Nationwide Ccds Regulatory News (NBS)

Nationwide Building Society

Interim Management Statement

Q1 2018/19

10 August 2018

Nationwide Building Society today publishes its Interim Management Statement covering the period from 5 April 2018 to 30 June 2018 ('Q1 2018/19').

Nationwide reports strong first quarter trading with good growth in lending, member deposits

and current accounts, and is named Which? Best Bank Brand 2018

Key highlights

· No.1 for customer satisfaction in our high street peer group, with a lead of 4.0%1;

· Gross mortgage lending up 3.7% to £8.4 billion, (Q1 2017/18: £8.1 billion); supporting a record 20,600 first time buyers (Q1 2017/18: 19,400);

· Member deposit balances2 grew by £4.2 billion (Q1 2017/18: £1.3 billion), driven by strong ISA performance;

· Remained UK's top choice for current accounts3, opening more accounts than any other brand against lower market activity for new current accounts4; 

· Underlying profit of £270 million (Q1 2017/18: £301 million) well within our strategic target range; statutory profit of £281 million (Q1 2017/18: £322 million). Q1 2017/18 profits included £26 million one-off gain from VocaLink disposal;

· Maintained financial strength with CET1 ratio of 31.3% (4 April 2018: 30.5%) and UK leverage ratio of 4.9% (4 April 2018: 4.9%).

Nationwide Building Society Chief Executive, Joe Garner, said:

"As a member-owned organisation, Nationwide is committed to delivering exceptional value and service to members rather than seeking to maximise profits. Nationwide has made a strong start to the year, opening more current accounts than any other brand4 and attracting higher gross mortgage lending and member deposits than last year. We are also pleased to have been named Which? Best Banking Brand for the second year running.

"We were again number one for overall customer satisfaction within our high street peer group1, and improved our ranking among all firms - not just financial services - from joint seventh to joint fifth in the Institute of Customer Service's UK Customer Satisfaction Index5.

"Consumer expectations of service continue to evolve rapidly, as digital and data redefine how people manage their money. Therefore, we are progressing the review of our technology strategy to ensure Nationwide stays well ahead of future needs, and that we continue to pioneer legendary service in a digital age.

"Our outlook is unchanged from the full year, and we expect the economy to grow at a modest pace over the next 12 months. We are observing consumers adapting their behaviours in response to the pressure on disposable income. The housing market looks set to remain relatively subdued with house prices broadly flat in 2018. Against this background, we also expect intense competition to persist in our core markets." 

1 © GfK 2018, Financial Research Survey (FRS), 12 months ending 30 June 2018 and 12 months ending 31 March 2018, 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 >4% (Barclays, Halifax, HSBC, Lloyds Bank, NatWest, Santander and TSB).

2 Member deposits include current account credit balances.

3 Source: Nationwide Brand and Advertising tracker compiled by Independent Research Agency. 'Top choice' is most considered ie 'first choice' or 'seriously considered' current account provider amongst non-customers of each brand, 3 months ending June 2018. Financial brands included Nationwide, Barclays, Co-operative Bank, First Direct, Halifax, HSBC, Lloyds, NatWest, Santander and TSB. 

4 Sources: eBenchmarkers (April-June 2018), CACI (April-May 2018) and internal sources.

5 Source: Institute of Customer Service UK Customer Satisfaction Index (UKCSI), July 2018. Previous report issued January 2018.

Trading performance

Trading performance in the first quarter was strong reflecting the long-term value that we offer our members. Nationwide advanced new residential lending of £8.4 billion in the first quarter and increased member deposit balances by £4.2 billion.

Gross mortgage lending includes £7.4 billion of prime residential mortgages (Q1 2017/18: £7.3 billion), demonstrating good performance in spite of sustained, intense competition. We supported 20,600 first time buyers, higher than any previous quarter. Following enhancements to our buy to let (BTL) product range, the flow of advances has improved with gross BTL mortgage lending for the period of £1.0 billion (Q1 2017/18: £0.8 billion).

Net prime residential mortgage lending decreased slightly to £2.2 billion for the period (Q1 2017/18: £2.4 billion) due to increased mortgage redemptions in a highly competitive market, with no net growth in respect of specialist mortgages. This represented a 19.0% (Q1 2017/18: 21.8%) market share of all net lending.

Our member deposit balances grew by £4.2 billion following the success of our Single Access and Loyalty ISAs and higher current account balances. This increased our market share of deposits to 10.2% (4 April 2018: 10.0%). Nationwide remained the UK's top choice for current accounts3, attracting 21% of all switchers9 in the period. Against lower market activity for new current accounts, we have maintained market share of both current account openings10 and the stock of main standard and packaged current accounts8.

6 Figures have been adjusted to reflect the impact of applying IFRS 9 from 5 April 2018. On 5 April 2018, Nationwide implemented IFRS 9 Financial Instruments. As a result, impairment provisions increased by £172 million, reducing net loans and advances to customers. The total impact on member's interests and equity from IFRS 9 transition at 5 April 2018, net of deferred tax, was a reduction of £162 million. Further information is provided in our Report on Transition to IFRS 9: Financial Instruments, which can be found on nationwide.co.uk

7 Residential lending balances are stated net of impairment provisions.

8 Source: CACI (May 2018).

9 Source: CASS BACS Payments Schemes monthly CASS switching market data, Apr-June 2018.

10 Sources: eBenchmarkers (April-June 2018), CACI (April-May 2018).

Financial performance

Note: Underlying profit represents management's view of underlying performance and is presented to aid comparability across reporting periods, as explained on page 5.

Underlying profit before tax of £270 million (Q1 2017/18: £301 million) has reduced by 10% predominately due to the inclusion of a one-off gain of £26 million in the prior period from the sale of the Society's investment in VocaLink. Statutory profit before tax of £281 million (Q1 2017/18: £322 million) includes £11 million (Q1 2017/18: £20 million) of derivative and hedge accounting gains14 which are excluded from underlying profit.

Net interest margin (NIM) was 7 basis points lower than for the same period last year, and 3 basis points lower than for the 2017/18 full year. This was in line with our expectations, as we continue to see borrowers switching onto lower priced products in a highly competitive market. This trend includes the continued run-off in our legacy base mortgage rate (BMR) balances which have fallen to £22.0 billion. We are anticipating that market conditions will remain competitive, and the run-off of BMR balances will continue, and consequently we expect our reported margin to trend lower during the remainder of the year.

Costs for the year to date are in line with expectations. We remain committed to our efficiency programme, targeting sustainable saves of £300 million by 2022; we will provide an update on progress in our Interim Results announcement in November 2018.

Asset quality remains strong, with an average loan to value (LTV) of loan stock for total residential lending of 56% at the end of the period, consistent with that reported at the year end. The average LTV of new lending in the period of 71% was slightly higher compared to the same period last year (Q1 2017/18: 70%).

The number of cases more than three months in arrears as a percentage of the total book improved marginally to 0.33% (4 April 2018: 0.34%) for prime lending and to 0.81% (4 April 2018: 0.83%) for specialist lending.

11 Common Equity Tier 1 (CET1) ratio has been calculated under CRD IV on an end point basis. For 30 June 2018 and 5 April 2018, IFRS 9 transitional adjustments have been applied.

12 The UK leverage ratio is shown on the basis of measurement announced by the Prudential Regulation Authority (PRA) and excludes eligible central bank reserves from the leverage exposure measure. For 30 June 2018 and 5 April 2018, IFRS 9 transitional adjustments have been applied.

13 The Capital Requirements Regulation (CRR) leverage ratio is calculated using the CRR definition of Tier 1 for the capital amount and the delegated act definition of the exposure measure and is reported on an end point basis. For 30 June 2018 and 5 April 2018, IFRS 9 transitional adjustments have been applied.

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

Impairment losses on loans and advances during the quarter total £13 million (Q1 2017/18: £36 million reported under IAS 3915) reflecting strong asset quality, stable economic conditions and no significant changes to assumptions since the adoption of IFRS 9 at the beginning of the year.

We continue to review compliance with ongoing and emerging regulatory matters with no significant charge in the period in respect of potential customer redress.

Capital and leverage ratios have remained comfortably in excess of regulatory requirements with a CET1 ratio of 31.3% (4 April 2018: 30.5%16) and a UK leverage ratio of 4.9% (4 April 2018: 4.9%). The improvement in our CET1 ratio was predominantly due to profits in the period and a small decrease in risk weighted assets (RWAs). Further information on our capital position can be found in Appendix 1.

Outlook

Our outlook is unchanged from the full year, and we expect the economy to grow at a modest pace over the next 12 months. We are observing consumers adapting their behaviours in response to the pressure on disposable income. The housing market looks set to remain relatively subdued with house prices broadly flat in 2018. Against this background, we also expect intense competition to persist in our core markets.

Additional information

The financial information on which this Interim Management Statement is based is unaudited and has been prepared on the basis of International Financial Reporting Standards, incorporating IFRS 9 and its consequential amendments to other standards including IFRS 7, as endorsed by the EU and including transitional arrangements for regulatory capital as appropriate. Comparative information for the accounting periods prior to adoption were not restated, as permitted by IFRS 9. The Group's full statement of accounting policies is disclosed within the Annual Report and Accounts 2018. The policies for financial assets and impairment of financial assets have changed from 5 April 2018 following the adoption of IFRS 9, and the revised policies can be found in the Report on Transition to IFRS 9: Financial Instruments on nationwide.co.uk

This Interim Management Statement contains the Group's first results prepared under IFRS 9. The Group's first full year set of financial statements prepared under IFRS 9 will be published in the Annual Report and Accounts for the year ending 4 April 2019.

For further information please contact:

Investor queries: Alex Wall, 0207 2616568 or 07917 093632, alexander.wall@nationwide.co.uk

Media contact: Tanya Joseph, 020 72616503 or 07826 922102, tanya.joseph@nationwide.co.uk

Sara Batchelor, 01793 657770 or 07785 344137, sara.batchelor@nationwide.co.uk

15 Under IFRS 9, the recognition and measurement of expected credit losses differs from under IAS 39. As prior periods have not been restated, impairment losses on loans and advances in the comparative periods remain in accordance with IAS 39 and are therefore not necessarily comparable to impairment losses recorded for the current period.

16 The Common Equity Tier 1 (CET1) ratio reported at 4 April 2018 is based on profits reported in accordance with IAS 39.

Underlying profit

Profit before tax shown on a statutory and underlying basis is set out on page 3. Statutory profit before tax of £281 million has been adjusted to derive an underlying profit before tax of £270 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.

Nationwide has developed a financial performance framework based on the fundamental principle of maintaining its capital at a prudent level in excess of regulatory requirements. The framework provides parameters which allow it to calibrate future performance and help ensure that it achieves the right balance between distributing value to members, investing in the business and maintaining financial strength. The most important of these parameters is underlying profit which is a key component of Nationwide's capital. We believe that a level of underlying profit of approximately £0.9 billion to £1.3 billion per annum over the medium-term would meet the Board's objective for sustainable capital strength. This range, will vary from time to time, and whether our profitability falls within or outside this range in any given financial year or period will depend on a number of external and internal factors, including a conscious decision to return value to members or to make investments in the business. It should not be construed as a forecast of the likely level of Nationwide's underlying profit for any financial year or period within a financial year.

Forward looking statements

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

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

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

Appendix 1 - Supplementary capital disclosures

IFRS 9, implemented on 5 April 2018, impacted capital requirements and resources. The capital ratios for 5 April 2018 are disclosed on page 3 and more information is provided in our Report on Transition to IFRS 9: Financial Instruments, which can be found on nationwide.co.uk

Key Metrics (KM1 and IFRS 9 - FL)

Note: Capital metrics are on a CRD IV end-point basis.

17 These values are calculated on a simple average basis using the preceding 12 month-end LCR observations, on a consolidated currency basis. Nationwide's LCR was 139% as at the 30 June 2018, whilst the average LCR over 12 months ending 30 June 2018 was 133%.

The UK leverage ratio is unchanged at 4.9% (4 April 2018: 4.9%). Minimum leverage requirements are monitored by the PRA on this basis with the current regulatory threshold set at 3.45%, composed of a minimum requirement of 3.25% and a countercyclical leverage ratio buffer of 0.2%. Following the release of CP14/18 in July 2018, we will be subject to an additional leverage ratio buffer (ALRB) from January 2019 aligned to the implementation of the systemic risk buffer. Our current expectation is that the ALRB will be 0.35%. The Financial Policy Committee (FPC) has announced that the countercyclical buffer will increase to 1% in November 2018, increasing the equivalent countercyclical leverage ratio buffer to 0.4%. Therefore, the minimum leverage ratio requirement is expected to be 4% by January 2019. We remain confident in the strength of our capital position to meet the increased minimum requirements.

The average UK leverage ratio for the three months to 30 June 2018 was 4.9%, with an average exposure measure of £225,900 million.

Common Equity Tier 1 (CET1) capital resources have increased by approximately £0.2 billion, predominantly due to profits after tax for the period of £0.2 billion. The impact of the introduction of IFRS 9 has been largely offset by the reduction in net expected loss deduction and further, by the adoption of the transitional adjustments. Risk weighted assets (RWAs) decreased over the period by approximately £0.1 billion. These movements have strengthened our CET1 ratio to 31.3% (4 April 2018: 30.5%).

Capital structure

Overview of RWAs (EU OV1)

RWA flow statements of credit risk exposures (EU CR8)

IRB credit risk RWAs have fallen primarily due to improving credit quality within the commercial and unsecured retail portfolios. Standardised credit risk RWAs have fallen due to the runoff of closed books. Counterparty credit risk RWAs have increased due to higher regulatory exposures. Total RWAs have reduced by £0.1 billion.

18 Capital is also held to meet Pillar 2 and capital buffer requirements. Further details on Pillar 2 requirements can be found in the Pillar 3 Disclosure 2018 at nationwide.co.uk

19 Market risk has been set to zero as permitted by the CRR as exposure is below the threshold of 2% of own funds.