Last checked at 6 Mar 2020 07:00
Nottingham Building Society
The Nottingham announces robust financial performance and continued progress in the delivery of its unique member proposition as it prepares for a new digital world of financial services.
The Nottingham is pleased to present its results for the year ended 31 December 2019, in what was another period of good progress and performance in the delivery of our unique 'all under one roof' advice and service proposition for members.
Below are some of the key achievements and financial highlights of 2019:
· Underlying profit before tax of £10.0 million; · Strong retail franchise growth - total branch savings balances of £2.4 billion, up 2% in 2019; · Total assets of £3.8 billion and gross mortgage lending of over £350 million for 2019; · The Society welcomed over 20,000 new customers and is present in over 60 locations across nine counties; · Successful completion of the project to replace all of our online/digital member facing activity; · Achieved a customer Net Promoter Score of 77%; · Net interest margin at 1.17%; · Arrears levels remain very low, below a quarter of the industry average (2019: 0.15% v industry at average of 0.72%); and · Capital strength improved with Common Equity Tier 1 at 15.1% and leverage of 5.3%.
Commenting David Marlow, Chief Executive, said:
"There have been a number of market and societal changes that we have had to face into over the past year and I am pleased to report good progress across a range of our activities.
One of the biggest challenges of 2019 has been to effectively balance the conflicting needs of our savings and mortgage members, in the face of a continued ultra-low interest rate environment and intense mortgage price competition, as the UK ring-fenced banks exerted their influence on the market. The challenge for us here was to respond to falling rates for new mortgages whilst protecting the average rate we pay to our savers. This has meant that we have reduced our new mortgage lending, which is down almost 60% from £834m in 2018 to £353m in 2019, whilst continuing to be successful in raising the number of existing borrowers choosing to stay with us when they get to the end of their promotional period. This is something we have achieved well this year, with over 70% of members choosing to stay with us at the end of their initial product term.
This is in contrast to our savers, where we continue to work hard to hold up savings rates in the face of falling mortgage yields. Again, we are pleased with the outcome whereby our average rate payable on our savings at the end of 2019 is 1.00% compared to 1.02% at the end of 2018.
How we have strived to strike this balance is best demonstrated at the income statement level. In 2019, our interest receivable from mortgages was down 2% or £1.4m whereas our interest payable to savers actually increased by 7.7% or £2.7m. This £4.1m swing could be viewed as a further mutual dividend and strong evidence of our commitment and track record in doing all that we can to protect saving rates in these market conditions.
A vital component of our membership are those savers that use our branches. Despite our balance sheet overall undertaking a controlled contraction in 2019, we have seen the number of members and saving balances in our branches continuing to grow, with membership in branches up 2% in the year. We also continue to see an increasing number of members utilising our unique Member Rewards Scheme, which has been designed to reward members for planning for their financial future, in the form of a range of discounts and cashbacks. In 2019, members enjoyed rewards benefits of £0.6m.
Whilst continuing to grow our branch based membership and aiming to serve them brilliantly, we have been consistent in stressing the importance of building a strong digital capability, to ensure that we can serve the increasing number of existing and potential members who expect to deal with us not just digitally but mobile-led. 2019 has been a year of significant progress for us on this front, as we have implemented the Salesforce platform across all our online/digital member activity and in the process delivered significant benefits in terms of access, convenience and ease to our members.
Following the successful launch of Beehive Money in December 2018, we launched our member portal offering Lifetime ISAs (LISA) online for the first time in April. We now have the ability to open a LISA fully authenticated and ready to fund in under four minutes. Then in November, we launched our Mortgage Broker Portal, which has significantly improved our online mortgage decisioning and processing capability for the thousands of brokers that deal with us over the course of a year. These enhancements have resulted in us reducing the time for a broker to receive a decision in principle and apply for a mortgage with us from just over 2 ½ hours to under 20 minutes. As a consequence of these innovations we are seeing some encouraging results with mortgage flows increasing as we become easier to deal with and in one striking example we opened over 500 LISAs in less than an hour following the airing of a popular money advice programme.
These fundamental improvements in how we provide our service in a digital world, signal a strong beginning to the continuing digital transformation of the Society and one which we are committed to in the years ahead. We believe that not only will it make us more relevant to a broader and younger set of potential members, but also serve our need to deliver quick, easy access to our services at lower cost.
Another element of our proposition, which continues to develop well, is our whole-of-market mortgage advice service which is increasingly attractive to members (who can qualify for free advice) and fee paying non-members. We have continued to grow this part of our offering, with the number of mortgages completed in 2019, up 15% on 2018. This is particularly important when considered against the context of our own current reduced appetite for lending. Our approach ensures that we can always offer our members the best the mortgage market has to offer in all conditions, ensuring that we are always relevant.
Whatever we do to support our members to save, plan for and protect their financial futures, it is important that we do that well and deliver a level of service that we could expect to receive ourselves. I am delighted that we have continued to achieve this and to report that our Net Promoter Score remains at the high level of 77%; this continues to place us amongst the very best global service providers. My gratitude goes to our team members across the Society, who strive to look after and serve our members in a way that they would wish to be served every day.
Our performance
As we trailed last year, our objectives in 2019 were to undertake a planned contraction of the balance sheet, do all we could to protect savings rates and continue to invest strongly in our digital future. Inevitably this has led us to operating at a reduced level of profit in 2019.
The ability to do so, without compromising our financial strength, is one of the attributes of the mutual model, as the Board can look through short term turbulence and continue to focus on the medium and longer term.
I have already outlined our actions on accepting lower interest receivable; whilst boosting interest payable creating a £4.1m reduction in net interest income taking overall income down by 9% in the year, although we have protected our net interest margin well which was 1.17% in 2019, only 9 basis points down on last year.
In times such as this, it is very important that management ensure that the money we spend running the Society on a day to day basis is well controlled and proportionate to the income we derive. I am pleased therefore to report that in 2019, due to strong management action and the benefits of new digital delivery, we reduced our underlying administration expenses by just over 10% to £35.2m.
But as you might expect our costs related to investment in the Society increased; when combining depreciation, strategic and project costs we invested a total of £6.8m over the course of the year; 70% up on 2018.
Overall, this has led us to deliver an underlying profit before tax of £10.0m. Although down on 2018, this is a strong return in the low interest rate, low profitability market environment we are in. Financial strength and quality
As we approached the end of the year, we have reviewed how two of our core markets, mortgages and estate agency, have changed in the past couple of years and how we believe these changes will continue in the years ahead.
The Board has therefore elected to re-evaluate some of the assets we hold on our balance sheet and in doing so ensure that we are effectively positioning ourselves for the future. As we continue to increase the number of mortgage members we retain at the end of their product term, our change in accounting estimate and resulting write down of the mortgage EIR asset reflects our increasing conviction that no member should remain on our SVR for any meaningful period of time at the end of their product term. This prudent step also reflects our intention to begin to refine the way we charge for mortgages over the next two years or so, as we carry out work to develop the capability to individually price each member's mortgage, based on their own distinct characteristics.
We have benefitted overall as a Society from the expansion of building society services to branches facilitated by the acquisition of Harrison Murray, but the estate agency market has undertaken material structural changes over the past 2-3 years; in terms of the UK average annual transaction numbers, in the level of fees that agents are likely to be able to accrue from these transactions and in extra costs arising from new additional regulatory requirements. We have, therefore, deemed it prudent to write off the goodwill that sits on our balance sheet in relation to the historic acquisition of the estate agency.
Whilst both of these adjustments take us to an accounting loss for the year of £7.2m after tax, it is a strong affirmation of our financial strength, that despite these deductions totalling £16.3m, our core capital strength has improved over the period, with our CET 1 ratio increasing to 15.1%.
In addition to capital, the core components of the financial strength of a building society are liquidity and credit risk and I am pleased to report that our performance in each of these two areas remains very strong.
Our liquidity position, as always, is strong and our liquidity coverage ratio ended the year at 229% which is significantly ahead of what we are required to hold.
And finally our credit risk profile remains one of the strongest in our sector and across all the lending industry. We only had to make £0.4m of loan impairment provisions from a book totalling £3.2bn and only had 36 customers more than 3 months in arrears at the end of 2019.
People and culture
We would not have been able to achieve and deliver all that we have during the year without our great team of enthusiastic experts. In 2019 we have continued to ensure that our people strategy is focused on supporting our team members to deliver our vision in line with our values and create a positive open culture focused on serving our membership.
Our People and Development team have continued to work very hard on this and this was reflected in our annual Your Voice Matters team engagement survey where we saw over 25% of responses to questions improving by 5 points or more.
Engaging our teams and creating an open culture that creates psychological safety for all to speak up and express themselves is a vital component of a high performing organisation. In the latter part of the year we have been carrying out some work across the Society to help us achieve that aim.
As always, there remains a great deal to still achieve but we are committed to creating a positive contemporary workplace for all our people to thrive as they serve our members.
Supporting our communities
As one of our four key pillars, it remains as important as ever to support the communities we serve. Through our corporate responsibility programme, we commit to 'doing the right thing for our communities' by working with a wide range of charities and projects that seek to tackle homelessness and improve employability and financial awareness. In 2019, the programme reached a milestone as we surpassed £1m of contributions to local causes.
We have continued to support our charity partners, Young Enterprise - supporting schools across the East Midlands to deliver their company programme and Framework - an East Midlands based homeless charity through support of their Off the Streets campaign.
We are also proud to have worked with the National Literacy Trust where we have donated over 2,500 books as part of their Better World Books campaign to raise literacy levels across our heartland.
My particular favourite in 2019, was our partnership work with Nottingham City Council in delivering their StoryParks initiative. Inspired by the first Chairman of the Society, Samuel Fox, who established the first UK adult school in Nottingham, we were delighted to have our teams spending time in the summer across all the city's major parks working with park rangers on raising numeracy and literacy skills amongst the less privileged children who live in our inner city. The initiative saw us give over 7,000 children a real summer holiday treat and learning experience in our parks.
I remain overawed at the commitment and skill our team members continue to demonstrate in all the volunteering and fundraising they do for such deserving causes.
Outlook
As we head into 2020 and life outside of the EU, the themes and priorities we have developed over the past 12 months will continue and in some cases pick up pace.
The Society continues to operate in and adapt successfully to changing and challenging market conditions. Our results this year reflect these challenges, but also how we are ensuring that we take a long lens view of the development of our strategy, whilst not compromising our financial strength.
We believe that to be successful in the longer run, we will need to keep members at the heart of our core purpose which is to help and support them to save, plan for and protect their financial futures; adapt and develop new mobile-led, digital capabilities; and have the scale and financial efficiency to successfully grow membership in a market where a 0.80% to a 1% net interest margin is seen as the norm.
Our mutual status and ethos serve us well in times like these, enabling us to utilise and leverage the financial strength that we have built up over more than 150 years and to adapt to a newly emerging world whilst continuing to serve our members with a proposition which is relevant and delivers value to them. We firmly believe that we remain well placed to do this.
With the decisions we have taken during 2019, we believe we are doing all the right things to prepare the Society for a new world of financial services. As the nation grows older and the welfare state's role in individuals' lives reduces, the younger generation particularly are going to have to be more financially independent than their parents and grandparents. We are building a Society that will be able to meet these needs and serve a new generation of members as well as we serve our members today, but in a digital first world. This will no doubt require us to continue to evolve the Society, introducing innovations in savings and mortgages, without compromising our service ethos or our financial strength and continuing to support the communities in which we serve."
David Marlow Chief Executive
6 March 2020
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Consolidated income statement for the year ended 31 December 2019 | ||||||||
2019 | 2018 | |||||||
£m | £m | |||||||
Interest receivable and similar income | 84.0 | 85.4 | ||||||
Interest payable and similar charges | (37.9) | (35.2) | ||||||
Net interest income | 46.1 | 50.2 | ||||||
Fees and commissions receivable | 6.2 | 7.5 | ||||||
Fees and commissions payable | (1.1) | (1.4) | ||||||
Other income | 0.2 | - | ||||||
Net losses from derivative financial instruments | (0.6) | (0.7) | ||||||
Total net income | 50.8 | 55.6 | ||||||
Administrative expenses | (36.5) | (40.0) | ||||||
Depreciation and amortisation | (5.5) | (3.4) | ||||||
Pension finance cost | (0.1) | (0.3) | ||||||
Operating profit before impairment, fair value movement, change in accounting estimate and provisions | 8.7 | 11.9 | ||||||
Impairment (charge)/ release - loans and advances | (0.4) | 0.3 | ||||||
Impairment charge - goodwill | (4.0) | (0.5) | ||||||
Change in EIR accounting estimate | (12.3) | - | ||||||
Provisions release - FSCS levy and other | - | 0.1 | ||||||
(Loss)/profit before tax | (8.0) | 11.8 | ||||||
Tax credit/(expense) | 0.8 | (2.4) | ||||||
(Loss)/ profit after tax for the financial year | (7.2) | 9.4 | ||||||
Reconciliation of statutory (loss)/ profit before taxation | ||||||||
2019 | 2018 | |||||||
£m | £m | |||||||
Statutory (loss)/ profit before taxation | (8.0) | 11.8 | ||||||
Adjusted for: | ||||||||
Losses from derivative financial instruments | 0.6 | 0.7 | ||||||
Other income | (0.2) | - | ||||||
Strategic investment costs | 1.3 | 0.6 | ||||||
Impairment - goodwill | 4.0 | 0.5 | ||||||
Change in accounting estimate | 12.3 | - | ||||||
Underlying profit before taxation | 10.0 | 13.6 | ||||||
Consolidated statement of comprehensive income for the year ended 31 December 2019 | ||||||||
2019 | 2018 | |||||||
£m | £m | |||||||
(Loss)/profit for the financial year | (7.2) | 9.4 | ||||||
Items that will not be re-classified to the income statement | ||||||||
Remeasurements of defined benefit obligations | - | 0.4 | ||||||
Tax on items that will not be re-classified | - | (0.1) | ||||||
Items that may subsequently be re-classified to the income statement | ||||||||
FVOCI reserve | ||||||||
Valuation gains/(losses) taken to reserves | 0.7 | (1.2) | ||||||
Tax on items that may subsequently be re-classified | (0.1) | 0.2 | ||||||
Other comprehensive income/(expense) for the period net of income tax | 0.6 | (0.7) | ||||||
Total comprehensive (expense)/income for the year | (6.6) | 8.7 | ||||||
Consolidated statement of financial position as at 31 December 2019 | |||
2019 | 2018 | ||
£m | £m | ||
Assets | |||
Liquid assets | 615.1 | 506.9 | |
Derivative financial instruments | 2.0 | 8.2 | |
Loans and advances to customers | 3,161.4 | 3,502.9 | |
Fixed and other assets | 40.5 | 35.6 | |
Total assets | 3,819.0 | 4,053.6 | |
Liabilities | |||
Shares | 2,781.1 | 2,869.2 | |
Borrowings | 771.3 | 918.0 | |
Derivative financial instruments | 12.8 | 5.9 | |
Other liabilities | 12.9 | 12.6 | |
Subscribed capital | 24.7 | 25.1 | |
Total liabilities | 3,602.8 | 3,830.8 | |
Reserves | |||
General reserves | 216.6 | 223.8 | |
Fair value reserves | (0.4) | (1.0) | |
Total reserves attributable to members of the Society | 216.2 | 222.8 | |
Total reserves and liabilities | 3,819.0 | 4,053.6 |
Consolidated statement of changes in members' interests as at 31 December 2019 | General reserve | FVOCI reserve | Total | ||||
£m | £m | £m | |||||
Balance as at 1 January 2019 | 223.8 | (1.0) | 222.8 | ||||
Loss for the year | (7.2) | - | (7.2) | ||||
Other comprehensive income for the period (net of tax) | |||||||
Net gains from changes in fair value | - | 0.6 | 0.6 | ||||
Total comprehensive (expense)/ income for the period | (7.2) | 0.6 | (6.6) | ||||
Balance as at 31 December 2019 | 216.6 | (0.4) | 216.2 | ||||
Balance as at 1 January 2018 | 212.7 | - | 212.7 | ||||
Change on initial recognition of IFRS 9 | 1.4 | - | 1.4 | ||||
Profit for the year | 9.4 | - | 9.4 | ||||
Other comprehensive income for the period (net of tax) | |||||||
Net losses from changes in fair value | - | (1.0) | (1.0) | ||||
Remeasurement of defined benefit obligation | 0.3 | - | 0.3 | ||||
Total comprehensive income/(expense) for the period | 9.7 | (1.0) | 8.7 | ||||
Balance as at 31 December 2018 | 223.8 | (1.0) | 222.8 | ||||
Summary consolidated cash flow statement for the year ended 31 December 2019 | |||
2019 | 2018 | ||
£m | £m | ||
Cash flows from operating activities | 4.5 | 18.0 | |
Changes in operating assets and liabilities | 109.0 | 4.5 | |
Net cash generated by operating activities | 113.5 | 22.5 | |
Cash flows from investing activities | (104.0) | (114.8) | |
Cash flows from financing activities | (3.0) | (1.9) | |
Increase/(decrease) in cash and cash equivalents | 6.5 | (94.2) | |
Cash and cash equivalents at beginning of year | 266.1 | 360.3 | |
Cash and cash equivalents at end of year | 272.6 | 266.1 |
Summary ratios | |||
2019 | 2018 | ||
% | % | ||
Common Equity Tier 1 ratio | 15.1 | 14.7 | |
Liquid assets as a percentage of shares and borrowings | 17.32 | 13.38 | |
Group (loss)/ profit for the year as a percentage of mean total assets | (0.18) | 0.24 | |
Group management expenses as a percentage of mean total assets | 1.07 | 1.09 | |
Society management expenses as a percentage of mean total assets | 0.94 | 0.95 | |
Society interest margin as a percentage of mean assets | 1.17 | 1.26 | |
Notes · The financial information set out above, which was approved by the Board of Directors on 5 March 2020, does not constitute accounts within the meaning of the Building Societies Act 1986. · The financial information for the years ended 31 December 2019 and 31 December 2018 has been extracted from the Accounts for those years and on which the auditors have given an unqualified opinion. | |||