Nationwide Ccds Regulatory News (NBS)

Nationwide Building Society

Interim Results

For the period ended 30 September 2017

Contents

Introduction

Unless otherwise stated, the income statement analysis compares the period from 5 April 2017 to 30 September 2017 to the corresponding six months of 2016 and balance sheet analysis at 30 September 2017 with comparatives at 4 April 2017.

Underlying profit

Profit before tax shown on a statutory and underlying basis is set out on page 5. Statutory profit before tax of £628 million has been adjusted for a number of items to derive an underlying profit before tax of £588 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 it 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.

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. In this context, Nationwide currently believes that generating underlying profit of approximately £0.9 billion to £1.3 billion per annum over the medium term is an appropriate target for capital planning purposes. This range is based on our current assumptions as to the size of the mortgage market, and maintaining a UK leverage ratio in excess of 4%. This range, which will vary from time to time, 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.

NATIONWIDE DELIVERS £245M OF MEMBER FINANCIAL BENEFIT AND

GAINS MORE CURRENT ACCOUNT SWITCHERS THAN THE MAJOR BANKS COMBINED1

First choice for switchers, gaining more than three times as many switchers as nearest rival1

Helped a record 39,500 first time buyers into homes

Highest customer satisfaction in high street peer group2

Delivering strong profits and enhancing financial strength

o Statutory profit of £628m (H1 2016/17: £696m); underlying profit3 of £588m (H1 2016/17: £615m)

o Profits include £26m one-off gain from VocaLink disposal (H1 2016/17: £100m one-off gain from Visa disposal)

o Capital strength at all-time high: CET1 ratio of 29.6% and UK leverage ratio of 4.9%, strengthened by issuance of £0.8bn of core capital deferred shares (4 April 2017: 25.4% and 4.4% respectively)

o Underlying cost income ratio of 59.0% (H1 2016/17: 57.1%), down from 60.2% for the full year 2016/17; on track for broadly flat costs for the full year

Demonstrating mutual value, rewarding members with £245m financial benefit

o Supported savings members, paying them £180m in extra interest (H1 2016/17: £185m) by keeping average rates around 50% higher than the market average4

o Rewarded members holding other products with better than average rates4, incentives and fees

Helping a record 39,500 first time buyers onto the housing ladder

o Prime mortgage gross lending increased to £15.0bn (H1 2016/17: £14.7bn)

o Helped a record 39,500 first time buyers into homes, 1 in 5 of total (H1 2016/17: 38,600)

o Buy to let gross lending reduced to £1.7bn reflecting changes in the market (H1 2016/17: £2.8bn)

o Grew member deposit balances by £1.8bn in a challenging market (H1 2016/17: £4.7bn)

Leading current account attracts over three times as many net switchers as nearest competitor1

o Remained UK's top choice for current accounts5

o Added more current account switchers than the major banks combined1

o Continued record current account growth, opening 427,000 accounts in the period, up 13%

o Grew stock share of youth accounts to 10.3% from 8.2%

Remained top for customer satisfaction in our high street peer group2

o Remaining at top for most trusted financial brand6, offering digital convenience with a human touch

o Grew active mobile users by 15.5%

o Investing in new branch formats in 20 locations nationwide

Well placed to support members in uncertain times

o Household incomes being squeezed by slowing growth and inflation, but borrowing costs will stay low

o Modest growth outlook expected to limit further rate rises and constrain housing market

o Mortgage demand has been strong, but intensifying competition may lead to a moderation in our volumes

o Nationwide's financial strength means we can support our members in uncertain times

Nationwide Chief Executive, Joe Garner, said:

"Nationwide is delivering strong profits through growing our membership and providing the best customer satisfaction in our high street peer group2. As a building society we are able to manage our profits in our members' interests, investing in current and future services to improve the lives of our members.

"People are attracted to Nationwide because we care, we deliver fair and good value products and services, and because of our mutual philosophy. Nationwide gained more than three times as many current account switchers as our nearest rival1.

"Our customer satisfaction remains the best in our high street peer group2. We aspire to become as well known for our service outside our industry, and were delighted to make the Which? all-industry customer service top 10 this year.

"We've demonstrated the value of mutuality in the period by returning £245 million to members in the form of better than average interest rates4, lower fees and higher incentives (H1 2016/17: £250 million). We know that exceptionally low interest rates have placed a strain on savers, so we've chosen to protect them by directing most of this financial benefit into higher savings rates: our average savings rates in the period were approximately 50% higher than the average market rate4. We were the first in the industry to respond to the recent base rate rise, passing on the full benefit to those members whose savings rates fell by 0.25% following the last base rate reduction in August 2016.

"Building societies were founded to help people into their own homes and, with consumers increasingly struggling to get on the housing ladder today, we're proud to continue to support homebuyers. In the last six months, we helped a record 39,500 first time buyers into their first home (H1 2016/17: 38,600), and a further 47,700 homeowners to move or re-mortgage (H1 2016/17: 48,500). We are extending choice for older members too, with the launch today of our new Lifetime Mortgage, which will allow people to access equity in their home in later life.

"Looking ahead, the UK economy should continue to grow, albeit at a slower rate due to the uncertainties around Brexit. Despite the recent base rate rise, borrowing costs overall remain low. However, we know that low wage growth and inflation are putting pressure on household budgets and we remain alert to signs of financial strains on consumers.

“Nationwide is in very good shape after another strong set of results. The second half may bring tougher trading conditions, but we remain well placed to stand by our members in these uncertain times. Nationwide is financially secure and will continue to promote the long-term interests of both the Society and our members.”

Nationwide Chief Financial Officer, Mark Rennison, said:

"Nationwide has traded strongly in a highly competitive market in the first six months of the year. Our statutory profit before tax was £628 million for the period (H1 2016/17: £696 million), and our underlying profit was £588 million (H1 2016/17: £615 million). After excluding one-off gains7, profits increased year on year.

"This strong performance was underpinned by business growth and lower cost growth. We grew our current account base substantially, exceeding 7 million accounts for the first time, we increased prime mortgage gross lending, and maintained our share of retail deposits. Cost growth was contained to 3%, and is on track to be broadly flat for the full year.

"Our capital strength reached an all-time high, with a CET1 ratio of 29.6% (4 April 2017: 25.4%) and a UK leverage ratio of 4.9% (4 April 2017: 4.4%), well above regulatory requirements. This was supported by issuing a second tranche of CCDS, a form of Common Equity Tier 1 capital specific to building societies, demonstrating capacity and liquidity in the CCDS market. Our offer was more than two times over-subscribed, reflecting the Society's financial strength, and raised £0.8 billion of capital. We remain on course to meet our Minimum Requirement for Own Funds and Eligible Liabilities in advance of the regulatory January 2020 target date."

 1 Source: Current Account Switch Service Dashboard, Issue 16 quarterly participant data, 3 months to March 2017.

2 © GfK 2017, Financial Research Survey (FRS), 12 months ending 30 September 2017 vs 31 March 2017, 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 (inc C&G), NatWest, Santander and TSB).

 3 Underlying profit represents management's view of underlying performance and excludes bank levy charges, FSCS costs and gains/losses from derivatives and hedge accounting.

 4 Market average interest rates are based on Bank of England whole of market average interest rates adjusted to exclude Nationwide's balances.

 5 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, based on responses from non-customers of each brand, 3 months ending September 2017. Financial brands included Nationwide, Barclays, Cooperative Bank, First Direct, Halifax, HSBC, Lloyds, NatWest, TSB and Santander.

6 Source: Nationwide Brand and Advertising tracker - compiled by Independent Research Agency, based on all consumer responses, 3 months ending September 2017. Financial brands included Nationwide, Barclays, Co-operative Bank, First Direct, Halifax, HSBC, Lloyds, NatWest, TSB and Santander. Nationwide's lead on trust is not statistically significant and therefore positioned as joint top with Halifax.

 7 H1 2017/18: £26m one-off gain from sale of investment in VocaLink (H1 2016/17: £100m one-off gain from the sale of investment in Visa Europe).

Financial summary

Notes:

i. Member deposits include current account credit balances.

ii. Net receipts include outflows of non-member deposits relating to the closure of off-shore operations in the Isle of Man and Republic of Ireland.

iii. Reported under CRD IV on an end point basis. The CRR 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 UK leverage ratio is shown on the basis of measurement announced by the Prudential Regulation Authority and excludes eligible central bank reserves from the leverage exposure measure.

v. The wholesale funding ratio includes all balance sheet sources of funding (including securitisations) but excludes Funding for Lending Scheme (FLS) drawings which, as asset swaps, are not included on Nationwide's balance sheet, reflecting the substance of the arrangement. Off-balance sheet FLS drawings totalled £3.0 billion (4 April 2017: £4.8 billion).

Chief Executive's review

A strong and growing Society, well placed to support members in the challenging environment ahead

As a mutual, owned by our members, Nationwide is driven by a strong sense of social purpose, based on our history and founding principles. As we exist primarily for the benefit of our members, we organise ourselves around their needs, as we set out in our refreshed strategy at the start of the financial year. Building society, nationwide describes our aspirations to grow the Society in a sustainable way that benefits our members, customers, colleagues, and society more generally.

Underpinning our strategy are our five strategic cornerstones. These set out what we aim to do and how we will do it. First, we must be built to last: financially strong, profitable, prudent and efficient, so that we are here for our members in the long term. A healthy society is a growing society, which is reflected in our second cornerstone, building thriving membership; this is about growing our relationship with existing members, and attracting new ones. Building legendary service is our commitment to becoming known for industry-leading service within our industry but also outside it. PRIDE describes our culture and deeply-held mutual values, and guides our people to do the right thing in the right way. Finally, we aspire to be a 'national treasure', one of the UK's most trusted and respected organisations, known for championing the interests of our members and society more generally.

We can only achieve all these aspirations by running a successful business, and I'm pleased to say our first half results demonstrated the strength of the Society.

Our underlying profit for the period was £588 million (H1 2016/17: £615 million). After excluding one-off gains from the sale of our interests in Visa and VocaLink[1], profits increased year on year. This reflected good trading in our core businesses as we maintain our low risk balance sheet.

This strong performance allowed us to reward members, putting £245 million in their pockets in member financial benefit (H1 2016/17: £250 million). Offering our members better rates, incentives and fees than the market[2] as a whole is one of the ways we deliver better value to members, which is what makes Nationwide, and our mutuality, distinctive.

We believe that mutuality, driven by social purpose as well as commercial needs, resonates today. In an era of declining trust in business, Nationwide remains at the top for most trusted financial brand[3] and first for customer satisfaction in our high street peer group with a lead of 2.7%[4].

This unique combination of leading value, trust and service is a compelling proposition and helped us attract 159,000 new members, leading to a record total membership of 15.4 million people. Our engaged members - those who do most business with us - also grew to a new high of 8.0 million, putting us well on track to reach our strategic target of 10 million engaged members by 2022.

Built to last: robust profits and enhanced financial strength

As a mutual, profit matters to us because it allows us to grow and invest in our business and deliver value to our members. Our statutory profit for the period was £628 million (H1 2016/17: £696 million) and on an underlying basis, profit was £588 million (H1 2016/17: £615 million) benefiting from a £26 million one-off gain from the VocaLink disposal (H1 2016/17: £100 million one-off gain from the Visa disposal). This strong profit performance is comfortably within our strategic target range of £0.9 to £1.3 billion annually.

We improved our capital strength, with our CET1 ratio increasing to 29.6% (4 April 2017: 25.4%), and improved our UK leverage ratio to 4.9% (4 April 2017: 4.4%), both well in excess of regulatory requirements. We are on course to meet our Minimum Requirements for Own Funds and Eligible Liabilities (MREL) in advance of the January 2020 target date. We enhanced our capital strength by issuing a second tranche of core capital deferred shares (CCDS), a form of CET1 capital specific to building societies. Our issuance both supported capacity and liquidity in the CCDS market, and raised £0.8 billion of capital.

Our net interest margin improved modestly to 1.34% (H1 2017/18: 1.33%) due to lower funding costs, which were partially offset by lower mortgage margins in a highly competitive market.

Our strong performance allowed us to continue to deliver incremental value to members, maintaining our member financial benefit of £245 million in the period (H1 2016/17: £250 million).

 1 H1 2017/18: £26m one-off gain from sale of investment in VocaLink (H1 2016/17: £100m one-off gain from the sale of investment in Visa Europe).

 2 Market average interest rates are based on Bank of England whole of market average interest rates adjusted to exclude Nationwide's balances.

 3 Source: Nationwide Brand and Advertising tracker - compiled by Independent Research Agency, based on all consumer responses, 3 months ending September 2017. Financial brands included Nationwide, Barclays, Co-operative Bank, First Direct, Halifax, HSBC, Lloyds, NatWest, TSB and Santander. Nationwide's lead on trust is not statistically significant and therefore positioned as joint top with Halifax.

 4 © GfK 2017, Financial Research Survey (FRS), 12 months ending 30 September 2017 vs 31 March 2017, 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 (inc C&G), NatWest, Santander and TSB).

Chief Executive's review (continued)

While costs have risen in recent years as we have made strategic investments in the Society, invested in our people and grown our business, we've worked hard to contain them. Our underlying cost income ratio of 59.0% (H1 2016/17: 57.1%) reduced from 60.2% for the year ended 4 April 2017. Our ongoing efficiency programme is delivering sustainable savings, and we're on track to deliver broadly flat costs for the full year, as we promised.

Building thriving membership: helping members into homes, to save and to manage their finances

Attracting a new generation of members while retaining the loyalty of our existing members is important for the long-term sustainability of the Society.

Mortgages: helping members onto or up the housing ladder

Our founding purpose - helping people into homes - is still the heart of our business. Although housing market activity remained subdued and competition intensified, prime mortgage gross lending of £15.0 billion was up 2% over the same period last year. At a time when many have difficulty getting on the property ladder, first time buyers remain a priority for us, and we helped a record 39,500 homebuyers into their first homes, 1 in 5 of all first time buyers (H1 2016/17: 38,600). Following our decision in 2016 to extend our borrowing in retirement options, we are launching a new Lifetime Mortgage that does not require repayments during the customer's lifetime. This is Nationwide's response to today's reality - that many older people have considerable wealth tied up in their property, which they can't - or can't afford to - access without moving home. Our Lifetime Mortgage will give members access to their capital in a flexible and affordable way.

We also want to remain the provider of choice for our existing members. 7 out of 10 members chose to renew their mortgage with Nationwide. In a more challenging environment for landlords, buy to let mortgages remain less attractive to borrowers. Buy to let lending in the period was in line with expectations, reflecting the highly competitive market and our decision to tighten our lending criteria in 2016, ahead of regulation and our competitors.

As 1 in 5 people now live in private rented accommodation, we want to help both tenants and landlords by using our influence to improve the standards of privately rented homes. We've introduced improved standards that landlords must meet in order to secure a mortgage with us. We've also launched the Nationwide Partnership Board, a cross-industry alliance, to monitor the health of the rental market, recommend solutions, and take action which delivers decent, affordable homes.

Savings: supporting savings members with above average rates

We've heard strongly from savings members about the strain of a decade of low interest rates and, despite market pressures, we're committed to helping savers make the most of their money. We've maintained our average rates approximately 50% higher than the market average[5], putting a financial benefit in members' pockets of over £180 million in the period (H1 2016/17: £185 million). And while our deposit balances grew more slowly than last year, we maintained our market share at 10% largely through growth in current accounts.

With low rates a disincentive for people to save, over the first half of the year we continued to encourage our loyal members to keep saving by offering exclusive products with higher rates, such as Flexclusive Regular Saver, our Loyalty Bonds and FRISAs.

We were the first in the industry to respond to the recent base rate rise, passing on the full benefit to those members whose savings rates fell by 0.25% following the last base rate reduction in August 2016. This includes popular products such as our Loyalty Saver, Flexclusive ISA and children's products like Smart Junior ISA.

Leading current account attracts more net switchers than the major banks combined[6]

We offer very attractive current accounts, which drew in record new accounts for the seventh half year running. We opened 427,000 accounts, a 13% increase year on year, bringing our market share of main standard and packaged accounts to 7.7% (4 April 2017 7.5%). We were delighted to be the UK's top choice[7] for current accounts again and to be first choice for switchers once more, attracting more than three times as many net switchers as our nearest competitor through the Current Account Switching Service (CASS)[6].

Our stock share of youth and student accounts increased to 10.3% in the period (4 April 2017: 8.2%), with 76,300 FlexOne (H1 2016/17: 70,300) and 17,700 FlexStudent (H1 2016/17: 9,400) account openings.

We also extended our 'recommend a friend' scheme to allow mortgage and savings members to benefit from loyalty incentives from recommending our current account.

In the last two years, our total stock of current accounts has increased by 19%, to a record 7.1 million.

5 Market average interest rates are based on Bank of England whole of market average interest rates adjusted to exclude Nationwide's balances.

6 Source: Current Account Switch Service Dashboard, Issue 16 quarterly participant data, 3 months to March 2017.

7 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, based on responses from non-customers of each brand, 3 months ending September 2017. Financial brands included Nationwide, Barclays, Cooperative Bank, First Direct, Halifax, HSBC, Lloyds, NatWest, TSB and Santander.

Chief Executive's review (continued)

Building legendary service: digital convenience with a human touch

High quality service has been a hallmark of the Society for many years. We are pleased to still have the highest customer satisfaction in our high street peer group with an overall lead of 2.7% over our nearest competitor and 7.5% over the peer group average[8]. This is despite extending the group we measure ourselves against this year. Importantly we also have a lead of 9.7% on current account customer satisfaction[9]. Longer term, our aim is to be among the best for service outside our industry, as well as within it.

We continue to work hard to deserve our reputation for service by investing in delivering excellent service across all our channels - branch, digital, mobile and telephony.

Through our Member Connect panel we know members want a balance of convenient technology and human interaction. With active mobile users up 15.5% since 4 April 2017, we're continuing to rethink and reconfigure our branch network by rolling out a new design, with branches organised in four separate zones: Convenience, where we offer speedy service; Conversation, for help and advice; Consultation, with private space for discussions; and a Community space where members can have a coffee and a chat. The new design has already been rolled out to seven locations, with a further 30 planned before the middle of next year.

We have started to prepare for the advent of Open Banking in 2018. This will give customers the opportunity to ask their banking provider, including Nationwide, to share their current account balance, transaction history and payment data with other financial institutions, in a secure manner so that they can see their accounts across different organisations. The result should be greater visibility for the consumer, and more control of their finances. Nationwide has taken a leading role in developing the industry standards that will protect consumers, and we're exploring how we can use Open Banking to provide a better sales and service experience for members. IT resilience is one of our highest priorities and we continue to focus on protecting customer services and data, balancing understandable customer expectations for 'always on' digital services with the need for resilient and secure systems. 

PRIDE: investing in our employees and values

Our 18,000 employees provide the high-quality service and care ethic that underpin our performance, which is why we place a high emphasis on being one of the best places to work in the UK. You can see this in our high employee engagement and enablement levels. Nationwide was named as a UK top three Outstanding Employer in Korn Ferry's 2017 employee engagement awards.

Our culture, which is summed up in our PRIDE values, has consistently driven an intense focus on our members, and the conduct we aspire to. Recently, 150 colleagues volunteered as PRIDE champions, to ensure we live our values and culture every day. In addition, a number of colleagues were chosen in a 'People's Choice' vote to join our leadership community and will take part in our Leading for Mutual Good programme for the Society's existing and future leaders.

Building a national treasure: building society, nationwide

We want to earn people's trust, help them understand our mutual difference and see that Nationwide makes a positive impact on people's lives. Among consumers, we remain at the top for trust and fair financial brands[10].

As a business with a social purpose at its heart, sharing the rewards of our success with society more generally is an important part of what we do. We have launched a new five-year social investment programme aimed at helping people find a place fit to call home. We expect to invest some £20 million over five years to help local communities solve their housing issues, with local members voting to choose which projects we will support. The programme is being piloted in the second half of 2017, before going nationwide in 2018.

Outlook: financial strength and strong trading allows us to support members in challenging times

Turning to the outlook. A number of financial factors are weighing on the economy and our members. On the one hand, employment is at or close to historic highs. On the other, uncertainty appears to be holding back investment, wages are shrinking in real terms, and inflation has ticked up to its highest level in five years. Annual house price growth has moderated to 2-4% in recent months. And of course, uncertainty about Brexit continues.

8 © GfK 2017, Financial Research Survey (FRS), 12 month rolling data from April 2012 to September 2017, 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 (inc C&G), NatWest, Santander and TSB). Prior to April 2017, 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). Prior to April 2015, Lloyds Bank and TSB combined as Lloyds TSB Group (including Lloyds Bank, TSB and C&G).

9 © GfK 2017, Financial Research Survey (FRS), 12 months ending 30 September 2017, proportion of extremely/very satisfied main current account customers minus proportion of extremely/very/fairly dissatisfied main current account customers. High street peer group defined as providers with main current account market share >4% (Barclays, Halifax, HSBC, Lloyds Bank (inc C&G), NatWest, Santander and TSB).

10 Source: Nationwide Brand and Advertising tracker - compiled by Independent Research Agency, based on all consumer responses, 3 months ending September 2017. Financial brands included Nationwide, Barclays, Co-operative Bank, First Direct, Halifax, HSBC, Lloyds, NatWest, TSB and Santander. Nationwide's lead on trust is not statistically significant and therefore positioned as joint top with Halifax.

Chief Executive's review (continued)

Overall, however, we expect the economy to grow in the quarters ahead. While the pace of expansion is likely to remain sluggish in the near term, our central expectation is that it will accelerate in the years ahead, once Brexit uncertainties recede and the squeeze on incomes reduces. We expect the housing market to mirror trends in the wider economy.

This mixed economic picture means that it is vital we continue to support our members, providing them with the appropriate products and services to manage their financial lives.

In the housing market, with interest rates still at historic lows, November's rate rise should only have a modest impact on most households. Further interest rate rises are likely to be gradual and, providing employment remains buoyant, mortgages will remain affordable. There are, however, some signs of a squeeze on household finances from low wage growth and above-target inflation. Our member panel tells us people are beginning to cut back, particularly on savings and discretionary expenditure, which is not surprising when real incomes are falling.

Competition in the mortgage market remains intense, and shows no sign of abating. Although mortgage volumes remain strong, we're prepared for the possibility that intense competition combined with declining consumer confidence may lead to a moderation in gross lending and market share in the second half of the year.

The launch of Open Banking in 2018 will also bring new competitive challenges and opportunities for a growing Society like Nationwide. We will meet any pressures by being more efficient - we're already on track to deliver broadly flat costs for the full year - and by continuing to attract new members with our distinctive combination of excellent value, leading service, and social purpose.

Nationwide is in very good shape after another strong set of results. The second half may bring tougher trading conditions, but we remain well placed to stand by our members in these uncertain times. Nationwide is financially secure and will continue to promote the long-term interests of both the Society and our members.

Financial review

Overall performance

Our financial performance for the period ended 30 September 2017 was in line with expectations. Statutory profit before tax was £628 million (H1 2016/17: £696 million) and includes £36 million (H1 2016/17: £77 million) of derivative and hedge accounting gains. Underlying profit before tax was £588 million (H1 2016/17: £615 million). Profits in the prior period benefited from a one-off gain of £100 million from the sale of our investment in Visa Europe; the current period profits included a gain of £26 million from the sale of our investment in VocaLink.

Our underlying cost income ratio was 59.0% (H1 2016/17: 57.1%), reflecting increased costs and broadly unchanged total income. The rise in costs is primarily due to higher defined benefit pension costs and an increase in depreciation. We remain committed to a lower trajectory of cost growth in the future and, compared to the same period last year, cost growth has slowed to 3% (H1 2016/17: 9% growth). We anticipate full year costs will be broadly flat year on year, in line with the expectations communicated in our 2016/17 financial results.

Impairment losses on loans and advances to customers have increased by £27 million to £59 million (H1 2016/17: £32 million), reflecting a rate of incurred losses which is in line with the full year performance for 2016/17. The increase in impairments is driven by updates to our provision assumptions to reflect the current economic environment. Delinquency levels remain low across all our portfolios.

A £6 billion growth in total assets to £228 billion has been driven mainly by a £4 billion growth in residential mortgage balances to £175 billion, reflecting strong trading in the period. The remaining asset growth reflects an increase in high quality liquid assets from on-balance sheet Term Funding Scheme (TFS) drawdowns (replacing off-balance sheet Funding for Lending Scheme (FLS) liquidity) and from cash received in relation to the Society's recent core capital deferred shares (CCDS) issuance.

Our capital levels have improved during the period with CET1 and UK leverage ratios of 29.6% and 4.9% respectively (4 April 2017: 25.4% and 4.4%) comfortably in excess of current regulatory requirements. The recent CCDS issuance improved our CET1 and UK leverage ratios by 2.4 percentage points and 0.4 percentage points respectively.

During the period, competition in the mortgage market has intensified and the savings market has experienced increased competition from challenger banks, alongside slower market growth. We anticipate these conditions will continue, resulting in the moderation of trading volumes during the remainder of the current financial year. Notwithstanding this, our financial strength and high quality balance sheet mean that we are well placed to deliver long term value to our members.

Income statement

Notes:

i. Underlying profit represents management's view of underlying performance and is presented to aid comparability across reporting periods.

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

a. bank levy is included within administrative expenses

b. FSCS costs are included within provisions for liabilities and charges

c. gains from derivatives and hedge accounting are presented separately within total income.

iii. 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.

Financial review (continued)

Net interest income has increased 4% during the period to £1,514 million (H1 2016/17: £1,449 million), benefiting from lower funding costs. NIM of 1.34% is largely consistent with the same period last year (H1 2016/17: 1.33%).

Savings rates across the industry continued to fall during the first half of the year. Whilst we reduced the rates paid to our members on some of our savings products, our savings range remained competitively positioned in the market and continues to reflect our mutual principle of providing products that represent good long term value to our members. Over the last six months our depositors have benefited from average rates approximately 50% higher than the average market rate[1]. In anticipation of the base rate increase in November, we committed to increase rates on products impacted by the previous reductions.

The benefit to NIM from lower funding costs has been offset by a decrease in mortgage margins. Competition in retail lending markets remains intense and has resulted in more borrowers switching to competitively priced products. Our legacy base mortgage rate (BMR) balances, at £26.3 billion, have progressively declined period on period (4 April 2017: £29.1 billion) in line with both recent experience and our expectations. We are planning for market conditions to remain highly competitive, and the run-off of BMR balances to continue, and consequently we expect our reported margin to trend lower during the second half of the year and into 2018/19.

Other income has decreased during the period to £125 million (H1 2016/17: £193 million) predominantly due to the prior period impact of a one-off gain of £100 million from the sale of our investment in Visa Europe. This is offset in part by a current period gain of £26 million from the sale of our investment in VocaLink.

Underlying administrative expenses increased by 3%, driven by higher defined benefit pension costs as a result of market conditions, and the depreciation impact of previous investment in our infrastructure to enhance products and services. The remainder of our cost base was essentially unchanged compared with a year ago despite volume growth and the impact of inflation. The underlying cost income ratio of 59.0% (H1 2016/17: 57.1%) is down from 60.2% for the full year 2016/17.

To support the long-term interests of our members, we continue to invest in our products, service and resilience. During the period, investment spend has focused on improvements to our branches, continued updates to our digital channels and preparation for Open Banking. We have also invested in IT resilience and ensuring compliance with UK and EU regulatory requirements.

 1 Market average interest rates are based on Bank of England whole of market average interest rates adjusted to exclude Nationwide's balances. 

Financial review (continued)

We have continued our focus on operational efficiency, whilst ensuring the needs of our members are prioritised. We have made good progress with our efficiency programme, which targets £300 million of sustainable cost savings by 2022. Cost growth in the first half of the year slowed to 3% compared with 9% in the same period last year, and we have invested £15 million in the period in improving longer-term efficiency. This has included redesign of member processes, organisational simplification and improvements to the way we deliver change. Our efficiency programme is a key priority and we remain committed to a lower trajectory of cost growth in the future and a broadly flat cost position for the current year compared with 2016/17.

Impairment losses have increased by £22 million to £59 million (H1 2016/17: £37 million) but reflect a rate of incurred losses in line with the full year performance for 2016/17. The increase is driven mainly by additional consumer banking impairments from updating provision assumptions to reflect current economic conditions. Although loans continue to perform and delinquency levels have remained low across all portfolios during the period, there are emerging indications that affordability is under more pressure from the impact of inflation.

Further details on asset quality are included in the Business and risk report.

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 for the period primarily relates to customer redress provisions recognised in respect of PPI and Plevin, including the cost of administering these claims.

The income statement charge for the half year mainly reflects updated assumptions for provisions previously recognised. This includes a £28 million charge in relation to PPI, driven by an increase in the anticipated number of future complaints we expect to receive ahead of the Financial Conduct Authority's August 2019 deadline.

More information on customer redress and FSCS provisions is included in note 16.

Taxation

The tax charge for the period of £157 million (H1 2016/17: £194 million) represents an effective tax rate of 25% (H1 2016/17: 27.9%) which is higher than the statutory UK corporation tax rate of 19% (H1 2016/17: 20%). The effective tax rate is higher due to the 8% banking surcharge, equivalent to £33 million (H1 2016/17: £40 million), and the tax effect of disallowable customer redress costs and other disallowable expenses of £1 million and £4 million (H1 2016/17: £7 million and £7 million) respectively. Further information is provided in note 9.

Financial review (continued)

Member financial benefit

As a building society, we seek to maintain our financial strength whilst returning value to our members through pricing and service. We provide value to our members through the highly competitive mortgage, savings and banking products we can offer as a direct result of being a member-owned business. The calculation method used to quantify our member financial benefit is described in full in the Financial review section of the Annual Report and Accounts 2017. In summary, we quantify the financial benefit of being a member by comparing the following to industry benchmarks:

· our interest rate pricing on prime mortgages, unsecured lending and retail deposits; and

· the lower fees we charge and higher incentives we provide to our members.

For the period ended 30 September 2017, this measure shows we have provided our members with a financial benefit of £245 million (H1 2016/17: £250 million). This reflects our ongoing commitment to delivering long-term value to our members despite strong levels of competition in our core markets.

Balance sheet

Total assets have increased to £228 billion at 30 September 2017 (4 April 2017: £222 billion) with a strong trading performance driving £4.1 billion of net prime mortgage lending (H1 2016/17: £5.0 billion). The remainder of the balance sheet growth largely reflects an increase in high quality liquid assets.

Mortgage lending has been partially funded by growth in retail deposits, with member deposits increasing by £1.8 billion to £146.4 billion (4 April 2017 £144.5 billion). The growth in member balances is primarily attributable to increased current account balances as we focus on growing our base of engaged members. This includes growth from existing account holders, as well as 427,000 new current accounts opened during the period (H1 2016/17: 377,000). In a highly competitive market, our market share of UK household deposits remained stable at 10.0% at 30 September 2017 (4 April 2017: 10.1%).

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.

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 reduced by £0.8 billion to £16.7 billion (H1 2016/17: £17.5 billion), representing a market share of 12.9% for the period (H1 2016/17: 14.5%). Gross prime mortgage lending remained strong at £15.0 billion (H1 2016/17: £14.7 billion). Following the affordability criteria changes we made last year, and the impacts of the stamp duty increase on the BTL market, gross BTL mortgage lending for the period reduced to £1.7 billion (H1 2016/17: £2.8 billion).

Net mortgage lending has decreased during the period by £2.1 billion to £3.9 billion (H1 2016/17: £6.0 billion), reflecting the reduction in BTL advances and increased prime mortgage redemptions due to ongoing market competition. Net lending for the period includes £4.1 billion of prime lending (H1 2016/17: £5.0 billion). Given the sustained levels of competition in the prime mortgage market, and the slowdown in BTL volumes, we expect net lending to moderate in the period ahead.

The average loan to value (LTV) of our portfolio, weighted by value, was unchanged at 55% (4 April 2017: 55%). The average LTV of new lending in the period also remained unchanged at 71% (4 April 2017: 71%), reflecting our continued support of the first time buyer market as we recognise the importance of helping people take their initial steps onto the housing ladder.

The impairment provision balance has increased to £150 million (4 April 2017: £144 million) due to updated provision assumptions to reflect current economic conditions. The impact of these conditions has not yet been evident in arrears performance, which improved marginally, with cases more than three months in arrears improving slightly to 0.44% (4 April 2017: 0.45%).

Commercial lending

Total commercial lending balances were £11.8 billion (4 April 2017: £12.6 billion) and, given deleveraging activity undertaken in recent years, our overall portfolio is increasingly weighted towards registered social landlords, with balances of £7.4 billion (4 April 2017: £7.5 billion). The registered social landlords' portfolio is fully performing, reflecting its low risk nature.

The strategy for the commercial lending portfolio continues to be to hold and actively manage to maturity in line with contractual terms. During the period the commercial real estate (CRE) balances decreased by £0.4 billion to £2.2 billion (4 April 2017:£2.6 billion).

Consumer banking

Consumer banking comprises personal loans of £2.0 billion (4 April 2017: £2.0 billion), credit cards of £1.8 billion (4 April 2017: £1.7 billion) and current account overdrafts of £0.2 billion (4 April 2017: £0.2 billion). Delinquency levels in the portfolio remain low, benefiting from prudent lending criteria, proactive risk management practices and continued low interest rates.

Impairment provisions have increased to £282 million (4 April 2017: £269 million), primarily due to updated provision assumptions to reflect current economic conditions.

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

Other financial assets

Other financial assets of £34.4 billion (4 April 2017: £31.2 billion) comprise liquidity and investment assets held by our Treasury function of £29.1 billion (4 April 2017: £25.4 billion), derivatives with positive fair values of £5.1 billion (4 April 2017: £5.0 billion) and fair value adjustments and other assets of £0.2 billion (4 April 2017: £0.8 billion). Derivatives are primarily interest rate and foreign exchange derivatives which economically hedge financial risks inherent in our core lending and funding activities.

Growth in the levels of on-balance sheet liquid assets is predominantly due to the replacement of off-balance sheet FLS liquidity with on-balance sheet TFS drawdowns, additional cash from the recent issuance of CCDS and an increase in held to maturity investment securities. Although total on-balance sheet liquidity has increased, our Liquidity Coverage Ratio (LCR) has remained broadly stable at 125.2% (4 April 2017: 124.0%) due to certain assets not being eligible for the LCR calculation, and changes to LCR requirements.

Financial review (continued)

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 Nationwide's balance sheet, reflecting the substance of the arrangement. Off-balance sheet FLS drawings have reduced during the period to £3.0 billion (4 April 2017: £4.8 billion).

Member deposits

Member deposits have increased by £1.8 billion to £146.4 billion (4 April 2017: £144.5 billion). This includes current account credit balances, which have increased to £19.8 billion (4 April 2017: £17.5 billion).

Our market share of all UK household deposits at 30 September 2017 was 10.0% (4 April 2017: 10.1%).

Debt securities in issue

Debt securities in issue of £40.5 billion (4 April 2017: £40.3 billion) are used to raise funding in wholesale markets to finance our core activities. The wholesale funding ratio has increased to 28.2% (4 April 2017: 27.1%), reflecting wholesale issuance activity, as well as the drawdown of TFS.

Other financial liabilities

Other financial liabilities have increased during the period to £26.6 billion (4 April 2017: £23.9 billion) driven by an increase in bank deposits (which includes TFS drawdowns). This growth has been partly offset by a decrease in Nationwide International balances which have now fully run off. Following our strategic decision to exit the business, the outflow of Nationwide International balances was managed in an orderly manner, with the funding replaced by additional member deposits and the use of wholesale funding where appropriate.

Members' interests and equity

Movements in the period reflect the retained profit after tax and the issuance of CCDS during the period, details of which are included in the Capital structure section on the next page.

Movements in the table above are shown net of related taxation.

The net remeasurement of pension obligations of £71 million income (H1 2016/17: £405 million expense) mainly reflects £226 million of actuarial gains (H1 2016/17: £1,359 million actuarial losses). This is partly offset by a £129 million loss resulting from pension asset returns being lower than the rate used to discount future cashflows in calculating the pension obligation (H1 2016/17: £807 million gain). Further information on gross movements in the pension obligation is included in note 18.

The net movement in cash flow hedge reserve of £114 million expense (H1 2016/17: £310 million income) is driven by changes in derivative valuations from movements in foreign exchange rates and interest rates. Further information is included in note 6.

Financial review (continued)

Capital structure

Notes:

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

ii. 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.

iii. 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.

In September 2017, the Society issued an additional five million of £1 CCDS, as part of our strategy to maintain broad access to capital markets. This issuance supports the continued relevance of this instrument in the context of our strategic capital management and enhances its liquidity. Issuing from a position of strength, we remain well in excess of regulatory capital requirements. These CCDS form a single series together with the CCDS previously issued in December 2013. Further information on CCDS can be found in note 19. Detailed information on the key features of CCDS and other capital instruments can be found within the Interim Pillar 3 Disclosure 2017 at nationwide.co.uk

CET1 capital resources have increased over the period by £1.2 billion mainly due to the CCDS issuance, which raised £0.8 billion of CET1 capital, and profit after tax for the period of £471 million. Risk weighted assets (RWAs) reduced over the period by £0.6 billion primarily due to the continued run-off of the commercial book.

The movements described above have resulted in an increase in the CET1 ratio to 29.6% (4 April 2017: 25.4%).

The UK leverage ratio was 4.9% at 30 September 2017 (4 April 2017: 4.4%). The increase was a result of the CCDS issuance and profits for the period. The CRR leverage ratio also increased to 4.6% (4 April 2017: 4.2%).

We continue 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, regulatory announcements on the UK leverage ratio mean that we have a clearer understanding of the expected impact on our capital requirement. However, we will remain engaged in the development of the regulatory approach to ensure we are prepared for any changes. Whilst further amendments may result in significant increases to RWAs, we do not believe these will lead to a material increase in our overall capital requirements.

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

Business and risk report

Contents

Introduction

The Interim Business and risk report provides information on 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 year end, then this information has not been repeated in the 2017/18 Interim Results and can be found in the Business and risk report in the Annual Report and Accounts 2017.

Principal risks

Whilst it is accepted that all business activities involve some degree of risk, Nationwide seeks to protect its members by appropriately managing the risks that arise from its activities. The principal types of risk inherent within the business remain unchanged from those set out in the Business and risk report in the Annual Report and Accounts 2017, namely:

· Lending risk

· Financial risk

· Operational risk

· Conduct and compliance risk

· Strategic risk.

Top and emerging risks

Nationwide's top and emerging risks to the delivery of the strategy are identified through the process outlined in the Business and risk report section of the Annual Report and Accounts 2017. These risks are kept under close observation through the risk reporting and governance structure.

Nationwide's top and emerging risks continue to relate to three key themes:

· Macroeconomic and competitive environment

· Cyber security, data protection and operational resilience

· The pace of change in the digital and regulatory environment.

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

Macroeconomic and competitive environment

Nationwide continues to regularly monitor economic factors, including undertaking regular assessments of how economic stresses may impact its business model. Factors including the UK vote to leave the EU, geopolitical tensions, and European and domestic political changes are regularly discussed. While Nationwide's business model means it has limited direct exposure to the EU, should the UK leave the EU without a transitional deal in place, Nationwide could be exposed to secondary impacts.

Whilst the Bank of England has raised the base rate, interest rates remain at a historically low level. The Board continues to monitor closely and discuss the impact of any change in interest rates, competitor activity, and associated risks to economic growth and our margin.

In addition, the Board continues to balance carefully affordability with credit supply to support members, and actively monitors key indicators for any effect on credit losses or customer outcomes driven by the growth in the levels of UK household debt, or customer affordability resulting from wages not keeping pace with inflation.

Cyber security, data protection and operational resilience

Nationwide continues to focus on protecting customer services and data, balancing customer expectations for "always on" digital services with the need to provide compliant, resilient and secure systems.

Recent high profile attacks, such as WannaCry and NotPetya ransomware attacks, have not directly affected Nationwide, but emphasise the need for continued vigilance to ensure systems remain resilient and customers are protected from any future attacks.

Top and emerging risks (continued)

The pace of change in the digital and regulatory environment

Nationwide recognises both the risks and opportunities associated with changes that could impact the structure of the market, such as challenges from new competition as a result of Open Banking, artificial intelligence and automation, as well as broader changes to the external environment including climate change and the UK's aging population. Nationwide's stress testing activities consider a number of these to ensure the associated risks are understood and potential management responses have been identified.

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 Nationwide manages lending risk are available in the Annual Report and Accounts 2017. The table below summarises the Group's assets subject to lending risk.

Notes:

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 Nationwide's hedging programmes.

ii. The other lending portfolio includes deferred consideration relating an investment in Visa Inc and collateral balances to support repo transactions.

Lending risk - Residential mortgages

Nationwide's residential mortgages include both prime and specialist loans. Prime residential mortgages are mainly Nationwide branded advances made through the branch network and intermediary channels. Specialist lending primarily consists of buy to let mortgages originated under The Mortgage Works (UK) plc (TMW) brand, but also includes other specialist lending which is now closed to new business.

New lending in the prime portfolio has seen the residential mortgage exposure grow from £171 billion to £175 billion over the period. This has mainly been driven by continued support for first time buyers and reflects Nationwide's commitment to help people become homeowners.

Over the period the geographical distribution across the UK has remained stable and the average LTV, weighted by value, has remained at 55%. Support for first time buyers has seen the proportion of new lending made to this segment increase to 37%(H1 2016/17: 35%). Average LTV of new lending is unchanged at 71% and the proportion of the portfolio with an LTV above 80% fell to 9.5% (4 April 2017: 9.6%).

The proportion of lending made to the buy to let segment has reduced over the period to 10% (H1 2016/17: 16%). In May 2017 Nationwide reintroduced a 125% Interest Cover Ratio (ICR) mortgage for basic rate taxpayers to recognise the lower impact the phased changes to income tax relief for buy to let investors will have on these borrowers.

Arrears levels remain low across prime and specialist lending, reflecting the favourable economic conditions, the low interest rate environment and robust lending controls. The proportion of loans more than three months in arrears reduced to 0.44%(4 April 2017: 0.45%), significantly below the Council of Mortgage Lenders (CML) average of 0.86%. With the immediate outlook for the UK less certain and the buy to let market facing increased costs, the expectation is for a very gradual rise in arrears from these low levels.

The proportion of non-performing loans reduced to 1.5% of the total mortgage portfolio. Provisions for impairment remain broadly stable.

Lending and new business

The table below summarises the residential mortgage portfolios:

Note:

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

Lending risk - Residential mortgages (continued)

Note:

All new business measures exclude existing customers who are only switching products and/or taking further advances.

The proportion of prime remortgage lending increased during the period reflecting an increased customer appetite for remortgaging.

The proportion of lending to buy to let investors reduced during the period. Influencing factors include a contraction in the buy to let market following the introduction of further stamp duty charges for additional property purchases, and Nationwide taking a lead in the market by increasing its minimum interest cover ratio requirement in anticipation of the effect phased tax rises will have on affordability for some property investors.

Lending risk

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

LTV and lending risk concentration

Average LTV shown below is calculated by weighting by value as this is considered to reflect most appropriately the exposure at risk.

Note:

The LTV of new business excludes further advances and product switchers.

The average LTV of buy to let new lending reduced by two percentage points in the period. This is due in part to the introduction of a reduced maximum LTV of 75% in May 2016 (previously 80%).

Lending risk - Residential mortgages (continued)

The maximum LTV for new prime residential customers is 95%. The proportion of new lending below 60% increased, in part as a consequence of an increased customer appetite for remortgaging.

Geographical concentration

Lending risk - Residential mortgages (continued)

The value of partially collateralised non-performing loans has reduced to £49 million (4 April 2017: £66 million), primarily reflecting the growth in house prices.

During the period the proportion of loan balances with an LTV greater than 80% has reduced to 9.5% (4 April 2017: 9.6%).

Arrears

Favourable economic conditions and a continued low interest environment have resulted in the arrears performance of both the prime and specialist mortgage portfolios reaching a level where any future changes are more likely to be gradual increases rather than further falls. The combined arrears rate of 0.44% is approximately half of the Council of Mortgage Lenders' (CML) industry average rate of 0.86%.

Lending risk - Residential mortgages (continued)

Impaired loans

Impaired and non-performing loans are identified primarily by arrears status, as shown in the table below.

Impairment provisions increased to £150 million (4 April 2017: £144 million) due to updates to assumptions to reflect current economic conditions.

Lending risk - Residential mortgages (continued)

Interest only mortgages

Nationwide does not offer any new advances for prime residential mortgages on an interest only basis. However, there are historical balances which were originally advanced as interest only mortgages or where a change in terms to an interest only basis was agreed (this option was withdrawn in 2012). Maturities of interest only mortgages are managed closely, engaging regularly with customers to ensure the loan can be redeemed or to agree a strategy for repayment.

The majority of the specialist portfolio comprises buy to let loans, of which approximately 82% continue to be advanced on an interest only basis.