Nationwide Ccds Regulatory News (NBS)

Nationwide Building Society

Interim Results

for the period ended 30 September 2022

Contents

Introduction

Unless otherwise stated, the income statement analysis compares the period from 5 April 2022 to 30 September 2022 to the corresponding six months of 2021 and balance sheet analysis compares the position at 30 September 2022 to the position at 4 April 2022.

Underlying profit

Profit before tax shown on a statutory and underlying basis is set out on page 8. 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, the policies and actions of regulatory authorities and the impact of tax or other legislation and other regulations in the jurisdictions in which Nationwide operates. The economic outlook remains unusually uncertain and, as a result, Nationwide's actual future financial condition, business performance and results may differ materially from the plans, goals and expectations expressed or implied in these forward-looking statements. Due to such risks and uncertainties Nationwide cautions readers not to place undue reliance on such forward-looking statements.

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

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

Chief Executive's review 

Nationwide's mutual model delivers a strong financial performance, enabling support for members through uncertain times

Debbie Crosbie, Chief Executive, Nationwide Building Society, said:

"Nationwide's focus is on supporting members, today and for the long term.

"We continue to deliver competitive products, high-quality services and great customer experience. Nationwide has remained number 1 for customer satisfaction in our peer group for more than ten years1.

"Our half year performance means we can invest more in new ways to support members; we have increased the current account switcher incentive and extended our support for members facing increases in the cost of living, including practical support provided in our branches, a dedicated telephone hotline and an online support hub.

"Nationwide is not immune to the current economic challenges and it's important to maintain financial strength. Our strategy is focused on growing the membership base, increasing value to members, and becoming simpler and more efficient in the way we operate. This will ensure the Society's future strength and ability to continue to support members and wider society."

Business and trading highlights

· Total gross mortgage lending grew by £1.5bn to £19.7bn (H1 2021: £18.2bn), with net lending of £5.4bn (H1 2021: £3.2bn). Market share of balances was maintained at 4 April 2022 level of 12.4% in a highly competitive market

· First for customer satisfaction among our peer group for over ten years, with a current lead of 3.4%pts1. Ranked 37th (January 2022: Joint 22nd)2 in the all-sector UK Customer Satisfaction Index

· Supported our members through the launch of Member Online Bond and Start to Save products, and extended our Branch Promise to 2024

· Helped over 27,500 first time buyers into a home of their own (H1 2021: 30,000)

· Committed members have continued to grow to 3.64m3 (4 April 2022: 3.62m)

· Deposit market share was 9.3% (4 April 2022: 9.4%)

· Continued growth in current accounts, maintaining market share of accounts at 10.3%4 (February 2022: 10.3%)

· Proud to continue to commit 1% of pre-tax profits to good causes each year, which for 2022/23 includes £4m for our Community Grants programme and £1m cost of living support for charities. During the period we donated £817k to Shelter.

· Remain committed to achieving net zero by 2050.   

1 Lead at September 2022: 3.4%pts, March 2022: 4.6%pts. © Ipsos 2022, Financial Research Survey (FRS), for the 12 months ending 31 March 2013 to 12 months ending 30 September 2022. Results based on a sample of around 47,000 adults (aged 16+). The survey contacts around 51,000 adults (aged 16+) a year in total across Great Britain. Interviews were face to face, over the phone and online, taking into account (and weighted to) the overall profile of the adult population. The results reflect the percentage of extremely satisfied and very satisfied customers minus the percentage of customers who were extremely or very or fairly dissatisfied across those customers with a main current account, mortgage or savings. Those in our peer group are providers with more than 3.3% of the main current account market as of April 2022 - Barclays, Halifax, HSBC, Lloyds Bank, NatWest, Santander and TSB. Prior to April 2017, those in our peer group were providers with more than 6% of the main current account market - Barclays, Halifax, HSBC, Lloyds Bank (Lloyds TSB prior to April 2015), NatWest and Santander.

2 Institute of Customer Service UK Customer Satisfaction Index (UKCSI) as at July 2022 and January 2022.

3 The 3.64 million refers to 'committed members' who have their main personal current account with us or a mortgage of at least £5,000, or at least £1,000 in savings accounts, plus at least one other product.

4 CACI's Current Account and Savings Database, Stock (August 2022 and February 2022).

Financial highlights

· Underlying profit increased to £980m (H1 2021: £850m) and statutory profit increased to £969m (H1 2021: £853m) due to income growth

· Rising interest rates supported growth in total underlying income to £2,190m (H1 2021: £1,894m)

· Net interest margin improved to 1.48% (H1 2021: 1.24%)

· Credit impairment charges are higher at £108m (H1 2021: release of £34m). We have not yet seen a significant increase in arrears; however, higher interest rates, rising inflation and the uncertain economic outlook remain key risks

· Total costs have increased to £1,083m (H1 2021: £1,025m) reflecting inflation and the cost of providing support to members and colleagues

· Our balance sheet remains strong, with Tier 1 capital resources increasing by £0.5bn, a leverage ratio of 5.8% and CET1 ratio of 25.5% (4 April 2022: 5.4% and 24.1%)

· Member financial benefit for H1 has increased to £320m (H1 2021: £145m), supported by our competitive mortgage and savings products; we passed a greater proportion of interest rate rises to savers than the market average

Chief Executive's review (continued)

Strategy update

· We want Nationwide to be considered the number one choice for personal financial services, with customer experience that's amongst the best in any sector.

· Following our strategic review, we will deliver a distinctive experience for our members today and in the future, shaped by our mutual model.

· We will use our strength as the world's largest building society to increase the value that our products provide to members, to excel in the services we provide, and to become more flexible and efficient as an organisation. We will commit our mutual purpose to the benefit of society as well as our members.

· We will increase member value and reward those who do more with us through tailored and competitive mortgage, savings and current account products. First time buyers will continue to trust us to help them into a home.

· Our value will be beyond rates and products, with services that stand out for ease, accessibility, security and trust: We will enhance our mobile-first experience, twinned with modern branches that offer personal support when members need it the most.

· Service excellence will be delivered through operational excellence: Simple, streamlined and flexible processes that respond when circumstances change and always grounded in resilient controls that protect our members and their money.

· The singular focus on members that only a mutual has, combined with the strength that comes from Nationwide's scale, provides the best opportunity to make a lasting impact in the lives of our members and on society for today and for the future.

Outlook

· The economic outlook remains highly uncertain, with increases in the cost of living and higher interest rates for borrowers putting further pressure on household finances and reducing consumer confidence. This is expected to lead to lower mortgage market activity in the second half of the year. These factors are fully reflected in the economic scenarios used within our credit loss provisions.

· Overall, our borrowers are relatively well placed to withstand these challenges in the short to medium term, 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. However, the transition to higher interest payments is a challenge for households as they adjust their expenditure priorities. We will continue to support those borrowers who face payment difficulties.

· Nationwide remains well positioned to use its financial strength to continue to support its members through the challenges ahead.

Debbie Crosbie

Chief Executive

Performance summary

5 ©Ipsos 2022, Financial Research Survey (FRS), for the 12 months ending 30 September 2022. For more information, see footnote 1 on page 4.

6 Institute of Customer Service UK Customer Satisfaction Index (UKCSI) as at July 2022.

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 in the consolidated income statement.

ii. We aim to provide at least £400 million of member financial benefit each year, through better incentives and pricing than the market average. For more information on member financial benefit see page 8.

iii. Member deposits include current account credit balances.

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

v. Committed members have their main personal current account with us or a mortgage of at least £5,000, or at least £1,000 in savings accounts, plus at least one other product.

vi. Mortgage balances are presented gross of credit provisions.

vii. We aim to have a minimum leverage ratio of at least 4.5%.

viii. The Liquidity Coverage Ratio represents a simple average of the ratios for the last 12 month ends.

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

Financial review

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

"The sustained strength of our finances will allow us to support our members through a highly uncertain period and significant cost of living increases.

"We have continued to support our members' borrowing and savings needs during the period, and as a result have delivered growth in our mortgage and deposit balances.

"Due to the highly uncertain economic outlook, it is important that we maintain our financial strength and continue to focus on efficiency. This will mean we can face the future with confidence and continue to support our members."

Financial highlights

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

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 in the Consolidated income statement) 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 £349 million to £2,055 million (H1 2021/22: £1,706 million), with the net interest margin increasing to 1.48% (H1 2021/22: 1.24%). Increases in the bank base rate during the period have led to an increase in net interest income, reflecting the timing and the level of pass through of interest rate changes to savings products, partially offset by a decline in mortgage net interest income. Member financial benefit has increased in the period, reflecting the fact that Nationwide has passed a greater proportion of interest rate rises to savers than the market average.

Net other income has reduced by £53 million to £135 million (H1 2021/22: £188 million), with £25 million gains from investments in H1 2021/22 not repeated in the period, whilst in H1 2022/23 we have observed higher costs of providing travel insurance to packaged current account holders.

Member financial benefit

As a building society, we seek to maintain Nationwide's financial strength whilst providing value to our members through pricing, products and service. Through member financial benefit, we measure the additional financial value for members from the competitive mortgage, savings and banking products that we offer compared to the market average. Member financial benefit is calculated by comparing, in aggregate, Nationwide's average interest rates and incentives to the market, predominantly using market data provided by the Bank of England and CACI, alongside internal calculations. The value for individual members will depend on their circumstances and product choices. More information on how we calculate member financial benefit can be found in our Annual Report and Accounts 2022.

For the half year ended 30 September 2022, this measure shows we provided our members with a financial benefit of £320 million (H1 2021/22: £145 million). This increase is due to our strong mortgage and savings products which seek to provide good value to members. As interest rates have risen, we have passed through a higher proportion of the increase to savers than the market average. We expect to exceed our member financial benefit target of £400 million for this financial year.

Administrative expenses

Administrative expenses increased by £58 million to £1,083 million in the period (H1 2021/22: £1,025 million). Business-as-usual costs increased by £48 million, predominantly due to inflation, including cost of living support to colleagues earning less than £35k which amounted to £15 million. Investment in financial crime controls and the future resilience of payment systems increased expenses by £24 million and impairment charges relating to property estate restructure were £16 million (H1 2021/22: £nil). These increases were partly offset by a £14 million reduction in depreciation and other asset impairment charges.

Impairment charge/(release)

Note:

i. Impairment charge/(release) represents the net amount recognised in the income statement, rather than amounts written off during the period.

The net impairment charge in the period of £108 million (H1 2021/22: release of £34 million) is primarily due to a deterioration in the economic outlook, which is reflected in the economic scenarios and associated weightings used to model expected credit losses. Overall arrears performance of the lending portfolios was broadly stable during the period, although an increase in arrears from current levels is expected due to affordability pressures. More information regarding critical accounting judgements, and the forward-looking economic information used in impairment calculations, is included in note 8 to the consolidated interim financial statements.

Provisions for liabilities and charges

Provisions are held to cover the costs of remediation and redress in relation to historical quality control procedures, past sales and administration of customer accounts, and other regulatory matters. The customer redress charge of £19 million (H1 2021/22: £53 million) includes a £16 million (H1 2021/22: £29 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 £241 million (H1 2021/22: £168 million) represents an effective tax rate of 24.9% (H1 2021/22: 19.7%) which is higher than the statutory UK corporation tax rate of 19% (H1 2021/22: 19%). The effective tax rate is higher primarily due to the banking surcharge of £54 million (H1 2021/22: £38 million). The effective tax rate in H1 2021/22 was also reduced by the impact of £22 million of non-recurring tax adjustments in respect of prior years. Further information is provided in note 9 to the consolidated interim financial statements.

Balance sheet

Total assets have increased by 2.8% to £279.9 billion at 30 September 2022 (4 April 2022: £272.4 billion). This increase is predominantly due to mortgage growth and higher holdings of cash and liquid assets.

Mortgage lending has been robust during the period, with residential mortgage balances increasing to £203.6 billion (4 April 2022: £198.1 billion) in line with market growth. Member deposit balances have increased by £3.2 billion to £181.2 billion (4 April 2022: £178.0 billion) as a result of new current accounts opened and increases in balances on savings following the launch of competitive new products.

Notes:

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

ii. This represents a simple average of the Liquidity Coverage Ratio (LCR) for the last 12 month ends. The LCR ensures that sufficient high-quality liquid assets are held to survive a short-term severe but plausible liquidity stress.

Cash

Cash is liquidity held by our Treasury function amounting to £32.9 billion (4 April 2022: £30.2 billion). The £2.7 billion increase is driven by a combination of long-term wholesale funding issuance during the period and an increase in member deposits, which have been partially offset by mortgage lending.

The average Liquidity Coverage Ratio of 179% (4 April 2022: 183%) 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

Total gross mortgage lending was higher than the prior period at £19.7 billion (H1 2021/22: £18.2 billion) and the market share of gross advances increased to 11.8% (H1 2021/22: 11.4%). Lending in the period was supported by our continued focus on first time buyers and growth in the remortgage market. Prime mortgage balances increased to £159.2 billion (4 April 2022: £154.4 billion) and buy to let and legacy mortgage balances increased to £44.4 billion (4 April 2022: £43.7 billion).

Arrears performance has improved slightly during the period, with cases more than three months in arrears representing 0.32% (4 April 2022: 0.34%) of the total portfolio. However, an increase in arrears from current levels is expected, due to rising inflation and increasing interest rates negatively impacting household finances. Impairment provision balances increased to £256 million (4 April 2022: £187 million) due to deterioration in the economic scenarios used to model expected credit losses, including an increase in provisions for the impact of increasing interest rates on mortgage affordability.

Consumer banking

Consumer banking balances remained stable at £4.6 billion (4 April 2022: £4.6 billion). Consumer banking comprises personal loan balances of £2.8 billion (4 April 2022: £2.9 billion), credit card balances of £1.5 billion (4 April 2022: £1.5 billion) and overdrawn current account balances of £0.3 billion (4 April 2022: £0.3 billion).

Arrears performance has deteriorated slightly during the period, with balances more than three months in arrears (excluding charged off accounts) representing 1.28% of the total portfolio (4 April 2022: 1.13%). Provision balances were £530 million (4 April 2022: £529 million) with underlying performance remaining stable. The provisions raised during the prior year to reflect concerns about the continued ability of some borrowers to repay in challenging economic circumstances have been maintained.

Commercial lending

During the period, commercial lending balances decreased to £5.9 billion (4 April 2022: £6.1 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 £4.4 billion (4 April 2022: £4.3 billion), and project finance balances of £0.6 billion (4 April 2022: £0.6 billion). With a smaller book, and fewer active borrowers requiring further lending, commercial real estate balances have decreased to £0.5 billion (4 April 2022: £0.6 billion).

Impairment provision balances decreased to £28 million (4 April 2022: £30 million) due to an improvement in the expected outcome of a small number of individual loans.

Other financial assets

Other financial assets of £30.5 billion (4 April 2022: £30.8 billion) comprise investment assets held by Nationwide's Treasury function amounting to £25.1 billion (4 April 2022: £25.5 billion), loans and advances to banks and similar institutions of £4.0 billion (4 April 2022: £3.0 billion), derivatives with positive fair values of £11.0 billion (4 April 2022: £4.7 billion) and fair value adjustments and other assets of £(9.7) billion (4 April 2022: £(2.4) billion). Derivatives largely comprise interest rate and foreign exchange contracts which economically hedge financial risks inherent in Nationwide's lending and funding activities.

Member deposits

Member deposit balances grew by £3.2 billion (H1 2021/22: £7.1 billion) to £181.2 billion (4 April 2022: £178.0 billion). This increase is due to growth in current account credit balances of £1.9 billion (H1 2021/22: £2.9 billion) and retail savings balances of £1.3 billion (H1 2021/22: £4.2 billion). Current account balance growth was driven by strong new account openings as a result of switching incentives and increasing the credit interest rate payable on the Flex Direct current account to 5% on balances up to £1,500. Operating in a dynamic savings market, balance growth has been supported by competitive fixed rate products and our Triple Access Online Saver. Nationwide's market share of deposit balances reduced to 9.3% (4 April 2022: 9.4%).

Debt securities in issue and other financial liabilities

Debt securities in issue relate to wholesale funding but exclude subordinated debt which is included within other financial liabilities. Balances increased to £30.7 billion (4 April 2022: £25.6 billion) reflecting secured and unsecured wholesale funding issuances during the period. Other financial liabilities decreased to £50.5 billion (4 April 2022: £51.5 billion) primarily due to a reduction in repurchase agreement balances, partially offset by the receipt of derivative collateral. Nationwide's wholesale funding ratio remained stable at 28.7% (4 April 2022: 28.8%). Further details are included in the Liquidity and funding risk section of the Risk report.

Members' interests and equity

Members' interests and equity have increased to £16.3 billion (4 April 2022: £15.7 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 65.

Capital structure

Nationwide's capital position remains strong, with both the Common Equity Tier 1 (CET1) ratio and leverage ratio comfortably above regulatory capital requirements of 11.1% and 3.6% respectively. The CET1 ratio increased to 25.5% (4 April 2022: 24.1%) and the leverage ratio increased to 5.8% (4 April 2022: 5.4%). The capital disclosures included in this report are in line with UK Capital Requirements Directive V (UK CRD V) with IFRS 9 transitional arrangements included.

The CET1 ratio increased to 25.5% (4 April 2022: 24.1%) as a result of an increase in CET1 capital of £0.5 billion, in conjunction with a reduction in RWAs of £1.0 billion. The CET1 capital resources increase was driven by £0.7 billion profit after tax, partially offset by £0.1 billion of capital distributions and a £0.1 billion reduction in the fair value through other comprehensive income reserve. RWAs reduced, with an increase in retail lending being more than offset by a reduction in the fair value accounting adjustment for portfolio hedged risk, driven by recent changes in the interest rate outlook.

The leverage ratio was 5.8% (4 April 2022: 5.4%), with Tier 1 capital increasing by £0.5 billion as a result of the CET1 capital movements referenced above. In addition, there was a decrease in leverage exposure of £7.2 billion, driven by the same movements as described above for RWAs. Leverage requirements continue to be Nationwide's binding Tier 1 capital constraint, as the combination of minimum and regulatory buffer requirements are in excess of the risk-based equivalent.

Further details of the capital position, the risk weighted asset movements and future regulatory developments 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 2022. 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 these Interim results.

Top and emerging risks

Nationwide's top and emerging risks are managed through the process outlined in the Risk overview section of the Annual Report and Accounts 2022 and remain broadly unchanged from those reported there. The external environment continues to present the most significant threats to the delivery of the Group's strategy, reflecting the volatile geopolitical and economic environment, with the key developments in the risk profile since 4 April 2022 described below.

The following internal and external risks, which were highlighted in the Annual Report and Accounts 2022, have not materially changed:

Principal risks and uncertainties

Nationwide operates an Enterprise Risk Management Framework (ERMF), which ensures it remains safe and secure for its members. The principal risks set out below are the key risks relevant to Nationwide's business model and achievement of its strategic objectives.

The principal risk categories remain unchanged from those set out in the Risk report in the Annual Report and Accounts 2022 and 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 are included within this report, except for business risk. Business risk is the risk that achievable volumes or margins decline relative to the cost base, affecting the sustainability of the business and delivery of its strategy. This risk is impacted by the geopolitical and macro-economic environment, and material developments to this are set out in Top and emerging risks on page 15.

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, together with information on the calculation of impairment provisions based on expected credit losses (ECLs), is included within the Annual Report and Accounts 2022.

Performance overview

During the period, the UK has experienced continued economic uncertainty, with rising energy prices driving an increase in the cost of living and contributing to a high inflationary environment. This has increased pressure on household affordability. In addition to this, increases in bank base rate have led to higher institutional borrowing costs and in turn higher interest rates for consumers. We therefore continue to hold a model adjustment to reflect the impact of rising inflation on those borrowers most impacted by the cost of living challenge. A further £16 million provision has been recognised at 30 September 2022, relating to the affordability risk associated with prime mortgage borrowers whose mortgage payments are expected to increase as their current fixed rate mortgage deal expires.

The housing market has retained a degree of momentum, with the latest Nationwide House Price Index showing year on year growth of 9.5%. However, with the continued squeeze on household finances and falling levels of consumer confidence, there is an increased sentiment that the challenges around affordability may begin to be reflected in the UK housing market as it begins to show signs of demand starting to cool.

Observed credit quality and performance remained broadly stable during the period, with arrears and forbearance for both residential and consumer banking remaining low and below pre-pandemic levels. However, arrears levels are expected to increase as cost of living pressures take effect, but to remain low relative to the industry.

Outlook

Continued uncertainty is expected within the UK economy, with interest rates continuing to rise in an effort to curb rising inflation. There is likely to be more pressure on household budgets, causing a deterioration in credit performance. The potential impact of this is captured by the economic scenarios used within the calculation of credit provisions.

Nationwide continues to support its members through the cost of living challenges with concessions granted based on consideration of their individual circumstances, to ensure that they have the help they need to meet their financial obligations.

Support options available to members also include a dedicated team of experts available through the Cost of Living freephone hotline.

Credit risk - Overview (continued)

Maximum exposure to credit risk

Nationwide's maximum exposure to credit risk has increased to £290 billion (4 April 2022: £284 billion), principally reflecting higher residential mortgages and cash balances.

Credit risk largely arises from loans and advances to customers, which account for 78% (4 April 2022: 78%) of Nationwide's total credit risk exposure. Within this, the exposure relates primarily to

residential mortgages, which account for 95% (4 April 2022: 95%) of total loans and advances to customers and comprise high-quality assets with historically low occurrences of arrears and

possessions.

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

Credit risk - Overview (continued)

Notes:

i. In addition to the amounts shown above, Nationwide has revocable commitments of £10,487 million (4 April 2022: £10,622 million) in respect of credit card and overdraft facilities. These commitments represent agreements to lend in the future, subject to certain considerations. Such commitments are cancellable by Nationwide, subject to notice requirements, and given their nature are not expected to be drawn down to the full level of exposure.

ii. The fair value adjustment for portfolio hedged risk and the fair value adjustment for micro hedged risk (which relates to the commercial lending portfolio) represent hedge accounting adjustments.

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

Commitments

Irrevocable undrawn commitments to lend are within the scope of provision requirements. The commitments in the table above consist of overpayment reserves and separately identifiabl 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 £0.3 million (4 April 2022: £0.4 million) is included within provisions for liabilities and charges.

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

exposure at default.

Credit risk - Residential mortgages 

Summary

Nationwide's residential mortgages comprise prime, buy to let and legacy loans. Prime residential mortgages are mainly Nationwide-branded advances made through intermediary channels and the branch network. Since 2008 buy to let mortgages have only originated under The Mortgage Works (UK) plc (TMW) brand. Legacy mortgages are smaller portfolios in run-off.

Arrears rates on the residential mortgage portfolios remain low. However, higher inflation and rising interest rates are placing greater pressure on household finances, increasing the potential for future defaults.

The housing market remained strong over the period, with continued house price growth reducing the average LTV of the residential portfolios. There are, however, some signs of a slowdown in activity and this is expected to continue as the inflationary pressure on household budgets intensifies.

Notes:

i. Buy to let mortgages include £41,854 million (4 April 2022: £40,879 million) originated under the TMW brand, with other brands now closed to new originations.

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

Credit risk - Residential mortgages (continued)

The impairment charge for the period includes the impact of updating macro-economic assumptions and scenario weightings to reflect the deterioration in economic outlook since 4 April 2022; further details are included in note 8 to the consolidated interim financial statements. Closing provisions have increased to £256 million (4 April 2022: £187 million). The prior period impairment releases reflected a decrease in provisions during a period where the economic outlook had improved.

The following table shows residential mortgage lending balances carried at amortised cost, the stage allocation of the loans, impairment provisions and the resulting provision coverage ratios.

Credit risk - Residential mortgages (continued)

Notes:

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

ii.  POCI loans are those which were credit-impaired on purchase or acquisition. The POCI loans shown in the table above were recognised on the balance sheet when the Derbyshire Building Society was acquired in December 2008. These balances, which are mainly interest-only, were 90 days or more in arrears when they were acquired and so have been classified as credit-impaired on acquisition. The gross balance for POCI is shown net of the lifetime ECL of £5 million (4 April 2022: £5 million).

Total residential mortgage provisions have increased to £256 million (4 April 2022: £187 million), with £51 million of this increase relating to buy to let and legacy mortgages. This provision increase is largely the result of a deterioration in the economic outlook, including an update to the severe downside scenario to reflect an increasing interest rate environment. Further information regarding economic scenarios used in ECL modelling and associated weightings is provided in note 8 to the consolidated interim financial statements. The main driver of the prime mortgage provision increase to £91 million (4 April 2022: £73 million) is a new £16 million provision for the affordability risk associated with borrowers whose mortgage payments are expected to increase as their current fixed rate mortgage deal expires.

Stage 2 loans have increased in the period to £18,514 million (4 April 2022: £16,449 million), with this increase relating to buy to let mortgages. The increase is largely due to the impact of updating the economic scenarios to reflect expected increases in interest rates, with the buy to let portfolio stage allocation being sensitive to interest rate changes.

Credit performance continues to be strong. Stage 3 loans in the residential mortgage portfolio equate to 0.5% (4 April 2022: 0.6%) of the total residential mortgage exposure. Of the total £1,073 million (4 April 2022: £1,224 million) stage 3 loans, £537 million (4 April 2022: £552 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; £200 million (4 April 2022: £346 million) of the stage 3 balances in forbearance are in this probation period.

Credit risk - Residential mortgages (continued)

The table below summarises the movements between stages in the Group's residential mortgages held at amortised cost. The movements within the table are an aggregation of monthly movements over the period.

Note:

i. Gross balances of credit-impaired loans include £128 million (4 April 2022: £135 million) of POCI loans, which are presented net of lifetime ECL impairment provisions of £5 million (4 April 2022: £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 2022 sets out the main criteria used to determine whether a significant increase in credit risk has occurred since origination. There have been no changes to the criteria during the period.

Credit risk - Residential mortgages (continued)

The value of loans reported in stage 2 as a result of being in arrears by 30 days or more has increased to £359 million, 0.18% of total gross balances (4 April 2022: £295 million, 0.15% of total gross balances). The majority of these loans are reported within stage 2 as a result of the probability of default (PD) having increased since origination. This category includes £4.5 billion (4 April 2022: £4.6 billion) of loans where the modelled PD has been uplifted to recognise the judgement that the improvements in borrower credit quality observed since the start of the Covid-19 pandemic are temporary, and also to reflect an increase in affordability risk as a result of inflationary pressures. In both instances the uplift has resulted in the loans breaching existing quantitative PD thresholds.

Credit quality

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