Interim Management Statement 30 June 2018

RNS Number : 4031X

Nationwide Building Society

10 August 2018

 

Nationwide Building Society

Interim Management Statement

Q1 2018/19

 

10 August 2018

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

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

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

Key highlights

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

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

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

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

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

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

Nationwide Building Society Chief Executive, Joe Garner, said:

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

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

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

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

1 © GfK 2018, Financial Research Survey (FRS), 12 months ending 30 June 2018 and 12 months ending 31 March 2018, proportion of extremely/very satisfied customers minus proportion of extremely/very/fairly dissatisfied customers summed across current account, mortgage and savings. High street peer group defined as providers with main current account market share >4% (Barclays, Halifax, HSBC, Lloyds Bank, NatWest, Santander and TSB).

2 Member deposits include current account credit balances.

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

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

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

Trading performance

	Quarter ended 30 June 2018		Quarter ended 30 June 2017
	£bn	%	£bn	%
Gross residential mortgage lending/market share	8.4	12.8	8.1	13.0
Net residential mortgage lending/market share	2.2	19.0	2.4	21.8
Member deposits balance movement2/market share	4.2	27.5	1.3	10.2
Number of new current accounts opened	186,900		202,000

	At 30 June 2018		At 5 April 2018 (adjusted) 6		At 4 April 2018 (reported)
	£bn	%	£bn	%	£bn	%
Residential lending balances7	179.3		177.1		177.2
Member deposit balances2 /market share	152.2	10.2	N/A	N/A	148.0	10.0
Market share of main standard and packaged current accounts8		8.0		N/A		7.9

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

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

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

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

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

7 Residential lending balances are stated net of impairment provisions.

8 Source: CACI (May 2018).

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

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

Financial performance

	Quarter ended 30 June 2018		Quarter ended 30 June 2017
	£m	%	£m	%
Underlying profit before tax	270		301
Statutory profit before tax	281		322
Statutory profit after tax	210		240
Net interest margin		1.28		1.35
Underlying cost income ratio		63.7		58.8
Statutory cost income ratio		62.8		57.4

	At 30 June 2018		At 5 April 2018 (adjusted)6		At 4 April 2018 (reported)
	£bn	%	£bn	%	£bn	%
Total assets	236.0		228.9		229.1
Loans and advances to customers	195.1		191.5		191.7
Common Equity Tier 1 (CET1) ratio11		31.3		30.4		30.5
UK leverage ratio12		4.9		4.9		4.9
CRR leverage ratio13		4.6		4.6		4.6
Liquidity coverage ratio		139.2		N/A		130.3
Wholesale funding ratio		28.2		N/A		28.2

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

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

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

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

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

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

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

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

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

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

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

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

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

Outlook                   

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

Additional information

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

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

For further information please contact:

Investor queries: Alex Wall, 0207 2616568 or 07917 093632, [e-mail]

Media contact:  Tanya Joseph, 020 72616503 or 07826 922102, [e-mail]

                           Sara Batchelor, 01793 657770 or 07785 344137, [e-mail]

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

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

Underlying profit

Profit before tax shown on a statutory and underlying basis is set out on page 3. Statutory profit before tax of £281 million has been adjusted to derive an underlying profit before tax of £270 million. The purpose of this measure is to reflect management's view of the Group's underlying performance and to assist with like for like comparisons of performance across periods. Underlying profit is not designed to measure sustainable levels of profitability.

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

Forward looking statements

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

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

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

 

Appendix 1 - Supplementary capital disclosures

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

Key Metrics (KM1 and IFRS 9 - FL)

	30 Jun 2018	4 Apr 2018	31 Dec 2018	30 Sep 2017	30 Jun 2017
	£m	£m	£m	£m	£m
Available Capital
Common Equity Tier 1 (CET1)	10,154	9,925	9,907	9,758	8,769
Common Equity Tier 1 if IFRS 9 transitional arrangements not applied	10,095
Tier 1	11,146	10,917	10,899	10,750	9,761
Tier 1 if IFRS 9 transitional arrangements not applied	11,087
Total capital	14,263	13,936	15,124	14,104	12,308
Total capital if IFRS 9 transitional arrangements not applied	14,243
Risk-weighted assets
Total risk- weighted assets	32,430	32,509	32,492	32,999	33,197
Total risk- weighted assets if IFRS 9 transitional arrangements not applied	32,465
Risk-based capital ratios as a percentage of RWA
Common Equity Tier (CET1) ratio (%)	31.3	30.5	30.5	29.6	26.4
CET1 if IFRS 9 transitional arrangements had not been applied (%)	31.1
Tier 1 ratio (%)	34.4	33.6	33.5	32.6	29.4
Tier 1 ratio if IFRS 9 transitional arrangements not applied (%)	34.2
Total regulatory capital (%)	44.0	42.9	46.5	42.7	37.1
Total regulatory capital if IFRS 9 transitional arrangements not applied (%)	43.9
Additional CET1 buffer requirements as a percentage of RWA
Capital conservation buffer requirement (%)	1.9	1.9	1.3	1.3	1.3
Countercyclical buffer requirement (%)	0.5	0.0	0.0	0.0	0.0
D-SIB additional requirements (%)	0.0	0.0	0.0	0.0	0.0
Total of CET1 specific buffer requirements (%)	2.4	1.9	1.3	1.3	1.3
CET1 available after meeting minimum capital requirements, but before buffer requirements (%)	26.8	26.0	26.0	25.1	21.9
UK leverage ratio
UK leverage exposure measure	227,943	221,992	222,573	220,614	219,693
UK leverage exposure measure if IFRS 9 transitional arrangements not applied (%)	227,884
UK leverage ratio (%)	4.9	4.9	4.9	4.9	4.4
UK leverage ratio if IFRS 9 transitional arrangements not applied (%)	4.9
CRR leverage ratio
CRR leverage ratio exposure measure	244,652	236,468	242,398	236,002	236,675
CRR leverage ratio exposure measure if IFRS 9 transitional arrangements not applied (%)	244,594
CRR leverage ratio (%)	4.6	4.6	4.5	4.6	4.1
CRR leverage ratio (%) if IFRS 9 transitional arrangements not applied	4.5
Liquidity Coverage Ratio17
Total high quality liquid assets (HQLA)	27,229	27,145	27,152	27,991	29,601
Total net cash outflows	20,510	20,555	20,400	21,030	21,295
Liquidity coverage ratio (%)	133	132	133	133	139

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

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

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

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

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

Capital structure

	30 June 2018	4 April 2018
	£m	£m
Common Equity Tier 1 capital before regulatory adjustments	11,452	11,351
Total regulatory adjustments to Common Equity Tier 1	(1,298)	(1,426)
Common Equity Tier 1 capital	10,154	9,925
Additional Tier 1 capital before regulatory adjustments	992	992
Total regulatory adjustments to Additional Tier 1 capital	-	-
Additional Tier 1 capital	992	992
Total Tier 1 capital	11,146	10,917
Tier 2 capital before regulatory adjustments	3,117	3,019
Total regulatory adjustments to Tier 2 capital	-	-
Tier 2 capital	3,117	3,019
Total capital	14,263	13,936
Note: Capital metrics are on a CRD IV end-point basis, with the application of IFRS 9 transitional arrangements for 30 June 2018.

Overview of RWAs (EU OV1)

		RWAs		Minimum capital requirements18
		30 Jun 2018	4 Apr 2018	30 Jun 2018	4 Apr 2018
		£m	£m	£m	£m
1	Credit risk	25,467	25,875	2,037	2,070
2	Of which standardised approach	2,182	2,364	175	189
3	Of which the foundation IRB approach	5,643	5,843	451	468
4	Of which the advanced IRB approach	17,447	17,500	1,395	1,400
5	Of which Equity IRB under the simple risk-weight or the internal models approach	195	168	16	13
6	Counterparty credit risk	1,539	1,184	123	95
7	Of which marked to market	665	512	53	41
9	Of which standardised approach for counterparty credit risk	33	28	3	2
11	Of which risk exposure for contributions to the default fund of a CCP	6	9	0	1
12	Of which CVA	835	635	67	51
13	Settlement risk	-	-	-	-
14	Securitisation exposures in banking book (after cap)	270	290	22	23
15	Of which IRB ratings-based approach	270	290	22	23
19	Market risk19	-	-	-	-
23	Operational risk	4,901	4,901	392	392
25	Of which Standardised approach	4,901	4,901	392	392
27	Amounts below the thresholds for deduction (subject to 250% risk weight)	253	259	20	21
29	Total	32,430	32,509	2,594	2,601

RWA flow statements of credit risk exposures (EU CR8)

			IRB credit risk		Standardised credit risk		Counterparty credit risk
			RWA amounts	Capital requirements	RWA amounts	Capital requirements	RWA amounts	Capital requirements
			£m	£m	£m	£m	£m	£m
1	RWA as at 4 April 2018		23,511	1,881	2,364	189	1,184	95
2	Asset size		259	21	(179)	(14)	336	26
3	Asset quality		(485)	(39)	(3)	-	19	2
9	RWA as at 30 June 2018		23,285	1,863	2,182	175	1,539	123

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

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

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

 

END

 

 

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