Nationwide Ccds Regulatory News (NBS)

Nationwide Building Society

Interim Results

for the period ended 30 September 2023

Introduction

Unless otherwise stated, the income statement analysis compares the period from 5 April 2023 to 30 September 2023 to the corresponding six months of 2022 and balance sheet analysis compares the position at 30 September 2023 to the position at 4 April 2023.

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 the Group. Although the expectations reflected in these forward-looking statements are considered reasonable, the Group 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 the Group including, amongst other things, UK domestic and global economic and business conditions, market-related risks such as fluctuation in interest rates and exchange rates, inflation/deflation, the impact of competition, changes in customer preferences, risks concerning borrower credit quality, delays in implementing proposals, the timing, impact and other uncertainties of future acquisitions or other combinations within relevant industries, risks relating to sustainability and climate change, the policies and actions of regulatory authorities and the impact of tax or other legislation and other regulations in the jurisdictions in which the Group operates. The economic outlook remains uncertain and, as a result, the Group'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, the Group cautions readers not to place undue reliance on such forward-looking statements.

The Group 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 the Group and its management, as well as its financial statements.

Nationwide delivers highest ever member value and strong financial performance

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

"We provide customers with great value products, choice in the way they bank with us, and the best possible service. As a result, we have grown our deposit and mortgage balances, and our financial strength means we can invest in even better products and services, and increase value for our members.

"Nationwide delivered a total of £1,229m in value to our members this half year. This included our inaugural Nationwide Fairer Share Payment of £344m and our highest ever half year member financial benefit of £885m from pricing and incentives that were better than the market average.

"We remain first among our peer group for customer satisfaction, and we provide choice in how customers bank with us, including through our digital channels, on the phone, or in our network of branches. We passed a greater proportion of interest rate rises to savers than the market average and are investing to grow our customer base through service improvements and our current account switching incentive, which we relaunched in September 2023.

"Nationwide is performing strongly, and our strategy is to safeguard the future strength of the Society and provide a good way to bank for customers. We are the main challenger to shareholder-owned banks and use our mutual status to make a meaningful impact on communities and improve society. Our rebrand in October 2023 was the most significant in 36 years and will help us to build stronger relationships with our customers, now and in the future."

· Extended our Branch Promise, to not leave any town or city in which we are based until at least 2026. We now have the largest single-brand branch network in the UK, and 23% of our savings accounts were opened in branches this half year.

· Remained first for customer satisfaction among our peer group for over 11 years, with a current lead of 5.2%pts1 (March 2023: lead of 3.8%pts).

· Continued growth in current account volumes and maintained our market share at 10.4%2 (February 2023: 10.4%).

· Maintained deposit market share at 9.6% (4 April 2023: 9.6%), with £4.2bn (H1 2022/23: £3.2bn) of balance growth in the period.

· Mortgage balances increased to £202.3bn (4 April 2023: £201.7bn). Market share of balances remained robust at 12.2% (4 April 2023: 12.2%) in a competitive market.

· Delivered changes in line with the Government's Mortgage Charter; we contacted 1.3m mortgage customers to explain the support available, and we enabled customers to benefit from the changes via our online Mortgage Manager.

· Helped over 31,000 (H1 2022/23: over 40,000) first time buyers3 into a home of their own.

· Continued to commit 1% of pre-tax profits to good causes each year4, which for 2023/24 includes over £5.1m to our Community Grants programme.

Financial highlights

· In total, Nationwide delivered £1,229m in value to its members. This included the distribution of the £100 Nationwide Fairer Share Payment to over 3.4m members in June 2023, totalling £344m, as well as our member financial benefit, which increased to £885m (H1 2022/23: £320m). Member financial benefit was supported by the strength of our savings and mortgage propositions; we passed a greater proportion of interest rate rises to savers than the market average.

· Underlying profit increased to £1,262m (H1 2022/23: £980m) and statutory profit increased to £989m5 (H1 2022/23: £969m) due to income growth.

· Rising interest rates supported growth in total underlying income to £2,449m (H1 2022/23: £2,190m). Net interest margin improved to 1.66% (H1 2022/23: 1.48%).

· Credit impairment charges were lower at £54m (H1 2022/23: £108m). Arrears levels have increased slightly but remain low; however higher interest rates, continued inflationary pressures and the uncertain economic outlook remain key risks.

· Total costs increased to £1,115m (H1 2022/23: £1,083m), below the rate of inflation.

· Our balance sheet remains strong, with Tier 1 capital resources increasing by £0.6bn, leading to a leverage ratio of 6.4% (above our target of at least 4.5%) and a CET1 ratio of 27.4% (4 April 2023: 6.0% and 26.5% respectively).

1 Lead at September 2023: 5.2%pts, March 2023: 3.8%pts. © Ipsos 2023, Financial Research Survey (FRS), for the 12 months ending 31 March 2013 to 12 months ending 30 September 2023. 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 3.2% of the main current account market as of April 2023 - 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 CACI's Current Account and Savings Database, Stock (August 2023 and February 2023).

3 The prior year comparative has been restated to be on a consistent basis with the current year metric and that reported at the 2023 year end.

4 The 1% is calculated based on average pre-tax profits over the previous three years.

5 The Nationwide Fairer Share Payment of £344m accounted for the majority of the difference between underlying and statutory profit in H1 2023. For more information, see the Financial Review on page 8.

Chief Executive's review (continued)

· More rewarding relationships: We will create deeper, lifelong relationships with our customers, that provide the best value in banking. As well as distributing £344 million to our members through the Nationwide Fairer Share Payment in June 2023, we delivered our highest ever level of member financial benefit of £885 million, from better pricing and incentives than the market average. We also provided £22 million cashback to current account customers on their supermarket shopping in April 2023, and relaunched our current account switching incentive in September 2023, alongside our Flex Regular Saver exclusive to current account holders, with an interest rate of 8%.

· Simply brilliant service: We will provide value beyond rates, with distinctive, personalised service our customers can trust, at every touchpoint. We renewed our Branch Promise until at least 2026; we now have the largest single-brand branch network in the UK, and so far this year, our branch colleagues have prevented our customers from losing £3.5 million to scams. We increased our branch colleague resource to support face-to-face account openings across 51 branches, and continued to have colleagues in branches serving more of our customers in different ways, including by phone and through online chat. We also extended our phone line operating hours to increase convenience for our customers and continued to provide our dedicated cost of living helpline.

· Beacon for mutual good: We want to have a meaningful impact on our customers, colleagues, communities and society, by driving fairer banking practices and positive change. We remain committed to building a supportive and inclusive environment for our colleagues, and our colleague index, an aggregated measure of colleague engagement, increased to 79.7% (4 April 2023: 77.1%). We continued to support the UK's 10,000 Black Interns initiative, hosting 71 (H1 2022/23: 30) new colleagues on 8-week internships. We also launched our 0% Green Additional Borrowing product, as we aim to support the UK in achieving its ambition to be net-zero by 2050.

· Continuous improvement: We will be focused, fit and fast, and simplify our processes and ways of working to deliver for the benefit of our customers, while retaining resilient controls that protect our customers and their money. In line with our continued commitment to our own branch network, we announced that we will leave Cash Access UK, as our strategy does not require us to rely on banking hubs. We are also streamlining our operations to drive greater efficiency, and we announced the proposed transfer of our financial planning service to our longstanding partner, Aegon UK, which will give our customers access to a broader proposition.

Outlook

· While the economic outlook remains uncertain and cost of living challenges persist, as the UK's largest building society, Nationwide is well positioned to continue to use its financial strength to support its customers.

· Encouragingly, economic activity, while still weak by historical standards, has held up better than expected, and there are signs that cost of living pressures are starting to ease. However, conditions for households are likely to remain challenging in the near term, as the effect of previous interest rate increases feeds through and labour market conditions soften.

· Bank rate is at or close to its peak, though there are significant risks in both directions driven by the ongoing uncertainty surrounding demand prospects and the supply capacity of the economy.

· The housing market has slowed and house prices have edged lower as a result of the higher interest rate environment. While activity is anticipated to remain subdued in the short term, income growth and lower fixed rate mortgage rates should help to improve housing affordability over time.

· Household deposit growth has also slowed, mirroring the decline in mortgage lending. However, there has been significant movement within the deposits market, stimulated by the higher rates available, with customers transferring money from current accounts and instant access savings into fixed rate savings.

· Despite the uncertain economic outlook, the credit quality of our lending portfolios is strong and our capital resources are robust. As more households adjust their expenditure priorities in the higher interest rate environment, we will continue to support those borrowers who face payment difficulties.

Debbie Crosbie

Chief Executive

Performance summary

Notes:

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

· Member reward payments, which are presented on a separate line within the condensed consolidated income statement.

· Gains or losses from derivatives and hedge accounting, which are presented separately within total income in the condensed consolidated income statement.

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

ii. Member deposits include current account credit balances.

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

iv. Mortgage balances are presented gross of credit provisions.

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

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

Financial review

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

"We continue to deliver a robust financial performance in an uncertain economic environment, with underlying profit increasing by 29% to £1,262 million. During the period we have continued to provide member value, delivering a combined £1,229 million of value to members, comprising £885 million member financial benefit through better pricing and incentives than the market average and the inaugural Nationwide Fairer Share payment of £344 million to eligible members. In addition, we delivered £22 million of cashback to current account customers on their supermarket shopping.

"We have continued to support our customers' banking, savings and borrowing needs during the period. Our good value savings and mortgage products have supported growth in our deposit and mortgage balances."

Financial highlights

Income statement

Notes:

i. Underlying profit represents management's view of underlying performance. Member reward payments, gains or losses from derivatives and hedge accounting (presented separately within total income in the condensed consolidated income statement) and any FSCS costs and refunds from institutional failures (included within provisions for liabilities and charges) are excluded from statutory profit to arrive at underlying profit. There were no FSCS costs or refunds from institutional failures for the periods ended 30 September 2023 and 30 September 2022.

ii. Although we only use derivatives to hedge market risks, income statement volatility can still arise. Further information is provided in note 6 to the condensed consolidated interim financial statements.

iii. Member reward payments represent discretionary payments to members of the Society which may be determined by the Board from time to time, depending on the financial strength of the Society. Member reward payments were first recognised in the half year to 30 September 2023, and have been excluded from underlying profit on the basis that management does not consider such payments to be part of the Group's underlying business performance.

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

Total income and net interest margin

Net interest income increased by £282 million to £2,337 million (H1 2022/23: £2,055 million), with a net interest margin of 1.66% (H1 2022/23: 1.48%). Increases in the Bank rate during the period have led to an increase in net interest income, reflecting the timing and level of pass through of interest rate changes to savings products, partially offset by a decline in mortgage net interest income. Nationwide has passed a greater proportion of interest rate rises to savers than the market average, resulting in an increase in member financial benefit in the period.

Net other income has reduced by £23 million to £112 million (H1 2022/23: £135 million), with £22 million of supermarket shopping cashback to customers with a personal current account recognised in April 2023 as part of the Society's cost of living support.

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 2023.

For the half year ended 30 September 2023, we delivered member financial benefit of £885 million (H1 2022/23: £320 million). The increase is due to our strong savings and mortgage 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.

Member reward payments

The Board announced the inaugural Nationwide Fairer Share payment in May 2023 as part of our ongoing commitment to reward our members. During the period, the initial Nationwide Fairer Share payment of £344 million was paid to eligible members who had a qualifying current account plus either qualifying savings or a qualifying mortgage as at 31 March 2023. This payment is in addition to delivering the £885 million of member financial benefit to our members outlined above.

Administrative expenses

Administrative expenses have increased by £32 million to £1,115 million (H1 2022/23: £1,083 million) with inflationary increases mitigated by efficiencies within strategic investment and the non-repeat of restructuring costs incurred in the prior period.

Impairment charge on loans and advances to customers

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 for the period has reduced to £54 million (H1 2022/23: £108 million). In the period we have retained provisions for affordability risks as a result of ongoing elevated inflation and interest rates and their impact on borrower affordability. The higher charge in the prior period included the recognition of additional provisions to reflect the deteriorating economic outlook at that time. Residential mortgage arrears have increased from historically low levels, leading to an increase in stage 3 provisions, but arrears remain well below the industry average and below the expected levels included in our provision models. Consumer banking arrears have reduced slightly. More information regarding critical accounting judgements, and the forward-looking economic information used in impairment calculations, is included in note 8 to the condensed 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 charge of £18 million (H1 2022/23: £19 million) reflects judgements and estimates used in determining provisions for such matters.

Taxation

From 1 April 2023, the main rate of corporation tax increased from 19% to 25% and the banking surcharge decreased from 8% to 3%. The tax charge for the period of £267 million (H1 2022/23: £241 million) represents an effective tax rate of 27.0% (H1 2022/23: 24.9%) which is higher than the statutory UK corporation tax rate of 25% (H1 2022/23: 19%). The effective tax rate is higher primarily due to the banking surcharge of £24 million (H1 2022/23: £54 million). Further information is provided in note 9 to the condensed consolidated interim financial statements.

Balance sheet

Total assets have increased by 1.0% to £274.5 billion at 30 September 2023 (4 April 2023: £271.9 billion). This increase is predominantly due to higher holdings of cash.

Mortgage lending has been robust during the period, with residential mortgage balances increasing to £202.3 billion (4 April 2023: £201.7 billion), maintaining our market share of mortgage balances in a competitive market. Member deposit balances have increased by £4.2 billion to £191.3 billion (4 April 2023: £187.1 billion) as a result of increases in savings balances, supported by competitive fixed rate products and increased levels of accrued and capitalised interest due to higher average savings rates.

Notes:

i. Residential mortgages include owner-occupied, 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 held by our Treasury function for liquidity purposes, with the £3.0 billion increase to £28.7 billion (4 April 2023: £25.6 billion) predominantly due to increases in retail savings balances.

The average Liquidity Coverage Ratio over the 12 months ended 30 September 2023 increased to 191% (12 months ended 4 April 2023: 180%), with higher average liquid asset balances driven by growth in member deposits. Liquidity continues to be managed against internal risk appetite, which is more prudent than regulatory requirements and, under the most severe internal 30 calendar day stress test, the average liquid asset buffer remains robust. Further details are included in the Liquidity and funding risk section of the Risk report.

Residential mortgages

Total gross mortgage lending was lower than in the prior period at £12.1 billion (H1 2022/23: £19.7 billion) and our market share of gross advances decreased to 10.5% (H1 2022/23: 11.8%). Net lending in the period was £0.5 billion (H1 2022/23: £5.4 billion), maintaining our market share of balances at 12.2% in a competitive market with subdued growth. Net lending has been supported by our continued focus on retention through highly competitive products provided to existing customers, as well as our focus on first time buyers. Owner-occupied mortgage balances increased to £158.4 billion (4 April 2023: £157.6 billion) and buy to let and legacy mortgage balances decreased slightly to £43.8 billion (4 April 2023: £44.1 billion).

Arrears remain low but have increased slightly during the period, with cases more than three months in arrears representing 0.38% (4 April 2023: 0.32%) of the total portfolio. Further increases in arrears from current levels are expected, due to both inflation and higher interest rates negatively impacting household finances. Impairment provision balances have increased to £305 million (4 April 2023: £280 million) primarily due to higher interest rates, which have resulted in an increase in the provisions held to reflect mortgage affordability risks.

Consumer banking

Consumer banking balances were £4.3 billion (4 April 2023: £4.4 billion). Consumer banking comprises personal loan balances of £2.4 billion (4 April 2023: £2.6 billion), credit card balances of £1.6 billion (4 April 2023: £1.5 billion) and overdrawn current account balances of £0.3 billion (4 April 2023: £0.3 billion).

Arrears have reduced slightly during the period, with balances more than three months in arrears (excluding charged off accounts) representing 1.14% (4 April 2023: 1.21%) of the total portfolio. Provision balances reduced to £450 million (4 April 2023: £469 million), primarily due to updated expectations of the impacts of cost inflation pressures on future credit performance.

Commercial lending

During the period, commercial lending balances remained stable at £5.5 billion (4 April 2023: £5.5 billion). The overall portfolio includes registered social landlords with balances of £4.3 billion (4 April 2023: £4.1 billion), project finance with balances of £0.5 billion (4 April 2023: £0.5 billion), commercial real estate balances of £0.3 billion (4 April 2023: £0.4 billion) and a fair value adjustment for micro hedged risk of £0.4 billion (4 April 2023: £0.4 billion). Both project finance and commercial real estate books are closed to new lending.

Impairment provision balances increased to £19 million (4 April 2023: £16 million) due to updates relating to a small number of individual loans.

Other financial assets

Other financial assets of £31.7 billion (4 April 2023: £32.4 billion) comprise investment assets held by Nationwide's Treasury function amounting to £26.2 billion (4 April 2023: £27.6 billion), loans and advances to banks and similar institutions of £3.2 billion (4 April 2023: £2.9 billion), derivatives with positive fair values of £8.0 billion (4 April 2023: £6.9 billion) and fair value adjustments for portfolio hedged risk of £(5.8) billion (4 April 2023: £(5.0) 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 £4.2 billion to £191.3 billion (4 April 2023: £187.1 billion). Nationwide's market share of deposit balances remained at 9.6%. The increase in deposit balances is due to growth in savings balances of £5.1 billion (H1 2022/23: £1.3 billion) supported by competitive fixed rate products, including the Fairer Share Bond, and increased levels of accrued and capitalised interest due to higher average savings rates. Credit balances on current accounts reduced by £0.9 billion (H1 2022/23: £1.9 billion growth), driven by a competitive savings market.

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 £29.5 billion (4 April 2023: £27.6 billion), reflecting secured and unsecured wholesale funding issuances during the period. Other financial liabilities decreased to £34.9 billion (4 April 2023: £38.7 billion) primarily due to repayment of £4.1 billion of drawings from the Bank of England's Term Funding Scheme with additional incentives for SMEs (TFSME). Nationwide's wholesale funding ratio decreased to 23.5% (2022: 25.0%). 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 £17.4 billion (4 April 2023: £16.9 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 condensed 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 12.5% and 4.3% respectively. The CET1 ratio increased to 27.4% (4 April 2023: 26.5%) and the leverage ratio increased to 6.4% (4 April 2023: 6.0%). 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 27.4% (4 April 2023: 26.5%) as a result of an increase in CET1 capital of £0.6 billion, partially offset by an increase in RWAs of £0.6 billion. The CET1 capital resources increase was driven by £0.7 billion profit after tax, partially offset by £0.1 billion of capital distributions. RWAs increased, predominantly due to an increase in residential mortgage balances.

The leverage ratio increased to 6.4% (4 April 2023: 6.0%), with Tier 1 capital increasing by £0.6 billion as a result of the CET1 capital movements referenced above. In addition, there was a decrease in leverage exposure of £3.5 billion, with an increase in residential mortgage balances more than offset by a reduction in treasury investments in the period. 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 and future regulatory developments are described in the Capital risk section of the Risk report.

Contents

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 2023. 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

Top and emerging risks are managed through the process outlined in the Risk overview section of the Annual Report and Accounts 2023 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. Key developments in the macroeconomic and geopolitical environment since 4 April 2023 are described below.

The following internal and external risks, which were highlighted in the Annual Report and Accounts 2023, have not materially changed:

Nationwide operates an Enterprise Risk Management Framework (ERMF), which ensures it remains safe and secure for its customers. 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 2023 and are as follows:

· Credit risk

· Liquidity and funding risk

· Capital risk

· Market risk

· Pension risk

· Operational and conduct risk

· Model risk

· Business 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 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 regarding the scope of Nationwide's credit risks and how they are managed, together with information on the calculation of impairment provisions based on expected credit losses (ECLs), is included within the Annual Report and Accounts 2023.

Performance overview

During the period the UK has seen steady increases in Bank rate aimed at reducing inflation. This has increased the cost of borrowing and put further pressure on household affordability. Residential mortgage arrears have increased from historically low levels but remain well below the industry average and below the levels expected in our provision models. Consumer banking arrears have seen limited movement during the period.

Nationwide has supported the Mortgage Charter initiatives introduced by the Government to mitigate the increase in mortgage costs and provide help and support to those who are in financial difficulty. Customer take-up has been relatively low with only circa 5,000 customers on Mortgage Charter interest only concessions as at 30 September 2023.

Provisions have remained broadly stable at £774 million (4 April 2023: £765 million) and include a modelled adjustment for economic uncertainty totalling £170 million (4 April 2023: £177 million). This modelled adjustment captures the affordability risks caused by inflation, and the increased cost of borrowing.

Outlook

A softening of housing market activity is expected to continue in the period ahead as transactions are deferred due to uncertainty in house price values and interest rates remaining elevated. The Group's base case economic scenario assumes that house prices will fall by 3.7% during 2023 and a further 1.0% during 2024. As a result of continued economic uncertainty, the house price forecasts used within the provision models cover a wide range of outcomes.

We continue to monitor the external environment, its impact on borrowers and the credit risks affecting our lending portfolios to ensure that provisions reflect these risks.

Credit risk - Overview (continued)

Maximum exposure to credit risk

Nationwide's maximum exposure to credit risk at 30 September 2023 was £282 billion (4 April 2023: £279 billion).

Credit risk largely arises from loans and advances to customers, which account for 79% (4 April 2023: 79%) of Nationwide's total credit risk exposure. Within this, the exposure relates primarily to

residential mortgages, which account for 95% (4 April 2023: 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 £10,314 million (4 April 2023: £10,444 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 identifiable irrevocable commitments for the pipeline of residential mortgages, personal loans, commercial loans and investment securities. These commitments are not recognised on the balance sheet; the

associated provision of £0.3 million (4 April 2023: £0.2 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.

Summary

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

Residential mortgage arrears have seen marginal increases in early and late arrears as higher inflation and rising interest rates place greater pressure on household finances.

The value of residential mortgages has seen a modest increase to £202.3 billion (April 2023: £201.7 billion), reflecting a slowdown in housing market activity.

Notes:

i. Buy to let mortgages include £41,734 million (4 April 2023: £41,805 million) originated under the TMW brand, with other brands now closed to new originations.

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

Credit risk - Residential mortgages (continued)

Balance sheet provisions have increased to £305 million (4 April 2023: £280 million). This includes a modelled adjustment totalling £87 million (4 April 2023: £77 million) to reflect an increase to the probability of default to account for the combined risks of rising inflation, increasing interest rates and the impact of model inputs still benefitting from improvements in credit indicators which are judged to be temporary, such as reduced levels of arrears. The impairment charge for the period reflects the increase in this adjustment, primarily due to latest expectations of the extent to which higher mortgage interest rates will reduce borrower affordability. Further information is included in note 8 to the condensed consolidated interim financial statements.

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 on transition to IFRS 9 of £5 million (4 April 2023: £5 million).

Total residential mortgage provisions have increased to £305 million (4 April 2023: £280 million), due to an increase in stage 3 provisions combined with an increase to the provisions held for affordability risks resulting from higher interest rates.

Stage 2 loans total £39.4 billion (4 April 2023: £35.5 billion), which includes £17.3 billion (4 April 2023: £16.6 billion) of loans where the PD has been uplifted to recognise the increased risk of default in a period of economic uncertainty. The stage 2 increase is primarily due to increases in the buy to let and legacy portfolios, which due to their interest only nature are more sensitive to increasing interest rates.

Credit performance continues to be strong. Stage 3 loans in the residential mortgage portfolio equate to 0.6% (4 April 2023: 0.5%) of the total residential mortgage exposure. Of the total

£1,174 million (4 April 2023: £1,066 million) stage 3 loans, £692 million (4 April 2023: £562 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; £175 million (4 April 2023: £179 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 compare the position at 30 September 2023 to that at the start of the reporting period.

Notes:

i. The basis of preparation for this note has been updated. Previously, the table was presented on a gross basis, with the reported values representing an aggregation of monthly movements over the period. To reflect more appropriately the movements in credit quality over the period, the note is now prepared on a net basis.

ii. Gross balances of credit impaired loans include £118 million (4 April 2023: £123 million) of POCI loans, which are presented net of lifetime ECL on transition to IFRS 9 of £5 million (4 April 2023: £5 million).

iii.  If a new asset is originated in the period, the values included are the closing gross balance and provision for the period. The stage in which the addition is shown reflects the stage of the account at the end of the period.

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 condensed 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 2023 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)

Credit quality

The residential mortgage 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.