Nationwide Ccds Regulatory News (NBS)

Nationwide Building Society

Interim Results

for the period ended 30 September 2021

Contents

Introduction

Unless otherwise stated, the income statement analysis compares the period from 5 April 2021 to 30 September 2021 to the corresponding six months of 2020 and balance sheet analysis compares the position at 30 September 2021 to the position at 4 April 2021.

Underlying profit

Profit before tax shown on a statutory and underlying basis is set out on page 10. The purpose of the underlying profit measure is to reflect management's view of the Group's underlying performance and to assist with like for like comparisons of performance across periods. Underlying profit is not designed to measure sustainable levels of profitability as that potentially requires exclusion of non-recurring items even though they are closely related to (or even a direct consequence of) the Group's core business activities.

Forward-looking statements

Certain statements in this document are forward-looking with respect to plans, goals and expectations relating to the future financial position, business performance and results of Nationwide. Although Nationwide believes that the expectations reflected in these forward-looking statements are reasonable, Nationwide can give no assurance that these expectations will prove to be an accurate reflection of actual results. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond the control of Nationwide including, amongst other things, UK domestic and global economic and business conditions, market-related risks such as fluctuation in interest rates and exchange rates, inflation/deflation, the impact of competition, changes in customer preferences, risks concerning borrower credit quality, delays in implementing proposals, the timing, impact and other uncertainties of future acquisitions or other combinations within relevant industries, risks relating to sustainability and climate change, the policies and actions of regulatory authorities, the impact of tax or other legislation and other regulations in the jurisdictions in which Nationwide operates. The economic outlook also remains unusually uncertain due to the impacts of the Covid-19 pandemic and the UK's exit from the EU. As a result, Nationwide's actual future financial condition, business performance and results may differ materially from the plans, goals and expectations expressed or implied in these forward-looking statements. Due to such risks and uncertainties Nationwide cautions readers not to place undue reliance on such forward-looking statements.

Nationwide undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

This document does not constitute or form part of an offer of securities for sale in the United States. Securities may not be offered or sold in the United States absent registration or an exemption from registration. Any public offering to be made in the United States will be made by means of a prospectus that may be obtained from Nationwide and will contain detailed information about Nationwide and its management as well as financial statements.

Nationwide's mutual model delivers leading service and strong financial performance, enabling continued investment in its membership and wider society

Headlines

· Decisions we made early in the pandemic to protect long-term financial strength and to continue lending enabled us to deliver a very strong half year performance

· Continuing strong demand for mortgages, savings and current accounts

· Total mortgage lending higher on a gross and net basis

· Grew total market share of deposits

· First for customer satisfaction among our peer group for over nine years1

· Supported members with prize draw, scam checker service and Helping Hand mortgage

· Committed to achieving net zero by 20502 and continued to develop green propositions

Numbers at a glance

Financial highlights

· Underlying profit increased to £850m (H1 2020: £305m) and statutory profit increased to £853m (H1 2020: £361m), benefiting from:

o Growth in net interest income to £1,706m (H1 2020: £1,448m), with higher margins on mortgages as we continued to lend in the early stages of the pandemic

o Net release of £34m of credit provisions (H1 2020: charge of £139m) as the economic outlook improved, while retaining provisions to reflect current uncertainty

o £133m increase in other income, reflecting higher income from banking products and supported by gains from investments

· Net interest margin improved to 1.24% (H1 2020: 1.15%) and is broadly stable against H2 2020; this is expected to moderate in future

· Strong focus on efficiency kept costs flat, even as we invested in, and grew, the business

· Strengthened capital ratios: UK leverage ratio of 5.5% and CET1 ratio of 37.7% (4 April 2021: 5.4% and 36.4%)

· Member financial benefit broadly stable at £145m (H1 2020: £140m), but tracking below our annual target

Trading highlights

· Gross mortgage lending grew by £5.5bn to £18.2bn (H1 2020: £12.7bn); our market share was 11.4% (H1 2020: 12.0%) in a buoyant and highly competitive market

· Lent over £5bn to first time buyers, supported by our new Helping Hand mortgage and return to 95% loan to value lending

· Deposit market share rose to 9.6% (4 April 2021: 9.4%) following strong deposit growth, supported by competitive products such as our Member Exclusive Fixed Rate ISA and Triple Access Online Saver, and growth in current account balances

· Switching incentives helped grow current accounts to 8.7m (4 April 2021: 8.5m), increasing our market share to 10.3% (February 2021: 10.2%)3

1 ©Ipsos MORI 2021, Financial Research Survey (FRS), for the 12 months ending 31 March 2013 to the 12 months ending 30 September 2021. For more information, see footnote 7 on page 7.

2 We recognise that Nationwide alone cannot improve the energy efficiency of UK homes and we are working with

Government and industry to achieve this.

3 CACI's Current account and savings database stock volume (August 2021 and February 2021).

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

"Early in the pandemic we made decisions to stand by our members and to protect our financial strength. This year we continued to support our members and have delivered a very strong half year performance, with capital reaching an all-time high. As a mutual, profits are retained to invest in the Society for the benefit of its members and wider society over the long term.

"Over the last six months we have focused on providing highly competitive products for our mortgage and savings members. These have been very popular, resulting in a successful ISA season, increased deposits, higher mortgage lending, and a larger share of the current account market. We continue to focus on providing the high-quality personal and digital service our members expect of us, and have led our peer group on satisfaction for over nine years1. We have delivered value to members through our member prize draw, the restarting of our current account switching incentive and the launch of a scam checker service.

"Our success is a testament to the strength of our mutual business model, to the hard work of our colleagues, and to the value we provide to our members. Given the level of uncertainty about the future, the strength of our finances gives us freedom to make choices, and confidence in continuing to support our members, colleagues and communities."

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

"During the last six months, the Society has delivered strong performance across our three main product areas of mortgages, savings and current accounts. During the pandemic, strong demand for mortgages, coupled with macro-economic uncertainty, led to higher margins on mortgage lending. This resulted in significantly higher income, and a very strong overall financial performance. Net interest margin improved, but is unlikely to be sustained at this level in future due to intense competition in the mortgage market.

"We have continued to focus on efficiency and our costs remain flat despite further investment and growth of our business. While the improving economic outlook led us to release some of the credit provisions taken during the pandemic, there still remains significant economic uncertainty. Our balance sheet strength, as evidenced by our very strong CET1 and UK leverage ratios, means we are well positioned for what remains an uncertain period ahead."

Performance summary

Notes:

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

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

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

ii. Member deposits include current account credit balances.

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

iv. The liquidity coverage ratio represents a simple average of the ratios reported for the prior 12 month-ends.

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

Chief Executive's review

Building thriving membership - innovating to meet members' changing financial needs

As a mutual, Nationwide is owned by, and run for, our 16.3 million members. We continue to build a thriving membership by helping our millions of members manage and make more of their money, and at the period end had 3.6 million 'committed' members who have two or more products with us4, in line with our target.

The housing market was both incredibly buoyant and highly competitive during the last six months, due to pent-up demand and the stamp duty holiday. Our total gross mortgage lending rose strongly, by £5.5 billion, to £18.2 billion (H1 2020: £12.7 billion). Net lending was £3.2 billion (H1 2020: £1.6 billion). Our gross mortgage lending market share was 11.4% (H1 2020: 12.0%) in a larger market. We supported over 30,000 (H1 2020: 21,000) first time buyers, offering high loan to value (LTV) mortgages and introducing our Helping Hand mortgage, to help more people onto the housing ladder. We became the largest mortgage provider to reintroduce 95% LTV lending without government support, and in October we were the first major lender to sign up to Deposit Unlock, a proposition to help buyers with small deposits access higher LTV mortgages on new build homes.

Our buy to let subsidiary, The Mortgage Works, saw strong demand from landlords. We have been designing an online platform to improve rental standards by helping landlords manage their properties better, which we launched as The Landlord Works in October.

Many people accumulated savings during lockdown and Nationwide's deposits grew by £7.1 billion (H1 2020: £1.3 billion) during the half year, lifting our market stock share of deposits to 9.6% (4 April 2021: 9.4%). This growth reflected a very strong ISA season in which we took almost 30% of all ISA account openings among our peer group5 due to our market-leading Member Exclusive Fixed Rate ISA, and competitive rates on accounts such as the Triple Access Online Saver. Our Start to Save account continues to encourage people to start building a nest egg. As people had less opportunity to spend during lockdown, higher current account balances also contributed to growth in deposits.

Last year, we paused our current account switching incentive so we could focus on supporting our existing members during the pandemic. Since reintroducing a switching incentive in August, we have seen significant growth in new current accounts, with total current accounts reaching 8.7 million. We continue to be a net gainer from the Current Account Switching Service, demonstrating the satisfaction of our existing members and our continued appeal to new joiners6.

4 Committed members have at least two products with us including one of: their main personal current account, a mortgage of at least £5,000 or a savings account balance of at least £1,000.

5 Volume of new ISA account openings from CACI's Current Account and Savings Database for the period April 2021 to August 2021. Peer group is defined as members of CACI's Current Account and Savings Database for 2021, comprising over 30 brands.

6 Pay.UK quarterly CASS data, 3 months to June 2021.

Our members enjoy a range of benefits including automatic entry into our members-only monthly prize draw. For a year from September 2021, members will have a chance of winning a share of a £1 million prize fund each month.

Built to last - financially safe and secure for the long term

The strength of our trading over the last six months, along with decisions we made at the emergence of the pandemic to protect our financial strength, delivered a very strong financial performance for the Society. Underlying profit was higher at £850 million (H1 2020: £305 million) and statutory profit increased to £853 million (H1 2020: £361 million), while our capital and liquidity improved further.

Our profitability improved for several reasons. Net interest income increased significantly, driven by higher volumes in mortgages, deposits, and current accounts, and by mortgages taken out in 2020 with higher margins due to macro-economic uncertainty. Net interest margin improved compared to the same period last year, and is broadly stable compared with H2 2020/21; this is expected to moderate in future. Profitability also benefited from the improving economic outlook, leading to the release of £34 million in credit provisions, and from an increase in other income.

Cost efficiency remains an important area of focus, and our costs remained flat even as we continued to invest in and grow our business.

Member financial benefit - the value we offer members as a member-owned mutual through better incentives and pricing than the market average - remained broadly stable at £145 million for the half year, although tracking below our annual target of £400 million. Over the last five years, we have rewarded members with around £2.9 billion in additional value, demonstrating our commitment to delivering real, long-term financial value to members as a result of our mutuality. In the last six months, we have introduced new benefits for members such as the monthly prize draw.

Capital and liquidity improved, from an already strong base. Our UK leverage ratio improved to 5.5% (4 April 2021: 5.4%) and our Common Equity Tier 1 ratio improved to 37.7% (4 April 2021: 36.4%). The strength of our balance sheet means we are well-positioned for what remains an uncertain period ahead.

Chief Executive's review (continued)

Building legendary service - when and where members want it

We know that our members value high quality service and care, which is why we are pleased to have remained no. 1 for customer satisfaction among our peer group for over nine years7. Our latest customer satisfaction lead of 3.3%pts is significantly above our 2%pt target. We also track our performance in the all-sector UK Customer Satisfaction Index8. Our ranking (joint 19th) is below our target of being in the top five but our satisfaction score of 82.4, is 5pts ahead of the all-sector average.

Members value both face-to-face interactions and the convenience of digital technologies and we are investing in both. We have now completed the upgrade of 245 branches over the last four years, introducing new technology, self-service options, and formal and informal meeting spaces. Our Branch Promise means that, while we may need to close a branch occasionally, we will remain in every town or city we are in today, until at least 2023. We are also introducing new ways of working, to make our network sustainable for the future. These include reduced branch opening hours and multi-skilled roles where branch staff can help members over the phone and online as well as in person. We hope this will help branches continue to play a key role in serving our members in the future.

Our digital services continue to grow in popularity. Over 3.9 million current account members use our mobile banking app, up from 3.7 million in April 2021, and we are always working to make it easier and more convenient to use. We have attached clearer names and logos to card transactions so members can see more easily where they've spent their money and we have incorporated Apple Pay into the app. We have enhanced security for digital payments and launched a scam checker service to protect members from fraud and give them peace of mind when making payments. We have introduced instant account opening with digital identification and signature capabilities, which is speeding up account opening and reducing the amount of paperwork our members need to deal with.

7 © Ipsos MORI 2021, Financial Research Survey (FRS), for the 12 months ending 31 March 2013 to the 12 months ending 30 September 2021. Results based on a sample of around 46,000 adults (aged 16+). The survey contacts around 53,000 adults (aged 16+) a year in total across Great Britain. Interviews were face to face, over the phone and online, taking into account (and weighted to) the overall profile of the adult population. The results reflect the percentage of extremely satisfied and very satisfied customers minus the percentage of customers who were extremely or very or fairly dissatisfied across those customers with a main current account, mortgage or savings.

Those in our peer group are providers with more than 3.5% of the main current account market as of April 2021 - Barclays, Halifax, HSBC, Lloyds Bank, NatWest, Santander and TSB. Prior to April 2017, those in our peer group were providers with more than 6% of the main current account market - Barclays, Halifax, HSBC, Lloyds Bank (Lloyds TSB prior to April 2015), NatWest and Santander.

8 Institute of Customer Service UK Customer Satisfaction Index (UKCSI) as at July 2021.

Building PRIDE - helping colleagues thrive at work

The future of work looks very different post-pandemic. We have learnt how much can be achieved when people have more choice over where, how, and when they work - and also some of the limitations of remote working. We also need to develop new capabilities to serve our members better, as the take-up of digital technologies accelerates. We are therefore reimagining how we use our workspaces, our working day and the skills we need for the future.

Through our Future of Work programme, we are embracing the flexible working practices that have proved so successful during the pandemic, helping colleagues achieve a better work-life balance. We are widening our recruitment talent pool by moving away from fixed location working for most of our non-branch roles. For colleagues who want or need to work in an office, social distancing measures enable them to do so safely. We are also helping colleagues develop the capabilities we need to serve our members better on-and-offline. We are retraining and redeploying colleagues and introducing multi-skilled roles in branches.

We have put in place mental health and wellbeing support to help our colleagues through the massive change we have seen over the last 18 months. We are pleased that eight out of 10 colleagues say they feel supported at work, and to have received the Mind Workplace Wellbeing Gold Award for the first time.

Inclusion and diversity are key areas of focus. We are challenging ourselves to achieve ambitious measures of gender, ethnicity, disability and LGBTQ+ diversity by 2028. We are embedding inclusion and diversity in everything we do; we have sponsorship and mentoring programmes in place, are supporting colleague-led networks which champion diversity, and are introducing diverse interview panels for recruitment. We are encouraged to see improvements in some areas. However, there is more to do, particularly on gender and ethnic diversity at senior levels. We believe that the policies and practices we are putting in place now will deliver a more inclusive and diverse Society in time, and are actively tracking our progress towards our 2028 measures.

Chief Executive's review (continued)

Building a national treasure - working for the mutual good of society

The building society movement was founded to help 'everyday people' own a decent home of their own. This aim, to ensure everyone has a place fit to call home, remains important to us, not just in our business activities, but in our broader contribution to society.

We remain committed to giving at least 1% of pre-tax profits to charity annually, which is largely spent on housing initiatives. We are in the fourth year of our Community Boards programme where members decide on local housing projects to receive grants of up to £50,000 each. We have received 375 grant applications for this financial year and will be awarding £4 million to the successful applicants later this year, taking the total grants awarded since the programme was founded to almost £18 million.

A large part of our donation goes to The Nationwide Foundation, an independent charity funded by Nationwide, which campaigns and supports initiatives for systemic changes to increase the availability of decent, affordable homes for people in housing need. An example of this is We Can Make, a community project in Bristol, which has successfully developed a new way to unlock publicly-owned land for the development of genuinely affordable homes.

We have made good progress with the Oakfield development we are funding in Swindon, which aims to create a blueprint for a better way of developing high-quality, sustainable homes. We are targeting an EPC A rating for all 239 homes, the first of which will be ready for occupation in early 2022. The development has recently been awarded the prestigious Building for a Healthy Life Housing Design Award.

We have committed to achieving net zero by 2050, recognising the need for Government and industry to work together to achieve this, and have joined the Net Zero Banking Alliance and the Glasgow Financial Alliance for Net Zero. Having already met net zero emissions for our internal operations, we are also mindful of the impact on the environment of housing on which we lend. Housing accounts for around 20% of UK emissions9, and we are actively supporting the greening of UK homes; we are offering green lending incentives, as well as working on a range of green propositions. For example, in October, we began to trial a retrofit initiative to simplify the installation of solar panels on homes. We have also worked with other industry leaders, including E.on, Federation of Master Builders, Igloo Regeneration, TrustMark, Switchd, Energiesprong UK and the Green Homes Action Group, to set out principles for a national retrofitting strategy.

9 2020 UK greenhouse gas emissions, provisional figures (publishing.service.gov.uk).

Beyond home and savings, we stand up for the core values of mutuality, including respect. Our partnerships with the Diana Trust and the FA champion the importance of mutual respect and nurture those values in young people. In addition, our Together Against Hate campaign has focused on protecting frontline workers across all industries from unacceptable behaviour, including campaigning for tougher sentencing guidelines for abuse of frontline colleagues.

Outlook

The UK economy has proved remarkably resilient in the face of the pandemic, thanks in large part to its inherent flexibility and to government support.

Unemployment has trended down in recent months and wages are growing faster than they were before Covid. Combined with record low mortgage rates, this has contributed to a buoyant mortgage market, despite the phased withdrawal of stamp duty relief since June. Pandemic-related shifts in housing preferences have continued to spur people to move home, creating strong demand. Meanwhile, the limited supply of homes coming onto the market has meant house price growth has been robust, with prices rising at an annual rate of 9.9% in October following five months of double-digit increases.

The outlook remains uncertain. It is unclear how the economy will respond to the winding down of government support, and how long it will take for bottlenecks in global supply chains and domestic capacity constraints to ease. If the jobs market weakens post-furlough, it is likely to have a knock-on effect on the housing market, especially as inflation is likely to remain high in the coming quarters, eating into households' disposable income.

If the recovery remains resilient, higher interest rates are likely to exert a moderating influence on the housing market, as well as dampening price pressures across the economy more generally. Households appear well-placed to withstand an increase in interest rates, given the significant proportion of borrowing on fixed rates, and the relatively low number of borrowers who spend a high proportion of their income on debt repayments.

While the outlook remains challenging, and net interest margins are unlikely to be sustained at current levels, the Society continues to demonstrate its resilience. Nationwide's financial strength and strong social purpose mean we can continue to support members, colleagues and communities.

Financial review

The results below are prepared in accordance with International Financial Reporting Standards (IFRSs). Underlying results are shown on page 10, together with a reconciliation to the statutory results.

In summary

Income statement

Notes:

i. Underlying profit represents management's view of underlying performance. Gains or losses from derivatives and hedge accounting (presented separately within total income) and FSCS costs and refunds from institutional failures (included within provisions for liabilities and charges) are excluded from statutory profit to arrive at underlying profit.

ii. Although we only use derivatives to hedge market risks, income statement volatility can still arise due to hedge accounting ineffectiveness or because hedge accounting is either not applied or is not achievable. This volatility is largely attributable to accounting rules which do not fully reflect the economic reality of the hedging strategy.

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

Total income and net interest margin (NIM)

Net interest income increased by £258 million to £1,706 million (H1 2020/21: £1,448 million) and net interest margin increased to 1.24% (H1 2020/21: 1.15%). This is primarily driven by strong demand for mortgages coupled with macroeconomic uncertainty during much of 2020, leading to elevated mortgage new business margins. Lending was higher during the past six months, with £14.5 billion of prime mortgage gross lending (H1 2020/21: £9.6 billion) and £3.7 billion of buy to let gross lending (H1 2020/21: £3.1 billion).

Net other income has increased by £133 million to £188 million (H1 2020/21: £55 million), primarily due to higher income across our banking products during the period, gains from investments and the £35 million loss in H1 2020/21 arising from a buyback of covered bond funding.

Member financial benefit

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

More information on how we calculate member financial benefit can be found in our Annual Report and Accounts 2021. The components of member financial benefit have been updated since the Annual Report and Accounts 2021 to include the recently launched member prize draw, which contributed £1 million to member financial benefit in the period. 

For the half year ended 30 September 2021, this measure shows we have provided our members with a financial benefit of £145 million (H1 2020/21: £140 million) which is broadly consistent with the value delivered in H1 2020/21. It remains low compared to historic periods primarily due to continued low interest rates on savings accounts. This period of exceptionally low interest rates means it is unlikely that we will meet our member financial benefit target of £400 million for this financial year.

Administrative expenses

Administrative expenses reduced by £8 million to £1,025 million (H1 2020/21: £1,033 million). The decrease is attributable to a £20 million reduction in business-as-usual costs, despite growth of our business, together with a £33 million decrease in restructuring costs. These have been largely offset by a £21 million net increase in investment spend and depreciation, and a £23 million charge relating to historic fraud cases.

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

Note:

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

The net impairment release in the period of £34 million (H1 2020/21: charge of £139 million) is primarily due to house price growth and improvements in the economic outlook, which are reflected in the economic scenarios and associated weightings used to model expected credit losses. The underlying arrears performance of our portfolios has improved during the period, although this may be temporary, having benefited from government support schemes. More information regarding the critical accounting judgements, and the forward-looking economic information used in impairment calculations, is included in note 8 to the consolidated interim financial statements.

Provisions for liabilities and charges

We hold provisions to cover the costs of remediation and redress in relation to historical quality control procedures, past sales and administration of customer accounts, and other regulatory matters. The customer redress charge of £53 million (H1 2020/21: £26 million) includes a £29 million (H1 2020/21: £15 million) charge relating to historical quality control procedures. More information is included in note 13 to the consolidated interim financial statements.

Taxation

The tax charge for the period of £168 million (H1 2020/21: £80 million) represents an effective tax rate of 19.7% (H1 2020/21: 22.2%) which is higher than the statutory UK corporation tax rate of 19% (H1 2020/21: 19%). The effective tax rate is higher primarily due to the 8% banking surcharge of £38 million (H1 2020/21: £14 million). This is largely offset by adjustments in respect of prior years of £22m (H1 2020/21: £nil), the tax credit on the distribution to the holders of Additional Tier 1 capital instruments of £8 million (H1 2020/21: £9 million), and the reinstatement of deferred tax assets previously written off of £5 million (H1 2020/21: £nil). Further information is provided in note 9 to the consolidated interim financial statements.

In its March 2021 Budget, the UK Government announced that the UK rate of corporation tax will increase from 19% to 25% from 1 April 2023. This legislative change was enacted on 10 June 2021. Closing deferred tax assets and liabilities have therefore been recalculated taking into account this change of rate and the applicable period the deferred tax assets and liabilities are expected to crystalise. The impact of this change on deferred tax balances was an increase in the net deferred tax liability of £6 million, which was recognised in other comprehensive income.

It was further announced in the Budget on 27 October 2021 that the banking surcharge of 8% will decrease to 3% and the surcharge allowance will increase from £25 million to £100 million with effect from 1 April 2023. As this change was not substantively enacted prior to 30 September 2021, the impact has not been reflected in these interim financial statements. Upon enactment, this will require a further remeasurement of deferred tax assets and liabilities which is expected to substantially reverse the £6 million impact recognised above.

Balance sheet

Total assets have increased by 12% to reach £285.4 billion at 30 September 2021 (4 April 2021: £254.9 billion). This growth is predominantly due to higher holdings of cash and liquid assets, driven largely by an increase in short-term funding, an increase in member deposits and the drawdown of funds from the Bank of England's Term Funding Scheme with additional incentives for SMEs (TFSME).

Mortgage lending has been robust during the period, in part due to the temporary changes to stamp duty, with residential mortgage balances increasing to £194.3 billion (4 April 2021: £191.0 billion). Member deposit balances have increased by £7.1 billion to £177.4 billion (4 April 2021: £170.3 billion) as a result of strong inflows on savings, predominantly driven by competitive products such as the Member Exclusive Fixed Rate ISA and Triple Access Online Saver, and current account balance growth.

Notes:

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

ii. This represents a simple average of the liquidity coverage ratio reported for the prior 12 month-ends.

Cash 

Cash comprises liquidity held by our Treasury function amounting to £46.5 billion (4 April 2021: £16.7 billion). The £29.8 billion increase in cash is driven by higher levels of short-term funding, an increase in member deposits, the drawdown of funds from the Bank of England's TFSME, and increased repurchase agreement balances.

The average Liquidity Coverage Ratio of 173% (4 April 2021: 159%) remains well above regulatory requirements. Liquidity continues to be managed against internal risk appetite, which is more prudent than regulatory requirements. Further details are included in the Liquidity and funding risk section of the Risk report.

Residential mortgages

The lending market was substantially different from the prior period as a result of the changing pandemic restrictions and the effects of the stamp duty holiday that concluded in September 2021. Total gross mortgage lending in the period was higher at £18.2 billion (H1 2020/21: £12.7 billion), although market share of gross advances was slightly lower than the prior period at 11.4% (H1 2020/21: 12.0%). Lending continues to be supported by our focus on first time buyers; earlier this year we re-entered 95% LTV lending and we are also seeing balance growth of our Helping Hand product that supports affordability for first time buyers up to 90% LTV. Prime mortgage balances have increased to £151.6 billion (4 April 2021: £149.8 billion) and buy to let mortgage balances have increased to £42.7 billion (4 April 2021: £41.2 billion).

Arrears performance has improved during the period, with cases more than three months in arrears at 0.37% of the total portfolio (4 April 2021: 0.43%). This improvement is expected to be temporary, with levels likely to have been suppressed by government support measures. An increase in arrears from current levels is expected over the medium term. Impairment provision balances have decreased to £273 million (4 April 2021: £317 million) due to an improvement in the economic outlook reflected in the economic scenarios and changes to weightings used to model expected credit losses.

Commercial lending

During the period, commercial lending balances have decreased to £6.6 billion (4 April 2021: £7.0 billion). Continuing the deleveraging activity in previous financial periods, the overall portfolio remains weighted towards public sector lending. This includes registered social landlords, with balances of £4.6 billion (4 April 2021: £4.8 billion), and project finance balances of £0.6 billion (4 April 2021: £0.7 billion). With a smaller book, and fewer active borrowers requiring further lending, our commercial real estate balances decreased during the year to £0.7 billion (4 April 2021: £0.8 billion).

Impairment provision balances have decreased to £25 million (4 April 2021: £33 million) due to an improvement in the expected outcome of a small number of individual loans.

Consumer banking

Consumer banking balances have increased to £4.7 billion (4 April 2021: £4.4 billion). Consumer banking comprises personal loan balances of £3.0 billion (4 April 2021: £2.8 billion), credit card balances of £1.5 billion (4 April 2021: £1.4 billion) and overdrawn current account balances of £0.2 billion (4 April 2021: £0.2 billion). The increase in balances has been driven by the gradual lifting of pandemic restrictions across the period increasing the market demand for consumer credit.

Provision balances have decreased to £486 million (4 April 2021: £502 million) primarily due to an improved economic outlook, reflected in the economic scenarios and weightings used to model expected credit losses, with underlying performance remaining broadly stable.

Other financial assets

Other financial assets total £31.4 billion (4 April 2021: £33.9 billion) and comprise assets held by our Treasury function amounting to £27.2 billion (4 April 2021: £29.1 billion), derivatives with positive fair values of £4.1 billion (4 April 2021: £3.8 billion) and fair value adjustments and other assets of £0.1 billion (4 April 2021: £1.0 billion). Derivatives largely comprise interest rate and foreign exchange contracts which economically hedge financial risks inherent in core lending and funding activities.

Member deposits

Member deposit balance growth of £7.1 billion (H1 2020/21: £1.3 billion) to £177.4 billion (4 April 2021: £170.3 billion) represents growth in retail savings balances of £4.2 billion and current account credit balances of £2.9 billion. Balance growth has been supported by competitive products such as the Member Exclusive Fixed Rate ISA and Triple Access Online Saver and forced saving balances built up during the start of the period before pandemic related restrictions were eased. This has contributed to a strengthening of our deposit stock market share to 9.6% (4 April 2021: 9.4%).

Debt securities in issue and other financial liabilities

Debt securities in issue primarily comprise wholesale funding, excluding subordinated debt which is included within other financial liabilities. Balances have increased to £38.0 billion (4 April 2021: £27.9 billion) reflecting an increase in the short-term funding book, with Nationwide's wholesale funding ratio also increasing to 31.7% (4 April 2021: 26.7%) as a result. Other financial liabilities have increased to £53.6 billion (4 April 2021: £41.0 billion) primarily due to a drawdown of funds from the Bank of England's TFSME and increased repurchase agreement balances. Further details are included in the Liquidity and funding risk section of the Risk report.

Members' interests and equity

Members' interests and equity have increased to £14.9 billion (4 April 2021: £14.1 billion) largely as a result of retained profits.

Statement of comprehensive income

Note:

i. Movements are shown net of related taxation. Gross movements are set out in the consolidated interim financial statements on page 66.

Capital structure

Nationwide's capital position remains strong, with both the Common Equity Tier 1 (CET1) ratio and UK leverage ratio comfortably above regulatory capital requirements of 12.7% and 3.6% respectively. The CET1 ratio increased to 37.7% (4 April 2021: 36.4%) and the UK leverage ratio increased to 5.5% (4 April 2021: 5.4%). The capital disclosures included in this report are in line with UK Capital Requirements Directive V (UK CRD V) and on an end point basis with IFRS 9 transitional arrangements applied.

Note:

i. The UK leverage ratio differs from the Capital Requirements Regulation (CRR) leverage ratio, as it excludes eligible central bank claims per the PRA Rulebook. During the period, eligible central bank reserves increased by £30 billion, thereby reducing the CRR leverage ratio whilst having no impact on the UK leverage ratio.

The CET1 ratio increased to 37.7% (4 April 2021: 36.4%) as a result of an increase in CET1 capital of £0.4 billion with RWAs remaining relatively stable. The CET1 capital increase was driven by £0.6 billion profit after tax, net of distributions, partially offset by a £0.2 billion movement in deductible intangible assets, IFRS 9 transitional arrangements and prudent valuation adjustments. RWAs remained stable with a reduction in retail and commercial RWAs offset by growth in liquid assets.

On 23 December 2020, EU Regulation 2020/2176 came into force, removing the deduction of certain intangible assets from CET1 resources. The PRA indicated in CP5/21 'Implementation of Basel standards' that they found no credible evidence that software assets would absorb losses effectively in a stress. Subsequently, as part of PS17/21, they have confirmed the reversal of this amendment from 1 January 2022. If the revised rules had not been applied, Nationwide's CET1 ratio and UK leverage ratio at 30 September 2021 would have been 36.9% and 5.3% respectively.

Whilst the future economic impact of Covid-19 continues to be unclear, it could lead to some RWA inflation and therefore a lower CET1 ratio in the medium term. The government job retention scheme ended on 30 September 2021; in the coming months we will better understand how individual borrowers have been affected and the resulting impact on risk-based ratios. However, the current capital position and the published stress testing results show that Nationwide is well-capitalised and positioned to meet periods of financial stress.

The UK leverage ratio increased to 5.5% (4 April 2021: 5.4%), with Tier 1 capital increasing by £0.4 billion as a result of the CET1 capital movements referenced above. Partially offsetting the impact of this, there was an increase in UK leverage exposure of £2.8 billion primarily as a result of net retail lending in the period.

The CRR leverage ratio decreased to 4.6% (4 April 2021: 5.0%) due to an increase in central bank reserves. On 8 October 2021, as part of its policy statement PS21/21, the PRA confirmed its intention to simplify the leverage framework by applying a single Leverage Exposure Measure (LEM) for all purposes, from 1 January 2022. This measure would align to the current UK leverage exposure definition, which excludes central bank claims.

Further details of the capital position and future regulatory developments, including the result of policy statements in-force from 1 January 2022 which impact RWAs, are described in the Capital risk section of the Risk report.

Risk report

Contents

Introduction

This report provides information on developments during the period in relation to the risks Nationwide's business is exposed to, and how those risks are managed. This information supports, and should be read in conjunction with, the material found in the Risk report in the Annual Report and Accounts 2021. Where there has been no change to the approach to managing risks, or there has been no material change to the relevant risk environment from that disclosed at year end, this information has not been repeated in the 2021/22 Interim results.

Top and emerging risks

The top and emerging risks are managed through the process outlined in the 'Risk overview' section of the Annual Report and Accounts 2021 and remain broadly unchanged from those reported there. The external environment continues to present the most significant threats to the delivery of the Society's strategy in light of the Covid-19 pandemic, the UK's exit from the European Union and the resultant geopolitical and macroeconomic environment shifts. A description of material developments to the top and emerging risks in the period is provided below:

The following internal and external risks, which were highlighted in the Annual Report and Accounts 2021, have not materially changed:

· Regulatory change

· Climate change

· Libor transition

· Resilience

· People risk

· Third parties

· Data

· Model risk

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

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

Principal risks and uncertainties

The Society operates an Enterprise Risk Management Framework (ERMF), which ensures Nationwide remains safe and secure for our members. The principal risk categories set out below have been defined to ensure the Society understands and manages its risks in a comprehensive and consistent way.

The principal risk categories remain unchanged from those set out in the Risk report in the Annual Report and Accounts 2021. During the first half of this year, the previous Solvency risk category has been renamed Capital risk, to align with wider financial services sector terminology. The principal risks are as follows:

· Credit risk

· Liquidity and funding risk

· Capital risk

· Market risk

· Pension risk

· Model risk

· Business risk

· Operational and conduct risk

Information on key developments in relation to the principal risks above is included within this report, except for business risk where there have been no significant developments which have altered the Society's outlook or approach during the period.

Credit risk - Overview

Credit risk is the risk of loss as a result of a member, customer or counterparty failing to meet their financial obligations. Credit risk encompasses borrower/counterparty risk, security/collateral risk, concentration risk and refinance risk.

Nationwide manages credit risk for the following portfolios:

Further detail on how Nationwide manages credit risk and what credit risk encompasses is included within the Annual Report and Accounts 2021. Information on the calculation of impairment provisions based on expected credit losses (ECLs) is also included in the Annual Report and Accounts 2021.

Performance overview

Following staged easing of national lockdown restrictions from March 2021, the UK economy has seen a period of recovery as social distancing controls relaxed, and businesses reopened.

A number of schemes available to support borrowers facing financial difficulty during the pandemic, including payment deferrals and furlough, have now come to an end. Residential mortgage and consumer banking payment deferrals, offered to affected borrowers to temporarily suspend their contractual payments in accordance with regulatory guidance, were closed to new applications in March 2021, with all payment deferrals ending in July 2021. At 30 September 2021 there were therefore no outstanding balances subject to a payment deferral (4 April 2021: £1,385 million), with 94% of borrowers with expired payment deferrals having resumed full payments. The 6% who have entered arrears or alternative forbearance arrangements include some borrowers who were in financial difficulty prior to the pandemic.

Help and support for members who remain impacted in these challenging times continue to be offered, with concessions granted based on consideration of their individual circumstance.

Observed credit quality and performance have remained broadly stable over the period, with residential mortgage and consumer banking arrears remaining at a relatively low level. It remains our judgement that arrears performance has benefited from the government measures, combined with the low bank base rate environment and reduced discretionary spending. It is expected that arrears levels will rise given the end of the furlough scheme and recent increases in consumer spending, with these anticipated arrears reflected in provisions at the period end.

The housing market has seen strong activity over the last 12 months supported by the stamp duty holiday, with the Nationwide House Price Index recording a 10% increase in house prices. Nationwide has continued to support borrowers looking to take out a mortgage throughout the period, with greater availability of products at higher loan to value. These products have been designed to support first time buyers, while taking careful consideration of risk.

Credit risk - Overview (continued)

Maximum exposure to credit risk

Nationwide's maximum exposure to credit risk has increased to £296 billion (4 April 2021: £265 billion), principally reflecting higher cash balances.

Credit risk largely arises from loans and advances to customers, which account for 74% (4 April 2021: 81%) of Nationwide's total credit risk exposure. Within this, the exposure relates primarily to residential mortgages, which account for 95% (4 April 2021: 94%) of total loans and advances to customers and comprise high quality assets with historically low occurrences of arrears and possessions.

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

Credit risk - Overview (continued)

Notes:

i. In addition to the amounts shown above, Nationwide has revocable commitments of £10,563 million (4 April 2021: £10,624 million) in respect of credit card and overdraft facilities. These commitments represent agreements to lend in the future, subject to certain considerations. Such commitments are cancellable by Nationwide, subject to notice requirements, and given their nature are not expected to be drawn down to the full level of exposure.

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

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

Commitments

Irrevocable undrawn commitments to lend are within the scope of provision requirements. The commitments in the table above consist of overpayment reserves and separately identifiable irrevocable commitments for the pipeline of residential mortgages, personal loans, commercial loans and investment securities. These commitments are not recognised on the balance sheet; the associated provision of £0.4 million (4 April 2021: £0.5 million) is included within provisions for liabilities and charges.

Revocable commitments relating to overdrafts and credit cards are included in the calculation of impairment provisions, with the allowance for future drawdowns included in the estimate of the exposure at default.

Credit risk - Residential mortgages

Summary

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

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

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

Notes:

i. Buy to let mortgages include £39,664 million (4 April 2021: £37,983 million) originated under the TMW brand.

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

Total balances across the residential mortgage portfolios have grown by 2% during the period to £194 billion (4 April 2021: £191 billion), in particular within the buy to let portfolio which saw 4% growth during the period.

Credit risk - Residential mortgages (continued)

Impairment reversals for the period include the impact of updating macroeconomic assumptions and scenario weightings to reflect the improvement in economic outlook since 4 April 2021; further details are included in note 8 to the consolidated interim financial statements. Closing provisions have reduced to £273 million (4 April 2021: £317 million). The prior period impairment losses reflected an increase in provisions during a period of significant economic uncertainty.

The following table shows residential mortgage lending balances carried at amortised cost, the stage allocation of the loans, impairment provisions and the resulting provision coverage ratios. Details of stages and the approach to the allocation of loans to stages are included in the Annual Report and Accounts 2021.

Credit risk - Residential mortgages (continued)

Notes:

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

ii. Purchased or originated credit impaired (POCI) loans are those which were credit impaired on purchase or acquisition. The POCI loans shown in the table above were recognised on the balance sheet when the Derbyshire Building Society was acquired in December 2008. These balances, which are mainly interest only, were 90 days or more in arrears when they were acquired and so have been classified as credit impaired on acquisition. The gross balance for POCI is shown net of the lifetime ECL of £5 million (4 April 2021: £5 million).

At 30 September 2021, 95% (4 April 2021: 94%) of the residential mortgage portfolio is in stage 1, reflecting the portfolio's underlying strong credit quality. During the period there has been a decrease in stage 2 balances to £8,864 million (4 April 2021: £10,659 million). This reduction is largely the result of updating macroeconomic assumptions and scenario weightings to reflect the improvement in economic outlook since 4 April 2021. This improvement, combined with the house price growth experienced during the period, has reduced residential mortgage provisions to £273 million (4 April 2021: £317 million). Further information regarding economic scenarios and associated weightings is provided in note 8 to the consolidated interim financial statements.

Stage 3 loans in the residential mortgage portfolio equate to 0.7% (4 April 2021: 0.7%) of the total residential mortgage exposure. Of the total £1,346 million (4 April 2021: £1,401 million) stage 3 loans, £604 million (4 April 2021: £690 million) is in respect of loans which are more than 90 days past due, with the remainder being impaired due to other indicators of unlikeliness to pay such as forbearance or the bankruptcy of the borrower.

For loans subject to forbearance, accounts are transferred from stage 3 to stages 1 or 2 only after being up to date and meeting contractual obligations for a period of 12 months; £398 million

(4 April 2021: £242 million) of the stage 3 balances in forbearance are in this probation period.

Credit risk - Residential mortgages (continued)

The table below summarises the movements, including between stages, of residential mortgages held at amortised cost. The movements within the table are an aggregation of monthly movements over the period.

Note:

i. Gross balances of credit impaired loans include £140 million (4 April 2021: £148 million) of POCI loans, which are presented net of lifetime ECL impairment provisions of £5 million (4 April 2021: £5 million).

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

Credit risk - Residential mortgages (continued)

Note:

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

Loans which are reported within stage 2 are those which have experienced a significant increase in credit risk since origination. The Annual Report and Accounts 2021 sets out the main criteria used to determine whether a significant increase in credit risk has occurred since origination. There have been no changes to the criteria during the period. 

The value of loans reported within stage 2 as a result of being in arrears by 30 days or more has reduced to £305 million (4 April 2021: £338 million). Management has judged this to be a temporary position due to the availability of government support schemes and an adjustment to provisions has been made to recognise the underlying risk.

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

The significant stage 2 movements during the period are detailed beneath the residential mortgages staging analysis table on page 23.

Credit risk - Residential mortgages (continued)

Credit quality

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

Note:

i. Includes POCI loans of £140 million (4 April 2021: £148 million).

At 30 September 2021, 98% (4 April 2021: 97%) of the portfolio had a PD of less than 2.5%, reflecting the high quality of the residential mortgage portfolios. The provisions allocated to the lowest PD range primarily reflect the fact that the majority of loans are in this range. The reduction in the stage 2 balances within the 0.00% to 0.50% bands is primarily the result of the improvement in economic outlook, where up to date accounts no longer breach the quantitative stage 2 criteria.

Credit risk - Residential mortgages (continued)

Distribution of new business by borrower type (by value)

Note:

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

The proportion of lending by borrower type during the half year to September 2020 was impacted by the pandemic, with the house purchase market virtually closed during the initial lockdown. Since then, demand for mortgages has been boosted by the stamp duty holiday, and the proportion of prime home movers and first time buyers increased to 63% (30 September 2020: 48%). The proportion of new purchases within the buy to let portfolio has also increased.

Credit risk - Residential mortgages (continued)

LTV and credit risk concentration

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

Notes:

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

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

Nationwide withdrew from 95% LTV lending in the wake of the pandemic whilst tighter controls were also employed at 85% to 90% LTV due to uncertainty regarding the immediate economic outlook, particularly house prices and levels of unemployment. This reduced the proportion of lending at 85% LTV and above to 12% (30 September 2020: 18%). However, the average has remained stable due to a higher concentration of lending at 75% to 85% LTV which increased to 27% (30 September 2020: 19%).

The housing market has been strong over the period with the Nationwide House Price Index showing a 10% increase in house prices year on year supported by the stamp duty holiday. Although this holiday has now ended demand continues to exceed supply, driving up prices and causing the Group average LTV to reduce to 53% (4 April 2021: 56%). To support first time buyers Nationwide re-entered the 95% LTV purchase market in May 2021, supported by controls to help mitigate the uncertainty regarding future credit performance.

Credit risk - Residential mortgages (continued)

Residential mortgage balances by LTV and region

Geographical concentration by stage

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