable at 1.5%
(4 April 2018: 1.5%) 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. In
total, GBP370 million (4 April 2018: GBP368 million) of specialist
lending balances were more than 3 months past due or in possession.
Of these, GBP233 million or 63.0% (4 April 2018: GBP252 million;
68.5%) related to legacy portfolios in run-off.
As at 4 April 2019, the mortgage portfolios included 1,491
mortgage accounts (4 April 2018: 1,634), including those in
possession, where payments were more than 12 months in arrears. The
total principal outstanding in these cases was GBP165 million (4
April 2018: GBP182 million), and the total value of arrears was
GBP20 million (4 April 2018: GBP22 million) or 0.01% (4 April 2018:
0.01%) of total mortgage balances.
Interest only mortgages
Interest only balances for prime residential mortgages relate
primarily to historical balances which were originally advanced as
interest only mortgages or where a subsequent change in terms to an
interest only basis was agreed. Maturities on interest only
mortgages are managed closely, engaging regularly with borrowers to
ensure the loan is redeemed or to agree a strategy for repayment.
The majority of the specialist lending portfolio comprises buy to
let loans, with 89% of the portfolio relating to interest only
balances (4 April 2018: 89%).
Interest only mortgages (gross balance) - term to maturity
(note i) Term expired Due within Due after Due after Due after Total % of
(still one year one year two years more than book
open) and before and before five years
two years five years
------------ ---------- ----------- ----------- ----------- ------ -----
4 April 2019 GBPm GBPm GBPm GBPm GBPm GBPm %
------------- ------------ ---------- ----------- ----------- ----------- ------ -----
Prime 69 278 329 1,532 9,288 11,496 7.6
------------- ------------ ---------- ----------- ----------- ----------- ------ -----
Specialist 133 166 272 1,281 28,785 30,637 88.8
------------- ------------ ---------- ----------- ----------- ----------- ------ -----
Total 202 444 601 2,813 38,073 42,133 22.7
------------- ------------ ---------- ----------- ----------- ----------- ------ -----
4 April 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
------------- ------------ ---------- ----------- ----------- ----------- ------ -----
Note:
i. Balances subject to forbearance with agreed term extensions
are presented based on the latest agreed contractual term.
Interest only loans that are term expired (still open) are not
considered to be past due where contractual interest payments
continue to be met, pending renegotiation of the facility. However,
under IFRS 9 these are now treated as credit impaired and form part
of the stage 3 balance from three months after the maturity date.
Previously, term expired (still open) loans were not categorised as
impaired unless in litigation or more than 3 months in arrears on
the contractual interest payments.
Credit risk - Consumer banking
Summary
The consumer banking portfolio comprises balances on unsecured
retail banking products: overdrawn current accounts, personal loans
and credit cards. Over the year, total balances across these
portfolios have grown by GBP479 million to GBP4,586 million (4
April 2018: GBP4,107 million), equating to 12% growth, and credit
quality has remained stable.
Consumer banking gross balances
--------------------------------------------------------------
4 April 2019 4 and 5 April
2018
---------------
(Audited) GBPm % GBPm %
--------------------------- -------- ---- --------- ----
Overdrawn current accounts 324 7 277 7
--------------------------- -------- ---- --------- ----
Personal loans 2,449 53 2,031 49
--------------------------- -------- ---- --------- ----
Credit cards 1,813 40 1,799 44
--------------------------- -------- ---- --------- ----
Total consumer banking 4,586 100 4,107 100
--------------------------- -------- ---- --------- ----
Following the transition to IFRS 9, all consumer banking loans
continue to be classified and measured at amortised cost.
Impairment losses for the year
2019 2018
(IFRS (IAS 39
9 basis) basis)
--------
(Audited) GBPm GBPm
--------------------------- ---------- --------
Overdrawn current accounts 9 15
--------------------------- ---------- --------
Personal loans 38 36
--------------------------- ---------- --------
Credit cards 67 46
--------------------------- ---------- --------
Total 114 97
--------------------------- ---------- --------
Note:
Impairment losses represent the net amount charged through the
profit and loss account, rather than amounts written off during the
year.
Impairment losses for the year reflect updates to the economic
assumptions applied to provision calculations, which have led to a
GBP23 million increase in provisions. The losses also include GBP13
million in recognition of the risk related to borrowers in
persistent debt(17) in the credit card portfolio. As impairment
provisions are calculated on a different basis under IFRS 9 from
IAS 39, the losses shown above are not comparable between 2018 and
2019.
(17) Borrowers are classified as being in persistent debt when
they have paid more interest, fees and charges than capital over an
18-month period.
Credit risk - Consumer banking (continued)
The following table shows consumer banking balances by stage,
with the corresponding impairment provisions and resulting
provision coverage ratios:
Consumer banking product and staging analysis
-----
4 April 2019 5 April 2018
--------------------------
Stage Stage Stage Total Stage Stage Stage Total
1 2 3 1 2 3
----- ----- ----- -----
(Audited) GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------ ----- ----- ----- ----- ----- ----- ----- -----
Gross balances
------------------------------ ----- ----- ----- ----- ----- ----- ----- -----
Overdrawn current accounts 187 100 37 324 149 94 34 277
------------------------------ ----- ----- ----- ----- ----- ----- ----- -----
Personal loans 2,140 186 123 2,449 1,803 116 112 2,031
------------------------------ ----- ----- ----- ----- ----- ----- ----- -----
Credit cards 1,211 475 127 1,813 1,312 365 122 1,799
------------------------------ ----- ----- ----- ----- ----- ----- ----- -----
Total 3,538 761 287 4,586 3,264 575 268 4,107
------------------------------ ----- ----- ----- ----- ----- ----- ----- -----
Provisions
------------------------------ ----- ----- ----- ----- ----- ----- ----- -----
Overdrawn current accounts 2 18 33 53 2 23 30 55
------------------------------ ----- ----- ----- ----- ----- ----- ----- -----
Personal loans 11 22 107 140 10 18 96 124
------------------------------ ----- ----- ----- ----- ----- ----- ----- -----
Credit cards 14 92 119 225 13 62 111 186
------------------------------ ----- ----- ----- ----- ----- ----- ----- -----
Total 27 132 259 418 25 103 237 365
------------------------------ ----- ----- ----- ----- ----- ----- ----- -----
Provisions as a % of total %% %% %% % %
balance
------------------------------ ----- ---- ----- ---- ----- ---- ----- -----
Overdrawn current accounts 1.30 17.42 89.92 16.37 1.34 24.19 90.52 19.97
------------------------------ ----- ----- ----- ----- ----- ----- ----- -----
Personal loans 0.53 12.11 86.58 5.74 0.57 15.16 86.31 6.11
------------------------------ ----- ----- ----- ----- ----- ----- ----- -----
Credit cards 1.12 19.33 93.61 12.38 1.03 17.09 90.64 10.36
------------------------------ ----- ----- ----- ----- ----- ----- ----- -----
Total 0.77 17.32 90.12 9.11 0.78 17.86 88.45 8.90
------------------------------ ----- ----- ----- ----- ----- ----- ----- -----
As at 4 April 2019, 77% (5 April 2018: 79%) of the consumer
banking portfolio is in stage 1. Over the year, consumer banking
balances in stages 2 and 3 have increased, principally as a result
of updating personal loan and credit card risk models for latest
performance expectations and the recognition of the risks
associated with persistent debt in the credit card portfolio, which
resulted in balances moving from stage 1 to stage 2. In addition,
changes in assumptions regarding the economic outlook have led to
increased provisions, and therefore provision coverage, in the
credit card portfolio.
Consumer banking stage 3 gross balances and provisions include
charged off balances. These are accounts which are closed to future
transactions and are held on the balance sheet for an extended
period (up to 36 months) whilst recovery activities take place.
Excluding these charged off balances and related provisions, the
provision coverage ratio for the total portfolio is 5.0% (5 April
2018: 4.8%).
Credit risk - Consumer banking (continued)
Reason for consumer banking balances being included in stage 2
4 April 2019 Overdrawn current Personal loans Credit cards Total
accounts
------------------- ---------------- -------------- ---------
GBPm % GBPm % GBPm % GBPm %
------------------------------------ ---------- ------- -------- ------ ------- ----- ---- ---
Quantitative criteria:
------------------------------------ ---------- ------- -------- ------ ------- ----- ---- ---
Payment status (greater than
30 DPD) (note i) 3 3 9 5 6 1 18 2
------------------------------------ ---------- ------- -------- ------ ------- ----- ---- ---
Increase in PD since origination
(less than 30 DPD) 84 84 172 92 414 87 670 88
------------------------------------ ---------- ------- -------- ------ ------- ----- ---- ---
Qualitative criteria:
------------------------------------ ---------- ------- -------- ------ ------- ----- ---- ---
Forbearance (less than 30 DPD)
(note ii) 2 2 - - - - 2 -
------------------------------------ ---------- ------- -------- ------ ------- ----- ---- ---
Other qualitative criteria
(less than 30 DPD) 11 11 5 3 55 12 71 10
------------------------------------ ---------- ------- -------- ------ ------- ----- ---- ---
Total Stage 2 gross balances 100 100 186 100 475 100 761 100
------------------------------------ ---------- ------- -------- ------ ------- ----- ---- ---
Notes:
i. This category includes all loans greater than 30 DPD,
including those whose original reason for being classified as stage
2 was not arrears over 30 DPD.
ii. Stage 2 forbearance relates to cases where full repayment of
principal and interest is still anticipated, on a discounted
basis.
Of the GBP761 million stage 2 balances, only 2% are in arrears
by 30 days or more. Balances reported within stage 2 are those
which have experienced a significant increase in credit risk since
origination. The significant increase is determined through both
quantitative and qualitative indicators. The majority of credit
card balances included in stage 2 due to qualitative factors relate
to exposures where there is increased risk as a result of
persistent debt, reflecting emerging regulatory requirements.
The primary quantitative indicators are the outputs of internal
credit risk assessments. For retail exposures, PDs are derived
using modelled scorecards, which use external information such as
that from credit reference agencies as well as internal information
such as known instances of arrears or other financial difficulty.
While different approaches are used within each portfolio, current
and historic data relating to the exposure are combined with
forward-looking macroeconomic information to determine the
likelihood of default.
The credit risk of each loan is evaluated at each reporting date
by calculating its residual lifetime PD. For retail loans, the main
indicators of a significant increase in credit risk are either of
the following:
-- the residual lifetime probability of default (PD) exceeds a
benchmark determined by reference to the maximum credit risk that
would have been accepted at origination
-- the residual lifetime PD has increased by both at least 75bps
and a 4x multiple of the original lifetime PD.
Qualitative criteria include both forbearance events and, within
the credit card portfolio, recognition of the risk related to
borrowers in persistent debt. In addition, loans are moved to stage
2 when certain "backstop" events occur, including arrears of
greater than 30 days past due.
Credit risk - Consumer banking (continued)
Credit quality
Nationwide adopts robust credit management policies and
processes designed to recognise and manage the risks arising from
the portfolio.
The following table shows gross balances and provisions for
consumer banking balances held at amortised cost, by PD range. The
PD distributions shown are based on a 12 month probability of
default under IFRS 9 at the reporting date:
Consumer banking gross balances and provisions by PD
4 April 2019 Gross balances Provisions Provision
coverage
(Audited)
--------------------------- -------------------------- ---------
Stage Stage Stage Total Stage Stage Stage Total
1 2 3 1 2 3
------ ----- ----- ----- ----- ---------
PD range GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm %
----------------- ------ ----- ----- ----- ----- ----- ----- ----- ---------
0.00 to <0.15% 1,016 5 - 1,021 3 - - 3 0.29
----------------- ------ ----- ----- ----- ----- ----- ----- ----- ---------
0.15 to < 0.25% 364 9 - 373 1 1 - 2 0.48
----------------- ------ ----- ----- ----- ----- ----- ----- ----- ---------
0.25 to < 0.50% 542 24 - 566 2 2 - 4 0.74
----------------- ------ ----- ----- ----- ----- ----- ----- ----- ---------
0.50 to < 0.75% 332 26 - 358 2 2 - 4 1.19
----------------- ------ ----- ----- ----- ----- ----- ----- ----- ---------
0.75 to < 2.50% 911 190 - 1,101 9 21 - 30 2.71
----------------- ------ ----- ----- ----- ----- ----- ----- ----- ---------
2.50 to < 10.00% 366 349 1 716 9 53 - 62 8.74
----------------- ------ ----- ----- ----- ----- ----- ----- ----- ---------
10.00 to < 100% 7 158 4 169 1 53 2 56 33.19
----------------- ------ ----- ----- ----- ----- ----- ----- ----- ---------
100% (default) - - 282 282 - - 257 257 90.98
----------------- ------ ----- ----- ----- ----- ----- ----- ----- ---------
Total 3,538 761 287 4,586 27 132 259 418 9.11
----------------- ------ ----- ----- ----- ----- ----- ----- ----- ---------
Consumer banking gross balances and provisions by PD
5 April 2018 Gross balances Provisions Provision
coverage
(Audited)
-------------------------- -------------------------- ---------
Stage Stage Stage Total Stage Stage Stage Total
1 2 3 1 2 3
----- ----- ----- ----- ----- ---------
PD range GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm %
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ---------
0.00 to <0.15% 998 3 - 1,001 1 - - 1 0.15
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ---------
0.15 to < 0.25% 314 5 - 319 1 - - 1 0.32
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ---------
0.25 to < 0.50% 465 17 - 482 2 1 - 3 0.58
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ---------
0.50 to < 0.75% 292 17 - 309 2 1 - 3 0.90
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ---------
0.75 to < 2.50% 838 116 - 954 9 9 - 18 1.93
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ---------
2.50 to < 10.00% 347 282 1 630 9 41 - 50 7.86
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ---------
10.00 to < 100% 10 135 5 150 1 51 3 55 36.92
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ---------
100% (default) - - 262 262 - - 234 234 89.26
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ---------
Total 3,264 575 268 4,107 25 103 237 365 8.90
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ---------
The credit quality of the consumer banking portfolio has
remained broadly stable, benefiting from the continued low interest
rate environment, with 90% of the portfolio (5 April 2018: 90%)
considered good quality with a PD of less than 10%. Changes in
provision coverage for loans in different PD ranges are principally
due to changes in the mix of products.
Credit risk - Consumer banking (continued)
Consumer banking balances by payment due status
Credit risk in the consumer banking portfolios is primarily
monitored and reported based on arrears status which is set out
below:
Consumer banking gross balances by payment due status
(Audited) 4 April 2019 4 April 2018
---------------------------------------- ----------------------------------------
Overdrawn Personal Credit Total Overdrawn Personal Credit Total
current loans cards current loans cards
accounts accounts
--------- -------- ------ ----- ----
GBPm GBPm GBPm GBPm % GBPm GBPm GBPm GBPm %
------------------------ --------- -------- ------ ----- ---- --------- -------- ------ ----- ----
Not past due 279 2,282 1,667 4,228 92.2 235 1,882 1,656 3,773 91.9
======================== ========= ======== ====== ===== ==== ========= ======== ====== ===== ====
Past due up to 3 months 12 48 30 90 1.9 12 43 33 88 2.1
======================== ========= ======== ====== ===== ==== ========= ======== ====== ===== ====
Past due 3 to 6 months 3 8 11 22 0.5 4 13 11 28 0.7
======================== ========= ======== ====== ===== ==== ========= ======== ====== ===== ====
Past due 6 to 12 months 3 15 2 20 0.4 3 12 2 17 0.4
======================== ========= ======== ====== ===== ==== ========= ======== ====== ===== ====
Past due over 12 months 3 14 - 17 0.4 3 13 - 16 0.4
======================== ========= ======== ====== ===== ==== ========= ======== ====== ===== ====
Charged off (note i) 24 82 103 209 4.6 20 68 97 185 4.5
------------------------ --------- -------- ------ ----- ---- --------- -------- ------ ----- ----
Total 324 2,449 1,813 4,586 100 277 2,031 1,799 4,107 100
------------------------ --------- -------- ------ ----- ---- --------- -------- ------ ----- ----
Note:
i. Charged off balances relate to accounts which are closed to
future transactions and are held on the balance sheet for an
extended period (up to 36 months, depending on the product) whilst
recovery procedures take place.
Total balances subject to arrears, excluding charged off
balances, have remained stable at GBP149 million (4 April 2018:
GBP149 million). Excluding charged off balances, balances on
accounts in arrears has reduced to 3.2% (4 April 2018: 3.6%) of the
total portfolio as a result of overall portfolio growth.
Credit risk - Commercial and other lending
Summary
The commercial portfolio comprises loans which have been
provided to meet the funding requirements of registered social
landlords, commercial real estate investors and project finance
initiatives. Whilst the project finance and commercial real estate
portfolios are closed to new business, the registered social
landlord portfolio was re-opened in September 2018.
Commercial and other lending gross balances
-----------------------------------------------------------
4 April 5 April 4 April
2019 2018 2018
------- -------
GBPm GBPm GBPm
-------------------------------- ------- ------- -------
Registered social landlords
(note i) 5,980 6,816 6,820
-------------------------------- ------- ------- -------
Commercial real estate (CRE) 1,383 1,810 1,868
-------------------------------- ------- ------- -------
Project finance (note ii) 807 906 906
-------------------------------- ------- ------- -------
Other lending (note iii) 8 8 8
-------------------------------- ------- ------- -------
Commercial and other lending
balances at amortised cost 8,178 9,540 9,602
-------------------------------- ------- ------- -------
Fair value adjustment for micro
hedged risk (note iv) 883 1,042 1,043
-------------------------------- ------- ------- -------
Commercial lending balances
- FVTPL (note v) 57 58 -
-------------------------------- ------- ------- -------
Total 9,118 10,640 10,645
-------------------------------- ------- ------- -------
Notes:
i. Loans to registered social landlords are secured on residential property.
ii. Loans advanced in relation to project finance are secured on
cash flows from government or local authority backed contracts
under the Private Finance Initiative.
iii. Other lending previously included balances held with
counterparties which are institutions similar to banks. These are
now reported in loans and advances to banks and similar
institutions, and comparatives for the prior period have been
restated to disclose information on the same basis. Further details
are included in note 2 to the financial statements.
iv. Micro hedged risk relates to loans hedged on an individual basis.
v. As a result of their contractual cash flow characteristics,
certain commercial loans were reclassified from amortised cost to
FVTPL on transition to IFRS 9 on 5 April 2018 and remeasured at
fair value.
Over the year, total balances across the commercial portfolios
have reduced, reflecting run-off of the closed CRE and project
finance books, with borrowers repaying loans at or before loan
maturity. In the registered social landlord portfolio, reductions
are due to early repayments and a managed reduction in the
concentration risk to loans above GBP200 million. As the portfolio
balances have reduced the quality and performance of the portfolios
has remained stable.
Impairment losses /(reversals) for the year for commercial
and other lending
---------------------------------------------------------------
2019 2018
(IFRS 9 basis) (IAS 39 basis)
------------------------
GBPm GBPm
---------- ------------------------- ------------------------
Total 16 (1)
---------- ------------------------- ------------------------
Note:
Impairment losses represent the net amount charged through the
profit and loss account, rather than amounts written off during the
year.
The GBP16 million impairment loss for the year relates to two
loans which are not representative of risks in the wider portfolio.
As impairment provisions are calculated on a different basis under
IFRS 9 from IAS 39, the losses shown above are not comparable
between 2018 and 2019
Credit risk - Commercial and other lending (continued)
The following table shows commercial and other lending balances
carried at amortised cost on the balance sheet, with the stage
allocation of the exposures, impairment provisions and resulting
provision coverage ratios:
Commercial and other lending product and staging analysis
-----
4 April 2019 5 April 2018
--------------------------
Stage Stage Stage Total Stage Stage Stage Total
1 2 3 1 2 3
----- ----- ----- -----
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------- ----- ----- ----- ----- ----- ----- ----- -----
Gross balances
------------------------------- ----- ----- ----- ----- ----- ----- ----- -----
Registered social landlords 5,923 57 - 5,980 6,725 91 - 6,816
------------------------------- ----- ----- ----- ----- ----- ----- ----- -----
CRE 1,122 213 48 1,383 1,587 186 37 1,810
------------------------------- ----- ----- ----- ----- ----- ----- ----- -----
Project finance 754 29 24 807 818 88 - 906
------------------------------- ----- ----- ----- ----- ----- ----- ----- -----
Other lending 8- -8 8- - 8
------------------------------- ----- ---- ----- ---- ----- ---- ----- -----
Total 7,807 299 72 8,178 9,138 365 37 9,540
------------------------------- ----- ----- ----- ----- ----- ----- ----- -----
Provisions
------------------------------- ----- ----- ----- ----- ----- ----- ----- -----
Registered social landlords 1- -1 1- - 1
------------------------------- ----- ---- ----- ---- ----- ---- ----- -----
CRE 22 18 22 53 13 21
------------------------------- ----- ---- ----- ----- ----- ---- ----- -----
Project finance 1- 17 18 -7 - 7
------------------------------- ----- ---- ----- ----- ----- ---- ----- -----
Other lending -- -- -- - -
------------------------------- ----- ---- ----- ---- ----- ---- ----- -----
Total 42 35 41 6 10 13 29
------------------------------- ----- ---- ----- ----- ----- ----- ----- -----
Provisions as a % of total %% %% %% % %
balance
------------------------------- ----- ---- ----- ---- ----- ---- ----- -----
Registered social landlords 0.02 0.18 - 0.02 0.01 0.15 - 0.01
------------------------------- ----- ----- ----- ----- ----- ----- ----- -----
CRE 0.19 0.96 37.11 1.58 0.32 1.19 36.99 1.15
------------------------------- ----- ----- ----- ----- ----- ----- ----- -----
Project finance 0.15 0.97 71.54 2.20 0.02 8.37 - 0.83
------------------------------- ----- ----- ----- ----- ----- ----- ----- -----
Other lending -- -- 1.25- - 1.25
------------------------------- ----- ---- ----- ---- ----- ---- ----- -----
Total 0.05 0.81 48.74 0.50 0.07 2.74 35.55 0.30
------------------------------- ----- ----- ----- ----- ----- ----- ----- -----
Over the year, the performance of the commercial and other
lending portfolios has remained stable, with 95% (5 April 2018:
96%) of balances remaining in stage 1. Of the GBP299 million stage
2 loans (5 April 2018: GBP365 million), GBP1 million (5 April 2018:
GBP2 million) is in arrears by 30 days or more, with the remainder
in stage 2 due to non-arrears factors such as a deterioration in
risk rating or placement on a watchlist.
The increase in CRE stage 2 and 3 balances is in respect of a
small number of loans that are subject to increased loan maturity
risk, with stage 3 (credit-impaired) loans, at GBP48 million (5
April 2018: GBP37 million), equating to 3% (5 April 2018: 2%) of
the total CRE exposure.
Within the registered social landlord portfolio, there are no
stage 3 assets, and only 1% (5 April 2018: 1%) of the exposure is
in stage 2. Against a backdrop of a long history of zero defaults,
the risk profile of this portfolio remains low.
Loans in the project finance portfolio benefit from long-term
cash flows, which typically emanate from the provision of assets
such as schools, hospitals, police stations, government buildings
and roads, procured under the Private Finance Initiative. 97% of
balances are in respect of fully developed assets.
There is no significant exposure to credit risk on the other
lending balances.
Credit risk - Commercial and other lending (continued)
Credit quality
Nationwide adopts robust credit management policies and
processes designed to recognise and manage the risks arising from
the portfolio.
The following table shows the CRE portfolio by risk grade and
the provision coverage for each category. The table includes
balances held at amortised cost only.
CRE gross balances by risk grade and provision coverage
4 April 2019 5 April 2018
-------------------------------------
Stage Stage Stage Total Provision Stage Stage Stage Total Provision
1 2 3 coverage 1 2 3 coverage
----- ----- ----- ----- ---------
GBPm GBPm GBPm GBPm % GBPm GBPm GBPm GBPm %
------------- ----- ----- ----- ----- --------- ----- ----- ----- ----- ---------
Strong 676 57 - 733 0.3 912 20 - 932 0.5
------------- ----- ----- ----- ----- --------- ----- ----- ----- ----- ---------
Good 381 76 - 457 0.1 614 79 - 693 0.1
------------- ----- ----- ----- ----- --------- ----- ----- ----- ----- ---------
Satisfactory 65 8 - 73 0.4 61 32 - 93 1.2
------------- ----- ----- ----- ----- --------- ----- ----- ----- ----- ---------
Weak - 72 - 72 1.4 - 55 - 55 2.0
------------- ----- ----- ----- ----- --------- ----- ----- ----- ----- ---------
Impaired - - 48 48 37.1 - - 37 37 36.0
------------- ----- ----- ----- ----- --------- ----- ----- ----- ----- ---------
Total 1,122 213 48 1,383 1.6 1,587 186 37 1,810 1.1
------------- ----- ----- ----- ----- --------- ----- ----- ----- ----- ---------
The risk grades in the table above are based upon supervisory
slotting criteria, under which exposures are classified into
categories depending on the underlying credit risk, with the
assessment based upon financial strength, asset characteristics,
the strength of the sponsor and the security. As CRE balances
reduce, the credit quality of the portfolio remains strong, with
91% (5 April 2018: 95%) of the portfolio continuing to be rated as
satisfactory or better.
Risk grades for the project finance portfolio are also based
upon supervisory slotting criteria, with 97% of the exposure rated
strong or good.
The registered social landlord portfolio is risk rated using an
internal PD rating model with the major drivers being financial
strength, independent viability assessment ratings provided by the
Regulator of Social Housing, and the type and size of the
registered social landlord. The distribution of exposures is
weighted towards the stronger risk ratings and against a backdrop
of zero defaults, the credit quality remains high, with an average
12 month PD of 0.05% across the portfolio.
In addition to the above, GBP57 million (5 April 2018: GBP58
million) of commercial lending balances are classified as FVTPL, of
which GBP53 million (5 April 2018: GBP53 million) relates to CRE
loans with a risk grade of satisfactory.
Credit risk - Commercial and other lending (continued)
CRE balances by LTV and region
The following table includes both amortised cost and FVTPL CRE
balances.
CRE lending gross balances by LTV and region
(note i) 4 April 2019 5 April 2018
---------------------- ----------------------
London Rest of Total London Rest of Total
UK UK
------ ------ ------- -----
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------- ------ ------- ----- ------ ------- -----
Fully collateralised
-------------------------- ------ ------- ----- ------ ------- -----
LTV ratio (note ii):
-------------------------- ------ ------- ----- ------ ------- -----
Less than 25% 89 70 159 189 124 313
-------------------------- ------ ------- ----- ------ ------- -----
25% to 50% 559 298 857 569 374 943
-------------------------- ------ ------- ----- ------ ------- -----
51% to 75% 181 175 356 241 291 532
-------------------------- ------ ------- ----- ------ ------- -----
76% to 90% 1 20 21 4 51 55
-------------------------- ------ ------- ----- ------ ------- -----
91% to 100% 1 6 7 1 4 5
-------------------------- ------ ------- ----- ------ ------- -----
831 569 1,400 1,004 844 1,848
-------------------------- ------ ------- ----- ------ ------- -----
Not fully collateralised:
-------------------------- ------ ------- ----- ------ ------- -----
Over 100% LTV - 36 36 - 16 16
-------------------------- ------ ------- ----- ------ ------- -----
Collateral value - 19 19 - 7 7
-------------------------- ------ ------- ----- ------ ------- -----
Negative equity - 17 17 - 9 9
-------------------------- ------ ------- ----- ------ ------- -----
Total CRE loans 831 605 1,436 1,004 860 1,864
-------------------------- ------ ------- ----- ------ ------- -----
Geographical concentration 58% 42% 100% 54% 46% 100%
-------------------------- ------ ------- ----- ------ ------- -----
Notes:
i. A CRE loan may be secured on assets located in different
regions. The calculation for regional allocation has been changed
in the year to reflect a more refined approach, with comparatives
presented on a consistent basis.
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 (IPD) monthly index is used.
Changes to the regional distribution of the CRE portfolio
reflect the managed reduction of the portfolio, with 58% (5 April
2018: 54%) of the CRE exposure now being secured against assets
located in London. Over the year, the LTV distribution of the CRE
portfolio remained stable, with 96% (5 April 2018: 96%) of the
portfolio having an LTV of 75% or less, and 71% (5 April 2018: 67%)
of the portfolio having an LTV of 50% or less.
The distribution of the CRE balances by geography and LTV ratios
at 4 April 2018 is the same as that disclosed above as at 5 April
2018.
Credit risk concentration by industry sector
Credit risk exposure by industry sector is unchanged from the
prior year, continuing to be spread across the retail, office,
residential investment, industrial and leisure sectors. Where a CRE
loan is secured on assets crossing different sectors, the sector
allocation is based upon the value of the underlying assets in each
sector. For CRE exposures, including FVTPL balances, the highest
concentration is to the residential investment sector at 44% (5
April 2018: 44%). Over the year, our exposure to retail assets has
reduced from GBP367 million to GBP286 million.
CRE balances by payment due status
Of the GBP1,436 million (5 April 2018: GBP1,864 million) CRE
exposure, including FVTPL balances, GBP24 million (5 April 2018:
GBP52 million) relates to balances with arrears, of which GBP2
million (5 April 2018: GBP24 million) have arrears greater than 3
months.
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 2019 treasury assets represented 15.2%
(2018: 15.3%) of total assets.
Investment activity, in line with the Board's risk appetite,
remains restricted to high quality liquid securities. The size of
the portfolio has increased, predominantly due to higher US
Treasury balances held as a strategic response to potential market
volatility during ongoing negotiations for the UK's departure from
the EU. In addition, the Society invests in highly rated liquid
assets that are eligible for accessing central bank funding
operations. Derivatives are used to reduce exposure to market risks
but are not used for trading or speculative purposes. There are no
exposures to emerging markets, hedge funds or credit default
swaps.
The table below shows the classification of treasury asset
balances following the adoption of IFRS 9.
Treasury asset balances
IFRS 9 4 April 5 April 4 April
classification 2019 2018 2018
(IFRS (IAS
9) 39)
---------------- ------- ------- -------
(Audited) GBPm GBPm GBPm
----------------------------------- ---------------- ------- ------- -------
Amortised
Cash cost 12,493 14,361 14,361
----------------------------------- ---------------- ------- ------- -------
Loans and advances to banks
and similar institutions (note Amortised
i) cost 4,009 3,493 3,493
----------------------------------- ---------------- ------- ------- -------
Investment securities FVOCI 14,500 11,881 11,926
----------------------------------- ---------------- ------- ------- -------
Investment securities FVTPL 78 45 -
----------------------------------- ---------------- ------- ------- -------
Amortised
Investment securities cost 1,656 1,120 1,120
----------------------------------- ---------------- ------- ------- -------
Liquidity and investment portfolio 32,736 30,900 30,900
----------------------------------------------------- ------- ------- -------
Derivative instruments (note
ii) FVTPL 3,562 4,121 4,121
----------------------------------- ---------------- ------- ------- -------
Treasury assets 36,298 35,021 35,021
----------------------------------------------------- ------- ------- -------
Notes:
i. Loans and advances to banks has been renamed to loans and
advances to banks and similar institutions and now includes
balances held with counterparties that are institutions similar to
banks. These balances were previously reported in loans and
advances to customers. Comparatives have been restated to disclose
information on the same basis. Further details are included in note
2 to the financial statements.
ii. Derivatives are classified as assets where their fair value
is positive and liabilities where their fair value is negative. At
4 April 2019, derivative liabilities were GBP1,593 million (4 April
2018: GBP2,337 million).
Managing treasury credit risks
Credit risk within the treasury portfolio arises primarily from
the instruments held and transacted by the Treasury function for
operational, liquidity and investment purposes. In addition,
counterparty credit risk arises from the use of derivatives to
reduce exposure to market risks; these are only transacted with
highly rated organisations and are collateralised under market
standard documentation. The Treasury Credit Risk function manages
all aspects
of credit risk in accordance with the Society's risk governance
frameworks, under the supervision of the Credit Committee.
A monthly review is undertaken of the current and expected
future performance of treasury assets. An established governance
structure identifies and reviews under-performing assets to assess
the likelihood of future losses. There were no impairment losses
for the year ended 4 April 2019, or the prior year. For financial
assets classified as FVTPL, no provisions are calculated as credit
risk is reflected in the carrying value of the asset; no additional
provision information is therefore disclosed in respect of these
assets. For financial assets held at amortised cost or at FVOCI,
the stage distribution is described below.
Impairment provisions on treasury assets
4 April 2019 5 April 2018
--------------------- ---------------------
Gross Provisions Gross Provisions
balances balances
--------- --------- ----------
(Audited) GBPm GBPm GBPm GBPm
---------------------------------- --------- ---------- --------- ----------
Loans and advances to banks
and similar institutions (note
i) 4,009 - 3,493 -
---------------------------------- --------- ---------- --------- ----------
Investment securities - FVOCI 14,500 - 11,881 -
---------------------------------- --------- ---------- --------- ----------
Investment securities - Amortised
cost 1,656 - 1,120 -
---------------------------------- --------- ---------- --------- ----------
Note:
i. Loans and advances to banks has been renamed to loans and
advances to banks and similar institutions and now includes
balances held with counterparties that are institutions similar to
banks. These balances were previously reported in loans and
advances to customers. Comparatives have been restated to disclose
information on the same basis. Further details are included in note
2 to the financial statements.
Credit risk - Treasury assets (continued)
The credit quality of treasury financial assets continues to be
low risk and stable with all exposures within the table on the
previous page classified as stage 1, except for GBP1.5 million of
FVOCI investment securities in stage 2. If there is objective
evidence that an instrument measured at amortised cost or FVOCI is
credit-impaired, the financial asset will be transferred into stage
3. There are no assets in stage 3.
Liquidity and investment portfolio
The liquidity and investment portfolio of GBP32,736 million (4
April 2018: GBP30,900 million) comprises liquid assets and other
securities. An analysis of the on-balance sheet portfolios is set
out below.
Liquidity and investment portfolio by credit rating (note i)
4 April 2019 AAA AA A Other UK US Europe Other
------ --- --- ------------------------- --- ------ -----
(Audited) GBPm % % % % % % % %
-------------------------------- ------ --- --- ------------------------- --- ------ -----
Liquid assets:
-------------------------------- ------ --- --- ------------------------- --- ------ -----
Cash and reserves at central
banks 12,493 - 100 - - 100 - - -
-------------------------------- ------ --- --- ------------------------- --- ------ -----
Government bonds 11,581 29 71 - - 63 23 14 -
-------------------------------- ------ --- --- ------------------------- --- ------ -----
Supranational bonds 725 100 - - - - - - 100
-------------------------------- ------ --- --- ------------------------- --- ------ -----
Covered bonds 1,202 60 4 36 - 59 - 18 23
-------------------------------- ------ --- --- ------------------------- --- ------ -----
Residential mortgage backed
securities (RMBS) 556 100 - - - 54 - 46 -
-------------------------------- ------ --- --- ------------------------- --- ------ -----
Asset backed securities (other) 258 100 - - - 49 - 51 -
-------------------------------- ------ --- --- ------------------------- --- ------ -----
Liquid assets total 26,815 21 77 2 - 78 10 8 4
-------------------------------- ------ --- --- ------------------------- --- ------ -----
Other securities (note ii):
-------------------------------- ------ --- --- ------------------------- --- ------ -----
RMBS FVOCI 142 35 20 45 - 100 - - -
-------------------------------- ------ --- --- ------------------------- --- ------ -----
RMBS amortised cost 1,656 84 6 8 2 100 - - -
-------------------------------- ------ --- --- ------------------------- --- ------ -----
Other investments (note iii) 114 - 29 52 19 19 52 29 -
-------------------------------- ------ --- --- ------------------------- --- ------ -----
Other securities total 1,912 75 9 13 3 95 3 2 -
-------------------------------- ------ --- --- ------------------------- --- ------ -----
Loans and advances to banks
and similar institutions (note
iv) 4,009 - 51 49 - 86 7 6 1
-------------------------------- ------ --- --- ------------------------- --- ------ -----
Total 32,736 22 70 8 - 80 9 8 3
-------------------------------- ------ --- --- ------------------------- --- ------ -----
Liquidity and investment portfolio by credit rating (note i)
4 April 2018 AAA AA A Other UK US Europe Other
------ --- --- ----- --- ------ -----
(Audited) GBPm % % % % % % % %
-------------------------------- ------ --- --- ----- --- ------ -----
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) 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 (note iii) 99 - 36 42 22 22 42 36 -
-------------------------------- ------ --- --- ----- --- ------ -----
Other securities total 1,407 71 9 16 4 95 3 2 -
-------------------------------- ------ --- --- ----- --- ------ -----
Loans and advances to banks
and similar institutions (note
iv) 3,493 - 47 50 3 84 6 8 2
-------------------------------- ------ --- --- ----- --- ------ -----
Total 30,900 16 77 6 1 87 2 8 3
-------------------------------- ------ --- --- ----- --- ------ -----
Notes:
i. Ratings used are obtained from Standard & Poor's
(S&P), and from Moody's or Fitch if no S&P rating is
available. For loans and advances to banks and similar
institutions, internal ratings are used.
ii. Includes RMBS (UK Buy to let and UK Non-conforming) not
eligible for the Liquidity Coverage Ratio (LCR).
iii. Includes investment securities held at FVTPL of GBP78
million (2018 IAS 39 basis: GBPnil).
iv. Loans and advances to banks has been renamed to loans and
advances to banks and similar institutions and now includes
balances held with counterparties that are institutions similar to
banks. These balances were previously reported in loans and
advances to customers. Comparatives have been restated to disclose
information on the same basis. Further details are included in note
2 to the financial statements.
Credit risk - Treasury assets (continued)
Country exposures
The following table summarises the exposure (shown at the
balance sheet carrying value) to institutions outside the UK. None
of the exposures detailed in the table were in stage 2 or 3 at 4
April 2019.
Country exposures
4 April 2019 Government Mortgage Covered Supra-national Loans and Other Total
bonds backed bonds bonds advances assets
securities to banks
and similar
institutions
----------- ------- -------------- ----------------------- ------- -----
(Audited) GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- ---------- ----------- ------- -------------- ----------------------- ------- -----
Belgium 208 - - - - - 208
----------------------- ---------- ----------- ------- -------------- ----------------------- ------- -----
Finland 244 - 24 - - - 268
----------------------- ---------- ----------- ------- -------------- ----------------------- ------- -----
France 185 - - - 24 33 242
----------------------- ---------- ----------- ------- -------------- ----------------------- ------- -----
Germany 673 - 15 - 190 132 1,010
----------------------- ---------- ----------- ------- -------------- ----------------------- ------- -----
Netherlands 178 255 - - - - 433
----------------------- ---------- ----------- ------- -------------- ----------------------- ------- -----
Spain - - - - 18 - 18
----------------------- ---------- ----------- ------- -------------- ----------------------- ------- -----
Total Eurozone 1,488 255 39 - 232 165 2,179
----------------------- ---------- ----------- ------- -------------- ----------------------- ------- -----
USA 2,642 - - - 265 59 2,966
----------------------- ---------- ----------- ------- -------------- ----------------------- ------- -----
Rest of world (note i) 140 - 455 725 60 - 1,380
----------------------- ---------- ----------- ------- -------------- ----------------------- ------- -----
Total 4,270 255 494 725 557 224 6,525
----------------------- ---------- ----------- ------- -------------- ----------------------- ------- -----
Country exposures
4 April 2018 Government Mortgage Covered Supra-national Loans and Other Total
bonds backed bonds bonds advances assets
securities to banks
and
similar
institutions
----------- ------- -------------- ------------- ------- -----
(Audited) 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
----------------------- ---------- ----------- ------- -------------- ------------- ------- -----
Note:
i. Rest of world exposure is to Australia, Canada, Denmark, Norway, Sweden and Switzerland.
Credit risk - Treasury assets (continued)
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 2019 was GBP3.6 billion (4 April 2018:
GBP4.1 billion) and the fair value of derivative liabilities was
GBP1.6 billion (4 April 2018: GBP2.3 billion).
To comply with EU regulatory requirements, Nationwide, as a
direct member of a central counterparty (CCP), has central clearing
capability which it uses to clear standardised derivatives. Where
derivatives are not cleared at a CCP they are transacted under the
International Swaps and Derivatives Association (ISDA) Master
Agreement. A Credit Support Annex (CSA) is always executed in
conjunction with the ISDA Master Agreement. Under the terms of a
CSA, collateral is passed between parties to mitigate the
market-contingent counterparty risk inherent in the outstanding
positions. CSAs are two-way agreements where both parties post
collateral dependent on the exposure of the derivative. Collateral
is paid or received on a regular basis (typically daily) to
mitigate the mark to market exposures.
Nationwide's CSA legal documentation for derivatives grants
legal rights of set off for transactions with the same
counterparty. Accordingly, the credit risk associated with such
positions is reduced to the extent that negative mark to market
values offset positive mark to market values in the calculation of
credit risk within each netting agreement.
Under the terms of CSA netting agreements, outstanding
transactions with the same counterparty can be offset and settled
on a net basis following a default, or another predetermined event.
Under these arrangements, netting benefits of GBP1.4 billion (4
April 2018: GBP2.0 billion) were available and GBP2.1 billion of
collateral (4 April 2018: GBP2.2 billion) was held. Only cash is
held as collateral.
The following table shows the exposure to counterparty credit
risk for derivative contracts after netting benefits and
collateral.
Derivative credit exposure
4 April 2019 4 April 2018
------------------------------- --------------------------------
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 as reported on the
balance sheet 1,096 2,460 6 3,562 1,584 2,266 271 4,121
------------------------------- ------ ------- ---- ------- ------- ------- ----- -------
Netting benefits (350) (1,007) (6) (1,363) (532) (1,156) (271) (1,959)
------------------------------- ------ ------- ---- ------- ------- ------- ----- -------
Net current credit exposure 746 1,453 - 2,199 1,052 1,110 - 2,162
------------------------------- ------ ------- ---- ------- ------- ------- ----- -------
Collateral (cash) (732) (1,398) - (2,130) (1,051) (1,106) - (2,157)
------------------------------- ------ ------- ---- ------- ------- ------- ----- -------
Net derivative credit exposure 14 55 - 69 1 4 - 5
------------------------------- ------ ------- ---- ------- ------- ------- ----- -------
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 policies, 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 throughout the year. This
includes the Liquidity Coverage Ratio (LCR), which ensures that
sufficient high quality liquid assets are held to survive a short
term severe but plausible liquidity stress. Nationwide's LCR at 4
April 2019 was 150.2% (4 April 2018: 130.3%), above the regulatory
minimum of 100%. Nationwide continues to manage its liquidity
against its internal risk appetite, which is more prudent than
regulatory requirements.
Nationwide also monitors its position against the longer term
funding metric, the Net Stable Funding Ratio (NSFR). Based on
current interpretations of expected European regulatory
requirements and guidance, the NSFR at 4 April 2019 was 130.5% (4
April 2018: 131.0%) which exceeds the expected 100% minimum future
requirement.
Funding risk
Funding strategy
Nationwide's funding strategy is to remain predominantly retail
funded, as set out below.
Funding profile
Assets 4 April 5 April 4 April Liabilities 4 April 5 April 4 April
(note i) 2019 2018 (note 2018 2019 2018 (note 2018
ii) ii)
----------- ------- ------- ----------- -------
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
--------------------------- ------- ----------- ------- -------------------- ------- ----------- -------
Retail mortgages 185.8 177.1 177.2 Retail funding 154.0 148.4 148.4
--------------------------- ------- ----------- ------- -------------------- ------- ----------- -------
Treasury assets (including
liquidity portfolio)
(note iii) 32.7 30.9 30.9 Wholesale funding 61.2 58.8 58.8
--------------------------- ------- ----------- ------- -------------------- ------- ----------- -------
Commercial lending (note
iii) 9.1 10.6 10.6 Other liabilities 3.0 3.7 3.7
--------------------------- ------- ----------- ------- -------------------- ------- ----------- -------
Consumer lending 4.2 3.7 3.8 Capital and reserves 20.1 18.0 18.2
--------------------------- ------- ----------- ------- -------------------- ------- ----------- -------
Other assets 6.5 6.6 6.6
--------------------------- ------- ----------- ------- -------------------- ------- ----------- -------
238.3 228.9 229.1 238.3 228.9 229.1
--------------------------- ------- ----------- ------- -------------------- ------- ----------- -------
Notes:
i. The figures in the above table are stated net of impairment provisions where applicable.
ii. Balances as at 5 April 2018 reflect the impact of applying IFRS 9 'Financial Instruments'.
iii. Treasury assets now include balances held with
counterparties that are institutions similar to banks. These
balances were previously reported in commercial lending balances.
Comparatives have been restated to disclose information on the same
basis. Further details are included in note 2 to the financial
statements.
At 4 April 2019, Nationwide's loan to deposit ratio, which
represents loans and advances to customers divided by the total of
shares and other deposits, was 125.2% (4 April 2018: 125.5%).
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 stable and
diversified funding base across a range of instruments, currencies,
maturities and investor types. Part of Nationwide's wholesale
funding strategy is to remain active in core markets and
currencies. A funding risk limit framework also ensures that a
prudent funding mix and maturity concentration profile is
maintained, and limits the level of encumbrance to ensure
sufficient contingent funding capacity is retained in the event of
a stress.
Wholesale funding has increased by GBP2.4 billion to GBP61.2
billion during the year primarily in liabilities with maturities of
less than one year. 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
28.6% at 4 April 2019 (4 April 2018: 28.2%).
The table below sets out Nationwide's wholesale funding by
currency.
Wholesale funding by currency
4 April 2019 4 April 2018
-----------------------------------------
GBP EUR USD Other Total % of GBP EUR USD Other Total % of
total total
------ ----- ----- ----- ----- ----- ------
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
------------------------ ----- ----- ----- ----- ----- ------ ----- ----- ----- ----- ----- ------
Repos 0.4 0.3 0.1 - 0.8 1 0.7 0.2 - - 0.9 2
------------------------ ----- ----- ----- ----- ----- ------ ----- ----- ----- ----- ----- ------
Deposits 6.0 1.2 0.1 - 7.3 12 5.4 1.4 - - 6.8 12
------------------------ ----- ----- ----- ----- ----- ------ ----- ----- ----- ----- ----- ------
Certificates of deposit 3.2 1.1 0.5 - 4.8 8 4.0 0.1 0.2 - 4.3 7
------------------------ ----- ----- ----- ----- ----- ------ ----- ----- ----- ----- ----- ------
Commercial paper - 0.3 2.9 - 3.2 5 - - 1.0 - 1.0 2
------------------------ ----- ----- ----- ----- ----- ------ ----- ----- ----- ----- ----- ------
Covered bonds 3.8 12.9 - 0.1 16.8 28 2.5 12.6 - 0.2 15.3 26
------------------------ ----- ----- ----- ----- ----- ------ ----- ----- ----- ----- ----- ------
Medium term notes 2.0 3.0 1.9 0.6 7.5 12 2.0 4.6 1.8 0.6 9.0 15
------------------------ ----- ----- ----- ----- ----- ------ ----- ----- ----- ----- ----- ------
Securitisations 0.7 1.1 1.2 - 3.0 5 1.1 1.3 1.3 - 3.7 6
------------------------ ----- ----- ----- ----- ----- ------ ----- ----- ----- ----- ----- ------
TFS 17.0 - - - 17.0 28 17.0 - - - 17.0 29
------------------------ ----- ----- ----- ----- ----- ------ ----- ----- ----- ----- ----- ------
Other 0.2 0.6 - - 0.8 1 0.2 0.6 - - 0.8 1
------------------------ ----- ----- ----- ----- ----- ------ ----- ----- ----- ----- ----- ------
Total 33.3 20.5 6.7 0.7 61.2 100 32.9 20.8 4.3 0.8 58.8 100
------------------------ ----- ----- ----- ----- ----- ------ ----- ----- ----- ----- ----- ------
The residual maturity of the wholesale funding book, on a
contractual maturity basis, is set out below.
Wholesale funding - residual maturity
4 April 2019 Not more Over one Over three Over six Subtotal Over one Over two Total
than one month months months less than year but years
month but not but not but not one year not more
more than more than more than than two
three six months one year years
months
--------- ---------- ----------- ---------- ---------- --------- -------- -----
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
------------------------ --------- ---------- ----------- ---------- ---------- --------- -------- -----
Repos 0.8 - - - 0.8 - - 0.8
------------------------ --------- ---------- ----------- ---------- ---------- --------- -------- -----
Deposits 4.5 0.6 2.2 - 7.3 - - 7.3
------------------------ --------- ---------- ----------- ---------- ---------- --------- -------- -----
Certificates of deposit - 2.3 2.3 0.2 4.8 - - 4.8
------------------------ --------- ---------- ----------- ---------- ---------- --------- -------- -----
Commercial paper - 2.0 1.2 - 3.2 - - 3.2
------------------------ --------- ---------- ----------- ---------- ---------- --------- -------- -----
Covered bonds 0.8 0.9 - - 1.7 3.3 11.8 16.8
------------------------ --------- ---------- ----------- ---------- ---------- --------- -------- -----
Medium term notes - 0.6 0.4 0.9 1.9 0.1 5.5 7.5
------------------------ --------- ---------- ----------- ---------- ---------- --------- -------- -----
Securitisations 0.4 - 0.1 0.3 0.8 1.0 1.2 3.0
------------------------ --------- ---------- ----------- ---------- ---------- --------- -------- -----
TFS - - - - - 6.0 11.0 17.0
------------------------ --------- ---------- ----------- ---------- ---------- --------- -------- -----
Other - - - - - 0.2 0.6 0.8
------------------------ --------- ---------- ----------- ---------- ---------- --------- -------- -----
Total 6.5 6.4 6.2 1.4 20.5 10.6 30.1 61.2
------------------------ --------- ---------- ----------- ---------- ---------- --------- -------- -----
Of which secured 2.0 0.9 0.1 0.3 3.3 10.5 24.6 38.4
------------------------ --------- ---------- ----------- ---------- ---------- --------- -------- -----
Of which unsecured 4.5 5.5 6.1 1.1 17.2 0.1 5.5 22.8
------------------------ --------- ---------- ----------- ---------- ---------- --------- -------- -----
% of total 10.6 10.5 10.1 2.3 33.5 17.3 49.2 100.0
------------------------ --------- ---------- ----------- ---------- ---------- --------- -------- -----
Liquidity and funding risk (continued)
Wholesale funding - residual maturity
4 April 2018 Not more Over one Over three Over six Subtotal Over one Over two Total
than one month months months less than year but years
month but not but not but not one year not more
more than more than more than than two
three six months one year years
months
--------- ---------- ----------- ---------- ---------- --------- -------- -----
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
------------------------ --------- ---------- ----------- ---------- ---------- --------- -------- -----
Repos 0.9 - - - 0.9 - - 0.9
------------------------ --------- ---------- ----------- ---------- ---------- --------- -------- -----
Deposits 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
------------------------ --------- ---------- ----------- ---------- ---------- --------- -------- -----
At 4 April 2019, cash, government bonds and supranational bonds
included in the liquid asset buffer represented 120% of wholesale
funding maturing in less than one year, assuming no rollovers (4
April 2018: 142%).
The increase in the proportion of wholesale funding with a
residual maturity of less than one year is principally driven by
the pre-funding of upcoming maturities as we manage funding in the
uncertain economic environment.
Liquidity risk
Liquidity strategy
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.
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
and highly rated debt securities issued by a restricted range of
governments, central banks and supranationals.
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.
Liquidity and funding risk (continued)
Liquid assets
The table below sets out the sterling equivalent fair value of
the liquidity portfolio, by issuing currency. It includes
off-balance sheet liquidity, such as bonds received through reverse
repurchase (repo) agreements, and excludes bonds encumbered through
repo agreements.
Liquid assets
4 April 2019 4 April 2018
--------------------------
GBP EUR USD Total GBP EUR USD Total
----- ----- ----- -----
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
----------------------------- ------------------- ---------- --------- -------- ----- ----- ----- -----
Cash and reserves at central
banks 12.4 0.1 - 12.5 14.4 - - 14.4
----------------------------- ------------------- ---------- --------- -------- ----- ----- ----- -----
Government bonds 7.8 0.7 2.8 11.3 6.8 0.8 0.6 8.2
----------------------------- ------------------- ---------- --------- -------- ----- ----- ----- -----
Supranational bonds 0.5 - 0.2 0.7 0.4 - 0.3 0.7
----------------------------- ------------------- ---------- --------- -------- ----- ----- ----- -----
Covered bonds 0.4 0.7 - 1.1 0.6 0.6 - 1.2
----------------------------- ------------------- ---------- --------- -------- ----- ----- ----- -----
Residential mortgage backed
securities (RMBS) (note i) 0.6 0.3 0.1 1.0 1.7 0.3 - 2.0
----------------------------- ------------------- ---------- --------- -------- ----- ----- ----- -----
Asset-backed securities and
other securities 0.1 0.1 0.1 0.3 0.2 0.1 - 0.3
----------------------------- ------------------- ---------- --------- -------- ----- ----- ----- -----
Total 21.8 1.9 3.2 26.9 24.1 1.8 0.9 26.8
----------------------------- ------------------- ---------- --------- -------- ----- ----- ----- -----
Note:
i. Balances include all RMBS held by the Society which can be monetised through sale or repo.
The average combined month end balance during the year of cash
and reserves at central banks, and government and supranational
bonds, was GBP27.8 billion (2018: GBP27.2 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 monetise the liquid asset buffer
rapidly in a stress.
For contingent purposes, Nationwide pre-positions unencumbered
mortgage assets at the Bank of England which can be used in the
Bank of England's liquidity operations if market liquidity is
severely disrupted.
Liquidity and funding risk (continued)
Residual maturity of financial assets and liabilities
The table below segments the carrying value of financial assets
and financial liabilities into relevant maturity groupings based on
the final contractual maturity date (residual maturity):
Residual maturity
Due less Due Due Due Due Due Due Due after Total
than between between between between between between more
one month one and three six and nine and one and two and than
(note three and nine twelve two years five five
ii) months six months months years years
(note i) months
---------- --------- --------- ---------- ---------- ---------- ---------- ---------- -------
4 April 2019 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------- ---------- --------- --------- ---------- ---------- ---------- ---------- ---------- -------
Financial
assets
------------- ---------- --------- --------- ---------- ---------- ---------- ---------- ---------- -------
Cash 12,493 - - - - - - - 12,493
------------- ---------- --------- --------- ---------- ---------- ---------- ---------- ---------- -------
Loans and
advances to
banks
and similar
institutions
(note
iii) 3,363 - - - - - - 646 4,009
------------- ---------- --------- --------- ---------- ---------- ---------- ---------- ---------- -------
Investment
securities 16 20 114 284 78 971 5,558 9,193 16,234
------------- ---------- --------- --------- ---------- ---------- ---------- ---------- ---------- -------
Derivative
financial
instruments 18 127 29 33 70 535 1,183 1,567 3,562
------------- ---------- --------- --------- ---------- ---------- ---------- ---------- ---------- -------
Fair value
adjustment
for
portfolio
hedged risk (2) 4 11 26 26 132 71 143 411
------------- ---------- --------- --------- ---------- ---------- ---------- ---------- ---------- -------
Loans and
advances to
customers 3,024 1,393 1,982 2,003 1,974 8,303 23,549 156,823 199,051
------------- ---------- --------- --------- ---------- ---------- ---------- ---------- ---------- -------
Total
financial
assets 18,912 1,544 2,136 2,346 2,148 9,941 30,361 168,372 235,760
------------- ---------- --------- --------- ---------- ---------- ---------- ---------- ---------- -------
Financial
liabilities
------------- ---------- --------- --------- ---------- ---------- ---------- ---------- ---------- -------
Shares 131,451 3,039 4,070 1,482 1,475 3,926 7,386 1,140 153,969
------------- ---------- --------- --------- ---------- ---------- ---------- ---------- ---------- -------
Deposits from
banks and
similar
institutions 3,026 1 122 - - 6,000 11,000 - 20,149
------------- ---------- --------- --------- ---------- ---------- ---------- ---------- ---------- -------
Of which repo 849 - - - - - - - 849
------------- ---------- --------- --------- ---------- ---------- ---------- ---------- ---------- -------
Of which TFS - 1 - - - 6,000 11,000 - 17,001
------------- ---------- --------- --------- ---------- ---------- ---------- ---------- ---------- -------
Other
deposits 2,295 625 2,094 25 19 4 12 - 5,074
------------- ---------- --------- --------- ---------- ---------- ---------- ---------- ---------- -------
Fair value
adjustment
for
portfolio
hedged risk - (1) (1) - (1) (2) (12) - (17)
------------- ---------- --------- --------- ---------- ---------- ---------- ---------- ---------- -------
Secured
funding -
ABS and
covered
bonds 1,183 887 132 141 148 4,367 7,754 5,777 20,389
------------- ---------- --------- --------- ---------- ---------- ---------- ---------- ---------- -------
Senior
unsecured
funding 43 4,890 3,979 512 466 99 2,297 3,267 15,553
------------- ---------- --------- --------- ---------- ---------- ---------- ---------- ---------- -------
Derivative
financial
instruments 36 118 21 10 12 127 69 1,200 1,593
------------- ---------- --------- --------- ---------- ---------- ---------- ---------- ---------- -------
Subordinated
liabilities 18 - 54 3 - 662 756 5,213 6,706
------------- ---------- --------- --------- ---------- ---------- ---------- ---------- ---------- -------
Subscribed
capital
(note iv) 1 1 1 - - - - 247 250
------------- ---------- --------- --------- ---------- ---------- ---------- ---------- ---------- -------
Total
financial
liabilities 138,053 9,560 10,472 2,173 2,119 15,183 29,262 16,844 223,666
------------- ---------- --------- --------- ---------- ---------- ---------- ---------- ---------- -------
Off-balance
sheet
commitments
(note v) 12,956 - - - - - - - 12,956
------------- ---------- --------- --------- ---------- ---------- ---------- ---------- ---------- -------
Net liquidity
difference (132,097) (8,016) (8,336) 173 29 (5,242) 1,099 151,528 (862)
------------- ---------- --------- --------- ---------- ---------- ---------- ---------- ---------- -------
Cumulative
liquidity
difference (132,097) (140,113) (148,449) (148,276) (148,247) (153,489) (152,390) (862) -
------------- ---------- --------- --------- ---------- ---------- ---------- ---------- ---------- -------
Liquidity and funding risk (continued)
Residual maturity
(note i) Due less Due Due Due Due Due Due Due after Total
than between between between between between between more
one month one and three six and nine and one and two and than
(note three and nine twelve two years five five
ii) months six months months months years years
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
4 April 2018 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Financial
assets
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Cash 14,361 - - - - - - - 14,361
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Loans and
advances to
banks
and similar
institutions
(note
iii) 3,149 - - - - - - 344 3,493
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Investment
securities 76 64 17 141 89 387 2,498 9,774 13,046
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
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)
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Loans and
advances to
customers
(note iii) 2,970 1,318 1,925 1,886 1,908 7,564 22,961 151,061 191,593
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
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 and
similar
institutions
(note iii) 3,375 9 47 5 - - 17,000 - 20,436
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Of which repo 946 - - - - - - - 946
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Of which TFS - 1 - - - - 17,000 - 17,001
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Other
deposits
(note iii) 2,493 481 1,343 315 50 11 - - 4,693
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Fair value
adjustment
for
portfolio
hedged risk - (6) (6) (4) (4) (8) (25) - (53)
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
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
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Subordinated
liabilities 17 - 49 - - - 690 4,741 5,497
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Subscribed
capital
(note iv) 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 v) 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) -
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
Notes:
i. The analysis excludes certain non-financial assets (including
property, plant and equipment, intangible assets, other assets,
deferred tax assets and accrued income and 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. Loans and advances to banks and deposits from banks have
been renamed to loans and advances to banks and similar
institutions and deposits from banks and similar institutions and
now include balances held with counterparties that are institutions
similar to banks. These balances were previously reported in loans
and advances to customers and other deposits respectively. In
addition, balances reported previously as due to customers are now
reported in other deposits. Comparatives for the prior period have
been restated to disclose information on the same basis. Further
details are included in note 2 to the financial statements.
iv. The principal amount for undated subscribed capital is
included within the due after more than five years column.
v. 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.
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 Nationwide's Assets and Liabilities
Committee (ALCO). Nationwide uses judgement and past behavioural
performance of each asset and liability class to forecast likely
cash flow requirements.
Liquidity and funding risk (continued)
Financial liabilities - gross undiscounted contractual cash
flows
The tables below provide an analysis of gross contractual cash
flows. The totals differ from the analysis of residual maturity as
they include estimated future interest payments, calculated using
balances outstanding at the balance sheet date, contractual
maturities and appropriate forward looking interest rates.
Amounts are allocated to the relevant maturity band based on the
timing of individual contractual cash flows.
Gross contractual cash flows
4 April 2019 Due less Due between Due between Due between Due between Due between Due between Due after Total
than one and three six and nine and one and two and more
one month three and nine twelve two years five than
(note months six months months months years five
i) years
------------- -------------- -------------- -------------- -------------- ------------- ------------ ------------- --------
(Audited) GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------- ------------- -------------- -------------- -------------- -------------- ------------- ------------ ------------- --------
Shares 131,451 3,098 4,121 1,525 1,514 4,063 7,605 1,141 154,518
---------------- ------------- -------------- -------------- -------------- -------------- ------------- ------------ ------------- --------
Deposits from
banks and
similar
institutions
(note ii) 3,026 32 153 31 31 6,102 11,119 - 20,494
---------------- ------------- -------------- -------------- -------------- -------------- ------------- ------------ ------------- --------
Other deposits 2,295 630 2,096 25 19 4 12 - 5,081
---------------- ------------- -------------- -------------- -------------- -------------- ------------- ------------ ------------- --------
Secured funding
- ABS and
covered
bonds 1,199 835 172 185 186 4,313 7,493 5,901 20,284
---------------- ------------- -------------- -------------- -------------- -------------- ------------- ------------ ------------- --------
Senior unsecured
funding 43 4,670 4,270 518 524 252 2,656 3,486 16,419
---------------- ------------- -------------- -------------- -------------- -------------- ------------- ------------ ------------- --------
Subordinated
liabilities 20 - 123 28 75 888 607 6,412 8,153
---------------- ------------- -------------- -------------- -------------- -------------- ------------- ------------ ------------- --------
Subscribed
capital (note
iii) 1 1 4 3 4 13 68 217 311
---------------- ------------- -------------- -------------- -------------- -------------- ------------- ------------ ------------- --------
Total
non-derivative
financial
liabilities 138,035 9,266 10,939 2,315 2,353 15,635 29,560 17,157 225,260
---------------- ------------- -------------- -------------- -------------- -------------- ------------- ------------ ------------- --------
Derivative
financial
liabilities:
---------------- ------------- -------------- -------------- -------------- -------------- ------------- ------------ ------------- --------
Gross
settled
derivative
outflows (439) (2,565) (1,243) (76) (71) (1,951) (2,840) (5,349) (14,534)
---------------- ------------- -------------- -------------- -------------- -------------- ------------- ------------ ------------- --------
Gross
settled
derivative
inflows 427 2,485 1,185 58 45 1,783 2,595 5,086 13,664
---------------- ------------- -------------- -------------- -------------- -------------- ------------- ------------ ------------- --------
Gross
settled
derivatives
-
net flows (12) (80) (58) (18) (26) (168) (245) (263) (870)
---------------- ------------- -------------- -------------- -------------- -------------- ------------- ------------ ------------- --------
Net settled
derivative
liabilities (28) (125) (101) (130) (119) (368) (579) (916) (2,366)
---------------- ------------- -------------- -------------- -------------- -------------- ------------- ------------ ------------- --------
Total derivative
financial
liabilities (40) (205) (159) (148) (145) (536) (824) (1,179) (3,236)
---------------- ------------- -------------- -------------- -------------- -------------- ------------- ------------ ------------- --------
Total financial
liabilities 137,995 9,061 10,780 2,167 2,208 15,099 28,736 15,978 222,024
---------------- ------------- -------------- -------------- -------------- -------------- ------------- ------------ ------------- --------
Off-balance
sheet
commitments
(note iv) 12,956 - - - - - - - 12,956
---------------- ------------- -------------- -------------- -------------- -------------- ------------- ------------ ------------- --------
Total financial
liabilities
including
off-balance
sheet
commitments 150,951 9,061 10,780 2,167 2,208 15,099 28,736 15,978 234,980
---------------- ------------- -------------- -------------- -------------- -------------- ------------- ------------ ------------- --------
Liquidity and funding risk (continued)
Gross contractual cash flows
4 April 2018 Due less Due Due Due Due Due Due Due after Total
than between between between between between between more
one month one and three six and nine and one and two and than
(note three and nine twelve two years five five
i) months six months months months years years
---------- --------- ---------- ---------- ---------- ---------- ---------- --------- -------
(Audited) GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------- -------
Shares 120,617 2,959 4,462 4,479 3,288 6,708 4,690 1,524 148,727
--------------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------- -------
Deposits from
banks and
similar
institutions
(note ii) 3,402 8 48 64 75 182 17,271 - 21,050
--------------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------- -------
Other deposits
(note ii) 2,493 486 1,345 315 50 11 - - 4,700
--------------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------- -------
Secured funding
- ABS and
covered
bonds 880 76 297 193 367 2,739 8,006 8,625 21,183
--------------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------- -------
Senior
unsecured
funding 162 4,712 638 990 629 1,992 1,049 5,274 15,446
--------------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------- -------
Subordinated
liabilities 18 - 104 18 56 197 1,004 5,400 6,797
--------------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------- -------
Subscribed
capital (note
iii) 1 1 4 3 14 13 60 244 340
--------------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------- -------
Total
non-derivative
financial
liabilities 127,573 8,242 6,898 6,062 4,479 11,842 32,080 21,067 218,243
--------------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------- -------
Derivative
financial
liabilities:
--------------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------- -------
Gross
settled
derivative
outflows (13) (67) (39) (237) (103) (522) (2,522) (5,692) (9,195)
--------------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------- -------
Gross
settled
derivative
inflows 14 59 41 222 105 521 2,479 5,596 9,037
--------------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------- -------
Gross
settled
derivatives
-
net flows 1 (8) 2 (15) 2 (1) (43) (96) (158)
--------------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------- -------
Net settled
derivative
liabilities (23) (63) (59) (105) (46) (265) (608) (1,190) (2,359)
--------------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------- -------
Total
derivative
financial
liabilities (22) (71) (57) (120) (44) (266) (651) (1,286) (2,517)
--------------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------- -------
Total financial
liabilities 127,551 8,171 6,841 5,942 4,435 11,576 31,429 19,781 215,726
--------------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------- -------
Off-balance
sheet
commitments
(note iv) 13,890 - - - - - - - 13,890
--------------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------- -------
Total financial
liabilities
including
off-balance
sheet
commitments 141,441 8,171 6,841 5,942 4,435 11,576 31,429 19,781 229,616
--------------- ---------- --------- ---------- ---------- ---------- ---------- ---------- --------- -------
Notes:
i. Due less than one month includes amounts repayable on demand.
ii. Deposits from banks has been renamed to deposits from banks
and similar institutions and now includes balances held with
counterparties that are institutions similar to banks. These
balances were previously reported in other deposits. In addition,
balances reported previously as due to customers are now reported
in other deposits. Comparatives have been restated to disclose
information on the same basis. Further details are included in note
2 to the financial statements.
iii. The principal amount for undated subscribed capital is
included within the due 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.
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 and from participation in the Bank of England's Term
Funding Scheme (TFS).
Certain unencumbered assets are readily available to secure
funding or meet collateral requirements. These include prime
mortgages and cash and securities held in the liquid asset buffer.
Other unencumbered assets, such as non-prime mortgages, are capable
of being encumbered with a degree of further management action.
Assets which do not fall into either of these categories are
classified as not being capable of being encumbered.
An analysis of Nationwide's encumbered and unencumbered
on-balance sheet assets is set out below. This disclosure is not
intended to identify assets that would be available in the event of
a resolution or bankruptcy.
Asset encumbrance
4 April 2019 Assets encumbered as a result Other assets (comprising assets encumbered Total
of transactions with counterparties at the
other than central banks central bank and unencumbered assets)
-------------- ------------------------------------------------------ -------------------------------------------------------------------------------- -------
Assets not positioned
at the central bank
-------------- --------- ---------------- ---------- ------------- --------------- --------------------------------------------------- ---------- -------
Assets
positioned
at the Other
As a central assets
result bank (i.e. Readily that are
of As a result prepositioned available capable
covered of plus for of being Cannot
bonds securitisations Other Total encumbered) encumbrance encumbered be encumbered Total
-------------- --------- ---------------- ---------- ------------- --------------- --------------- --------------- ----------------- ---------- -------
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- --------- ---------------- ---------- ------------- --------------- --------------- --------------- ----------------- ---------- -------
Cash 590 660 - 1,250 140 10,859 - 244 11,243 12,493
-------------- --------- ---------------- ---------- ------------- --------------- --------------- --------------- ----------------- ---------- -------
Loans and
advances to
banks
and similar
institutions - - 1,352 1,352 1,276 - - 1,381 2,657 4,009
-------------- --------- ---------------- ---------- ------------- --------------- --------------- --------------- ----------------- ---------- -------
Investment
securities - - 1,694 1,694 30 13,043 - 1,467 14,540 16,234
-------------- --------- ---------------- ---------- ------------- --------------- --------------- --------------- ----------------- ---------- -------
Derivative
financial
instruments - - - - - - - 3,562 3,562 3,562
-------------- --------- ---------------- ---------- ------------- --------------- --------------- --------------- ----------------- ---------- -------
Loans and
advances to
customers 22,656 6,936 - 29,592 39,558 82,561 47,340 - 169,459 199,051
-------------- --------- ---------------- ---------- ------------- --------------- --------------- --------------- ----------------- ---------- -------
Non-financial
assets - - - - - - - 2,541 2,541 2,541
-------------- --------- ---------------- ---------- ------------- --------------- --------------- --------------- ----------------- ---------- -------
Other
financial
assets - - - - - - - 411 411 411
-------------- --------- ---------------- ---------- ------------- --------------- --------------- --------------- ----------------- ---------- -------
Total 23,246 7,596 3,046 33,888 41,004 106,463 47,340 9,606 204,413 238,301
-------------- --------- ---------------- ---------- ------------- --------------- --------------- --------------- ----------------- ---------- -------
4 April 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
and similar institutions
(note i) - - 1,220 1,220 1,124 - - 1,149 2,273 3,493
--------------------------------- ------ ----- ----- ------ ------ ------- ------ ----- ------- -------
Investment securities - - 944 944 30 12,027 - 45 12,102 13,046
--------------------------------- ------ ----- ----- ------ ------ ------- ------ ----- ------- -------
Derivative financial instruments - - - - - - - 4,121 4,121 4,121
--------------------------------- ------ ----- ----- ------ ------ ------- ------ ----- ------- -------
Loans and advances to customers
(note i) 21,000 8,712 - 29,712 37,732 76,791 47,358 - 161,881 191,593
--------------------------------- ------ ----- ----- ------ ------ ------- ------ ----- ------- -------
Non-financial assets - - - - - - - 2,593 2,593 2,593
--------------------------------- ------ ----- ----- ------ ------ ------- ------ ----- ------- -------
Other financial assets - - - - - - - (109) (109) (109)
--------------------------------- ------ ----- ----- ------ ------ ------- ------ ----- ------- -------
Total 21,381 9,088 2,164 32,633 38,886 102,207 47,358 8,014 196,465 229,098
--------------------------------- ------ ----- ----- ------ ------ ------- ------ ----- ------- -------
Note:
i. Loans and advances to banks has been renamed to loans and
advances to banks and similar institutions now includes balances
held with counterparties that are institutions similar to banks.
These balances were previously reported in loans and advances to
customers. Comparatives have been restated to disclose information
on the same basis. Further details are included in note 2 to 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 Short-term Senior Tier 2 Date of Outlook
preferred non-preferred last rating
action /
confirmation
----------------- ---------- ---------- -------------- ------ ------------- -------------
Standard & Poor's A A-1 BBB+ BBB November Positive
2018
----------------- ---------- ---------- -------------- ------ ------------- -------------
Moody's Aa3 P-1 Baa1 Baa1 February Negative
2019
----------------- ---------- ---------- -------------- ------ ------------- -------------
Fitch A+ F1 A A- March 2019 Ratings Watch
Negative
----------------- ---------- ---------- -------------- ------ ------------- -------------
In November 2018 Standard & Poor's reaffirmed their positive
outlook reflecting their 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.
In October 2018, Moody's affirmed Nationwide's Aa3/P-1 long and
short term ratings, but changed its outlook to negative from
stable. The change in outlook reflected uncertainties embedded in
Moody's forward looking view on the loss given failure of the
Society's senior debt. This was reaffirmed in February 2019.
In March 2019, Fitch placed the Long Term Issuer Default Rating
of Nationwide, along with eighteen other UK banking groups, on
Ratings Watch Negative. The Ratings Watch Negative reflects the
heightened uncertainty over the ultimate outcome of the Brexit
process and the increased risk that a disruptive 'no-deal' Brexit
could result in negative action on the UK banks, with the
likelihood that negative outlooks will be assigned.
Whilst there have been changes to outlook as referred to above,
Nationwide's credit ratings remain unchanged since April 2018.
The table below sets out the amount of additional collateral
Nationwide would need to provide in the event of a one and two
notch downgrade by external credit rating agencies.
Cumulative adjustment Cumulative adjustment
for for
a one notch downgrade a two notch downgrade
------------- ---------------------- ----------------------
GBPbn GBPbn
------------- ---------------------- ----------------------
4 April 2019 3.0 3.4
------------- ---------------------- ----------------------
4 April 2018 3.1 3.3
------------- ---------------------- ----------------------
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
4 April 5 April 4 April
2019 2018 (note 2018
i)
---------------------------------- -------- ----------- -------
Solvency % % %
---------------------------------- -------- ----------- -------
Common Equity Tier 1 (CET1) ratio 32.4 30.4 30.5
---------------------------------- -------- ----------- -------
Total Tier 1 ratio 35.4 33.5 33.6
---------------------------------- -------- ----------- -------
Total regulatory capital ratio 44.6 42.8 42.9
---------------------------------- -------- ----------- -------
Leverage GBPm GBPm GBPm
---------------------------------- -------- ----------- -------
UK leverage exposure (note ii) 235,147 221,982 221,992
---------------------------------- -------- ----------- -------
CRR leverage exposure (note iii) 247,586 236,458 236,468
---------------------------------- -------- ----------- -------
Tier 1 capital 11,509 10,907 10,917
---------------------------------- -------- ----------- -------
%% %
---------------------------------- -------- ---------- -------
UK leverage ratio 4.9 4.9 4.9
---------------------------------- -------- ----------- -------
CRR leverage ratio 4.6 4.6 4.6
---------------------------------- -------- ----------- -------
Notes:
i. Figures have been adjusted to reflect the impact of applying
IFRS 9 Financial Instruments from 5 April 2018. Further information
is provided in our Report on Transition to IFRS 9: Financial
Instruments, which can be found on nationwide.co.uk.
ii. The UK 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,
excluding eligible central bank reserves.
iii. 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.
The CET1 ratio increased to 32.4% (5 April 2018: 30.4%) as a
result of an increase in CET1 capital resources, with risk weighted
assets (RWAs) remaining relatively stable. CET1 capital resources
have increased by GBP0.6 billion, primarily due to the profit after
tax for the year of GBP0.6 billion. RWAs remained stable with
increased retail lending and treasury related RWAs offset by
run-off in the commercial book and the implementation of a new
credit card internal ratings based (IRB) model.
Risk-based ratios remain in-excess of regulatory requirements
with the CET1 ratio of 32.4% (5 April 2018: 30.4%) above
Nationwide's capital requirement of 13.2%. This includes a minimum
CET1 capital requirement of 8.7% (Pillar 1 and Pillar 2A) and CRD
IV combined buffer requirements of 4.5% (allowing for the announced
1% systemic risk buffer). The CET1 ratio is expected to be impacted
by future regulatory developments, with Nationwide expecting to
implement the PRA's revised expectations for residential mortgage
IRB models in 2020. The implementation of the new IRB models is
expected to cause an increase in RWAs leading to an estimated
reduction in the CET1 ratio of approximately one third. We also
expect the CET1 ratio to be impacted further through the Basel III
reforms, expected to come into effect between 2022 and 2027 (see
regulatory developments section for further details).
CRD IV requires firms to calculate a non-risk based leverage
ratio, to supplement risk-based capital requirements. The UK
leverage ratio of 4.9% (5 April 2018: 4.9%) remains in excess of
Nationwide's capital requirement of 4.0% from August 2019, which
comprises of a minimum Tier 1 capital requirement of 3.25% and
buffer requirements of 0.75% (allowing for the 0.35% additional
leverage buffer).
The UK leverage ratio remained stable at 4.9% (5 April 2018:
4.9%), with an increase in Tier 1 capital driven by profits after
tax of GBP0.6 billion offset by an increase in UK leverage exposure
of GBP13 billion resulting from an increase in net retail lending
of GBP9 billion, an increase in treasury exposures (including
counterparty credit risk) of GBP5 billion, and an increase in other
assets of GBP1 billion, offset by run-off in the commercial book of
GBP2 billion. The CRR leverage ratio is based on the Delegated Act
definition and therefore exposures include central bank reserves.
This also remained stable at 4.6% (5 April 2018: 4.6%). On 24 April
2019, Nationwide notified investors of its intention to redeem its
outstanding Additional Tier 1 capital instrument in full, on 20
June 2019. This will reduce Tier 1 capital resources by GBP992
million, resulting in a 0.4 percentage points reduction in the UK
leverage ratio, to 4.5%, and a 0.4 percentage points reduction in
CRR leverage ratio to 4.2%, based on the year-end balance
sheet.
Leverage requirements continue to be Nationwide's binding
capital constraint, as they are in excess of risk-based
requirements, and it is expected that will continue despite the
impact of IRB model changes and Basel III reforms on risk-based
capital requirements. The expected impact of the Basel III reforms
on Nationwide's leverage ratio is negligible. The risk of excessive
leverage is managed through regular monitoring and reporting of the
leverage ratio, which forms part of risk appetite.
Solvency risk (continued)
The table below reconciles the general reserves to total
regulatory capital on an end-point basis and so does not include
non-qualifying instruments.
Total regulatory capital
2019 2018
------- -------
(Audited) GBPm GBPm
---------------------------------------- ------- -------
General reserve 10,418 9,951
---------------------------------------- ------- -------
Core capital deferred shares (CCDS) 1,325 1,325
---------------------------------------- ------- -------
Revaluation reserve 64 68
---------------------------------------- ------- -------
FVOCI reserve 50 -
---------------------------------------- ------- -------
Available for sale reserve - 75
---------------------------------------- ------- -------
Regulatory adjustments and deductions:
---------------------------------------- ------- -------
Foreseeable distributions (note
i) (68) (68)
---------------------------------------- ------- -------
Prudent valuation adjustment (note
ii) (50) (32)
---------------------------------------- ------- -------
Own credit and debit valuation
adjustments (note iii) - (1)
---------------------------------------- ------- -------
Intangible assets (note iv) (1,274) (1,286)
---------------------------------------- ------- -------
Goodwill (note iv) (12) (12)
---------------------------------------- ------- -------
Excess of regulatory expected losses
over impairment provisions (note
v) (2) (95)
---------------------------------------- ------- -------
IFRS 9 transitional arrangements
(note vi) 66 -
---------------------------------------- ------- -------
Total regulatory adjustments and
deductions (1,340) (1,494)
---------------------------------------- ------- -------
Common Equity Tier 1 capital 10,517 9,925
---------------------------------------- ------- -------
Additional Tier 1 capital securities
(AT1) (note vii) 992 992
---------------------------------------- ------- -------
Total Tier 1 capital 11,509 10,917
---------------------------------------- ------- -------
Dated subordinated debt (notes
viii) 2,976 3,019
---------------------------------------- ------- -------
Excess of impairment provisions
over regulatory expected losses
(note v) 46 -
---------------------------------------- ------- -------
IFRS9 transitional arrangements
(note vi) (46) -
---------------------------------------- ------- -------
Tier 2 capital 2,976 3,019
---------------------------------------- ------- -------
Total regulatory capital 14,485 13,936
---------------------------------------- ------- -------
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 are deducted from capital
resources after netting associated deferred tax liabilities.
v. Where capital expected loss exceeds accounting impairment
provisions, the excess balance is removed from CET1 capital, gross
of tax. In contrast, where impairment provisions exceed capital
expected loss, the excess balance is added back to Tier 2 capital,
gross of tax. This calculation is not performed for equity
exposures, in line with Article 159 of CRR. The expected loss
amounts for equity exposures are deducted from CET1 capital, gross
of tax.
vi. The transitional adjustments to capital resources apply
scaled relief for the impact of IFRS 9, over a 5-year transition
period.
vii. On 24 April 2019 Nationwide announced the redemption of the
AT1 instrument in full at the first call date of 20 June 2019,
therefore making it ineligible as regulatory capital from the date
of this announcement.
viii. 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.
As part of the Bank Recovery and Resolution Directive (BRRD),
the Bank of England, in its capacity as the UK resolution
authority, has published its policy for setting the minimum
requirement for own funds and eligible liabilities (MREL) and
provided firms with indicative MREL. From 1 January 2020, it is
anticipated that Nationwide will be subject to a requirement to
hold twice the minimum capital requirements (6.5% of UK leverage
exposure), plus the applicable capital requirement buffers, which
are currently expected to amount to 0.75% of UK leverage exposure.
In order to meet this pending requirement, Nationwide issued a
further GBP1 billion of senior non-preferred notes in the financial
year which are MREL eligible.
At 4 April 2019, total MREL resources were equal to 7.9% of UK
leverage ratio exposure (4 April 2018: 7.5%), above the anticipated
2020 requirement of 7.25% described above.
Solvency risk (continued)
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
2019 2018
------------------------------- -------------------------------
Credit Operational Total Risk Credit Operational Total Risk
Risk Risk (note Weighted Risk Risk (note Weighted
(note ii) Assets (note ii) Assets
i) i)
------ ------ ----------- ----------
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------- ------ ----------- ---------- ------ ----------- ----------
Retail mortgages 14,072 3,393 17,465 13,764 3,564 17,328
------------------------- ------ ----------- ---------- ------ ----------- ----------
Retail unsecured lending 5,581 778 6,359 5,805 725 6,530
------------------------- ------ ----------- ---------- ------ ----------- ----------
Commercial loans 3,604 176 3,780 4,634 210 4,844
------------------------- ------ ----------- ---------- ------ ----------- ----------
Treasury 779 152 931 540 87 627
------------------------- ------ ----------- ---------- ------ ----------- ----------
Counterparty credit risk
(note iii) 1,532 - 1,532 1,184 - 1,184
------------------------- ------ ----------- ---------- ------ ----------- ----------
Other (note iv) 2,095 344 2,439 1,681 315 1,996
------------------------- ------ ----------- ---------- ------ ----------- ----------
Total 27,663 4,843 32,506 27,608 4,901 32,509
------------------------- ------ ----------- ---------- ------ ----------- ----------
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.
iv. Other relates to equity, fixed and other assets.
RWAs remained stable at GBP32.5 billion (4 April 2018: GBP32.5
billion) primarily due to an increase in retail lending and
treasury related RWAs offset by run-off in commercial loans and the
implementation of a new credit card IRB model impacting retail
unsecured lending RWAs.
The increase in counterparty credit risk RWAs is driven by
changes in interest rates and foreign exchange rates, impacting the
regulatory value of derivative exposures. The increase in Other
RWAs is driven by higher equity balances and a change in the
treatment of 'items in the course of collection', which is now risk
weighted at 100% (2018: 20%).
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.
Following the Financial Policy Committee's (FPC) announcement on
the countercyclical buffer (November 2018: 1%), the equivalent
countercyclical leverage ratio buffer (CCLB) was set at 0.4%. There
is also an additional leverage ratio buffer (ALRB) due to be
implemented in August 2019, linked to the individual systemic risk
buffer (SRB) requirement, which will be set at 0.35%. Therefore,
Nationwide's leverage ratio requirement is expected to be 4% from
August 2019. Nationwide's UK leverage ratio of 4.9% at 4 April 2019
exceeds the requirement and will continue to meet requirements
after redemption of the outstanding Additional Tier 1 capital
instrument, which will result in a UK leverage ratio of 4.5% on a
proforma year end basis.
Nationwide has submitted its new hybrid IRB mortgage models to
the PRA for approval with the expectations that these will be
implemented during 2020, in line with the deadline set out in
PS13/17. Our current estimate is that the impact of these models
will be to reduce our reported CET1 ratio by approximately one
third given the material increase in risk weighted assets; however
we expect UK leverage requirements to continue to be the binding
capital constraint.
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. These reforms
will lead to a significant increase in the Group's risk weights
over time, Nationwide currently expects the consequential impact on
the reported CET1 ratio to ultimately be a reduction of
approximately a half relative to the current position. The change
relates to the application of standardised floors which override
IRB model outputs and should therefore not be aggregated with the
impact of new hybrid IRB models noted above. Organic earnings
through the transition will mitigate this impact such that the
reported CET1 ratio will in practice remain well in excess of the
proforma levels implied by this change, and leverage requirements
will remain the binding constraint based on latest projections.
These reforms represent a re-calibration of regulatory requirements
with no underlying change in the capital resources held or the risk
profile of assets. Final impacts are 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
Page
Consolidated income statement 64
Consolidated statement of comprehensive income 65
Consolidated balance sheet 66
Consolidated statement of movements in members' interests
and equity 67
Notes to the consolidated financial statements 68
Consolidated income statement
For the year ended 4 April 2019
2019 2018*
------- -------
Notes GBPm GBPm
-------------------------------------------------- ----- ------- -------
Interest receivable and similar income/(expense):
-------------------------------------------------- ----- ------- -------
Calculated using the effective interest
rate method 3 5,141 4,862
-------------------------------------------------- ----- ------- -------
Other 3 (23) (51)
-------------------------------------------------- ----- ------- -------
Total interest receivable and similar
income/(expense) 3 5,118 4,811
-------------------------------------------------- ----- ------- -------
Interest expense and similar charges 4 (2,203) (1,807)
-------------------------------------------------- ----- ------- -------
Net interest income 2,915 3,004
-------------------------------------------------- ----- ------- -------
Fee and commission income 449 449
-------------------------------------------------- ----- ------- -------
Fee and commission expense (248) (244)
-------------------------------------------------- ----- ------- -------
Other operating income/(expense) 5 54 (77)
-------------------------------------------------- ----- ------- -------
Gains/(losses) from derivatives and
hedge accounting 6 36 (1)
-------------------------------------------------- ----- ------- -------
Total income 3,206 3,131
-------------------------------------------------- ----- ------- -------
Administrative expenses 7 (2,254) (2,024)
-------------------------------------------------- ----- ------- -------
Impairment losses on loans and advances
to customers 8 (113) (107)
-------------------------------------------------- ----- ------- -------
Impairment recoveries on investment
securities - 2
-------------------------------------------------- ----- ------- -------
Provisions for liabilities and charges 13 (6) (25)
-------------------------------------------------- ----- ------- -------
Profit before tax 833 977
-------------------------------------------------- ----- ------- -------
Taxation 9 (215) (232)
-------------------------------------------------- ----- ------- -------
Profit after tax 618 745
-------------------------------------------------- ----- ------- -------
*Comparatives have been restated as detailed in note 2.
Consolidated statement of comprehensive income
For the year ended 4 April 2019
Group
--------------
2019 2018*
-----
GBPm GBPm
-------------------------------------------- ----- -------
Profit after tax 618 745
--------------------------------------------- ----- -------
Other comprehensive income/(expense)
-------------------------------------------- ----- -------
Items that will not be reclassified
to the income statement
-------------------------------------------- ----- -------
Remeasurements of retirement benefit
obligations:
-------------------------------------------- ===== =======
Retirement benefit remeasurements
before tax 210 29
--------------------------------------------- ----- -------
Taxation (57) (7)
--------------------------------------------- ===== =======
153 22
-------------------------------------------- ----- -------
Revaluation of property:
-------------------------------------------- ===== =======
Revaluation before tax (2) 2
--------------------------------------------- ----- -------
Taxation 1 (1)
--------------------------------------------- ===== =======
(1) 1
-------------------------------------------- ----- -------
152 23
-------------------------------------------- ----- -------
Items that may subsequently be reclassified
to the income statement
-------------------------------------------- ----- -------
Cash flow hedge reserve:
-------------------------------------------- ===== =======
Fair value movements taken to members'
interests and equity 540 (2,316)
--------------------------------------------- ----- -------
Amount transferred to income statement (100) 2,057
--------------------------------------------- ----- -------
Taxation (112) 68
--------------------------------------------- ===== =======
328 (191)
-------------------------------------------- ----- -------
Fair value through other comprehensive
income reserve:
-------------------------------------------- ===== =======
Fair value movements taken to members'
interests and equity 12
--------------------------------------------- ----- -------
Amount transferred to income statement (28)
--------------------------------------------- ----- -------
Taxation 4
--------------------------------------------- ===== =======
(12)
-------------------------------------------- ----- -------
Available for sale reserve:
-------------------------------------------- ===== =======
Fair value movements taken to members'
interests and equity 50
--------------------------------------------- ----- -------
Amount transferred to income statement (8)
--------------------------------------------- ----- -------
Taxation (11)
--------------------------------------------- ----- -------
31
-------------------------------------------- ----- -------
Other comprehensive income/(expense) 468 (137)
--------------------------------------------- ----- -------
Total comprehensive income 1,086 608
--------------------------------------------- ----- -------
*The year to 4 April 2019 is prepared on an IFRS 9 basis;
comparatives are prepared on an IAS 39 basis. On implementation of
IFRS 9 the available for sale reserve was replaced by the fair
value through other comprehensive income reserve.
Consolidated balance sheet
At 4 April 2019
--------------------------------------------------------------------
4 April 5 April 4 April
2019 2018* 2018*
------- -------- -------
Notes GBPm GBPm GBPm
--------------------------------- ----- ------- -------- -------
Assets
--------------------------------- ----- ------- -------- -------
Cash 12,493 14,361 14,361
--------------------------------- ----- ------- -------- -------
Loans and advances to
banks and similar institutions 4,009 3,493 3,493
--------------------------------- ----- ------- -------- -------
Investment securities 16,234 13,046 13,046
--------------------------------- ----- ------- -------- -------
Derivative financial instruments 3,562 4,121 4,121
--------------------------------- ----- ------- -------- -------
Fair value adjustment
for portfolio hedged risk 411 (144) (109)
--------------------------------- ----- ------- -------- -------
Loans and advances to
customers 11 199,051 191,421 191,593
--------------------------------- ----- ------- -------- -------
Intangible assets 1,324 1,342 1,342
--------------------------------- ----- ------- -------- -------
Property, plant and equipment 889 887 887
--------------------------------- ----- ------- -------- -------
Accrued income and expenses
prepaid 184 164 164
--------------------------------- ----- ------- -------- -------
Deferred tax 53 144 98
--------------------------------- ----- ------- -------- -------
Other assets 91 102 102
--------------------------------- ----- ------- -------- -------
Total assets 238,301 228,937 229,098
--------------------------------- ----- ------- -------- -------
Liabilities
--------------------------------- ----- ------- -------- -------
Shares 153,969 148,003 148,003
--------------------------------- ----- ------- -------- -------
Deposits from banks and
similar institutions 20,149 20,436 20,436
--------------------------------- ----- ------- -------- -------
Other deposits 5,074 4,693 4,693
--------------------------------- ----- ------- -------- -------
Fair value adjustment
for portfolio hedged risk (17) (53) (53)
--------------------------------- ----- ------- -------- -------
Debt securities in issue 35,942 34,118 34,118
--------------------------------- ----- ------- -------- -------
Derivative financial instruments 1,593 2,337 2,337
--------------------------------- ----- ------- -------- -------
Other liabilities 583 345 345
--------------------------------- ----- ------- -------- -------
Provisions for liabilities
and charges 13 199 274 273
--------------------------------- ----- ------- -------- -------
Accruals and deferred
income 346 336 336
--------------------------------- ----- ------- -------- -------
Subordinated liabilities 12 6,706 5,497 5,497
--------------------------------- ----- ------- -------- -------
Subscribed capital 12 250 263 263
--------------------------------- ----- ------- -------- -------
Deferred tax 144 49 49
--------------------------------- ----- ------- -------- -------
Current tax liabilities 89 53 53
--------------------------------- ----- ------- -------- -------
Retirement benefit obligations 15 105 345 345
--------------------------------- ----- ------- -------- -------
Total liabilities 225,132 216,696 216,695
--------------------------------- ----- ------- -------- -------
Members' interests and
equity
--------------------------------- ----- ------- -------- -------
Core capital deferred
shares 16 1,325 1,325 1,325
--------------------------------- ----- ------- -------- -------
Other equity instruments 17 992 992 992
--------------------------------- ----- ------- -------- -------
General reserve 10,418 9,802 9,951
--------------------------------- ----- ------- -------- -------
Revaluation reserve 64 68 68
--------------------------------- ----- ------- -------- -------
Cash flow hedge reserve 320 (8) (8)
--------------------------------- ----- ------- -------- -------
Fair value through other
comprehensive income reserve 50 62
--------------------------------- ----- ------- -------- -------
Available for sale reserve 75
--------------------------------- ----- ------- -------- -------
Total members' interests
and equity 13,169 12,241 12,403
--------------------------------- ----- ------- -------- -------
Total members' interests,
equity and liabilities 238,301 228,937 229,098
--------------------------------- ----- ------- -------- -------
*Comparatives have been restated as detailed in note 2. Balances
at 5 April 2018 have been prepared under IFRS 9 as detailed in note
18.
Consolidated statement of movements in members' interests and
equity
For the year ended 4 April 2019
Core capital Other General Revaluation Cash flow Available FVOCI Total
deferred equity reserve reserve hedge for reserve
shares instruments reserve sale
reserve
------------ ------------ -------- ----------- --------- --------- -------- ------
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------- ------------ ------------ -------- ----------- --------- --------- -------- ------
At 4 April 2018 1,325 992 9,951 68 (8) 75 12,403
--------------- ------------ ------------ -------- ----------- --------- --------- -------- ------
IFRS 9
transition
(note i) - - (149) - - (75) 62 (162)
--------------- ------------ ------------ -------- ----------- --------- --------- -------- ------
At 5 April 2018 1,325 992 9,802 68 (8) 62 12,241
--------------- ============ ============ ======== =========== ========= ========= ======== ======
Profit for the
year - - 618 - - - 618
--------------- ------------ ------------ -------- ----------- --------- --------- -------- ------
Net
remeasurements
of retirement
benefit
obligations - - 153 - - - 153
--------------- ------------ ------------ -------- ----------- --------- --------- -------- ------
Net revaluation
of property - - - (1) - - (1)
--------------- ------------ ------------ -------- ----------- --------- --------- -------- ------
Reserve
transfer - - 3 (3) - - -
--------------- ------------ ------------ -------- ----------- --------- --------- -------- ------
Net movement in
cash flow
hedge
reserve - - - - 328 - 328
--------------- ------------ ------------ -------- ----------- --------- --------- -------- ------
Net movement in
FVOCI reserve - - - - - (12) (12)
--------------- ============ ============ ======== =========== ========= ========= ======== ======
Total
comprehensive
income - - 774 (4) 328 (12) 1,086
--------------- ------------ ------------ -------- ----------- --------- --------- -------- ------
Distribution to
the holders of
core capital
deferred
shares - - (108) - - - (108)
--------------- ------------ ------------ -------- ----------- --------- --------- -------- ------
Distribution to
the holders of
Additional
Tier 1 capital
(note
ii) - - (50) - - - (50)
--------------- ------------ ------------ -------- ----------- --------- --------- -------- ------
At 4 April 2019 1,325 992 10,418 64 320 50 13,169
--------------- ------------ ------------ -------- ----------- --------- --------- -------- ------
For the year ended 4 April 2018
Core capital Other General Revaluation Cash flow Available Total
deferred equity reserve reserve hedge for
shares instruments reserve sale
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
----------------------------------- ------------ ------------ -------- ----------- --------- --------- ------
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
ii) - - (50) - - - (50)
----------------------------------- ------------ ------------ -------- ----------- --------- --------- ------
At 4 April 2018 1,325 992 9,951 68 (8) 75 12,403
----------------------------------- ------------ ------------ -------- ----------- --------- --------- ------
Notes:
i. Adjustments on implementation of IFRS 9 as detailed in note 18.
ii. The distribution to the holders of Additional Tier 1 capital
is shown net of an associated tax credit of GBP18 million (2018:
GBP18 million).
Notes to the consolidated financial statements
1. Reporting period
These results have been prepared as at 4 April 2019 and show the
financial performance for the year from, and including, 5 April
2018 to this date.
2. Basis of preparation
These financial statements 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 2019 were included in the
'Annual Report and Accounts 2018' document except as detailed
below. Copies of these documents are available at
nationwide.co.uk/about_nationwide/results_and_accounts
Adoption of new and revised IFRSs
The Group has adopted the following standards with effect from 5
April 2018:
-- IFRS 9 'Financial Instruments'
-- IFRS 15 'Revenue from Contracts with Customers'.
Further information on the impacts of adopting these new
standards is set out below.
In addition, a number of amendments and improvements to
accounting standards have been issued by the International
Accounting Standards Board (IASB) with an effective date of 1
January 2018. Those relevant to these financial statements, being
minor amendments to IFRS 2 'Classification and Measurement of
Share-based Payment Transactions' and IAS 40 'Transfers of
Investment Property', were adopted with no significant impact for
the Group.
IFRS 9 'Financial Instruments'
The Group has adopted the requirements of IFRS 9 from 5 April
2018. The classification and measurement and impairment
requirements have been applied retrospectively by adjusting the
opening balance sheet at the date of initial application, with no
restatement of comparatives. The impacts on the Group's balance
sheet and members' interests and equity at 5 April 2018 are
included in note 18. Additional information on the transition to
IFRS 9 can be found in Nationwide's 'Report on Transition to IFRS
9: Financial Instruments', available on the Group's website at
nationwide.co.uk
IFRS 9 also includes an accounting policy choice to continue
applying IAS 39 hedge accounting, which the Group has exercised
within these financial statements. The revised accounting policies
following the adoption of IFRS 9 are set out in the Interim Results
for the period ended 30 September 2018, available on the Group's
website at nationwide.co.uk
Consequential amendments to IAS 1 'Presentation of Financial
Statements,' arising from IFRS 9, introduced a requirement to
present separately interest revenue calculated using the effective
interest rate method. The Group has therefore disaggregated the
previous line item for interest receivable and similar income into
two separate components for amounts:
-- calculated using the effective interest rate method, and
-- other.
Comparative amounts have been restated.
IFRS 15 'Revenue from Contracts with Customers'
The Group has applied IFRS 15 'Revenue from Contracts with
Customers' from 5 April 2018. The standard applies to all contracts
with customers but does not apply to financial instruments, lease
contracts or non-monetary exchanges. IFRS 15 has introduced a
principles-based approach for revenue recognition, with revenue
being recognised as the related obligations are satisfied.
The Group has assessed revenue streams within the scope of IFRS
15 and concluded that the timing of revenue recognition is
unchanged under the new standard. There is therefore no
transitional impact from adopting this standard.
Notes to the consolidated financial statements (continued)
2. Basis of preparation (continued)
Other changes in accounting policy
Income statement presentation
While not necessarily required by the adoption of IFRS 9 as
described above, voluntary changes in accounting policy have also
been made in relation to the presentation of financial instruments.
In particular, the opportunity has been taken to reclassify certain
items previously included in interest receivable and similar
income/(expense) to reflect better the nature of the transactions,
with gains and losses recognised on the disposal of investment
securities classified as FVOCI (2018: available for sale) now
presented in other operating income. Comparatives have been
restated as shown below:
Consolidated income statement extract for the
year ended 4 April 2018
Previously Adjustment Restated
published
---------- ---------- --------
GBPm GBPm GBPm
--------------------------------- ---------- ---------- --------
Interest receivable and
similar income 4,818 (7) 4,811
--------------------------------- ---------- ---------- --------
Other operating income/(expense) (84) 7 (77)
--------------------------------- ---------- ---------- --------
This reclassification has no impact on the Group's net assets or
members' interests and equity at 4 April 2018.
Balance sheet presentation
To provide a more meaningful presentation of the Group's
collateral, repurchase agreement and reverse repurchase agreement
balances, amounts held with counterparties which are non-banking
financial institutions and central clearing houses are now
presented with similar balances held with banking counterparties
within newly named categories of 'loans and advances to banks and
similar institutions' and 'deposits from banks and similar
institutions.' Previously, balances with non-banking and central
clearing house counterparties were presented separately within
'loans and advances to customers' and 'other deposits,' and similar
balances with banking counterparties were included within 'loans
and advances to banks' and 'deposits from banks'.
Additionally, following the closure of the Group's Isle of Man
and Republic of Ireland operations in the year ended 4 April 2018,
the remaining balances within 'due to customers' have been combined
with 'other deposits'.
Comparatives have been restated to reflect these
reclassifications as shown below:
Consolidated balance sheet extract at 4 April 2018
------------------------------------------------------------------
Previously Adjustment Restated
published
---------- ---------- --------
GBPm GBPm GBPm
-------------------------------- ---------- ---------- --------
Loans and advances to banks
and similar institutions
(note i) 3,422 71 3,493
-------------------------------- ---------- --------
Loans and advances to customers 191,664 (71) 191,593
-------------------------------- ---------- --------
Deposits from banks and
similar institutions (note
ii) 19,404 1,032 20,436
-------------------------------- ---------- --------
Other deposits 5,323 (630) 4,693
-------------------------------- ---------- --------
Due to customers 402 (402) -
-------------------------------- ---------- ---------- --------
Notes:
i. Previously 'Loans and advances to banks'.
ii. Previously 'Deposits from banks'.
These reclassifications have no impact on the Group's net assets
or members' interests and equity at 4 April 2018.
Judgements in applying accounting policies and critical
accounting estimates
The preparation of the Group's consolidated financial statements
in accordance with IFRS involves management making judgements and
estimates when applying those accounting policies that affect the
reported amounts of assets, liabilities, income and expense. Actual
results may differ from those on which management's estimates are
based. Estimates and assumptions are continually evaluated and are
based on historical experience and other factors, including
expectations of future events that are believed to be
reasonable.
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.
Notes to the consolidated financial statements (continued)
3. Interest receivable and similar income
2019 2018
(note
i)
----- ------
GBPm GBPm
----------------------------------------------- ----- ------
On financial assets measured at amortised
cost:
----------------------------------------------- ------
Residential mortgages 4,469 4,532
----------------------------------------------- ------
Other loans 656 677
----------------------------------------------- ------
Other liquid assets 137 67
----------------------------------------------- ------
Investment securities 27 14
----------------------------------------------- ------
On investment securities measured at
FVOCI (2018: available for sale) 167 115
----------------------------------------------- ------
On financial instruments hedging assets
in a qualifying hedge accounting relationship (315) (543)
----------------------------------------------- ----- ------
Total interest receivable and similar
income calculated using the effective
interest rate method 5,141 4,862
----------------------------------------------- ----- ------
Other interest and similar income/(expense)
(note ii) (23) (51)
----------------------------------------------- ----- ------
Total 5,118 4,811
----------------------------------------------- ----- ------
Notes:
i. Comparative balances have been restated to present separately
interest receivable and similar income calculated using the
effective interest rate method as detailed in note 2.
ii. Includes interest on financial instruments hedging assets
that are not in a qualifying hedge accounting relationship.
4. Interest expense and similar charges
2019 2018
----- -----
GBPm GBPm
---------------------------------------- ----- -----
On shares held by individuals 1,335 1,140
---------------------------------------- -----
On subscribed capital 14 15
---------------------------------------- -----
On deposits and other borrowings:
---------------------------------------- -----
Subordinated liabilities 238 175
---------------------------------------- -----
Other 207 320
---------------------------------------- -----
On debt securities in issue 673 712
---------------------------------------- -----
Net income on financial instruments
hedging liabilities (270) (563)
---------------------------------------- -----
Interest on net defined benefit pension
liability 6 8
---------------------------------------- ----- -----
Total 2,203 1,807
---------------------------------------- ----- -----
In the year to 4 April 2018 interest on deposits and other
borrowings included an expense of GBP210 million in relation to the
maturity and redemption of Protected Equity Bond (PEB) deposits
which had 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 in the year to
4 April 2018 included income of GBP206 million in relation to the
associated derivatives.
Notes to the consolidated financial statements (continued)
5. Other operating income/expense
2019 2018
(note
i)
---- ------
GBPm GBPm
-------------------------------------- ---- ------
Gains on financial assets measured
at FVTPL 23 -
-------------------------------------- ------
Gains on FVOCI investment securities
(2018: available for sale investment
securities) 27 33
-------------------------------------- ------
Other income/(expense) 4 (110)
-------------------------------------- ---- ------
Total 54 (77)
-------------------------------------- ---- ------
Note:
i. Comparatives have been restated as detailed in note 2.
Other income/(expense) includes the net amount of rental income,
profits or losses on the sale of property, plant and equipment and
increases or decreases in the valuations of branches and
non-specialised buildings which are not recognised in other
comprehensive income. There were no gains or losses on disposal of
financial assets measured at amortised cost in the year ended 4
April 2019 (2018: GBPnil). In the year ended 4 April 2018, other
income/(expense) included a GBP116 million loss from a debt
buy-back exercise.
6. Gains/losses from derivatives and hedge accounting
As a part of its risk management strategy, the Group uses
derivatives to economically hedge financial assets and liabilities.
More information on how the Group manages market risk can be found
in the Business and Risk Report. Hedge accounting is employed by
the Group to minimise the accounting volatility associated with the
change in fair value of derivative financial instruments. This
volatility does not reflect the economic reality of the Group's
hedging strategy. The Group only uses derivatives for the hedging
of risks; however, income statement volatility can still arise due
to hedge accounting ineffectiveness or because hedge accounting is
either not applied or is not currently achievable. The overall
impact of derivatives will remain volatile from period to period as
new derivative transactions replace those which mature to ensure
that interest rate and other market risks are continually
managed.
2019 2018
---- ----
GBPm GBPm
-------------------------------------- ---- ----
Gains/(losses) from fair value hedge
accounting 24 (86)
-------------------------------------- ---- ----
Gains/(losses) from cash flow hedge
accounting 23 17
-------------------------------------- ---- ----
Net gain from mortgage pipeline (note
i) - 50
-------------------------------------- ---- ----
Fair value (losses)/gains from other
derivatives (note ii) (18) 5
-------------------------------------- ---- ----
Foreign exchange retranslation (note
iii) 7 13
-------------------------------------- ---- ----
Total 36 (1)
-------------------------------------- ---- ----
Notes:
i. Includes the fair value movement of both interest rate swaps,
which are used to economically hedge expected new mortgage
business, and firm mortgage commitments, where the Group has
elected to fair value those commitments to reduce the accounting
mismatch. The Group has not applied this fair value option for new
mortgage business in the year ended 4 April 2019; therefore, the
fair value movements of the interest rate swaps have been reported
in 'fair value (losses)/gains from other derivatives'.
ii. Other derivatives are those used for economic hedging
purposes, but which are not currently in a hedge accounting
relationship.
iii. Gains or losses arise from the retranslation of foreign
currency monetary items not subject to effective hedge
accounting.
Gains of GBP24 million (2018: losses of GBP86 million) from fair
value hedge accounting include losses of GBP9 million (2018: losses
of GBP42 million) from macro hedges, due to hedge ineffectiveness
and the amortisation of existing balance sheet amounts, and gains
of GBP33 million relating to micro hedges (2018: losses of GBP44
million) which arise due to a combination of hedge ineffectiveness,
disposals and restructuring, and the amortisation of existing
balance sheet amounts.
Notes to the consolidated financial statements (continued)
7. Administrative expenses
2019 2018
----- -----
Notes GBPm GBPm
------------------------------- ----- ----- -----
Employee costs:
------------------------------- ----- -----
Wages and salaries 525 524
------------------------------- ----- -----
Bonuses 55 61
------------------------------- ----- -----
Social security costs 65 66
------------------------------- ----- -----
Pension costs 181 173
-----
826 824
------------------------------- ----- -----
Other administrative expenses 836 758
------------------------------- ----- -----
Bank levy 13 43 45
-----
1,705 1,627
------------------------------- ----- -----
Depreciation, amortisation and
impairment 549 397
-----
Total 2,254 2,024
------------------------------- ----- ----- -----
8. Impairment losses and provisions on loans and advances to
customers
The following tables set out impairment losses and reversals
during the year and the closing provision balances which are
deducted from the relevant asset values in the balance sheet:
Impairment losses/(reversals)
2019 2018
(note
i)
GBPm GBPm
---- -------
Prime residential (1) 3
----------------------- ----
Specialist residential (16) 8
----------------------- ----
Consumer banking 114 97
----------------------- ----
Commercial and other
lending 16 (1)
----------------------- ----
Total 113 107
----------------------- ---- -------
Impairment provisions
4 April 5 April 4 April
2019 2018 2018
(note (note
i) i)
GBPm GBPm GBPm
Prime residential 44 47 36
----------------------- ------- -------
Specialist residential 162 188 109
----------------------- ------- -------
Consumer banking 418 365 298
----------------------- ------- -------
Commercial and other
lending 41 29 15
----------------------- ------- -------
Total 665 629 458
----------------------- ------- -------
Note:
i. 5 April 2018 balances are prepared under IFRS 9. Comparatives
for the year ended and as at 4 April 2018 are prepared under IAS
39.
Notes to the consolidated financial statements (continued)
9. Taxation
Tax charge in the income statement
2019 2018
GBPm GBPm
Current tax:
---- ----
UK corporation tax 209 246
Adjustments in respect of prior years (12) (12)
Total current tax 197 234
Deferred tax:
Current year charge/(credit) 6 (7)
Adjustments in respect of prior years 9 9
Effect of deferred tax provided at different
tax rates 3 (4)
Total deferred taxation 18 (2)
Tax charge 215 232
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
2019 2018
----
GBPm GBPm
----
Profit before tax: 833 977
Tax calculated at a tax rate of 19% 158 186
Adjustments in respect of prior years (3) (3)
Banking surcharge 37 43
Expenses not deductible for tax purposes/(income
not taxable):
Depreciation on non-qualifying assets 3 1
Bank levy 8 8
Customer redress 8 -
Other 1 1
Effect of deferred tax provided at different
tax rates 3 (4)
Tax charge 215 232
Notes to the consolidated financial statements (continued)
10. Classification and measurement
The following table summarises the classification of carrying
amounts of the Group's financial assets and liabilities.
Classification of financial assets and liabilities
4 April 2019 5 April 2018 (note i)
Amortised Fair value Fair value Total Amortised Fair value Fair value Total
cost through through cost through through
other profit other profit
comprehensive or loss comprehensive or loss
income income
Group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------- -------------- ---------- ------- --------- -------------- ---------- -------
Financial assets
---------------------- --------- -------------- ---------- ------- --------- -------------- ---------- -------
Cash 12,493 - - 12,493 14,361 - - 14,361
---------------------- --------- -------------- ---------- ------- --------- -------------- ---------- -------
Loans and advances to
banks
and similar
institutions 4,009 - - 4,009 3,493 - - 3,493
---------------------- --------- -------------- ---------- ------- --------- -------------- ---------- -------
Investment securities 1,656 14,500 78 16,234 1,120 11,881 45 13,046
---------------------- --------- -------------- ---------- ------- --------- -------------- ---------- -------
Derivative financial
instruments - - 3,562 3,562 - - 4,121 4,121
---------------------- --------- -------------- ---------- ------- --------- -------------- ---------- -------
Fair value adjustment
for portfolio
hedged risk 411 - - 411 (144) - - (144)
---------------------- --------- -------------- ---------- ------- --------- -------------- ---------- -------
Loans and advances to
customers 198,922 - 129 199,051 191,174 - 247 191,421
---------------------- --------- -------------- ---------- ------- --------- -------------- ---------- -------
Total financial assets 217,491 14,500 3,769 235,760 210,004 11,881 4,413 226,298
---------------------- --------- -------------- ---------- ------- --------- -------------- ---------- -------
Other non-financial
assets 2,541 2,639
---------------------- --------- -------------- ---------- ------- --------- -------------- ---------- -------
Total assets 238,301 228,937
---------------------- --------- -------------- ---------- ------- --------- -------------- ---------- -------
Financial liabilities
---------------------- --------- -------------- ---------- ------- --------- -------------- ---------- -------
Shares 153,969 - - 153,969 148,003 - - 148,003
---------------------- --------- -------------- ---------- ------- --------- -------------- ---------- -------
Deposits from banks
and similar
institutions 20,149 - - 20,149 20,436 - - 20,436
---------------------- --------- -------------- ---------- ------- --------- -------------- ---------- -------
Other deposits 5,074 - - 5,074 4,693 - - 4,693
---------------------- --------- -------------- ---------- ------- --------- -------------- ---------- -------
Fair value adjustment
for portfolio
hedged risk (17) - - (17) (53) - - (53)
---------------------- --------- -------------- ---------- ------- --------- -------------- ---------- -------
Debt securities in
issue 35,942 - - 35,942 34,118 - - 34,118
---------------------- --------- -------------- ---------- ------- --------- -------------- ---------- -------
Derivative financial
instruments - - 1,593 1,593 - - 2,337 2,337
---------------------- --------- -------------- ---------- ------- --------- -------------- ---------- -------
Subordinated
liabilities 6,706 - - 6,706 5,497 - - 5,497
---------------------- --------- -------------- ---------- ------- --------- -------------- ---------- -------
Subscribed capital 250 - - 250 263 - - 263
---------------------- --------- -------------- ---------- ------- --------- -------------- ---------- -------
Total financial
liabilities 222,073 - 1,593 223,666 212,957 - 2,337 215,294
---------------------- --------- -------------- ---------- ------- --------- -------------- ---------- -------
Other non-financial
liabilities 1,466 1,402
---------------------- --------- -------------- ---------- ------- --------- -------------- ---------- -------
Total liabilities 225,132 216,696
---------------------- --------- -------------- ---------- ------- --------- -------------- ---------- -------
Note:
i. 5 April 2018 balances are presented under IFRS 9. Balances
have been restated as detailed in note 2 and adjustments made on
transition to IFRS 9 are detailed in note 18.
As at 4 April 2019, the Group had no financial assets or
liabilities (5 April 2018: none) for which it had taken the option
to designate at FVTPL. Further details on the transition to IFRS 9
are included in note 18.
Notes to the consolidated financial statements (continued)
11. Loans and advances to customers
4 April 2019 5 April 2018 (note i) 4 April 2018 (note i)
Loans held at amortised Loans Total Loans held at amortised Loans Total Loans held at amortised Total
cost held cost held cost
at at
FVTPL FVTPL
Gross Provisions Other Total Gross Provisions Other Total Gross Provisions Other
(note (note (note
ii) ii) ii)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Prime
residential
mortgages 151,445 (44) - 151,401 72 151,473 143,869 (47) - 143,822 189 144,011 144,049 (36) - 144,013
Specialist
residential
mortgages 34,495 (162) - 34,333 - 34,333 33,245 (188) - 33,057 - 33,057 33,250 (109) - 33,141
Consumer
banking 4,586 (418) - 4,168 - 4,168 4,107 (365) - 3,742 - 3,742 4,107 (298) - 3,809
Commercial
and
other
lending 8,178 (41) 883 9,020 57 9,077 9,540 (29) 1,042 10,553 58 10,611 9,602 (15) 1,043 10,630
Total 198,704 (665) 883 198,922 129 199,051 190,761 (629) 1,042 191,174 247 191,421 191,008 (458) 1,043 191,593
Notes:
i. 5 April 2018 balances are presented under IFRS 9. Balances
have been restated as detailed in note 2 and adjustments made on
transition to IFRS 9 are detailed in note 18.
ii. Loans held at amortised cost include a fair value adjustment
for micro hedged risk for commercial loans hedged on an individual
basis.
Notes to the consolidated financial statements (continued)
11. Loans and advances to customers (continued)
The table below summarises the movements in gross loans and
advances to customers held at amortised cost, including the impact
of ECL impairment provisions and excluding the fair value
adjustment for micro hedged risk. The lines within the tables are
an aggregation of monthly movements over the year. Residential
mortgages represent the majority of the Group's loans and advances
to customers. An additional table that summarises the movements for
the Group's residential mortgages, is presented in the Credit risk
section of the Business and Risk Report.
Reconciliation of movements in gross balances and impairment provisions
Non-credit impaired Credit impaired
(note i)
Subject to 12 Subject to lifetime Subject to lifetime Total
month ECL ECL ECL
Stage 1 Stage 2 Stage 3 and POCI
Gross Provisions Gross Provisions Gross Provisions Gross Provisions
balances balances balances balances
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 5 April 2018 169,049 48 20,012 284 1,700 297 190,761 629
Stage transfers:
Transfers from Stage 1
to Stage 2 (29,278) (30) 29,278 30 - - - -
Transfers to Stage 3 (305) (1) (1,022) (113) 1,327 114 - -
Transfers from Stage 2
to Stage 1 37,282 266 (37,282) (266) - - - -
Transfers from Stage 3 187 3 573 24 (760) (27) - -
Net remeasurement of
ECL arising from
transfer of stage (237) 287 20 70
Net movement arising
from transfer
of stage (note ii) 7,886 1 (8,453) (38) 567 107 - 70
----------
New assets originated
or purchased
(note iii) 38,717 30 - - - - 38,717 30
----------
Repayments and changes
in risk parameters
(note iv) (8,835) (9) (199) 32 (63) 29 (9,097) 52
----------
Other items impacting
income statement
charge/(reversal)
including recoveries 2 - - - (1) (19) 1 (19)
----------
Redemptions (note v) (19,451) (2) (1,821) (17) (285) (1) (21,557) (20)
----------
Income statement
charge for the year 113
Decrease due to
write-offs - - - - (121) (96) (121) (96)
----------
Other provision
movements - - - - - 19 - 19
----------
4 April 2019 187,368 68 9,539 261 1,797 336 198,704 665
Net carrying amount 187,300 9,278 1,461 198,039
----------
Notes:
i. Gross balances of credit impaired loans include GBP167
million (5 April 2018: GBP180 million) of purchased or originated
credit impaired (POCI) loans, which are presented net of lifetime
ECL impairment provisions of GBP6 million (5 April 2018: GBP7
million).
ii. The remeasurement of provisions arising from a change in
stage is reported within the stage to which the assets are
transferred.
iii. If a new asset is generated in the month, the value
included is the closing gross balance and provision for the month.
All new business written is included in Stage 1.
iv. This line comprises capital repayments where the asset is
not derecognised, changes in risk parameters, and changes to
modelling inputs and methodology. The repayment value for gross
balances is calculated as the closing gross balance for the month
less the opening gross balance for the month. The repayment value
for provisions is calculated as the change in exposure at default
(EAD) multiplied by opening provision coverage for the month. The
provision movement for the change in risk parameters is calculated
for assets that do not move stage in the month.
v. For any asset that is derecognised in the month, the value
disclosed is the provision at the start of that month.
The key movements shown in the table above are as follows:
-- The movement in gross balances is principally a result of
GBP38,717 million of new lending, offset by a reduction of
GBP30,654 million as a result of repayments and redemptions. The
majority of these movements relate to residential mortgages.
-- Of the GBP121 million of write-offs, GBP74 million relates to
unsecured lending, GBP41 million to residential mortgages and GBP6
million to commercial and other lending.
-- Impairment provisions increased by GBP36 million in the
period to GBP665 million. As shown in note 8, unsecured and
commercial provisions increased in the period; however, these
increases were offset by a reduction in residential mortgages
provisions.
-- The net GBP52 million increase in impairment provisions from
'Repayments and changes in risk parameters', includes the majority
of the GBP23 million impact of changes made to the economic
scenarios applied during the period.
Notes to the consolidated financial statements (continued)
11. Loans and advances to customers (continued)
Asset backed funding
Certain prime residential mortgages have been pledged to the
Group's asset backed funding programmes or utilised as whole
mortgage loan pools for the Bank of England's (BoE) Term Funding
Scheme (TFS). The programmes have enabled the Group to obtain
secured funding. Mortgages pledged and the carrying values of the
notes in issue are as follows:
Mortgages pledged to asset backed funding programmes
2019 2018
Notes in issue Notes in issue (note i)
Held by the Group Held by the Group
------------------
Held by Held by
Mortgages third Mortgages third
pledged parties Drawn Undrawn Total pledged parties Drawn Undrawn Total
(note (note (note (note notes (note (note (note (note notes
ii) iii) iv) v) in issue ii) iii) iv) v) in issue
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------- -------- -------- -------- ---------
Covered bond
programme 22,656 17,339 - - 17,339 21,000 16,035 - - 16,035
-------- -------- -------- -------- ---------
Securitisation
programme 6,936 3,051 - 339 3,390 8,711 3,655 - 338 3,993
-------- -------- -------- -------- ---------
Whole mortgage
loan
pools 24,117 - 17,001 - 17,001 22,831 - 17,001 - 17,001
-------- -------- -------- -------- ---------
Total 53,709 20,390 17,001 339 37,730 52,542 19,690 17,001 338 37,029
-------- -------- -------- -------- ---------
Notes:
i. Prior year comparatives have been restated to present
balances on a consistent basis with the current period.
ii. Mortgages pledged include GBP5.4 billion (2018: GBP8.7
billion) in the covered bond and securitisation programmes that are
in excess of the amount contractually required to support notes in
issue.
iii. Notes in issue which are held by third parties are included
within debt securities in issue.
iv. Notes in issue, held by the Group and drawn are whole
mortgage loan pools securing amounts drawn under the TFS. At 4
April 2019 the Group had outstanding TFS drawings of GBP17.0
billion (2018: GBP17.0 billion).
v. Notes in issue, held by the Group and undrawn, are debt
securities issued by the programmes to the Society and mortgage
loan pools that have been pledged to the BoE but not utilised.
The Group established the Nationwide Covered Bond programme in
November 2005. Mortgages pledged under the Nationwide Covered Bond
programme provide security for issues of covered bonds made by the
Group. During
the year ended 4 April 2019, GBP2.5 billion (sterling
equivalent) of notes were issued, and GBP0.8 billion (sterling
equivalent) of notes matured.
The Group established the Silverstone Master Trust
securitisation programme in July 2008. The securitisation programme
notes are issued by Silverstone Master Issuer plc 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 GBP3.9 billion (2018: GBP5.2 billion) stays with the Group and
includes its required minimum seller share in accordance with the
rules of the programme. The Group is under no obligation to support
losses incurred by the programme or holders of the notes and does
not intend to provide such further support. The entitlement of note
holders is restricted to payment of principal and interest to the
extent that the resources of the programme are sufficient to
support such payment and the holders of the notes have agreed not
to seek recourse in any other form. During the year ended 4 April
2019 a total of GBP0.7 billion (sterling equivalent) of notes
matured, with no issuances in the period.
The securitisation programme notes are issued by Silverstone
Master Issuer plc. Silverstone Master Issuer plc is fully
consolidated into the accounts of the Group.
The whole mortgage loan pools are pledged at the BoE under the
TFS. 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 2019, GBP24.1 billion (2018: GBP22.8 billion) of pledged
collateral supported GBP17.0 billion (2018: GBP17.0 billion) of TFS
drawdowns. There were no further drawdowns during the year
following the closure of the TFS drawdown window in February
2018.
In accordance with accounting standards, notes in issue and held
by the Group are not recognised in the Group's consolidated balance
sheet. Mortgages pledged are not derecognised from the Group
consolidated balance sheet as the Group has retained substantially
all the risks and rewards of ownership. The Group continues to be
exposed to the liquidity risk, interest rate risk and credit risk
of the mortgages. No gain or loss has been recognised on pledging
the mortgages to the programmes.
Notes to the consolidated financial statements (continued)
12. Subordinated liabilities and subscribed capital
2019 2018
GBPm GBPm
----- -----
Subordinated liabilities
Senior non-preferred notes and Tier
2 eligible subordinated notes 6,700 5,487
Fair value hedge accounting adjustments 37 42
Unamortised premiums and discounts (31) (32)
Total 6,706 5,497
Subscribed capital
Subordinated notes 212 225
Fair value hedge accounting adjustments 40 40
Unamortised premiums and discounts (2) (2)
Total 250 263
All of the Society's subordinated liabilities and permanent
interest-bearing shares (PIBS) are unsecured. The Society may, with
the prior consent of the Prudential Regulation Authority (PRA),
repay the PIBS and redeem the subordinated liabilities early.
Senior non-preferred notes are a class of subordinated liability
which rank equally with each other and behind the claims against
the Society of all depositors, creditors and investing members
other than holders of Tier 2 eligible subordinated notes, permanent
interest-bearing shares (PIBS), Additional Tier 1 (AT1) instruments
and CCDS. The Tier 2 eligible subordinated notes rank equally with
each other and ahead of claims against the Society of holders of
PIBS, AT1 instruments and CCDS.
PIBS rank equally with each other and the Group's AT1
instruments. They are deferred shares of the Society and rank
behind the claims against the Society of all noteholders,
depositors, creditors and investing members of the Society, other
than the holders of CCDS.
Notes to the consolidated financial statements (continued)
13. Provisions for liabilities and charges
Bank levy FSCS Customer Other Total
redress provisions
---- -----------
GBPm GBPm GBPm GBPm GBPm
---------------------------- ---- -------- ----------- -----
At 4 April 2018 24 15 221 13 273
---------------------------- --------- ---- ----------- -----
Transition to IFRS 9 (note
i) - - - 1 1
---------------------------- --------- ---- ----------- -----
At 5 April 2018 24 15 221 14 274
---------------------------- --------- ---- ----------- -----
Provisions utilised (46) (6) (77) (17) (146)
---------------------------- --------- ---- ----------- -----
Charge for the year 43 1 79 26 149
--------- ---- ----------- -----
Release for the year - (10) (64) (4) (78)
--------- ---- ----------- -----
Net income statement charge
(note ii) 43 (9) 15 22 71
---------------------------- --------- ---- ----------- -----
At 4 April 2019 21 - 159 19 199
---------------------------- --------- ---- ----------- -----
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
(note ii) 45 (1) 26 3 73
---------------------------- --------- ---- ----------- -----
At 4 April 2018 24 15 221 13 273
---------------------------- ---- ----------- -----
Notes:
i. On transition to IFRS 9, an expected credit loss provision of
GBP1 million was recognised in respect of separately identifiable
irrevocable loan commitments.
ii. Of the net income statement charge of GBP71 million (2018:
GBP73 million), a net charge of GBP6 million (2018: GBP25 million)
relating to FSCS and customer redress is included in provisions for
liabilities and charges, and a net charge of GBP65 million (2018:
GBP48 million) relating to bank levy and other provisions is
included in administrative expenses.
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 of
approximately GBP15.6 billion from HM Treasury, the interest on
which was charged to firms through the FSCS levy. During the year,
UK Asset Resolution (UKAR) sold portfolios relating to Bradford and
Bingley plc, and repaid the outstanding loan from HM Treasury.
There are therefore no further amounts due in respect of this
interest levy at 4 April 2019. In common with other financial
institutions subject to the FSCS, the Group continues to have a
potential exposure to future levies resulting from any future
failure of other financial institutions and consequential claims
which arise against the FSCS as a result of any such failure.
Customer redress
During the course of its business, the Group receives complaints
from customers in relation to past sales or ongoing administration.
The Group is also subject to enquiries from and discussions with
its regulators, 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 GBP159 million (2018: GBP221
million) in respect of the potential costs of remediation and
redress in relation to past sales of PPI, issues relating to
administration of customer accounts, non-compliance with consumer
credit legislation and other regulatory matters.
Other provisions
Other provisions include amounts for severance costs, a number
of property related provisions and ECLs on irrevocable personal
loan and mortgage lending commitments.
Notes to the consolidated financial statements (continued)
14. Contingent liabilities
The Group does not expect the ultimate resolution of any current
complaints, threatened or actual legal proceedings, regulatory or
other matters to have a material adverse impact on its financial
position.
15. Retirement benefit obligations
The Group operates two defined contribution pension schemes in
the UK - the Nationwide Group Personal Pension Plan (GPP) and the
Nationwide Temporary Workers Pension Scheme. New employees are
automatically enrolled into one of these schemes, 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.
The Group also has funding obligations to several defined
benefit pension schemes, which are administered by boards of
trustees. Pension trustees are required by law to act in the
interests of all relevant beneficiaries and are responsible for the
investment policy of fund assets, as well as the day to day
administration. The Group's largest pension scheme is the
Nationwide Pension Fund (the Fund). This is a contributory defined
benefit pension scheme, with both final salary and career average
revalued earnings (CARE) sections. The Fund was closed to new
entrants in 2007 and since that date employees have been able to
join the GPP. Further information on the Group's obligations to
defined benefit pension schemes are set out below.
Defined benefit pension schemes
Retirement benefit obligations on the balance sheet
2019 2018
------- -------
GBPm GBPm
-------
Present value of funded obligations 6,375 6,108
-------
Present value of unfunded obligations 8 12
-------
6,383 6,120
-------
Fair value of fund assets (6,278) (5,775)
-------
Deficit at 4 April 105 345
-------
Most members of the Fund can draw their pension when they reach
the Fund's retirement age of 65. The level of 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).
On the death of a Fund member, 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 refund of
Fund member contributions. Fund members are able to place
redundancy severance into their pension.
Approximately 31% of the Fund's pension 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 obligation between
current employees (27 years), deferred Fund members (24 years) and
current pensioners (15 years).
The Group's retirement benefit obligations include GBP2 million
(2018: GBP2 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 GBP8
million (2018: GBP12 million) in respect of unfunded legacy defined
benefit arrangements.
Notes to the consolidated financial statements (continued)
15. Retirement benefit obligations (continued)
The principal actuarial assumptions used are as follows:
Principal actuarial assumptions
2019 2018
---- ----
% %
----
Discount rate 2.40 2.45
----
Future salary increases 3.25 3.10
----
Future pension increases (maximum 5%) 3.00 2.90
----
Retail price index (RPI) inflation 3.25 3.10
----
Consumer price index (CPI) inflation 2.25 2.10
----
The assumptions for mortality rates are based on standard
mortality tables which allow for future improvements in life
expectancies and are adjusted to represent the Fund's membership.
The assumptions made are illustrated in the table below showing how
long we would expect the average Fund member to live for after the
age of 60, based on reaching that age at 4 April 2019 or in twenty
years' time at 4 April 2039.
Life expectancy assumptions
2019 2018
---- ----
% %
----
Age 60 at 4 April 2019
---- ----
Males 27.9 28.0
----
Females 29.1 29.3
----
Age 60 at 4 April 2039:
----
Males 29.0 29.2
----
Females 30.6 30.8
----
Changes in the present value of the net defined benefit
liability (including unfunded obligations) are as follows:
Movements in net defined benefit liability
Group
2019 2018
-----
GBPm GBPm
-----
Deficit at 5 April 345 423
-----
Current service cost 89 95
-----
Past service cost 12 5
-----
Curtailment gains (7) (9)
-----
Benefits paid directly by the Group (3) -
-----
Interest on net defined benefit liability 6 8
-----
Return on assets (greater)/less than
discount rate (370) 1
-----
Contributions by employer (131) (152)
-----
Administrative expenses 4 4
-----
Actuarial losses/(gains) on defined
benefit obligations 160 (30)
-----
Deficit at 4 April 105 345
-----
Notes to the consolidated financial statements (continued)
15. Retirement benefit obligations (continued)
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 (AVCs or pension credits) to boost their pension
benefits. Included in the GBP12 million past service cost in the
table above is GBP9 million representing the Fund's estimated
Guaranteed Minimum Pensions (GMPs) equalisation obligation,
following the High Court verdict on 26 October 2018 on GMP
equalisation for men and women.
Curtailment gains are in respect of Fund members made redundant
during the year. As an active member pension benefits are linked to
the Retail Prices Index (RPI). When a member becomes a deferred
member their pension benefits are linked from that point to the
Consumer Price Index (CPI), which reduces the liability.
Benefits paid directly by the Group relate to a settlement of a
retirement benefit obligation for an unfunded legacy pension
obligation paid directly by the Group.
The interest on net defined benefit liability represents the
expected interest accruing on the liabilities over the year, offset
by the expected interest income on assets.
The GBP370 million gain relating to the return on assets greater
than the discount rate (2018: GBP1 million loss from returns less
than the discount rate) is driven by positive equity returns,
positive increases in the value of government bond holdings due to
falling bond yields and an increase in long term inflation
expectations.
The GBP131 million of employer contributions includes deficit
contributions of GBP61 million (2018: GBP152 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 2020 will be GBP126 million.
The GBP160 million actuarial loss on defined benefit obligations
(2018: GBP30 million actuarial gain on defined benefit obligations)
shown above is due to:
-- A GBP206 million loss (2018: GBP153 million gain) from
changes in financial assumptions, including a 0.05% decrease in the
discount rate and a 0.15% increase in assumed Retail Prices Index
inflation, both of which increase the value of the liabilities.
-- A GBP58 million gain (2018: GBP97 million loss) due to
updating to the latest industry standard actuarial model for
projecting future longevity improvements.
-- An experience loss of GBP12 million (2018: GBP26 million
loss) reflecting the difference between previous estimates of
long-term inflation assumptions and actual experience.
Notes to the consolidated financial statements (continued)
16. Core capital deferred shares
Number CCDS Share Total
of shares premium
---- -------- -----
GBPm GBPm GBPm
---- -------- -----
At 4 April 2019 10,500,000 11 1,314 1,325
---------- ---- -------- -----
At 4 April 2018 10,500,000 11 1,314 1,325
---- -------- -----
CCDS are a form of Common Equity Tier 1 (CET1) capital which
have been developed to enable the Group to raise capital from the
capital markets. Previously issued Tier 1 capital instruments,
PIBS, no longer meet the regulatory capital requirements of CRD IV
and are being gradually phased out of the calculation of capital
resources under transitional rules.
CCDS are perpetual instruments. They rank equally to each other
and are junior to claims against the Society of all depositors,
creditors and investing members. Each holder of CCDS has one vote,
regardless of the number of CCDS held.
In the event of a winding up or dissolution of the Society and
if a surplus was available, the amount that the investor would
receive for each CCDS held is limited to the average principal
amount in issue, which is currently 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 GBP16.36
per share and is adjusted annually in line with CPI.
A final distribution of GBP54 million (GBP5.125 per share) for
the financial year ended 4 April 2018 was paid on 20 June 2018 and
an interim distribution of GBP54 million (GBP5.125 per share) in
respect of the period to 30 September 2018 was paid on 20 December
2018. 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 2019, amounting in aggregate to GBP54 million. This has not
been reflected in these financial statements as it will be
recognised in the year ending 4 April 2020, by reference to the
date at which it was declared.
17. Other equity instruments
Total
-----
GBPm
At 4 April 2019 992
-----
At 4 April 2018 992
-----
Other equity instruments are AT1 capital instruments with a
notional value of GBP1 billion. AT1 instruments rank equally 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 bear interest at a fully
discretionary, non-cumulative initial rate of 6.875% per annum.
Interest is paid semi-annually in June and December.
An interest payment of GBP34 million, covering the period to 19
June 2018, was paid on 20 June 2018 and an interest payment of
GBP34 million, covering the period to 19 December 2018, was paid on
20 December 2018. These payments have been recognised in the
statement of movements in members' interests and equity. AT1
instruments have no maturity date but are repayable at the option
of the Society on 20 June 2019 and every fifth anniversary
thereafter.
Event after the reporting period
On 24 April 2019, the Society notified investors of its
intention to redeem the outstanding AT1 capital instruments in full
on 20 June 2019.
An interest payment of GBP34 million, covering the period to 19
June 2019, will be paid at redemption on 20 June 2019 and will be
recognised in the statement of movements in members' interests and
equity in the financial year ending 4 April 2020. The impact on the
Group's capital is explained further in the Solvency risk section
of the Business and Risk Report.
Notes to the consolidated financial statements (continued)
18. Adoption of IFRS 9
The Group has adopted IFRS 9 from 5 April 2018. As permitted by
IFRS 9, comparatives have not been restated following adoption. The
following tables summarise the adjustments to the Group's
consolidated balance sheet at 5 April 2018.
Group
IAS 39 IFRS 9 As at Classification Measurement Impairment As at
category category
4 April 5 April
2018 2018
(note (note
i) i)
Notes GBPm GBPm GBPm GBPm GBPm
---------- ---------- -------- -------------- ----------- ---------- --------
Assets
---------- ---------- -------- -------------- ----------- ---------- --------
Amortised Amortised
Cash cost cost 14,361 - - - 14,361
---------- --------- -------- -------------- ----------- ---------- --------
Loans and advances to banks and
similar Amortised Amortised
institutions cost cost 3,493 - - - 3,493
---------- --------- -------- -------------- ----------- ---------- --------
Investment securities ii AFS FVOCI 11,926 (45) - - 11,881
---------- ---------- -------- -------------- ----------- ---------- --------
Investment securities ii AFS FVTPL - 45 - - 45
---------- ---------- -------- -------------- ----------- ---------- --------
Amortised Amortised
Investment securities cost cost 1,120 - - - 1,120
---------- --------- -------- -------------- ----------- ---------- --------
Derivative financial instruments FVTPL FVTPL 4,121 - - - 4,121
---------- --------- -------- -------------- ----------- ---------- --------
Fair value adjustment for
portfolio Amortised Amortised
hedged risk iii cost cost (109) - (35) - (144)
---------- ---------- -------- -------------- ----------- ---------- --------
iv,
Loans and advances to v, Amortised Amortised
customers vi cost cost 191,593 (246) (2) (171) 191,174
---------- ---------- -------- -------------- ----------- ---------- --------
Loans and advances to iv, Amortised
customers vii cost FVTPL - 246 1 - 247
---------- ---------- -------- -------------- ----------- ---------- --------
Assets not affected by changes arising
from IFRS 9 2,495 - - - 2,495
-------- -------------- ----------- ---------- --------
Deferred tax viii 98 - 8 38 144
-------------- ----------- ---------- --------
Total assets 229,098 - (28) (133) 228,937
-------------- ----------- ---------- --------
Liabilities
---------- ---------- -------- -------------- ----------- ---------- --------
Liabilities not affected by changes
arising from IFRS 9 216,422 - - - 216,422
-------- -------------- ----------- ---------- --------
Provisions for
liabilities and charges ix 273 - - 1 274
-------------- ----------- ---------- --------
Total liabilities 216,695 - - 1 216,696
-------------- ----------- ---------- --------
Members' interests and
equity
---------- ---------- -------- -------------- ----------- ---------- --------
Capital and reserves not impacted
by changes arising from IFRS 9 2,377 - - - 2,377
-------- -------------- ----------- ---------- --------
General reserve x 9,951 13 (28) (134) 9,802
-------- -------------- ----------- ---------- --------
Fair value through other
comprehensive
income reserve x 62 - - 62
-------------- ----------- ---------- --------
Available for sale
reserve x 75 (75) - -
-------------- ----------- ----------
Total members' interests and equity 12,403 - (28) (134) 12,241
-------------- ----------- ---------- --------
Total members' interests, equity
and liabilities 229,098 - (28) (133) 228,937
-------- -------------- ----------- ---------- --------
Notes:
i. Comparatives have been restated as detailed in note 2.
ii. Includes a debt security that has been transferred from
available for sale investment securities to FVTPL due to its
contractual cash flow characteristics.
iii. The reduction in fair value for portfolio hedged risk
relates to the removal of fair value hedge accounting adjustments
for loans that have been reclassified from amortised cost to FVTPL,
and which therefore no longer qualify for hedge accounting.
iv. The reduction of amortised cost loans and advances to
customers under IAS 39 relates to loans reclassified under IFRS 9
as FVTPL due to their contractual cash flow characteristics.
v. GBP2 million is the net impact of the transitional lifetime
ECL adjustment on the balance sheet carrying value of POCI loans,
and the adjustment to credit impaired loans to restore the carrying
value to the contractual amount owed.
vi. The reduction of the amortised cost loans and advances to
customers due to impairment is the difference between IFRS 9 ECL
impairment and the IAS 39 incurred loss provisions.
vii. Carrying values of FVTPL loans and advances to customers
increased by GBP1 million on transition to IFRS 9.
viii. The valuation of the deferred tax assets recognised on
adoption of IFRS 9 reflects HMRC's legislation that the tax effect
of the impact on adoption of IFRS 9 should be realised over the ten
years following adoption. Deferred tax is determined using tax
rates and laws that are expected to apply in the period when the
deferred tax asset is realised based on rates enacted or
substantively enacted at the balance sheet date, including the
banking surcharge when applicable.
ix. An additional GBP1 million has been provided separately
within provisions for liabilities and charges. This relates to
provisions against separately identifiable irrevocable commitments
for the pipeline of personal loans, commercial loans and mortgages.
Overdrafts and credit card commitments are provided for within the
ECL provision models, with allowance for future drawdowns made as
part of the exposure at default (EAD) element of the ECL
calculation for each account.
x. The transfer from the FVOCI reserve to general reserve
relates to the accumulated AFS reserve in respect of financial
instruments that have been reclassified from AFS to FVTPL.
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 2019.
Signed on behalf of the Board by
Mark Rennison
Chief Financial Officer
20 May 2019
Other information
The financial information set out in this announcement which was
approved by the Board on 20 May 2019 does not constitute accounts
within the meaning of section 73 of the Building Societies Act
1986.
The Annual Report and Accounts 2018 have been filed with the
Financial Conduct Authority and the Prudential Regulation
Authority. The Annual Report and Accounts 2019 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 2019 will be lodged with the Financial Conduct
Authority and the Prudential Regulation Authority following
publication.
A copy of this Preliminary report is placed on the website of
Nationwide Building Society, nationwide.co.uk from 21 May 2019. 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.joseph@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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