Nationwide Ccds Regulatory News (NBS)

Nationwide Building Society

Interim Results

For the period ended

30 September 2016

Contents

Underlying profit

Profit before tax shown on a statutory and underlying basis is set out on page 5. Statutory profit before tax of £696 million has been adjusted for a number of items, consistent with prior periods, to derive an underlying profit before tax of £615 million. The purpose of this measure is to reflect management's view of the Group's underlying performance and to assist with like for like comparisons of performance across periods. Underlying profit is not designed to measure sustainable levels of profitability as that potentially requires exclusion of non-recurring items even though they are closely related to (or even a direct consequence of) the Group's core business activities.

Forward looking statements

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

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

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

RECORD CURRENT ACCOUNT AND LENDING GROWTH AND PROTECTION FOR SAVERS AS NATIONWIDE SUPPORTS MEMBERS DURING UNCERTAIN TIMES

Nationwide Chief Executive, Joe Garner, said:

"As a building society we are owned by our members and are answerable to them, which is why, for 170 years, we have made decisions focused on their best interests. The performance we are announcing today is a reflection of this. Despite economic uncertainty following the EU referendum, the Society has continued to lend to help our members get onto and move up the housing ladder, with record net lending in the half year. We have offered long term value for those who want to save for their future and more people than ever before have chosen to open a Nationwide current account. We have also continued to be ranked number one for customer service satisfaction amongst our high street peer group1.

"We have made a number of pledges to help our savers and borrowers. These include protecting selected savings rates to minimise the impact of the base rate change and helping our members with variable rate mortgages by passing on the base rate decrease in full. These conscious decisions and those taken over recent years have contributed to a reduction in profits in the first half of the year in line with expectations, demonstrating our commitment to putting members' interests at the heart of everything we do.

"Our investment in technology, is enabling us to test the viability of returning branches to communities which have been left without banking services, by opening a pilot branch in Glastonbury which will use the latest technology alongside the personal service so many value.

"Nationwide's strong capital position and commitment to continue to deliver the best service on the high street mean we are well placed to continue to support members whatever the prevailing economic conditions."

Nationwide Finance Director, Mark Rennison, said:

"Nationwide has traded strongly over the first six months of the year, increasing gross mortgage lending by 17% to £17.5 billion, a market share of 14.5%. Our focus on offering attractive products and rewarding loyal savers has resulted in member deposit balances increasing by £4.7 billion.

"Statutory profit for the period was £696 million and underlying profit was £615 million, both of which include a gain of £100 million on the disposal of our stake in Visa Europe. Our profit performance has reduced in line with our expectations and reflects continued margin pressure due to the prevailing low interest rate environment and the conscious decisions we have taken over recent years to support our members.

"We have also increased investment in our products and services for the long term benefit of our membership consistent with our position as the leader for customer service on the high street."

1 © GfK 2016, Financial Research Survey (FRS), 3 months ending 30 September 2016 vs. 31 March 2016, proportion of extremely/very satisfied customers minus proportion of extremely/very/fairly dissatisfied customers summed across current account, mortgage and savings; high street peer group defined as providers with main current account market share >6% (Barclays, Halifax, HSBC, Lloyds Bank (inc C&G), NatWest and Santander).

Key highlights

· A strong Society, making decisions for the benefit of members over the long term

o in line with expectations statutory profit reduced to £696 million (H1 2015/16: £802 million)

o underlying profit £615 million (H1 2015/16: £801 million)

o Common Equity Tier 1 ratio of 23.3% and leverage ratio of 4.0% (4 April 2016: 23.2% and 4.2% respectively)

· Record prime gross mortgage lending

o gross mortgage lending up 17% to £17.5 billion

o best ever net mortgage lending, up 46% to £6 billion

o record gross prime lending of £14.7 billion, up 23%

o accounted for one-third of UK net mortgage lending over the past five years

o helped a record number of first-time buyers, up 50% to 38,600

· Strong growth in deposit balances

o increased our member deposit balances by £4.7 billion (H1 2015/16: £2.6 billion)

o average deposit rate of 1.07%, 25 basis points higher than the market average, equating to an annualised benefit for our members of £380 million

· Record numbers of new current accounts

o record 377,000 current accounts opened, an increase of 36%

o 75,500 accounts switched to Nationwide, up 61%, representing a 15.8% market share

o continued investment with the launch of FlexStudent, our first student current account

o 'Best Rewards' - uSwitch Current Accounts Awards (2016); 'Best Online Current Account Provider 2016' - Your Money

· No.1 for customer service

o ranked number one for customer service satisfaction amongst our high street peer group with a lead of 8.0%2

o No. 1 in Forrester UK 2016 Customer Experience Index

o 'Best Extra Large Call Centre' - Top 50 Companies for Customer Service

· Building society, nationwide

o testing the viability of returning branches to communities, with a pilot branch in Glastonbury

o supported savers and borrowers after the base rate cut, protecting rates for those with Regular Saver and Help to Buy products, and making £10 billion a year available to first time buyers

o Ministry of Defence Gold Award for our support of the military community

o our Specialist Support Service has helped more than 700 members affected by life-limiting situations, unlocking almost £66,000 in financial support

· Housing market outlook

o demand and supply well matched with modest slowdown in activity since the EU referendum

o less certain economic outlook may soften demand but prices will continue to be supported by low interest rates and limited supply of new homes

2 © GfK 2016, Financial Research Survey (FRS), 30 September 2016 vs. 31 March 2016, proportion of extremely/very satisfied customers minus proportion of extremely/very/fairly dissatisfied customers summed across current account, mortgage and savings; high street peer group defined as providers with main current account market share >6% (Barclays, Halifax, HSBC, Lloyds Bank (inc C&G), NatWest and Santander).

Financial summary

Notes:

i. Member deposits include current account credit balances.

ii. Charged off balances relate to accounts which are closed to future transactions and are held on the balance sheet for an extended period (up to 36 months, depending on the product) whilst recovery procedures take place.

iii. Reported under CRD IV on an end point basis. The leverage ratio is calculated using the Capital Requirements Regulation (CRR) definition of Tier 1 for the capital amount and the Delegated Act definition of the exposure measure.

iv. The loan to deposit ratio represents loans and advances to customers divided by (shares + other deposits + amounts due to customers).

Chief Executive's review

Making decisions for the benefit of members over the long term

As a building society, we were founded by ordinary people who came together to achieve things they could not achieve alone, like owning a home and saving for their future. To this day, we remain a member-owned mutual building society able to take a long term view and focus on providing excellent service, security and stability for our members, our owners. This has been particularly important over the first half of the year given the uncertainty and market volatility which followed the EU referendum.

We have taken the conscious decision to stand by our members, continuing to help them by reducing variable mortgage rates and offering long term value to savers, even in the current low interest rate environment. As expected these conscious decisions and those taken in recent years have had a knock-on impact on our profits. At the same time more people than ever before have chosen us for their everyday banking needs, attracted by the breadth, value and quality of our current account range. This has resulted in strong trading and a good financial performance over the first half of the year.

Underlying profit has reduced in the period to £615 million. This is due to three things. First, a reduction in net interest income due to the prevailing low interest rate environment, competition in the mortgage market and the active decisions we have taken to support savers and variable rate mortgage members. Second, a growth in underlying costs. And third, a modest increase in impairment provisions. These have been partially offset by a gain of £100 million from the disposal of the Society's stake in Visa Europe during the period. Our NIM in the period of 1.33% was lower than the same period last year (H1 2015/16: 1.58%), but has been broadly stable over the first half of the year, with closing spot NIM in September 2016 in line with that for the period.

Strategic investment into the Society is greater than ever before reflecting our financial strength and ability to make the right long term decisions for our members. We are investing in new products and investing to provide members with better service propositions such as our new banking app and further expansion of Nationwide Now (our video link advice service) which is proving so successful. We also continue to make investment in strengthening our resilience and control environment to keep our members' money safe, as well as supporting our people as a responsible employer through increases to our pension contributions. This investment, along with costs driven by our strong trading performance, has led to an increased underlying cost income ratio of 57.1% (H1 2015/16: 51.0%). Whilst sharpening our focus on efficiency, we will continue to invest where we believe it is in the long term interests of our members.

Nationwide remains safe and secure as evidenced by our strong capital position and balance sheet, with consolidated CET1 and leverage ratios of 23.3% and 4.0% respectively (4 April 2016: 23.2% and 4.2% respectively).

Building society, nationwide

As a mutual we do not aim to maximise profit, instead retaining sufficient earnings to support future growth and sustain a strong capital position. Being member-owned we are in an enviable position that allows us to take the right long term decisions and invest in making a tangible difference to our members' and employees' lives by tackling the issues that are important to them.

We believe that there is still a role for the branch on the high street, offering people the choice of managing their money using the latest technology in branch together with the personal service so many value in a digital age. Indeed, our branches are alive and well as evidenced by the fact that of all new current account openings during the first half of the year, over half were opened in a branch, and of these almost 20% were opened through Nationwide Now. We believe we can use this technology and digital investment to test the viability of opening a branch on high streets with limited access to a bank or building society. We will pilot this concept with a 'community contract' branch in Glastonbury, Somerset, where a consultation suggested that residents were willing to become a member of Nationwide to support the Society's investment. This branch will feature the latest technology, including the Nationwide Now service which gives members access to our financial consultants at a time that suits them.

Chief Executive's review (continued)

We were delighted to have been awarded the Employer Recognition Scheme's Gold award by the Ministry of Defence in recognition of our support for former and serving armed forces personnel.

Following the EU referendum, we have established a Brexit Consumer Support Panel which brings together leading consumer industry organisations to address the challenges facing consumers as the UK's relationship with the EU evolves. The panel, chaired by Nationwide Building Society, will provide insights to Government into consumer attitudes and behaviours in relation to Brexit and will help to promote positive outcomes for consumers as the renegotiation process is progressed. The organisations represented on this panel have millions of members, customers and employees across the UK, bringing a real insight into the levels of confidence around the country and we look forward to working with the Government over the coming months to better understand the challenges households face.

We are also committed to investing in our people. Not only have we championed fair pay as one of the first high street names to sign up to the Living Wage Foundation but we have also improved our pension scheme, increasing the amount we contribute to our employees' pensions. For employees in our defined contribution scheme who pay up to 7% of their salary into their pension, Nationwide will put in 16%, representing one of the most attractive pension schemes in the UK.

We continue to place a sharp focus on our core purpose of building society, nationwide and making decisions which are in the best interests of our membership. It is for this reason, following a strategic review of our commercial real estate (CRE) business, we have concluded our CRE lending is not key to the Society's vision for the future and that our resources would be better deployed elsewhere. Therefore, we will stop lending to new and existing CRE customers. We will maintain a dedicated service for each existing CRE customer throughout the remainder of their loan term. We will continue to provide funding to registered social landlords and existing Project Finance customers as well as continuing our Business Savings proposition.

Helping members buy homes and save for the future

Nationwide was founded to help people own their own homes and save for the future.

We have continued to help more members get onto or move up the housing ladder in the last six months. Gross mortgage lending increased by 17% to £17.5 billion (H1 2015/16: 14.9 billion) and net lending was up 46% to £6.0 billion (H1 2015/16: £4.1 billion), representing our best period ever. These equate to market shares of 14.5% and 33.9% respectively, well above our natural par share and strengthening our position as the UK's second largest mortgage lender. Within this, we delivered record prime gross mortgage lending of £14.7 billion, up 23%.

We arranged a record 38,600 mortgages for people buying their first home, an increase of 50%. This represents one in five of all first time buyers. We are committed to helping first time buyers by maintaining low deposit lending and minimising costs with schemes such as Help to Buy and Save to Buy.

We have taken a stand to help more people onto the housing ladder. As part of our five-point plan, launched to underline our commitment to our members, the Society will make at least £10 billion a year available to lend to first time buyers, where it is appropriate and responsible to do so. We have also protected the rates on Nationwide's Help to Buy ISA and Save to Buy products following the base rate decrease. This will help ensure the road to home ownership does not get longer for those saving to buy their first home.

At the same time, the Society passed on the base rate cut in full to Base Mortgage Rate (BMR), Standard Mortgage Rate (SMR) and tracker mortgage members, thereby lowering their monthly payments.

Chief Executive's review (continued)

As the proportion of UK households living in rented accommodation continues to grow, we have maintained support for the private rented sector through our dedicated buy to let subsidiary, The Mortgage Works (TMW). Gross buy to let mortgage lending for the first six months of the year was £2.8 billion (H1 2015/16: £2.9 billion). The buy to let sector is going through a period of substantial change resulting from new rules on landlord taxation and a new regulatory regime which provides guidance on underwriting and affordability standards for lending to landlords. As a responsible lender we took the decision to lead the market in making changes to our affordability assessment criteria to ensure our borrowers do not overstretch themselves. This is expected to result in lower buy to let lending in the second half of the year.

While borrowers have benefited from lower interest rates, we have also offered a support package for savers, protecting rates where possible and offering competitive products.

We have protected our Help to Buy ISA and Save to Buy rates, as well as maintaining the rates on the Flexclusive Regular Saver and Regular Saver accounts. During the period our members have benefited from an average rate on their deposits of 1.07%, 25 basis points higher than the market average, equating to an annualised benefit for our members of £380 million. Our loyal savers3 have received an average rate of 1.13% over the last six months, 46 basis points higher than the equivalent market average, equating to an annualised benefit of almost £100 million.

In addition, over 185,000 Flexclusive Regular Saver accounts have been opened in the first half of the year, offering current account holders 5.00% on monthly payments of up to £500 for the first 12 months.

Thanks to our competitive savings range, we have seen an increase in member deposit balances of £4.7 billion, maintaining our position as the UK's second largest savings provider with a market share of over 10%.

More people than ever before choose Nationwide for everyday banking

As well as strong mortgage and savings growth, more people than ever before are choosing Nationwide for their everyday banking, attracted by the breadth, value and quality of our current account range. We opened a record 377,000 current accounts during the first half of the year, a 36% increase on last year (H1 2015/16: 277,000). Again, we have been a net beneficiary of customers switching via the Current Account Switch Service, driven by the popular 'Recommend a Friend' referral scheme. In total 75,500 accounts were switched to Nationwide, an increase of 61%, representing a market share of switchers of 15.8%.

Our continued investment in growing our current account base has contributed to the record account openings. During the half year we have extended our product range with the launch of FlexStudent, our first ever student account, and offered members innovative new ways to manage their money. This has led to an increase in our share of main standard and packaged current accounts to 7.3%4 (4 April 2016: 7.1%).

Number one for customer satisfaction amongst our high street peer group5

We strive to provide members with excellent service whether they choose the convenience of managing their money digitally or the personal touch in a branch. We continue to invest in technology to make life easier for members. As with Apple Pay, we were amongst the first in the UK to provide Android Pay and we have launched a new version of our mobile banking app, which allows customers to manage their accounts quicker and easier than ever before.

We know our members still value the face to face help and support they can receive in a branch so we are using the latest fibre optic technology to enhance and deliver great service in locations which our members find convenient.

We continue to be ranked number one for customer satisfaction amongst our high street peer group, with a lead of 8.0%5.

3 Nationwide rewards loyalty by giving members with a Loyalty Saver product a higher rate of interest depending on the length of their membership.

4 Based on market data as at August 2016.

5 © GfK 2016, Financial Research Survey (FRS), 3 months ending 30 September 2016 vs. 31 March 2016, proportion of extremely/very satisfied customers minus proportion of extremely/very/fairly dissatisfied customers summed across current account, mortgage and savings; high street peer group defined as providers with main current account market share >6% (Barclays, Halifax, HSBC, Lloyds Bank (inc C&G), NatWest and Santander).

Chief Executive's review (continued)

Our record on complaints continues to be very strong. Despite having a 12.8% market share of mortgages and a 10.1% market share of savings, we account for only 2% of total industry complaints, and we make every attempt to resolve complaints with the customer. If complaints are referred to the Financial Ombudsman, latest figures show that the Ombudsman upholds our decisions in 85% of cases, compared with an industry average of only 52%.

Supporting members in uncertain times

The UK economy grew at a respectable pace in the first nine months of 2016. However, uncertainty following the EU referendum is likely to adversely impact investment and hiring decisions which in turn is likely to result in slower growth in the quarters ahead. To date, market data points to a modest slowdown in the wider economy and our core markets. Policy stimulus measures aimed at lowering borrowing costs should help to provide support for economic activity and policymakers appear willing to further ease monetary and fiscal policy if required.

The longer term impacts of the EU referendum will depend on a range of factors, not least the time it takes to reach trading agreements with EU and non-EU economies and the nature of those agreements. Though the outlook is uncertain, our assumption is that economic growth will be maintained at a modest pace in the years ahead. Interest rates are expected to remain at historically low levels for a prolonged period in order to support economic activity, where further stimulus measures (including a base rate cut to close to, but above, zero) may still be required.

The recent decline in sterling should provide some support for UK exports, though in the short term it will also exert upward pressure on inflation which will act as a drag on real income growth. However, the impact on inflation is expected to prove transitory and is unlikely to prevent policymakers implementing further stimulus if required.

There are signs of a modest slowdown in activity in the housing market, especially in regard to the buy to let market, and this has made it difficult to assess the underlying strength of demand in recent quarters. The number of mortgages approved for house purchase has moderated, and new buyer enquiries remain subdued, though the supply of houses is also constrained. Indeed, demand and supply have remained fairly well matched and the annual pace of house price growth has remained in a narrow range of between 3% and 6% since early 2015.

Housing market trends will depend crucially on developments in the wider economy. This suggests activity may soften further in the months ahead, though the low level of interest rates will provide support for demand and the limited supply of homes on the market is likely to provide support for prices.

We will continue to act in the best interests of our members. Nationwide's strong capital position, high quality balance sheet and lead on customer satisfaction means we are well placed to continue to help our members whatever the prevailing economic conditions. We face the future with confidence and will continue to do the right thing for our members.

Financial review

Overall performance

Our financial results for the period ended 30 September 2016 show a statutory profit before tax of £696 million (H1 2015/16: £802 million) and underlying profit before tax of £615 million (H1 2015/16: £801 million). These results include a gain of £100 million on the disposal of our stake in Visa Europe.

Underlying profit has reduced 23% to £615 million, predominantly due to a reduction in net interest income, growth in underlying costs and an increase in impairment charges. As indicated when announcing our results for the 2015/16 financial year, our margins have trended lower as a result of ongoing competition in the mortgage market, combined with continued natural attrition of BMR balances and the impact of the prolonged low interest rate environment, including the cut in the base rate to 0.25% in August.

Profit for the period remains within the target range of our financial performance framework (£1 billion to £1.5 billion per annum), which we introduced in the Annual Report and Accounts 2016. This range represents the level of annual profit we believe is necessary for us to continue to invest and support members' needs while maintaining financial strength. The framework is based on the underlying principle of maintaining capital comfortably in excess of regulatory leverage ratio requirements. As a consequence of lowering our forecast balance sheet in light of the outcome of the EU referendum, we expect to update the target range at the end of the year.

The underlying cost income ratio has increased to 57.1% (H1 2015/16: 51.0%). The movement reflects the reduction in net interest income combined with incremental expenditure on strategic investment to enhance efficiency and service for our members, and increased employee costs, including our investment in a 'Living Pension' for our employees. Whilst sharpening our focus on efficiency, we will continue to invest where we believe it is right for our members.

Total assets have grown by £17 billion to £226 billion as at 30 September 2016. This increase is attributable to £6 billion growth in residential mortgage lending, reinforcing our position as the second largest mortgage lender in the UK and increasing our market share of prime mortgage balances to 12.7% (4 April 2016: 12.4%). In addition, there has been an increase in our high quality liquid assets primarily due to pre-funding of wholesale maturities and an increase in collateral relating to derivatives.

Our capital levels have remained strong during the period with CET1 and leverage ratios of 23.3% and 4.0% respectively (4 April 2016: 23.2% and 4.2%), comfortably in excess of current regulatory requirements, and well placed to meet foreseeable regulatory capital requirements.

Income statement

Notes:

i. Underlying profit represents management's view of underlying performance and is presented to aid comparability across reporting periods. It is not designed to measure sustainable levels of profitability.

ii. Within the statutory results presented in the financial statements:

- transformation costs are included within administrative expenses

- FSCS costs are included within provisions for liabilities and charges

- gains/losses from derivatives and hedge accounting are presented separately within total income.

Financial review (continued)

As anticipated our net interest margin (NIM) in the period of 1.33% was lower than the same period last year (H1 2015/16: 1.58%). The reduction in NIM relative to the previous year is primarily due to ongoing competition in the mortgage market, combined with continued natural attrition of BMR balances and the impact of medium term interest rate expectations. The NIM position has stabilised, with closing spot NIM at 30 September 2016 in line with that for the period.

Our BMR balances have reduced by £7.1 billion over the past 12 months to £32.3 billion as at 30 September 2016 and we expect this trend to continue for the remainder of the financial year. This, together with the impact of competition on new business pricing, has resulted in a reduction of approximately 20 bps in the average margin on mortgage balances, measured against relevant market indices (swaps or Libor).

At a market level, the incentive to support overall margins through lower deposit rates in the face of competition for lending, combined with deposit growth in excess of demand for lending, has resulted in retail funding costs declining over the last 12 months. Against this backdrop we have sought to support our saving members as far as possible by deferring rate reductions and maintaining rates significantly in excess of those on offer from our major high street peers. Following the decision by the Bank of England to cut the base rate to 0.25% we committed to protecting members who save regularly, or are building a deposit to buy their own home, resulting in selected products being maintained at their existing rates. As a mutual we offer savings products which represent long term good value and over the last six months our depositors have benefited from an average rate of 1.07%, 25 bps higher than the market average rate, equating to an annualised benefit to savers of some £380 million.

Key factors influencing NIM in the second half of the year are likely to be interest rate expectations, sustained mortgage market competition, and our continued focus on delivering long term value to our savers. We currently expect that our NIM for the second half of the year will be only modestly lower than for the first half.

Underlying net other income has increased by 53% to £193 million (H1 2015/16: £126 million) primarily due to a gain of £100 million from the disposal of our stake in Visa Europe during the period, which is included in 'Other' above. Excluding this gain, net underlying other income has reduced during the period primarily due to a decrease in interchange income from credit card and current account transactions, following the introduction of regulatory caps. In addition current account fee income has reduced following the introduction of our FlexBasic current account, which has no fees for certain transactions.

Our general insurance income has reduced by £7 million due to an increasingly challenging market environment, combined with our pricing proposition which is focused on delivering value to members.

Financial review (continued)

Gains or losses from derivatives and hedge accounting arise due to hedge accounting ineffectiveness or because hedge accounting is not achievable. This volatility is largely attributable to accounting rules which do not fully reflect the economic reality of the Group's hedging strategy. Details of fair value gains and losses relating to derivatives and hedge accounting are provided in note 6 to the consolidated interim financial statements.

The strong trading performance in the period which has led to additional business volumes, coupled with increases to employee costs and strategic investment in propositions and service for members, has resulted in an increase in underlying administrative expenses of 9.3% (£80 million). At a statutory level administrative expenses have increased by 8.3% (£72 million). As a result, the cost income ratio (CIR), on an underlying basis, has increased to 57.1% (H1 2015/16: 51.0%).

Employee costs have increased, reflecting the impact of an annual pay award averaging 2.1% and higher costs resulting from enhancements to the Group's defined contribution pension scheme in line with our policy of providing a 'Living Pension' alongside being a Living Wage employer. In addition, average employee numbers have increased by 4% period on period as we continue to build greater capacity to meet additional business volumes and further strengthen risk and control functions.

Strategic investment has been greater than ever before, with the majority relating to initiatives that directly benefit members and reflecting our strategy of taking decisions to support the long term interests of our members. During the period, investment has focused on service and efficiency improvements, both in branch and through digital channels, such as payments through mobile phones, updating our savings point of sale systems and video links in branches which allow members to speak face to face with advisors in another location. Further investment has concentrated on IT resilience and ensuring compliance with UK and EU regulatory requirements.

Our cost trajectory reflects significant growth and investment over recent years. Mortgage balances have grown 12.8% over the last 2 years and we have 24% more main current account members today than in 2014. Investment in support of our member proposition will continue though we expect the impact on the cost base from this activity to be offset by the efficiencies it provides and efficiencies realised from previous investment. The continuing low rate environment will constrain income growth over the foreseeable future and we therefore intend to increase focus on driving our efficiency agenda, exploiting the benefits of past and ongoing investment to accelerate automation and digitise service delivery in line with the needs of our members. This will result in lower cost growth in future periods and we will provide further information in our full year results announcement.

Financial review (continued)

Impairment losses for the period of £37 million have increased compared to the same period last year (H1 2015/16: £nil) primarily due to a lower level of net recoveries in the commercial real estate (CRE) portfolio.

Residential lending impairment charges for the period of £5 million (H1 2015/16: £7 million reversal) reflect a lower benefit from house price improvement than seen in the previous period. Arrears performance and LTV profile have been stable with cases in excess of three months in arrears amounting to 0.45% (4 April 2016: 0.45%) and the indexed LTV of the portfolio now at 54% (4 April 2016: 55%).

Consumer banking impairment losses have remained broadly stable at £32 million (H1 2015/16: £33 million), with the overall performance and risk profile of the portfolio improving during the period.

Commercial lending impairments relate exclusively to commercial real estate (CRE) lending, with no arrears in our registered social landlords and Project Finance portfolios. A continuation of improved CRE market conditions in the early part of the period, including increased liquidity and capital values, has resulted in a net impairment reversal of £5 million. The higher reversal in the previous year reflected strongly improving market conditions impacting higher impaired balances, which have been reducing in line with the managed run-off of the book. Since the EU referendum expectations for commercial property values have moderated and most forecasts are predicting modest falls.

The impairment on investment securities of £5 million relates to the revaluation of a single available for sale asset which is held within our closed out of policy Treasury portfolio.

We hold provisions for customer redress to cover the costs of remediation and redress in relation to past sales of financial products and post sales administration, including compliance with consumer credit legislation and other regulatory requirements. The charge in the period predominantly relates to updated estimates for provisions previously recognised, including £30 million relating to Payment Protection Insurance (PPI) redress and £15 million for the related cost of administering PPI claims. When assessing the adequacy of our PPI provision we have considered the implications of the proposals published by the Financial Conduct Authority in its August 2016 consultation paper (CP16/20), including the estimated impact of the Plevin case.

The Financial Services Compensation Scheme (FSCS) release of £4 million (H1 2015/16: £5 million charge), reflects a small reduction in the balance sheet amount provided on 4 April 2016 for our anticipated share of interest costs in relation to the 2016/17 FSCS scheme year. More information on customer redress and FSCS is included in note 18 to the consolidated interim financial statements.

Financial review (continued)

Taxation

The statutory reported tax charge for the period of £194 million (H1 2015/16: £166 million) represents an effective tax rate of 27.9% (H1 2015/16: 20.7%), which is higher than the statutory rate in the UK of 20% (H1 2015/16: 20%). The higher effective rate is due principally to the banking surcharge of 8%, equivalent to £40 million (H1 2015/16: £nil), together with the tax effect of disallowable expenses. Further information is provided in note 9 to the consolidated interim financial statements.

Balance sheet

Total assets have increased 8% during the period to reach £226 billion at 30 September 2016 (4 April 2016: £209 billion). This increase is in part attributable to net mortgage lending of £6.0 billion resulting from our continued strong trading performance. The remainder of the growth in total assets predominantly reflects an increase of £8.4 billion in high quality liquid assets.

Mortgage lending has largely been supported by strong retail funding flows with member balances growing by £4.7 billion in the period, resulting in our market share of savings stock remaining broadly flat at 10.1% (4 April 2016: 10.2%). Of the growth in member balances, £1.8 billion is attributable to our current account proposition as we have continued to increase our market share of main current accounts from 7.1% at 4 April 2016 to 7.3%6. Debt securities in issue have increased by £7.6 billion to £43.7 billion reflecting additional issuance activity in the wholesale markets during the period to support the increase in liquidity.

The Group intends to participate in the Bank of England's Term Funding Scheme (TFS) which provides cash secured against eligible collateral and has a four year maturity.

Note:

i. Charged off balances relate to accounts which are closed to future transactions and are held on the balance sheet for an extended period (up to 36 months, depending on the product) whilst recovery procedures take place.

ii. The loan to deposit ratio represents loans and advances to customers divided by (shares + other deposits + amounts due to customers).

6 Based on market data as at August 2016.

Financial review (continued)

Residential mortgages

Residential mortgages include prime and specialist loans, with the specialist portfolio primarily comprising buy to let (BTL) lending. Gross mortgage lending in the period increased 17% to £17.5 billion (H1 2015/16: £14.9 billion), representing a market share of 14.5% (H1 2015/16: 13.2%).

Net mortgage lending was £6.0 billion (H1 2015/16: £4.1 billion), a market share of 33.9% (H1 2015/16: 21.2%), of which £5.0 billion was prime lending (H1 2015/16: £2.7 billion) and £1.0 billion related to BTL lending (H1 2015/16: £1.4 billion).

The flow of BTL advances has slowed following our decision to increase the minimum interest coverage ratio from 125% to 145%, with a particular decrease in the proportion of our new BTL lending that is secured on properties located in London.

The average loan to value (LTV) of new lending in the period, weighted by value, increased 2% to 71% (H1 2015/16: 69%) primarily due to our strategy to increase lending to the first time buyer market. House price growth has continued, albeit modestly, resulting in the average LTV of the Group's portfolio reducing slightly to 54% (4 April 2016: 55%). Our residential mortgage arrears have remained flat at 0.45% (4 April 2016: 0.45%) as we continue to benefit from low unemployment and growth in household income. Our arrears levels continue to be significantly lower than the Council of Mortgage Lenders industry average of 1.01%, demonstrating our low risk appetite and strong underwriting standards.

Non-performing balances have reduced by £147 million, with particular improvements in balances past due up to 3 months. Impairment provisions have fallen by £6 million to £96 million (4 April 2016: £102 million) reflecting this improvement and house price growth during the period.

Commercial lending

As a result of deleveraging activity undertaken in recent years, our overall commercial portfolio is increasingly weighted towards registered social landlords, with balances of £7.5 billion (4 April 2016: £7.6 billion), and a portfolio of loans made under the Government's Project Finance initiative amounting to £1.1 billion (4 April 2016: £1.2 billion). These portfolios are fully performing and remain stable, reflecting their low risk nature. The commercial portfolio also includes commercial real estate (CRE) loans of £2.8 billion (4 April 2016: £3.0 billion) and fair value adjustments of £1.7 billion (4 April 2016: £1.4 billion) relating to loans where we have hedged associated financial risks, typically interest rate risk.

We have undertaken £192 million of new CRE lending during the period which has been focused on low risk commercial loans with an average LTV of new business of 51%. The level of impaired balances as a proportion of our total CRE exposure has fallen from 6% at 4 April 2016 to 3%, reflecting resolution of impaired asset positions and improved asset quality.

In line with our managed run-off of the CRE book, it has been concluded that our CRE business is not key to the Society's vision for the future and therefore we have decided to cease new CRE lending. We will maintain a dedicated service for existing CRE customers throughout the remainder of their loan term. We will continue to provide funding to registered social landlords and existing Project Finance customers.

Consumer banking

Despite particularly intense competition in the consumer banking market in recent months, balances have grown modestly reflecting our attractive pricing propositions and loyalty offers. Consumer banking comprises personal loans of £1.9 billion (4 April 2016: £1.9 billion), credit cards of £1.8 billion (4 April 2016: £1.7 billion) and current account overdrafts of £0.2 billion (4 April 2016: £0.2 billion). Asset quality has benefited in the period from previous tightening of our credit risk policies reducing our early arrears rates, and more competitive pricing on personal loans attracting higher quality new business.

Further details of our lending and lending risks are provided in the 'Lending risk' section of the Business and Risk Report.

Financial review (continued)

Other financial assets

Other financial assets of £37.8 billion (4 April 2016: £27.8 billion) comprise cash of £17.2 billion (4 April 2016: £8.8 billion), other liquidity and investment assets held by our Treasury Division of £13.2 billion (4 April 2016: £14.3 billion), derivatives with positive fair values of £6.2 billion (4 April 2016: £3.9 billion), and fair value adjustments and other assets of £1.2 billion (4 April 2016: £0.8 billion).

Levels of liquidity have increased, reflecting both an element of pre-funding of wholesale maturities and an increase in collateral relating to derivatives following the EU referendum. The increased amount of high quality liquidity being held on the balance sheet is reflected in the Liquidity Coverage Ratio (LCR) remaining broadly consistent at 140.6% (4 April 2016: 142.6%), with higher liquidity balances being offset by increased LCR requirements relating to upcoming wholesale funding maturities and increased collateral holdings.

Further details of our treasury portfolios are included in the 'Treasury assets' section of the Business and Risk Report.

Note:

i. The wholesale funding ratio includes all balance sheet sources of funding (including securitisations) but excludes Funding for Lending Scheme (FLS) drawings which, as an asset swap, are not included on the Group's balance sheet, reflecting the substance of the arrangement. Off balance sheet FLS drawings have reduced from £8.5 billion at 4 April 2016 to £8.0 billion at 30 September 2016.

Member deposits

Member deposits have increased by £4.7 billion to £143.4 billion (4 April 2016: £138.7 billion) as we continue to offer competitive savings and current account propositions which provide long term good value and seek to support members in the current low base rate environment. Our market share of savings stock at 30 September 2016 was 10.1% (4 April 2016: 10.2%). Current account credit balances have increased to £16.6 billion (4 April 2016: £14.8 billion) which reflects the increase in our market share of main standard and packaged accounts stock to 7.3%7 (4 April 2016: 7.1%).

Debt securities in issue

Debt securities in issue of £43.7 billion (4 April 2016: £36.1 billion) are used to raise funding in wholesale markets in order to finance core activities. The increase in outstanding amounts reflects increased issuance activity in the wholesale markets during the period to support planned increased liquidity and pre-fund wholesale maturities in the second half of the year. The wholesale funding ratio has increased to 27.2% (4 April 2016: 24.8%).

Further details on the Group's wholesale funding mix and liquidity holdings are included in the 'Liquidity and funding risk' section of the Business and Risk Report.

7 Based on market data as at August 2016.

Financial review (continued)

Other financial liabilities

Other financial liabilities have increased from £21.6 billion as at 4 April 2016 to £24.9 billion primarily due to increases in customer and bank deposits of £1.7 billion and issuances of subordinated debt during the period of £1.1 billion.

Capital structure

Notes:

i. Data in the table is reported under CRD IV on an end point basis.

ii. The leverage ratio is calculated using the Capital Requirements Regulation definition of Tier 1 for the capital amount and the Delegated Act definition of the exposure measure.

CET1 capital resources have increased over the period by £54 million, with £502 million of profit after tax being largely offset by an increase in the pension deficit decreasing the general reserve by £405 million. The pension deficit has significantly increased over the period, driven by changes in the economic environment impacting long-term interest rates and causing the value of the Pension Fund's liabilities to increase significantly. Further details of the pension deficit are included within the 'Pension risk' section of the Business and Risk Report and note 20 of the consolidated interim financial statements.

Risk weighted assets (RWAs) have increased slightly over the period due to higher derivative market values driven by the fall in sterling following the EU referendum. This was partially offset by a reduction in residential mortgage RWAs due to improved book quality from rising house prices, which outweighed the increase in balances. As a result the CET1 ratio has remained broadly stable at 23.3% (4 April 2016: 23.2%).

The modest growth in capital resources, combined with an increase in leverage exposure of £14.7 billion, resulted in a leverage ratio at 30 September 2016 of 4.0% (4 April 2016: 4.2%). The increase in leverage exposure is mainly attributable to net lending in the period and increased liquidity balances.

The Group continues to monitor regulatory developments that could lead to an increased level of capital requirements. Whilst there are a number of areas where potential requirements are yet to be finalised, recent regulatory announcements mean that we have better visibility of expectations for future capital requirements. On 8 November, the Bank of England published its policy for the UK Minimum Requirement for own funds and Eligible Liabilities (MREL) framework. In line with our expectations, this confirmed that our MREL requirement from 2020 will be twice our minimum leverage capital requirements plus CRD IV capital buffers. We are confident in our ability to meet this new requirement over the transitional period based on our recent successful issuance of $1.25 billion of Tier 2 securities. We will remain engaged in the development of the regulatory capital framework to ensure we are prepared for any additional changes.

We expect to have a steady state leverage ratio requirement of 3.75% from 2019, which comprises a minimum requirement of 3%, a supplementary leverage ratio buffer of 0.35% and Countercyclical Leverage Ratio Buffer (CCyLB) of 0.4%. The Financial Policy Committee (FPC) could set a CCyLB of up to 0.9% (i.e. a total leverage requirement of 4.25%) if it deems risks to be elevated; however following recent guidance on the CCyLB, Nationwide's minimum leverage requirements are expected to remain at 3% until at least June 2017.

Further details of the capital position are included in the 'Solvency risk' section of the Business and Risk Report.

Business and Risk Report

Introduction

The Interim Business and Risk Report provides information on key developments during the period in relation to the Group's business, the risks it is exposed to and how it manages those risks. Where there has been no change to the Group's approach to managing its risks, or there has been no material change to the relevant risk environment from that disclosed at the year end, then this information has not been repeated in this report and can be found in the Business and Risk Report in the Annual Report and Accounts 2016.

As the risks of the organisation are managed on a Group basis, the disclosures in the Business and Risk Report are on a consolidated basis covering the activities of both the Society and its subsidiaries.

Principal risks

Whilst the Group accepts that all business activities involve risk, it seeks to protect members by managing the risks that arise appropriately. The Group adopts an enterprise-wide risk management framework to manage risk; further details of this and the risks managed can be found in the Business and Risk Report in the Annual Report and Accounts 2016. The principal categories of risk inherent within the business remain unchanged, namely:

· Lending risk

· Financial risk

· Operational risk

· Conduct and compliance risk

· Strategic risk

Top and emerging risks

The Group's top and emerging risks are identified through the process outlined in the 'Managing risk' section of the Annual Report and Accounts 2016 and are closely tracked throughout the governance structure. The Group continues to keep these risks under close observation through risk reporting and governance.

The Group's top and emerging risks continue to relate to four key themes:

· Macroeconomic environment

· Cyber attack and business resilience

· Changing face of financial services

· Conduct and compliance challenges

The latest developments in relation to the Group's top and emerging risks are set out below:

Top and emerging risks (continued)

Lending risk

Lending risk is the risk that a borrower or counterparty fails to pay interest or to repay the principal on a loan or other financial instrument (such as a bond) on time. Lending risk also encompasses extension risk and concentration risk. Further details on how the Group manages lending risk are available in the Annual Report and Accounts 2016.

The table below summarises the Group's assets subject to lending risk.

Lending risk (continued)

Note:

i. The fair value adjustment for portfolio hedged risk and the fair value adjustment for micro hedged risk (included within the carrying value of the commercial lending portfolio) represent hedge accounting adjustments. They are indirectly exposed to lending risk through the relationship with the underlying loans covered by the Group's hedging programmes.

ii. The other lending portfolio includes collateral balances relating to repo transactions.

Further information on the residential mortgages, consumer banking, commercial lending and treasury portfolios is provided in the subsequent sections of this report.

Residential mortgages

The Group's residential mortgages comprise prime and specialist loans. Prime residential mortgages are mainly Nationwide branded advances made through the Group's branch network and intermediary channels; all new specialist lending is limited to buy to let mortgages originated under The Mortgage Works (UK) plc (TMW) brand.

The residential mortgage portfolio has increased to £168 billion (4 April 2016: £162 billion), predominantly driven by strong levels of prime lending, particularly in the first time buyer segment which has increased as a proportion of Group new lending to 35% (H1 2015/16: 27%). The increase in first time buyer lending is partly attributed to the widening of the availability of mortgages at 90% to 95% LTV since September 2015. Our support of this market has been reinforced by a commitment to make at least £10 billion a year available to first time buyers where it is appropriate, provided we are able to lend responsibly and within appetite. This is one of a number of commitments Nationwide has made to the Government, demonstrating our intention to stand by our customers and members as the economy enters a period of uncertainty following the result of the EU referendum.

The growth of the buy to let portfolio has slowed following the decision to increase the minimum interest coverage ratio (ICR) from 125% to 145% and lower the maximum LTV for buy to let borrowing from 80% to 75% in May 2016. These steps were taken in direct response to the new government policy for personal income tax relief for buy to let properties, due to be phased in between April 2017 and March 2021. The new policy for income tax relief will materially affect the cash flow of many investors, including existing investors, and these changes to our lending policy help ensure that buy to let borrowing remains sustainable and affordable.

The PRA published the Supervisory Statement 'Underwriting standards for buy to let contracts' in September 2016, outlining the minimum standards they expect firms to employ as part of their lending decision. Nationwide is reviewing the requirements and will respond accordingly.

Lending risk - Residential mortgages (continued)

The proportion of loans that are more than three months in arrears has remained stable at 0.45% (4 April 2016: 0.45%) and remains materially below the CML industry average of 1.01%.

Lending and new business

The table below summarises the Group's residential mortgages portfolio:

Note: Self-certified, near prime and sub prime lending were discontinued in 2009.

Over the coming months the Group's residential mortgage portfolio is expected to shift towards prime lending as the tightening of interest cover and LTV thresholds continue to slow the growth in the buy to let portfolio.

Note: All new business measures exclude existing customers who are only switching products, and further advances.

Lending risk - Residential mortgages (continued)

Lending risk

Residential mortgage lending in the Group continues to have a low risk profile as demonstrated by a low level of arrears compared to the industry average. The Group's residential mortgages portfolio comprises a large number of relatively small loans which are broadly homogenous, have low volatility of credit risk outcomes and are intrinsically highly diversified in terms of the UK market and geographic segments.

LTV and lending risk concentration

The Group calculates LTV by weighting the account level LTV by loan balance to arrive at an average LTV. This approach is considered to most accurately reflect the exposure at risk to the Group.

Note: The LTV of new business excludes further advances.

Although the rate of growth has slowed in some areas, house prices continue to increase, reducing the average LTV of loan stock to 54% (4 April 2016: 55%).

The average LTV of new prime residential mortgages has increased to 72% (H1 2015/16: 70%) with the proportion greater than 80% increasing to 34% (H1 2015/16: 22%) as a direct result of the Group's strategy to extend its product offering at 95% LTV and support the first time buyer market. The growth in higher LTV lending, which reflects an increased commitment to lending to first time buyers, is monitored closely. Underwriting standards have been maintained which contain tighter credit controls for higher LTV lending. Lending remains within the Group's appetite.

From May 2016 the maximum LTV for buy to let was lowered from 80% to 75%.

Lending risk - Residential mortgages (continued)

Geographical concentration

Lending risk - Residential mortgages (continued)

Note:

i. Non-performing loans are all loans which are in arrears, including impaired loans with individually assessed impairment provisions.

The value of non-performing loans in negative equity has reduced to £62 million (4 April 2016: £99 million) due to a combination of increasing house prices and an overall reduction in non-performing loans.

House price growth in London is slowing as weaker investor demand, deteriorating affordability metrics and uncertainty caused by the vote to leave the EU have reduced demand at a time when supply has increased. Whilst there is currently no indication of a significant house price correction, the Group continues to monitor potential exposure to negative equity should house prices reverse. Stress tests have shown that even in the event of an extreme reduction in house prices this would not undermine the Group's strong capital position.

Arrears

Lending risk - Residential mortgages (continued)

Impaired loans

Please refer to the Annual Report and Accounts 2016 for details of how the Group identifies impaired loans.

The provision balance has reduced to £96 million (4 April 2016: £102 million). This reflects a lower proportion of non-performing loans particularly in relation to balances which are past due up to 3 months, together with house price growth during the period.

Lending risk - Residential mortgages (continued)

The £5 million residential impairment loss for the period reflects the stable arrears performance and LTV profile, with house price improvements more modest than experienced in the prior year.

Interest only mortgages

The Group does not offer any new advances for prime residential mortgages on an interest only basis. However, the Group has historical balances which were originally advanced as interest only mortgages or where the Group agreed a change in terms to an interest only basis (this option was withdrawn in 2012). The Group manages maturities on interest only mortgages closely, engaging regularly with customers to ensure the loan is redeemed or to agree a strategy for repayment.

The majority of the specialist portfolio is made up of buy to let loans, of which approximately 90% are advanced on an interest only basis.

The proportion of interest only mortgages included within the prime residential portfolio has continued to fall and now stands at 12.9% (4 April 2016: 14.5%).

Interest only loans which are 'term expired (still open)' are, to the extent they are not otherwise in arrears, reported as performing. They are included within the 'Repair: Term extensions' category in the renegotiated loans tables on the following pages.

Lending risk - Residential mortgages (continued)

Renegotiated loans

Where residential mortgage customers face financial difficulty the Group seeks to find a solution to mitigate losses and, where possible, to support customers through a change in terms, forbearance or repair. Collectively, these loans are classified as renegotiated. Please refer to the Annual Report and Accounts 2016 for details of the Group's policies for renegotiated loans.

The following table provides the loans still on the books at the period end which have been subject to renegotiation (change in terms, forbearance or repair) since 2008: