Nationwide Ccds Regulatory News (NBS)

Nationwide Building Society

Interim Management Statement

Q3 2018/19

8 February 2019

Nationwide Building Society today publishes its Interim Management Statement covering the period from 5 April 2018 to 31 December 2018 ('Q3 2018/19').

Nationwide grows membership and leads on service1 as it attracts one in five current account switchers

Key highlights

· No. 1 for customer satisfaction amongst our high street peer group, with a lead of 3.1% (March 2018: 4.6%)1, and no. 1 for consumer trust, with a lead of 2.7% (March 2018: 1.3%)2;

· More than one in five current account switchers (21.6%; Q3 2017/18: 19.5%) chose Nationwide3 as we grew current accounts by 5% to 7.7m (4 April 2018: 7.3m);

· Gross and net mortgage lending grew, to £26.8bn (Q3 2017/18: £24.1bn) and £6.1bn (Q3 2017/18: £3.9bn) respectively; and we helped 59,400 first-time buyers into their own homes;

· Deposit balances up by £5.9bn (Q3 2017/18: £2.3bn) as members chose to save more with us;

· Underlying profit of £691m (Q3 2017/18: £880m) and statutory profit of £703m (Q3 2017/18: £886m);

· Profits are after a charge of £167m for asset write-offs and additional technology spend in line with the Society's September 2018 announcement of increased investment to meet members' future needs;

· Capital further strengthened with CET1 ratio of 31.7% (4 April 2018: 30.5%) and UK leverage ratio of 5.0% (4 April 2018: 4.9%).

Nationwide Building Society Chief Executive, Joe Garner, said:

"Nationwide Building Society is owned and run for the benefit of our members - not shareholders. Our membership has grown this year, we've continued to lead on service1 and trust2, helped more people into a home, and seen more members trust us with their money. Our commitment to rewarding these members with great value products and prioritising long-term value has encouraged more people to switch their mortgages and current accounts to us, and save with our Single Access and Loyalty ISAs. We've also helped 59,400 first-time buyers into their first home.

"As a mutual we are different in having more scope to make decisions in the long-term interest of our members. In September we took the conscious decision to increase significantly our investment in the Society in the full knowledge that it would impact profitability in the short-to medium-term but would be of long-term benefit to our members. Underlying profit for the first nine months of the year, at £691 million, is broadly flat year on year, excluding a charge of £167 million relating to asset write-offs and additional technology spend. This investment is to ensure we can continue to meet our members' changing needs in an increasingly digital future. At the same time, consistent with member feedback, we remain committed to and are investing in our presence on the high street.

"Additionally, in November we announced our commitment to launch a small business current account and expect to submit a bid for £50 million from the RBS Alternative Remedies Package. Our service will combine an advanced digital offering that integrates with our UK-wide network of branches and people to meet the needs of the many small and micro businesses that are not currently being well-served by incumbent banks. We believe that a combination of new technology and traditional face-to-face service will bring to life our vision for business banking - one built on excellent levels of service, trust and value.

"Looking ahead to the fourth quarter, as consumers continue to benefit from considerable choice, we intend to remain competitive and thus expect that lending margins will continue to moderate. We are confident that the Society's financial strength means we can continue to support members, as we have always done."

1 © Ipsos MORI 2019, Financial Research Survey (FRS), 12 months ending 31 December 2018 and 12 months ending 31 March 2018, c.60,000 adults interviewed per annum, 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 Source: Nationwide Brand and Advertising tracker compiled by Independent Research Agency, 12 months ending 31 December 2018 vs 12 months ended 31 March 2018. Financial brands included Nationwide, Barclays, Co-operative Bank, First Direct, Halifax, HSBC, Lloyds, NatWest, Santander and TSB. 

3 Source: CASS BACS Payments Schemes monthly CASS switching market data, Apr-Dec 2018.

Trading performance

Note:

i. The calculation of market share for mortgage lending and deposit balances has been refined to better reflect the position at the reporting date, with comparatives restated accordingly. Market data is available at calendar month ends and therefore market share for Q3 2018/19 and Q3 2017/18 is for the period 1 April to 31 December.

Trading performance for the period has been strong with gross lending of £26.8 billion (Q3 2017/18: £24.1 billion), and growth in member deposit balances of £5.9 billion (Q3 2017/18: £2.3 billion).

Gross mortgage lending includes £23.4 billion of prime residential mortgages (Q3 2017/18: £21.6 billion), demonstrating our competitively priced products and the long-term value that we continue to offer members. 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 £3.4 billion (Q3 2017/18: £2.5 billion).

Net mortgage lending was £6.1 billion (Q3 2017/18: £3.9 billion), reflecting higher gross mortgage advances. Net lending for prime mortgages was £5.7 billion (Q3 2017/18: £4.3 billion), and for specialist mortgages was £0.4 billion (£0.4 billion net redemption).

Member deposits grew by £5.9 billion following the success of our Single Access and Loyalty ISAs, together with higher current account balances. This increased our market share of deposits to 10.1% (31 March 2018: 10.0%). Our stock of all current accounts continues to grow and now stands at 7.7 million and we've maintained our share of main standard and packaged current accounts of 7.9%. Our market share of switchers increased to 21.6% (Q3 2017/18: 19.5%) with 1 in 5 of all switchers1 moving to Nationwide.

4 Member deposits include current account credit balances.

5 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. Further information is provided in our Report on Transition to IFRS 9: Financial Instruments, which can be found on nationwide.co.uk

6 Residential lending balances are stated net of impairment provisions.

7 Source: CACI (November 2018) and internal calculations. In June 2018, the size of the market reported for main standard and packaged current accounts increased due to updates of participant data. Had this change been applied in the March 2018 data, we estimate that Nationwide's market share of standard and packaged current accounts would have been 7.8%.

Financial performance

Note:

i. The following items are excluded from statutory profit to arrive at underlying profit:

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

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

The components of underlying profit have been changed in the period to reflect more appropriately ongoing business performance and now include the bank levy and FSCS management expenses, which were previously excluded. The comparative for the prior period has been reduced by £3 million to reflect this change. The impact will be more significant for the full financial year as the bank levy expense (£45 million in 2017/18) is incurred in the last quarter of the year.

Underlying profit for the period has reduced, principally due to a charge of £167 million driven by asset write-offs and additional investment in technology, in line with our technology strategy announcement in September 2018. This has also impacted cost income ratios, increasing the underlying cost income ratio to 68.4%.

Net interest margin was 7 basis points lower than for the same period last year, and 5 basis points lower than for the 2017/18 full year. As consumers continue to benefit from considerable choice, we intend to remain competitive and thus expect that margins will continue to moderate in retail lending markets generally, and particularly in relation to both prime and buy to let mortgages. Attractive new business pricing, combined with a base rate change in the period, has encouraged product switching as well as refinancing with our legacy base mortgage rate (BMR) balances continuing to run off. BMR balances have fallen by 14% to £19.5 billion over the nine-month period.

Costs are flat period on period, excluding asset write-offs and our additional technology investment, and we are on track to deliver £100 million of sustainable saves within the 2018/19 year.

Asset quality remains strong, with an average loan to value (LTV) of loan stock for total residential lending of 57% (4 April 2018: 56%). The average LTV of new lending in the period of 71% is consistent with the prior period.

Arrears performance for residential mortgages is stable with the number of cases more than three months in arrears at 0.43% of the total portfolio (4 April 2018: 0.43%).

8 Common Equity Tier 1 (CET1) ratio has been calculated under CRD IV on an end point basis. For 31 December 2018 and 5 April 2018, IFRS 9 transitional adjustments have been applied.

9 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 31 December 2018 and 5 April 2018, IFRS 9 transitional adjustments have been applied.

10 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 31 December 2018 and 5 April 2018, IFRS 9 transitional adjustments have been applied.

Impairment losses on loans and advances of £69 million (Q3 2017/18: £79 million reported under IAS 3911) reflect strong asset quality and stable credit performance.

We continue to review compliance with ongoing and emerging regulatory matters. During the period there has been a net release of £11 million of provisions for customer redress (Q3 2017/18: £25 million charge), reflecting latest estimates of the liabilities.

Capital ratios have remained comfortably in excess of regulatory requirements with a CET1 ratio of 31.7% (4 April 2018: 30.5%12) and a UK leverage ratio of 5.0% (4 April 2018: 4.9%). The improvement in our CET1 ratio was predominantly due to profits after tax in the period, partially offset by an increase in risk weighted assets. As future regulatory developments come into force, we expect risk weighted assets to be higher and our CET1 ratio therefore to reduce on a pro forma basis. Further information on our capital position can be found in Appendix 1.

Publication of Interim Management Statements

Nationwide's core purpose as a building society enables us to take long term decisions which are in the best interest of current and future members. Our recent external financial reporting has emphasised the importance of long-term sustainability and the prioritisation of security, service and delivering value to members over pure profit generation. Following a careful review, we've decided that we will discontinue the publication of an Interim Management Statement for Q1 and Q3, given the short-term focus of these updates. This Interim Management Statement for Q3 2018/19 will therefore be the last one routinely issued by the Society.

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. The Group's full statement of accounting policies is disclosed within the Annual Report and Accounts 2018. The revised accounting policies following adoption of IFRS 9 can be found in the Interim Results for the period ended 30 September 2018. Additional information on the transition to IFRS 9 can be found in Nationwide's 'Report on Transition to IFRS 9: Financial Instruments', available on the Society's website at nationwide.co.uk.

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 

11 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 are not necessarily comparable to impairment losses recorded for the current period.

12 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 £703 million has been adjusted to derive an underlying profit before tax of £691 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. The components of underlying profit have changed in the period to more accurately reflect underlying performance. For more information see page 3.

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 conscious decisions 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. The economic outlook also remains unusually uncertain due to Brexit. As a result, Nationwide's actual future financial condition, business performance and results may differ materially from the plans, goals and expectations expressed or implied in these forward-looking statements. Due to such risks and uncertainties Nationwide cautions readers not to place undue reliance on such forward-looking statements.

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

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

Appendix 1 - Supplementary capital disclosures

IFRS 9, implemented on 5 April 2018, impacted capital requirements and resources. The capital ratios as at 5 April 2018 are disclosed on page 3.

Key Metrics (KM1 and IFRS 9 - FL)

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

13 The 4 April 2018 and 31 December 2017 figures are presented on an IAS 39 basis. IFRS 9 was adopted on 5 April 2018.

14 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 152.5 % as at the 31 December 2018, whilst the average LCR over 12 months ending 31 December 2018 was 138%.

The UK leverage ratio has increased to 5.0% (4 April 2018: 4.9%), with 0.4% provided by Additional Tier 1 resources. Minimum leverage requirements are monitored by the PRA on a UK leverage basis with the current regulatory threshold set at 3.65%, composed of a minimum requirement of 3.25% and a countercyclical leverage ratio buffer of 0.4%. Following the release of CP14/18 in July 2018, we will be subject to an additional leverage ratio buffer (ALRB) in 2019, aligned to the implementation of the systemic risk buffer. Our current expectation is that the ALRB will be 0.35%. Therefore, the leverage ratio requirement is expected to be 4.0% during 2019. We remain confident in the strength of our capital position to meet the increased requirements.

The average UK leverage ratio for the three months to 31 December 2018 was 5.0%, with an average exposure measure of £231,673 million.

Common Equity Tier 1 (CET1) capital resources have increased by approximately £0.6 billion predominantly due to profits after tax for the period of £0.5 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. RWAs increased over the period by approximately £0.7 billion. These movements have strengthened our CET1 ratio to 31.7% (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 increased due to continued lending whilst 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 increased by £0.7 billion.

15 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

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