Annual Report • Apr 4, 2016
Annual Report
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Because we're owned by our members, not shareholders.
Because we're a building society and our mutual values ensure we put our members first.
Because delivering value for our members is the reason why we exist.
| 2016 Society highlights | 5 |
|---|---|
| Chairman's statement | 7 |
| Chief Executive's review | 11 |
| Strategic review | 17 |
| Financial review | 27 |
| Risk overview | 37 |
| Our people | 39 |
| Citizenship report | 43 |
| The Nationwide Foundation | 53 |
| Board of directors | 57 |
|---|---|
| Group directors | 61 |
| Directors' report | 63 |
| Report of the directors on corporate governance | 69 |
| Report of the directors on remuneration | 93 |
| Annual business statement | 289 |
|---|---|
| Forward looking statements | 293 |
| Glossary | 294 |
| Index | 304 |
| 2016 Society highlights | 5 |
|---|---|
| Chairman's statement | 7 |
| Chief Executive's review | 11 |
| Strategic review | 17 |
| Financial review | 27 |
| Risk overview | 37 |
| Our people | 39 |
| Citizenship report | 43 |
| The Nationwide Foundation | 53 |
The Strategic Report on pages 3 to 54 has been approved by the board of directors and signed on its behalf by:
Chief Executive 23 May 2016
Our vision is to be the UK's first choice financial services provider. We are a modern mutual providing a full service, multi-channel offering to a growing number of members.
We are the UK's second largest mortgage and savings provider.
We believe that being a great employer and employing first class people offers us a genuine competitive advantage.
3rd in the Sunday Times' list of top Corporate Responsibility Index. 25 best big companies to work for, up from 6th last year.
We made the Times' list of the UK's 17 top 50 employers for women for the 4th year running.
We aim to be an exemplar organisation, being trusted always to do the right thing.
We are working closely with
98% and 4½ stars in the 2016 BITC
suppliers to identify opportunities to reduce carbon emissions, water usage and waste.
We developed a first-of-its-kind Specialist Support Service for customers affected by cancer.
To read more on our progress go to pages
A strong Society. Profit is important as it allows us to grow and invest in the Society for our members. Our Common Equity Tier 1 ratio and our leverage ratio are key measures of our financial strength. Our cost income ratio is a measure of our efficiency.
1 © GfK 2016, Financial Research Survey (FRS), 3 months ending 31 March 2016 vs 31 March 2015, 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 >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). 2 As at February 2016.
3 Main personal current account (PCA) customers and mortgage/savings customers with balances greater than £5,000. 4 Comparatives have been restated as described in note 1 to the financial statements.
23.2%
2016 19.8%
4.2%
2016 4.1%
This is my first annual statement as your Chairman. It has been a privilege and a pleasure to have led the Board during what has, once again, been a highly successful year.
The 'magic ingredient' that sets your Society apart from all other competitors in retail financial services is the commitment of our people to always do the right thing for our members. I am convinced this culture is a direct consequence of our history and heritage, and the resultant mutual business model.
From our earliest ancestry in Ramsbury, Wiltshire in 1846, when we were formed to offer ordinary people a safe place to save and the prospect of borrowing to buy a home, Nationwide (and its constituent societies) has always stood for doing what's right and delivering the very best service, and this continues to the present day. Indeed, every day I experience first-hand the overwhelming commitment within the Board, the management team and all colleagues across the Society to do the right thing for you, our members, and on your behalf I extend my deepest thanks to them all for their outstanding professionalism, dedication and care.
I joined Nationwide in 2014 after a 30 year career in retail and commercial banking, working both in the UK and around the world. Based on that experience, I would like to take the opportunity to offer some reflections about your Society and why I believe we are able to make a genuine difference in the provision of retail financial services in the United Kingdom:
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We run the Society to deliver outstanding service to all customers and members, and we seek to optimise, rather than maximise, profits. I am often asked why the Society makes a profit when it is run for the benefit of our members. Put simply, profits are the 'oxygen' that allows the Society to support future growth, to sustain a strong balance sheet and capital ratios in order to keep the Society safe and secure, and crucially to be able to invest to provide the consistent top quality service our members rightfully demand.
Nationwide is a business that our members and employees say 'feels different'. Our mutual heritage drives a shared sense of purpose to offer good, long term value products and exceptional service, recognising the complementarity of our members foremost as customers and secondly as owners. Your Board is constantly seeking to balance the needs of all members, particularly between savers and borrowers, and between delivering value in both the short term and over the longer term.
Our performance in the past year is reflective of this approach. In the last twelve months, Nationwide has successfully grown its membership through strong mortgage lending, an increase in savings balances and a continued expansion of our current account market share, all reflecting our strategic focus on being a modern mutual. I am pleased to report we have delivered a set of results which are the product of this consistent strategy, achieving underlying profits in excess of £1.3 billion and continuing to demonstrate strong levels of capital. We are, and will remain, a safe and trusted home for our members' money at all times, and we have the 'financial firepower' to continue to support our members and invest in our future service.
Technology and consumer demand for digital services continue to evolve rapidly, and it is vital that we allow members to transact with us in their preferred manner. As we seek to offer more products to more people, we will not forget that exceptional member service is critical across all points of access.
Importantly, this includes a firm commitment to our branches, as we know that these are valued by many of you and offer a level of service that we believe differentiates us from our peers. We are investing in improving our branch network to maintain a compelling experience, offering members an increasing range of options from self-service to full face to face support, including our leading video technology - Nationwide Now which allows members to access a team of expert advisers at a central location. This provides us with greater capacity to offer you the service you seek at a time and location to suit you.
As a modern mutual, I believe it is important we continue to invest in order to meet members' current and future needs. This is a challenge in a highly competitive market, and does not mean that we will always be top of the best buy tables. However, we will always offer good value over the medium term, and whatever we do we will be open, honest and transparent. I recognise that the ongoing low interest rate environment is particularly challenging for our savers, and the current economic uncertainty suggests that market rates are likely to remain low for some time yet. We take our responsibility to our savings members very seriously and will continue to monitor conditions in the savings and mortgage markets to ensure we are offering sustainable rates. In line with other providers, we have to balance the amount of savings we attract and the loans we make; failure to do so would leave us with excess funds, which would have an adverse impact on our long term ability to invest in the business.
Investing in the Society to provide new or enhanced products and services comes at a cost, most notably in personal current accounts, where we have yet to reach our strategic target of a 10% market share. Your Board believes this is the right thing to do, especially at a time when digital innovation and other initiatives are having a major impact on consumer behaviour and high expectations of service and digital access.
Of course, the products and services your Society offers would be nothing without great employees. Our people embody our culture and are ambassadors for our mutual approach. Our strong principles are expressed across Nationwide through our PRIDE behaviours: Putting members first; Rewarding membership; Inspiring trust; Doing the right thing; Excelling at service. We are proving that it is possible to operate successfully as a modern mutual by adopting a culture consistent with our status and heritage, but which is aligned with an increasingly digital world, and are delighted to have been named as the third best big company to work for by the Sunday Times and as a Times Top 50 employer for women.
As the Chairman of your Society, it is very important that I am able to gain direct feedback on how Nationwide is performing, what members think could improve and how we might help them more effectively in the future.
We are constantly looking for ways to make it easier for members to talk to us through a range of media, and to listen and respond to suggestions and comments. We run a wide range of events and activities over the course of the year, full details of which can be found in the Report of the directors on corporate governance, but amongst the highlights are:
All directors are engaged in listening directly to the views of members through attendance at Member TalkBack events and similar activities, and your Board receives regular reports on the views and inputs of members. We place real value on the feedback we receive and a number of enhancements to our products and services can be traced directly to ideas generated by our members.
Effective and proportionate regulation is critical to ensuring the long term sustainability of the financial services sector, and as an exemplar organisation we are committed to operating to both the letter and spirit of regulation and legislation.
Nationwide has been a long term provider of finance to the buy to let market, and we have noted with interest recent actions and proposals of both regulators and government which are designed to control growth in the sector and ensure that it does not pose a threat to market stability. The precise impacts of the measures on the broader market will become apparent over time, and we will adjust our approach accordingly.
We were pleased to work with the Banking Standards Board as it carried out its initial assessment of the culture and standards of behaviour and competence in leading firms across the retail banking industry. Exercises such as this force organisations to take a long, hard look at how they are operating and challenge themselves as to whether they are acting in the best interests of their customers. Whilst there will always be room for improvement, we were very pleased that the final report noted Nationwide's strong and stable culture and the consistency and stability of our stated values.
In addition to providing financial services to members, we have a role to play in positively impacting the communities in which we operate, full details of which can be found in our Citizenship report. We aim to be recognised as one of the UK's leading corporate citizens and over the past year we have continued to engage in a range of initiatives to add value both at a local and national level.
To read more about our citizenship strategy go to pages 52 43 This encompasses a wide range of activities, including our longstanding commitment to employee volunteering, whereby all employees are provided with two paid volunteering days per annum, and the start of our plan to plant a series of woodlands to provide local amenities that can be enjoyed by the public for generations to come.
The retail financial services marketplace is changing rapidly, and it is my responsibility to ensure the composition of the Board has the correct mix of skills, experiences and diverse thinking to steer the Society through the challenges ahead.
We are delighted to welcome three new independent non executive directors to the Board. Mai Fyfield and Tim Tookey joined us in June 2015. Kevin Parry was appointed to the Board on 23 May 2016 and will become Chairman of the Audit Committee upon the retirement of Roger Perkin at the conclusion of this year's AGM. Roger has provided his fellow directors with much wise counsel and Nationwide owes him a debt of gratitude for his significant contribution over the last six years.
This year also saw the retirement of our longstanding Chief Executive, Graham Beale. Graham worked for Nationwide for over 30 years and was appointed CEO in 2007, just before the financial crisis hit. He played a critical role in ensuring that your Society not only survived the financial crisis unscathed, but also took the courageous decision to invest for the future at a time when the easier decision would have been simply to hunker down and wait for the storm to abate. He has left the business in great shape, prospering as a modern mutual, ready to take on new opportunities as the market for financial services evolves. On behalf of all at Nationwide, I would like to thank him for his immense contribution to the Society, and wish him well for the future.
Your Board spent considerable time identifying a suitable successor to Graham. We set out first and foremost to find someone who embodied Nationwide's values and who was deeply committed to the mutual business model. In addition, we were looking for someone who had the skills and experience to lead the Society in the years to come as the market evolves and as the widespread adoption of digital technology changes the way members and customers wish to interact with the Society. I am delighted Joe Garner has been appointed as our new Chief Executive. Joe brings a breadth of experience gained from his wide-ranging career working for a number of large organisations, most particularly from his time as Head of HSBC UK. Your Board is convinced he is the right person to take Nationwide forward into new opportunities and looks forward to working closely with him. Further details on Joe and his background can be found in the Governance section of this report.
We are committed to ensuring that our Board, management and broader workforce reflects the communities in which we operate, and we value diversity across the Society. With our recent appointments, women make up 27% of our Board and 33% of our Executive Committee. But we recognise that there is still much to do, and have a strategy to focus activity on equality, diversity and inclusion, setting ourselves challenging aims in our priority areas of ethnicity, gender and disability across the whole Society.
We are in a new era in UK financial services, an era which is increasingly defined by a move to digital technology but one in which the personal touch will continue to be of critical importance. I am delighted to be your Chairman at this exciting time, and am confident that Nationwide is ideally placed to take advantage of the opportunities on offer to provide ever-better services and products to you, our members.
I am privileged to have been chosen to take over as Chief Executive of Nationwide Building Society. Nationwide is an exceptional organisation, one which has consistently demonstrated that it is possible to be successful by doing the right thing.
This success is manifested in the latest set of results, which show strong mortgage lending, strong savings inflows and over half a million new current accounts opened. These figures are the result of a consistent and sustained focus on the needs of our members and customers, through the provision of excellent service, great products and continued investment in the fabric which underpins the Society.
Our underlying profit of £1,337 million is the culmination of our performance over the past twelve months and the member relationships that we have formed over previous years. We stood by our members' borrowing needs through the difficult financial crisis and over the four year period to March 2016 accounted for 36% of net mortgage lending in the UK. Our capital ratios
have further improved, are comfortably ahead of current requirements and broadly in line with our best understanding of the medium term regulatory requirements. This enables us to be secure and to invest in the future for the benefit of members today and tomorrow.
As the new Chief Executive my job will be to build on this success. As the results show, Nationwide is not in need of radical reform, but it is an organisation that should constantly challenge itself on ways it can improve and offer an enhanced level of service to its members.
Our heritage is in providing support to the UK housing market, and 2015/16 was no exception. Over the year our gross mortgage advances reached £32.6 billion, while net lending amounted to £9.1 billion. These represent market shares of 13.7% and 21.4% respectively, strengthening our position as the UK's second largest mortgage lender. As ever, we have recognised the importance of helping people take their initial steps onto the housing ladder, and over the year we provided finance for 57,200 first time buyer mortgages, one in six of all such mortgages in the UK.
Our mutual commitment to providing consistently good value to all members has been delivered through competitive products and propositions, with no fees for standard valuations on all of our mortgage products, and we continue to provide our best rates exclusively to our existing mortgage members.
We have played a major role in supporting borrowers in the buy to let market, in which we have maintained our position as the second largest lender. As the pattern of tenure in the UK continues to evolve, we believe it is right that we should offer good value, low risk loans to investors who are able to demonstrate their commitment to the rental market. We recognise that buy to let has come under regulatory and political scrutiny in recent times, including significant changes to the tax regime governing mortgage interest tax relief which come into effect from 2017. We pride ourselves on being a responsible lender, and since the year end we have taken a lead by increasing rental cover requirements to ensure loans are affordable, and by reducing the maximum loan to value for new buy to let loans.
Our strategy of offering a range of long term good value products has resulted in us growing our member deposit balances by £6.3 billion. This is despite significant competition at the start of the year from NS&I, offering rates well above those generally available in the market.
In our drive for transparency and ease of access, we have further simplified our savings range and made it easier for members to select the best product for their needs. The vast majority of main savings products can now be opened online as well as in branch, and members can receive email and SMS updates on the status of their savings application.
In addition, around ten million members received their annual statement as part of Nationwide's Savings Promises, providing details of all their savings accounts, their current interest rates and the Society's top variable rates. During the year over 760,000 members subscribed to our free SavingsWatch service, which automatically informs them whenever the interest rate on their account changes or Nationwide launches a new savings account.
We understand that low market interest rates continue to pose challenges for savers and, in response, have offered a number of products aimed at rewarding our loyal and committed members:
I am very pleased that we have opened 525,000 new current accounts in the last twelve months, up 12% on the previous year. This has taken our market share of main standard and packaged current accounts as at February to 7.1%; our strategic aim is to expand this to 10% to provide an effective balance with our established positions in the mortgage and savings markets.
As testament to the quality of our current account range we have been a net beneficiary of customers seeking to switch their account in each and every month since the introduction of the Current Account Switch Service in September 2013. During the past year over 129,000 customers have switched their accounts to us through this service, up 38% on the previous year and representing a market share of switchers of 12.5%.
We have opened 525,000 new current accounts in the last twelve months
Our current accounts are complemented by our high quality, good value credit card and personal loan propositions. We issued 186,000 new cards (2015: 196,000), with the attraction of new customers being impacted by the long term balance transfer products which are dominating the market. We continue to reward our main current account customers with the Select Credit Card cashback, which benefited customers to a total of over £15 million in cash reward payments, and also provides them with fee-free overseas transactions. Our strategy is to meet the unsecured borrowing needs of our existing members, and over the year we have lent £1.2 billion (2015: £0.9 billion) of personal loans.
Over 129,000 customers have switched their accounts to us
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I am delighted that we continue to be ranked number one for customer satisfaction amongst our high street peer group and our lead over our nearest competitor has increased to 7.7% for the quarter ending March 2016 (2015: 4.5%)1 . Over a longer twelve month period we remain ranked number one with a 6.6% lead2 .
Our service satisfaction lead is a measure of our performance over the last three months compared to the performance of our next nearest competitor, in our high street peer group. As a result, our lead can be volatile as it is dependent on the performance of our competitors.
Despite our size, we account for only 2% of total industry complaints, and we make every attempt to resolve these to members' satisfaction. When cases do get referred to the Financial Ombudsman Service, 82% of our decisions are upheld, compared with the industry average of 47%.
1 © GfK 2016, Financial Research Survey (FRS), 3 months ending 31 March 2016 vs 31 March 2015, 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 >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). 2 © GfK 2016, Financial Research Survey (FRS), 12 months ending 31 March 2016, 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 >6% (Barclays, Halifax, HSBC, Lloyds Bank (inc C&G), NatWest and Santander).
As a mutual we aim to optimise, rather than maximise, profit, retaining sufficient earnings to support future growth, sustain strong capital ratios and to allow us to invest in the business to provide the services that our members demand. This will help us to deliver a long term, sustainable business that operates in the interests of our members.
Buoyant volumes and an improved net interest margin have contributed to a 5% increase in total underlying income to £3,333 million (2015:£3,163 million). Our underlying profit for the year was £1,337 million (2015: £1,227 million), an increase of 9%, and statutory profit before tax was £1,279 million (2015: £1,044 million), an increase of 23%. Underlying costs have increased by £170 million to £1,796 million, reflecting the growth of our business, our focus on risk and control and continued investment in new and enhanced products and services. This has resulted in our underlying cost income ratio deteriorating slightly to 53.9% (2015: 51.4%).
Our strong financial performance has resulted in our CET1 ratio increasing to 23.2% (2015: 19.8%). The primary driver of the amount of capital we hold is our leverage ratio, which over the year has improved to 4.2% (2015: 4.1%).
Guidance issued by the regulators during the financial year has given us greater certainty of the expected maximum capital requirements for the Society. This has allowed us to develop a financial framework to assess future performance and maintain our financial strength.
The framework is based on the fundamental principle of maintaining our capital in excess of regulatory leverage ratio requirements. Based on our current assumptions, a level of underlying Group profit of approximately £1 billion to £1.5 billion per annum over the medium term would optimise our ability to invest to support members' needs while maintaining our financial strength.
Our delivery of great service, great products and great results flows from employing talented and dedicated people and allowing them to make the most of their diverse range of talents. Being a great employer provides a genuine competitive advantage. We pay particular attention to providing a supportive and encouraging working environment, and our success is reflected in our annual employee survey, which continues to show exceptionally high levels of employee engagement and enablement.
We have continued to support the communities in which we operate through a broad range of initiatives. The most notable development during the year has been our investment to extend our existing Specialist Support Service for customers affected by cancer; going forward, this will be available for customers facing other life-limiting or long term physical conditions, such as heart disease, stroke and multiple sclerosis. We will phase the roll-out to allow us to gather feedback and refine the service as it is deployed to meet a range of different circumstances. To read more
about our objectives and how we measure success see pages 23
Our financial performance in the period ahead is likely to be influenced by a number of themes in line with the guidance we provided at our half year results:
The continual evolution of technology, changing customer preferences and regulatory change will affect the whole industry, and we will continue to invest to ensure we are able to deliver value to our members and maintain excellent relationships with regulators. The threat of cyber-attacks has increased, and will require ongoing focus and investment as we seek constantly to maintain the resilience of our systems and protect the interests of our members.
Uncertainty surrounding the EU referendum and the global economic outlook are likely to have some impact on UK economic activity in the near term. Our central expectation is that if this uncertainty lifts and the global economy gradually strengthens, UK economic growth will move back towards its long term trend rate of 2% to 2.5% per annum. The household sector is expected to remain a main driving force, underpinned by continued healthy gains in employment and rising real earnings. We expect the housing market to remain resilient, with any dampening of activity from modest increases in interest rates offset by a strengthening labour market and an under-supply of housing.
Nationwide is a unique organisation with a proud history and an optimistic future. We have the potential to build an even stronger Society serving the needs of today's and tomorrow's members, by championing the right thing to do and continuing to deliver tangible service excellence and long term value. We are committed to serving members and the wider society.
We have been looking after the interests of our members since the 19th century. Although the world has changed radically in the intervening years, our core social purpose remains the same: to help improve the quality of life for our members, to use the power of the collective to help benefit each individual and o be innovative in how we do it.
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1
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Nationwide was originally founded around a simple idea, the power of the collective: by giving members a secure place to grow their savings, we were able to offer mortgages to allow people to buy their own homes.
We are now the world's largest building society, with relationships with one in four households in the UK, and we are still owned by our members, not shareholders.
Our aim is to help our members, at every stage of their lives. We can provide a secure home for members' savings, offer them a range of current accounts, help them to buy their first home and work with them o plan for their retirement.
Our low risk business model is focused mainly on the provision of retail financial se vices, almost exclusively in the UK and as a building society we are barred from any speculative trading. Reflecting our heritage and the legislation that governs our business, our balance sheet comprises primarily residential mortgages funded through retail deposits and, to a lesser extent, wholesale funding.
In our traditional products, mortgages and savings, we are the second largest provider in the UK, with over 12% of total residential mortgage balances and over 10% of total retail deposit balances.
We have recognised that as a modern mutual we need to diversify our business model by offering a range of current accounts to new and existing members, thereby enabling us to build deeper, long term member relationships. We began offering current accounts in 1987; our market share now stands at over 7% and our strategic aim is to expand this to 10%.
We also offer competitive personal loans, credit cards, general insurance, protection products and financial planning se vices. We undertake a limited range of other activities, including property based commercial lending and deposit-taking for small and medium sized enterprises (SMEs).
We retain only sufficient earnings o ensure the financial afety and security of our business. The remainder is reinvested into the Society to maintain our capital ratios, provide consistently good value products and deliver industry leading service for our members. For this reason we invest heavily in our culture and our people, who are committed to ensuring we deliver the best possible customer outcomes.
Our approach to providing financial services is straightforward – we offer a broad range of competitive mortgages, savings, current accounts and other financial products, delivering consistently excellent service to our members, who are also our owners.
As a mutual we aim to optimise, rather than maximise, profit, retaining sufficient earnings to support future growth, sustain a strong capital position and allow us to invest in the business to provide the products and services that our members demand. This helps us to deliver a long term, sustainable business that operates in the interests of our members.
Recent guidance from regulators has given us greater certainty of the expected maximum capital requirement for the Group. This has allowed us to develop a framework based on the fundamental principle of maintaining our capital at a prudent level in excess of regulatory leverage ratio requirements. The framework provides parameters which will allow us to calibrate future performance and help ensure we achieve the right balance between distributing value to members, investing in the business and maintaining our financial strength.
Based on current assumptions, we believe that a level of underlying Group profit of approximately £1 billion to £1.5 billion per annum over the medium term, would optimise our ability to invest and support members' needs while maintaining financial strength.
We may see our profitability move outside the range in any one individual year, either through external factors, a conscious decision to return value or to make investment into the business. One of the benefits of being a strong, safe and secure modern mutual is that we are able to take long term decisions which are in the best interests of current and future members. Should performance move outside the range, management will consider what future actions, if any, to take in order to bring financial performance back within the range.
We have followed a consistent strategy for many years. As a result, we have been able to focus our business on one central aim: to deliver outstanding service and long term value to our current and future members. We expect this continued focus to result in the achievement of our vision of being the UK's first choice financial services provider. Our strategic priorities remain in line with those set out in last year's Annual Report and Accounts.
The Group's strategic priorities are set out under four themes:
What we measure
and why Performance Strategic target Commentary
| Market leading satisfaction | |||
|---|---|---|---|
| Delivering leading levels of customer satisfaction is a key point of differentiation to our peers. We measure this through GfK FRS Customer Service Satisfaction scores relative to our high street peer group. |
1.8% 2012 2.3% 2013 4.2% 2014 4.5% 2015 7.7% 2016 |
1st + 6% | We ended the year with our lead over our nearest high street peer group competitor standing at 7.7%, compared with 4.5% at the same time last year¹. |
| Grow the membership |
| Growing our base of members with whom we have a main |
||||
|---|---|---|---|---|
| product relationship2 allows |
2012 | 6.7m | Main product relationships | |
| us to spread the benefits of | 2013 | 6.7m | grew by 300,000 during | |
| mutuality to a wider proportion | 2014 | 6.9m | 9 million main product | the year to 7.4 million, largely |
| of the UK population. | 2015 | 7.1m | relationships by 2021 | driven by growth in current |
| 2 Defined as main personal current account customers and mortgages/savings customers with a balance greater than £5,000 |
2016 | 7.4m | account customers. |
© GfK 2016, Financial Research Survey (FRS), 3 months ending 31 March 2016 vs 31 March 2015, 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 >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).
Performance Strategic target Commentary What we measure and why
| Next generation banking | |||
|---|---|---|---|
| We offer a number of options to access our services, ranging from the traditional face to face transactions in branches to a mobile app. We use the number of members transacting online or via mobile to measure our performance in meeting evolving member needs. |
1.7m 2012 1.9m 2013 2.1m 2014 2.3m 2015 2.6m 2016 |
80% growth over the next five years (4.7 million by 2021)3 3 Source: eBenchmarkers digitally active current customers |
We currently have 2.6 million members transacting online or using our mobile app, in line with our annual target. |
What we measure
and why Performance Strategic target Commentary
Having highly engaged and enabled employees will be a key source of competitive advantage as we strive to maintain industry leading levels of customer satisfaction and to grow our business. Our performance is measured through our annual employee survey.
Our commitment to being a leading corporate citizen is consistent with our mutual heritage and our drive to make a difference in people's lives. Our chosen measure is the Business in the Community (BITC) Corporate Responsibility Index.
5* BITC accreditation
During the year we received a 98% and 4½* BITC rating. This is below our 2015 5* rating and reflects the generally tougher criteria applied by BITC in 2016.
What we measure and why Performance Strategic target* Commentary Leverage ratio6 : 4.5% Financially robust Strong Society Running a robust business which delivers optimal levels of profitability will provide our members with confidence and allow us to invest in services and good value products for our members. 2015 2014 2013 2012 2016 £279m Underlying profit: £1 billion to £1.5 billion per annum Underlying profit for the year over £1.3 billion. Financially sustainable £433m £1,227m £952m £1,337m We aim to run the Society's business efficiently, managing our costs prudently and ensuring that our income is derived in a manner that supports our business and adds demonstrable value to our members. 2015 2014 2013 2012 2016 61.8% Medium term underlying cost income ratio: ˛55% Our cost income ratio ended the year at 53.9%. Efficient business 52.0% 55.9% More efficient 51.4% 53.9%
Strong capital ratios are the ultimate demonstration of our core strength, providing confidence to our members that they can trust us to safeguard their finances. 2015 2014 2013 2016 2.2% 3.4% 4.1% 4.2% 6 The 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.
*Our strategic targets are reviewed annually as part of our strategic planning process and these targets have been amended.
Our leverage ratio ended the year at 4.2%, below our strategic target but in line with anticipated regulatory requirements.
Our 2015/16 financial performance has been strong with statutory profit before tax up 23% year on year, reflecting a 7% increase in net interest income, underpinned by our strong operating performance, and an improvement in asset quality with impairments falling 71%.
The underlying cost income ratio has deteriorated to 53.9% (2015: 51.4%) reflecting our investment in new products and services such as Nationwide Now and Apple Pay functionality, our ongoing investment in improving and strengthening our IT infrastructure, increasing sales and service capacity and our response to new regulation.
Total assets have grown by £13 billion to £209 billion at 4 April 2016. This increase is largely attributable to £9.3 billion growth in residential mortgage lending, reinforcing our position as second largest mortgage lender in the UK. The remaining growth is driven by an increase in high quality liquid assets, with the Liquidity Coverage Ratio (LCR) increasing to 142.6% (2015: 119.3%).
Our capital strength has improved during the year through retained earnings and a continued improvement in asset quality. As a result our CET1 and leverage ratios have reached 23.2% and 4.2% respectively (2015: 19.8% and 4.1% respectively), well in excess of current regulatory requirements. We also believe we are well placed to meet foreseeable regulatory capital requirements.
We anticipate that profits are likely to moderate in the period ahead as competition maintains pressure on margins and we focus on delivering value to members, including investment in service enhancements, whilst maintaining our capital strength.
Our Financial Statements can be found on pages
| Year to 4 April 2016 |
Year to 4 April 2015* |
||
|---|---|---|---|
| £m | £m | ||
| Net interest income | 3,086 | 2,872 | |
| Net other income | 247 | 291 | |
| Total underlying income | 3,333 | 3,163 | |
| Underlying administrative expenses | (1,796) | (1,626) | |
| Impairment losses | (73) | (251) | |
| Underlying provisions for liabilities and charges | (127) | (59) | |
| Underlying profit before tax | 1,337 | 1,227 | |
| Bank levy (note i) | (41) | (28) | |
| Transformation costs (note i) | (10) | (52) | |
| FSCS (note ii) | (46) | (83) | |
| Gains/(losses) from derivatives and hedge accounting (note iii) |
39 | (20) | |
| Statutory profit before tax | 1,279 | 1,044 | |
| Taxation | (294) | (205) | |
| Profit after tax | 985 | 839 | |
£1,279m profit before tax
*Comparatives have been restated for the reclassification of foreign currency retranslation amounts from net interest income to gains/losses from derivatives and hedge accounting as described in note 1 to the financial statements.
Notes:
i. Within the statutory results presented in the financial statements, bank levy and transformation costs are included within administrative expenses.
ii. Within the statutory results presented in the financial statements, FSCS costs are included within provisions for liabilities and charges.
iii. Within the statutory results presented in the financial statements, gains/losses from derivatives and hedge accounting are presented separately within total income.
Underlying profit represents management's view of underlying performance and is presented to aid comparability across reporting periods.
Underlying profit growth of 9% year on year is largely attributable to our operating performance driving higher net interest income, combined with significantly lower impairment losses. This is partially offset by a reduction in net other income and an increase in administration costs.
| Year to 4 April 2016 |
Year to 4 April 2015* |
|
|---|---|---|
| £m | £m | |
| Net interest income | 3,086 | 2,872 |
| Net other income | 247 | 291 |
| Total underlying income | 3,333 | 3,163 |
| Gains/(losses) from derivatives and hedge accounting | 39 | (20) |
| Total statutory income | 3,372 | 3,143 |
| Weighted average total assets | 203,623 | 195,429 |
| Net interest margin (NIM) % | 1.52 | 1.47 |
Statutory and underlying income
* Comparatives have been restated for the reclassification of foreign currency retranslation amounts from net interest income to gains/losses from derivatives and hedge accounting as described in note 1 to the financial statements.
Net interest income has increased 7% to £3,086 million (2015: £2,872 million) due to a 4% growth in average assets, reflecting a 21.4% market share of net residential mortgage lending in the year, and a 5 bps improvement in NIM to 152 bps.
Interest income during the year reflects our consistent support for the housing market over recent years, providing mortgages to customers over a period when a number of our competitors constrained their lending. In the four years to 4 April 2016, the Group accounted for over one third of net lending in the market.
Savings rates have continued to fall across the industry and this reduction in retail funding costs has underpinned our margin performance. We estimate that our average margin on savings balances measured against relevant market indices (swaps or Bank base rate) was circa 50 bps over the year in comparison to circa 70 bps during the year to 4 April 2015. Notwithstanding this, our savings range has been very competitively positioned throughout the year with savings rates often better than, and sometimes significantly so, equivalent products offered by our high street peer group.
The benefit to NIM of lower retail funding costs has been partly offset by a decrease in mortgage margins. Over the last year there has been increased competition in both the prime and buy to let mortgage markets, resulting in new business gross margins falling by an average of 24 bps during 2015/16. In addition, our Base Mortgage Rate (BMR) balances continue to run off, reducing by £8 billion to £35 billion at 4 April 2016. This attrition reflects the highly competitive new business rates available across the market which have increased switching and redemption behaviours of customers, a trend which is likely to continue into 2016/17.
Whilst our average NIM has increased year on year by 5 bps, the quarterly picture for the 2015/16 financial year shows a downward trend, caused by the repricing of assets described above. Our spot margin at the end of the financial year was 10 bps lower than the rate of 152 bps reported for the year as a whole. Whilst we expect the impact to moderate, we nevertheless anticipate further margin compression throughout 2016/17 as competition is sustained and we focus on delivering long term value to members.
The macroeconomic environment could pose further risks to NIM, in particular sustained low interest rates and deterioration in the global economy, which could lead to a downturn in the UK economy, and could have an impact on the cost of wholesale funding.
Net other income has reduced by 15% to £247 million (2015: £291 million). We have chosen to improve our current account and credit card propositions during the period by removing unauthorised overdraft fees and removing fees on our credit card associated with spending above authorised credit limits. Interchange income associated with current account and credit card transactions has also reduced following the introduction of regulatory caps. As a result, despite increasing the number of active current accounts and credit cards, fee income has reduced on these products. Reduction in our general insurance income is largely due to lower profit share following a higher level of claims due to adverse weather conditions.
Although the Group only uses derivatives to hedge risks, income statement volatility can still arise due to hedge accounting ineffectiveness or because hedge accounting is not achievable. This volatility is largely attributable to accounting rules which do not fully reflect the economic reality of the Group's hedging strategy. Details of fair value gains and losses relating to derivatives and hedge accounting are provided in note 6 of the financial statements.
29
| Administrative expenses | ||
|---|---|---|
| Year to 4 April 2016 |
Year to 4 April 2015* |
|
| £m | £m | |
| Employee costs | 736 | 671 |
| Other administrative expenses | 735 | 661 |
| Depreciation and amortisation | 325 | 294 |
| Total underlying administrative expenses | 1,796 | 1,626 |
| Bank levy | 41 | 28 |
| Transformation costs | 10 | 52 |
| Total statutory administrative expenses | 1,847 | 1,706 |
| % | % | |
| Cost income ratio – underlying basis* | 53.9 | 51.4 |
| Cost income ratio – statutory basis | 54.8 | 54.3 |
53.9% underlying cost income ratio
* Comparatives have been restated for the reclassification of foreign currency retranslation amounts from net interest income to gains/losses from derivatives and hedge accounting as described in note 1 to the financial statements.
Total underlying administrative expenses have increased by £170 million to £1,796 million, driven by continued investment in the business. At a statutory level administrative expenses have increased by £141 million to £1,847 million.
Employee costs have increased by £65 million to £736 million reflecting the impact of annual pay awards averaging 3.0% and 2.5% in each of the last two years and higher costs resulting from enhancements to the Nationwide Group Personal Pension Plan. In addition, employee numbers have increased by 3% year on year as the Group continues to build greater capacity to support our members' needs and strengthen risk and control functions.
Other administrative expenses have increased by £74 million to £735 million, driven by increased brand development costs and revenue costs associated with our ongoing commitment to a targeted programme of strategic investment. During the year, this investment has included enhancements in our digital capability, including Nationwide Now, Apple Pay functionality and PayM, IT resilience and investment in core product platforms to meet additional business volumes, and ensuring compliance with UK and European Union regulatory requirements. Depreciation charges have risen by £31 million to £325 million as a consequence of strategic investment in the business.
Transformation costs are significantly lower than the prior year as a result of the successful completion of the integration of the Dunfermline, Cheshire and Derbyshire brands which have resulted in ongoing savings of £20 million per annum.
Activities relating to changes in the Group's IT service delivery model have also completed which has enabled the Group to deliver increased investment in the business at a lower cost through the utilisation of strategic partner capabilities.
The cost income ratio, on an underlying basis, has deteriorated to 53.9% (2015: 51.4%) as a result of the growth in administrative expenses described above, which reflects our focus on improving product propositions and services for members whilst remaining strong, safe and secure.
| Impairments | ||
|---|---|---|
| Year to 4 April 2016 |
Year to 4 April 2015 |
|
| £m | £m | |
| Residential lending | 18 | 58 |
| Consumer banking | 96 | 89 |
| Retail lending | 114 | 147 |
| Commercial lending | (34) | 52 |
| Other lending | 1 | 34 |
| Impairment losses on loans and advances | 81 | 233 |
| Impairment (reversals)/losses on investment securities | (8) | 18 |
| Total | 73 | 251 |
Impairment losses for the year of £73 million are 71% lower than in the year ended 4 April 2015 primarily as a result of an improvement in asset quality and divestment of our commercial lending portfolio.
Residential lending impairment charges of £18 million (2015: £58 million) comprise a reduction in provision requirement of £9 million as a result of moderate house price growth combined with the continued reduction in our mortgage arrears to 0.45% (2015: 0.49%). This has been more than offset by increased provisions of £27 million due to refinements in our credit risk impairment assumptions to take account of the impacts of a prolonged period of low interest rates and the risks attaching to interest only mortgages.
Consumer banking impairments have increased by 8% to £96 million (2015: £89 million). Of this charge, £29 million reflects a reassessment of assumptions embedded within provisioning models across each of the consumer banking products to ensure that they remain appropriate in a low interest rate environment. Excluding these model changes, the underlying consumer banking impairment charge has reduced by 25%, predominantly a result of improving economic conditions combined with improved credit underwriting for personal loans.
Commercial lending impairments relate exclusively to commercial real estate (CRE) lending, with no arrears in our registered social landlords and Project Finance portfolios. The continued improvement in market conditions for CRE, as asset values improve and liquidity strengthens, has driven a high level of provision reversals and recoveries.
| Provisions for liabilities and charges | ||
|---|---|---|
| Year to 4 April 2016 |
Year to 4 April 2015 |
|
| £m | £m | |
| Underlying provisions for liabilities and charges – customer redress | 127 | 59 |
| FSCS levy | 46 | 83 |
| Total provisions for liabilities and charges | 173 | 142 |
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 £127 million charge in the period predominantly relates to updated estimates for provisions previously recognised, with £95 million of the increase relating to Payment Protection Insurance (PPI). Of the total charge a significant proportion relates to the cost of administering claims.
When assessing the adequacy of our PPI provision we have considered the implications of the proposals published by the Financial Conduct Authority (FCA) in its November 2015 consultation, including the expected impact of the Plevin case. The remainder of the charge for the year is in respect of claims relating to consumer credit legislation.
The FSCS charge has reduced by 45% to £46 million, reflecting the Group's expected share of interest costs in relation to the 2016/17 FSCS scheme year and final confirmation of previous scheme year charges.
During the year, the FSCS have confirmed that the non-Bradford & Bingley loan was fully repaid and any excess dividends received from the wind-up of these failed institutions will be used to pay the outstanding balance of the Dunfermline capital. As a result no capital costs have been included in the charge. More information on FSCS is included in note 28.
The statutory tax charge for the year of £294 million (2015:
Assets
Total assets have increased 7% year on year to reach £209 billion at 4 April 2016 (2015: £196 billion). This growth largely reflects increases in residential mortgage lending which grew by over £9 billion as a result of the strong operating performance. This is combined with an increase in high quality on balance sheet liquid assets of £4 billion.
£205 million) represents an effective tax rate of 23% (2015: 19.6%) which is higher than the statutory rate in the UK of 20% (2015: 21%). The higher effective rate is due principally to the banking surcharge of 8% effective from 1 January 2016, equivalent to £22 million (2015: £nil), together with the tax effect of disallowable bank levy and customer redress costs of £8 million and £7 million (2015: £6 million and £nil) respectively. Further information is provided in note 10.
In line with our mutual model, strong retail funding flows have largely supported the strategic growth in retail assets as we continue to introduce attractive savings products to both new and existing members. Member balances have grown by £6 billion, of which £2 billion is attributable to our award winning current account proposition as we continue to demonstrate our position as a modern mutual, improving our market share of main current accounts from 6.8% to 7.1%.
| 4 April 2016 | 4 April 2015 | |||
|---|---|---|---|---|
| £m | % | £m | % | |
| Residential mortgages | 162,164 | 91 | 152,885 | 89 |
| Commercial lending | 13,197 | 7 | 14,594 | 9 |
| Consumer banking | 3,869 | 2 | 3,791 | 2 |
| Other lending | 20 | - | 29 | - |
| 179,250 | 100 | 171,299 | 100 | |
| Impairment provisions | (443) | (652) | ||
| Loans and advances to customers | 178,807 | 170,647 | ||
| Other financial assets | 27,782 | 22,721 | ||
| Other non-financial assets | 2,350 | 2,212 | ||
| Total assets | 208,939 | 195,580 | ||
| Asset quality | ||||
| Residential mortgages: | % | % | ||
| Proportion of residential mortgage accounts 3 months+ in arrears |
0.45 | 0.49 | ||
| Average indexed loan to value of residential mortgage book (by value) |
55 | 56 | ||
| Impairment provisions as a % of non-performing balances |
3.2 | 3.1 | ||
| Commercial real estate (CRE) lending: | £m | £m | ||
| Gross balances | 3,009 | 4,043 | ||
| Impaired balances | 171 | 608 | ||
| Individual provisions as a % of impaired balances | 32% | 51% | ||
| Other key ratios | % | % | ||
| Loan to deposit ratio (note i) | 117.2 | 115.6 | ||
| Return on assets | 0.47 | 0.43 | ||
| Liquidity coverage ratio | 142.6 | 119.3 |
0.45% residential mortgage accounts 3 months in arrears
142.6% liquidity coverage ratio
Note:
i. The loan to deposit ratio represents loans and advances to customers divided by (shares + other deposits + amounts due to customers).
Residential mortgages include prime and specialist loans, with the specialist portfolio primarily comprising buy to let (BTL) lending. Gross mortgage lending in the period was £32.6 billion (2015: £27.1 billion), representing an increased market share of 13.7% (2015: 13.4%).
Net of repayment and redemptions, mortgage balances grew by £9.3 billion, of which £5.4 billion was prime lending and £3.9 billion related to specialist lending. The loan to value (LTV) profile of new lending, weighted by value, remained at 69% (2015: 69%). Annual house price growth over the financial year was 5.3%, contributing to the reduction in the average LTV of the total portfolio which fell to 55% (2015: 56%). Our residential mortgage arrears have reduced to 0.45% (2015: 0.49%) and continue to be significantly lower than the Council of Mortgage Lenders industry average which stood at 1.04% at 31 March 2016. The performance of our residential portfolios continues to be underpinned by the sustained low interest rate environment and is also now benefiting from broader market conditions, including low levels of unemployment and a return to growth in household incomes.
The level of impaired balances fell by £117 million to £778 million (2015: £895 million) reflecting lower arrears. Impairment provisions have fallen by £8 million to £102 million (2015: £110 million) reflecting strong underlying asset performance, in part offset by refinements in provision modelling assumptions to take account of the impacts of a prolonged period of low interest rates and the risks attaching to interest only mortgages.
Commercial lending includes commercial real estate (CRE) loans of £3.0 billion (2015: £4.0 billion), a reduction of 25% during the year achieved through deleveraging and repayment. Commercial lending balances also include loans to housing associations of £7.6 billion (2015: £7.8 billion) and a portfolio of loans made under the Government's Project Finance initiative amounting to £1.2 billion (2015: £1.4 billion). The balance sheet total for commercial lending also includes £1.4 billion (2015: £1.4 billion) of fair value adjustments relating to loans where we have hedged associated financial risks, typically interest rate risk, using derivatives which are carried at fair value on the balance sheet.
We have undertaken minimal amounts of new lending during the year, with activity being concentrated on ongoing management of the existing portfolio and with focus on the managed work out of weak CRE exposures. During the year, we have deleveraged over £1.0 billion of non-core CRE loans and we have reduced other CRE exposures by a further £1.0 billion through repayment and managed workout of individual exposures.
The level of impaired balances as a proportion of our total CRE exposure has fallen from 15% to 6%, reflecting deleveraging and resolution of impaired asset positions. Individual provision coverage against impaired balances has fallen from 51% to 32% reflecting the work out of our higher risk cases.
There has been particularly intense competition in the consumer banking environment in recent months; however the Group has maintained broadly stable balances reflecting our attractive pricing propositions and loyalty offers. Consumer banking comprises personal loans of £1.9 billion (2015: £1.8 billion), credit cards of £1.7 billion (2015: £1.7 billion) and current account overdrafts of £0.2 billion (2015: £0.2 billion). Asset quality remains high as we see the benefit of improved credit policies contributing to the Group's low risk, high quality asset balance sheet.
Further details of our lending and lending risks are provided in the 'Lending risk' section of the Business and Risk Report.
Other financial assets total £27.8 billion (2015: £22.7 billion) and comprise liquidity and investment assets held by our Treasury Division amounting to £23.1 billion (2015: £18.8 billion), derivatives with positive fair values of £3.9 billion
(2015: £3.3 billion) and fair value adjustments and other assets of £0.8 billion (2015: £0.6 billion). Derivatives largely comprise interest rate and other derivatives with positive fair values, taken out to hedge financial risks inherent in our core lending and funding activities.
The increase in liquidity and investment assets reflects both the transition to Liquidity Coverage Ratio (LCR) requirements and an element of pre-funding of wholesale and Bank of England Funding for Lending Scheme (FLS) maturities to de-risk our funding plans ahead of the EU referendum in June 2016. For all these reasons we have taken opportunities to increase both the quality and duration of wholesale funding on our balance sheet over the last year with a consequent increase in liquidity. This has increased the LCR to 142.6% (2015: 119.3%).
Further details of our treasury portfolios are included in the 'Treasury assets' section of the Business and Risk Report.
| Liabilities | ||
|---|---|---|
| 4 April 2016 | 4 April 2015 | |
| £m | £m | |
| Member deposits | 138,715 | 132,373 |
| Debt securities in issue | 36,085 | 28,105 |
| Other financial liabilities | 21,637 | 23,767 |
| Other liabilities | 1,572 | 1,594 |
| Total liabilities | 198,009 | 185,839 |
| Members' interests and equity | 10,930 | 9,741 |
| Total members' interests, equity and liabilities | 208,939 | 195,580 |
| Key ratio | % | % |
| Wholesale funding ratio (note i) | 24.8 | 23.3 |
24.8% wholesale funding ratio
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 the Group's balance sheet, reflecting the substance of the arrangement. Off balance sheet FLS drawings totalling £8.5 billion are unchanged from the prior year.
Member deposits have increased by £6.3 billion to £138.7 billion (2015: £132.4 billion) as we continue to offer competitive savings and current account propositions which provide long term good value and seek to support members in the current low base rate environment. The Group has continued to attract inflows from both new and existing members through the introduction of successful products such as our Help to Buy ISA and our range of loyalty regular
saver products. We estimate our share of the balance growth in the UK deposit market for the year to be 8.7% (2015: 3.4%). Of this balance growth, £2.2 billion relates to inflows into our current account products as we have increased our market share of main standard and packaged accounts from 6.8% to 7.1%, with in-credit balances on those accounts amounting to £14.8 billion (2015: £12.6 billion).
Debt securities in issue of £36.1 billion (2015: £28.1 billion) are used to raise funding in wholesale markets in order to finance core activities. The increase in outstanding amounts reflects increased issuance activity in the wholesale markets during the year to support increased liquidity.
The wholesale funding ratio has increased to 24.8% (2015: 23.3%), as a result of the wholesale issuance activity.
Further details on the Group's wholesale funding mix and liquidity holdings are included in the 'Liquidity and funding risk' section of the Business and Risk Report.
Other financial liabilities include customer and bank deposits of £15.9 billion (2015: £17.2 billion), permanent interest bearing shares (PIBS) of £0.4 billion (2015: £0.4 billion), subordinated debt of £1.8 billion (2015: £2.1 billion) and derivatives and fair value adjustments of £3.5 billion (2015: £4.0 billion). Derivatives and fair value adjustments largely comprise interest rate and other derivatives with negative fair values, taken out to hedge financial risks inherent in our core lending and funding activities.
| 4 April 2016 | 4 April 2015 | |
|---|---|---|
| £m | £m | |
| Capital resources (note i) | ||
| Common Equity Tier 1 (CET1) capital | 8,013 | 7,279 |
| Total Tier 1 capital | 9,005 | 8,271 |
| Total regulatory capital | 10,654 | 9,950 |
| Risk weighted assets (RWAs) | 34,475 | 36,804 |
| Leverage exposure | 213,181 | 200,665 |
| CRD IV capital ratios | % | % |
| CET1 ratio | 23.2 | 19.8 |
| Leverage ratio (note ii) | 4.2 | 4.1 |
i. Data in the table is reported under CRD IV on an end point basis.
ii. The leverage ratio is calculated using the Capital Requirements Regulation definition of Tier 1 for the capital amount and
the Delegated Act definition of the exposure measure.
CET1 capital resources have increased over the period by approximately £0.7 billion mainly as a result of a strong operating performance with £985 million of profit after tax for the period.
Risk weighted assets (RWAs) reduced over the period by approximately £2.3 billion due to reduced commercial RWAs, lower retail unsecured RWAs (resulting from model development) and lower residential lending RWAs as a result of house price inflation, which more than offset portfolio growth.
The movements described above have resulted in an increase in the CET1 ratio to 23.2% (2015: 19.8%). The leverage ratio has increased to 4.2% (2015: 4.1%) as growth in Tier 1 capital has outstripped the balance sheet growth, which has been driven by increases in residential mortgage and liquidity balances.
The Group continues 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 during the financial year mean that we have better visibility of expectations for future capital requirements. The Group will remain engaged in the development of the regulatory approach to ensure we are prepared for any change.
We expect to have a steady state leverage ratio requirement of 3.75% from 2019, which comprises a minimum requirement of 3%, a supplementary leverage ratio buffer of 0.35% and countercyclical leverage ratio buffer of 0.4%. The Financial Policy Committee could set a countercyclical leverage buffer up to 0.9%, but has so far set the buffer at 0.2%, which is expected to apply from March 2017. The Group's strategic leverage ratio target of 4.5% reflects its desire to maintain strong levels of capital relative to maximum regulatory expectations (4.25%).
Further details of the capital position are included in the 'Solvency risk' section of the Business and Risk Report.
The Group has adopted the Code of Practice on Taxation for Banks and has established appropriate processes and oversight to ensure it meets its obligations under the Code. As a result the Group manages its tax obligations to ensure full compliance with all statutory requirements and does not structure transactions to give a result which is contrary to the intentions of Parliament. This includes working with HMRC in real-time to agree the tax treatment of transactions where the law is uncertain. Tax planning is undertaken where it supports genuine commercial activity in order to maximise member value. The Group maintains an open and transparent relationship with HMRC and has been granted a low risk status. An in-house team of tax specialists is responsible for managing the Group's tax affairs in accordance with an Audit Committee endorsed tax policy. This provides a framework for the operation, planning and oversight of tax and tax risk to
ensure the Group complies with all relevant tax legislation and minimises reputational risk. Regular updates are provided to the Audit Committee on tax matters.
The Group maintains a branch presence in the Isle of Man and Republic of Ireland as part of normal business operations.
A measure of the contribution the Group makes to our wider society is through the amount of taxes it pays on its activities. During the year ended 4 April 2016 the Group paid £542 million (2015: £427 million) in taxes. This includes irrecoverable VAT, bank levy, employment and property taxes in addition to corporation tax and the banking surcharge. A further £342 million (2015: £358 million) was collected and remitted on behalf of customers and employees. An analysis of the taxes paid and collected by the Group is detailed below.
Notes:
i. The banking surcharge at 8% of profits chargeable to corporation tax on banking business applied from 1 January 2016.
ii. Bank levy includes £2 million (2015: £2 million) paid in Ireland for the Irish bank levy.
From 6 April 2016 tax will no longer be withheld from savings interest on customer accounts following new legislation proposed in Finance Bill 2016.
Effective risk management is at the heart of the business, supporting the delivery of the Group's strategy by ensuring the business continues to be safe and sustainable and ultimately by protecting members' interests.
The Group adopts an enterprise-wide risk management framework to ensure that it manages risks effectively. This is underpinned by the three lines of defence model which ensures independent oversight and audit of risk management carried out by the business. More detail on the risk management framework and three lines of defence model is given in the Business and Risk Report.
The principal risks facing the Group are set out below. Fuller definitions are provided in the Business and Risk Report.
For each of these principal risks, a formal statement of Board appetite for risk defines how much risk the Board is prepared to take in pursuit of the Group's goals, and establishes a framework for decision making. Performance is reviewed regularly against this statement to ensure that the business operates within risk appetite.
In addition, the Group manages each of these principal risks through adopting policies and practices as set out below:
| To manage | Policies and practices are in place to ensure that |
|---|---|
| Lending risk |
• the Group lends responsibly, only taking risks that are well understood • the Group builds prudent loan portfolios, primarily focused on residential mortgages, without creating undue risk concentrations and controls exposure to higher risk portfolios • the Group only participates in non-member business where it has existing capabilities and earns a premium return on capital or provides valuable services to members. |
| Financial risk |
• the Group maintains a strong balance sheet with prudent levels of liquidity and diverse sources of funding • the Group maintains a strong capital base above regulatory requirements • the Group can withstand a severe stress event without any significant disruption to products and services. |
| Operational risk |
• the Group operates its business to ensure a minimum level of serious disruption to customers, brand and reputation with systems and services designed to achieve defined levels of availability and performance. |
| Conduct and compliance risk |
• the Group never knowingly creates unfair outcomes for customers • the Group's products, services and distribution channels are designed, monitored and managed to provide value over time, accessibility, and meet the needs and experience expectations of our customers • the Group has a strong, focused conduct culture, where conduct risk is embedded in governance frameworks, to ensure adequate consideration, identification, management and mitigation of conduct risks • the Group puts customers at the heart of everything it does, and this is reflected in its conduct outcomes. |
| Strategic risk |
• the Group is committed to a mutual business model, and ensures this model remains sustainable within legal and regulatory requirements • the Group focuses strategic decisions on achieving the best long term outcome for its members. |
Whilst the Group accepts that all of its business activities involve risk, it seeks to protect its members by managing risks that arise from its activities appropriately. Against this background, during the last year the Group's financial strength has continued to grow and lending performance has further improved, with low arrears reflecting high quality underwriting and the current economic environment. Risk management activity has focused on strengthening business resilience and managing conduct and regulatory challenges. As a result the Group's top and emerging risks remain largely unchanged and fall within four themes: macroeconomic, cyber attack and business resilience, the changing face of financial services, and conduct and compliance risk challenges. More details of these are given in the Business and Risk Report and are summarised below.
The Group's financial position remains strong, with increasing profitability and robust capital and liquidity positions. However, uncertainty both globally and in the UK presents two main areas that could affect the Group. If UK bank base rates remain at their current low levels for a protracted period this could constrain the Group's margin. In addition, although not expected, a move to zero or negative rates may result in changing customer attitudes to savings which could challenge the Group's business model. Global factors or the referendum on UK membership of the EU could temporarily affect access to and pricing of wholesale funding or reduce confidence and activity in property markets.
Cyber security threats are increasing and this, coupled with the pace of technological development, creates risk across the financial services industry. Recent high profile cyber attacks serve to illustrate the increasing sophistication in this area and also prompt greater member and regulator concerns about security. In addition, customer tolerance for service disruption continues to reduce within the financial services industry. The potential for cyber attacks across the industry increases as the business becomes increasingly digital, and greater reliance is placed on integrated industry-wide systems.
The Group will continue to develop new and existing technology to deliver a market-leading proposition. However, there are a number of challenges from new and changing competition, in particular: ring-fencing of retail operations may lead traditional banking competitors to refocus their activity in the Group's core markets, whilst challenger banks and FinTech firms may impact product pricing and customer propositions. New technology and new models, such as peer-to-peer lending or robo-advice, may mean that customer behaviours and attitudes deviate significantly from expectations.
The Group's culture places conduct and compliance as central to its values and behaviours. The Group's risk governance and control framework drives a strong customer-focused conduct culture at each stage of a customer's interaction from product design, through sales and post-sales servicing. However, the scale and quantity of changing regulation affecting the industry continues apace, with the consequential risk that industry developments proceed ahead of regulatory change. In addition, customers increasingly expect to be able to access products and services at a time, and through a medium, of their choosing. It is critical that the Group's products and services remain resilient to meet customer expectations and are designed to meet the changing needs of an ageing population.
Further details on risk management and top and emerging risks can be found in the Business and Risk Report, together with full principal risk definitions.
Our Business and Risk Report can be found on pages 192
Our people are central to providing exceptional service to our members. We believe that being a great employer and employing first class people offers us a genuine competitive advantage. We are proud to have been ranked as the third best big company to work for by the Sunday Times and a top 50 employer for women by The Times.
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Our annual employee survey indicates that our people feel more engaged and enabled than ever. Our results are well above the norm not only for financial services providers, but for high performing (HP) companies in general. Over the past year our employee engagement score increased by 1% to
80% (HP Norm: 73%) and our enablement score increased by 2% to 77% (HP Norm: 71%). In addition, over 93% of our employees are proud to work for us and 88% agreed we demonstrate care and concern for our employees.
Employee Engagement is a measure of the extent to which employees feel motivated to deliver. Employee Enablement is a measure of the extent to which employees feel equipped to succeed. We measure our success in the delivery of a great place to work through an annual employee survey which is independently run by the Hay Group plc. Benchmarks which we are measured against are: HP Norm: High performance normalised scores
FS Norm: Financial services normalised scores
These levels of employee engagement and enablement are achieved by developing an outstanding member-focused culture, which is underpinned by our PRIDE values:
Our business results pay testimony to a leadership team that has delivered high levels of customer satisfaction, a strong financial performance and best-in-class employee engagement levels in our sector.
The development of our people is essential to the future performance of our business. We are identifying the capabilities our people need to serve our customers in a digital age and training them accordingly. We are also developing tools to enable our people to drive their own careers. We continue to identify and develop talented employees to build our leadership for the future.
During the year, we have tripled our intake of entry talent (graduates, apprentices and industrial placements). We will continue to offer entry talent schemes to ensure we have a source of future leaders prepared to manage a digital Society.
We value pathways for progression and therefore we are significantly increasing our apprenticeship programme this year. This will supply structured career opportunities to our entry level talent and will benefit from the apprenticeship levy. This levy will be on UK employers which will facilitate an additional three million apprenticeships in England by 2020.
We believe that apprenticeships are an attractive alternative to university, and are therefore developing new apprenticeship courses that will provide clear learning opportunities. As a Society we want individuals to get the best possible start in their career and are actively engaging with our community to communicate the benefits of apprenticeships, as well as breaking down gender and age misconceptions commonly associated with being an apprentice.
We value people from all backgrounds, ensuring an inclusive approach that celebrates diversity. Having a workforce that is representative of the UK's rapidly changing communities means, quite simply, we're better able to serve our customers and provide the excellent service they expect and deserve. This also helps us strengthen our inclusive culture, developing and retaining a secure supply of skilled, committed employees. We aim to achieve this through our Equality, Diversity and Inclusion agenda which is based around four themes:
The Nomination Committee in 2015 set a target range of 8-15% of the entire director population (divisional directors and above) to be BAME (Black, Asian and Minority Ethnic) by 2020. Currently 2.6% of the Group's director population is BAME.
Our diversity agenda spans across the themes of Gender, Ethnicity ('BAME') and Disability. In addition, to deliver the breadth of skills we need now and for a digital future and to build a workforce that is representative of all our customers, further work will consider other areas, including age, sexual orientation, faith/belief and carers.
The charts below show the number and proportion of Society employees, senior managers and directors of each sex as at 4 April 2016. A senior manager is an employee who has responsibility for planning, directing or controlling the activities of the Society, or a strategically significant part thereof.
As we move into an increasingly digital world the requirements of our leaders will change. To ensure that we continue to meet our members' needs we will continue to develop our future leadership capability.
We will focus on our diversity agenda to ensure our people continue to feel confident in working and developing in a diverse workforce, and can respond appropriately to an increasingly diverse customer base.
Further detail on our talent development, diversity and gender balance initiatives and targets may be found in the Nomination and Governance Committee report within the Report of the directors on corporate governance.
For the Nomination and Governance Committee report see pages
The 'Living on your side' citizenship strategy is built on feedback received from the Society's members, doing what is right for the communities in which they live. The strategy focuses on four key areas that are at the heart of the business: Your Home, Your Money, Your Community and Your Society.
The 'Living on your side' strategy is also about how the Society stays true to its mutual values and how it runs its business in a responsible and ethical way. The following pages tell you how the Society has performed in all four areas.
This year, 'Living on your side' has made strong progress against the targets which were set in 2012. Members and employees have worked side by side to make a real difference to local communities, including:
As the Society enters the fifth and final year of its 'Living on your side' strategy, it is ready to start to make a difference as a leading responsible business. Input from members will be crucial in this process – the Society wants members' views on what it should be doing to support local communities and what can be achieved by investing up to 1% of profits to support good causes. For more information, visit
The citizenship agenda is a core part of how the Society operates as a business, staying true to its mutual values and helping it remain truly 'on your side'. This was recognised when the Society scored 98% in the BITC Corporate Responsibility Index and received re-accreditation of BITC's CommunityMark.
While 'Living on your side' is the collective citizenship strategy of the Society, overall accountability for it rests with the senior management team and the board of directors.
* Graham Beale led this until his intention to retire in April 2016. A replacement will be appointed shortly.
732,000 helped since 2012 against a target of 750,000 by 2017.
Nationwide has been working with the housing and homeless charity Shelter for 15 years to help people into a home of their own. This year, the Society has continued to provide funding to support the following Shelter services:
Since becoming signatories to the Armed Forces Covenant in 2014, the Society has taken a co-ordinated approach to supporting the military community. As well as supporting the Government's 'Forces Help to Buy' scheme, military personnel can let their property from day one of their mortgage at no additional charge if they are posted elsewhere in the UK or abroad. The Society also held 'Big Brew Ups' in aid of SSAFA, the Armed Forces charity (formerly known as the Soldiers, Sailors, Airmen & Families Association), to fundraise for the UK's oldest national tri-service charity.
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Nationwide continues to work in partnership with Elderly Accommodation Counsel (EAC) to help older people remain independent in their own home. The Society funds their 'Live Safely and Well at Home' campaign, along with their national FirstStop telephone advice service. This gives older people information regarding future housing options, including remaining at home or living in a supported home, such as sheltered accommodation. The Society has also introduced an employee 'Call in Time' volunteering befriending scheme, developed in partnership with Age UK. With the aim of reducing loneliness and isolation, employees make weekly calls to older people, totalling over 340 hours in 2015/16.
5,600 older people supported by EAC to remain in their homes The five year target is to help 750,000 people into a home of their own
Members and employees raised £116,000 for Shelter
In 2015/16 Nationwide donated £2.5 million to the Nationwide Foundation to support its Decent Affordable Homes strategy
Funded by Nationwide, the 'Live Safely and Well at Home' campaign focuses on how to prevent trips, falls and hazards in the home and so avoid unplanned hospitalisation and moves into care.
This advice and support can often enable older people to remain safe and comfortable at home rather than move into residential care. This may include working with agencies such as 'Care and Repair' that will assess a home and install adaptations such as ramps and grab rails.
Nationwide is committed to encouraging people to save. Initiatives this year included:
Talking Numbers is Nationwide's education programme to improve the everyday number skills of more than 200,000 young people by 2017. The Society works closely with teachers and partner organisations to improve numeracy skills. This year's highlights included:
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parents, teachers and young people regularly visited
benefited from MoneyLIVE workshops
Number Crunchers is Nationwide's volunteering programme that supports children in primary schools to help them improve number skills. It involves visiting a local school for short sessions to help those children who need a little extra support.
Jeremy Beach, a Nationwide employee, comments: "I love volunteering as a Number Cruncher as I'm helping the children directly and, of course, supporting the local community."
Together with members, the Society supports causes that are close to people's hearts. This has been achieved through:
Nationwide employees are passionate about supporting the communities in which they live and work, with 76% getting involved in fundraising, volunteering or payroll giving. More and more employees are choosing to share their business and professional skills with charities that benefit from expertise they may otherwise not be able to access or afford. The Great Western Air Ambulance Charity, for example, has a target to recruit 60 new volunteers. A team of employee volunteers spent time with the charity to develop a new volunteer recruitment strategy. The relationship has continued as the employees are now fundraising for the charity and continuing to support them with other activities.
The Society's 23 year relationship with Macmillan Cancer Support was taken to a new level this year. Both organisations have worked together to develop and launch a ground-breaking Specialist Support Service for Nationwide customers affected by cancer. Members and employees also celebrated Macmillan's World's Biggest Coffee Morning, raising more than £150,000 for the charity. A highlight of the year was breaking the record for holding the world's largest cream tea party in Swindon, with the support of one of the Society's suppliers, Baxter Storey.
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raised for charity by members and employees
The value of employees volunteering their time was £1.5 million (all employees are given up to 14 hours to volunteer during company time each year)
With the mutual goal to help customers manage their finances and reduce the stress of money worries, the Society has worked with Macmillan Cancer Support to develop a first-of-its-kind Specialist Support Service for customers affected by cancer. In its 2013 report, 'Cancer's Hidden Price Tag', Macmillan found that as a direct result of being diagnosed with cancer, four out of five people are on average £570 worse off each month, comparable to a monthly mortgage payment. Its 2014 report 'Counting on Your Support' also showed that 98% of people chose not to contact their bank or building society for fear of not getting any help or worse, that their diagnosis will have a negative impact on their financial situation. 800 Nationwide customers have been supported since the Service was set up and it is now being extended to other life limiting and life threatening conditions.
Are you affected by cancer? 0800 917 2393 You've got other things on your mind. So let us help you with your finances.
1,900 hours volunteered 1.2 through Side by Side million votes received for Big Local and Community Match
Despite growing as a Society and creating the need for new buildings and more data management facilities, the Society continues to reduce its energy consumption and carbon emissions. The Society does, however, face new challenges as it continues to grow, for example water usage has increased slightly across the organisation.
Over the last 12 months, the Society has reduced energy use by 1% and its carbon footprint by 3%.
A new 'Equality, Diversity and Inclusion' strategy was introduced this year covering four themes: inclusive leadership, diverse workforce, access and inclusion and workplace flexibility. It sets clear goals for the next five years, including specific workforce targets for women and Black, Asian and Minority Ethnic (BAME) employees at executive and senior manager levels and for disabled employees across the Society.
More than 50 apprentices, on a mixture of intermediate, advanced and higher schemes, are now working for the
Society and are a critical element of its people strategy. All apprentices are paid the Living Wage and have permanent contracts. The advanced and higher apprentices are also able to study to A-Level and degree level.
The Society continues to monitor its performance through a variety of equality, diversity and inclusion benchmarks. This year, it was ranked within the top 20% of participating organisations in the BITC Age and Wellbeing benchmarks, which reflects the Society's more holistic approach to the diversity agenda.
After becoming the first high street financial services provider to become a Principal Partner of the Living Wage Foundation, from 1 April 2016 everyone employed by Nationwide, including all contractors, will be paid a Living Wage. To encourage other organisations to take the Society's lead, Alison Robb, Group Director, has joined the Living Wage Commission.
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As part of the Society's programme to reduce its environmental impact, it pledged to plant a tree for every current and future employee and a tree for members who opted to go paperless at the 2015 AGM; this equates to a total of 60,000 trees. By planting trees, the Society will offset its impact on the environment and provide long lasting community benefit for generations to come.
In March 2016, a third tree planting event took place at a woodlands site, Ravens Retreat, in Wiltshire with the Wiltshire Wildlife Trust. Employees, their families and local members came together to work side by side to plant more of the trees the Society has committed to planting in UK woodlands.
To help Nationwide create woodlands in other parts of the UK, the Society has partnered with the Woodland Trust. One aspect of the partnership is to help local communities manage their own woodlands by offering start up grants and training. By providing resources and funding this can help people who are passionate about their local woods take an active role in the care and management of them.
The Nationwide Foundation is an independent registered charity which funds charitable work across the UK to create decent affordable homes for people in need.
The Nationwide Foundation's Decent Affordable Homes strategy focuses on:
In 2015/16 the Nationwide Foundation's funding helped bring empty properties back into use to create safe and secure homes for people in housing need.
The former empty properties are now homes for people who had been homeless, were at risk of homelessness or were living in poor housing. Those helped include vulnerable young people and low income families who were trapped in overcrowded damp homes. Without the help of the organisations funded by the Nationwide Foundation, none of these people could have accessed decent, affordable housing.
The community-led organisations that the Nationwide Foundation funds deliver greater benefits than simply creating a home. These organisations support local people to develop work skills; giving them opportunities to gain work experience, training or apprenticeships, as well as helping them to find paid employment.
In autumn 2015, the Nationwide Foundation continued its commitment to creating affordable homes from empty properties by launching a £1 million grants programme to bring more properties back into use, aiming to provide homes for 80 people in housing need.
Helped to create decent, affordable homes for 1,000 people since 2012
The Nationwide Foundation is committed to developing alternative models for the creation of genuinely affordable housing. It is a firm supporter of community-led housing, putting communities at the heart of housing development. Community-led housing includes community land trusts, cooperative housing, self and custom-build and cohousing. To grow these housing models, the Nationwide Foundation provided grants to a range of projects in 2015/16 including:
giving communities more power over local housing developments can help to get more homes built
• the launch of an online toolkit intended to help local councils take forward initiatives to boost the number of affordable self and custom-build homes.
The Nationwide Foundation has joined the Living Wage Foundation's scheme for charity funders ensuring that where its grants are supporting employment that these workers are paid fairly with a UK Living Wage. The UK Living Wage reflects the real cost of living and is a simple way of tackling poverty and disadvantage.
Find out more at www.nationwidefoundation.org.uk
The Nationwide Foundation is a registered charity (no.1065552) and a company limited by guarantee registered in England and Wales (no.3451979).
| Board of directors | 57 |
|---|---|
| Group directors | 61 |
| Directors' report | 63 |
| Report of the directors on corporate governance | 69 |
| • Corporate governance report |
69 |
| • Audit Committee report |
83 |
| • Board Risk Committee report |
87 |
| • Nomination and Governance Committee report |
89 |
| Report of the directors on remuneration | 93 |
Meet your Board of directors who were in office at 4 April 2016, including Mai Fyfield and Tim Tookey who are seeking election as non executive directors. Details of Joe Garner, who joined as Chief Executive on 5 April 2016, are also included below.
Executive Director since April 2003, Chief Executive since April 2007 and stepped down from the Board on 4 April 2016.
Graham joined the Society in 1985 and gained extensive experience and understanding of both retail financial services and the mutual building society sector. This has been established over a period of over 30 years and during this time the Society has grown and expanded to become one of the leading financial service providers in the UK as well as being the largest mutual financial institution and building society. In his role as Chief Executive, Graham was responsible for managing the Society in accordance with the strategy which remains firmly rooted in the Society's mutual heritage. Prior to joining Nationwide, Graham trained and qualified as a chartered accountant.
Graham was a member of the FCA Practitioner Panel and was Chairman of the Panel for two years to April 2015. He sat on the Council of the Building Societies Association, having been its Chairman during 2009 and 2010 and chaired its Remuneration and Nomination Committee from 2011 to 2014. He was a director of the British Bankers' Association. Previously, he has been a director of Visa Europe, 2007 to 2011.
Term of Office: Non Executive Director since July 2012.
Rita holds a number of non executive roles including at BUPA, ASOS and Populus and is a former non executive director of Dixons Retail plc (now Dixons Carphone plc). She is also a fellow of WWF-UK, and sits on the Assurance and Advisory Board for BP's carbon off-setting programme. Rita has over 20 years' senior management experience in a range of roles, with an expertise in demonstrating how brand is an integral part of long-term business strategy and in analysing and understanding consumer perceptions and behaviour. Her executive career has been in advertising, strategic marketing and market research; she was previously Chairman and Chief Executive at Interbrand UK Ltd, and prior to that Vice Chairman at Saatchi & Saatchi. During her career Rita has advised, at the most senior level, some of the UK's best known organisations, including British Airways, Barclays, BT, Citigroup, Visa and the British Army.
Term of Office: Non Executive Director since June 2015. Independent: Yes
Mai is currently Sky's Chief Strategy and Commercial Officer responsible for leading strategy across the Sky Group. She is also responsible for business development, negotiating agreements with third party channels included as part of Sky's retail offering and for the distribution of Sky's channels to other platforms. Prior to joining Sky in 1999, Mai spent eight years working as an economic advisor to blue-chip companies in a number of different industries, both in the UK and the USA.
Term of Office:
Non Executive Director since July 2011.
Lynne, a former Chief Executive of National Australia Bank's (NAB) UK business and Chief Executive of Woolwich plc, has over 25 years' senior management experience in a range of roles comprising brand development, mergers and acquisitions, change management and business transformation, including almost 20 years at board level. During her time at NAB, Lynne was responsible for its businesses in the UK consisting of Clydesdale and Yorkshire banks. She became Chief Executive of Woolwich plc in October 2000 following its takeover by the Barclays Bank Group, having previously held a number of senior management and board positions at the Woolwich Building Society, both before and after its conversion to a public listed company in 1997. Lynne is a non executive director of Scottish Water and Standard Life plc and a trustee of the Westminster Society for People with Learning Difficulties.
Term of Office: Non Executive Director since July 2011.
Independent: Yes
Mitchel has spent over 30 years in the financial services industry and is a former Group Chief Information Officer at Deutsche Bank with responsibility for IT and Operations for all operating divisions of the bank, including its retail banking operations. Mitchel was a member of the Executive Committee for both the Corporate and Investment Bank and the Private Client and Asset Management Division. He has also previously served as Managing Director, Global Head of Operations & Operations IT at UBS Warburg and as Director, Group Operations at Credit Suisse First Boston. Mitchel was a partner of Olivant & Co, an investment company providing strategic and operational expertise alongside investment capital to financial services businesses in Europe, the Middle East and Asia-Pacific and was a non executive director of NYFIX, a NASDAQ listed company and BCS, an AIM listed company. Mitchel is currently a non executive director of Currency Cloud.
Non Executive Director since April 2010 and Senior Independent Director since July 2012. Roger will step down from the Board at the AGM and is therefore not seeking re-election.
Roger is a former partner at Ernst & Young LLP and spent 40 years in the accounting profession. During his time at Ernst & Young he worked with many blue chip clients and advised boards across the spectrum of financial services, including banking, insurance, fund management and private equity. He is also a non executive director at Electra Private Equity plc and Tullett Prebon plc, chairing the Audit Committee of both companies. Additionally, he is a trustee of two charities, Chiddingstone Castle and Change, Grow, Live.
Executive Director since August 2007.
Tony is Nationwide's Group Chief Operating Officer and was previously Executive Director, Group Development. He previously held a number of senior executive roles at Barclays plc, including Managing Director Home Finance and Retail Support and Operations Director. He was a member of both Woolwich plc and Barclays Retail Banking Executive Committees. Tony is accountable for the Group's operational strategy, performance and transformation and his divisional reports include Customer Services and Product Operations, Telephone Channels, Digital Development, Transformation Delivery, Technology, Payments, Group Security and Property Services. Tony is a board member of Opportunity Now.
Executive Director since February 2007.
Mark, a chartered accountant, is the Group Finance Director with responsibility for Finance, Treasury and Corporate Development. He is also a director of various Society subsidiaries, a member of the PRA Practitioner Panel and Chair of the BBA Financial Risk and Policy Committee.
Prior to his appointment, Mark was a partner at PricewaterhouseCoopers LLP where he worked in the financial services practice with a specific focus on retail and corporate banking; whilst in professional practice, Mark also worked extensively with group treasury operations, leasing and asset finance businesses.
Term of Office: Executive Director since April 2009.
Chris joined Nationwide in April 2009 from Abbey Santander, where he was Director of Retail Distribution for Alliance and Leicester (A&L). Chris is the Group Retail Director and his responsibilities include Nationwide's retail product range, distribution and marketing. Chris has spent 28 years working in the financial services sector and his previous positions include Deputy Managing Director of Girobank and Retail Operations Director of A&L. In 2003 he was appointed as Managing Director Retail Banking for the entire A&L Group. In 2007 Chris moved to become Group Finance Director, a role he held until the merger with Santander in 2008. Chris is a board member of National Numeracy.
Non Executive Director and Chairman Elect from September 2014. Chairman since July 2015.
Independent: Yes (upon appointment as Chairman)
David joined Nationwide on 1 September 2014 and took over as Chairman in July 2015. From 2010 to 2014 he was on the Board of Lloyds Banking Group, where he was Group Deputy Chairman and Chairman of the Board Risk Committee. David has many years of experience at board and executive level in retail and commercial banking in the UK and internationally. He joined Barclays in 1983 and held various senior management positions culminating in Executive Director, member of the Group Executive Committee and Chief Executive, International Retail and Commercial Banking, a position he held until December 2006. He is a former Non Executive Director of BAA plc and Absa Group SA, and was Chairman and Chief Executive of Bawag PSK AG, Austria's second largest retail bank. David is Vice Chairman of NHS England, a fellow of the Chartered Institute of Financial Services and holds an MBA and Honorary Doctorate in Business Administration from Henley Business School.
Non Executive Director since June 2015.
Tim is a chartered accountant with substantial experience of major retail financial services organisations. He has significant board experience and became Chairman of the Society's Board Risk Committee in July 2015. Tim is a former Chief Financial Officer at Friends Life Group Ltd, a position he held from 2012 until the sale of the business to Aviva in April 2015. Prior to joining Friends Life, he was Group Finance Director of Lloyds Banking Group between 2008 and 2012, having been appointed as Deputy Group Finance Director upon joining the bank in 2006. From 2002 to 2006, he was Finance Director of Prudential PLC's UK business and from 1996 to 2002 he held the role of Group Finance Director at Heath Lambert Group.
Chief Executive since 5 April 2016. As Joe took up his role following the end of the 2015/16 financial year, in accordance with the Society's Memorandum and Rules, he will stand for election at the AGM 2017.
Joe joined Nationwide from BT Group where he was Chief Executive of Openreach, a position he held from early 2014. Prior to that he was Deputy Chief Executive of HSBC Bank PLC and Head of HSBC in the UK, roles which included responsibility for all of HSBC's retail and commercial banking business, including Marks and Spencer Bank, First Direct and The John Lewis Partnership Card. He has also held senior positions at Dixons Stores Group (now Dixons Carphone plc) and spent the early part of his career at Procter and Gamble. Joe was the Chair of the FSA (now FCA) Practitioner Panel from 2011 to 2013 and a non executive director of the Financial Ombudsman Service from 2007 to 2010. He is currently Chairman of the British Triathlon Foundation Trust.
| Board Committees | Membership | Board Committees | Membership |
|---|---|---|---|
| Audit Committee | Roger Perkin (Chairman) Rita Clifton Lynne Peacock Tim Tookey |
Executive Committee | Graham Beale Chief Executive (Chairman) (to 4 April 2016) Joe Garner |
| Board Risk Committee | Tim Tookey (Chairman) Mitchel Lenson |
Chief Executive (Chairman) (from 5 April 2016) |
|
| Lynne Peacock Roger Perkin |
Mark Rennison Group Finance Director |
||
| Remuneration Committee | Lynne Peacock (Chairman) Rita Clifton |
Tony Prestedge Chief Operating Officer |
|
| David Roberts | Chris Rhodes Executive Director Group Retail |
||
| Nomination and Governance Committee |
David Roberts (Chairman) Lynne Peacock Roger Perkin Tim Tookey |
Sara Bennison Chief Marketing Officer (from 1 March 2016) |
|
| IT Strategy and Resilience | Mitchel Lenson (Chairman) | Julia Dunn Chief Compliance Officer |
|
| Committee | David Roberts Tim Tookey |
Graeme Hughes Group Director Distribution |
|
| Results Approval Committee |
David Roberts (Chairman) Graham Beale (to 4 April 2016) |
Iain Laing Chief Risk Officer |
|
| Joe Garner (from 5 April 2016) Roger Perkin Mark Rennison |
Alison Robb Group Director People, Customer and Commercial |
Biographies of the Executive Committee who are not members of the Board are provided below.
Sara joined Nationwide in March 2016. She previously spent 7 years at Barclays in a number of marketing roles, finally as Chief Marketing Officer for the Personal and Corporate Bank globally. Before Barclays, Sara worked at BT but the majority of her career has been spent in advertising agencies in the UK and Asia, working across a variety of sectors and geographies.
As Chief Marketing Officer, Sara is responsible for developing and executing brand strategy, marketing, citizenship and communication across all audiences and channels.
Sara serves on a number of industry bodies, including the General Media Panel for the ASA, ISBA and Facebook's UK Advisory Council.
Julia joined Nationwide in September 2013 as the Chief Compliance Officer with responsibility for the Compliance, Legal, Secretariat and Financial Crime functions. Julia trained as an accountant with Price Waterhouse and before joining Nationwide she spent 13 years with the Financial Services Authority and latterly the Financial Conduct Authority in both supervision and enforcement as FCA Director of Retail Banking Supervision.
Julia has over 25 years' experience of managing complex conduct and compliance issues in financial services as well as strong working relationships with the regulatory authorities, HM Treasury and Law Enforcement Agencies. She leads the Disability Network at Nationwide and currently serves on the BITC Education Committee.
Graeme's career has been spent almost exclusively with Nationwide since joining the Society in 1984 as a management trainee. He has held a variety of roles within the Branch Network from Branch Manager to his present position of Group Distribution Director, having previously been a Director of Group HR , Customer Experience and Corporate Affairs.
Graeme is on the Board of the Society's Charitable Foundation and a member of the Executive Committee, as well as the Board of Race for Opportunity.
Iain is Nationwide's Chief Risk Officer, having joined the Society in 2011 when the role was first created. He is responsible for credit risk management, and for independent oversight of the Group's prudential risks. He joined Nationwide with experience of senior risk management roles at Capital One, HBoS and Santander UK and he was the Chief Credit Officer of Santander UK Retail throughout the financial crisis.
Prior to these financial services roles, Iain began his career in manufacturing engineering and strategic consulting.
Alison has been the Group Director for People, Customer & Commercial since December 2012.
Alison has been at Nationwide for almost 20 years and prior to her current role worked in many roles in the Group Finance function. She led Corporate Development during the financial crisis when Nationwide merged with a number of smaller societies. She trained as a chartered accountant with KPMG and also worked at WH Smith before she joined Nationwide.
In 2015 Alison was appointed as a non executive director of the Banking Standards Board, a new body supporting the development of trust in the banking sector and she is also a Commissioner of the Living Wage Commission.
The Annual Report and Accounts has been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU. All financial information given in this Directors' report is taken solely from the statutory results prepared on this basis. More information is included in Note 1 to the Accounts. Unaudited, underlying results which allow comparison between 2016 and 2015 are given in the Strategic Report and the Business and Risk Report.
The Group's objectives and future plans are set out in the Strategic Report, together with the Group's principal key performance indicators.
Profit before tax for the year ended 4 April 2016 was £1,279 million (2015: £1,044 million). The profit after tax transferred to the general reserve was £985 million (2015: £839 million).
Total Group reserves at 4 April 2016 were £9,407 million (2015: £8,218 million). Further details on the movements of reserves are given in the Group statement of movements in members' interests and equity.
Gross capital at 4 April 2016 was £13,160 million (2015: £12,277 million) including £531 million (2015: £531 million) of core capital deferred shares (CCDS), £992 million (2015: £992 million) of other equity instruments, £1,817 million (2015: £2,121 million) of subordinated debt and £413 million (2015: £415 million) of subscribed capital. The ratio of gross capital as a percentage of shares and borrowings at 4 April 2016 was 6.9% (2015: 6.9%) and the free capital ratio was 6.0% (2015: 6.0%). The Annual business statement includes an explanation of these ratios.
The Group mortgage portfolios at 4 April 2016 included 1,454 mortgage accounts (2015: 1,760), including those in possession, where payments were more than 12 months in arrears. The total amount of principal loans outstanding in these cases was £182 million (2015: £235 million). The total amount of arrears in these cases was £18 million (2015: £20 million) or 0.01% (2015: 0.01%) of total mortgage balances. The mortgage arrears methodology is based on the Council of Mortgage Lenders' definition, which calculates months in arrears by dividing the balance outstanding by the latest contractual payment.
Results for the year include charitable donations of £3,963,262 (2015: £2,212,619), including £2,523,333 (2015: £1,500,000) to the Nationwide Foundation; further details on the Foundation are provided in the Strategic Report. In addition, the Society has contributed employee time for volunteering programmes at a cost of £1,547,726 (2015: £1,219,929), resulting in a total commitment to the community of £5,510,988 (2015: £3,432,548). No contributions were made for political purposes. Time allowed to employees to carry out civic duties can amount to a donation. The Group supports a very small number of employees in this way.
The Society has participated in the Government-backed unclaimed assets scheme, whereby savings accounts that have been inactive for 15 years are eligible to be transferred into a central reclaim fund. The central reclaim fund has the responsibility for retaining sufficient monies to meet the costs of future reclaims for any previously transferred dormant account balances, and to transfer any surplus to the Big Lottery Fund for the benefit of good causes which have a social or environmental purpose. The Society transferred £1,185,455 on 5 April 2016 to the Reclaim Fund Limited, the administrators of the unclaimed assets scheme. The Group's total contributions from inception to that date are £52,502,672.
The Group's policy is to agree the terms of payment with suppliers at the start of trading, ensure that suppliers are aware of the terms of payment, and pay in accordance with its contractual and other legal obligations. The Group's policy is to settle the supplier's invoice for the complete provision of goods and services (unless there is an express provision for stage payments), when in full conformity with the terms and conditions of the purchase, within the agreed payment terms. The Society's creditor days were 13 days at 4 April 2016 (2015: 10 days).
The Group seeks to manage all the risks that arise from its activities. There is a formal structure for monitoring and managing risk across the Group comprising a risk appetite agreed by the Board, detailed risk management frameworks, and independent governance and risk oversight. The risk management objectives and risk framework of the Group are included in the Business and Risk Report.
The Group has established a number of committees, frameworks and policies to manage these risks. These are set out in the Business and Risk Report and in the Report of the directors on corporate governance.
The Business and Risk Report also details those risks which are considered the Group's top and emerging risks that could affect the delivery of the Corporate Plan.
In compliance with the Regulations of Article 89 of the Capital Requirements Directive IV (CRD IV) Country-by-Country Reporting Regulations 2013, effective 1 January 2014, the Group will publish additional information, in respect of the year ended 4 April 2016, by 31 December 2016. This information will be available by that date on Nationwide's website:
Nationwide has a culture focused on delivering an exceptional customer experience at all times. This culture is referred to as 'PRIDE'.
PRIDE is understood by our employees, supports the delivery of our member promise of being 'On your side' and is the combination of principles, values and behaviours which form the basis of our employment proposition and our ability to achieve fair customer outcomes.
As a key element of our corporate strategy, we aim to achieve industry leading levels of employee engagement and enablement, maintaining our unique culture as the leading mutual financial services organisation and have achieved levels above industry benchmarks. We focus on an inclusive culture in which employees can perform to their full potential in order to deliver our strategic aims. As a national organisation with local representation, the Society aims to contribute to each of its communities, for example our Corporate Citizenship strategy enables employees to engage locally through our volunteering programme.
We have continued to invest in the development of leaders and have launched an executive leadership programme in partnership with an accredited business school. In addition, we recognise that we must also deliver a steady flow of new talent to our business, and actively recruit from external sources. This includes award winning graduate programmes and apprenticeship schemes, which were significantly expanded in 2015 to bring in three times the number of people of the previous year. We will continue to expand our apprenticeship offering in response to the apprenticeship levy in 2016 and beyond.
To help ensure we build a workforce that represents our customer base and provides us with diverse decision making, a five year Equality, Diversity and Inclusion (ED&I) Strategy has been approved by the ED&I Steering Committee. This is chaired by the Chief Operating Officer and membership includes our staff union and other executive sponsors. The strategy maps out four Society wide themes, which together address our priority areas:
We are focusing on three distinct diversity strands in each of these areas: ethnicity, gender and disability.
It is the Society's policy to afford access to training, career development and promotion opportunities equally to all employees regardless of their ethnicity, faith and belief, gender, marital status, age or physical or mental disability. Should employees become disabled, it is the Society's policy to continue their employment where possible with appropriate training and redeployment. We are proud to note that over 80% of women return to Nationwide following maternity leave, often on more flexible working arrangements.
The Society continues to consult actively with the Nationwide Group Staff Union. The Employee Involvement Committee, chaired by the Chief Operating Officer, acts as a forum where representatives from the business and the Union consult and share information on a range of business and employment issues to the benefit of our employees and our business.
For further details on the Society's people strategy please see the 'Our people' section of the Strategic Report.
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Our vision is to be among the best performers for environmental sustainability in the UK Financial Services sector.
Our business is growing which in turn is creating a need for new buildings, increased use of digital technology and data management facilities. Despite these challenges we have continued to reduce our energy consumption and our carbon emissions. We also continue to divert our waste from landfill. We do, however, face new challenges – increased numbers of people working in our administration centres means water use and the amount of waste we produce has slightly increased. Therefore, we have set new targets to achieve by 2020:
The challenge we face now is how to continue to grow our business successfully and to reduce our environmental impacts. From July 2016, at least 50% of our electricity will be generated for us on a solar farm – this means we will be able
to meet the business demand for energy, whilst reducing our carbon emissions.
We are also committed to identifying, targeting and addressing inefficiencies in our supply chain and in 2015 were the first high street financial services provider to achieve level one of the new Carbon Trust Supply Chain Standard. Moving forward we will work with our key suppliers to identify innovative solutions which will continue to reduce our environmental impacts.
We have recently announced a new partnership with the Woodland Trust, which will help us meet our pledge to plant a tree for every employee and our pledge to plant a tree for every three members who opted to receive an electronic AGM pack last year. Over the next five years, the Trust will work with us to plant 60,000 trees in woodlands across the UK and these will provide lasting benefit for generations to come.
Further details of our activities can be found in our Citizenship report and on our website at
A summary of our greenhouse gas emissions performance is as follows:
| 3,138 | 3,498 | 4,890 |
|---|---|---|
| 2,239 | 2,243 | 2,448 |
| 44,934 | 46,245 | 50,802 |
| 50,311 | 51,986 | 58,140 |
| 2.81 | 2.90 | 3.46 |
| 198,450 | 191,242 | 259,718 |
| 11.06 | 10.85 | 15.45 |
Notes:
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CO2 e is an abbreviation of 'carbon dioxide equivalent' and is the internationally recognised measure of greenhouse gas emissions.
When calculating our carbon emissions we have used the new DEFRA 2015 conversion factors.
Scope 1 covers direct combustion of fuels and company owned vehicles and Scope 2 covers emissions from electricity.
This statement, which should be read in conjunction with the Independent auditors' report, is made by the directors to explain their responsibilities in relation to the preparation of the Annual Report and Accounts, the directors' emoluments disclosures within the Report of the directors on remuneration, the Annual business statement and the Directors' report.
As required by the Building Societies Act 1986 (the Act), the directors have prepared an Annual Report and Accounts which gives a true and fair view of the income and expenditure of the Society and the Group for the financial year and of the state of the affairs of the Society and the Group as at the end of the financial year, and which provides details of directors' emoluments in accordance with Part VIII of the Act and regulations made under it. The Act states that the requirements under international accounting standards achieve a fair presentation. In preparing the Annual Report and Accounts, the directors have:
As required by the Disclosure and Transparency Rules of the Financial Conduct Authority, the directors have included a management report containing a fair review of the business and a description of the principal risks and uncertainties facing the Group. This information is contained in the Strategic Report and the Business and Risk Report. In addition to the Annual Report and Accounts, as required by the Act the directors have prepared an Annual business statement and a Directors' report, each containing prescribed information relating to the business of the Society and its connected undertakings.
The British Bankers' Association Code for Financial Reporting Disclosure (the BBA Code), published in September 2010, sets out five disclosure principles together with supporting guidance. The principles are that UK financial institutions will:
The Group and other major UK banks have continued to adopt the BBA Code in their 2015/16 financial statements and the Group's financial statements have therefore been prepared in compliance with the BBA Code's principles.
The Group aims to continually enhance its disclosures and their usefulness to the readers of the financial statements in the light of developing market practice and areas of focus.
A copy of the Annual Report and Accounts can be found on Nationwide Building Society's website at
The directors confirm that, to the best of each director's knowledge and belief:
The directors are responsible for ensuring that the Society and its connected undertakings:
The directors have general responsibility for safeguarding the assets of the Group and for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The directors who held office at the date of approval of this Directors' report confirm that, so far as they are each aware, there is no relevant audit information of which the Group's auditors are unaware, and each director has taken all the steps that they ought to have taken as directors to make themselves aware of any relevant audit information and to establish that the Group's auditors are aware of that information.
The directors' responsibilities in respect of going concern are set out below. In addition, the directors now have an obligation under the UK Corporate Governance Code to state in a Business Viability Statement whether there is a reasonable expectation the Society and the Group will be able to continue in operation and meet their liabilities as they fall due. The period assessed under the Business Viability Statement is required to be significantly longer than the minimum period of 12 months over which going concern is assessed.
In preparing the financial statements the directors have satisfied themselves that it is reasonable for them to conclude that it is appropriate to adopt the going concern basis in accordance with the Financial Reporting Council's guidance 'Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009' and IAS 1 Presentation of Financial Statements.
The Group meets its day to day liquidity requirements through the management of both its retail and wholesale funding sources and is required to maintain a sufficient buffer over regulatory capital requirements in order to continue to be authorised to carry on its business.
The Group's business activities, along with its financial position, capital structure, risk management approach and factors likely to affect its future performance are described in the Strategic Report and the Business and Risk Report.
The Group's forecasts and projections, taking account of possible changes in trading performance and funding retention, and including stress testing and scenario analysis, show that the Group will be able to operate at adequate levels of both liquidity and capital for the next 12 months. Furthermore the Group's capital ratios and its total capital resources are comfortably in excess of PRA requirements.
After making enquiries the directors are satisfied that the Group has adequate resources to continue in business for the foreseeable future and that, therefore, it is appropriate to adopt the going concern basis in preparing the financial statements.
In addition to the going concern statement above, and in accordance with provision C.2.2 of the UK Corporate Governance Code, the directors confirm that they have a reasonable expectation that both the Society and the Group will be able to continue in operation and meet their liabilities as they fall due over the next three years. In making this confirmation the Board has specifically sought input from the Audit Committee and the Board Risk Committee.
The assessment covers a period of three years as this is within the period covered by the Group's medium-term plan (the Plan) and regulatory and internal stress testing. The time period chosen reflects the consideration that the level of uncertainty relating to the assessment increases the longer the period chosen. The pace of change of the economic, market and regulatory environments in which the Group operates may undermine the reliability of longer forecasts.
The directors have based this statement on a robust assessment of those risks that could threaten the business model, future profitability, solvency, liquidity or capital adequacy of the Group. In making the assessment, the directors considered a range of information concerning each of these risks across a range of scenarios, including but not limited to the Group's Plan and the programme of regulatory and internal stress testing it undertakes, further details of which are as follows:
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The review considered all aspects of emerging regulation where there is sufficient clarity over future standards to inform the analysis. For example, our assessment of the Group's capital position reflects our latest understanding of capital buffer and leverage requirements likely to be imposed on the Group, together with the consequences of the PRA's proposed minimum requirements for own funds and eligible liabilities (MREL).
Information relevant to these assessments can be found in the following sections of the Annual Report and Accounts:
The directors are satisfied that the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable, and provide the information necessary for members and other stakeholders to assess the Group's performance, strategy and business model.
Details of the governance procedures which have been embedded to support this can be found in the Audit Committee report.
The directors of the Society who were in office during the year and up to the date of signing the financial statements were:
| Geoffrey Howe | (Chairman) (retired on 23 July 2015) |
|---|---|
| David Roberts | (Chairman) (from 23 July 2015) |
| Graham Beale | (Chief Executive) (to 4 April 2016) |
| Joe Garner | (Chief Executive) (from 5 April 2016) |
| Tony Prestedge | (Chief Operating Officer) |
| Mark Rennison | (Group Finance Director) |
| Chris Rhodes | (Group Retail Director) |
| Rita Clifton | |
| Mai Fyfield | (appointed 2 June 2015) |
| Michael Jary | (retired on 23 July 2015) |
| Mitchel Lenson | |
| Kevin Parry | (appointed 23 May 2016) |
| Lynne Peacock | |
| Roger Perkin | |
| Tim Tookey | (appointed 2 June 2015) |
The Board has agreed that in accordance with the UK Corporate Governance Code (see the Report of the directors on corporate governance) that all the directors will stand for election or re-election on an annual basis. In accordance with these requirements all of the directors will stand for re-election at the 2016 AGM with the exception of Roger Perkin who will retire at the AGM and Mai Fyfield and Tim Tookey who are standing for election.
None of the directors has any beneficial interest in equity shares in, or debentures of, any connected undertaking of the Society. 50% of awards to directors from the 2015/16 Directors' Performance Award and the legacy 2013-16 Medium Term Performance Pay Plan will be linked to the value of the Society's core capital deferred shares, details of which have been provided in the Report of the directors on remuneration. 50% of outstanding awards under the 2014/15 Directors' Performance Pay Plan and the legacy 2012-15 Medium Term Performance Pay Plan are also linked to the value of the Society's core capital deferred shares.
A resolution to re-appoint PricewaterhouseCoopers LLP as auditors will be proposed at the Annual General Meeting.
Chairman, 23 May 2016
For the year ended 4 April 2016
I am pleased to present my first Corporate Governance Report as Chairman since succeeding Geoffrey Howe in July 2015.
Nationwide aims to be an exemplar organisation in all aspects of its business. The Board's commitment to good governance has served it well to date and it continues to aspire to the highest standards in order to safeguard members' interests.
As Chairman, I am responsible for ensuring that the Board operates effectively within a sound governance framework, based on best practice principles suitable for Nationwide's status as a mutual. As with all areas of our business, we keep our governance arrangements under review to ensure they remain fit for purpose. It is particularly important that, as our business adapts and grows to changing member and societal demands, we adapt our governance arrangements to address the risks and challenges we face as a modern mutual. For instance, as we enhance our digital capability and customer experience, our decision making will continue to focus first and foremost on the safety and security of the Society as well as balancing the interests of all our members. The move to a more modern, dynamic delivery of services does not signify a change in our strategic commitment, which remains to be unequivocally 'member-focused'.
Reflecting the need to keep pace with regulatory and best practice standards as well as developments in our own business, I am keen to ensure that there is appropriate oversight of governance arrangements at Board level. In
March 2016, the remit of the Nomination Committee was expanded to expressly include oversight of the Group's governance arrangements. Through the Nomination and Governance Committee, the Board will ensure that there is a renewed and ongoing focus on governance as we adapt to new ways of doing business and the new regulatory landscape.
Since taking over as Chairman in July 2015, my core priority has been to ensure that the Board has the requisite skills and experience to support continuing success in what we foresee as a more dynamic, competitive and fast moving retail financial services marketplace. During the year, a number of additions have been made to further strengthen the Board. Full details are set out in the report of the Nomination and Governance Committee and are summarised below:
Effective leadership is a prerequisite for good governance. Nationwide has enjoyed the considerable benefits of strong leadership under the stewardship of the previous Chairman, Geoffrey Howe and Chief Executive, Graham Beale. Ensuring the right successor to Graham as Chief Executive has therefore been of paramount importance to the Board.
After a thorough and rigorous search, the Board is delighted that Joe Garner joined Nationwide as Chief Executive with effect from 5 April 2016. The process leading to Joe's appointment is explained in the Chief Executive Succession section of the Nomination and Governance Report. Joe stood out as an exceptional candidate both as a motivational leader and customer champion. The Board believes that his character and expertise in financial services, marketing, customer services and digital delivery make him the right person to lead the Society through the next stage of its strategic development.
Having the right people with the right skills on the Board is critical to effective leadership. As Chairman, I am responsible for ensuring the Board collectively has the right mix of skills, diversity and independence to provide appropriate oversight of the whole business. Working with the Nomination and Governance Committee, we keep the composition of the Board under review to ensure that we bring in the necessary skills, experience and perspectives required to help steer the Society through the changing retail financial services marketplace. The need for new thinking always has to be balanced against the need for continuity and a deep understanding of Nationwide's business, including its culture and values. Continuity is particularly important when, as now, there are a number of new directors on the Board.
The appointments of Tim Tookey, Mai Fyfield and Kevin Parry have enhanced the Board's skills and experience across a range of areas. Tim has further strengthened the Board's retail financial services experience, while Mai brings broader commercial experience, including specialist digital strategy skills. Kevin's experience as the Chief Financial Officer of one of the FTSE's leading asset managers and as Chair of several audit committees makes him another excellent addition to the Board. Roger Perkin will retire by rotation as Senior Independent Director and Chairman of the Audit Committee. Nationwide owes him a deep debt of gratitude for his distinguished service and considerable wisdom over the last 6 years.
The report of the Nomination and Governance Committee explains the progress we are making with Board diversity, including our performance against internal targets. I am pleased with the progress being made with gender diversity but there is some way to go with other aspects, particularly ethnic diversity. To address this, we have, for the first time, set a Black, Asian and Minority Ethnic (BAME) target for the Board and Executive.
The Board has completed its annual review of its effectiveness and that of its Committees. As our last two reviews have been conducted internally, in keeping with best practice, this year's review was conducted by Independent Audit Limited, an external facilitator. A summary of findings is set out in the Nomination and Governance Committee report and the recommendations contained in their report will be addressed during 2016/2017.
The implementation in March 2016 of the Financial Services Senior Managers Regime provided an opportunity to review our governance arrangements to make certain that individual accountabilities continue to be allocated appropriately and are fully understood by all entrusted with the stewardship of the Society. One output of that review was the consolidation of the Society's governance arrangements into a comprehensive new 'Nationwide Governance Manual' (NGM) which describes the entirety of our governance arrangements, including clear delegation of authorities to management, to ensure the continued prudent management of the Society.
Further details of the above matters, as well as the wider work of the Board, are described in the report that follows.
In conclusion, whilst it has been another successful year for the Society, it is important that the Board continues to set the correct tone and provide strong leadership. I am confident the Board has the capacity and capabilities to fulfil this responsibility for the benefit of members.
Chairman
As the world's largest building society, Nationwide is owned by, and run for, its members. We are proud of, and committed to, our mutual status, which sets us apart from other types of business. We compete with banks in areas such as current accounts, savings, mortgages and personal loans. However, as a mutual, Nationwide is different; other than a small amount of core capital deferred shares (CCDS), we are not funded by shareholders, which means that we are able to reinvest all our profits into supporting lending to our members as well as improving products and customer service, and rewarding loyalty.
Whilst we balance the interests of a number of stakeholders including employees, customers, suppliers, regulators and communities, doing the right thing for our members is at the heart of everything we do. Our governance structures are designed to ensure that decisions are underpinned by our PRIDE values, in particular putting members first and doing the right thing.
As a major player in the UK financial services sector, it is imperative that we have in place robust risk management and control frameworks, including in relation to governance. Corporate governance is the set of internal standards and principles established by the Board to ensure sound and prudent control over the business. The Board sets the tone from the top and is responsible for promoting ethical leadership, culture, values, governance, controls and risk management. The Board relies on management, via the Chief Executive, to cascade the agreed standards to the business. The Society's governance arrangements are communicated to the business via the NGM which was introduced in March 2016 and will gradually replace the High Level Business Controls Manual. The NGM describes the Society's constitutional and governance arrangements including the cascade of delegations and authorities from the Board to the Chief Executive.
The Board is collectively responsible for ensuring the sustainability of the business model in order to deliver long term success for members of the Society. The Board operates under formal terms of reference which include a schedule of matters reserved to the Board for decision with the day to day running of the business delegated to the Chief Executive. Matters reserved to the Board include: determining the strategy; setting policies and guidelines within which the business is managed; reviewing business performance and determining the nature and extent of key risks to the business. The Board is also responsible for ensuring that the business is conducted in accordance with applicable laws and regulations including the Society's own Rules.
The Board sets the strategy and high level remuneration policy which the Remuneration Committee ensures is implemented. Strategic objectives are documented in the Corporate Plan (the Plan) which is reviewed and approved by the Board annually in March and monitored on an ongoing basis. The Plan is developed on the basis of current and prospective market conditions and incorporates a range of economic assumptions such as the Bank of England base rate, inflationary expectations, forecasts of the size of the mortgage and savings market and the regulatory environment in which Nationwide operates. The Board monitors performance against the Plan using key financial and non-financial indicators including the principal risks which are explained in the Business and Risk Report.
In reviewing management's performance, the Board is concerned to ensure that management has the necessary skills and resources to deliver the Plan within a framework of sound systems and controls. The Board sets prudent but stretching targets for achieving the strategy whilst ensuring that key risks are adequately assessed and managed. Whilst adhering to the Plan is important, it is essential that the Society can respond in a timely and considered manner to innovation or changes in market practices. The digital agenda is a good example of an area where the Plan has evolved to reflect changes in customer behaviours.
Consistent with Nationwide's strategic priority of being an exemplar organisation, the Board adheres to best practice governance principles, in particular, the UK Corporate Governance Code (the Code). Although the Code sets the standards for public listed companies, the Prudential Regulation Authority (PRA) expects building societies to follow the Code where practical to do so. Where possible and appropriate, the Society aims to comply with the Code's principles and provisions to ensure alignment with good practice, transparency and openness. As the Code is not written with mutuals in mind, the Board has regard to the Guidance for Building Societies (October 2014 version) issued by the Building Societies Association (BSA) to assist building societies in applying the Code.
The Board considers that the Society has, throughout the period, complied with the principles and relevant provisions of the Code to the extent applicable to building societies; this report explains how it has done so. The format of this report follows the Code's key themes of leadership, effectiveness, accountability and member engagement.
This report covers the period commencing 5 April 2015 until the date of the report.
As part of its ongoing responsibility for monitoring performance and holding the Executive to account, the Board receives a number of regular reports as well as keeping key
components of the strategy under review. The following is a sample of some of the matters that the Board has considered during the year.
| Board responsibility | |
|---|---|
| Key activities/items discussed | |
| Strategy and performance |
• Monthly reports from the Chief Executive on business performance, customer service, regulatory and market developments • Strategy Planning Conference, PRIDE, culture and HR strategy • Performance against Corporate Plan and strategic objectives • Updates and reviews of individual strategy themes. Eg retail and digital operations • Review/approval of significant contracts and projects • Review of the competitive environment • Economic review • Implications of a potential British exit from the EU (Brexit) |
| Finance and internal controls |
• Monthly reports from the Group Finance Director on the Society's financial position including capital, liquidity and funding • Approval of quarterly interim management statements, interim and full year results • Distributions to holders of CCDS and Additional Tier 1 capital and approval of Tier 2 capital issuance • Regulatory stress tests and results • Reports and minutes of the Audit Committee |
| Risk and compliance | • Quarterly reporting on risks and internal controls from the Chief Risk Officer and Chief Compliance Officer including performance under the Enterprise Risk Management Framework and against risk appetite and agreed limits/thresholds • Regulatory updates and emerging initiatives including consideration of implications. Eg the new Strengthening Individual Accountabilities and Senior Managers Regime • Reports and minutes of the Board Risk Committee and the IT Strategy and Resilience Committee |
| Governance | • Appointment of the new Chief Executive • Appointment/election of the new Chairman and non executive directors • Changes to individual Statements of Responsibilities • Board Effectiveness Review 2015 and 2016 • Review of the Chairman's performance • Annual review of Board governance arrangements. Eg review of Composition and Succession policy and directors' interests • Reports and minutes from the Nomination and Governance Committee |
| Customer | • Regular reports on customer experience including customer satisfaction and service • Review of customer complaints data and redress • Review of sources of customer and member feedback • Digital developments and strategy • Competitor analysis • Customer communications |
| Remuneration | • Review of regulatory developments in relation to remuneration • Reports and minutes from the Remuneration Committee |
| Member engagement | • Approval of the AGM notice and documentation • Regular reports and feedback on member engagement activities |
To ensure that adequate time is devoted to Board business, the Board operates through formally constituted committees, membership of which comprises non executive directors only. The terms of reference of the Board and its committees are reviewed at least annually and can be found on the Society's website:
The key activities of the Board and its committees are planned on an annual basis but also allow sufficient time for urgent or ad-hoc matters to be considered on a timely basis. The Board has access to all committee minutes and receives regular reports from the relevant committee chairs on the business transacted at each committee meeting.
The Board committees are:
• Nomination and Governance Committee – The
Nomination and Governance Committee is chaired by the Chairman of the Board. The work of the Committee is explained in the Nomination and Governance Committee Report. The purpose of the Nomination and Governance Committee is to assist the Chairman in keeping the composition of the Board under review and leading the appointments process for nominations to the Board. The Committee also keeps the Board's governance arrangements under review and makes recommendations to the Board to ensure that the arrangements are consistent with the Society's strategic objective of being an exemplar organisation and the Society's mutual status.
The Society has also established the IT Strategy and Resilience Committee which supports the Board.
• IT Strategy and Resilience Committee – The Committee is chaired by Mitchel Lenson, independent non executive director. David Roberts and Tim Tookey are members. The Committee oversees and advises the Board on IT strategy and governance controls, resilience and related risks. The Committee also oversees the strategic investment portfolio. The work of the Committee is described in the Board Risk Committee report.
An overview of the Board structure and its committees as at 4 April 2016 is set out below.
The roles and responsibilities of Board members are agreed by the Board and set out in writing in Statements of Responsibilities and in individual terms of service. These were reviewed and approved by the Board in January 2016 to reflect the introduction of the Senior Managers Regime in March 2016. Given the influence they exercise over the Society's conduct, the Chairman, Chairs of the Audit, Board Risk, Remuneration and Nomination and Governance Committees, and Senior Independent Director are subject to all aspects of the Senior Managers Regime including the Approved Persons Regime. Whilst all directors must satisfy requirements relating to their fitness and propriety, the appointment of non executive directors who fall outside the Senior Managers Regime are no longer subject to preapproval by the regulator.
Terms of appointment for non executive directors and their Statements of Responsibility are available on the Society's website or can be obtained from the Group Secretary on request.
Typically, non executive directors are appointed for an initial period of three years and may be invited to serve a second, or on occasion, a third term, subject to the overall Board composition and succession needs. All directors are required to stand for annual election by members. No current non executive director has served more than six years.
The collective and individual responsibilities of Board members are also set out in the NGM.
There is a clear division of responsibilities between the Chairman, as leader of the Board, and the Chief Executive who is responsible for the day to day running of the business.
Key responsibilities of the Chairman, Chairman Elect (which was an interim position), Senior Independent Director (SID), non executive directors, Chief Executive and executive directors are summarised in the following table.
| Role | Responsibilities |
|---|---|
| Chairman | • Provides leadership of the Board and ensures the effectiveness of all aspects of the Board's role • Fosters a culture of open dialogue and mutual respect between the executive and non executive directors and facilitates an effective contribution from all directors • Facilitates open and honest debate and constructive challenge of the executive directors • Together with other board members, sets the strategic direction and risk appetite of the Society • Together with the other board members, promotes the long term success and ensures the accountability of the Society to its members • Promotes the interests of the Society • Supervises and supports the Chief Executive |
| Chairman Elect | • Supported the Chairman in carrying out his responsibilities to ensure a smooth transition to the role of Chairman. This role was created as an interim role for David Roberts pending his appointment as Chairman; it ceased to exist in July 2015 when he succeeded Geoffrey Howe as Chairman |
| Chief Executive | • Responsible for the day to day running of the business and accountable to the Board for the Group's financial and operational performance • Leads the Executive Committee to direct and co-ordinate the management of the Group's business generally • Leads the Executive Risk Committee to monitor the Group's risk profile and performance, the impact of key current and emerging risks, the effectiveness of risk policies and processes, to authorise specific transactions and to oversee the Group's risk management committees and report to the Board Risk Committee • Implements and monitors systems for the apportionment and oversight of responsibilities, controls and best practices, policies and processes within the Group which maintain the Group's reputation for operational efficiency and high standards of business conduct • Establishes and maintains effective working relationships with the Chairman, the Board and all directors and officers of the Group and is available to the Chief Internal Auditor, the Chief Compliance Officer, the Chief Risk Officer and Chief Marketing Officer • Establishes and maintains effective working relationships with regulators, the Government, industry sector analysts, trade organisations and the media and strategically influences and lobbies these bodies as and when appropriate in the best interests of the Group • Promotes the Group, its good corporate image and social standing in the UK financial services industry |
| Senior Independent Director |
• Provides a sounding board for the Chairman • Leads the annual review of the Chairman's performance by the Board • Is available to directors and members should a situation arise where it is necessary for concerns to be referred to the Board other than through the Chairman or Chief Executive |
| Non executive directors |
• Collectively, set the tone from the top, in particular in relation to culture and governance, and hold the Executive to account for embedding and maintaining the Society's culture and values • Contribute to the development of the strategy and risk appetite exercising effective oversight over risk management controls • Monitor performance against the Corporate Plan, providing constructive challenge to the Executive as appropriate • Bring independent judgement, skills and experience to the Boardroom and engage in open and honest debate, including constructive challenge and support to the executive directors • Promote the long term success of the Society for the benefit of members and ensure that the Society meets its regulatory obligations as a regulated firm |
| Executive directors | • As members of the Board, collectively with non executive directors, set the strategy, risk appetite and culture and values • Submit proposals to the Board for decision or approval, ensuring timely and accurate management information to facilitate sound decision making • Ensure that the Board is kept informed of all significant matters, escalating issues on a timely basis • Are accountable to the Board for the execution of the strategy and the performance of the business • Hold specific management responsibilities in the day to day running of the business |
Biographies for all directors in place as at the date of this report are set out in the Board of directors section.
The Board is made up of a majority of independent non executive directors. As at the date of this report, the Board comprised the Chairman, seven independent non executive directors and four executive directors who collectively possess an appropriate balance of expertise suitable for Nationwide's business. Each non executive director not only brings a broad range of business knowledge and experience but also provides specific skills in key areas such as retail banking, information technology, strategy, brand, finance and risk.
The Society continues to comply with the Code provision which recommends that all directors stand for re-election on an annual basis.
Improving diversity and inclusion at Nationwide has been an important focus for the Board in recent years. The Board met the 2011 Davies Review target of 25% of women on the Board by July 2015 and has increased this target to 33% for female representation at Board and director level by 2020. This target includes representation at Group and divisional director level (non Board roles) with the objective of building a strong pipeline of senior women. Reflecting the need to do more to enhance other aspects of diversity, the Board has also set a target for Black, Asian and Minority Ethnic (BAME) of 8%-15% by 2020. Further information on diversity initiatives is set out in the report of the Nomination and Governance Committee.
All non executive directors have been assessed by the Nomination and Governance Committee to be independent as to character and judgement and to be free of relationships and other circumstances that might impact their independence.
At the time of his appointment as a non executive director and Chairman Elect in September 2014, the Board assessed David Roberts to be independent. The Chairman commits a substantial proportion of his time to his role and represents Nationwide in a number of capacities. Consequently, he is not expected to remain independent following his appointment.
During the year, the Chairman and the non executive directors held two meetings without the executive directors present.
In the course of the year, there have been a number of Board changes:
Appointments to the Board are generally led by the Nomination and Governance Committee. Further information on the process and individual appointments can be found in the Committee's report.
Throughout the period, the role of Chief Executive was held by Graham Beale. In May 2015, Graham Beale announced his intention to retire at or around the time of the AGM in 2016. A search for his successor was started immediately, led by a special committee made up of each of the non executive directors and chaired by David Roberts, Chairman of the Society. The process is explained in the report of the Nomination and Governance Committee.
In November 2015, the Board announced that Joe Garner would succeed Graham Beale as Chief Executive. Graham Beale stepped down from the Board on 4 April 2016 and was succeeded by Joe Garner on 5 April 2016.
Members of Nationwide have the right to nominate candidates for election to the Board, subject to the Society's own rules and compliance with PRA and FCA requirements. No such nominations had been received by 4 April 2016 being the deadline for election to the Board at the 2016 AGM.
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The Board held 13 meetings during the year, including an annual strategy conference in September 2015. The Board schedule is set in advance to ensure adequate notice of meetings. It is recognised that new directors do not receive the same level of notice which might impact their attendance during the early part of their tenure.
typically in response to specific events or external pressures; this resulted in some directors being unable to attend at short notice.
The attendance record for Board members during the period is set out below. The record shows the actual number of meetings attended with the number of meetings for which directors were eligible to attend shown in brackets.
| Attendance record for Board members | |||||||
|---|---|---|---|---|---|---|---|
| Board | Audit Committee |
Nomination and Governance Committee |
Remuneration Committee |
Board Risk Committee |
IT Strategy and Resilience Committee |
Results Approval Committee |
|
| Graham Beale* | 13 (13) | - | - | - | - | - | 2 (2) |
| Rita Clifton | 13 (13) | 9 (10) | - | 8 (9) | - | - | - |
| Mai Fyfield*** | 11 (11) | - | - | - | - | - | - |
| Geoffrey Howe** | 4 (4) | - | 2 (2) | - | - | - | 1 (1) |
| Michael Jary** | 4 (4) | - | - | 2 (2) | - | 2 (2) | - |
| Mitchel Lenson | 13 (13) | - | - | - | 8 (8) | 6 (6) | - |
| Lynne Peacock | 13 (13) | 10 (10) | 8 (8) | 9 (9) | 7 (8) | - | - |
| Roger Perkin | 12 (13) | 9 (10) | 7 (8) | - | 7 (8) | - | 2 (2) |
| Tony Prestedge* | 13 (13) | - | - | - | - | - | - |
| Mark Rennison* | 13 (13) | - | - | - | - | - | 2 (2) |
| David Roberts+ | 13 (13) | 4 (4) | 8 (8) | 7 (7) | 4 (4) | 6 (6) | 1 (1) |
| Chris Rhodes* | 13 (13) | - | - | - | - | - | - |
| Tim Tookey***++ | 9 (11) | 8 (8) | 5 (7) | - | 5 (6) | 5 (5) | - |
In the course of the year, additional meetings were required,
* Executive Directors ** Retired from the Board on 23 July 2015 *** Joined the Board on 2 June 2015
All directors receive papers for Board meetings. If a director is unable to attend a meeting, the Chairman seeks the director's views in advance of the meeting.
The amount of time that non executive directors are expected to commit in the discharge of their duties is agreed on an individual basis and depends on their responsibilities. As part of the recruitment process, the individual time commitment for non executive directors is agreed upon appointment and reviewed annually thereafter. The time commitment for each non executive director takes into account inter alia, whether the appointee is the chair or a member of a Board Committee(s), whether the director has any external executive responsibilities and any relevant regulatory requirements.
Typically this equates to a minimum of 40 days per annum for a Committee Chair and 30 days per annum for a non executive director who does not chair a Committee.
The Chairman spends a minimum of two and a half days a week on Nationwide's business. Details of his other directorships are set out in the Annual business statement.
The Nomination and Governance Committee reviews the time commitment for non executive directors annually. The 2015/2016 review concluded that each non executive director continues to allocate sufficient time to discharge their responsibilities effectively and did so throughout the year.
Directors have a legal duty to avoid conflicts of interests. Prior to appointment, potential conflicts of interest are disclosed and assessed to ensure that there are no matters which would prevent that person from taking on the appointment. The Board has considered the current external appointments of all directors which may give rise to a situational conflict and has authorised potential conflicts where appropriate.
If any potential conflict arises, the Rules permit the Board to authorise the conflict, subject to such conditions or limitations as the Board may determine. In situations where a potential conflict arises, the Director will excuse him/herself from any meeting or discussion, and all material in relation to that matter will be restricted, including Board papers and minutes.
The Board keeps its performance under review and formally evaluates its effectiveness on an annual basis. Having conducted internal effectiveness reviews in 2014 and 2015, the Board commissioned an externally facilitated review in 2016 by Independent Audit Limited. The process was overseen by the Nomination and Governance Committee. Further information can be found in that Committee's report.
The Board is accountable to the members of the Society and seeks to balance their interests with the broader range of stakeholders, including suppliers, customers, regulators, the community and employees.
The Board is responsible for ensuring that the Group maintains a sound system of internal control to support its strategy and objectives. The Board approves the Group's risk appetite and metrics, and Stress Testing results including the Concurrent Stress Test, the Internal Capital Adequacy Assessment Process and the Individual Liquidity Adequacy Assessment Process. It receives regular reports and assessments of the Group's risk and control processes, and recommendations from the Board Risk Committee on matters spanning all major risk categories and risk appetite.
The Board is responsible for robustly assessing the principal risks facing the Group, including those that could potentially threaten its business model, future performance, solvency or liquidity. These risks are set out in the Business and Risk Report which explains how they are being managed. To manage these risks effectively, the Board monitors the Group's risk management and internal control systems and carries out an annual review of their effectiveness. The Board delegates detailed review of these to the Board Risk Committee and Audit Committee as set out below.
The Board approves the Group's risk appetite and has delegated responsibility for monitoring performance against appetite to the Board Risk Committee. The Board has also delegated responsibility to the Board Risk Committee for approval of the Enterprise Risk Management Framework (ERMF) and principal risk management strategies. The ERMF is an enterprise-wide risk framework which defines how risk management should operate across the business. Further information about the Group's ERMF is set out in the Business and Risk Report.
The Board has delegated responsibility for reviewing the adequacy and effectiveness of the Group's internal controls to the Audit Committee.
The Audit Committee and the Board Risk Committee receive regular reports throughout the year, which include information about reviews conducted by Group Risk Oversight, Compliance Oversight and Group Internal Audit. The Audit Committee receives reports from the Group's auditor, PricewaterhouseCoopers LLP, and has a discussion with the auditor at least once a year without management present, to ensure that there are no unresolved issues of concern. The chairs of the Board Risk Committee and the Audit Committee are accountable to the Board, to which both submit regular reports covering the Committees' activities, providing an opportunity to highlight any potential areas of concern.
Between them the Audit Committee and the Board Risk Committee have reviewed all components of the ERMF. The Group will continue to enhance the ERMF to ensure it remains appropriate for the size and complexity of the organisation and responsive to its increased sophistication, emerging developments and regulatory change.
The Board has also delegated to the Audit Committee oversight of the management of the relationship with the Group's auditors, details of which are set out in the Audit Committee report. Group Internal Audit provides the Audit Committee with a report of their audit work carried out during the year. This is accompanied by reports from the Compliance and Group Risk Oversight teams which outline the programme of reviews performed during the year.
Individual accountability at Board and senior manager level has been strengthened during the year following the introduction by the Group's regulators of the Senior Managers Regime in March 2016. This established a revised framework under which senior managers are individually and personally accountable for specific areas of the Group's business. It also introduced a certification regime requiring the Group to assess the fitness and propriety of staff in positions where the decisions they make could pose significant harm to the business or its customers. In support of this, all directors have access to the services and advice of the Group Secretary, and the Group General Counsel, and are able to obtain independent, professional advice on matters relating to their responsibilities.
The Society maintains appropriate directors' and officers' insurance cover in respect of legal and regulatory claims against its directors and officers in relation to the Society's business.
Under the Society's Memorandum and Rules, and to the extent permitted by law, directors have been granted an indemnity by the Group in respect of any third party liabilities which they incur as a result of holding office. This policy was in force during the financial year and at the date of approval of this report.
Further information on risk management and the performance of internal controls is set out in the Audit Committee Report, the Board Risk Committee Report and the Business and Risk Report.
As a mutual organisation, our members are also the owners of Nationwide and, as such, they need to be able to share their views on the overall direction of the business. We seek to ensure they can do this in a number of ways. Our aims are:
The AGM is the key event at which members can have their say on the way the Society is run and hear first-hand from their directors. It is the main opportunity to hold the Board to account as members can vote for or against those standing for election and on a number of other key issues.
Member involvement is an important principle for us as a mutual. We work hard to make it as easy as possible for members to have their say and constantly work to improve our communication. Last year, with input from our online customer research panel, we redesigned our AGM mail pack to make it more engaging and as a result saw a 12% increase in young adults voting. Members' views have also informed what we will be doing with this year's pack. We are enabling more members than ever to receive the information, and vote, online, which also enables us to use more engaging ways such as films to provide some of the information. We also tell our members how they can get more involved with the Society, and provide a report on the Society's year and our financial results. Members are, of course, very welcome to attend the AGM itself, which, this year, will be held in Gateshead on Thursday 21 July 2016.
The AGM may be the single most important event in our calendar, but we work throughout the year to communicate with our members as owners of the business, and to encourage feedback on the way we operate.
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November 2015 saw us host our 150th Member TalkBack. These events provide an invaluable opportunity for Nationwide's members and decision-makers to get together to discuss the Group's activities face to face. Our members can listen to and question our directors, and our directors can hear our members talk about their needs and priorities. Overall, during the financial year, we held seven TalkBack sessions in Newbury, Sheffield, Belfast, Worcester, Manchester, Norwich and London and over 600 members attended. 90% of attendees rated the events as very good or excellent (up from 83% in 2015). In addition, we ran over 100 First Time Buyer and Investment seminars with more than 7,500 people attending.
Our branch employees are obviously the greatest source of face to face contact with our members. That sometimes goes beyond helping with queries or providing financial advice and information. Last year our branches in Nottingham, Swindon, London and Poole involved some of their members in our latest 'Side by Side' initiatives, which bring our employees and members together to offer practical support and help to local charities. On 25 September 2015, we celebrated our partnership with Macmillan by hosting the 'world's largest cream tea party', our version of their 'world's biggest coffee morning' campaign. Our record-breaking event saw members and employees come together to increase cancer awareness and raise vital funds. This coming year we plan to involve members in shaping some aspects of the way their branches look when we update or redesign them. A member suggestions leaflet available in branches is another way in which members can make their voice heard. The Society looks at every suggestion made.
Our online TalkBacks also provide an opportunity for members to interact with our directors, ask questions and make suggestions about our products and services. In addition, members can use our online Member Suggestion Scheme. We received nearly 1,000 ideas via this scheme during the year. Here are just a few of the member suggestions we have received over the past 12 months that we are working on:
Members can endorse other people's suggestions and see feedback on past suggestions. To see past examples of how members have shaped our products and services, visit your.nationwide.co.uk
You can find our latest performance figures for customer service and complaints there too.
The number of followers on our main social media channels has doubled over the last 12 months with our citizenship initiatives like Macmillan's coffee morning and Children in Need activity attracting most interest. Our monthly members' e-newsletter containing news on our latest products, services and competitions now reaches over 2 million members each month.
We commission research to find out how our members rate our service; we also have around 6,000 members signed up to our online customer research panel 'Nationwide Connect', which helps us by providing feedback on a variety of topics. Each week we ask them to take part in a survey. This year the panel gave us their views on topics like lending in retirement, our savings promises and cashless innovations. They can provide feedback on whatever is concerning them. We also ask them to take part in regular online discussions and polls. It's a two-way channel: every quarter we send out a newsletter recognising their contribution and telling them how their feedback has shaped our thinking.
We have recently amended the Board reporting pack to include a new section entitled 'member voice'. This has been designed to ensure that Nationwide Board members are kept abreast of member events, feedback and any issues arising across the Group.
on behalf of the Board
| Committee members Roger Perkin (Chairman) Rita Clifton Lynne Peacock Tim Tookey |
Regular attendees Chairman of the Board Chief Executive Group Finance Director Chief Risk Officer Chief Compliance Officer Chief Internal Auditor (including interim) Divisional Director Financial Performance and Reporting Divisional Director Financial Controls and Information |
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| Former Committee members David Roberts (until July 2015) |
Management Representatives from PricewaterhouseCoopers LLP (external auditors) |
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| What does the Committee do? Provides oversight of: • financial reporting and external audit • internal controls and risk management systems • internal audit • compliance oversight • whistleblowing, fraud and bribery prevention. The Committee's Terms of Reference are reviewed and approved at annually by the Board and are available at nationwide.co.uk |
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| Audit Committee governance The Committee was in place throughout the year and held ten meetings. The Committee Chairman provided a verbal update to the Board following each Committee meeting, and made a formal report to the Board three times during the year. |
This is my final report to you as I will be retiring from the Board of Nationwide at the Annual General Meeting in July. I have chaired the Society's Audit Committee for six years, which, as I have commented previously has been a period of significant change in the UK, in particular with increased public and regulatory focus on financial services organisations, a drive to continually raise standards of control and regulatory compliance, and changes to requirements for financial reporting.
The key role of the Audit Committee is to ensure that the financial statements published by the Group are fairly presented and are prepared using appropriate judgements.
The Committee also keeps under review the effectiveness of internal controls and risk management systems, including those relating to regulatory compliance, and oversees the relationship of the Group with its external audit firm.
A significant part of our time was spent on our review of the interim and year end financial statements, and also the interim management statements published in August 2015 and February 2016. In considering these financial statements, we discussed in detail management's analysis, the external auditor's comments and our conclusions on the main areas of judgement. This year the more significant matters related to:
• Impairment provisions for retail loan portfolios debating changes to assumptions with management to ensure that they are fully substantiated, and also satisfying ourselves that the provisions properly reflect the impairment in the portfolio. This is particularly important as there is a risk that the continuing low interest rate environment makes it more difficult to
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identify events leading to impairment. We continued to review provisions against commercial lending and treasury assets, although these are less material than in recent years.
In addition, we considered a number of matters relating to the overall presentation of the financial statements including:
• Whether the Annual Report and Accounts 2016 are fair, balanced and understandable. This means considering whether we are satisfied that the overall portrayal of Nationwide represents fairly the performance of the business against its strategy, and also whether the important messages about the results are clearly explained and can be understood by the reader. In considering this, we were provided with a report by management setting out the review processes used to assess the overall presentation of the financial statements. This included an independent management review which concluded that the Annual Report and Accounts are clear, consistent, balanced, open and appropriately focused on the more material items. After consideration of management's report and our own review of the financial statements, we concluded that we could recommend to the Board that the Annual Report and Accounts are fair, balanced and understandable.
In concluding on these matters we also considered the views of PricewaterhouseCoopers LLP (PwC), the external auditors. There were no disagreements between management and the audit firm. The external auditor's report sets out the key areas of focus considered by them in relation to their statutory audit; these matters were considered by the Committee in its assessment of areas of judgement in the financial statements as set out above.
To inform our consideration of internal controls, we received and discussed reports from a number of business areas, senior management teams and external sources during the year:
The Audit Committee approved the Group Internal Audit plan for the year, and discussed detailed quarterly reports from Group Internal Audit as well as an annual report which gave an overall assessment of the effectiveness of internal control. The reports included the key matters raised from their work, including common issues and themes, as well as management's effectiveness in taking prompt action to address issues reported.
Following the audit of the prior year Annual Report and Accounts, the external auditors provided the Committee with an Internal Controls Report setting out control weaknesses identified during the audit process and actions agreed with management.
We approved the annual Compliance Oversight plan and discussed quarterly reports and an annual report setting out the results of compliance reviews. These included the overall results of their oversight work, the more significant issues and themes arising and the effectiveness of action taken to resolve issues.
For comparability alongside the other lines of defence the Audit Committee reviewed and discussed the Group Risk Oversight annual plan that was approved by the Board Risk Committee. In addition the Committee received detailed reports on matters arising from Group Risk Oversight reviews and discussed measures to strengthen further Nationwide's Enterprise Risk Management Framework and deepen coordination of the activities of Group Risk, Compliance Oversight and Group Internal Audit.
During the year there was a focus on embedding the Financial Controls Framework as part of business as usual activities in the Finance function, which strengthened further the internal control environment. Certification on the operating effectiveness of these controls was performed at both the half year and full year with the results of assurance testing presented to the Audit Committee. Outcomes of this testing and progress on remediation activities were also communicated at these times.
During the year we invited members of the senior management team to our meetings to discuss the more significant issues raised by Internal Audit, Group Risk Oversight, Compliance Oversight and the external auditors. These discussions were important in demonstrating to the Audit Committee that management takes internal control seriously, and that action is taken swiftly to resolve any important issues.
As well as discussing the views of the external audit firm on the results of their audit work, the Audit Committee is responsible for oversight of the relationship with the firm and the effectiveness of the audit process. During the year this included:
The Audit Committee has considered a number of key factors relating to the performance and appropriateness of the external audit firm throughout the year including:
We have assessed the measures in place to safeguard the objectivity and independence of the external audit firm. This included our policy on the appointment of PwC for non-audit work, which specifies permitted, prohibited and pre-approved services as appropriate. We considered proposals from management to use PwC in accordance with our policy, challenging the appropriateness of the recommendations and the independence threats potentially arising. In addition the individual and overall fees were reviewed throughout the year as there is a potential for high levels of non-audit fees to affect objectivity. The fees are set out in the notes to the accounts. Private discussions between the external audit firm and the Audit Committee are held to provide an opportunity for any relevant issues to be raised directly with the Committee.
A formal assessment survey was completed on the effectiveness of the external audit firm. This survey considered expertise and independence including feedback from senior management. This found PwC and the audit process to be both robust and effective.
The need for a potential audit tender was discussed, as PwC has been in tenure since 1991 with the latest re-tender taking place in 2003. We have continued to be satisfied with the quality, objectivity and independence of PwC and did not consider a tender process necessary this year. However, regulatory change will require the Group to change its external audit firm no later than 2020. The process of the selection of a new external audit firm will commence in 2017.
Group Internal Audit plays a key role in providing independent assessment and challenge of governance, risk and control at Nationwide. As well as approving the Internal Audit plan and considering the results of its work, the Audit Committee is responsible for the oversight of Group Internal Audit. During the year we therefore:
I met monthly with the Chief Internal Auditor, and spent some time with the Internal Audit team discussing the priorities for their work and, as a Committee, we held a private discussion with the Chief Internal Auditor. We also held a number of workshops with Internal Audit senior management during the year, discussing audit planning and priorities as well as continued progress in developing the Internal Audit function.
Compliance Oversight also plays an important role in monitoring Nationwide's compliance with regulatory requirements and, critically, ensuring that we continue to deliver fair customer outcomes. The Audit Committee approved the Compliance Oversight plan for the year, and discussed with the Chief Compliance Officer the resources available to complete the planned programme of work. Regular reports from Compliance Oversight also gave updates on progress in delivering the Compliance Oversight plan, and we held private discussions with the Chief Compliance Officer as necessary.
The Group Risk Oversight function is operationally independent of management and personnel responsible for owning and managing risk. The teams are responsible for setting and embedding the methodologies and standards needed to enable business areas to assess and manage risk. The Audit Committee discussed the Group Risk Oversight plan for the year alongside the Group Internal Audit and Compliance Oversight plans to ensure sufficiency of coverage. The Audit Committee received reports on the oversight reviews and held private meetings with the Chief Risk Officer and Group Risk Director to discuss any issues arising.
During the year we carried out a range of other activities including:
Immediately following each Audit Committee meeting I provided a verbal update to the board of directors on matters discussed by the Audit Committee. I also presented a formal written paper to the Board three times during the year, giving details of the Committee's discussions and conclusions.
This is my final report as Audit Committee Chairman before I hand over to Kevin Parry. It has been both a privilege and hugely enjoyable to serve as both a Board member and Chair of this Committee. I wish Nationwide all the best for the future and will follow its progress with great interest, not least as a continuing member.
Chairman – Audit Committee
| Committee members Tim Tookey (Chairman from July 2015) Mitchel Lenson Lynne Peacock Roger Perkin |
Regular attendees Chairman of the Board Chief Executive Group Finance Director Chief Risk Officer Chief Compliance Officer Chief Internal Auditor Group Risk Director Representatives from PricewaterhouseCoopers LLP |
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| Former Committee members David Roberts (Chairman of the Committee until July 2015) |
(external auditors) | ||||
| What does the Committee do? Responsible for: • advising the Board on current and potential future risk exposure • overseeing risk management as a whole in the Group • monitoring the Enterprise Risk Management Framework (ERMF) including risk appetite, risk monitoring, and risk adjustments to remuneration. |
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| Risk Committee governance The Committee was in place throughout the year and held eight meetings. The Committee oversees the Executive Risk Committee, which is the management committee responsible for ensuring a co-ordinated risk management approach across all risks and provides a formal report to the Board on a quarterly basis. Further detail about the ERMF including three lines of defence, risk appetite and the risk committee structure can be found in the Business and Risk Report. |
This is my first report to you as Chairman of the Committee, having succeeded David Roberts in July 2015. I would like to thank David for his leadership as interim Chair. Over the past year, we have focused on continuing to build the Group's resilience to key risks in the interests of our members, against a background of continued focus on banking resilience and market conduct issues.
The principal purpose of the Committee is to provide oversight and advice to the Board in relation to risk-related matters. It allows for a subset of non executive directors to provide more focus on risk than would be possible in Board meetings. In addition to the regular attendees from management, we invite subject matter experts to present on a variety of topics. Each meeting considers the current and emerging risk exposures of the Group.
The Committee considers Board risk appetite in detail and makes recommendations to the Board for its adoption. It then monitors performance against Board risk appetite and undertakes appropriate deep dives on material risk issues to ensure that the Group remains within appetite. The Committee also approves the strategies for managing the Group's most significant risks and the use of relevant control frameworks.
To improve focus on IT and business resilience risks, including the risk of cyber attacks, the Committee has requested the IT Strategy and Resilience Committee (ITSRC) to review IT and resilience related risk strategies on its behalf and monitor progress against them. ITSRC then makes recommendations on these to the Board Risk Committee.
The Committee has carried out a robust assessment of the principal risks facing the Group. Specific matters considered by the Committee in the year included:
• Lending risk
The focus during the year was on lending risk strategies, with key discussions taking place regarding return on capital for new business, commercial lending policy and reviews of buy to let lending.
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Core responsibilities included reviewing capital and liquidity adequacy, stress testing and the Pillar 3 disclosures. In addition, the Committee reviewed the investment strategy of the defined benefit pension fund focusing on the inherent market risks, the long-term objectives and risk appetite.
• Operational risk
Risk strategy reviews were completed for people risk, fraud risk and information and financial management risk and recommendations were received from ITSRC on IT and resilience related risks.
• Conduct and compliance risk
Risk strategy reviews included product and service design and review, sales, after sales, financial crime and firm and culture. There were also reviews of anti-money laundering, vulnerable customers, and conduct risks relating to interest only mortgages.
• Strategic risk
Matters covered included discussion of potential emerging risks, developments in model risk governance, and a review of the economic and political landscape, including consideration of alternative economic scenarios.
• ERMF
Core responsibilities included the annual review and approval of changes to the ERMF, a review of conflicts of interest in the three lines of defence, risk adjustments to remuneration, and governance updates, including ensuring that Risk Committee Terms of Reference reflect the Senior Managers Regime (SMR).
• Risk Culture
A review of the Group's risk culture was carried out to assess whether the Group places sufficient value on risk management and that risk issues are proactively identified and addressed.
• Corporate Governance Code
A detailed review of the responsibilities relating to the Corporate Governance Code requirements for risk management was carried out to enable the Committee to confirm how it will review the effectiveness of risk management and internal control systems. The outcome of this review is recorded in the Accountability section of the Report of the directors on corporate governance.
Risk reporting is comprehensive across all risk categories (see Business and Risk Report for details). The Committee monitors the Group's risk profile against Board risk appetite. More granular risk appetite metrics are escalated when a trigger or limit has been breached. In addition, we also consider longer-term risks to delivering the Corporate Plan and emerging issues that could present risks in the future. These 'Top and Emerging' risks are presented within the Business and Risk Report. Following each Committee meeting, I update the Board verbally. In addition, a formal quarterly report to the Board summarises the Committee activities undertaken, discussions held and anticipated activities for the coming quarter. This is accompanied by reports from both the Chief Risk Officer and Chief Compliance Officer.
Other than the change in respect of the ITSRC as noted above, the operation of the Committee has remained similar to the previous year. The annual effectiveness review resulted in some minor revisions to our Terms of Reference to align to the SMR regime, and we have continued to focus the agenda on the most material risk items.
The last 12 months have seen continued progress in risk management at Nationwide. In particular, we continue to mature our risk management frameworks and improve our capital position and have focused on ensuring our stress testing capability remains in line with the expectations of the regulator. The results of the 2015 concurrent stress testing exercise demonstrated that we are resilient to a severe stress.
Over the next 12 months the Committee will further mature discussions on risk appetite, considering each principal risk category (see Business and Risk Report for detail). We will continue to focus on oversight of macroeconomic and market uncertainty, including the forthcoming referendum on EU membership, material lending portfolios and conduct challenges. We are also engaged in the next iteration of concurrent stress testing due for submission in June 2016. It is clear that regulatory and industry expectations of improvements in risk management continue to rise. In addition, perhaps more fundamentally, the expectations of members and the general public of the safety, security, resilience and ethics of large financial institutions are rightfully very high. The Committee engages fully with management in order to oversee the strengthening in the Group's business operations, to meet these rising standards to safeguard members' interests, and to continue to serve our members to the best of our ability. members to the best of our ability.Chairman – Board Risk CommitteeBack to Contents
Chairman – Board Risk Committee
| Committee members David Roberts (Committee Chairman - appointed July 2015; member throughout the year) Lynne Peacock Roger Perkin Tim Tookey (appointed June 2015) |
Regular attendees Chief Executive Group Director, People, Customer & Commercial Divisional Director, Human Resources |
|---|---|
| Former Committee members Geoffrey Howe (Chairman of the Committee until July 2015) |
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| What does the Committee do? • Reviews the structure, size and composition of the Board so that it is effective in managing the interests of its members • Reviews all director recruitment and on-boarding to ensure that leaders are selected and set up to succeed in fulfilling their responsibilities to members • Reviews the performance and development of directors to help them continue to be effective leaders now and in the future |
• Reviews talent and succession plans for director roles to ensure that there is a pipeline of talent ready to take on future leadership responsibilities • Sets the board governance framework and provides oversight of governance arrangements The Committee's Terms of Reference are reviewed and approved at least annually by the Board and are available at nationwide.co.uk |
| Nomination and Governance Committee governance The Committee comprises solely independent non executive directors and met eight times during the year for regular business. The Committee Chairman provided a verbal update to the Board following each Committee meeting. The special sub-committee set up to oversee the succession process for the Chief Executive met six times, in addition to meeting and interviewing candidates. |
I am pleased to present my first report as Chairman of the Nomination and Governance Committee which has made good progress in all areas of its responsibility this year. As explained in my introduction to the Corporate Governance Report, good governance promotes sound decision making. To ensure that there is appropriate focus on the Society's governance arrangements at Board level, in March 2016, the Nomination Committee extended its remit to expressly include governance.
The Committee's activities are explained below.
Making sure that the Board has the right balance of skills, diversity and independence is an important part of ensuring its effectiveness. The Committee keeps the composition of the Board under review to ensure that it provides effective oversight of all areas of the business, is equipped to deal with emerging challenges and that changes to the Board and its committees can be achieved without undue disruption.
The Board is guided by the Board Composition and Succession Policy which provides guidance on the size, structure and composition of the Board including succession. A copy of the policy is available on our website:
were validated as part of the Board Effectiveness Review (described below). As well as highlighting strengths of the current Board, the outputs will be used to inform decisions about the future composition of the Board.
Whilst it is important to refresh skills periodically and to plan for succession, it is also important to preserve continuity. Given recent changes on the Board in a number of key roles, I am grateful for the ongoing support of our longer serving non executive directors.
The Group has made good progress with its diversity strategy which is designed to promote equality and inclusion across the business. This has been achieved through an agenda of awareness raising and education, including the introduction
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of mandatory equality, diversity and inclusion online training and promoting Diversity Week 2015 with external keynote speakers and panel events open to all employees. Other activity has included enhanced governance, a new focus on diversity targets and a campaign to increase diversity declaration rates that resulted in a rise from 27% to over 90% in six months.
Nationwide demonstrates its commitment to equality, diversity and inclusion by endorsing and leveraging the power of employee network groups. These are groups of employees who share similar characteristics or life experiences and want to use those similarities to create cross-functional workplace connections, provide professional development and mentoring opportunities, and advance business initiatives. They were started in 2012 and now include employees all across the UK. Senior leaders actively demonstrate visible commitment to equality, diversity and inclusion by serving as key sponsors of our groups and provide support, guidance and resources.
In June 2015, we met our target of 25% female representation on the Board. In our last annual report, we committed to increasing female representation to 33% by 2020 across the Group's director population (divisional directors and above, including the Board). As a result of our focus on strengthening the talent pipeline at executive level, I am pleased to report that we have achieved 31.6% female representation in this director population.
Whilst there has been a strong focus on improving female representation at senior level, our strategy is broader than gender and includes initiatives aimed at increasing representation in other areas including ethnicity. The impact of positive action to promote ethnic diversity is yet to be felt. To ensure appropriate focus we have set a target of 8% - 15% for Black, Asian and Minority Ethnic (BAME) representation across our director population by 2020. Representation currently stands at 2.6%. We recognise that further attention will be needed in order to achieve our BAME target.
The recruitment process for non executive directors is designed to ensure that the Board collectively possesses a range of skills and expertise to oversee the full range of business activities and brings appropriate objectivity and independent judgement.
The Committee has presided over a number of changes to the Board and its Committees including the following as independent non executive directors:
• Tim Tookey, appointed in June 2015, who also serves as Chairman of the Board Risk Committee. Tim Tookey brings extensive executive experience as a Finance Director in the banking and insurance sector as well as in risk management and retail financial services.
As well as ensuring the right balance of non executive directors, the Chief Executive succession process has been a particular priority for the Board this year. All non executive directors participated in the search and selection process, which is described below.
In May 2015, Graham Beale announced his intention to retire at, or around, the time of the 2016 AGM. A search and selection process for a new Chief Executive was immediately commenced. The process was led by me as Chairman and supported by a specially constituted CEO Appointment Committee comprising all the independent non executive directors.
The Committee met six times prior to recommending Joe Garner to the Board as the preferred candidate as Chief Executive. Committee members also met and interviewed the candidates. The process was supported by independent search firm, JCA Group, who worked with the CEO Appointment Committee on a detailed role profile. In appointing a new Chief Executive we were keen to attract an exceptional individual with retail banking experience, a strong consumer and brand bias and ideally someone with significant experience of digital propositions. We were also looking for a visionary and strategic thinker with an engaging leadership style and, most importantly, a strong alignment with the Society's values and mutual principles.
JCA Group worked with the CEO Appointment Committee to develop a short list. Candidates (both internal and external) underwent a series of interviews supported by an external assessment.
Joe Garner stood out as an exceptional candidate; as a motivational leader, a customer champion with a strong focus on operational excellence in customer service, a role model of the Society's values, and as being committed to the principles of mutuality. The Board believes that he is the right person to lead the Society through the next stage of its strategic development and is delighted to have attracted someone of Joe's calibre.
Non executive directors are subject to a rigorous search and selection process which is overseen by the Committee. The Committee, supported by an independent search firm, prepares a detailed role description and person specification. The search firm conducts an extensive search of the market, usually agreeing a long list with the Committee before narrowing down to a short list for interview.
The Committee conducts the interviews to assess the suitability of the candidates for the role. Ensuring that the candidate is the right fit for Nationwide's culture as a mutual is a key part of the assessment stage. Preferred candidates may also meet other members of the Board and the Executive.
The process involves detailed referencing and other checks to establish the candidate's credentials including fitness and propriety. Certain roles also require regulatory pre-approval.
Once all checks have been completed and the Committee is satisfied that the candidate is right for the role, a recommendation is made to the Board. All members of the Board meet new non executive directors before they are appointed.
In 2015, the Committee worked with Spencer Stuart in relation to the appointment of Tim Tookey and Mai Fyfield. The Committee was also supported by JCA Group in relation to the appointment of Kevin Parry, who will succeed Roger Perkin as Chairman of the Audit Committee. Both firms are independent of Nationwide.
As part of our ongoing review of board composition, we continue to look for non executive directors with specialist skills to address succession needs. Consistent with our stated objectives, future appointments will seek to secure and further progress the diversity of our Board.
All new directors undergo a comprehensive induction and development programme which is designed to help new directors make an early contribution to the Board. The induction programme is tailored to the individual needs of directors identified during the selection process and is completed over a six-month period to ensure that directors gain an understanding of the business within an appropriately short period of time. The induction covers key themes, priorities and challenges faced by the Group and involves visits and meetings to various branches and office locations.
Board directors also receive ongoing training sessions on a quarterly basis, or more frequently as required, to address a range of Society-specific and market or regulatory matters. During 2015/16, topics included buy to let lending, cyber security, anti-money laundering requirements, changes to UK Corporate Governance Code requirements in relation to risk management and control reporting, emerging risks and changes to the Senior Managers Regime.
Ensuring a strong pipeline of future leaders is a key consideration for the Committee. Whilst four external divisional director appointments were made this year, a further ten internal director moves and role changes took place. Over 60% of all senior executive appointments were internal, confirming our commitment to "grow our own" talent.
Preparing for the future has also been a key driver for research undertaken to understand the capabilities required by our executive leaders in order to take the organisation forward in a rapidly changing world. Based on this research, the Committee has approved Nationwide's participation in an initiative run jointly with Imperial College Business School to provide development for all executive, Group and divisional directors, helping to develop the capabilities of our leaders and equipping them to deal with future challenges.
A key responsibility of the Committee is to ensure that the Board operates effectively. Whilst having the right people on the Board is central to overall effectiveness, how the Board operates and interacts at and outside meetings is equally important. In keeping with best practice, the Board conducts a review of its effectiveness annually. Having conducted internal reviews in 2014 and 2015, the 2016 review of the Board and its principal committees was carried out by Independent Audit Limited, an external facilitator which has no other connection with Nationwide.
91
The evaluation was conducted during the period from January 2016 to May 2016 and took the form of:
The assessment included a review of the Board composition and diversity of the Board, succession planning, effectiveness of decision-making processes, including the culture and behaviours at Board meetings, and the relationship between the Board and the Executive.
The findings concluded that the Board and its committees continue to operate effectively and recommended actions designed to maintain and enhance the Board's effectiveness.
The following priorities will form the basis for the Board's action plan for 2016/17:
• reviewing the development of the Board's operations and dynamics in the light of changes to the Board's composition.
As explained above, the Committee has expanded its remit during the year to support the Board in discharging its responsibilities for governance oversight. In executing its role, the Committee ensures that governance arrangements are appropriate to ensure that systems, controls, policies and procedures facilitate sound decision making that is consistent with the Group's strategy and risk appetite and ensures that due regard is paid to the interests of key stakeholders such as members, customers, employees, regulators, suppliers and communities. One of the first activities undertaken by the Committee since taking on this responsibility was the review and approval of the new Nationwide Governance Manual which documents the top down framework in place at Nationwide to ensure sound decision making and prudent management. The Committee will review the manual at least annually to ensure it remains fit for purpose. It also oversaw changes to directors' Statements of Responsibility and other related changes to support the move to the new Senior Managers Regime implemented by the regulators in March 2016.
In closing, I would like to thank the Committee for its commitment during what has been an active period. The Committee continues to play an important role in ensuring that the Society has an effective Board and Executive. A key area priority for the Committee during 2016 will be ensuring a smooth transition to the new Chief Executive who is critical to the continuing success of the Society for the benefit of its members.
Chairman – Nomination and Governance Committee
| Executive/non executive membership |
Gender | Age | Tenure | ||||
|---|---|---|---|---|---|---|---|
| Executive | 4 | Male | 8 | 45-50 | 2 | 0-3 years | 4 |
| Non executive | 7 | Female | 3 | 51-55 | 4 | 4-6 years | 4 |
| 56-60 | 2 | 6+ years | 3 | ||||
| 61+ | 3 |
For the year ended 4 April 2016
Dear Member, I am pleased to present the Remuneration Committee's report, including details of the directors' pay for the year to 4 April 2016.
Last year our long serving Chief Executive Graham Beale announced his intention to step down from his role leading our Society. We are grateful for Graham's successful leadership over the last nine years, the early part of which was characterised by some particularly challenging and turbulent times. He leaves our Society in great shape and in the careful stewardship of our incoming Chief Executive Joe Garner, who joined us on 5 April 2016. Details of Graham Beale's leaving arrangements and the remuneration package for Joe Garner are described within this report.
Our remuneration policy was approved by our members in 2014, and continues to set the framework for our directors' remuneration. For this year, the Directors' Performance Pay Plan (DPPP) has been renamed the Directors' Performance Award (DPA), although the plan design remains the same. For the 2016/17 performance year we have revised the deferral schedules in the DPA in response to new regulatory requirements, which have lengthened the period over which directors' pay will be deferred. Further details of this change are set out within the report.
The leadership team has again delivered a strong performance this year, driven by our consistent focus on putting the needs of our members first. We continue to be ranked number one for customer satisfaction amongst our high street peer group1 , underlying income and profits
have both increased and we strengthened our capital position. Underlying costs have increased, reflecting the growth of our business and continued investment in new products and services which means our underlying cost income ratio has increased slightly. We have successfully grown our membership, as well as continuing to invest in new products and technologies.
Our excellent results have led to payments being awarded under the DPA. Awards have also been made in relation to the final cycle of the Medium Term Performance Pay Plan (now discontinued), which was based on a three year performance period ending in March 2016. Details of how both sets of payments have been calculated are set out in this report.
In delivering the stretching targets which they were set, the Committee considers that our directors have delivered real benefits for the Society and all of our members.
Going forward, the total levels of variable pay opportunity available will fall, reflecting the reduction in the overall performance pay opportunity for directors under the DPA compared to our legacy plans.
On behalf of the Remuneration Committee, I recommend that you endorse the report.
Chair – Remuneration Committee
© GfK 2016, Financial Research Survey (FRS), 3 months ending 31 March 2016 vs 31 March 2015, 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 >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).
The remuneration policy approved by members at the 2014 AGM remains in force. In implementing the policy for this year, the Directors' Performance Pay Plan (DPPP) has been renamed the Directors' Performance Award (DPA); however the plan design remains the same.
A summary of the remuneration policy is set out below. It does not replace or override the full approved policy, which is available at
In applying this policy, the Committee is guided by the need to ensure executives are appropriately motivated and rewarded to deliver demonstrable value for our members.
| Operation | Maximum opportunity | |
|---|---|---|
| Base salary | • Reviewed annually, taking into account market data, individual skills, performance and experience, and the approach to salaries throughout Nationwide. |
No maximum opportunity for base salary or benefits. |
| Benefits | • Include car benefits, healthcare and insurance benefits. |
|
| Pension | • Executive directors receive a cash allowance in lieu of pension. |
Maximum allowance is 40% of salary. |
| Directors' Performance Award (DPA) |
• Rewards annual performance against challenging financial and strategic measures and key individual objectives. |
Maximum opportunity varies by role but will not exceed regulatory limits. |
| • Key measures within the Corporate Plan have to be achieved for target pay-out and considerably exceeded for maximum pay-out. |
||
| • Deferral periods have increased so that: | ||
| • 40% of the award is paid following the performance period |
||
| • 60% is deferred for between three and five years. |
||
| • 50% of awards are linked to the value of the Society's core capital deferred shares. |
||
| • Awards are subject to clawback for up to seven years. |
||
| Chairman fees | • Normally reviewed and approved by the Remuneration Committee on an annual basis. |
No maximum opportunity, but fee levels take into account |
| Non executive director fees |
• Normally reviewed and approved by the Executive Committee and the Chairman on an annual basis. |
time commitment for the role and practice at other organisations. |
| • Non executive directors receive a basic fee. |
||
| • An additional supplement is paid for serving on or chairing a Board Committee. |
||
| • Non executive directors do not participate in any performance pay or pension arrangement. |
From the 2016/17 plan onwards, the time horizons for awards under the DPA will be extended in response to changing regulatory requirements. Awards will now be deferred for
between three and seven years. The period during which awards are subject to clawback will also be extended to ten years in some circumstances.
1 The full policy can be found at
The table below sets out the base salary levels for executive directors which were in effect during the year and their revised salaries as at 1 April 2016. T P Prestedge has received a higher level of increase than other directors in order to recognise the balance of responsibilities amongst the executive team.
| Base salary | |||
|---|---|---|---|
| 2016/17 | 2015/16 | % increase | |
| G J Beale* | - | £893,000 | - |
| J D Garner* | £840,000 | - | - |
| T P Prestedge | £560,000 | £536,000 | 4.5% |
| M M Rennison | £614,000 | £602,000 | 2.0% |
| C S Rhodes * J Garner replaced G J Beale as CEO on 5 April 2016. |
£568,000 | £557,000 | 2.0% |
* J D Garner replaced G J Beale as Chief Executive on 5 April 2016.
2015/16 was the second year of operation for the DPA. This remains the only performance pay plan in which executive directors participate on an ongoing basis. The maximum award level under the DPA is 160% of salary for the Chief Executive and 120% of salary for other executive directors.
The plan rewards individual performance and the attainment of challenging strategic and financial corporate metrics. The measures fall within the following broad areas and ensure focus on delivering benefits for our members:
| Member measures (75% of award) | |
|---|---|
| Customer satisfaction (25%) | |
| Growing customer relationships (25%) | |
| Financial efficiency (25%) | |
Payments are made at the discretion of the Remuneration Committee who may reduce or cancel payments if it believes that the plan outcomes are not representative of the overall performance of the Society. The Society also has the ability to Individual performance (25% of award)
Individual performance objectives reflecting each individual's contribution towards the delivery of the Corporate Plan.
claw back performance pay awards for up to seven years after they were awarded if the Remuneration Committee considers it appropriate to do so.
A risk gateway must be passed before any payment is made under the plan, based on measures of statutory profit and CET1 capital ratio, and this gateway was achieved in 2015/16. In reviewing performance under the DPA during 2015/16, the Committee then assessed the Group's performance against three equally weighted measures:
| Measure | Performance target range: |
Performance relative to targets |
Outcome | Performance pay achieved (% of salary) |
|
|---|---|---|---|---|---|
| threshold - maximum |
Chief Executive |
Executive directors |
|||
| Customer satisfaction rating (based on average for the financial year) |
1st with a 4% lead - 1st with a 8% lead |
Above target | 1st in our high street peer group with a 6.6% lead1 |
31.2% | 23.0% |
| Growing customer relationships |
7.1 million - 7.5 million |
Above target | Main product relationships with 7.4 million customers |
35.5% | 26.4% |
| Financial efficiency (cost income ratio) |
54.7% - 49.9% | Above threshold | Cost income ratio of 53.9% |
18.8% | 13.6% |
| Total performance pay achieved based on Group performance | 85.5% | 63.0% |
© GfK 2016, Financial Research Survey (FRS), 12 months ending 31 March 2016, 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 >6% (Barclays, Halifax, HSBC, Lloyds Bank (inc C&G), NatWest and Santander).
| Performance pay achieved (% of salary) / maximum available |
Comments |
|---|---|
| 35.8% / 40% | Above target for individual performance, reflecting his overall leadership of the Society. |
| 26.7% / 30% | Above target for individual performance, reflecting the achievement of objectives around transformation and innovation. |
| 23.3% / 30% | Above target for individual performance, reflecting his leadership of the Society's strong financial performance for the year. |
| 20.0% / 30% | On target for individual performance, reflecting the trading and financial performance of the division under his leadership. |
For 2015/16, 40% of each individual's award vests in June 2016 and the remaining 60% is deferred, with 30% paid after three years and 30% after five years. 50% of both the upfront and deferred portions is linked to the performance
of the Society's core capital deferred shares (CCDS) and distributions paid. These elements are subject to a six month retention period and so will be paid to participants, in cash, in the following December.
The MTPPP was replaced by the single annual scheme from 2014/15, although historic awards under the 2013-16 award cycle remained due for payment. This is the final cycle of this legacy scheme.
The plan measures the Society's performance over a three year period against the following equally weighted factors:
The maximum award level under the plan was 120% of salary for the Chief Executive and 81% of salary for other executive directors.
In reviewing performance under the 2013-16 MTPPP, the Committee assessed the Group's performance against the following measures. These targets were set at the start
achievement of challenging financial targets over a three year performance cycle. For the 2013-16 award cycle the measures were:
The MTPPP rewards sustained performance and the
All outstanding medium term performance pay awards will be cancelled if the Group's Core Tier 1 capital ratio falls below a minimum level set by the Board.
Achievement of this measure ensures that the Group maintains a strong capital base that is consistent with our risk criteria and regulatory standards for the business.
of the plan in 2013, with performance assessed over a three year period.
| Measure Performance Performance Outcome target range: relative to targets |
Performance pay achieved (% of salary) |
|||
|---|---|---|---|---|
| maximum | Chief Executive |
Executive directors |
||
| 1st with a 2% lead - 1st with a 6% lead |
Maximum | 1st in our high street peer group with a 6.5% lead1 |
40.0% | 27.0% |
| £2,173 million - £3,531 million |
Above target | Cumulative underlying profit of £3,524 million achieved over period |
39.9% | 26.9% |
| 2,992 - 3,512 | Above threshold | 3,090 main and packaged current accounts held |
17.1% | 12.3% |
| Total performance pay achieved | 97.0% | 66.2% | ||
| threshold - |
1 © GfK 2016, Financial Research Survey (FRS), 6 months ending 31 March 2016, 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 >6% (Barclays, Halifax, HSBC, Lloyds Bank (inc C&G), NatWest and Santander).
In addition, the Committee confirmed that the risk criteria for the MTPPP had been met.
Two thirds of each individual's award vests in June 2016 and the remaining one third is deferred for an additional year until June 2017. For each portion vesting, 50% will be paid in
cash in the respective June. The remaining 50% of each portion is linked to the performance of the Society's CCDS. These elements are subject to a six month retention period and so will be paid to participants, in cash, in the following December.
Joe Garner commenced his role as Chief Executive on 5 April 2016. His remuneration package has been set at a level slightly below that of Graham Beale, reflecting the fact this is his first year in the role. He will receive a base salary of £840,000, benefits (including company car and private medical insurance) and a pension allowance of 40% of salary. He will participate in the Directors' Performance Award for 2016/17 with an award of 100% of salary for target performance and a maximum award of 160% of salary.
The Committee has agreed to provide compensation to Joe Garner for the forfeiture of an element of his existing unvested performance pay awards from his employment prior to joining. In line with regulatory requirements, this compensation is not more generous in terms or amounts than he would have otherwise received.
These awards are subject to continued employment and may be subject to repayment if he resigns or is dismissed for gross misconduct within two years of receipt.
Further details will be disclosed in next year's Annual Report.
The table below shows details of the Chief Executive's remuneration for the previous seven years.
| Total remuneration £'000 |
Annual performance pay earned as % of maximum available |
Medium term performance pay earned as % of maximum available |
|
|---|---|---|---|
| 2015/16 | £3,413 | 75.8% | 80.8% |
| 2014/15 | £3,3971 | 74.4% | 84.5% |
| 2013/14 | £2,571 | 83.3% | 74.9% |
| 2012/13 | £2,258 | 60.6% | 41.7% |
| 2011/12 | £2,251 | 60.6% | 40.7% |
| 2010/11 | £1,961 | 75.4% | 76.9% |
| 2009/10 | £1,539 | 33.8% | 61.7% |
This reflects the restated total remuneration figure shown in the single total figure of remuneration for each executive director table below.
The Chief Executive's total remuneration for 2015/16 includes awards under the DPA for 2015/16 and legacy payouts under the directors' previous medium term plan. Similarly, total remuneration for 2014/15 also included awards under both the DPPP for 2014/15 and the legacy medium term plan. The
transition from our old plans to the new one year plan means the total remuneration figures have increased compared with 2013/14. However, following the transition period into the new plan the Chief Executive's variable remuneration opportunity has decreased.
The change in remuneration (base salary, benefits and annual performance pay only) for the Chief Executive from 2014/15
to 2015/16 compared to the average for all other employees is as follows:
| Salary | Benefits | Annual performance pay | |
|---|---|---|---|
| Chief Executive | +2.06% | -3.55% | +3.93% |
| Average employee | +4.11% | +19.35%1 | -1.68% |
The increase in the value of benefits for our average employee reflects an increase in employers' pension contributions to our Group Personal Pension introduced during this year.
The chart below illustrates the amount spent on remuneration paid to all employees of the Group, compared with retained earnings.
Payroll costs represent 39.8% of total administrative expenses. The Group profit after tax for the year was £985 million, of which £110 million was paid as distributions and the remaining £875 million is held as retained earnings.
Where indicated, the tables in the following sections have been audited by PricewaterhouseCoopers LLP.
These disclosures are included in compliance with the Building Societies Act 1986 and other mandatory reporting regulations, as well as the Large and Medium-Sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013, which the Society has voluntarily adopted.
The table below shows the total remuneration for each executive director for the years ended 4 April 2016 and 4 April 2015.
In 2014/15 the performance pay arrangements for directors (the Annual Performance Pay Plan (APPP) and Medium Term Performance Pay Plan (MTPPP)) were replaced with a simplified single plan – the Directors' Performance Award (DPA).
The table below shows the awards made under the DPA for performance in 2015/16, as well as legacy awards that remain due in respect of the MTPPP from previous years. The total pay package excluding legacy payments is disclosed to reflect the ongoing position where the DPA is the only performance pay plan available to directors.
The performance pay plan awards shown are the total award under each plan, rather than the amount that is paid straight away. For DPA awards, only 40% of the award is payable in 2016 and the remainder is deferred for up to five years.
| Single total figure of remuneration for each executive director (Audited) | |||||||
|---|---|---|---|---|---|---|---|
| Fixed remuneration | Current | Legacy | Total pay Total pay |
||||
| Executive | Salary | Benefits (notes i and ii) |
Pension allowance |
variable remuneration (note iii) |
variable remuneration (note iv) |
package including legacy |
package excluding legacy |
| directors | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
| 2016 | |||||||
| G J Beale (note v) | 893 | 214 | 357 | 1,083 | 866 | 3,413 | 2,547 |
| T P Prestedge | 536 | 83 | 177 | 481 | 355 | 1,632 | 1,277 |
| M M Rennison | 602 | 90 | 199 | 520 | 399 | 1,810 | 1,411 |
| C S Rhodes | 557 | 60 | 184 | 463 | 369 | 1,633 | 1,264 |
| Total | 2,588 | 447 | 917 | 2,547 | 1,989 | 8,488 | 6,499 |
| 2015 | |||||||
| G J Beale | 875 | 242 | 350 | 1,042 | 888 | 3,397 | 2,509 |
| T P Prestedge | 525 | 83 | 173 | 460 | 362 | 1,603 | 1,241 |
| M M Rennison | 590 | 112 | 195 | 517 | 407 | 1,821 | 1,414 |
| C S Rhodes | 546 | 62 | 180 | 460 | 377 | 1,625 | 1,248 |
| Total | 2,536 | 499 | 898 | 2,479 | 2,034 | 8,446 | 6,412 |
Notes:
i. Taxable benefits include private medical cover, car allowance and the use of a company vehicle and driver when required for business purposes.
ii. Taxable benefit figures for 2015 have been restated to reflect HMRC guidance in relation to travel and subsistence expenses in situations where directors regularly work from more than one office location.
iii. Current variable remuneration consists of the awards under the DPPP / DPA. The components of these plans and details of the performance measures are described on pages 95 to 96.
iv. Legacy variable remuneration consists of awards under the MTPPP. Although the plan was discontinued for years starting after 2014, the nature of the plan which measures business performance over a three year period means there are awards in 2016 in respect of the MTPPP plan initiated in 2013. The components and performance measures of this plan are described on page 97.
v. The current and legacy variable remuneration figures shown for G J Beale reflect the treatment of his awards agreed by the Committee. Details of his payments for loss of office are set out in a separate section below.
G J Beale and M M Rennison have ceased ongoing participation of the Society's defined benefit pension plans and have become deferred members. No executive director accrued any additional pension entitlement during the year. The change in accrued pensions shown in the table below is as a result
of inflationary increases that are required by legislation. The increase in transfer values over the year reflect changes in the assumptions used to calculate pension transfer values for individual pension fund members. The normal retirement age for the Society's pension plans ranges from 60 to 65.
| Table of the value of pension benefits for executive directors (Audited) | ||||||||
|---|---|---|---|---|---|---|---|---|
| Accrued pension at 4 April 2016 |
Accrued pension at 4 April 2015 |
Transfer value at 4 April 2016 |
Transfer value at 4 April 2015 |
Change in transfer value (note i) |
Additional pensions earned in year |
Transfer value of the increase |
Directors' contributions in year |
|
| Executive | (a) | (b) | (c) | (d) | (c) - (d) | (e) | ||
| directors | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
| G J Beale | 286 | 285 | 6,562 | 6,390 | 172 | - | - | - |
| M M Rennison | 58 | 58 | 1,341 | 1,304 | 37 | - | - | - |
Note:
i. The transfer value basis is set by the Nationwide Pension Fund Trustee and is based on financial market conditions at the calculation date. The increase in transfer values over the year mainly reflects the fact that the executive directors are one year older and thus one year closer to normal retirement age.
Explanations:
(a) and (b) show deferred pension entitlements at 4 April 2016 and 4 April 2015 respectively.
(c) is the transfer value of the deferred pension in (a) calculated at 4 April 2016.
(d) is the transfer value of the deferred pension in (b) calculated at 4 April 2015.
(e) is the increase in pension built up during the year. A zero figure means that, after allowing for inflation, no additional pension was built up.
Executive directors and members of senior management may be invited to become non executive directors of other companies, subject to the agreement of the Society. These appointments provide an opportunity to gain broader experience outside Nationwide and therefore benefit the Society. Providing that appointments are not likely to lead to a conflict of interest, executive directors may accept non executive appointments and retain the fees received. With effect from 1 July 2014, the number of external appointments that executive and non executive directors can hold is limited as required under CRD IV.
C S Rhodes was a director of Visa Europe Limited and Visa Europe Services Incorporated from 1 May 2013 to 29 April 2015; however he did not receive any fees for services during the year ended 4 April 2016 (2015: £28,566).
Graham Beale stepped down from the Board as Chief Executive on 4 April 2016. All payments made to him in respect of his service during 2015/16 are reported in the table showing a total single figure of remuneration for each director. The table does not include the payments due to him for loss of office.
The total payments to be made to G J Beale in respect of his contractual notice period are £1,278,050 which includes twelve months' salary (£893,000), benefits (£27,750), and pension (£357,200). He will also receive life assurance and private healthcare throughout his contractual notice period.
In recognition of his long service and contribution to the Society, including nine years as Chief Executive, the Committee considered it appropriate to allow the deferred portions of his outstanding variable pay awards to subsist in full subject to continued performance adjustment requirements. Payments will be made on the normal payment dates. The full value of these awards has been disclosed in the single total figure of remuneration for current and prior years.
Regulatory requirements relating to risk adjustment, malus and clawback will continue to apply to all performance pay awards in the same way as if G J Beale had remained in employment.
No payments were made to past directors during the year.
The pay details of the eight highest paid senior executive officers who are not main board directors are set out below. This is part of our ongoing commitment to transparency and meeting sector best practice on remuneration disclosure.
| Remuneration of eight highest paid senior executive officers (excluding main board directors) | ||||||||
|---|---|---|---|---|---|---|---|---|
| 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | |
| 2016 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
| Fixed (note i) | 399 | 375 | 372 | 353 | 257 | 286 | 288 | 273 |
| Variable | ||||||||
| Cash bonus | 280 | 284 | 268 | 265 | 169 | 193 | 191 | 186 |
| Deferred cash bonus | 281 | 269 | 247 | 253 | 155 | 184 | 177 | 175 |
| Total variable | 561 | 553 | 515 | 518 | 324 | 377 | 368 | 361 |
| Contractual severance |
- | - | - | - | 239 | - | - | - |
| Total remuneration | 960 | 928 | 887 | 871 | 820 | 663 | 656 | 634 |
Note:
i. Fixed remuneration includes base salary and car allowance.
The fee policy was last reviewed in March 2016. Increases have been made to the Chairman fee, the non executive director basic fee, the Senior Independent Director fee, the Remuneration Committee Chairman fee, the Nomination and Governance Committee member fee, and fees for both the Chairman and members of the IT Strategy and Resilience Committee for 2016/17 as set out in the table below. These are intended to ensure that total fee levels remain competitive.
| Fee policy | ||
|---|---|---|
| Fees for 2016/17 | Fees for 2015/16 | |
| Chairman (note i) | £383,000 | £375,000 |
| Basic fee | £65,000 | £62,000 |
| Senior Independent Director (note ii) | £40,000 | £30,000 |
| Chairman of the Audit Committee or Board Risk Committee | £35,000 | £35,000 |
| Member of the Audit Committee or Board Risk Committee | £15,000 | £15,000 |
| Remuneration Committee Chairman | £35,000 | £30,000 |
| Remuneration Committee member | £15,000 | £15,000 |
| Nomination and Governance Committee member | £5,000 | £3,000 |
| IT Strategy and Resilience Committee Chairman | £25,000 | £20,000 |
| IT Strategy and Resilience Committee member | £10,000 | £4,000 |
Notes:
i. David Roberts succeeded Geoffrey Howe as Chairman with effect from the conclusion of the AGM in July 2015. He joined Nationwide's Board as a non executive
director and Chairman Elect on 1 September 2014. For the period following 1 September 2014 he received a fee of £150,000 per annum for the role of Chairman Elect. The Chairman fee for 2015/16 applies from when D L Roberts took up his role in July 2015.
ii. The Senior Independent Director fee is inclusive of committee membership fees. Committee chairman fees will continue to be paid.
Additional fees may be paid for other committee responsibilities during the year.
The total fees paid to each non executive director are shown below.
| Single total figure of remuneration for each non executive director (Audited) | |||||
|---|---|---|---|---|---|
| 2016 | 2015 | ||||
| Society and Group fees | Society and Group fees | ||||
| £'000 | £'000 | ||||
| G M T Howe (Chairman) (note i) | 98 | 310 | |||
| D L Roberts (Chairman) (note i) | 306 | 88 | |||
| R Clifton | 92 | 87 | |||
| A P Dickinson (note ii) | - | 47 | |||
| M Fyfield (note iii) | 51 | - | |||
| M K Jary (note iv) | 26 | 79 | |||
| M A Lenson | 97 | 89 | |||
| L M Peacock | 125 | 115 | |||
| R K Perkin (Senior Independent Director) | 127 | 127 | |||
| T Tookey (note iii) | 96 | - | |||
| Total | 1,018 | 942 | |||
| Pension payments to past non executive directors (note v) | 268 | 286 |
Notes:
i. D L Roberts succeeded G M T Howe as Chairman on 23 July 2015.
ii. A P Dickinson retired from the Board on 17 July 2014.
iii. M Fyfield and T Tookey joined the Board on 2 June 2015.
iv. M K Jary retired from the Board on 23 July 2015.
v. The Society stopped granting pension rights to non executive directors who joined the Board after January 1990.
The Remuneration Committee is responsible for determining remuneration strategy and policy for the remuneration of the Chairman, the executive directors and group and divisional directors of the Society as well as any other employees who are deemed to fall within scope of the PRA Remuneration Code and, within the terms of the agreed policy, the specific remuneration packages for these roles. This includes approving the design of, and determining the performance targets for, any discretionary performance pay plans operated by the Society for the benefit of employees within the Committee's remit, and approving the total annual payments under such plans.
The Committee also oversees the remuneration policy throughout the Society, with a specific focus on the risks posed by remuneration policies and practices.
The Committee's terms of reference were last reviewed and updated in May 2015. The full terms of reference are available on the Society's website.
The members of the Remuneration Committee are all independent non executive directors of the Society and include a member of the Board Risk Committee. During the year the Committee members were: Lynne Peacock (Chairman of the Committee), David Roberts and Rita Clifton.
The Committee met nine times during the year. Activities during the year included:
The Committee is supported by the Group Director, People, Customer & Commercial, the Divisional Director, Human Resources and where appropriate the Chief Executive, who is invited to attend Committee meetings to provide further background information and context to assist the Committee in its duties. The Remuneration Committee is also supported by the Board Risk Committee on risk related matters including performance pay plan design, the assessment of specific performance measures, and wider issues relating to risk and business protection. In no case is any person present when their own remuneration is discussed.
In performing its duties, the Remuneration Committee draws on the advice of independent external consultants. During the year the Committee received advice on market rates of pay, best practice and remuneration trends from Deloitte LLP, who were appointed by the Committee following a tender process.
Deloitte is a member of the Remuneration Consultants Group and as such, voluntarily operates under the code of conduct in relation to executive remuneration consulting in the UK.
As well as advising the Remuneration Committee, Deloitte also provided tax, corporate finance, risk, internal audit and consulting services to the Society during the year. The Committee is satisfied that the advice received is objective and independent, and reviews annually all other services provided by Deloitte to ensure this continues to be the case. Deloitte's fees are charged on a time and expenses basis. Their fees for advice provided to the Committee during 2015/16 were £216,700.
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A resolution to approve the 2014/15 'Report of the directors on remuneration' was passed at the 2015 AGM.
The Remuneration Policy was approved by members at the 2014 AGM. In each case votes were cast as follows:
| Report of the directors on remuneration | Remuneration Policy | |
|---|---|---|
| Votes in favour | 697,234 (93.66%) | 738,438 (91.4%) |
| Votes against | 47,180 (6.34%) | 69,518 (8.6%) |
| Votes withheld | 11,531 | 13,341 |
Chair of the Remuneration Committee 23 May 2016
All disclosures in this section (pages 105 to 192) are unaudited except the tables marked as audited.
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105
| Operational risk | 183 |
|---|---|
| Conduct and compliance risk | 186 |
| Strategic risk | 188 |
| Managing risk | 189 |
Further information on risk management can be found in the Pillar 3 disclosures which are available at
This Business and Risk Report explains the Group's business, the risks it is exposed to and how it manages those risks. As the risks of the organisation are managed on a Group basis, and given the dominant position of the Society within the Group structure, the disclosures in the Business and Risk Report are on a consolidated basis covering the activities of both the Group and the Society.
The Group is organised into three business operating segments: Retail, Commercial and Head office functions. The Group is predominantly a retail focused operation which trades almost exclusively within the UK. Wholesale funding is accessed by the Group from both UK and overseas markets.
The chart below shows the Group's business operating segments and how these activities are reflected in its risk measures. The regulatory risk weighted assets (RWAs) below indicate the relative risks each area carries as at 4 April 2016. Please see the 'Solvency risk' section of this report for further details regarding the Group's capital position.
Note: No amounts are shown for market risk RWAs as the Group has elected to set these to zero, as permitted by the Capital Requirements Regulation (CRR) where the exposure is below the threshold of 2% of own funds.
Whilst the Group accepts that all of its business activities involve risk, it seeks to protect its members by managing the risks that arise from its activities appropriately. The principal
risks inherent within the business, and the Group's attitude to managing them, are set out below:
| Risk category |
Definition | Attitude |
|---|---|---|
| Lending | The risk that a borrower or counterparty fails to pay the 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. |
• The Group lends responsibly only taking risks that are well understood. • The Group builds prudent portfolios, primarily focused on residential mortgages, without creating undue risk concentrations and controls exposure to higher risk portfolios. • The Group will participate in non-member business only where it has existing capabilities and earns a premium return on capital or provides valuable services to members. |
| Financial | The risk of the Group having inadequate earnings, cash flow or capital to meet current or future requirements and expectations. This includes loss or damage to the earnings capacity, market value or liquidity of the Group, arising from mismatches between assets, funding and other commitments, and which may be exposed by changes in market rates, market conditions or the Group's credit profile. |
• The Group maintains a strong balance sheet with prudent levels of liquidity, diverse sources of funding. • The Group maintains a strong capital base above regulatory requirements. • The Group can withstand a severe stress event without any significant disruption to products and services. |
| Operational | The risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. |
• The Group operates its business to ensure a minimum level of serious disruption to customers, brand and reputation with systems and services designed to achieve defined levels of availability and performance. |
| Conduct and compliance |
The risk that the Group exercises inappropriate judgement or makes errors in the execution of its business activities, leading to non-compliance with regulation or legislation, market integrity being undermined, or an unfair outcome being created for customers. |
• The Group never knowingly creates unfair outcomes for customers. • The Group's products, services and distribution channels are designed, monitored and managed to provide value over time, accessibility, and meet the needs and experience expectations of its customers. • The Group aims to have a strong, focused conduct culture, where conduct risk is embedded in governance frameworks, to ensure adequate consideration, identification, management and mitigation of conduct risks. • The Group aims to have customers at the heart of everything it does, and this is reflected in its conduct outcomes of: - protecting customers - meeting customer needs and doing what we say - creating and nurturing fair customer relationships - rebalancing unfair outcomes, and - protecting markets. |
| Strategic | The risk of significant loss or damage arising from business decisions that impact the long term interests of the membership, or from an inability to adapt to external developments. |
• The Group is committed to a mutual business model, and ensuring this model remains sustainable within legal and regulatory requirements. • The Group focuses strategic decisions on achieving the best long term outcome for its membership. |
The frameworks for the above risks, including associated risk appetite, limits and supporting policies, are reviewed at least annually, and are subject to continuous monitoring by the relevant governance committees.
Group's business, the Group identifies, monitors and manages the top and emerging risks that could affect delivery of the Corporate Plan as an integral element of its risk and management strategy. More details are set out the following section.
In addition to the above principal risks that are inherent in the
The Group's top and emerging risks are identified through the process outlined in the 'Managing risk' section, and are closely tracked throughout the governance structure. The Group continues to keep these risks under close observation through risk reporting.
Whilst the Group accepts that all of its business activities involve risk, it seeks to protect its members by managing risks that arise from its activities appropriately. Against this background, during the last year the Group's financial strength has continued to grow and lending performance has further improved with low arrears, reflecting high quality underwriting and management. Risk management activity has focused on strengthening business resilience and managing regulatory and conduct challenges. As a result the Group's top and emerging risks remain largely unchanged and fall within four themes: macroeconomic, cyber attack and business resilience, the changing face of financial services, and conduct and compliance challenges. These themes are outlined further below.
The Group's financial position remains strong, with increasing profitability and robust capital and liquidity positions. However, uncertainty both globally and in the UK present two main areas that could affect the Group:
A number of global factors could impact the UK economy, for example, a divergence in monetary policy between Europe and the US, a slow-down in China as well as the referendum on UK membership of the EU. Any slowdown could temporarily affect access to and pricing of wholesale funding or reduce confidence and activity in property markets. A deterioration in the housing market or unwinding of property hotspots, such as London, could affect new business volumes and credit losses in the Group's mortgage portfolios. The Group's exposure in central London, although within appetite, remains an area that is closely monitored.
The Group's strategy is to use new and existing technology to deliver a market leading proposition. At the same time cyber security threats are increasing and this, coupled with the pace of technological development, creates risk across the financial services industry. In particular the Group sees two key areas which pose risks to achieving its goals:
109
The Group has delivered significant digital change over the past year, including updates to mobile and internet banking and new payment technology. The branch experience has also evolved with the introduction of digital technology such as Nationwide Now, whilst still offering more traditional products and services that are so important to many of the Group's members. The Group will continue to develop new and existing technology to deliver a market-leading proposition. However, there are a number of challenges from new and changing competition and technology, in particular:
• The Group faces a range of direct and indirect challengers as the financial services industry evolves
For example:
The Group's culture places conduct and compliance as central to its values and behaviours. The Group's risk governance and control framework drives a strong customer-focused conduct culture at each stage of a customer's interaction from product design, through sales and to post-sales servicing.
The member-focused nature of the Group's business model places it in a good position to meet current and future conduct requirements. However, the following are seen as key conduct and compliance risks for the Group:
The scale and quantity of changing regulation affecting the industry continues apace. This change needs to reflect innovation in the industry that is designed to meet changing customer demands and behaviours. There is a risk that industry developments proceed ahead of regulatory change resulting in uncertainty and potential delays in the development and launch of products designed to meet customers' needs.
• The Group's digital strategy may not meet the changing behaviours of customers
Customers expect to be able to access products and services at a time, and through a medium, of their choosing. It is critical that these services remain resilient to meet demands and prevent customer detriment. As new channels are developed to meet evolving demands it is essential that fair customer outcomes continue to be delivered.
• The Group's business model may not address the developing needs of its customers
There is a risk that the Group's business model fails to develop to meet the changing needs of customers across their life stages. In particular the Group should ensure that it is able to quickly identify customers who may, at any time during their relationship with the Group, be in vulnerable circumstances.
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.
This section provides information on the Group's exposure to lending risk arising from loans and advances, together with
details of the level of collateral held, and impairment charges raised against these loans during the period. It also provides information about the lead risk factors and key performance indicators for each of the Group's loan portfolios.
The Group manages lending risk for each of the following portfolios:
| Portfolio | Definition |
|---|---|
| Residential mortgages | Loans secured on residential property; the Group separately manages prime and specialist lending |
| Consumer banking | Unsecured lending including current account overdrafts, personal loans and credit cards |
| Commercial lending | Commercial real estate, loans to registered social landlords and loans made under the Project Finance initiative |
| Other lending | Lending in respect of structured portfolios |
| Treasury | Treasury liquidity and discretionary portfolios |
Lending risk largely arises from the Group's exposure to loans and advances to customers, which account for 87.3% (2015: 88.8%) of the Group's total lending risk exposure. Within this, the Group's exposure relates primarily to residential mortgages, which account for 90.7% (2015: 89.5%) of total loans and advances to customers and which are comprised of high quality assets with low occurrences of arrears and possessions. The increase in the proportion of residential mortgages reflects the continued growth in mortgage lending and the strategic decision to exit from non-core commercial lending.
In addition to loans and advances to customers and banks, the Group is exposed to lending risk on all other financial assets. For financial assets recognised on the balance sheet, the maximum exposure to lending risk represents the balance sheet carrying value after allowance for impairment. For off-balance sheet guarantees, the maximum exposure is the maximum amount that the Group would have to pay if the guarantees were to be called upon. For loan commitments and other credit related commitments that are irrevocable over the life of the respective facilities, the maximum exposure is the full amount of the committed facilities.
The Group's maximum exposure to lending risk has risen from £207 billion to £220 billion. This is due to the growth in residential mortgage loans described above, as well as an increase in the Group's holding of liquidity assets reflecting the transition to Liquidity Coverage Ratio (LCR) requirements and the decision to pre-fund long term wholesale maturities.
| Maximum exposure to lending risk | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2016 | ||||||||
| Gross balance |
Less: Impairment provisions |
Carrying value |
Commitments (note i) |
Maximum lending risk exposure |
% of total lending risk exposure |
|||
| (Audited) | £m | £m | £m | £m | £m | % | ||
| Cash | 8,797 | - | 8,797 | - | 8,797 | 4 | ||
| Loans and advances to banks | 3,591 | - | 3,591 | 115 | 3,706 | 2 | ||
| Investment securities – AFS | 10,612 | - | 10,612 | - | 10,612 | 5 | ||
| Derivative financial instruments | 3,898 | - | 3,898 | - | 3,898 | 2 | ||
| Fair value adjustment for portfolio hedged risk (note ii) |
756 | - | 756 | - | 756 | - | ||
| Investments in equity shares | 126 | - | 126 | - | 126 | - | ||
| 27,780 | - | 27,780 | 115 | 27,895 | 13 | |||
| Loans and advances to customers: | ||||||||
| Residential mortgages | 162,164 | (102) | 162,062 | 12,336 | 174,398 | 79 | ||
| Consumer banking | 3,869 | (281) | 3,588 | 39 | 3,627 | 2 | ||
| Commercial lending (note ii) | 13,197 | (59) | 13,138 | 1,065 | 14,203 | 6 | ||
| Other lending | 20 | (1) | 19 | 75 | 94 | - | ||
| 179,250 | (443) | 178,807 | 13,515 | 192,322 | 87 | |||
| Total | 207,030 | (443) | 206,587 | 13,630 | 220,217 | 100 | ||
| Maximum exposure to lending risk | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2015 | ||||||||
| Gross balance |
Less: Impairment provisions |
Carrying value |
Commitments (note i and iii) |
Maximum lending risk exposure |
% of total lending risk exposure |
|||
| (Audited) | £m | £m | £m | £m | £m | % | ||
| Cash | 4,325 | - | 4,325 | - | 4,325 | 2 | ||
| Loans and advances to banks | 3,392 | - | 3,392 | 408 | 3,800 | 2 | ||
| Investment securities – AFS | 11,037 | - | 11,037 | - | 11,037 | 5 | ||
| Derivative financial instruments | 3,337 | - | 3,337 | - | 3,337 | 2 | ||
| Fair value adjustment for portfolio hedged risk (note ii) |
592 | - | 592 | - | 592 | - | ||
| Investments in equity shares | 26 | - | 26 | - | 26 | - | ||
| 22,709 | - | 22,709 | 408 | 23,117 | 11 | |||
| Loans and advances to customers: | ||||||||
| Residential mortgages | 152,885 | (110) | 152,775 | 11,796 | 164,571 | 79 | ||
| Consumer banking | 3,791 | (216) | 3,575 | 32 | 3,607 | 2 | ||
| Commercial lending (note ii) | 14,594 | (322) | 14,272 | 1,379 | 15,651 | 8 | ||
| Other lending | 29 | (4) | 25 | 75 | 100 | - | ||
| 171,299 | (652) | 170,647 | 13,282 | 183,929 | 89 | |||
| Total | 194,008 | (652) | 193,356 | 13,690 | 207,046 | 100 |
Notes:
i. In addition to the amounts shown above, the Group has, as part of its retail operations, revocable commitments of £8,513 million (2015: £8,081 million) in respect of credit card and overdraft facilities. These commitments represent agreements to lend in the future, subject to certain considerations. Such commitments are cancellable by the Group, subject to notice requirements, and given their nature are not expected to be drawn down to the full level of exposure.
ii. 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 the Group's hedging programmes.
iii. Off-balance sheet commitments at 4 April 2015 have been restated from £7,570 million to £13,690 million. The original disclosure omitted commitments of £6,120 million which related to customer overpayments on residential mortgages where the borrower is entitled to drawdown amounts overpaid.
The table below shows the movements throughout the year of all loans classified as impaired. The balance shown represents
the entire financial asset rather than just the overdue elements.
| Movements in impaired loan balances | ||||||
|---|---|---|---|---|---|---|
| Prime mortgages |
Specialist mortgages |
Consumer banking |
Commercial lending |
Other lending |
Total | |
| (Audited) | £m | £m | £m | £m | £m | £m |
| At 5 April 2015 | 396 | 499 | 225 | 608 | 10 | 1,738 |
| Classified as impaired during the year | 343 | 391 | 113 | 38 | - | 885 |
| Transferred from impaired to unimpaired |
(344) | (410) | (27) | (70) | - | (851) |
| Amounts written off | (23) | (66) | (41) | (283) | (5) | (418) |
| Disposals | - | - | - | - | - | - |
| Repayments | (6) | (2) | (10) | (122) | - | (140) |
| At 4 April 2016 | 366 | 412 | 260 | 171 | 5 | 1,214 |
| Movements in impaired loan balances | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Prime mortgages |
Specialist mortgages |
Consumer banking |
Commercial lending |
Other lending |
Total | ||||
| (Audited) | £m | £m | £m | £m | £m | £m | |||
| At 5 April 2014 | 504 | 651 | 182 | 3,065 | 107 | 4,509 | |||
| Classified as impaired during the year | 370 | 461 | 118 | 112 | 5 | 1,066 | |||
| Transferred from impaired to unimpaired |
(431) | (513) | (14) | (194) | (8) | (1,160) | |||
| Amounts written off | (39) | (102) | (51) | (638) | (42) | (872) | |||
| Disposals | - | - | - | (1,452) | (43) | (1,495) | |||
| Repayments | (8) | 2 | (10) | (285) | (9) | (310) | |||
| At 4 April 2015 | 396 | 499 | 225 | 608 | 10 | 1,738 | |||
Note: Loans that were classified as impaired and loans that have transferred into or out of the impaired classification are based on the relevant status at each month end, when compared to the previous month end. Amounts written off reflect cases where the loan has been removed from the balance sheet, for example a residential property repossessed and sold. Repayments reflect payments made by the customer, reducing the outstanding balance.
The Group's residential mortgages comprise prime and specialist loans. Prime residential mortgages are mainly Nationwide branded advances made through the Group's branch network and intermediary channels; all new specialist lending is limited to buy to let mortgages originated under The Mortgage Works (UK) plc (TMW) brand.
Strong levels of new lending across prime and buy to let have seen the residential mortgage portfolio continue to grow, from £153 billion to £162 billion over the year. The geographical distribution across the UK is unchanged and the average loan to value (LTV), weighted by value, is marginally lower at 55% (2015: 56%), attributable to the increase in house prices over the year.
Buy to let lending has accounted for 22% of total new business, up from 18% in 2015, primarily due to the growing importance of the private rental sector for UK housing needs as a whole, reflecting long term economic and social trends. New lending performance was boosted in the final quarter as many investors sought to complete purchases ahead of the imposition of the additional 3% stamp duty for buy to let properties at the end of March.
Within prime lending, first time buyers accounted for an increased share of overall lending, up to 28% compared to 26% in 2015. The Group has widened its offering of mortgages at 90 to 95% LTV, and revised its existing Save to Buy proposition to align to the government's Help to Buy ISA to give first time buyers a further contribution to a deposit. As a consequence the average LTV of new business, the proportion of lending at higher LTVs and the loan to income metric have increased and are likely to continue to do so as the Group maintains its support for first time buyers, whilst remaining within its risk appetite.
Arrears have continued to fall across both prime and specialist lending over the period reflecting the continuing favourable economic conditions and low interest rate environment, supported by a robust credit assessment and affordability controls at the point of lending. The proportion of loans that are more than three months in arrears fell from 0.49% to 0.45%; the proportion of non-performing loans and overall levels of impairment loss also fell. The Group has taken action during the year to increase the provision for losses which have been incurred but not specifically reported at the balance sheet date; this limited the fall in provisions which ended the year at £102 million (2015: £110 million).
In March of this year the PRA issued a consultation paper aimed at strengthening buy to let underwriting standards across the industry. It would require lenders to ensure their approach to affordability includes a provision for the usual costs associated with a buy to let property together with suitable allowances for tax liabilities. This follows changes to income tax relief on buy to let properties announced by the Chancellor in 2015 which are due to be phased in from April 2017 to March 2021. These changes will impact existing landlords and may also impact investor demand as net rental yields are reduced. As tax will be charged on rental income without deducting mortgage interest payments, it is likely to cause a number of investors to move from a basic rate to high rate tax band, and some borrowers may find that the tax charge exceeds the current net profit they make from rent after interest payments.
The Group's buy to let lending continues to benefit from a number of enhanced controls implemented since the financial crisis, including the use of a stressed interest rate when applying interest cover ratio criteria. However the Group recognises that the changes to tax relief will materially affect the cash flow and affordability of many investors, and has taken steps to ensure that buy to let borrowing remains sustainable and affordable for landlords as the tax changes are phased in. The Group has increased its minimum interest coverage ratio (ICR) from 125% to 145% with effect from 11 May 2016, and also lowered its maximum LTV for buy to let borrowing from 80% to 75%. The Group will continue to review its approach to underwriting as the PRA consultation concludes to ensure that asset quality is maintained and new regulations are met.
House prices in London have been outstripping the wider UK market in recent years. The gap between the price of a typical London house and the UK equivalent is at, or close to, record levels, with London houses worth twice as much on average as houses in the UK as a whole. The house price to earnings ratio for London has increased above 11, above its previous pre-crisis peak of 8.3, and rental yields have dropped below 3.5%. Demand in London has in part been driven by the growth in buy to let activity (which is more heavily concentrated in London) and there is a risk that the stretched affordability and yield metrics, combined with a change in economic conditions or reduced investor demand, could cause a correction to house prices.
115
Exposures in London are controlled through maximum loan sizes for new business tiered by LTV which limit individual exposures, and mean that where prices are higher, higher equity coverage is required. Both prime and buy to let lending is subject to affordability assessments using stressed interest rates (based on a five year forward view) to ensure that lending will remain affordable for borrowers even in the event of an increase in interest rates. The Group has conducted stress tests which demonstrate that even in the event of a reduction in house prices of around 40%, any losses that were to occur would not undermine the Group's capital strength. The Group continues to monitor potential levels of negative equity should three years' of house price increases reverse, and will take steps to control the concentration of lending in London should this become necessary.
The Group is exposed to higher LTV lending (up to 95% for new business) and is a strong participant in schemes designed to support first time buyers, such as the Help to Buy (Shared Equity) scheme where a deposit of 5% from the borrower is supported by an equity loan of up to 20% from the government. The Group believes that these schemes are well designed and offer valuable support to buyers, as well as providing additional credit protection for the lender. The Group controls its risk exposure to higher LTV business and shared equity schemes through a combination of risk appetite limits, credit scoring controls, and exposure limits on large new build development sites.
The table below summarises the Group's residential mortgages portfolio:
| Residential mortgage lending | ||||
|---|---|---|---|---|
| 2016 | 2015 | |||
| (Audited) | £m | % | £m | % |
| Prime | 129,973 | 80 | 124,549 | 81 |
| Specialist: | ||||
| Buy to let | 28,646 | 18 | 24,370 | 16 |
| Self-certified | 2,338 | 1 | 2,634 | 2 |
| Near prime | 859 | 1 | 952 | 1 |
| Sub prime | 348 | - | 380 | - |
| 32,191 | 20 | 28,336 | 19 | |
| Total residential mortgages | 162,164 | 100 | 152,885 | 100 |
Note: Self-certified, near prime and sub prime lending were discontinued in 2009.
The Chancellor's autumn statement announced that a 3% stamp duty surcharge on buy to let property was to be introduced from April 2016. This triggered an increase in the volume of applications as investors sought to complete ahead of the deadline and has contributed to the proportion of buy to let lending increasing over the period to 18% (2015: 16%) of total lending.
| Distribution of new business by borrower type (by value) | ||
|---|---|---|
| 2016 | 2015 | |
| % | % | |
| Prime: | ||
| Home movers | 31 | 32 |
| First time buyers | 28 | 26 |
| Remortgagers | 18 | 23 |
| Other | 1 | 1 |
| Total prime | 78 | 82 |
| Specialist: | ||
| Buy to let new purchases | 8 | 8 |
| Buy to let remortgagers | 14 | 10 |
| Total specialist | 22 | 18 |
| Total new business | 100 | 100 |
Note: All new business measures exclude existing customers who are only switching products and further advances.
In October 2014, the Financial Policy Committee (FPC) introduced a 15% limit on the proportion of new lending that may be written at income multiples of 4.5 and above. This limit applies to residential mortgages, excluding buy to let. The Group's proportion of new lending at income multiples of 4.5 or higher has averaged 7% (2015: 5%). The increase is principally driven by a higher proportion of lending to first time buyers as the Group continues to support this segment of the market. The proportion of new lending at income multiples of 4.5 or higher is likely to continue to increase but will remain within the FPC limit and in line with the Group's overall approach to lending.
Residential mortgage lending in the Group continues to have a low risk profile as demonstrated by a low level of arrears compared to the industry average. The Group's residential mortgages portfolio comprises a large number of relatively small loans which are broadly homogenous, have low volatility of credit risk outcomes and are intrinsically highly diversified in terms of the UK market and geographic segments.
The Group calculates LTV by weighting the borrower level LTV by the individual loan balance to arrive at an average LTV. This approach is considered to most appropriately reflect the exposure at risk to the Group.
| Group | 55 | 56 |
|---|---|---|
| Specialist | 61 | 63 |
| Prime | 54 | 54 |
| % | % | |
| 2016 | 2015 |
| Average LTV of new business | ||
|---|---|---|
| 2016 | 2015 | |
| % | % | |
| Prime | 71 | 70 |
| Specialist (buy to let) | 65 | 67 |
| Group | 69 | 69 |
Note: The LTV of new business excludes further advances.
The average LTV of buy to let new lending reduced by 2%. This is due in part to the impact of stricter affordability checks for higher LTV lending implemented in November 2014.
| LTV distribution of new business | ||
|---|---|---|
| 2016 | 2015 | |
| % | % | |
| 0% to 60% | 26 | 26 |
| 60% to 75% | 40 | 42 |
| 75% to 80% | 9 | 10 |
| 80% to 85% | 12 | 10 |
| 85% to 90% | 11 | 11 |
| 90% to 95% | 2 | 1 |
| Over 95% | - | - |
| Total | 100 | 100 |
The maximum LTV for new customers is 95%, the proportion of lending greater than 90% LTV has increased to 2% (2015: 1%) as a direct result of the Group's strategy to support the first time buyer market.
Buy to let lending is restricted to a maximum LTV of 80%, with only 4% (2015: 4%) of lending greater than 75% LTV.
| Residential mortgage balances by LTV and region | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2016 | |||||||||||
| Greater | Central | Northern | South | South | Scotland | Wales Northern | Total | ||||
| London | England | England | East | West | Ireland | ||||||
| England | England | ||||||||||
| (Audited) | £m | £m | £m | £m | £m | £m | £m | £m | £m | % | |
| Performing loans | |||||||||||
| Fully collateralised | |||||||||||
| LTV ratio: | |||||||||||
| Up to 50% | 26,991 | 8,795 | 5,866 | 7,855 | 5,051 | 2,711 | 1,178 | 785 | 59,232 | ||
| 50% to 60% | 12,350 | 4,971 | 3,402 | 4,262 | 2,733 | 1,547 | 637 | 346 | 30,248 | ||
| 60% to 70% | 8,465 | 6,636 | 5,052 | 4,363 | 3,460 | 2,095 | 903 | 390 | 31,364 | ||
| 70% to 80% 80% to 90% |
4,062 1,559 |
5,454 2,210 |
6,282 3,135 |
2,211 894 |
2,359 918 |
2,776 1,380 |
1,273 657 |
371 271 |
24,788 11,024 |
||
| 90% to 100% | 85 53,512 |
177 28,243 |
901 24,638 |
66 19,651 |
60 14,581 |
232 10,741 |
212 4,860 |
151 | 1,884 2,314 158,540 |
97.7 | |
| Not fully collateralised | |||||||||||
| – Over 100% LTV (A) | 7 | 8 | 80 | 1 | 4 | 31 | 13 | 301 | 445 | 0.3 | |
| – Collateral value on A | 6 | 7 | 73 | 1 | 3 | 29 | 13 | 248 | 380 | ||
| – Negative equity on A | 1 | 1 | 7 | - | 1 | 2 | - | 53 | 65 | ||
| Total performing loans | 53,519 | 28,251 | 24,718 | 19,652 | 14,585 | 10,772 | 4,873 | 2,615 158,985 | 98.0 | ||
| Non-performing loans | |||||||||||
| Fully collateralised | |||||||||||
| LTV ratio: | |||||||||||
| Up to 50% | 522 | 161 | 107 | 127 | 73 | 43 | 27 | 26 | 1,086 | ||
| 50% to 60% | 245 | 100 | 68 | 74 | 52 | 28 | 13 | 12 | 592 | ||
| 60% to 70% | 110 | 131 | 108 | 76 | 60 | 42 | 20 | 12 | 559 | ||
| 70% to 80% | 29 | 114 | 139 | 42 | 48 | 46 | 24 | 12 | 454 | ||
| 80% to 90% | 7 | 74 | 98 | 7 | 17 | 28 | 19 | 12 | 262 | ||
| 90% to 100% | 1 | 14 | 73 | 1 | 2 | 13 | 16 | 7 | 127 | ||
| 914 | 594 | 593 | 327 | 252 | 200 | 119 | 81 | 3,080 | 1.9 | ||
| Not fully collateralised | |||||||||||
| – Over 100% LTV (B) | - | 3 | 25 | 2 | 1 | 3 | 5 | 60 | 99 | 0.1 | |
| – Collateral value on B | - | 3 | 22 | 1 | 1 | 3 | 5 | 46 | 81 | ||
| – Negative equity on B | - | - | 3 | 1 | - | - | - | 14 | 18 | ||
| Total non-performing | 914 | 597 | 618 | 329 | 253 | 203 | 124 | 141 | 3,179 | 2.0 | |
| loans | |||||||||||
| Total residential mortgages |
54,433 | 28,848 | 25,336 | 19,981 | 14,838 | 10,975 | 4,997 | 2,756 | 162,164 100.0 | ||
| Geographical concentrations |
33% | 18% | 16% | 12% | 9% | 7% | 3% | 2% | 100% | ||
| Residential mortgages continued | ||
|---|---|---|
| -- | --------------------------------- | -- |
| Residential mortgage balances by LTV and region | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2015 | ||||||||||
| Greater | Central | Northern | South | South | Scotland | Wales | Northern | Total | ||
| London | England | England | East | West | Ireland | |||||
| England | England | |||||||||
| (Audited) | £m | £m | £m | £m | £m | £m | £m | £m | £m | % |
| Performing loans | ||||||||||
| Fully collateralised | ||||||||||
| LTV ratio: | ||||||||||
| Up to 50% | 21,388 | 8,168 | 5,778 | 6,752 | 4,528 | 2,716 | 1,144 | 780 | 51,254 | |
| 50% to 60% | 11,785 | 4,345 | 3,164 | 3,479 | 2,283 | 1,481 | 572 | 328 | 27,437 | |
| 60% to 70% | 9,490 | 6,470 | 4,864 | 4,594 | 3,191 | 2,102 | 830 | 381 | 31,922 | |
| 70% to 80% | 4,582 | 5,535 | 6,079 | 2,788 | 2,592 | 2,688 | 1,203 | 392 | 25,859 | |
| 80% to 90% | 1,476 | 2,148 | 3,000 | 821 | 952 | 1,192 | 676 | 236 | 10,501 | |
| 90% to 100% | 42 | 228 | 860 | 41 | 76 | 249 | 197 | 126 | 1,819 | |
| 48,763 | 26,894 | 23,745 | 18,475 | 13,622 | 10,428 | 4,622 | 2,243 | 148,792 | 97.3 | |
| Not fully collateralised | ||||||||||
| – Over 100% LTV (A) | 9 | 13 | 105 | 3 | 5 | 36 | 23 | 366 | 560 | 0.4 |
| – Collateral value on A | 7 | 11 | 97 | 3 | 4 | 34 | 22 | 300 | 478 | |
| – Negative equity on A | 2 | 2 | 8 | - | 1 | 2 | 1 | 66 | 82 | |
| Total performing loans | 48,772 | 26,907 | 23,850 | 18,478 | 13,627 | 10,464 | 4,645 | 2,609 | 149,352 | 97.7 |
| Non-performing loans | ||||||||||
| Fully collateralised | ||||||||||
| LTV ratio: | ||||||||||
| Up to 50% | 441 | 156 | 111 | 115 | 68 | 44 | 25 | 27 | 987 | |
| 50% to 60% | 287 | 98 | 69 | 70 | 44 | 26 | 13 | 12 | 619 | |
| 60% to 70% | 210 | 141 | 115 | 90 | 66 | 43 | 20 | 13 | 698 | |
| 70% to 80% | 78 | 138 | 148 | 69 | 56 | 53 | 25 | 12 | 579 | |
| 80% to 90% | 12 | 93 | 116 | 24 | 35 | 32 | 22 | 13 | 347 | |
| 90% to 100% | 1 | 26 | 91 | 1 | 4 | 14 | 18 | 13 | 168 | |
| 1,029 | 652 | 650 | 369 | 273 | 212 | 123 | 90 | 3,398 | 2.2 | |
| Not fully collateralised | ||||||||||
| – Over 100% LTV (B) | 1 | 7 | 33 | 2 | 1 | 4 | 9 | 78 | 135 | 0.1 |
| – Collateral value on B | 1 | 6 | 29 | 2 | 1 | 3 | 8 | 59 | 109 | |
| – Negative equity on B | - | 1 | 4 | - | - | 1 | 1 | 19 | 26 | |
| Total non-performing | 1,030 | 659 | 683 | 371 | 274 | 216 | 132 | 168 | 3,533 | 2.3 |
| loans | ||||||||||
| Total residential | 49,802 | 27,566 | 24,533 | 18,849 | 13,901 | 10,680 | 4,777 | 2,777 | 152,885 | 100.0 |
| mortgages | ||||||||||
| Geographical | 33% | 18% | 16% | 12% | 9% | 7% | 3% | 2% | 100% | |
| concentration |
growth in house prices and a reduction in arrears cases.
| Number of cases more than 3 months in arrears as % of total book | ||
|---|---|---|
| 2016 | 2015 | |
| % | % | |
| Prime | 0.35 | 0.36 |
| Specialist | 0.90 | 1.12 |
| Group | 0.45 | 0.49 |
| CML industry average | 1.04 | 1.30 |
Supported by favourable economic conditions and a continued low interest environment, the arrears performance of both the prime and specialist mortgage portfolios continues to improve. The Group's combined arrears rate of 0.45% remains less than half of the Council of Mortgage Lenders' (CML) industry average rate of 1.04%.
Impaired and non-performing loans are identified primarily by arrears status. Impaired accounts are defined as those greater than three months in arrears and include accounts subject to possession. Non-performing accounts include all impaired loans and also loans which are past due but not impaired, including any asset where a payment due is received late or missed. The non-performing loan amount represents the entire financial asset rather than just the payment overdue.
Loans on interest only or payment holiday concessions are initially categorised according to their payment status as at the date of concession, with subsequent revisions to this category assessed against the terms of the concession.
The Group holds impairment provisions in relation to both the performing and non-performing segments of the residential mortgage portfolio. Provisions reflect losses which have been incurred at the balance sheet date, based on objective evidence. Individual impairment provisions are assigned to accounts in possession and a collective provision is assigned to all other accounts. For currently performing loans, the provision reflects losses arising from impairment events that have occurred within the portfolio but are not identifiable at the reporting date.
| Residential mortgages by payment status | ||||
|---|---|---|---|---|
| 2016 | ||||
| Prime | Specialist | Total | ||
| (Audited) | £m | £m | £m | % |
| Performing: | ||||
| Neither past due nor impaired | 127,986 | 30,999 | 158,985 | 98.0 |
| Non-performing: | ||||
| Past due up to 3 months | 1,621 | 780 | 2,401 | 1.5 |
| Impaired: | ||||
| Past due 3 to 6 months | 170 | 188 | 358 | 0.2 |
| Past due 6 to 12 months | 115 | 115 | 230 | 0.2 |
| Past due over 12 months | 75 | 91 | 166 | 0.1 |
| Possessions | 6 | 18 | 24 | - |
| Total non-performing loans | 1,987 | 1,192 | 3,179 | 2.0 |
| Total residential mortgages | 129,973 | 32,191 | 162,164 | 100.0 |
| Non-performing loans as a % of total residential mortgages | 1.5% | 3.7% | 2.0% | |
| Impairment provisions (£m) | 25 | 77 | 102 | |
| Impairment provisions as a % of non-performing balances | 1.3% | 6.5% | 3.2% | |
| Impairment provisions as a % of total residential mortgages | 0.02% | 0.24% | 0.06% | |
| 2015 | ||||
|---|---|---|---|---|
| Prime | Specialist | Total | ||
| (Audited) | £m | £m | £m | % |
| Performing: | ||||
| Neither past due nor impaired | 122,424 | 26,928 | 149,352 | 97.7 |
| Non-performing: | ||||
| Past due up to 3 months | 1,729 | 909 | 2,638 | 1.7 |
| Impaired: | ||||
| Past due 3 to 6 months | 190 | 207 | 397 | 0.3 |
| Past due 6 to 12 months | 120 | 143 | 263 | 0.2 |
| Past due over 12 months | 72 | 97 | 169 | 0.1 |
| Possessions | 14 | 52 | 66 | - |
| Total non-performing loans | 2,125 | 1,408 | 3,533 | 2.3 |
| Total residential mortgages | 124,549 | 28,336 | 152,885 | 100.0 |
| Non-performing loans as a % of total residential mortgages | 1.7% | 5.0% | 2.3% | |
| Impairment provisions (£m) | 22 | 88 | 110 | |
| Impairment provisions as a % of non-performing balances | 1.0% | 6.3% | 3.1% | |
| Impairment provisions as a % of total residential mortgages | 0.02% | 0.31% | 0.07% |
The improved performance of the book has meant that during the period the Group's proportion of non-performing loans has reduced to 2.0% (2015: 2.3%).
The provision balance has fallen to £102 million (2015: £110 million). This reflects the continued improvement in the quality of the book, evidenced by a continued decline in instances of arrears. However, whilst credit risk metrics have improved, they have reached a level from which the rate of further improvement is likely to slow. In addition, the Group has reviewed and updated its provision models and
assumptions to ensure they appropriately reflect incurred losses within the portfolio. Specific areas of focus included interest only loans which are approaching maturity as well as accounts which have recently returned to performing status, supported by the low interest environment. The updates have resulted in provision increases for losses incurred but not identified at the balance sheet date.
The impairment charge for the year reflects both the improved performance of the book and the refinements to provision models and assumptions.
| 2016 | 2015 | |
|---|---|---|
| (Audited) | £m | £m |
| Prime | 8 | 13 |
| Specialist | 10 | 45 |
| Total | 18 | 58 |
| Number of properties in possession as % of total book | ||||
|---|---|---|---|---|
| 2016 | 2015 | |||
| Number of properties | % | Number of properties | % | |
| Prime | 57 | 0.01 | 151 | 0.01 |
| Specialist | 117 | 0.04 | 258 | 0.10 |
| Group | 174 | 0.01 | 409 | 0.03 |
| CML industry average | 0.03 | 0.05 | ||
Repossession numbers have reduced partly due to the strong performance of the portfolio in the current economic environment, consistent with the low arrears and impairment rates. The Group is also currently reviewing repossession processes which will have delayed possession in some
cases and contributed to the drop in volumes over this period. Provisions have been adjusted to ensure they remain adequate in light of this change in process.
The Group does not offer any new advances for prime residential mortgages on an interest only basis. However, the Group has historical balances which were originally advanced as interest only mortgages or where the Group agreed a change in terms to an interest only basis (this option was withdrawn in 2012). The Group manages maturities on interest only mortgages closely, engaging regularly with
customers to ensure the loan is redeemed or to agree a strategy for repayment.
The majority of the specialist portfolio is made up of buy to let loans, of which approximately 90% are advanced on an interest only basis.
| Interest only mortgages | |||||||
|---|---|---|---|---|---|---|---|
| Term expired (still open) |
Due within one year |
Due after one year and before two years |
Due after two years and before five years |
Due after more than five years |
Total | % of total book |
|
| 2016 | £m | £m | £m | £m | £m | £m | % |
| Prime | 58 | 396 | 475 | 1,731 | 16,178 | 18,838 | 14.5 |
| Specialist | 98 | 174 | 254 | 1,002 | 27,084 | 28,612 | 88.9 |
| Total | 156 | 570 | 729 | 2,733 | 43,262 | 47,450 | 29.3 |
| Interest only mortgages | |||||||
|---|---|---|---|---|---|---|---|
| Term expired (still open) |
Due within one year |
Due after one year and before |
Due after two years and before |
Due after more than five years |
Total | % of total book |
|
| two years | five years | ||||||
| 2015 | £m | £m | £m | £m | £m | £m | % |
| Prime | 57 | 376 | 538 | 1,898 | 19,217 | 22,086 | 17.7 |
| Specialist | 95 | 122 | 220 | 953 | 23,520 | 24,910 | 87.9 |
| Total | 152 | 498 | 758 | 2,851 | 42,737 | 46,996 | 30.7 |
The proportion of prime residential interest only mortgages has fallen to 14.5% (2015: 17.7%).
Interest only loans which are 'term expired (still open)' are, to the extent they are not otherwise in arrears, considered
to be performing. They are included within the 'Repair: Term extensions' category in the renegotiated loans tables on the following pages.
| Negative equity of non-performing residential mortgages | ||||
|---|---|---|---|---|
| 2016 | 2015 | |||
| Prime | Specialist | Prime | Specialist | |
| £m | £m | £m | £m | |
| Past due but not impaired | 2 | 4 | 2 | 7 |
| Impaired | 1 | 10 | 2 | 9 |
| Possessions | - | 1 | - | 6 |
| Total | 3 | 15 | 4 | 22 |
Note: Collateral is capped at the amount outstanding on an individual loan basis.
The improving arrears position and growth in house prices have combined to reduce the value of non-performing loans in negative equity to £18 million (2015: £26 million).
Mortgages may be renegotiated in a number of ways, including a change in terms, applying forbearance, or repairing arrears that have built up. Some of these changes are initiated by the customer, where the terms of the mortgage allow a revision to the payment schedule to suit the customer's needs (such as a payment holiday or term extension); other changes are specifically applicable where a customer is in or has been in financial difficulties.
This occurs when there is a temporary concession or permanent change which results in an amended monthly cash flow from:
Performing customers with loans on standard terms and conditions effective before March 2010, who are not experiencing financial difficulty and meet required criteria (including credit score), are permitted to apply for a payment holiday and make reduced or nil payments for an agreed period of time of up to twelve months.
The Group allows performing customers to apply to extend the term of their mortgage. No adjustment is made to the Group's provisioning methodology for these loans.
Customers in arrears may be offered a temporary payment concession allowing them to make reduced or nil payments for an agreed period of time. This does not result in a permanent change to the contract and during the concession arrears are still accrued.
Historically, performing customers who met specific criteria could apply for a permanent interest only conversion, normally reducing their monthly commitment. This facility was completely withdrawn in March 2012, although a temporary interest only arrangement may be available under forbearance as described below.
Forbearance takes place when a concession is made on the contractual terms of a loan to a customer as a result of financial difficulties. The only forbearance option which the Group offers to customers in these circumstances is a temporary interest only concession. During the period of the concession, loans do not accrue arrears and are therefore not categorised as impaired provided the revised interest
only repayment amount is maintained. However, the Group's provisioning methodology takes account of the shortfall from the full contractual payment.
The following diagram shows the process which is carried out in deciding the appropriate action when a customer is seeking forbearance.
The Group offers two forms of repair: capitalisation and term extension (at term expiry), as set out below.
When a customer emerges from financial difficulty provided they have made at least six full monthly instalments, the Group offers the ability to capitalise arrears, resulting in the account being repaired. Once capitalised, the loans are categorised as not impaired as long as contractual repayments are maintained.
Customers on interest only mortgages who are unable to repay their capital at term expiry may be offered a term extension. These extensions are typically on a capital and interest basis and aim to recover the outstanding balance as quickly as possible whilst ensuring the monthly payment remains manageable to the customer. Additional provision is held against these mortgages to account for the increased risk of a customer not being able to repay their capital.
The table below provides details of the current balances of loans which have been renegotiated at any point since January 2008, by region. It is possible for a loan to have more than one category and in the table below both are shown and multiple events are then eliminated.
| Residential mortgage balances subject to renegotiation since January 2008 (note i) | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Greater London |
Central England |
Northern England |
South East England |
South West England |
Scotland | Wales Northern Ireland |
Total | ||
| 2016 | £m | £m | £m | £m | £m | £m | £m | £m | £m |
| Change in terms: | |||||||||
| Payment holidays | 890 | 686 | 627 | 459 | 287 | 234 | 112 | 130 | 3,425 |
| Term extensions (within term) | 2,003 | 1,259 | 1,087 | 878 | 633 | 427 | 230 | 208 | 6,725 |
| Payment concessions | 292 | 179 | 190 | 111 | 75 | 41 | 39 | 27 | 954 |
| Interest only conversions | 625 | 311 | 292 | 219 | 163 | 81 | 61 | 79 | 1,831 |
| 3,810 | 2,435 | 2,196 | 1,667 | 1,158 | 783 | 442 | 444 | 12,935 | |
| Elimination of multiple events | (396) | (285) | (243) | (186) | (121) | (73) | (48) | (65) | (1,417) |
| Total change in terms | 3,414 | 2,150 | 1,953 | 1,481 | 1,037 | 710 | 394 | 379 | 11,518 |
| Forbearance: | |||||||||
| Temporary interest only concessions |
356 | 335 | 350 | 182 | 115 | 100 | 56 | 59 | 1,553 |
| Repair: | |||||||||
| Capitalisations | 180 | 105 | 110 | 72 | 43 | 17 | 22 | 9 | 558 |
| Term extensions (at term expiry) | 175 | 95 | 78 | 67 | 53 | 35 | 19 | 19 | 541 |
| 355 | 200 | 188 | 139 | 96 | 52 | 41 | 28 | 1,099 | |
| Elimination of multiple events | (3) | (1) | (2) | (1) | (1) | - | - | - | (8) |
| Total repairs | 352 | 199 | 186 | 138 | 95 | 52 | 41 | 28 | 1,091 |
| Elimination of multiple events | (290) | (236) | (235) | (133) | (85) | (55) | (43) | (44) | (1,121) |
| Total renegotiated loans | 3,832 | 2,448 | 2,254 | 1,668 | 1,162 | 807 | 448 | 422 | 13,041 |
| Of which prime/specialist lending: |
|||||||||
| Prime | 3,183 | 2,106 | 1,895 | 1,436 | 988 | 747 | 381 | 362 | 11,098 |
| Specialist | 649 | 342 | 359 | 232 | 174 | 60 | 67 | 60 | 1,943 |
| Total | 3,832 | 2,448 | 2,254 | 1,668 | 1,162 | 807 | 448 | 422 | 13,041 |
| Of which loans are still on special terms: (note ii) |
|||||||||
| Prime | 42 | 34 | 27 | 23 | 14 | 15 | 6 | 3 | 164 |
| Specialist | 5 | 5 | 7 | 3 | 1 | 1 | 1 | 1 | 24 |
| Total | 47 | 39 | 34 | 26 | 15 | 16 | 7 | 4 | 188 |
| Impairment provisions on renegotiated loans: |
|||||||||
| Individually assessed | - | - | 1 | - | - | - | - | 1 | 2 |
| Collectively assessed | - | 2 | 4 | 1 | 1 | 1 | 1 | 3 | 13 |
| Total impairment provisions | - | 2 | 5 | 1 | 1 | 1 | 1 | 4 | 15 |
| Greater Central Northern South South Scotland Wales Northern Total London England England East West Ireland England England 2015 (note iii) £m £m £m £m £m £m £m £m £m Change in terms: Payment holidays 1,011 781 712 522 329 265 126 144 3,890 Term extensions (within term) 2,059 1,337 1,159 927 662 453 248 220 7,065 Payment concessions 302 191 194 114 79 41 39 29 989 Interest only conversions 693 339 315 253 186 89 67 85 2,027 4,065 2,648 2,380 1,816 1,256 848 480 478 13,971 Elimination of multiple events (438) (316) (267) (208) (134) (78) (55) (67) (1,563) Total change in terms 3,627 2,332 2,113 1,608 1,122 770 425 411 12,408 Forbearance: Temporary interest only 379 361 371 196 125 102 61 64 1,659 concessions Repair: Capitalisations 188 110 113 74 46 17 23 9 580 Term extensions (at term expiry) 172 91 68 63 48 34 18 17 511 360 201 181 137 94 51 41 26 1,091 Elimination of multiple events (3) - (1) (1) (1) - - - (6) Total repairs 357 201 180 136 93 51 41 26 1,085 Elimination of multiple events (303) (251) (246) (139) (91) (56) (45) (47) (1,178) Total renegotiated loans 4,060 2,643 2,418 1,801 1,249 867 482 454 13,974 Of which prime/specialist lending: Prime 3,420 2,309 2,071 1,568 1,076 810 416 392 12,062 Specialist 640 334 347 233 173 57 66 62 1,912 Total 4,060 2,643 2,418 1,801 1,249 867 482 454 13,974 Of which loans are still on special terms: (note ii) Prime 72 50 47 33 23 15 12 6 258 Specialist 13 13 14 7 4 1 2 4 58 Total 85 63 61 40 27 16 14 10 316 Impairment provisions on renegotiated loans: Individually assessed - 1 1 - - - - 2 4 Collectively assessed - 2 5 1 1 1 2 4 16 Total impairment provisions - 3 6 1 1 1 2 6 20 |
Residential mortgage balances subject to renegotiation since January 2008 (note i) | |||||
|---|---|---|---|---|---|---|
Notes:
i. Information on renegotiated balances is reported since January 2008, reflecting the point in time from which this data was captured for reporting purposes. ii. Special terms refer to loans which are actively subject to a payment holiday, a payment concession or a temporary interest only concession. They do not
include term extensions, permanent interest only conversions or capitalisations.
iii. Comparatives have been restated to include data from the Dunfermline, Derbyshire and Cheshire mortgage portfolios which had not previously been included. Consequently the value of total renegotiated loans has increased by 2.7% to £13,974 million from the previously disclosed £13,613 million.
The value of renegotiated loans has fallen to £13,041 million (2015: £13,974 million) underlining the favourable economic conditions. For those cases that remain on special terms the
average LTV is comparable with the overall stock position at 55% (2015: 57%).
The Group's consumer banking portfolio includes balances relating to the unsecured portfolios for overdrawn current accounts, personal loans and credit cards. Total balances across these portfolios have grown by 2.1% during the period to £3,869 million (2015: £3,791 million), despite the continued intense competition across all lenders in the unsecured market. This is evident in the increasing duration of introductory offers for credit cards, switching incentives for current accounts and lower rates for personal loans.
Portfolio performance and risk profile has continued to improve as a result of previous policy and pricing changes, alongside the favourable economic environment. This has led to a 13.5% reduction in non-performing balances (excluding charged off accounts), from £171 million to £148 million, and forbearance levels have remained stable over this period.
The Group actively monitors and manages emerging risks in the UK and the potential impacts on its exposure to lending risk, including the potential effect of interest rate rises and a reversal in current trends, such as unemployment.
Due to the prolonged low interest environment and the associated improvement in portfolio performance, the Group has conducted a comprehensive review of its credit risk impairment assumptions to ensure they remain appropriate. This has led to an increase in provisions of £29 million in relation to the up to date book and total provisions have increased to £281 million (2015: £216 million).
The regulatory environment for unsecured lending continues to evolve with the Competition & Markets Authority assessment of competitive practices, fees charged and assistance for vulnerable customers, alongside the FCA market review due for publication later this year. The Group considers that its focus on responsible lending and its commitment to ensuring good outcomes for customers will be consistent with the direction of any regulatory changes.
The table below summarises the Group's consumer banking portfolio:
| 2016 | 2015 | |||
|---|---|---|---|---|
| (Audited) | £m | % | £m | % |
| Overdrawn current accounts | 247 | 6 | 248 | 7 |
| Personal loans | 1,901 | 49 | 1,799 | 47 |
| Credit cards | 1,721 | 45 | 1,744 | 46 |
| Total consumer banking | 3,869 | 100 | 3,791 | 100 |
The Group monitors and reports lending risk on consumer banking portfolios primarily on delinquency status, since no security is held against the loans. Impaired accounts are defined as those greater than three months in arrears. Nonperforming accounts include all impaired loans and also loans which are past due but not impaired, including any asset where a payment due is received late or missed. The nonperforming loan amount represents the entire financial asset rather than just the payment overdue.
The performance of the portfolios is closely monitored, with corrective action taken when appropriate to ensure adherence with risk appetite.
The Group holds impairment provisions for both the performing and non-performing segments of the consumer banking portfolio. Provisions reflect losses which have been incurred at the balance sheet date, based on objective evidence. For currently performing loans, the provision reflects the Group's assessment of losses arising from impairment events that have occurred but which have not been specifically identified at the reporting date.
129
| Consumer banking by payment due status | |||||||
|---|---|---|---|---|---|---|---|
| 2016 | |||||||
| Overdrawn current accounts |
Personal loans |
Credit cards |
Total | ||||
| (Audited) | £m | £m | £m | £m | % | ||
| Performing: | |||||||
| Neither past due nor impaired | 206 | 1,742 | 1,576 | 3,524 | 91 | ||
| Non-performing: | |||||||
| Past due up to 3 months | 16 | 42 | 27 | 85 | |||
| Impaired: | |||||||
| Past due 3 to 6 months | 4 | 11 | 11 | 26 | |||
| Past due 6 to 12 months | 3 | 11 | 3 | 17 | |||
| Past due over 12 months | 4 | 16 | - | 20 | |||
| 27 | 80 | 41 | 148 | 4 | |||
| Charged off (note i) | 14 | 79 | 104 | 197 | 5 | ||
| Total non-performing | 41 | 159 | 145 | 345 | |||
| Total consumer banking lending | 247 | 1,901 | 1,721 | 3,869 | 100 | ||
| Non-performing loans as % of total | 11% | 4% | 2% | 4% | |||
| (excluding charged off balances) | |||||||
| Impairment provisions excluding charged off balances |
13 | 46 | 38 | 97 | |||
| Impairment provisions on charged off balances | 12 | 75 | 97 | 184 | |||
| Total impairment provisions | 25 | 121 | 135 | 281 | |||
| Provision coverage ratio on total non-performing loans (excluding charged off balances) |
48% | 58% | 93% | 66% | |||
| Provision coverage ratio on total non-performing loans (including charged off balances) |
61% | 76% | 93% | 81% | |||
| Impairment provisions as % of total consumer banking lending |
10% | 6% | 8% | 7% | |||
| Consumer banking by payment due status | |||||
|---|---|---|---|---|---|
| 2015 | |||||
| Overdrawn current accounts |
Personal loans |
Credit cards |
Total | ||
| (Audited) | £m | £m | £m | £m | % |
| Performing: | |||||
| Neither past due nor impaired | 198 | 1,646 | 1,623 | 3,467 | 91 |
| Non-performing: | |||||
| Past due up to 3 months | 16 | 53 | 30 | 99 | |
| Impaired: | |||||
| Past due 3 to 6 months | 4 | 14 | 12 | 30 | |
| Past due 6 to 12 months | 4 | 18 | 3 | 25 | |
| Past due over 12 months | 3 | 14 | - | 17 | |
| 27 | 99 | 45 | 171 | 5 | |
| Charged off (note i) | 23 | 54 | 76 | 153 | 4 |
| Total non-performing | 50 | 153 | 121 | 324 | |
| Total consumer banking lending | 248 | 1,799 | 1,744 | 3,791 | 100 |
| Non-performing loans as % of total | 11% | 6% | 3% | 5% | |
| (excluding charged off balances) | |||||
| Impairment provisions excluding charged off balances |
11 | 37 | 29 | 77 | |
| Impairment provisions on charged off balances | 20 | 50 | 69 | 139 | |
| Total impairment provisions | 31 | 87 | 98 | 216 | |
| Provision coverage ratio on total non-performing loans (excluding charged off balances) |
41% | 37% | 64% | 45% | |
| Provision coverage ratio on total non-performing loans (including charged off balances) |
62% | 57% | 81% | 67% | |
| Impairment provisions as % of total consumer banking lending |
13% | 5% | 6% | 6% | |
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.
Total non-performing balances excluding charged off balances have decreased to £148 million (2015: £171 million). This is largely due to improved quality across the current account and personal loan portfolios following the implementation of enhanced pricing and risk policies, together with a favourable economy.
Whilst metrics indicating the quality of the Group's consumer banking portfolio have improved, a review of the credit risk impairment assumptions was undertaken during the year, with particular focus on up to date accounts. This has led to an increase in provision of £29 million as a consequence of changes to model assumptions.
Total balances in charge off and the provisions held against these balances continue to grow across the personal loan
and credit card portfolios. This is in line with expectations following the change, during 2014, to hold balances on the balance sheet for an extended period of up to 36 months, whilst recovery activity is completed. It is expected that charged off balances and associated provisions will reduce in the next financial year as accounts which have met the 36 month threshold are written off.
Charged off balances for current account overdrafts have fallen to £14 million (2015: £23 million). This is due to a higher value of accounts being written off, having reached the 24 month threshold during the year, than new accounts entering charge off.
| Impairment losses for the period | ||||
|---|---|---|---|---|
| Overdrawn current accounts |
Personal loans |
Credit cards |
Total | |
| (Audited) | £m | £m | £m | £m |
| Year to 4 April 2016 | 14 | 38 | 44 | 96 |
| Year to 4 April 2015 | 16 | 34 | 39 | 89 |
The provision charge is £7 million higher than the previous year, reflecting the impact of the assumption changes referred to above.
The Group's approach is to reduce lending risk through good lending decisions. Where it is considered likely that a customer may face financial difficulty the Group seeks to find a solution to support the customer and to mitigate losses, including proactive management of exposure, forbearance or arrears management.
Account performance is monitored on an ongoing basis using a range of factors including credit scores and information held by the credit reference agencies. For credit card and current account customers, this may result in the proactive reduction of credit limits or other changes in terms. In addition to this, unsecured customers may be contacted by a specialist team to discuss their financial commitments and consider available options to improve their financial position in a sustainable manner.
When a customer has, or expects to have, difficulty in meeting contractual payments, the Group will work with them to try to find a manageable solution. This will involve a full review of the customer's individual circumstances, including establishing the root cause behind the arrears, likely duration of this situation and monthly income and expenditure, before an outcome is agreed. The range of potential renegotiation outcomes includes change in terms, forbearance or repair. All these options, described more fully below, aim to alleviate payment difficulty and bring the account back into a sustainable position.
In certain circumstances, the loan agreement is terminated or charged off to avoid ongoing member detriment such as unsustainable fees and charges. Customers who enter charge off are managed through the Group's recoveries process.
This occurs when there is a temporary concession or permanent change which results in an amended monthly cash flow. The Group may agree a repayment plan to bring the account to a performing position over a set time period, or a plan which is typically less than the minimum contractual payment for an agreed time period. Changes in terms are not offered as a means of forbearance to assist customers already in financial difficulty and interest is not suppressed during this period.
This takes place when a concession on the contractual terms of a loan is made to a customer as a result of financial difficulties. The only forbearance option offered on the unsecured portfolios is an interest-suppressed payment concession, where the Group agrees a repayment plan which is typically less than the minimum contractual payment for an agreed time period, without interest being charged.
Any action that brings a loan back to a performing position is classified as repair. This is only offered to customers who have shown that they are no longer in financial difficulty. The conditions and treatments vary by product, and can include capitalisation of arrears on loans and credit cards, and a reducing overdraft limit on current accounts.
The balances at the balance sheet date which have been subject to a change in terms, forbearance or repair at any point since March 2010 are summarised in the table below. It is possible for borrowers to have more than one type of renegotiation and in this instance they are shown in both categories and multiple events are eliminated.
| Balances subject to renegotiation since March 2010 (note i) | ||||
|---|---|---|---|---|
| Overdrawn current accounts |
Personal loans |
Credit cards |
Total | |
| 2016 | £m | £m | £m | £m |
| Change in terms | 29 | 126 | 8 | 163 |
| Forbearance | 16 | 30 | 23 | 69 |
| Repair | 21 | 1 | 19 | 41 |
| Gross total | 66 | 157 | 50 | 273 |
| Elimination of multiple events | (32) | (19) | (8) | (59) |
| Total | 34 | 138 | 42 | 214 |
| Of which loans still on renegotiated terms | 21 | 95 | 17 | 133 |
| Balances subject to renegotiation since March 2010 (note i) | ||||
|---|---|---|---|---|
| Overdrawn current accounts |
Personal loans |
Credit cards (note ii) |
Total | |
| 2015 | £m | £m | £m | £m |
| Change in terms | 31 | 131 | 11 | 173 |
| Forbearance | 15 | 27 | 24 | 66 |
| Repair | 18 | 1 | 20 | 39 |
| Gross total | 64 | 159 | 55 | 278 |
| Elimination of multiple events | (30) | (18) | (10) | (58) |
| Total | 34 | 141 | 45 | 220 |
| Of which loans still on renegotiated terms | 21 | 106 | 22 | 149 |
Notes:
i. Renegotiated balances information for consumer banking is reported since March 2010, reflecting the point in time from which this data was captured for reporting purposes.
ii. Amounts have been restated following a review of the balances reported for credit cards. The previously reported total of £87 million was found to have included accounts which had been written-off.
The Group has continued its strategy of developing a diverse commercial real estate portfolio by selectively entering into new lending, whilst reducing exposures which are outside of its current risk appetite or do not align to its existing lending strategy.
The Group's commercial loan portfolio comprises the following:
| Commercial lending balances | ||||
|---|---|---|---|---|
| 2016 | 2015 | |||
| (Audited) | £m | % | £m | % |
| Commercial real estate (CRE) | 3,009 | 25 | 4,043 | 31 |
| Registered social landlords (note i) | 7,625 | 65 | 7,786 | 59 |
| Project Finance (note ii) | 1,197 | 10 | 1,383 | 10 |
| Total commercial lending | 11,831 | 100 | 13,212 | 100 |
| Fair value adjustment for micro hedged risk | 1,366 | 1,382 | ||
| Total | 13,197 | 14,594 | ||
Notes:
i. Loans to registered social landlords are secured on residential property.
ii. Loans advanced in relation to Project Finance are secured on cash flows from government or local authority backed contracts.
CRE loans have reduced, net of new lending, by £1,034 million to £3,009 million (2015: £4,043 million). This reduction, which includes managed exit activity, scheduled repayments and redemptions, has resulted in an increase in the percentage of commercial lending represented by the registered social landlord and Project Finance portfolios to 75% (2015: 69%).
Over the year the commercial property market has remained buoyant with investor confidence holding up well, supported by the availability of lending for commercial real estate. Non-performing loans have reduced to £226 million (2015: £685 million), non-performing loans over 100% LTV have reduced to £126 million (2015: £506 million) and impaired negative equity has fallen to £38 million (2015: £241 million). These improvements result from both previous deleveraging activity and the improvement in market conditions.
The registered social landlord portfolio, which represents 65% (2015: 59%) of total commercial lending balances, is fully performing and remains stable, reflecting its long term, low risk nature. The portfolio is risk rated using the Group's internal rating models with the major drivers being financial strength, independent viability assessment ratings provided
by the Homes and Communities Agency and the type and size of the registered social landlord. The distribution of exposures is weighted more towards the stronger risk ratings and, against a backdrop of a long history of zero defaults, the risk profile of the portfolio has remained low even through the recent economic downturn.
There have been no losses incurred on either the registered social landlord or Project Finance portfolios, no amounts are in arrears and there are no instances of forbearance.
The remaining core CRE portfolio is well spread across geographic locations and property sectors and is of robust credit quality.
Over the period since 2012 the Group has concluded its deleveraging of non-core CRE assets and given the small residual non-core balances, no longer separates the management of its non-core and core businesses.
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Lending risk in the commercial loan portfolio is linked to delinquency and the availability of collateral to cover any loan balances. The Group adopts robust credit management policies and processes designed to recognise and manage the risks arising, or likely to arise, from the portfolio.
The following table shows the CRE portfolio split by LTV and region:
| CRE lending balances by LTV and region | ||||||
|---|---|---|---|---|---|---|
| London | South East | Rest of UK | Non-UK | Total | ||
| (Audited) | (note i) | |||||
| 2016 | £m | £m | £m | £m | £m | % |
| Performing loans | ||||||
| Fully collateralised | ||||||
| LTV ratio (note ii): | ||||||
| Less than 25% | 136 | 24 | 60 | - | 220 | |
| 25% to 50% | 1,021 | 219 | 419 | - | 1,659 | |
| 51% to 75% | 329 | 111 | 390 | - | 830 | |
| 76% to 90% | 3 | 13 | 46 | - | 62 | |
| 91% to 100% | 1 | - | 5 | - | 6 | |
| 1,490 | 367 | 920 | - | 2,777 | 92 | |
| Not fully collateralised | ||||||
| – Over 100% LTV (A) | - | 3 | 3 | - | 6 | - |
| – Collateral value on A | - | 2 | 2 | - | 4 | |
| – Negative equity on A | - | 1 | 1 | - | 2 | |
| Total performing loans | 1,490 | 370 | 923 | - | 2,783 | 92 |
| Non-performing loans | ||||||
| Fully collateralised | ||||||
| LTV ratio (note iii): | ||||||
| Less than 25% | 17 | - | 2 | - | 19 | |
| 25% to 50% | 10 | 9 | 5 | - | 24 | |
| 51% to 75% | 8 | 5 | 17 | - | 30 | |
| 76% to 90% | 3 | - | 18 | - | 21 | |
| 91% to 100% | - | - | 6 | - | 6 | |
| 38 | 14 | 48 | - | 100 | 4 | |
| Not fully collateralised | ||||||
| – Over 100% LTV (B) | 7 | 52 | 67 | - | 126 | 4 |
| – Collateral value on B | 5 | 36 | 47 | - | 88 | |
| – Negative equity on B | 2 | 16 | 20 | - | 38 | |
| Total non-performing loans | 45 | 66 | 115 | - | 226 | 8 |
| Total CRE loans | 1,535 | 436 | 1,038 | - | 3,009 | 100 |
| Geographical concentration | 51% | 14% | 35% | - | 100% |
| CRE lending balances by LTV and region | ||||||
|---|---|---|---|---|---|---|
| (Audited) | London | South East | Rest of UK (note i) |
Non-UK | Total | |
| 2015 | £m | £m | £m | £m | £m | % |
| Performing loans | ||||||
| Fully collateralised | ||||||
| LTV ratio (note ii): | ||||||
| Less than 25% | 255 | 19 | 47 | - | 321 | |
| 25% to 50% | 877 | 189 | 351 | - | 1,417 | |
| 51% to 75% | 510 | 249 | 449 | - | 1,208 | |
| 76% to 90% | 117 | 25 | 220 | - | 362 | |
| 91% to 100% | - | 6 | 17 | - | 23 | |
| 1,759 | 488 | 1,084 | - | 3,331 | 82 | |
| Not fully collateralised | ||||||
| – Over 100% LTV (A) | 2 | - | 25 | - | 27 | 1 |
| – Collateral value on A | 1 | - | 24 | - | 25 | |
| – Negative equity on A | 1 | - | 1 | - | 2 | |
| Total performing loans | 1,761 | 488 | 1,109 | - | 3,358 | 83 |
| Non-performing loans (note iii) | ||||||
| Fully collateralised | ||||||
| LTV ratio: | ||||||
| Less than 25% | - | - | 1 | - | 1 | |
| 25% to 50% | 18 | 14 | 20 | - | 52 | |
| 51% to 75% | 14 | 16 | 15 | - | 45 | |
| 76% to 90% | 5 | 6 | 39 | - | 50 | |
| 91% to 100% | 3 | 2 | 26 | - | 31 | |
| 40 | 38 | 101 | - | 179 | 4 | |
| Not fully collateralised | ||||||
| – Over 100% LTV (B) | 3 | 140 | 354 | 9 | 506 | 13 |
| – Collateral value on B | 2 | 92 | 162 | 9 | 265 | |
| – Negative equity on B | 1 | 48 | 192 | - | 241 | |
| Total non-performing loans | 43 | 178 | 455 | 9 | 685 | 17 |
| Total CRE loans | 1,804 | 666 | 1,564 | 9 | 4,043 | 100 |
| Geographical concentration | 45% | 16% | 39% | - | 100% | |
Notes:
i. Includes lending to borrowers in the Channel Islands.
ii. The LTV ratio is calculated using the on-balance sheet carrying amount of the loan divided by the indexed value of the most recent independent external
collateral valuation. The Investment Property Databank (IPD) monthly index is used.
iii. Non-performing loans include impaired loans and loans with arrears of less than three months which are not impaired.
There have been no significant changes to geographic concentrations in the book and overall credit quality has improved over the year.
In particular, non-performing loans have reduced and now represent 8% of CRE balances (2015: 17%), whilst both the proportion of partially collateralised non-performing loans and the shortfall on collateral for non-performing loans have also reduced. These improvements reflect the impact of improving book performance and previous deleveraging activity to reduce exposure to assets that are outside of the Group's current risk appetite or do not align to the Group's current lending strategy.
The registered social landlord portfolio is secured against portfolios of residential real estate owned and let by UK housing associations. Collateral is typically revalued at least every five years based on standard social housing
methodologies, which generally assume that the properties continue to be let. If the valuation were based upon normal residential use the valuation would be considerably higher. In all cases, registered social landlord collateral is in excess of the loan balance.
The Project Finance portfolio is secured against contractual cash flows from projects procured under the UK Private Finance Initiative rather than physical assets. The majority of loans are secured on projects which are now operational and benefiting from secure long term cash flows, with only one case remaining in the construction phase.
The following table provides details of the Group's sectoral and regional CRE concentrations together with an impairment analysis in respect of these concentrations:
| CRE lending balances and impairment provisions by type and region | ||||||||
|---|---|---|---|---|---|---|---|---|
| London | South East | Rest of UK (note i) |
Non-UK | Total | ||||
| 2016 | £m | £m | £m | £m | £m | |||
| Retail | 459 | 235 | 317 | - | 1,011 | |||
| Office | 201 | 69 | 208 | - | 478 | |||
| Residential | 666 | 71 | 256 | - | 993 | |||
| Industrial and warehouse | 29 | 36 | 158 | - | 223 | |||
| Leisure and hotel | 88 | 25 | 87 | - | 200 | |||
| Other | 92 | - | 12 | - | 104 | |||
| Total CRE lending | 1,535 | 436 | 1,038 | - | 3,009 | |||
| Impairment provisions: | ||||||||
| Retail | 2 | 12 | 8 | - | 22 | |||
| Office | 4 | 1 | 3 | - | 8 | |||
| Residential | 1 | - | 5 | - | 6 | |||
| Industrial and warehouse | - | - | 12 | - | 12 | |||
| Leisure and hotel | 1 | - | 7 | - | 8 | |||
| Other | - | - | 3 | - | 3 | |||
| Total impairment provisions | 8 | 13 | 38 | - | 59 | |||
| CRE lending balances and impairment provisions by type and region | |||||
|---|---|---|---|---|---|
| London | South East | Rest of UK (note i) |
Non-UK | Total | |
| 2015 | £m | £m | £m | £m | £m |
| Retail | 596 | 376 | 422 | 9 | 1,403 |
| Office | 223 | 105 | 339 | - | 667 |
| Residential | 613 | 103 | 309 | - | 1,025 |
| Industrial and warehouse | 55 | 46 | 331 | - | 432 |
| Leisure and hotel | 185 | 34 | 151 | - | 370 |
| Other | 132 | 2 | 12 | - | 146 |
| Total CRE lending | 1,804 | 666 | 1,564 | 9 | 4,043 |
| Impairment provisions: | |||||
| Retail | 2 | 41 | 39 | 4 | 86 |
| Office | 2 | 18 | 64 | - | 84 |
| Residential | 1 | 2 | 25 | - | 28 |
| Industrial and warehouse | - | 1 | 84 | - | 85 |
| Leisure and hotel | 1 | 1 | 36 | - | 38 |
| Other | - | - | 1 | - | 1 |
| Total impairment provisions | 6 | 63 | 249 | 4 | 322 |
Note:
i. Includes lending to borrowers based in the Channel Islands.
Notwithstanding the reduction in CRE lending, the Commercial lending exposure remains well spread across sectors, and geographic regions.
The Group holds impairment provisions in relation to both the performing and non-performing segments of the commercial lending portfolio. Provisions reflect losses which have been incurred at the balance sheet date, based on objective evidence. Individual impairment provisions are assigned to facilities exhibiting signs of financial difficulty and a collective provision is assigned to all other accounts. For currently
performing loans, the collective provision reflects losses arising from impairment events that have occurred within the portfolio but are not identifiable at the reporting date.
No losses have been experienced on the registered social landlord or Project Finance portfolios and there is no nonperformance within these portfolios. As a result, impairment provisions are only needed against the CRE portfolio.
The table below sets out the payment due status and impairment provisions for the CRE portfolio:
| CRE lending balances by payment due status | ||||
|---|---|---|---|---|
| 2016 | 2015 | |||
| (Audited) | £m | % | £m | % |
| Performing: | ||||
| Neither past due nor impaired | 2,783 | 92 | 3,358 | 83 |
| Non-performing: | ||||
| Past due up to 3 months but not impaired (note i) | 55 | 2 | 77 | 2 |
| Impaired: (note ii) | ||||
| Past due up to 3 months | 115 | 4 | 413 | 11 |
| Past due 3 to 6 months | 21 | 1 | 59 | 1 |
| Past due 6 to 12 months | 4 | - | 56 | 1 |
| Past due over 12 months | 28 | 1 | 79 | 2 |
| Possessions (note iii) | 3 | - | 1 | - |
| Total non-performing balances | 226 | 8 | 685 | 17 |
| Total | 3,009 | 100 | 4,043 | 100 |
| Impairment provisions | ||||
| Individual | 54 | 92 | 313 | 97 |
| Collective | 5 | 8 | 9 | 3 |
| Total impairment provisions | 59 | 100 | 322 | 100 |
| Provision coverage ratios | ||||
| Individual provisions as % of impaired balances | 32 | 51 | ||
| Total provisions as % of non-performing balances | 26 | 47 | ||
| Total provisions as % of total gross balances | 2 | 8 | ||
| Estimated collateral: | ||||
| Against loans past due but not impaired | 55 | 100 | 77 | 100 |
| Against impaired loans | 133 | 78 | 367 | 60 |
| Total collateral | 188 | 83 | 444 | 65 |
Notes:
i. The status 'past due up to 3 months but not impaired' includes any asset where a payment due under strict contractual terms is received late or missed. The amount included is the entire financial asset rather than just the payment overdue.
ii. Impaired loans include those balances which are more than three months in arrears, or against which an individual provision is held.
iii. Possession balances represent loans for which the Group has taken ownership of security pending sale. Assets in possession are realised to derive the maximum benefit for all interested parties. The Group does not occupy or otherwise use for any purposes the repossessed assets.
Total non-performing loans, before provisions, have reduced by £459 million to £226 million, with a corresponding reduction of £263 million in total impairment provisions
reflecting the deleveraging activity in 2015/16 and an improvement in market conditions. These loans now represent 6% of the total CRE exposure (2015: 15%).
| Impairment (reversal)/loss for the year | ||
|---|---|---|
| 2016 | 2015 | |
| (Audited) | £m | £m |
| Total | (34) | 52 |
The improved CRE market conditions, including increased liquidity and capital values, have resulted in a net impairment reversal of £34 million. The £52 million charge in the prior period reflected accelerated disposals as part of the deleveraging activity.
The level of negative equity based upon indexed property values for the non-performing and impaired assets is detailed below:
| 2016 | 2015 | |
|---|---|---|
| £m | £m | |
| Past due but not impaired | - | - |
| Impaired | 38 | 240 |
| Possessions | - | 1 |
| Total | 38 | 241 |
The reduction in impaired negative equity reflects the improving book performance, previous deleveraging activity and positive economic environment where commercial properties have increased in value.
Forbearance occurs when concessions are made, on the contractual terms of a loan, when the borrower is facing or about to face difficulties in meeting its financial commitments.
A concession is a change in favour of the borrower which could be a modification to the previous terms and conditions of a facility letter/documentation or a total or partial refinancing of debt, mid-term or at maturity.
The concession requests the Group receives are principally attributable to:
141
All concession requests are assessed and approved by the independent credit team in Group Risk.
Exposures are only removed from being in forbearance when specified conditions have been met including:
• a minimum 2 year probation period has passed from the date the forborne exposure was classified as performing;
The following flowchart demonstrates the decision process for commercial forbearance:
The table below provides details of the CRE lending that is currently subject to forbearance, split by the concession events agreed:
| Lending subject to forbearance | |||||
|---|---|---|---|---|---|
| 2016 | 2015 | ||||
| £m | % | £m | % | ||
| Covenant breach | 54 | 9 | 180 | 18 | |
| Extension at maturity | 42 | 7 | 87 | 9 | |
| Multiple forbearance events | 484 | 82 | 639 | 63 | |
| Other | 8 | 2 | 106 | 10 | |
| Total | 588 | 100 | 1,012 | 100 | |
There are no instances of forbearance in either the registered social landlord or Project Finance portfolios.
CRE exposures currently subject to forbearance have decreased to £588 million, principally as a result of the controlled exit from non-core, higher risk loans, and now represent 20% of CRE loan balances (2015: 25%).
The other lending portfolio of £20 million consists primarily of a £15 million portfolio of secured loans relating to a European commercial loan facility held by one of the Group's subsidiaries, Cromarty CLO Ltd (Cromarty), of which £5 million is impaired. The portfolio has reduced during the year through ongoing loan maturities and amortisation and remains in run-off.
The remaining exposure consists of lending in the form of margin calls to support a small number of derivative transactions completed via a central clearing function available to the Group. The following table provides further information on other lending balances by payment due status.
| Other lending balances by payment due status | |||||
|---|---|---|---|---|---|
| 2016 | 2015 | ||||
| (Audited) | £m | % | £m | % | |
| Performing: | |||||
| Neither past due nor impaired | 15 | 75 | 19 | 66 | |
| Non-performing: | |||||
| Past due but not impaired | - | - | - | - | |
| Impaired | 5 | 25 | 10 | 34 | |
| Total | 20 | 100 | 29 | 100 | |
| Impairment provisions/coverage ratio | 1 | 20 | 4 | 40 | |
| Impairment losses for the year | 1 | 34 | |||
Note: Of the impaired Cromarty loans, £5 million (2015: £5 million) was past due more than 12 months.
The Group adopts robust credit management policies and processes designed to recognise and manage the risks arising, or likely to arise, from its other lending portfolio including strategies to maximise recoveries when required.
Cromarty agrees repayment terms for its borrowers that are within the definition of forbearance; the terms of the interest payments of the Society's loan to Cromarty, however, are aggregated so it does not have a forbearance position.
Forbearance in relation to Cromarty's borrowers that cannot demonstrate they have robust business models generating adequate debt servicing coverage tends to take the form of balance sheet restructures, often led by lenders; the terms of these attempt to balance the need to relieve companies of unsustainable debt burdens and to maximise returns for lenders.
As at 4 April 2016, four borrowers (2015: five borrowers) in the Cromarty loan portfolio with a total exposure of £7 million (2015: £9 million) would be classed as in forbearance.
The Group's treasury portfolio is held primarily for liquidity management purposes and, in the case of derivatives, for
market risk management. As at 4 April 2016 treasury assets represent 12.9% (2015: 11.3%) of the Group's total assets.
| Treasury asset balances | ||
|---|---|---|
| 2016 | 2015 | |
| (Audited) | £m | £m |
| Cash | 8,797 | 4,325 |
| Loans and advances to banks | 3,591 | 3,392 |
| Investment securities | 10,738 | 11,063 |
| Treasury liquidity and investment portfolio | 23,126 | 18,780 |
| Derivative assets | 3,898 | 3,337 |
| Total treasury portfolio | 27,024 | 22,117 |
Note: Derivatives are classified as assets where their fair value is positive and liabilities where their fair value is negative. At 4 April 2016, the Group had derivative liabilities of £3,463 million (2015: £4,048 million).
Investment activity is restricted to high quality primary liquidity securities comprising central bank reserves and highly rated debt securities issued by a limited range of governments, central banks and multilateral development banks. A secondary portfolio is also held offering access to central bank funding operations and a second tier of liquidity.
The total balance of out of policy legacy assets (investment securities acquired prior to the financial crisis and no longer approved within the Group's risk appetite) has reduced from £640 million to £423 million during the year through ongoing sales, maturities and amortisation. An £8 million reversal of impairment (2015: £18 million charge) has been recognised in the income statement from legacy asset disposals.
Although the out of policy portfolio risk profile has improved, opportunities to exit positions continue to be assessed against prevailing market conditions and the financial implications for the Group.
As part of the Group's risk management, derivatives are used to reduce exposure to market risks; the Group does not use any derivatives for trading or speculative purposes. The Group has no exposure to emerging markets, hedge funds or credit default swaps.
Credit risk within the treasury portfolio arises primarily from the instruments held by Treasury for operational, liquidity and investment purposes. The Treasury Credit Risk function manages all aspects of credit risk in accordance with the Group's risk governance framework with the policy approved by the Group's Lending Committee.
A monthly review is undertaken of the current and expected future performance of all treasury assets with regular challenge and independent review underpinned by robust risk reporting and performance metrics established to measure, mitigate and manage credit risk. In accordance with accounting standards, assets are impaired where there is objective evidence that current events or performance will result in a loss. In assessing impairment the Group evaluates, among other factors, normal volatility in valuation, evidence of deterioration in the financial health of the obligor, industry and sector performance and underlying cash flows.
In addition, counterparty credit risk arises from the use of derivatives; these are only traded with highly-rated organisations and are collateralised under market standard documentation.
The Group's liquidity and investment portfolio held on the balance sheet at 4 April 2016 of £23,126 million (2015: £18,780 million) is held in three separate portfolios: primary liquidity, other central bank eligible assets and other securities. The size of the portfolio has increased, predominantly via higher cash balances held as a strategic response to potential market volatility in the run up to the EU referendum in June 2016.
Primary liquidity comprises cash held at central banks and highly rated debt securities issued by governments or multi-lateral development banks. The remaining two portfolios comprise available for sale investment securities, with movements reflecting legacy asset disposals, market prices and the Group's operational and strategic liquidity requirements.
The Group's Treasury Credit Policy ensures all credit risk exposures align to the Board's risk appetite with investments restricted to low risk assets and proven market counterparties; an analysis of the on-balance sheet portfolios by credit rating and geographical location of the issuers is set out below.
| 2016 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| AAA | AA | A | Other | UK | US | Europe | Other | ||
| (Audited) | £m | % | % | % | % | % | % | % | % |
| Primary liquidity: | |||||||||
| Cash | 8,797 | 99 | - | 1 | - | 90 | - | 10 | - |
| Gilts | 4,731 | 100 | - | - | - | 100 | - | - | - |
| Non-domestic government bonds |
1,590 | 28 | 72 | - | - | - | 57 | 43 | - |
| Supranational bonds | 522 | 90 | 10 | - | - | - | - | - | 100 |
| Primary liquidity total | 15,640 | 92 | 8 | - | - | 81 | 6 | 10 | 3 |
| Other Central Bank eligible: | |||||||||
| Residential mortgage backed securities (RMBS) |
1,153 | 96 | 1 | 3 | - | 64 | - | 36 | - |
| Covered bonds | 1,011 | 97 | - | 3 | - | 52 | - | 36 | 12 |
| Other (secondary liquidity) | 365 | 87 | 13 | - | - | 54 | - | 46 | - |
| Other Central Bank eligible total |
2,529 | 95 | 3 | 2 | - | 58 | - | 37 | 5 |
| Other securities: | |||||||||
| Loans and advances to banks | 3,591 | 25 | 19 | 31 | 25 | 68 | 9 | 11 | 12 |
| RMBS | 487 | 16 | 15 | 55 | 14 | 77 | - | 20 | 3 |
| Commercial mortgage backed securities (CMBS) |
40 | - | 16 | 67 | 17 | 16 | 84 | - | - |
| Collateralised loan obligations | 528 | 84 | 13 | 3 | - | 78 | 22 | - | - |
| Student loans | 136 | 19 | 53 | 28 | - | - | 100 | - | - |
| Other | 175 | - | 9 | 63 | 28 | 36 | 64 | - | - |
| Other securities total | 4,957 | 29 | 18 | 32 | 21 | 66 | 15 | 10 | 9 |
| Total | 23,126 | 79 | 10 | 7 | 4 | 75 | 7 | 13 | 5 |
Liquidity and investment portfolio by credit rating
| Liquidity and investment portfolio by credit rating | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2015 | |||||||||
| AAA | AA | A | Other | UK | US | Europe | Other | ||
| (Audited) | £m | % | % | % | % | % | % | % | % |
| Primary liquidity: | |||||||||
| Cash | 4,325 | 100 | - | - | - | 100 | - | - | - |
| Gilts | 5,031 | 100 | - | - | - | 100 | - | - | - |
| Non-domestic government bonds |
1,200 | 21 | 79 | - | - | - | 25 | 75 | - |
| Supranational bonds | 495 | 90 | 10 | - | - | - | - | - | 100 |
| Primary liquidity total | 11,051 | 91 | 9 | - | - | 85 | 3 | 8 | 4 |
| Other Central Bank eligible: | |||||||||
| Residential mortgage backed securities (RMBS) |
1,189 | 82 | 12 | 6 | - | 38 | - | 62 | - |
| Covered bonds | 993 | 96 | - | - | 4 | 44 | - | 48 | 8 |
| Other (secondary liquidity) | 239 | 90 | - | - | 10 | 35 | - | 65 | - |
| Other Central Bank eligible total | 2,421 | 88 | 6 | 3 | 3 | 40 | - | 57 | 3 |
| Other securities: | |||||||||
| Loans and advances to banks | 3,392 | 10 | 30 | 60 | - | 49 | 16 | 15 | 20 |
| RMBS | 876 | 35 | 7 | 53 | 5 | 86 | - | 11 | 3 |
| Commercial mortgage backed securities (CMBS) |
60 | - | 19 | 70 | 11 | 15 | 78 | 7 | - |
| Collateralised loan obligations | 556 | 75 | 21 | 4 | - | 59 | 41 | - | - |
| Covered bonds | 40 | 100 | - | - | - | 100 | - | - | - |
| Student loans | 163 | - | 64 | 36 | - | - | 100 | - | - |
| Other | 221 | 42 | 25 | 13 | 20 | 40 | 13 | 47 | - |
| Other securities total | 5,308 | 22 | 26 | 50 | 2 | 55 | 19 | 13 | 13 |
| Total | 18,780 | 71 | 13 | 15 | 1 | 70 | 7 | 16 | 7 |
Note: Ratings used are obtained from Standard & Poor's in the majority of cases, from Moody's if there is no Standard & Poor's rating available, and internal ratings are used if neither is available.
The above analysis does not include off balance sheet funding, including £8.5 billion (2015: £8.5 billion) of primary liquidity representing short dated UK Treasury bills held as a result of FLS drawings. These are included in the analysis of funding in the 'Financial Risk' section of this report.
Credit quality has improved with 79% of investments rated at AAA (2015: 71%). Primary liquidity exposure makes up 68% of the total portfolio (2015: 59%).
Collateral held as security for treasury assets is determined by the nature of the instrument. Treasury liquidity portfolio assets are generally unsecured with the exception of reverse repos, asset backed securities and similar instruments, which are secured by pools of financial assets. Within loans and advances to banks is a reverse repo of £0.1 billion (2015: £0.1 billion) which is secured by gilts.
Out of a total of £23,126 million (2015: £18,780 million) on balance sheet treasury liquidity and investment portfolio, £10,738 million (2015: £11,063 million) is held as available for sale (AFS). Under IFRS, AFS assets are marked to market through other comprehensive income and fair value movements are accumulated in reserves.
Of the £10,738 million of AFS assets, £125 million (2015: £12 million) are classified as Level 3 (valuation not based on observable market data) for the purposes of IFRS 13. This increase is primarily caused by an £81 million gain connected with the impending disposal of the Society's investment in Visa Europe, further details of which can be found in note 14 to the accounts. Details of fair value movements can be found in notes 22 and 23 to the accounts.
The table below shows the fair value carrying amount and AFS reserve for the treasury liquidity and investment portfolio.
| Fair value of treasury assets and AFS reserve | ||||
|---|---|---|---|---|
| 2016 | 2015 | |||
| Fair value on balance sheet |
Cumulative AFS reserve |
Fair value on balance sheet |
Cumulative AFS reserve |
|
| (Audited) | £m | £m | £m | £m |
| Cash | 8,797 | (note i) | 4,325 | (note i) |
| Gilts | 4,731 | (374) | 5,031 | (468) |
| Non-domestic government bonds | 1,590 | (48) | 1,200 | (91) |
| Supranational bonds | 522 | (3) | 495 | (6) |
| Primary liquidity portfolio total | 15,640 | (425) | 11,051 | (565) |
| Residential mortgage backed securities (RMBS) | 1,153 | 10 | 1,189 | 4 |
| Covered bonds | 1,011 | (15) | 993 | (21) |
| Other investments | 365 | 1 | 239 | - |
| Other Central Bank eligible liquidity portfolio total | 2,529 | (4) | 2,421 | (17) |
| Loans and advances to banks | 3,591 | (note i) | 3,392 | (note i) |
| RMBS | 487 | 23 | 876 | (2) |
| Commercial mortgage backed securities (CMBS) | 40 | 6 | 60 | 8 |
| Covered bonds | - | - | 40 | - |
| Collateralised loan obligations (CLO) | 528 | 5 | 556 | 1 |
| Student loans | 136 | 11 | 163 | 7 |
| Other investments | 175 | (97) | 221 | (1) |
| Other portfolio total | 4,957 | (52) | 5,308 | 13 |
| Total treasury liquidity portfolio | 23,126 | (481) | 18,780 | (569) |
| AFS reserve before hedge accounting and taxation |
(481) | (569) | ||
| Hedge accounting adjustment for interest rate risk | 498 | 544 | ||
| Taxation | (9) | (1) | ||
| AFS reserve (net) | 8 | (26) | ||
Note:
i. Not applicable for 'Cash' and 'Loans and advances to banks'.
As at 4 April 2016, the balance on the AFS reserve had moved to an £8 million loss, net of tax (2015: £26 million gain). The movements in the AFS reserve reflect general market
movements and the disposal of legacy assets. The fair value movement of AFS assets that are not impaired has no effect on the Group's profit.
The Group holds £162 million (2015: £315 million) of securities which are domiciled in the peripheral Eurozone countries; these are held outside of primary liquidity. Of the £162 million, 79% is rated single A or above (2015: 74%). This exposure has reduced by 49% in the year to 4 April 2016 due primarily to the disposal of legacy Spanish assets, maturities and fair value and exchange rate movements. The Group continues to actively manage these exposures which remain outside of current credit policy.
The following table summarises the Group's exposure to issuers in the peripheral Eurozone countries; the Group has no direct sovereign exposure to these countries. The exposures are shown at their balance sheet carrying values.
| Country exposures (peripheral Eurozone) | ||||
|---|---|---|---|---|
| 2016 | ||||
| Italy | Portugal | Spain | Total | |
| £m | £m | £m | £m | |
| Mortgage backed securities | 21 | 22 | 85 | 128 |
| Covered bonds | - | - | 31 | 31 |
| Other corporate | 3 | - | - | 3 |
| Total | 24 | 22 | 116 | 162 |
| Country exposures (peripheral Eurozone) | ||||||
|---|---|---|---|---|---|---|
| 2015 | ||||||
| Italy | Portugal | Spain | Total | |||
| £m | £m | £m | £m | |||
| Mortgage backed securities | 45 | 32 | 206 | 283 | ||
| Covered bonds | - | - | 29 | 29 | ||
| Other corporate | 3 | - | - | 3 | ||
| Total | 48 | 32 | 235 | 315 | ||
None of the Group's exposures to the peripheral Eurozone countries detailed in the table above are in default, and the Group has not incurred any impairment on these assets in the period.
In addition to exposure to peripheral Eurozone countries, the Group's total exposure in respect of the other Eurozone and
rest of the world countries is shown below at the balance sheet carrying value.
| Country exposures (other than peripheral Eurozone) | |
|---|---|
| 2016 | |||||||
|---|---|---|---|---|---|---|---|
| Finland | France | Germany | Netherlands | USA | Rest of world | Total | |
| £m | £m | £m | £m | £m | £m | £m | |
| Government bonds | 242 | - | 365 | 82 | 902 | - | 1,591 |
| Mortgage backed securities |
- | - | - | 385 | 35 | 17 | 437 |
| Covered bonds | 23 | 52 | - | - | - | 383 | 458 |
| Senior debt | - | - | - | - | - | 522 | 522 |
| Loans to banks | - | 60 | 107 | - | 350 | 627 | 1,144 |
| Other corporate | - | 4 | 3 | - | - | - | 7 |
| Other assets | - | 66 | 102 | - | 365 | - | 533 |
| Total | 265 | 182 | 577 | 467 | 1,652 | 1,549 | 4,692 |
| Country exposures (other than peripheral Eurozone) | |||||||
|---|---|---|---|---|---|---|---|
| 2015 | |||||||
| Finland | France | Germany | Netherlands | USA | Rest of world | Total | |
| £m | £m | £m | £m | £m | £m | £m | |
| Government bonds | 231 | - | 253 | 411 | 305 | - | 1,200 |
| Mortgage backed securities |
- | 4 | - | 551 | 49 | 27 | 631 |
| Covered bonds | 21 | 125 | 37 | 27 | - | 315 | 525 |
| Senior debt | - | - | - | - | - | 495 | 495 |
| Loans to banks | - | 146 | 229 | - | 527 | 823 | 1,725 |
| Other corporate | 2 | 7 | 5 | 3 | - | - | 17 |
| Other assets | - | 88 | 169 | - | 420 | - | 677 |
| Total | 254 | 370 | 693 | 992 | 1,301 | 1,660 | 5,270 |
Note: Rest of world exposure is to Australia, Canada, Denmark, Norway, Sweden and Switzerland.
The Group uses derivatives to reduce exposure to market risks, although the application of accounting rules can create volatility in the income statement in a particular financial year. The fair value of derivative assets at 4 April 2016 was £3.9 billion (2015: £3.3 billion) and the fair value of derivative liabilities was £3.5 billion (2015: £4.0 billion).
The International Swaps and Derivatives Association (ISDA) Master Agreement is the Group's preferred agreement for documenting derivative transactions. A Credit Support Annex (CSA) is always executed in conjunction with the ISDA Master Agreement. Under a CSA, collateral is passed between parties to mitigate the market contingent counterparty risk inherent in the outstanding positions. The Group's CSAs are two-way agreements where both parties post collateral dependent on the exposure of the derivative. Collateral is paid or received on a regular basis (typically daily) to mitigate the mark to market exposures on derivatives.
The Group's CSA legal documentation for derivative transactions grants legal rights of set off for transactions with the same overall counterparty. Accordingly, the credit risk associated with such positions is reduced to the extent that negative mark to market values offset positive mark to market values in the calculation of credit risk within each netting agreement.
As a result of CSA netting arrangements, outstanding transactions with the same counterparty can be offset and settled net following a default or other predetermined event. Under CSA arrangements netting benefits of £2.0 billion (2015: £1.9 billion) are available and £1.8 billion of collateral is held (2015: £1.3 billion) is available; cash is the only collateral held.
The following table shows the exposure to counterparty credit risk for derivative contracts after netting benefits and collateral:
| Derivative credit exposure | |||||||
|---|---|---|---|---|---|---|---|
| 2016 | 2015 | ||||||
| Counterparty credit quality | AA | A | Total | AA | A | Total | |
| (Audited) | £bn | £bn | £bn | £bn | £bn | £bn | |
| Gross positive fair value of contracts | 1.1 | 2.8 | 3.9 | 0.4 | 2.9 | 3.3 | |
| Netting benefits | (0.5) | (1.5) | (2.0) | (0.3) | (1.6) | (1.9) | |
| Net current credit exposure | 0.6 | 1.3 | 1.9 | 0.1 | 1.3 | 1.4 | |
| Collateral held | (0.6) | (1.2) | (1.8) | (0.1) | (1.2) | (1.3) | |
| Net derivative credit exposure | - | 0.1 | 0.1 | - | 0.1 | 0.1 | |
The Group is exposed to financial risks as follows:
| Risk category | Definition |
|---|---|
| Liquidity and funding | Liquidity risk is the risk that the Group is unable to meet its liabilities as they fall due and maintain member and stakeholder confidence. Funding risk is the risk that the Group is unable to maintain diverse funding sources in wholesale and retail markets and manage retail funding risk that can arise from excessive concentrations of higher risk deposits. |
| Solvency | The risk that the Group fails to maintain sufficient capital to absorb losses throughout a full economic cycle and sufficient to maintain the confidence of current and prospective investors, the Board and regulators. |
| Market | The risk that the net value of, or net income arising from, the Group's assets and liabilities is impacted as a result of market price or rate changes. |
| Pension | The risk that the value of the Fund's assets will be insufficient to meet the estimated liabilities of the Fund. Pension risk can adversely impact the Group's capital position and/or result in increased cash funding obligations to the Fund. |
| Earnings | The risk that a source of income or value is unable to continue to add the expected value, due to changes in market, regulatory or other environmental factors. |
Financial risk is managed within a framework of approved assets, currencies and capital instruments supported by detailed limits set by either the Board or the Assets and Liabilities Committee (ALCO) under its delegated mandate. The Board retains responsibility for approval of derivative
classes that may be used for market risk management purposes, restrictions over the use of such derivative classes (within the limitations imposed under the Building Societies Act, Section 9A) and for asset classes that may be classified as liquidity.
The Group's liquidity and funding levels continue to be within Board risk appetite and regulatory requirements.
The Group monitors its position relative to internal risk appetite and the regulatory short term liquidity stress metric, the Liquidity Coverage Ratio (LCR), which was implemented on 1 October 2015. The Group's LCR at 4 April 2016 was 142.6% (2015: 119.3%), which reflects the Group's strategy of maintaining a LCR of at least 100% and represents a surplus to the UK regulatory minimum requirement of 80%, rising to 100% by January 2018.
The Group also monitors its position against the longer-term funding metric, the Net Stable Funding Ratio (NSFR), which is due to become a regulatory standard in January 2018. Based on current interpretations of regulatory requirements and guidance, the Group's NSFR at 4 April 2016 was 127.9% (2015: 121.9%) which exceeds the expected 100% minimum future requirement.
The Group monitors liquidity and funding risks on an ongoing basis. This includes the current geopolitical uncertainty, such as a sustained economic slowdown in China and the Eurozone and the forthcoming EU referendum, which could have an impact on funding markets.
The Bank of England has recently consulted on the UK framework for banks and building societies to hold a minimum level of liabilities which can be bailed-in to recapitalise it in the event of failure, known as the minimum requirement for own funds and eligible liabilities (MREL). The Group is confident that it will be able to meet the full requirements when implemented in 2020.
Overall, the Group's stable and diverse funding base and sufficient holdings of high-quality liquid assets combine to ensure that there is no significant risk that liabilities cannot be met as they fall due.
The Group's strategy is to remain predominantly retail funded; retail customer loans and advances are therefore largely funded by customer deposits. Non-retail lending,
including treasury assets and commercial customer loans, are largely funded by wholesale debt, as set out below.
| Funding profile | |||||
|---|---|---|---|---|---|
| 2016 | 2015 | 2016 | 2015 | ||
| Assets | £bn | £bn | Liabilities | £bn | £bn |
| Retail mortgages | 162.1 | 152.8 | Retail funding | 144.9 | 138.5 |
| Treasury assets (including liquidity portfolio) | 23.1 | 18.8 | Wholesale funding | 45.8 | 39.2 |
| Other retail lending | 3.6 | 3.6 | Capital and reserves | 13.2 | 12.3 |
| Commercial/Other lending | 13.1 | 14.2 | Other liabilities | 5.0 | 5.6 |
| Other assets | 7.0 | 6.2 | |||
| Total | 208.9 | 195.6 | Total | 208.9 | 195.6 |
The Group's loan to deposit ratio at 4 April 2016 was 117.2% (2015: 115.6%).
On-balance sheet wholesale funding has increased by £6.6 billion to £45.8 billion, as set out in the table below. This reflects the ongoing management of the Group's liquidity and an element of pre-funding of wholesale and Bank of England Funding for Lending Scheme (FLS) maturities to
de-risk our funding plans ahead of the EU referendum in June 2016. The wholesale funding portfolio is made up of a range of unsecured and secured instruments to ensure the Group has a diversified funding base across a range of currencies, maturities and investor types.
| Wholesale funding sources | ||||
|---|---|---|---|---|
| 2016 | 2015 | |||
| £bn | % | £bn | % | |
| Deposits, including PEB balances | 9.7 | 21.2 | 11.0 | 28.1 |
| Certificates of deposit | 5.1 | 11.2 | 3.1 | 7.9 |
| Commercial paper | 1.3 | 2.8 | 2.4 | 6.1 |
| Covered bonds | 13.8 | 30.1 | 11.3 | 28.8 |
| Medium term notes | 9.9 | 21.6 | 5.2 | 13.3 |
| Securitisations | 4.7 | 10.3 | 4.8 | 12.2 |
| Other | 1.3 | 2.8 | 1.4 | 3.6 |
| Total | 45.8 | 100.0 | 39.2 | 100.0 |
At 4 April 2016 'Deposits, including PEB balances' comprised deposits of £3.6 billion (2015: £4.5 billion), PEBs of £1.9 billion (2015: £3.3 billion), business savings of £2.4 billion (2015: £1.3 billion) and other deposits of £1.8 billion (2015: £1.9 billion).
The table below sets out an analysis by currency of the Group's wholesale funding.
| Wholesale funding currency | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2016 | 2015 | |||||||||
| GBP | EUR | USD | Other | Total | GBP | EUR | USD | Other | Total | |
| £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | |
| Deposits, including PEB balances |
9.0 | 0.5 | 0.2 | - | 9.7 | 10.1 | 0.6 | 0.3 | - | 11.0 |
| Certificates of deposit | 4.7 | - | 0.4 | - | 5.1 | 2.9 | 0.1 | 0.1 | - | 3.1 |
| Commercial paper | 0.2 | - | 1.1 | - | 1.3 | 0.1 | 0.6 | 1.7 | - | 2.4 |
| Covered bonds | 2.5 | 11.1 | - | 0.2 | 13.8 | 1.8 | 9.4 | - | 0.1 | 11.3 |
| Medium term notes | 2.3 | 4.8 | 2.2 | 0.6 | 9.9 | 1.2 | 2.4 | 1.4 | 0.2 | 5.2 |
| Securitisations | 1.9 | 1.2 | 1.6 | - | 4.7 | 1.7 | 1.3 | 1.8 | - | 4.8 |
| Other | 0.2 | 1.0 | 0.1 | - | 1.3 | 0.3 | 1.0 | 0.1 | - | 1.4 |
| Total | 20.8 | 18.6 | 5.6 | 0.8 | 45.8 | 18.1 | 15.4 | 5.4 | 0.3 | 39.2 |
To mitigate cross-currency refinancing risk, the Group ensures it holds liquidity in each currency to cover at least the next ten business days of wholesale funding maturities.
Managing the maturity profile is crucial to maintaining the Group's ongoing liquidity position. The residual maturity of the wholesale funding book, on a contractual maturity basis, is set out below.
| Wholesale funding – residual maturity | ||||||||
|---|---|---|---|---|---|---|---|---|
| Not more than one month |
Over one month but not more than three months |
Over three months but not more than six months |
Over six months but not more than one year |
Subtotal less than one year |
Over one year but not more than two years |
Over two years |
Total | |
| 2016 | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn |
| Deposits, including PEB balances |
4.1 | 1.2 | 1.6 | 1.9 | 8.8 | 0.9 | - | 9.7 |
| Certificates of deposit |
1.3 | 1.6 | 1.7 | 0.5 | 5.1 | - | - | 5.1 |
| Commercial paper | 0.3 | 0.9 | 0.1 | - | 1.3 | - | - | 1.3 |
| Covered bonds | 0.1 | - | - | 1.2 | 1.3 | 0.8 | 11.7 | 13.8 |
| Medium term notes | - | - | - | 0.9 | 0.9 | 0.6 | 8.4 | 9.9 |
| Securitisations | - | - | - | 1.4 | 1.4 | 0.7 | 2.6 | 4.7 |
| Other | - | - | - | - | - | - | 1.3 | 1.3 |
| Total | 5.8 | 3.7 | 3.4 | 5.9 | 18.8 | 3.0 | 24.0 | 45.8 |
| Of which secured | 0.1 | - | - | 2.6 | 2.7 | 1.5 | 15.3 | 19.5 |
| Of which unsecured | 5.7 | 3.7 | 3.4 | 3.3 | 16.1 | 1.5 | 8.7 | 26.3 |
| % of total | 12.6 | 8.1 | 7.4 | 12.9 | 41.0 | 6.6 | 52.4 | 100.0 |
| Wholesale funding – residual maturity | ||||||||
|---|---|---|---|---|---|---|---|---|
| Not more than one month |
Over one month but not more than three months |
Over three months but not more than six months |
Over six months but not more than one year |
Subtotal less than one year |
Over one year but not more than two years |
Over two years |
Total | |
| 2015 | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn |
| Deposits, including PEB balances |
3.8 | 1.8 | 1.3 | 2.1 | 9.0 | 1.2 | 0.8 | 11.0 |
| Certificates of deposit |
0.5 | 1.3 | 0.8 | 0.5 | 3.1 | - | - | 3.1 |
| Commercial paper | 1.1 | 1.2 | 0.1 | - | 2.4 | - | - | 2.4 |
| Covered bonds | - | - | 0.9 | 1.5 | 2.4 | 1.1 | 7.8 | 11.3 |
| Medium term notes | - | - | 0.2 | - | 0.2 | - | 5.0 | 5.2 |
| Securitisations | - | - | - | 1.2 | 1.2 | 1.3 | 2.3 | 4.8 |
| Other | - | - | - | - | - | - | 1.4 | 1.4 |
| Total | 5.4 | 4.3 | 3.3 | 5.3 | 18.3 | 3.6 | 17.3 | 39.2 |
| Of which secured | - | - | 0.9 | 2.7 | 3.6 | 2.4 | 10.1 | 16.1 |
| Of which unsecured | 5.4 | 4.3 | 2.4 | 2.6 | 14.7 | 1.2 | 7.2 | 23.1 |
| % of total | 13.8 | 11.0 | 8.4 | 13.5 | 46.7 | 9.2 | 44.1 | 100.0 |
The Group's wholesale funding ratio (wholesale funding as a proportion of total funding liabilities) was 24.8% at 4 April 2016 (2015: 23.3%). The wholesale funding ratio includes all balance sheet sources of funding (including securitisations) and therefore excludes off-balance sheet FLS drawings.
The proportion of on-balance sheet funding categorised as long term (more than one year to maturity) is 59.0% (2015: 53.3%), which increased as a result of long term wholesale funding issuance during the year.
FLS drawings have a flexible and maximum maturity of four years. After including off-balance sheet FLS drawings, the residual maturity profile of the Group's wholesale funding portfolio was 50 months (2015: 40 months) and the total proportion of funding that is categorised as long term was 60.8% (2015: 61.6%).
At 4 April 2016, cash, government and supranational bonds included in the liquidity pool, including FLS treasury bills represented 128% (2015: 107%) of wholesale funding maturing in less than one year, assuming no rollovers.
The Group ensures it has sufficient resources to meet day-to-day cash flow needs and to meet internal and regulatory liquidity requirements which are calibrated to ensure the Group has sufficient liquidity, both in terms of amount and quality, in a range of stress scenarios and across multiple time horizons.
The table below sets out the sterling equivalent fair value of the liquidity portfolio, categorised by issuing currency. It includes off-balance sheet liquidity (FLS treasury bills) and excludes encumbered assets.
| Liquid assets | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2016 | 2015 | |||||||
| GBP | EUR | USD | Total | GBP | EUR | USD | Total | |
| £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | |
| Cash and reserves at central banks | 7.9 | 0.9 | - | 8.8 | 4.3 | - | - | 4.3 |
| Government bonds | 13.4 | 0.5 | 0.9 | 14.8 | 13.7 | 0.8 | 0.3 | 14.8 |
| Supranational bonds | 0.4 | - | 0.1 | 0.5 | 0.4 | - | 0.1 | 0.5 |
| Other Central Bank eligible assets | 1.4 | 1.0 | 0.1 | 2.5 | 0.7 | 1.5 | 0.1 | 2.3 |
| Other securities | 0.4 | 0.6 | 0.3 | 1.3 | 1.5 | 0.6 | 0.5 | 2.6 |
| Total | 23.5 | 3.0 | 1.4 | 27.9 | 20.6 | 2.9 | 1.0 | 24.5 |
The Group's liquid assets are held and managed centrally by the Group's Treasury Division. The Group maintains a high quality liquidity portfolio through continued investment in highly liquid assets, predominantly comprising:
Government bonds in the table above include £8.5 billion of off-balance sheet treasury bills held through FLS participation. The average combined month end balance of cash and reserves at central banks, government and supranational bonds during the year was £22.8 billion (2015: £22.0 billion).
The Group also holds a portfolio of other central bank eligible covered bonds and asset backed securities that are eligible for use in the funding operations of those central banks that it has access to. In terms of their relative liquidity characteristics, these assets may be viewed as the second tier of liquidity after cash reserves and highly rated debt securities.
Other securities, such as RMBS, are held that are not eligible for central bank operations but can be monetised through repurchase agreements with third parties or through sale.
For contingent funding purposes, unencumbered mortgage assets are pre-positioned at the Bank of England and represent eligible collateral which can be used in the Bank of England's liquidity operations if market liquidity is severely disrupted.
The table below segments the carrying value of financial assets and financial liabilities into relevant maturity groupings based on the final contractual maturity date (residual maturity). In practice, customer behaviours mean that liabilities are often retained for longer than their contractual maturities and assets are repaid faster. This gives rise to funding gaps on the Group's balance sheet.
The balance sheet structure and risks are managed and monitored by ALCO. For forecasting purposes, the Group uses judgement and past behavioural performance of each asset and liability class to anticipate likely cash flow requirements of the Group.
The analysis below excludes certain non-financial assets (including property, plant and equipment, intangible assets, investment property, other assets, deferred tax assets and accrued income and expenses prepaid) and non-financial liabilities (including provisions for liabilities and charges, accruals and deferred income, current tax liabilities, other liabilities and retirement benefit obligations).
| Liquidity and funding risk continued | ||||
|---|---|---|---|---|
| -------------------------------------- | -- | -- | -- | -- |
| Residual maturity | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Due less | Due | Due | Due | Due | Due | Due | Due | Total | |
| than one | between | between | between | between | between | between | after | ||
| month (note i) |
one and three |
three and six |
six and nine |
nine and twelve |
one and two |
two and five |
more than five |
||
| months | months | months | months | years | years | years | |||
| 2016 | £m | £m | £m | £m | £m | £m | £m | £m | £m |
| Financial assets: | |||||||||
| Cash | 8,797 | - | - | - | - | - | - | - | 8,797 |
| Loans and advances to banks |
3,179 | 87 | - | - | - | - | - | 325 | 3,591 |
| Available for sale investment securities |
6 | 15 | 14 | 1 | 178 | 352 | 3,680 | 6,366 | 10,612 |
| Loans and advances to customers |
2,825 | 1,256 | 1,929 | 1,810 | 1,823 | 7,124 | 20,237 | 141,803 178,807 | |
| Derivative financial instruments |
25 | 151 | 128 | 102 | 30 | 227 | 994 | 2,241 | 3,898 |
| Other financial assets | 5 | 15 | 107 | 17 | 65 | 142 | 234 | 299 | 884 |
| Total financial assets |
14,837 | 1,524 | 2,178 | 1,930 | 2,096 | 7,845 | 25,145 | 151,034 206,589 | |
| Financial liabilities: | |||||||||
| Shares | 103,296 | 1,632 | 5,875 | 4,608 | 5,122 | 10,731 | 6,251 | 1,200 | 138,715 |
| Deposits from banks | 1,658 | 184 | 168 | 41 | 19 | - | 25 | - | 2,095 |
| Of which repo | 122 | - | 5 | - | - | - | - | - | 127 |
| Other deposits | 2,549 | 1,392 | 1,843 | 716 | 391 | 737 | 7 | - | 7,635 |
| Due to customers | 3,563 | 543 | 1,347 | 345 | 215 | 126 | 62 | - | 6,201 |
| Secured funding – ABS and covered bonds |
65 | 19 | 43 | 2,238 | 323 | 1,524 | 7,002 | 8,263 | 19,477 |
| Senior unsecured funding |
1,637 | 2,478 | 1,810 | 315 | 1,040 | 632 | 3,878 | 4,818 | 16,608 |
| Derivative financial instruments |
31 | 9 | 23 | 33 | 84 | 338 | 647 | 2,298 | 3,463 |
| Other financial liabilities |
2 | 2 | 1 | 1 | (1) | - | 8 | - | 13 |
| Subordinated liabilities |
- | - | - | - | - | 114 | 669 | 1,034 | 1,817 |
| Subscribed capital (note ii) |
- | - | - | - | - | - | - | 413 | 413 |
| Total financial liabilities |
112,801 | 6,259 | 11,110 | 8,297 | 7,193 | 14,202 | 18,549 | 18,026 196,437 | |
| Off-balance sheet commitments (note iii) |
13,630 | - | - | - | - | - | - | - | 13,630 |
| Net liquidity difference |
(111,594) | (4,735) | (8,932) | (6,367) | (5,097) | (6,357) | 6,596 | 133,008 | (3,478) |
| Cumulative liquidity difference |
(111,594) (116,329) (125,261) (131,628) (136,725) (143,082) (136,486) | (3,478) |
| Residual maturity | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Due less | Due | Due | Due | Due | Due | Due | Due | Total | |
| than one | between | between | between | between | between | between | after | ||
| month | one and | three | six and | nine and | one and | two and | more | ||
| (note i) | three | and six | nine | twelve | two | five | than five | ||
| months | months | months | months | years | years | years | |||
| 2015 | £m | £m | £m | £m | £m | £m | £m | £m | £m |
| Financial assets: | |||||||||
| Cash | 4,325 | - | - | - | - | - | - | - | 4,325 |
| Loans and advances to banks |
2,923 | 2 | - | 61 | - | 87 | - | 319 | 3,392 |
| Available for sale | |||||||||
| investment securities | 5 | 14 | 19 | 1 | 122 | 219 | 1,830 | 8,827 | 11,037 |
| Loans and advances to customers |
2,450 | 1,198 | 1,713 | 1,893 | 1,739 | 7,272 | 19,361 | 135,021 | 170,647 |
| Derivative financial instruments |
42 | 115 | 153 | 322 | 110 | 452 | 573 | 1,570 | 3,337 |
| Other financial assets | - | 12 | - | 2 | 10 | 126 | 224 | 256 | 630 |
| Total financial assets | 9,745 | 1,341 | 1,885 | 2,279 | 1,981 | 8,156 | 21,988 | 145,993 | 193,368 |
| Financial liabilities: | |||||||||
| Shares | 97,712 | 1,464 | 5,837 | 5,380 | 6,353 | 8,353 | 6,326 | 948 | 132,373 |
| Deposits from banks | 1,479 | 391 | 10 | 64 | 6 | - | 24 | - | 1,974 |
| Of which repo | - | - | - | - | - | - | - | - | - |
| Other deposits | 2,582 | 1,458 | 1,565 | 923 | 584 | 1,205 | 759 | - | 9,076 |
| Due to customers | 3,727 | 441 | 1,318 | 254 | 224 | 42 | 113 | - | 6,119 |
| Secured funding – | |||||||||
| ABS and covered bonds |
4 | 15 | 944 | 2,810 | 22 | 2,514 | 3,153 | 8,071 | 17,533 |
| Senior unsecured | |||||||||
| funding | 1,640 | 2,467 | 1,005 | 339 | 235 | 746 | 2,676 | 1,464 | 10,572 |
| Derivative financial | |||||||||
| instruments | 64 | 31 | 13 | 27 | 25 | 345 | 791 | 2,752 | 4,048 |
| Other financial | |||||||||
| liabilities | 1 | 2 | - | 1 | 1 | 1 | 8 | - | 14 |
| Subordinated liabilities (note iv) |
- | - | 266 | - | - | - | 122 | 1,733 | 2,121 |
| Subscribed capital | |||||||||
| (note ii,iv) | - | - | - | - | - | - | - | 415 | 415 |
| Total financial | |||||||||
| liabilities | 107,209 | 6,269 | 10,958 | 9,798 | 7,450 | 13,206 | 13,972 | 15,383 | 184,245 |
| Off-balance sheet | |||||||||
| commitments | 13,690 | - | - | - | - | - | - | - | 13,690 |
| (note iii) | |||||||||
| Net liquidity | (111,154) | (4,928) | (9,073) | (7,519) | (5,469) | (5,050) | 8,016 | 130,610 | (4,567) |
| difference | |||||||||
| Cumulative liquidity difference |
(111,154) | (116,082) | (125,155) | (132,674) | (138,143) | (143,193) | (135,177) | (4,567) | |
i. Due less than one month includes amounts repayable on demand.
ii. The principal amount for undated subscribed capital is included within the due after more than five years column.
iii. Off-balance sheet commitments include amounts payable on demand for unrecognised loan commitments and customer overpayments on residential mortgages, where the borrower is able to drawdown the amount overpaid.
iv. Comparatives have been restated for the reclassification of certain amounts based on contractual maturity date rather than call date for financial instruments callable at the Group's option.
Liquid assets include cash, loans and advances to banks, and available for sale investment securities, which in aggregate have increased by £4,246 million to £23,000 million over the period. Other financial assets and liabilities include the fair value adjustments for portfolio hedged risk and investments in equity shares.
The tables below provide an analysis of gross contractual cash flows. The totals differ from the analysis of residual maturity as they include interest, accrued at current rates for the average period until maturity, on the balances outstanding at the balance sheet date.
Amounts are allocated to the relevant maturity band based on the timing of individual contractual cash flows.
| Gross contractual cash flows | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| (Audited) | Due less than one month (note i) |
Due between one and three months |
Due between three and six months |
Due between six and nine months |
Due between nine and twelve months |
Due between one and two years |
Due between two and five years |
Due after more than five years |
Total |
| 2016 | £m | £m | £m | £m | £m | £m | £m | £m | £m |
| Shares | 103,296 | 1,723 | 5,956 | 4,675 | 5,177 | 10,866 | 6,387 | 1,369 139,449 | |
| Deposits from banks | 1,657 | 184 | 169 | 41 | 19 | - | 25 | - | 2,095 |
| Other deposits | 2,550 | 1,398 | 1,846 | 717 | 391 | 737 | 7 | - | 7,646 |
| Due to customers | 3,563 | 549 | 1,351 | 347 | 216 | 127 | 63 | - | 6,216 |
| Secure funding – ABS and covered bonds |
70 | 23 | 68 | 2,282 | 503 | 1,832 | 7,683 | 8,444 | 20,905 |
| Senior unsecured funding |
1,638 | 2,583 | 1,769 | 332 | 1,152 | 854 | 4,292 | 5,336 | 17,956 |
| Subordinated liabilities |
- | - | 38 | - | 49 | 212 | 233 | 1,704 | 2,236 |
| Subscribed capital (note ii) |
1 | 5 | 4 | 7 | 4 | 22 | 67 | 362 | 472 |
| Total non-derivative financial liabilities |
112,775 | 6,465 | 11,201 | 8,401 | 7,511 | 14,650 | 18,757 | 17,215 | 196,975 |
| Derivative financial liabilities: |
|||||||||
| Gross settled derivatives – outflows |
26 | 244 | 101 | 27 | 889 | 1,221 | 2,079 | 1,015 | 5,602 |
| Gross settled derivatives – inflows |
(25) | (234) | (88) | (14) | (830) | (1,088) | (1,858) | (897) | (5,034) |
| Gross settled derivatives – net flows |
1 | 10 | 13 | 13 | 59 | 133 | 221 | 118 | 568 |
| Net settled derivative liabilities |
56 | 119 | 188 | 163 | 170 | 489 | 840 | 1,257 | 3,282 |
| Total derivative financial liabilities |
57 | 129 | 201 | 176 | 229 | 622 | 1,061 | 1,375 | 3,850 |
| Total financial liabilities |
112,832 | 6,594 | 11,402 | 8,577 | 7,740 | 15,272 | 19,818 | 18,590 200,825 | |
| Off-balance sheet commitments (note iii) |
13,630 | - | - | - | - | - | - | - | 13,630 |
| Total financial liabilities including off-balance sheet commitments |
126,462 | 6,594 | 11,402 | 8,577 | 7,740 | 15,272 | 19,818 | 18,590 214,455 |
| Gross contractual cash flows | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Due less than one month (note i) |
Due between one and three |
Due between three and six |
Due between six and nine |
Due between nine and twelve |
Due between one and two |
Due between two and five |
Due after more than five |
Total | |
| (Audited) | months | months | months | months | years | years | years | ||
| 2015 | £m | £m | £m | £m | £m | £m | £m | £m | £m |
| Shares | 97,712 | 1,568 | 5,930 | 5,456 | 6,411 | 8,494 | 6,478 | 977 | 133,026 |
| Deposits from banks | 1,479 | 392 | 10 | 64 | 6 | - | 25 | - | 1,976 |
| Other deposits | 2,582 | 1,477 | 1,579 | 933 | 591 | 1,223 | 773 | - | 9,158 |
| Due to customers | 3,727 | 448 | 1,322 | 256 | 225 | 44 | 115 | - | 6,137 |
| Secure funding – ABS and covered bonds |
36 | 20 | 971 | 2,846 | 187 | 2,797 | 3,771 | 8,068 | 18,696 |
| Senior unsecured funding |
1,640 | 2,471 | 1,048 | 344 | 337 | 897 | 3,053 | 1,640 | 11,430 |
| Subordinated liabilities (note iv) |
- | 4 | 315 | 4 | 50 | 96 | 390 | 1,811 | 2,670 |
| Subscribed capital (note ii, iv) |
1 | 5 | 4 | 7 | 4 | 22 | 68 | 363 | 474 |
| Total non-derivative financial liabilities |
107,177 | 6,385 | 11,179 | 9,910 | 7,811 | 13,573 | 14,673 | 12,859 | 183,567 |
| Derivative financial liabilities: |
|||||||||
| Gross settled derivatives – outflows |
1,503 | 1,653 | 29 | 101 | 38 | 1,026 | 3,634 | 5,649 | 13,633 |
| Gross settled derivatives – inflows |
(1,452) | (1,610) | (15) | (70) | (19) | (815) | (3,021) | (4,912) | (11,914) |
| Gross settled derivatives – net flows |
51 | 43 | 14 | 31 | 19 | 211 | 613 | 737 | 1,719 |
| Net settled derivatives liabilities |
50 | 123 | 212 | 150 | 185 | 487 | 712 | 1,319 | 3,238 |
| Total derivative financial liabilities |
101 | 166 | 226 | 181 | 204 | 698 | 1,325 | 2,056 | 4,957 |
| Total financial liabilities |
107,278 | 6,551 | 11,405 | 10,091 | 8,015 | 14,271 | 15,998 | 14,915 | 188,524 |
| Off-balance sheet commitments (note iii) |
13,690 | - | - | - | - | - | - | - | 13,690 |
| Total financial liabilities including off-balance sheet commitments |
120,968 | 6,551 | 11,405 | 10,091 | 8,015 | 14,271 | 15,998 | 14,915 | 202,214 |
Notes:
i. Due less than one month includes amounts repayable on demand.
ii. The principal amount for undated subscribed capital is included within the due after more than five years column.
iii. Off-balance sheet commitments include amounts payable on demand for unrecognised loan commitments and customer overpayments on residential
mortgages, where the borrower is able to drawdown the amount overpaid.
iv. Comparatives have been restated for the reclassification of certain amounts based on contractual maturity date rather than call date for financial instruments callable at the Group's option.
Asset encumbrance arises from collateral pledged against secured funding and other collateralised obligations. The majority of asset encumbrance within the Group arises from the use of prime mortgage pools to collateralise the Covered Bond and Silverstone asset-backed funding programmes and from participation in the FLS. Encumbrance also results from repurchase transactions, voluntary excess collateral balances, participation in payment schemes and collateral posted for derivative margin requirements. Assets that have been used for any of these purposes cannot be utilised for other purposes and are classified as encumbered.
All other assets are by definition unencumbered. These comprise assets that are readily available to secure funding or meet collateral requirements, and assets that are capable of being encumbered with a degree of further management action. Any remaining assets which do not fall into either of these categories are classified as not being capable of being encumbered.
An analysis of the Group's encumbered and unencumbered on-balance sheet assets is set out below. The table does not include off-balance sheet assets received by the Group as part of its participation in the FLS, which the Group is permitted to re-use. This disclosure is not intended to identify assets that would be available in the event of a resolution or bankruptcy.
| Assets encumbered as a result of Other assets (comprising assets transactions with counterparties encumbered at the central bank other than central banks and unencumbered assets) As a result of As a result of Assets positioned at the central bank (i.e. prepositioned Total Assets not positioned Total covered bonds securitisations Other and encumbered) at the central bank Readily available for Other assets of being Cannot be |
Total |
|---|---|
| that are capable encumbrance encumbered encumbered |
|
| 2016 £m £m £m £m £m £m £m £m £m |
£m |
| Cash 1,328 397 - 1,725 - 6,851 - 221 7,072 |
8,797 |
| Loans and - - 1,511 1,511 765 - - 1,315 2,080 advances to banks |
3,591 |
| Available for sale investment - - 128 128 42 10,442 - - 10,484 securities |
10,612 |
| Loans and advances to 18,996 12,368 - 31,364 28,387 70,312 48,744 - 147,443 customers |
178,807 |
| Derivative - - - - - - - 3,898 3,898 financial instruments |
3,898 |
| Other financial - - - - - - - 884 884 assets |
884 |
| Non-financial - - - - - - - 2,350 2,350 assets |
2,350 |
| Total 20,324 12,765 1,639 34,728 29,194 87,605 48,744 8,668 174,211 |
208,939 |
| Asset encumbrance | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Assets encumbered as a result of transactions with counterparties other than central banks |
Other assets (comprising assets encumbered at the central bank |
Total | ||||||||
| Other | Total | Assets not positioned at the central bank |
Total | |||||||
| As a result of covered bonds |
As a result of securitisations |
Assets positioned at the central bank (i.e. prepositioned and encumbered) |
Readily available for encumbrance |
Other assets that are capable of being encumbered |
Cannot be encumbered |
|||||
| 2015 | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m |
| Cash | 1,804 | 414 | - | 2,218 | - | 1,947 | - | 160 | 2,107 | 4,325 |
| Loans and advances to banks |
- | - | 2,308 | 2,308 | 327 | - | - | 757 | 1,084 | 3,392 |
| Available for sale investment securities |
- | - | - | - | 266 | 10,771 | - | - | 11,037 | 11,037 |
| Loans and advances to customers |
17,161 | 14,902 | - | 32,063 | 29,797 | 62,548 | 46,239 | - | 138,584 | 170,647 |
| Derivative financial instruments |
- | - | - | - | - | - | - | 3,337 | 3,337 | 3,337 |
| Other financial assets |
- | - | - | - | - | - | - | 630 | 630 | 630 |
| Non-financial assets |
- | - | - | - | - | - | - | 2,212 | 2,212 | 2,212 |
| Total | 18,965 | 15,316 | 2,308 | 36,589 | 30,390 | 75,266 | 46,239 | 7,096 | 158,991 | 195,580 |
The Group undertakes securities financing transactions in the form of repurchase agreements (repo) to demonstrate liquidity of the securities held in the Group's Liquid Asset Buffer (LAB). Cash is borrowed in return for pledging securities as collateral and because settlement is on a simultaneous 'delivery versus payment' basis, the main credit risk arises from intra-day changes in the value of the collateral. This is largely mitigated by the Group's collateral management processes.
From a liquidity perspective, the main risk is that during a period of stress the Group has insufficient repo market capacity to rapidly monetise the LAB. To mitigate this risk, repo market capacity is assessed and tested regularly.
The Group's management of liquidity and funding risks aims to ensure that at all times there are sufficient liquid resources, both as to amount and quality, to cover cash flow mismatches and fluctuations in funding, to retain public confidence and to enable it to meet financial obligations as they fall due, even during episodes of stress. This is achieved through management and stress testing of business cash flows, and the setting of appropriate risk limits, to maintain a prudent funding mix, maturity profile and level of high quality liquid assets.
The Board is responsible for setting risk appetite with respect to levels of liquidity and funding risks. The Board's risk appetite statements are translated into limits which define the minimum level of liquid resources and the funding structure of the balance sheet.
ALCO and the Group's Balance Sheet Risk Committee are responsible for monitoring liquidity and funding risks and the composition of the Group's balance sheet through setting more detailed limits within Board limits. These include limits in respect of the composition of the liquidity portfolio, the funding mix, levels of maturity concentration and levels of encumbrance.
Further, the Liquidity and Funding risk framework is reviewed by the Board as part of the annual Internal Liquidity Adequacy Assessment Process (ILAAP).
A consolidated cash flow forecast is also maintained on an ongoing basis and reviewed by the Group's Weekly Trading Committee which is also responsible for monitoring liquidity metrics.
A Liquidity Contingency Plan (LCP) is maintained and describes metrics which would indicate an emerging marketwide or Nationwide-specific stress. It also details invocation and escalation procedures and a range of available actions that the Group could take in the event of a liquidity or funding stress, thereby allowing adequate liquidity resources to be maintained. The LCP is reviewed every six months and tested at least annually. The Group also has a Recovery Plan which describes potential actions that could be utilised in a more extreme stress.
To mitigate liquidity and funding risks generated by its business activities, the Group holds a portfolio of liquid assets as detailed in the 'Total liquidity' section of this report. A series of liquidity stress tests are performed daily against a number of scenarios, including those prescribed by the regulator. Internal stress tests are run to assess the Group's minimum liquidity requirement alongside the calculation of the prescribed regulatory Liquidity Coverage Ratio (LCR). Together, they represent the Group's view of the required levels of liquidity.
The Group aims to maintain liquidity resources of at least 100% of the anticipated outflows seen under each of the internal and regulatory-prescribed stress tests. The internal scenarios include an idiosyncratic stress, a market-wide stress and a combination of the two. The stress scenarios consider a range of risk factors and the consequent impact of stressed behavioural and contractual assumptions on the Group's cash flows over multiple time horizons. Assumptions used in internal liquidity stress tests are reviewed regularly with changes proposed to ALCO for approval and approved annually by the Board as part of the ILAAP.
The primary period over which internal liquidity stress testing is performed is 30 business days (circa six weeks), with a three month assessment also being performed against which LCP capacity is assessed.
As at 4 April 2016, potential stressed net outflows under the most severe 30 business day stress test (a combined market wide and Nationwide-specific stress scenario) were modelled at £22.6 billion (2015: £18.9 billion), with key cash flow assumptions summarised below. The liquidity portfolio as a percentage of stressed net outflows equated to 114% (2015: 133%).
The reduction reflects increased liquidity requirements arising from the ongoing evaluation of the Group's liquidity risk, which includes the impact of digital technology on retail liquidity requirements as customers have an increased ability to withdraw their deposits at an accelerated rate.
The table below details the key assumptions used in modelling the liquidity stress scenarios.
| Liquidity risk driver | Modelling assumptions used |
|---|---|
| Retail funding | Significant unexpected outflows are experienced with no new deposits received. |
| Wholesale funding | Following assumed credit rating downgrades, there is no rollover of maturing long term wholesale funding and only partial rollover of certain short term funding. No new wholesale funding is received. |
| Off-balance sheet | Contractual outflows occur in relation to asset-backed funding programmes as a result of credit rating downgrades. |
| Outflows are experienced as a result of other off-balance sheet commitments such as the mortgage pipeline. |
|
| Outflows arise due to adverse movements in market rates. | |
| Inflows from mortgages or retail and commercial loans are assessed on a behavioural basis. | |
| Intra-day | Liquidity is needed to meet additional intra-day requirements such as pre-funding outgoing payments. |
| Liquid assets | Asset values are reduced in recognition of the stressed conditions assumed. |
165
The Society's short and long term credit ratings from the major rating agencies at 23 May 2016 are as follows:
| Credit ratings | Long term | Short term | Tier 2 | Date of last rating action/confirmation |
Outlook |
|---|---|---|---|---|---|
| Standard & Poor's | A | A-1 | BBB | January 2016 | Stable |
| Moody's | A1 | P-1 | Baa1 | February 2016 | Positive |
| Fitch | A | F1 | A- | June 2015 | Stable |
Standard & Poor's affirmed the Society's A long term and A-1 short term ratings with a stable outlook in January 2016.
In February 2016, Moody's affirmed the Society's A1 long term and P-1 short term ratings and changed the outlook to positive from stable. The positive outlook reflects the potential for increased senior and subordinated debt issuance to result in lower expected loss levels for the Society's deposits and senior unsecured debt.
The table below sets out the amount of additional collateral the Group would need to provide in the event of a one and two notch downgrade by external credit rating agencies.
The contractually required cash outflow would not necessarily match the actual cash outflow as a result of management actions that could be taken to reduce the impact of the downgrades.
| Cumulative adjustment for a one notch downgrade |
Cumulative adjustment for a two notch downgrade |
|
|---|---|---|
| £bn | £bn | |
| 2016 | 4.1 | 4.5 |
| 2015 | 3.8 | 4.2 |
Solvency risk is the risk that the Group fails to maintain sufficient capital to absorb losses throughout a full economic cycle and sufficient to maintain the confidence of current and prospective investors, members, the Board and regulators. Capital is held by the Group to protect its depositors, cover its inherent risks, provide a buffer for stress events and support its business strategy. In assessing the adequacy of its capital resources, the Group considers its risk appetite in the context of the material risks to which it is exposed and the appropriate strategies required to manage those risks.
The Group manages its capital structure to ensure it continues to meet minimum regulatory requirements, as well as meeting the expectations of other key stakeholders. As part of the risk appetite framework, the Group targets strong capital ratios relative to both regulatory requirements and major banking peers. Any planned changes to the balance sheet, potential regulatory developments and other factors (such as trading outlook, movements in the available for sale reserve and pension deficit) are all considered. The Group's strategic leverage ratio target is 4.5%.
The capital strategy is to manage capital ratios through retained earnings, supplemented by external capital where appropriate. In recent years, the Group has demonstrated its ability to supplement retained earnings through the issuance of Common Equity Tier 1 (CET1), Additional Tier 1 and Tier 2 capital instruments and has delivered significant deleveraging of its non-core commercial real estate portfolio and out of policy treasury assets.
The capital disclosures included in this report are reported on a CRD IV end point basis unless otherwise stated. This assumes that all CRD IV requirements are in force during the period, with no transitional provisions permitted. In addition, the disclosures are on a Group (consolidated) basis, including all subsidiary entities, unless otherwise stated.
The Group's capital and leverage ratios have increased since 4 April 2015 mainly as a result of a strong trading performance with £985 million of profit after tax for the year and a reduction in risk weighted assets of £2,329 million. The Group's key capital measures at 4 April 2016 are summarised in the table below:
| Key capital ratios | ||
|---|---|---|
| 2016 | 2015 | |
| Solvency (note i) | % | % |
| Common Equity Tier 1 (CET1) ratio | 23.2 | 19.8 |
| Total Tier 1 ratio | 26.1 | 22.5 |
| Total regulatory capital ratio | 30.9 | 27.0 |
| Leverage (note ii) | £m | £m |
| Exposure | 213,181 | 200,665 |
| Total Tier 1 capital | 9,005 | 8,271 |
| Leverage ratio | 4.2% | 4.1% |
Notes:
i. The solvency ratios are on an end point basis. Transitional ratios can be found in the Group's 2016 Pillar 3 disclosures at
ii. The Group's 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.
On a transitional basis the CET1 ratio is 23.2% (2015: 19.8%). The CET1 ratio on an Individual (solo) consolidated basis at 4 April 2016 is 23.3% (2015: 19.6%) and is marginally greater than the Group's CET1 ratio due to higher general reserves as a result of cash flow hedge accounting. The majority of cash flow hedge accounting affects the Group accounts only, with gains or losses on derivatives being deferred to the cash flow
hedge reserve in the Group accounts, but not the Individual (solo) consolidation accounts. The cash flow hedge reserve is not included in CET1 capital.
More detail on the capital position measured on an Individual consolidated basis can be found in the Group's 2016 Pillar 3 disclosures at
167
CET1 capital has increased from £7,279 million to £8,013 million over the year primarily due to increased retained earnings, driven by a strong trading performance for the year and a reduction in the pension deficit. This was partly offset by an increase in intangible assets and the prudent valuation adjustment as well as a reduction in the value of the available for sale reserve. The increases in total Tier 1 capital and total regulatory capital include the increase in CET1 resources, offset at a total regulatory capital level by a reduction in Tier 2 capital, due to amortisation of subordinated debt.
Total exposure used to calculate the leverage ratio, which consists of balance sheet assets, off-balance sheet items and other regulatory adjustments, has increased by £12,516 million to £213,181 million. Balance sheet assets have grown by £13,359 million to £208,939 million since 4 April 2015, mainly driven by increases in mortgage balances, together with higher deposits with central banks held for liquidity purposes as a result of the Group's pre-funding of wholesale maturities ahead of the EU referendum. The leverage ratio has increased to 4.2% (2015: 4.1%) as growth in Tier 1 capital has outstripped the balance sheet growth. The leverage ratio at 4 April 2016 is lower than that reported at 31 December 2015 (4.3%) due to balance sheet growth during the fourth quarter. Further details on leverage can be found in the Group's 2016 Pillar 3 disclosures at
The Group holds capital to meet Pillar 1 requirements (for credit, operational and market risks). In addition, the PRA requires firms to hold capital to meet Pillar 2A requirements, which are set out in the Individual Capital Guidance (ICG). This is a point in time estimate, set by the PRA on an annual basis, of the amount of capital required to be held to meet risks partly covered by Pillar 1 such as credit concentration and operational risk, and risks not covered by Pillar 1 such as pension and interest rate risk.
The Group's current ICG equates to £2.2 billion, of which at least £1.2 billion must be met by CET1 capital (previously around £1.9 billion, of which at least approximately £1.1 billion had to be met by CET1 capital). This amount is equivalent to 6.4% of RWAs as at 4 April 2016 (2015: 5.2%), reflecting the Group's low average risk weight given that approximately 76% (2015: 76%) of the Group's exposure is in the form of secured residential mortgages, of which 80% (2015: 81%) are prime.
In order to protect against the risk of consuming Pillar 1 or Pillar 2A requirements (thereby breaching ICG), firms are subject to regulatory capital buffers which are set out in CRD IV. In addition, the PRA may set a firm-specific buffer based upon supervisory judgement informed by the impact of stress scenarios on a firm's capital requirements and resources, and taking into account other factors including leverage, systemic importance and any weaknesses in firms' risk management and governance procedures.
The table below reconciles the general reserves to total regulatory capital. Both 2016 and 2015 have been presented on an end point basis and so do not include grandfathered instruments.
| 2016 | 2015 | |
|---|---|---|
| £m | £m | |
| General reserve (note i) | 8,921 | 7,995 |
| Core capital deferred shares (CCDS) | 531 | 531 |
| Revaluation reserve | 64 | 68 |
| Available for sale reserve | (8) | 26 |
| Regulatory adjustments and deductions: | ||
| Foreseeable distributions (note ii) | (42) | (44) |
| Prudent valuation adjustment (note iii) | (55) | (1) |
| Own credit and debit valuation adjustments (note iv) | (2) | (11) |
| Intangible assets (note v) | (1,120) | (982) |
| Goodwill (note v) | (12) | (12) |
| Excess of regulatory expected losses over impairment provisions (note vi) | (264) | (291) |
| Total regulatory adjustments and deductions | (1,495) | (1,341) |
| Common Equity Tier 1 capital | 8,013 | 7,279 |
| Additional Tier 1 capital securities (AT1) | 992 | 992 |
| Total Tier 1 capital | 9,005 | 8,271 |
| Dated subordinated debt (note vii) | 1,628 | 1,653 |
| Collectively assessed impairment allowances | 21 | 26 |
| Tier 2 capital | 1,649 | 1,679 |
| Total regulatory capital | 10,654 | 9,950 |
Notes:
i. The general reserve includes independently verified profits for the year to 4 April 2016.
ii. Foreseeable distributions in respect of CCDS and AT1 securities are deducted from CET1 capital under CRD IV.
iii. A prudent valuation adjustment (PVA) is applied in respect of fair valued instruments as required under regulatory capital rules. Following publication of the PVA Regulatory Technical Standard in January 2016, this revised methodology has been applied for April 2016 reporting which accounts for the increase. iv. Own credit and debit valuation adjustments are applied to remove balance sheet gains or losses of fair valued liabilities and derivatives that result from
changes in the Group's own credit standing and risk, in accordance with CRD IV rules.
v. Intangible assets and goodwill do not qualify as capital for regulatory purposes.
vi. Under CRD IV the net regulatory capital expected loss in excess of accounting impairment provisions is deducted from CET1 capital, gross of tax.
vii. Subordinated debt includes fair value adjustments related to changes in market interest rates, adjustments for unamortised premiums and discounts that are included in the consolidated balance sheet, and any amortisation of the capital value of Tier 2 instruments required by regulatory rules for instruments with less than five years to maturity. It does not include instruments that are subject to CRD IV grandfathering provisions, as this table is presented on an end point basis.
169
The table below shows the breakdown of the Group's risk weighted assets (RWAs):
| Risk weighted assets | ||
|---|---|---|
| 2016 | 2015 | |
| £m | £m | |
| Credit risk: | ||
| Retail mortgages | 14,086 | 14,372 |
| Retail unsecured lending | 5,621 | 7,023 |
| Commercial loans | 6,194 | 7,646 |
| Treasury | 1,039 | 1,375 |
| Counterparty credit risk (note i) | 1,296 | 826 |
| Other (note ii) | 1,635 | 1,334 |
| Total credit risk | 29,871 | 32,576 |
| Operational risk | 4,604 | 4,228 |
| Market risk (note iii) | - | - |
| Total risk weighted assets | 34,475 | 36,804 |
Notes:
i. Counterparty credit risk relates to derivative financial instruments.
ii. Other relates to fixed and other assets held on the balance sheet.
iii. The Group elected to set this to zero in 2016 and 2015, as permitted by the CRR, as exposure was below the threshold of 2% of own funds.
RWAs have decreased by £2,329 million since 4 April 2015, to £34,475 million. Commercial RWAs have continued to decrease driven by continued run-off of the commercial book and improvements in the credit quality of the remaining exposures. The implementation of a redeveloped Internal Ratings Based (IRB) model for personal loans, to better reflect the risk in the portfolio, has resulted in lower RWAs for the retail unsecured portfolios. Credit risk RWAs have also been further reduced by an improvement in credit quality, notably in specialist mortgage lending, due to the increase in house prices; this has more than offset the RWA increase from the portfolio growth. Treasury RWAs have decreased due to a
reduction in exposures to other banks and securitisation assets; however, an increase in derivative values has resulted in higher RWAs for counterparty credit risk. Other RWAs are higher mainly due to an increase in the value of the Visa Europe Limited equity holding (more information on Visa Europe Limited is included in note 14 to the accounts). Operational risk RWAs, calculated on the standardised approach, have increased due to higher income.
Details on how RWAs are calculated can be found in the Group's 2016 Pillar 3 disclosures at
The Group employs a number of tools to support the management of solvency risks. The Board is responsible for setting risk appetite with respect to solvency risk, which is articulated through its risk appetite statements, and it defines minimum levels of capital, including leverage, that it is willing to operate with. These are translated into specific risk metrics, which are monitored by the Board Risk Committee, Assets and Liabilities Committee (ALCO) and other internal management committees.
With general reserves forming the majority of the Group's capital resources, profitability is an important factor when considering the ability to meet capital requirements. A return on capital framework is in place, based upon an allocation of overall capital requirements, which monitors targets for individual product segments.
The Group also undertakes a regular Internal Capital Adequacy Assessment Process (ICAAP), which considers the minimum amount of capital to be held in order to cover all risks including credit risks, operational risks, interest rate risks in the banking book and pension risks, and also considers an additional buffer to ensure that the impact of a severe but plausible stress can be absorbed. As a result of this internal assessment, the PRA sets the Group's Pillar 2 capital requirements.
Regular Group-wide stress tests are undertaken to enhance the understanding of potential vulnerabilities and how management actions might be deployed in the event of stressed conditions developing. These stress tests project capital resources and requirements over a five-year period, during severe but plausible scenarios.
The Group aims to be in a position where it would maintain strong capital and leverage ratios in the event of a severe but plausible economic or idiosyncratic stress. Embedded in the risk appetite framework is an expectation to maintain the CET1 and leverage ratios in excess of regulatory minima, including buffers where appropriate.
A set of management actions is maintained, that would be available in the event of a breach of one or more of the risk metrics, to support the capital position. In a more severe stress, the Group would expect to invoke its Recovery Plan, maintained under UK regulatory rules implementing the European Bank Recovery and Resolution Directive (BRRD), which documents a broad range of management actions.
During 2015, the major UK banks and building societies, including Nationwide, took part in the PRA's annual concurrent stress test, which assessed firms' resilience to a severe global downturn, albeit with a materially less severe impact on the UK housing market than the 2014 concurrent stress scenario. The impact of the stress differed substantially across banks, and most significantly affected those with exposures to international markets, in particular Asia and emerging markets. The results of this stress test, published by the PRA in December 2015, showed that Nationwide remained in a strong position, above the PRA's minimum CET1 ratio hurdle rate throughout the period, with a low point CET1 ratio of 19.1% (prior to application of management actions).
Nationwide, along with other major UK banks and building societies, is currently taking part in the 2016 PRA annual concurrent stress test. The scenario (published in March 2016) is the first Annual Cyclical Scenario issued by the PRA as part of the new approach to concurrent stress testing. It is a broad stress describing vulnerabilities that crystallise across financial markets, incorporating a synchronised global and domestic downturn.
The Group continues 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 during the financial year mean that we have better visibility on expectations for future capital requirements. However, the Group will remain engaged in the development of the regulatory approach to ensure it is prepared for any change.
We expect to have a steady state leverage ratio requirement of 3.75% from 2019, which comprises a minimum requirement of 3%, a supplementary leverage ratio buffer of 0.35% and countercyclical leverage ratio buffer of 0.4%. Whilst the Financial Policy Committee could set a countercyclical leverage buffer up to 0.9%, in March 2016 it set the buffer at 0.2%, which is expected to apply from March 2017. The Basel Committee on Banking Supervision and the European Banking Authority are currently reviewing the leverage ratio requirement for banks and building societies, but it is expected that the PRA leverage framework will remain the Group's binding requirement. The Group's strategic leverage ratio target of 4.5% reflects its desire to maintain strong levels of capital relative to maximum regulatory expectations (4.25%).
As part of the European BRRD, the Bank of England, in its capacity as the UK resolution authority, has consulted on setting the Minimum Requirement for Eligible Liabilities (MREL). This consultation proposed that a firm of Nationwide's size should, from 2020, have a MREL requirement equal to double minimum capital requirements. The Group is confident it has a strong foundation from which to meet MREL requirements.
The Basel Committee is expected to finalise its revisions to the standardised approach for credit and operational risks in late 2016. We do not believe that these will lead to a material increase in capital requirements for the Group. Whilst the revised standardised approach is due to be used as a basis for a floor for minimum capital requirements, the precise calibration of this has not yet been published. In addition, a Basel Committee consultation proposing constraints on the use of IRB approaches for credit risk was published in March 2016, which could lead to higher risk weights for certain portfolios.
In October 2015, the Bank of England published its medium term approach to concurrent stress testing: 'The Bank of England's approach to stress testing the UK banking system'. Two additional hurdle rates have been introduced for this year's exercise (firms must meet Pillar 2A capital requirements and Global Systemically Important Bank (G-SIB) buffers in addition to CET1 and leverage ratios), and the Bank of England has clarified its approach to scenario setting. Each year the participating firms will be required to model a stress scenario that is linked to the UK's position in the economic cycle, and on a biannual basis an additional 'exploratory scenario' will be published that will explore specific areas of risk or vulnerability in the economy that may not be captured in the annual scenario.
The Group continues to develop its approach to stress testing to ensure it responds to increasing regulatory expectations and it remains a valuable tool for the management of risk within its business.
Market risk is the risk that the net value of, or net income arising from, the Group's assets and liabilities is impacted as a result of market price or rate changes, specifically interest rates, foreign exchange rates or equity prices. The Board risk appetite is not to take any market risks except those that are essential to supporting core business activities. In consequence, the Group does not maintain a trading book
and it uses risk management strategies designed to provide stability of earnings.
The Group's principal market risks, linked to balance sheet assets and liabilities, are listed in the table below on a complete basis, irrespective of materiality.
| Market risk linkage to the balance sheet | ||||||
|---|---|---|---|---|---|---|
| 2016 | Market risk | |||||
| £bn | Interest rate risk |
Basis risk |
Swap spread risk |
FX risk |
Product option risk |
|
| Assets | ||||||
| Cash | 8.8 | ✓ | ✓ | |||
| Loans and advances to banks | 3.6 | ✓ | ✓ | ✓ | ||
| Investment securities – available for sale | 10.6 | ✓ | ✓ | ✓ | ✓ | |
| Derivative financial instruments | 3.9 | ✓ | ✓ | ✓ | ✓ | ✓ |
| Loans and advances to customers | 178.8 | ✓ | ✓ | ✓ | ✓ | |
| Other assets | 3.2 | ✓ | ✓ | ✓ | ||
| Total assets | 208.9 | |||||
| Liabilities | ||||||
| Shares (customer deposits) | 138.7 | ✓ | ✓ | ✓ | ||
| Deposits from banks | 2.1 | ✓ | ✓ | ✓ | ||
| Other deposits (including PEB deposits) | 7.6 | ✓ | ✓ | ✓ | ✓ | |
| Due to customers (including offshore deposits) |
6.2 | ✓ | ✓ | ✓ | ✓ | |
| Debt securities in issue | 36.1 | ✓ | ✓ | ✓ | ||
| Derivative financial instruments | 3.5 | ✓ | ✓ | ✓ | ✓ | ✓ |
| Subordinated liabilities | 1.8 | ✓ | ✓ | ✓ | ||
| Other liabilities (note i) | 2.0 | ✓ | ✓ | ✓ | ||
| Total liabilities | 198.0 | |||||
Notes:
173
i. Other liabilities include the Group's pension liability which is exposed to equity risk (the risk to the Group of movements in share prices). This pension risk is managed separately to the Group's core business operations. For further details see the 'Pension risk' section of this report.
✓ Represents assets or liabilities exposed to market risk, irrespective of materiality.
Market conditions continue to be characterised by low interest rates with an uncertain economic environment leading to volatility in these rates. The ongoing participation in the Funding for Lending Scheme (FLS) is a significant contributor to the Group's liquidity position, reducing our requirement to hold sovereign bonds for liquidity purposes and consequently reducing swap spread risk. The spread between swap rates and gilt yields has worsened in the second half of the year due to changing investor demand for swaps and gilts. This has led to a decrease in the available for sale (AFS) reserve which is monitored by the Assets and Liabilities Committee (ALCO).
There have been no material changes to our policies and practices for the management of market risk. During the year, a number of internal risk limits have been reduced to further restrict the potential exposure to market risk arising from the daily management of residual positions. The Market Risk Policy is embedded in the Group's Financial Risk Framework and relevant market risk metrics are reported to ALCO where appropriate.
The Basel Committee on Banking Supervision published the Standards for Interest Rate Risk in the Banking Book (IRRBB) in April 2016, which updates the 2004 principles for the management and supervision of interest rate risk. Capital for IRRBB will continue to be captured under Pillar 2. The Group will assess the new guidelines over the coming months and ensure readiness for the enhanced disclosure requirements for 2018.
Interest rates are expected to remain low over the medium term due to geopolitical uncertainty and concerns over global economic growth and the associated deflationary pressures. Market uncertainty around the timing of base rate increases is compounded further by the forthcoming EU referendum.
This could increase the likelihood of results outside of those predicted by the Value at Risk (VaR) model which is used for monitoring risk. Net interest income (NII) is also subject to fluctuations due to volatility in swap rates. Further information on macroeconomic risk is included in the 'Top and emerging risks' section of this report.
Market risk only arises in the banking book as the Group does not have a trading book. Most of the Group's exposure to market risk arises from fixed rate mortgages or savings, or foreign exchange risk on non-sterling financial assets and liabilities held.
The principal market risks that affect the Group are listed below together with the types of risk reporting measures used:
| Market risk exposure | Reporting measure |
|---|---|
| Interest rate risk | Sensitivity/Value at Risk |
| Basis risk | Annual earnings at Risk |
| Swap spread risk | Sensitivity/Value at Risk |
| Foreign exchange risk | Value at Risk |
| Product option risk | Sensitivity |
In addition, stress analysis is used to evaluate the impact of more extreme, but plausible events. These techniques are described below with a review of the exposures during the year.
Sensitivity analysis is used to assess the change in value of, for example, the Group's net exposure against a one basis point (0.01%) parallel shift in interest rates (PV01). As is the case with VaR (see below), this analysis is done on a daily basis separately for each currency (but with the main risk arising from sterling exposures) and in aggregate. Sensitivity analysis is also used for swap spread risk and product option risks.
Earnings at risk is used to measure basis risk exposures and net interest income (NII) metrics are used to monitor exposure to interest rate risks. Both measures apply rate shocks to the rates paid on liabilities and to the rates earned on assets and the impact on net interest earnings is calculated. Both risks are described below in more detail.
VaR is a technique that estimates the potential losses that could occur on risk positions as a result of future movements in market rates and prices over a specified time horizon and to a given level of statistical confidence. VaR is based on historic market behaviour and uses a series of recorded market rates and prices to derive plausible future scenarios. This takes into account inter-relationships between different markets and rates. There are separate models for interest rates and currencies.
The VaR model used by the Group incorporates risk factors based on interest rate and foreign exchange volatilities and correlations. Potential movements in market prices are calculated by reference to historical daily market data, equally weighted. The Group uses a 10-day horizon and a 99% confidence level in its day to day VaR monitoring. VaR is used to monitor interest rate, swap spread and currency risks and is not used to model income. Exposures against limits are reviewed daily by management. Actual outcomes are monitored on an ongoing basis by the Balance Sheet Risk Committee (BSRC) to test the validity of the assumptions and factors used in the VaR calculation. To be consistent with the management view, values reported below are on the same basis as those used internally.
Although it is a valuable guide to risk, VaR needs to be viewed in the context of the following limitations which may mean that exposure could be higher than modelled:
To seek to mitigate these limitations, the Group undertakes backtesting of the VaR model on a regular basis to ensure that the model is appropriate. This process compares actual performance against the estimated VaR numbers. An exception is created when a loss is greater than the daily VaR on any given day. In 2015/16, the backtesting did not highlight any model deficiencies. The chart below shows the results of this backtesting. The four loss exceptions were due to significant movements in market rates on each of those days. The results remain within acceptable tolerance (four backtesting exceptions or less over one year period at a 99% confidence level). More exceptions occurred than in 2014/15 due to increased volatility in swap rates compared to the previously benign period. Stressed VaR is used to assess potential losses in a more extreme scenario (see below).
The model is subject to an annual review process to ensure it continues to be appropriate for risk reporting. Risks not captured in VaR (RNIV) are risks that cannot be captured by a VaR model as movements are outside of the historic range. These include:
To evaluate the potential impact of more extreme, though plausible, events or movements in a set of financial variables the standard VaR metric is augmented with sensitivity or stress analysis.
For example, for interest rate risk exposures standard PV01 sensitivity analysis is supplemented by the production of stressed sensitivity measures. A more severe 200 basis point (2.0%) parallel shift in interest rates is calculated in a similar manner to PV01; this sensitivity analysis is known as PV200. PV200 numbers are generated and monitored daily.
In addition, stressed VaR is used to estimate the potential loss arising from unfavourable market movements in a stressed environment. It is calculated in the same way as standard VaR, calibrated over a two year period and on a 99% 10-day basis but uses volatilities and correlations from a period of significant financial stress. During the last year stressed VaR on interest rates was, on average, 10.2 times the standard VaR. This is higher than in 2014/15 but the average underlying risk position is lower in magnitude than in previous years. The stressed VaR is greater on a relative basis because in 2015/16 the Group's residual risk was typically short-dated, so has a lower underlying VaR in normal conditions, which coincided with the highest rate movements during the stressed period. The Group only reviews stressed VaR on its GBP portfolio.
Each quarter, the residual interest rate risk and foreign exchange positions are also subjected to a range of stressed scenarios designed to highlight potential losses in extreme market scenarios. The results of these situations are presented to the BSRC to provide insight into scenarios in which the Group may make losses on the residual interest rate and foreign currency positions.
A range of metrics are also regularly produced focusing on the crystallisation of product option risks under stressed events.
The main market risk faced by the Group is interest rate risk which primarily arises from the retail and commercial assets and liabilities, reserves, liquidity holdings, and wholesale funding activities. Market movements in interest rates affect the interest rate margin realised from lending and borrowing activities.
To reduce the impact of such movements, hedging activities are undertaken by Treasury. For example, interest rate risks generated by lending to and receiving deposits from members are offset against each other internally.
The remaining net exposure is managed using derivatives on a continuous basis, within parameters set by ALCO.
The income contribution from the reserves and non-interest bearing current accounts are subject to the volatility of short term interest rate movements. They are hedged to reduce the impact on earnings by converting short term interest margin volatility into a more stable medium term rate.
The table below highlights the limited amount to which the Group is exposed to interest rate risk:
| 2016 | 2015 | |||||
|---|---|---|---|---|---|---|
| Average High Low |
Average | High | Low | |||
| £m | £m | £m | £m | £m | £m | |
| VaR (99%/10-day) (audited) | 0.3 | 0.8 | 0.1 | 0.4 | 1.0 | 0.1 |
| Sensitivity analysis (PV01) (audited) | - | 0.1 | (0.1) | - | 0.1 | (0.1) |
| Stress testing (PV200: all currencies) | 6.9 | 19.3 | (10.8) | 4.9 | 20.9 | (10.8) |
Basis risk arises where variable rate assets and liabilities re-price with reference to differing short term interest rate benchmarks. The primary interest rates that the Group is exposed to are the Bank of England base rate and three month Libor. If the difference between base rate and three month Libor changes over time, the Group may be subject to changes in its margins.
At a Group level, assets and liabilities are offset by a reference rate, or 'basis' type. Exposure to the net mismatch is mitigated, where necessary, by transacting basis swaps to ensure the Group remains within an agreed risk appetite. Basis risk is managed using a holistic approach incorporating a projection of balance sheet exposures, net of derivatives.
Sensitivity of net interest income (NII) is the risk that the Group's income is adversely affected by a change in the level of interest rates. The sensitivity of Group NII to changes in interest rates is measured on a monthly basis using a forecasting model and potential interest rate scenarios. This is calculated for a forward period of one year. Within that forecast, all assets and liabilities maturing within the year are assumed to reinvest in like for like products, which ensures that the balance sheet remains static. The model does not take any corporate strategies or management actions into account.
The table below sets out the sensitivity of future NII to rises and falls in interest rates over a one year period:
| 2016 | 2015 | |
|---|---|---|
| (Audited) | £m | £m |
| +200 basis points shift | 230 | 193 |
| +100 basis points shift | 108 | 88 |
| -25 basis points shift | (25) | (24) |
| -50 basis points shift, floored at 1 basis point | (90) | (74) |
The following should be noted in relation to the above:
The absolute levels of interest rates can influence the Group's flexibility to manage NII. If interest rates fall further or become negative, margins may be constrained because the Group is unlikely to be able to fully offset the benefit to borrowers through rate changes to banking or savings products.
The Group holds a liquidity portfolio in order to manage liquidity risk. These assets are predominantly fixed rate sovereign securities and the Group uses interest rate swaps to hedge against movements in interest rates. However, there remains a residual risk associated with the possible movements in the spread between sovereign debt yields and swap rates. This 'swap spread risk' reflects the fact that the market value of the swapped primary liquidity portfolio can move up and down based on changes in swap spreads. In economic terms this risk is only realised if a bond is sold and the swap is cancelled ahead of maturity.
These market value movements will directly impact the Group's capital resources through the AFS reserves. They are monitored using stressed VaR metrics and the risk is controlled via internal limits linked to capital requirements. Exposures are monitored daily and are reported on a monthly basis to ALCO.
As a UK based business the Group has low levels of foreign exchange risk. Foreign currency exposure is managed through natural offset on the balance sheet or by the use of derivatives to reduce currency exposures to acceptable levels. ALCO sets and monitors limits on the net currency exposure. The table below sets out the limited extent of the residual exposure to foreign exchange risk:
| Foreign exchange risk | ||||||
|---|---|---|---|---|---|---|
| 2016 | 2015 | |||||
| Average | High | Low | Average | High | Low | |
| (Audited) | £m | £m | £m | £m | £m | £m |
| VaR (99%/10-day) | 0.1 | 0.3 | - | 0.1 | 0.3 | - |
Potential losses from market risks also arise as a result of customers exercising options embedded in fixed rate products which can result in required changes to hedging. The key product risks are prepayment risk (early redemption or overpayment of fixed rate mortgages), access risk (early withdrawal of fixed rate savings), and take-up risk (higher or lower take-up of fixed rate mortgages). These risk exposures are quantified and assessed using a set of bespoke models that predict customer behaviour in response to changes in interest rates. The resulting potential costs are then closely monitored. These stressed risk measures are subject to a set of triggers and are reported to ALCO, along with a set of proposed management actions where necessary to bring the exposures within appetite. Stresses are also used to calculate potential losses to drive internal capital requirements for product option related risks.
Managing market risk effectively is highly dependent on effective models which are mathematical representations of business systems designed to help describe, predict and optimise decisions and scenarios which are used throughout the Group's business.
The risk associated with market risk models is controlled and managed through the Model Validation Policy which requires that all significant new models are validated by an independent oversight team prior to use. The validation process identifies model strengths and weaknesses, assesses the potential impact of these and suggests appropriate mitigating actions. The review findings are finally presented to the Model Risk Oversight Committee (MROC) which is responsible for endorsing models for use. In addition, the business performs backtesting and sensitivity analysis on models with a set of performance metrics assessed monthly for each model in terms of accuracy and its associated impact on results. All models are also subject to a more thorough periodic review, at least annually, to ensure they remain fit for purpose.
Calculations to determine the capital requirements for interest rate risk are made using the same models as those used for monitoring day-to-day interest rate risk to ensure consistency with the management view.
179
The Group has funding obligations to a number of defined benefit pension schemes, the most significant being the Nationwide Pension Fund (the Fund). Pension risk is defined as the risk that the value of the Fund's assets will be insufficient to meet the estimated liabilities of the Fund. Pension risk can adversely impact the Group's capital position and/or result in increased cash funding obligations to the Fund.
The Fund is closed to new employees, although some employees continue to accrue benefits. In accordance with UK legislation, the assets of the Fund are held in a legally separate trust from the Group's assets and are administered by a board of trustees (the Trustee) who have fiduciary responsibilities to the beneficiaries of the Fund.
Volatility in investment returns from the assets and the value of the liabilities cause volatility in the Fund's deficit. The key risk factors impacting the deficit are set out below. These factors can have a positive or negative impact on the deficit.
Decreases in long-term interest rates and/or credit spreads will increase the value placed on the Fund's liabilities. The increase in liabilities will be partially offset by an increase in the value of the Fund's bonds and credit investments.
The majority of the pension benefits are linked to inflation and higher inflation will lead to higher liabilities (although, for most benefits, caps on the level of inflationary increases protect the Fund against extreme inflation). Where asset values are correlated with inflation (for example, index-linked gilts and inflation swaps), the increase in the liabilities will be partially offset by asset increases.
The liabilities are calculated using a discount rate set with reference to bond yields. If the assets underperform the bond yields, this will cause the net position of the Fund to deteriorate.
The Fund also holds a significant proportion of return-seeking assets such as equities and credit investments. Whilst return-seeking assets are expected to outperform the liabilities in the long term, they create risk and volatility in the short to medium term. The investment in return-seeking assets, such as equities, is monitored by both the Trustee and the Group to ensure it remains appropriate given the Fund's long term objectives.
The majority of the pension benefits received by members of the Fund are paid for life. Therefore, the Group is exposed to the risk of Fund members living longer than expected, as this would lead to pension benefits being paid for longer.
The Group is exposed to potential changes in the regulatory environment and pension legislation, which could increase the pension liabilities and/or impact the Group's capital position.
In addition, a change in the methodology used to derive key actuarial assumptions (for example, the discount rate, or longevity assumption) can result in a step change in the assessment of the liabilities and therefore the deficit. However, the ultimate cost of providing benefits will depend on actual future events, rather than assumptions made.
In line with the Fund's current deficit recovery plan, a £49 million employer deficit contribution was paid in the year (2015: £91 million). These deficit contributions are reflected in the table below, with further annual deficit contributions of £49 million payable over each of the next five years.
The effective date of the Fund's next triennial funding valuation is 31 March 2016, following which a new deficit recovery plan will be agreed with the Trustee.
The retirement benefit obligation that appears within liabilities on the balance sheet has decreased from £286 million to £213 million, as set out below:
| Changes in the present value of net defined benefit liability | ||
|---|---|---|
| 2016 | 2015 | |
| £m | £m | |
| At 5 April | (286) | (235) |
| Pension charge | (69) | (57) |
| Net interest cost | (7) | (6) |
| Actuarial remeasurement | 42 | (136) |
| Employer contributions (including deficit contributions) | 107 | 148 |
| At 4 April | (213) | (286) |
The actuarial remeasurement quantifies the impact on the deficit from the updating of economic and demographic assumptions on the balance sheet. In contrast to 2015, positive movements from the Fund's assets and the actuarial assumptions over the year (a higher discount rate, lower inflation expectations and slightly reduced life expectancy assumptions) have resulted in a beneficial impact on the Fund's deficit.
During the year the analysis, insight and monitoring of pension risk was enhanced by the Group, to support risk management and anticipate any management actions required. These enhancements include risk appetite articulation and regular reporting up to board-level committees. In addition, pension risk is embedded into the Group's Enterprise Risk Management Framework and enterprise-wide stress testing processes.
Over the long term, the Trustee intends to significantly reduce the Fund's investment strategy risk, and the Group actively engages with the Trustee to ensure broad alignment on investment objectives and implementation. This is supported by permanent representation by the Group at the Trustee's Investment and Funding Committee, the sharing of management information between the Group and the Trustee and establishment during the year of an investment working group (which includes representatives from the Trustee and Group) to consider specific risk management initiatives.
Potential initiatives to reduce pension risk include, but are not limited to, adjusting the asset allocation (for example reducing the allocation to equities and increasing the allocation to bonds), adjusting contribution levels and adjusting the level of benefits that members of the Fund accrue in the future.
In June 2015, an Exposure Draft was published on the interaction between IAS 19 Employee Benefits and IFRIC 14 'IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirement and their Interaction'. Whilst the clarifications in the Exposure Draft are not expected to impact the Group, the finalisation and evolving practice of IAS 19 and IFRIC 14 will continue to be monitored.
181
The Group ensures that it can generate sustainable profit through focus on recurrent sources of income commensurate with the risks taken. Earnings risk is defined as the risk that the Group's sources of income are unable to continue to add the expected value, due to changes in market, regulatory or other environmental factors.
The Group's earnings risk strategy is to ensure that sufficient earnings are maintained to withstand non-trading shocks and deliver retained member value. The strategy identifies and quantifies plausible trading risks within the context of the Corporate Plan and financial forecast. The strategy takes into account economic and market uncertainties, such as the potential earnings impact of lower for longer bank base rates and the impact of regulatory and tax changes in the buy to let market. These risks are then monitored and updated on an ongoing basis throughout the financial year.
The Group mitigates and manages its earnings risk through the following measures:
The Group's planning process forecasts earnings over a five year period. Income forecasts are reviewed and updated monthly through a detailed 'opportunities and risks' assessment and reported to the Weekly Trading Committee. In addition the Executive Committee and the Board are provided with a current year earnings and capital forecast.
Earnings risk is monitored against internal forecasts, limits and triggers set by the Board's earnings risk strategy. This process involves reviewing product pricing scenarios and their impact on net interest margin, provisioning and costs. Investment spend is analysed and approved under a cost benefit methodology by the applicable investment board.
The Group's earnings are regularly stress tested as part of both internal management reporting and externally, under the PRA's scenario based testing. Sensitivity analysis of expected recurrent net interest income and net interest margin is conducted against a range of possible macroeconomic scenarios.
• Reporting governance
The Board reviews recurrent earnings in the Business Performance Pack, which is updated each month for the latest financial forecasts and assumptions on the Group's underlying performance.
The Group defines operational risk as the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. The Group manages operational risk across a number of sub-categories, the most significant of which cover Cyber, Information Technology (IT) Resilience and Security, Business Continuity, Payments and Fraud.
The Group's operational risk profile is informed by risk assessments from across the business, and by review and challenge by both management and the oversight functions. The Group's operational risk oversight function supports the business in managing the risks it faces in its normal day-to-day activities and when implementing change programmes. The Group continues to strengthen and embed the operational risk framework, expanding the use of techniques such as scenario analysis and 'war-gaming' to support the understanding of current and future risks and optimise risk-based decision making across the business.
The oversight function also monitors and reports on the operational risk events that have occurred, by number and by value, in order to better understand those exposures that require management attention. For the purposes of reporting, operational risk events include those which have a financial loss or costs arising from an operational risk incident. The Group reports operational risk events against the causal category, as well as by Basel defined categories. This latter approach allows the Group to compare operational risk experience with its peer group and is a regulatory requirement.
The analysis below presents the Group's operational risk events by Basel regulatory event category. In order to give the Group more clarity over the root causes of conduct losses, we have chosen this year to categorise a number of events into the 'Execution, delivery and process management' category and as a result we have restated the 2015 comparative figures for consistency.
A significant majority of the Group's operational risk events have been recorded against three of the Basel categories: 'Clients, products and business practices', 'External fraud' and 'Execution, delivery and process management'. In the year these categories account for 99.0% by value, and 96.7% by number, of the Group's operational risk events (2015: 96.8% by value and 96.6% by number).
| Operational risk events by Basel risk category | ||
|---|---|---|
| 2016 | 2015 restated |
|
| % of total events by value | % | % |
| Clients, products and business practices | 77.5 | 58.9 |
| External fraud | 12.2 | 17.2 |
| Execution, delivery and process management | 9.3 | 20.7 |
| Internal fraud | 0.4 | 2.6 |
| Business disruption and system failure | - | 0.3 |
| Damage to physical assets | 0.1 | 0.1 |
| Employment practices and workplace safety | 0.5 | 0.2 |
| Total | 100.0 | 100.0 |
| Operational risk events by Basel risk category | |
|---|---|
| 2016 | 2015 restated |
|
|---|---|---|
| % of total events by number | % | % |
| Clients, products and business practices | 6.1 | 4.7 |
| External fraud | 79.0 | 84.9 |
| Execution, delivery and process management | 11.6 | 7.0 |
| Internal fraud | 0.8 | 1.3 |
| Business disruption and system failure | - | 0.5 |
| Damage to physical assets | 0.4 | 0.9 |
| Employment practices and workplace safety | 2.1 | 0.7 |
| Total | 100.0 | 100.0 |
Over the course of the year, the overall portfolio of operational risks has remained relatively stable. The increased expectations surrounding key inherent risks such as cyber security and IT resilience, particularly when coupled with an increasing pace of change, have been matched by increased control and monitoring in order to ensure service availability and customer data security. These main drivers of operational risk across the Group are detailed below:
The threat of organised cyber crime continues to increase and has been highlighted by a number of recent attacks in the financial and non-financial sectors. Such attacks have also increased the public awareness of cyber threats. As a result of the increasing threat from cyber crime the Group's security controls need to keep pace to prevent, detect and respond to any threats or attacks.
The Group continues to focus its efforts on discharging its cyber risk management responsibilities effectively, with ongoing investment in appropriate technology and processes. This ensures the Group safeguards its operations and, more importantly, its customers. The cyber security control framework includes systems, processes, policies and controls to ensure the Group manages cyber risk effectively. This framework is also designed to ensure that the Group has effective approaches to responding to any attacks, whether aimed directly at the Group or at other parties where there may be an indirect impact on our customers.
The Group's implementation of new systems, infrastructures and processes, alongside the maintenance of legacy systems, introduces a level of operational complexity. In an increasingly digital world, customer expectations for service availability are rising with a significantly lower tolerance of service disruption. Ensuring a highly reliable and widely available service requires resilient IT, business systems and processes. Meanwhile the exponential rise in data used in digital services increases the complexity and cost of managing data securely and effectively. In response, the Group operates a dedicated Operational Resilience Function to ensure it meets customer expectations.
The Group invests significantly in its digital channels, regularly updating the mobile and internet banking services and enabling new payment technologies such as Apple Pay. The experience for members and staff in branches has also improved with the expansion of the 'Nationwide Now' service to over 400 installations (Nationwide Now allows the Group to provide its members with the opportunity to meet with a consultant via a high definition video link in a branch). Whilst the member-focused nature of the Group's business model puts it in a good position to respond to the varied and evolving needs of members, the scale and pace of change can create delivery challenges. Such challenges can lead to disruption of the Group's operating environment, with impacts on the service experienced by members. These operational risks are managed through a strong focus on service management, transformation governance and programme management disciplines.
The Group needs to ensure that customer outcomes and service experience are maintained regardless of whether services are delivered in house or through third parties. The relationships with our third parties are managed closely to ensure that the service they offer is in line with acceptable standards and Nationwide's customer ethos.
The operational risk outlook focuses on the environment in which the Group operates and on its strategy. The Group expects that the drivers of operational risk will remain broadly stable, with themes around the scale and pace of change in a digital environment, IT resilience, effective management of increasingly sophisticated cyber security threats and use of third parties.
Conduct and compliance risk is defined as the risk that the Group exercises inappropriate judgement or makes errors in the execution of its business activities, leading to non-compliance with regulation or legislation, market integrity being undermined, or an unfair outcome being created for customers.
The Group has a culture in which conduct and compliance is central to its values and behaviours. It will continue to deliver and develop systems and controls that protect its members, with carefully designed products with transparent and fair pricing, delivered by a sales force that is well-trained and monitored, and offering channels that meet the customers' demands for flexibility of access.
The Group has developed a set of conduct risk statements to more clearly emphasise its focus on proactively creating fair customer outcomes and protecting market integrity. This is supported by a comprehensive suite of policies and controls, designed to ensure the delivery of fair customer outcomes. Performance against these outcomes and of the operation of key controls is reported to the Conduct and Compliance Committee, which is chaired by the Chief Compliance Officer with escalation to the Executive Risk Committee.
In recent years, issues associated with poor customer conduct, unfair customer outcomes, and insufficient market integrity have proven costly for the industry. The ongoing focus on conduct and customer outcomes in this environment will, rightly, remain a key area of priority for the industry. The Financial Conduct Authority (FCA) continues to evolve its regulatory regime around the concept of culture and conduct risk. This supports the FCA's aim of securing an appropriate degree of protection for consumers, protecting and enhancing the integrity of the UK financial system and promoting effective competition in the interests of consumers, each of which will contribute to the improved trust and confidence in the UK financial services market. The Group is very supportive of these developments.
The growth in digital channels has changed the nature of many interactions with customers and challenges the industry to ensure that it continues to deliver fair customer outcomes as these channels evolve. The development of the 'Nationwide Now' proposition in addition to the Group's existing digital, mobile, telephone and branch services has enabled the Group
to interact with its customers in a manner and at a time of their choosing. This service has been designed with fair customer outcomes in mind.
The Group always seeks to do the right thing for its customers and is developing its policy and practical approach to the support of customers in vulnerable circumstances. It has worked with Macmillan Cancer Care to provide additional support for customers with cancer and is piloting the extension of this support to customers with other life-limiting conditions. The lessons learned will inform the Group's wider approach to other groups of vulnerable customers.
Given changing regulatory expectations, there is a risk that some parts of the Group's past business may be considered as not having been conducted fully in accordance with law and regulation or may not, in the regulator's opinion, be regarded as having resulted in fair or reasonable treatment of customers. This could occur, for example, through products, sale processes or services failing to meet customer expectations. The Group is reviewing its compliance with various regulatory matters, including consumer credit legislation and during the period has recognised a net provision charge of £127 million in respect of potential customer redress to reflect its latest estimate of potential exposure.
The total provision held at 4 April 2016 of £227 million (2015: £140 million) continues to include amounts for the mis-selling of payment protection insurance (PPI). The provision held represents the Group's best estimate of the amount required to deal with PPI claims, taking into account the consultation issued by the FCA in November 2015. The amount provided at 4 April 2016 reflects the compensation likely to be payable in respect of the claims which the Group now expects to receive and the associated administrative costs of processing claims.
There has been significant strengthening of financial crime controls across the industry in recent years. The Group has introduced tighter controls to protect customers and has an ongoing programme of activity to ensure that these controls address emerging threats and ongoing industry changes.
187
There is a significant volume of change currently affecting the Group. Some of the key developments being addressed by the Group are listed below:
There is increasing demand from customers to transact business at a time and through a medium of their choosing. The Group will continue to develop its proposition to meet the changing behaviours of customers. Increasing standards for conduct could restrict the Group's channels, services or proposition whilst developments pushing the boundaries of existing regulation may increase the risk of misinterpretation through greater reliance on subjective assessments. The Group is continuing to develop new service propositions for customers to meet their changing demands and operates policies and controls that are designed to ensure the delivery of fair customer outcomes at the point of product development, selling and post-sales support.
The scale and pace of regulatory change will see the industry continuing to evolve as it responds to these demands. The Group is, however, well placed to meet these challenges.
The Group defines strategic risk as the risk of significant loss or damage arising from business decisions that impact the long term interests of the membership, or from an inability to adapt to external developments.
Strategic risk focuses on large, longer term risks that could become a material issue for the Group, arising from the business model or strategic initiatives that the Group undertakes. Whilst all business areas are responsible for managing their own risks, management of strategic risk is primarily the responsibility of senior management.
The management of strategic risk is intrinsically linked to the corporate planning and stress testing processes, and is further supported by the regular provision of consolidated business performance and risk reporting data to the Board and senior risk committees. In addition, the annual process of setting Board risk appetite ensures that the Group establishes the risks it is willing to take to achieve its strategic goals.
A number of the top and emerging risks have the potential to affect more than one risk category and could have significant impact on the business model if these were to crystallise in the same timeframe. In particular, new business models operated by new market entrants or changes made by existing large competitors could significantly change the UK banking landscape which could, over the longer term, require changes to the Group's business model.
As the scale and pace of digital change intensifies there is a risk that financial services providers who do not keep pace will be left with unattractive customer propositions with resulting damage to reputation and underlying viability. The pace of change may also result in investments in technology becoming outdated before the end of their expected lives. The cost of keeping pace with change must be carefully monitored, particularly in the face of the intense competition seen across the retail banking market which could compress margins, to ensure that the business model remains financially balanced.
Global economic factors, including the UK referendum on membership of the EU, have the scope to disrupt financial markets and therefore impact on the strategic priorities of the Group.
To manage strategic risk, the Group considers strategic investments in the light of its focus on serving both current and future members while maximising member benefit. Activities are centred on mainstream UK retail personal financial services, with participation in other non-member businesses only where these activities fit with core capabilities, diversify risks, and earn a premium return for members.
Effective risk management is at the heart of the business, supporting the delivery of the Group's strategy by ensuring the business continues to be safe and sustainable and ultimately protecting members' interests. The Group adopts an enterprise-wide risk management framework underpinned by the three lines of defence model to manage risks effectively.
The Group continues to develop and revise the ERMF to ensure that it is appropriate for the size and complexity of the organisation. The ERMF has been re-articulated during the year to improve ease and consistency of communication and therefore increase the framework's effectiveness as a risk management tool. The framework sets out the high level policy, standards and requirements for the management of all risks across the Group, as shown below, and in the table opposite.
| 1 | External environment | The Group's risk management agenda is shaped by external environmental factors including but not limited to those listed in the diagram. |
|---|---|---|
| 2 | Putting members first | The Group's core purpose sets its corporate ambitions and informs its strategy and attitude to risks. |
| 3 | Culture | Having the right culture supports risk management activity across the business. The Group's 'On your side' culture and PRIDE values ensure that customers' interests, safety and security are put at the heart of its approach to risk management. |
| 4 | Board appetite for risk | Board appetite for risk defines how much risk the Board is prepared to take in pursuit of the Group's goals, and establishes a framework for decision making. It is supported by metrics and limits which enable performance against appetite to be effectively reported. Board appetite for risk is informed by and informs the Group's strategy. |
| 5 | Risk strategies and Control frameworks |
The Board approves the control frameworks and strategies that management use to ensure that major risks remain within Board appetite for risk. |
| 6 | Local management of risk | Local management of risk is the process of identifying, assessing, managing, monitoring and reporting risks. Risk management activity is carried out by all of the Group's staff to ensure that risks which are part of their day-to-day jobs are properly identified and controlled. As part of this, the Group undertakes stress testing and scenario analysis to ensure that it understands and remains resilient to the impact of remote but potentially severe risks. Further details of stress testing can be found in the 'Liquidity and funding risk' and the 'Solvency risk' sections of the Business and Risk Report. |
| 7 | Governance and assurance |
Governance and assurance describes the risk committee structures and mandates and ensures that roles and responsibilities are clear and operate within the Group's 'three lines of defence' model. These are described further on the following pages. |
| 8 | Risk and control reporting | Risk and control reporting enables the Board to ensure that the ERMF and internal control systems are working correctly and that risks are being managed within risk appetite. |
Responsibilities within the three lines of defence model are described below.
| First line – Risk control | Second line – Independent oversight | Third line – Audit |
|---|---|---|
| The first line ensures all key risks within business operations are identified, mitigated and controlled within risk appetite. |
Independent functions within the Group Risk and Compliance divisions provide oversight and challenge of first line activities. |
Group Internal Audit provides independent assurance over both first line risk management and controls and second line of defence activities. |
| Specific responsibilities include: • setting business objectives • identifying inherent risks • defining specific risk strategies and control frameworks • managing and monitoring controls • conducting stress testing and scenario analysis • ensuring risks are managed within appetite. |
Specific responsibilities include: • advising the Board on setting Board appetite for risk • maintaining the ERMF • providing oversight and challenge of first line risk management activities and control frameworks • undertaking horizon scanning to identify potential threats • taking an enterprise-wide view of the effectiveness of risk management and internal control systems and the Group's risk profile. |
Specific responsibilities include: • performing independent audits of the effectiveness of first line risk control and second line risk oversight • taking a risk-based approach to the programme of audit work • preparing an annual opinion on the risk management and controls framework across the Group to the Audit Committee. |
The Board Risk Committee and Audit Committee continue to provide oversight and advice to the Board. The Executive Risk Committee ensures a co-ordinated management approach
across all risk categories. The Group's risk committee structure is represented in the following diagram.
| Independent auditors' report | 195 |
|---|---|
| Income statements | 202 |
| Statements of comprehensive income | 203 |
| Balance sheets | 204 |
| Statements of movements in members' interests | |
| and equity | 205 |
| Cash flow statements | 207 |
| Notes to the accounts | 208 |
| • Note 1 - Statement of accounting policies |
208 |
| • Note 2 - Judgements in applying accounting |
|
| policies and critical accounting estimates | 223 |
| Performance/Return | |
| • Note 3 - Interest receivable and similar income |
223 |
| • Note 4 - Interest expense and similar charges |
224 |
| • Note 5 - Fee and commission income |
|
| and expense | 225 |
| • Note 6 - Gains/losses from derivatives and |
|
| hedge accounting | 226 |
| • Note 7 - Administrative expenses |
227 |
| • Note 8 - Employees |
229 |
| • Note 9 - Impairment provisions on loans and |
|
| advances to customers | 230 |
| • Note 10 - Taxation |
233 |
| • Note 11 - Operating segments |
237 |
| Financial assets and liabilities | |
| • Note 12 - Classification and measurement |
240 |
| • Note 13 - Available for sale investment |
|
| securities | 242 |
| • Note 14 - Investments in equity shares |
243 |
| • Note 15 - Loans and advances to customers |
243 |
| • Note 16 - Derivative financial instruments |
247 |
| • Note 17 - Deposits from banks |
250 |
| • Note 18 - Other deposits |
250 |
| • Note 19 - Debt securities in issue |
251 |
| • Note 20 - Subordinated liabilities |
252 |
| • Note 21 - Subscribed capital |
253 |
| • Note 22 - Fair value hierarchy of financial assets |
|
| and liabilities held at fair value | 254 |
| • Note 23 - Fair value of financial assets and |
|
| liabilities held at fair value – Level 3 portfolio | 256 |
| • Note 24 - Fair value of financial assets and |
|
| liabilities measured at amortised cost | 261 |
| • Note 25 - Offsetting financial assets and |
|
| financial liabilities | 264 |
| Other assets and investments | |
|---|---|
| • Note 26 - Intangible assets |
265 |
| • Note 27 - Property, plant and equipment |
267 |
| Accruals, provisions, contingent liabilities and other | |
| legal proceedings | |
| • Note 28 - Provisions for liabilities and charges |
269 |
| • Note 29 - Capital and leasing commitments |
271 |
| • Note 30 - Contingent liabilities |
272 |
| Employee benefits | |
| • Note 31 - Retirement benefit obligations |
272 |
| Capital instruments, equity and reserves | |
| • Note 32 - Core capital deferred shares (CCDS) |
278 |
| • Note 33 - Other equity instruments |
278 |
| Scope of consolidation | |
| • Note 34 - Investments in subsidiary |
|
| undertakings | 279 |
| • Note 35 - Structured entities |
281 |
| Other disclosure matters | |
| • Note 36 - Related party transactions |
282 |
| • Note 37 - Notes to the cash flow statements |
285 |
| • Note 38 - Capital management |
286 |
| • Note 39 - Registered office |
286 |
193
In our opinion, Nationwide Building Society's Group financial statements and Society financial statements (the "financial statements"):
The financial statements, included within the Annual Report and Accounts (the "Annual Report"), comprise:
Certain required disclosures have been presented elsewhere in the Annual Report, rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited.
The financial reporting framework that has been applied in the preparation of the financial statements is IFRSs as adopted by the European Union, and applicable law.
Set out below is an overview of our audit approach, highlighting key aspects, including materiality level, scope and areas of focus. These are described in further detail later in this audit report.
| Our audit approach | |||||||
|---|---|---|---|---|---|---|---|
| Materiality | Overall group materiality: £50 million, which represents 4% of profit before tax. |
||||||
| Audit scope | The scope of our audit and the nature, timing and extent of audit procedures performed were determined by our risk assessment, the financial significance of the components and other qualitative factors (including history of misstatement through fraud or error). We performed: • full scope audit procedures over products considered to be financially significant, • audit procedures over specific account balances on other products, and • testing over entity level controls, information technology general controls and analytical review procedures. |
||||||
| Areas of focus | The areas of focus for our audit which involved the greatest allocation of our resources and effort were: • Impairment of retail loans and advances to customers. • Provisions for customer redress. • Hedge accounting. |
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) ("ISAs (UK & Ireland)").
We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud.
The risks of material misstatement that had the greatest effect on our audit, including the allocation of our resources and effort, are identified as "areas of focus" in the table below. We have also set out how we tailored our audit to address these specific areas in order to provide an opinion on the financial statements as a whole, and any comments we make on the results of our procedures should be read in this context. This is not a complete list of all risks identified by our audit. We discussed these areas of focus with the Audit Committee. Their report on those matters that they considered to be significant issues in relation to the financial statements is covered on pages 83 to 84.
| Area of focus | |
|---|---|
| How our audit addressed the area of focus | |
| Impairment of retail loans and | |
| advances to customers | We understood management's basis for determining whether a loan is impaired and |
| Impairment of retail loans and | assessed the reasonableness of that basis, using our understanding of the Group's |
| advances to customers is an area | lending portfolios and our broader industry knowledge. |
| where a high level of judgement is | We tested the accuracy of extraction of historic data from the underlying systems to |
| applied in determining the necessity | be input into the impairment models and that access to the underlying systems and |
| for and then estimating the size of any | data was appropriately restricted to protect the integrity of the data within them. We |
| impairment. | found no material exceptions in these tests. |
| Retail impairment is calculated on a | We used our industry knowledge and expertise to assess the models used. Where |
| modelled basis for each portfolio of | changes had been made in model parameters and assumptions, or new overlays to |
| loans. Inputs to the models are based | models had been made, we understood the reasons why changes had taken place |
| on historic data. | and used our industry knowledge and experience to evaluate the appropriateness of |
| In the current year, management | such changes. We considered the changes and explanations given to be reasonable. |
| have refined a number of modelled | We tested the operation of models used to calculate the impairment, including using |
| assumptions to take account of a | our specialists to rebuild a sample of models using management's assumptions, and |
| prolonged period of low interest | comparing the results. We found no material differences in these tests. |
| rates and the risks associated with | We tested the inputs to the models and considered whether the time periods used for |
| maturing interest only mortgages. We | the data sets were reasonable. We also considered the potential for impairment to be |
| therefore focused our work on these | affected by events that were not captured by management's models and evaluated |
| model adjustments and updates to | how management had responded to these by making further adjustments where |
| assumptions. | appropriate. |
| See note 9 to the financial statements on pages 230 to 232. |
We tested all significant model overlays, including considering the basis for the adjustment, the logic applied, the source data used and the key assumptions adopted. |
| Based on the evidence we obtained, we determined that the impairment model assumptions, data used within the models and refinements to assumptions were reasonable and in accordance with accounting standards. |
| Area of focus | |
|---|---|
| How our audit addressed the area of focus | |
| Provisions for customer redress We focused on this area because of the inherent uncertainty and difficulty that the directors faced in assessing and measuring the potential obligations resulting from ongoing regulatory matters and past sales practices, including mis-selling of Payment Protection Insurance ("PPI") and non-compliance with consumer credit regulations and then determining the resulting provision that needed to be recognised in the balance sheet. Although the directors have experience of calculating provisions in respect of regulatory matters that have been ongoing for some time, there is a risk in respect of the emerging conduct risk areas that the lack of historic claims and settlement data will make the task of making the necessary judgements more difficult and more prone to misstatement. During the current year, the Financial Conduct Authority issued a consultation paper CP15/39 in which they propose a two year time bar and address how firms should respond to the Plevin ruling in relation to PPI. The directors have had to make significant judgements in updating their PPI provision methodology to reflect the impact these factors may have on future claim flows. |
For regulatory matters identified by management, we considered whether the Group had an obligation at the year end and whether any provision recognised was calculated in accordance with IFRSs as adopted by the European Union and properly disclosed based upon the facts available. To assess the amount and disclosure of the provisions, we also: • Made inquiries of the Group's internal legal advisors and read reports issued by the Group's external legal advisors. • Read the Group's correspondence with the Financial Conduct Authority and Prudential Regulation Authority and discussed the output of any meetings held. • Used our industry experience and knowledge of the Group to determine whether management's judgements were consistent with industry norms and the historic trends of customer complaints received. • Tested a sample of customer complaints by reading related correspondence with the customer to understand whether there were indicators of systemic issues being present for which provisions or disclosures may need to be made in the financial statements. This testing did not identify any factors that management had not considered in determining the amount of the provision and the disclosures in the financial statements. For significant provisions, we tested the accuracy and completeness of the data used and re-performed the calculations. We also assessed the assumptions used for reasonableness based on our broader industry knowledge and actual claims experience to date. Specifically, for PPI provisioning, we tested how management updated their provisioning models and assumptions to address actual complaints flow, the proposed time bar and implications of the Plevin judgement. Based on the evidence we obtained, we determined that the provisions have been reasonably calculated and are within an acceptable range of expected outcomes. Given the inherent uncertainty in the calculation of conduct provisions and their judgemental nature, we considered whether the disclosures of the application |
| See note 28 to the financial statements on pages 269 to 270. |
of judgement in estimating the provisions adequately reflected the uncertainties associated with customer redress and found that it did. |
| No additional material conduct issues that would require either provision or disclosure in the financial statements were identified as a result of the audit work performed. |
| Area of focus | |
|---|---|
| How our audit addressed the area of focus | |
| Hedge accounting The Group enters into derivatives for risk management purposes. This can lead to income statement volatility due to an accounting mismatch between the derivative and the underlying item. The Group manages this volatility through the application of hedge accounting. For certain financial instruments the Group and the Society apply fair value hedge accounting. The Group also applies cash flow hedging to reduce volatility on a wider range of hedged items. Accounting for hedges is complex and involves manual calculations. Hence, the Group is exposed to a risk of error. Furthermore, IFRSs as adopted by the European Union require the regular calculation of the effectiveness of each hedging relationship, which is also complex but is performed using models. The results of this calculation determine whether or not hedge accounting is permitted in the financial statements. See note 6 to the financial statements |
The Group uses a number of complex models to calculate hedge accounting adjustments. We tested the design and operating effectiveness of controls over these models including automated and manual controls over the inputs, hedge designations and de-designations, effectiveness testing and the generation of hedge documentation and amortisation schedules. We determined that we could rely on these controls for the purposes of our audit. For cash flow hedging, we also tested management's assertion that the predicted future cash flows being hedged were highly probable by agreeing a sample of contractual cash flows to underlying loan agreements. We tested the inputs into the hedge accounting models by agreeing historical data to the underlying systems and agreeing external inputs including foreign currency indices and interest rates to independent third party data. We confirmed that access to such models and systems was restricted to protect the integrity of the data within them by testing a sample of access rights. Using our valuation specialists, we independently revalued a sample of the financial instruments and compared these values to those reflected in the financial statements and found these valuations to be within a reasonable range of possible valuations. We recalculated a sample of the automated calculations used to generate the hedge accounting entries in both the cash flow and fair value models and found that these entries were materially accurate. Our testing did not identify any material misstatements or departures from IFRSs as adopted by the European Union, in accounting for fair value of cash flow hedges. |
| on page 226. |
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the Group, the accounting processes and controls, and the industry in which the Group operates.
The Group is structured into three segments, being Retail, Commercial and Head Office functions. Each of the segments comprises a number of product offerings and service functions. Our audit focus is defined at a product and service function level. The consolidated financial statements are a consolidation of the different products and service functions within each segment.
In establishing the overall approach to the Group audit, we determined the type of work that needed to be performed over the products and service functions in each segment, by the Group engagement team, or by auditors within PwC UK and from other PwC network firms operating under our instruction ("component auditors"). Almost all of our audit work was undertaken by PwC UK.
Where the work was performed by component auditors, we determined the level of involvement we needed to have in the audit work to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the consolidated financial statements as a whole.
We audited the full financial information for products that we considered individually financially significant in the context of the Group's consolidated financial statements. We then considered the individual financial significance of other products in relation to primary statement account balances and the presence of any significant audit risks and other qualitative factors (including history of misstatements through fraud or error). These products were subject to specific audit procedures over those account balances or to address the significant audit risks or qualitative factors. Inconsequential components (defined as products that, in our view, did not represent a risk of material misstatement either individually or in aggregate) were eliminated from further consideration for specific audit procedures although they were subject to Group level analytical review procedures. Certain account balances were audited centrally by the Group engagement team.
Balances within the scope of our audit contributed 99% of Group total assets and 96% of Group profit after tax.
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and on the financial statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
| Overall group materiality |
£50 million (2015: £40 million). |
|---|---|
| How we determined it |
4% of profit before tax (2015: 0.75% of interest receivable and similar income). |
| Rationale for benchmark applied |
We consider profit before tax to be one of the principal considerations when assessing the Group's performance, and is a generally accepted auditing benchmark. |
| We changed our basis of materiality from interest receivable and similar income to profit before tax, as the Group's profits are much less volatile now than in recent years. The use of profit before tax aligns our audit to the measures used by management to focus on the performance of the Group. |
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £2.5 million (2015: £2 million) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
The directors have voluntarily complied with Listing Rule 9.8.6(R)(3)(a) of the Financial Conduct Authority and provided a statement in relation to going concern, set out on page 67, required for companies with a premium listing on the London Stock Exchange.
The directors have requested that we review the statement on going concern as if the Society were a premium listed company. We have nothing to report having performed our review.
The directors have chosen to voluntarily report how they have applied the UK Corporate Governance Code (the "Code") as if the Society were a premium listed company. Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to the directors' statement about whether they considered it appropriate to adopt the going concern basis in preparing the financial statements. We have nothing material to add or to draw attention to.
As noted in the directors' statement, the directors have concluded that it is appropriate to adopt the going concern basis in preparing the financial statements. The going concern basis presumes that the Group and Society have adequate
199
resources to remain in operation, and that the directors intend them to do so, for at least one year from the date the financial statements were signed. As part of our audit we have concluded that the directors' use of the going concern basis is appropriate. However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Group's and Society's ability to continue as a going concern.
Opinions on other matters prescribed by the Building Societies Act 1986
In our opinion:
As a result of the directors' voluntary reporting on how they have applied the Code, under ISAs (UK & Ireland) we are required to report to you if, in our opinion:
| • information in the Annual Report is: - materially inconsistent with the information in the audited financial statements; or - apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group and Society acquired in the course of performing our audit; or - otherwise misleading. |
We have no exceptions to report. |
|---|---|
| • the statement given by the directors on page 68, in accordance with provision C.1.1 of the Code, that they consider the Annual Report taken as a whole to be fair, balanced and understandable and provides the information necessary for members to assess the Group's and Society's position and performance, business model and strategy, is materially inconsistent with our knowledge of the Group and Society acquired in the course of performing our audit. |
We have no exceptions to report. |
| • the section of the Annual Report on pages 83 to 86, as required by provision C.3.8 of the Code, describing the work of the Audit Committee, does not appropriately address matters communicated by us to the Audit Committee. |
We have no exceptions to report. |
As a result of the directors' voluntary reporting on how they have applied the Code, under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to:
| • the directors' confirmation on page 67 of the Annual Report, in accordance with provision C.2.1 of the Code, that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity. |
We have nothing material to add or to draw attention to. |
|---|---|
| • the disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated. |
We have nothing material to add or to draw attention to. |
| • the directors' explanation on pages 67 to 68 of the Annual Report, in accordance with provision C.2.2 of the Code, as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. |
We have nothing material to add or to draw attention to. |
Under the Building Societies Act 1986 we are required to report to you if, in our opinion:
We have no exceptions to report arising from this responsibility.
The Society voluntarily prepares a Directors' Remuneration Report in accordance with the provisions of the Companies Act 2006. The directors have requested that we audit the part of the Directors' Remuneration Report specified by the Companies Act 2006 to be audited as if the Society were a quoted company.
In our opinion, the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006.
The Society voluntarily prepares a Corporate Governance Statement in accordance with the provisions of the UK Corporate Governance Code. The directors have requested that we review the parts of the Corporate Governance Statement relating to ten further provisions of the UK Corporate Governance Code specified for auditor review by the Listing Rules of the Financial Conduct Authority as if the Society were a premium listed company. We have nothing to report having performed our review.
As explained more fully in the 'Directors' responsibilities in respect of the preparation of the Annual Report and Accounts' set out on pages 65 to 66, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and only for the Society's members as a body in accordance with Section 78 of the Building Societies Act 1986 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of:
We primarily focus our work in these areas by assessing the directors' judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements.
We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both.
In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Hemione Hudson (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 23 May 2016
201
| For the year ended 4 April 2016 | ||
|---|---|---|
| Group | Society | ||||
|---|---|---|---|---|---|
| 2016 | 2015* | 2016 | 2015* | ||
| Notes | £m | £m | £m | £m | |
| Interest receivable and similar income | 3 | 5,294 | 5,347 | 4,943 | 5,207 |
| Interest expense and similar charges | 4 | (2,208) | (2,475) | (2,367) | (2,680) |
| Net interest income | 3,086 | 2,872 | 2,576 | 2,527 | |
| Fee and commission income | 5 | 428 | 447 | 421 | 442 |
| Fee and commission expense | 5 | (192) | (169) | (189) | (168) |
| Income from investments | 3 | 4 | 13 | 2 | |
| Other operating income | 8 | 9 | 8 | 7 | |
| Gains/(losses) from derivatives and | |||||
| hedge accounting | 6 | 39 | (20) | 129 | (74) |
| Total income | 3,372 | 3,143 | 2,958 | 2,736 | |
| Administrative expenses | 7 | (1,847) | (1,706) | (1,819) | (1,680) |
| Impairment losses on loans and advances | 9 | (81) | (233) | (55) | (159) |
| Impairment recoveries/(losses) on | |||||
| investment securities | 13 | 8 | (18) | 8 | (18) |
| Provisions for liabilities and charges | 28 | (173) | (142) | (173) | (139) |
| Profit before tax | 1,279 | 1,044 | 919 | 740 | |
| Taxation | 10 | (294) | (205) | (228) | (154) |
| Profit after tax | 985 | 839 | 691 | 586 | |
*Comparatives have been restated as detailed in note 1.
| For the year ended 4 April 2016 | |||||
|---|---|---|---|---|---|
| Group | Society | ||||
| 2016 | 2015 | 2016 | 2015 | ||
| Notes | £m | £m | £m | £m | |
| Profit after tax | 985 | 839 | 691 | 586 | |
| Other comprehensive income/(expense): | |||||
| Items that will not be reclassified to the income statement |
|||||
| Remeasurements of retirement benefit obligations: |
|||||
| Retirement benefit remeasurements before tax | 31 | 42 | (136) | 42 | (135) |
| Taxation | 10 | 9 | 21 | 9 | 21 |
| 51 | (115) | 51 | (114) | ||
| Revaluation of property: | |||||
| Revaluation before tax | 27 | 4 | 5 | 4 | 5 |
| Taxation | 10 | (7) | 1 | (7) | 1 |
| (3) | 6 | (3) | 6 | ||
| Other items through the general reserve, | |||||
| including effect of corporation tax rate change | 10 | (1) | (1) | - | (1) |
| 47 | (110) | 48 | (109) | ||
| Items that may subsequently be reclassified to the income statement |
|||||
| Cash flow hedge reserve: | |||||
| Fair value movements taken to members' | |||||
| interests and equity | 2,099 | (503) | (5) | (5) | |
| Amount transferred to income statement | (1,666) | 664 | 10 | (3) | |
| Taxation | 10 | (132) | (32) | (1) | 2 |
| 301 | 129 | 4 | (6) | ||
| Available for sale reserve: | |||||
| Fair value movements taken to members' interests and equity |
(60) | (79) | (60) | (79) | |
| Amount transferred to income statement | 19 | 183 | 19 | 182 | |
| Taxation | 10 | 7 | (27) | 7 | (25) |
| (34) | 77 | (34) | 78 | ||
| Other comprehensive income/(expense) | 314 | 96 | 18 | (37) | |
| Total comprehensive income | 1,299 | 935 | 709 | 549 | |
| At 4 April 2016 | |||||
|---|---|---|---|---|---|
| Group | Society | ||||
| 2016 | 2015 | 2016 | 2015 | ||
| Notes | £m | £m | £m | £m | |
| Assets | |||||
| Cash | 8,797 | 4,325 | 8,797 | 4,325 | |
| Loans and advances to banks | 3,591 | 3,392 | 3,542 | 3,357 | |
| Available for sale investment securities | 13 | 10,612 | 11,037 | 10,612 | 11,037 |
| Derivative financial instruments | 16 | 3,898 | 3,337 | 3,515 | 3,664 |
| Fair value adjustment for portfolio hedged risk | 756 | 592 | 756 | 592 | |
| Loans and advances to customers | 15 | 178,807 | 170,647 | 146,289 | 141,894 |
| Investments in equity shares | 14 | 126 | 26 | 126 | 26 |
| Investments in Group undertakings | 34 | - | - | 31,402 | 27,732 |
| Intangible assets | 26 | 1,191 | 1,040 | 1,179 | 1,028 |
| Property, plant and equipment | 27 | 823 | 856 | 821 | 854 |
| Investment properties | 8 | 8 | 8 | 8 | |
| Accrued income and expenses prepaid | 166 | 192 | 421 | 188 | |
| Deferred tax | 10 | 35 | 38 | 27 | 26 |
| Other assets | 129 | 90 | 127 | 90 | |
| Total assets | 208,939 | 195,580 | 207,622 | 194,821 | |
| Liabilities | |||||
| Shares | 138,715 | 132,373 | 138,715 | 132,373 | |
| Deposits from banks | 17 | 2,095 | 1,974 | 1,373 | 1,167 |
| Other deposits | 18 | 7,635 | 9,076 | 8,797 | 10,023 |
| Due to customers | 6,201 | 6,119 | 6,201 | 6,119 | |
| Fair value adjustment for portfolio hedged risk | 13 | 14 | 13 | 14 | |
| Debt securities in issue | 19 | 36,085 | 28,105 | 30,521 | 22,143 |
| Derivative financial instruments | 16 | 3,463 | 4,048 | 4,910 | 5,037 |
| Other liabilities | 414 | 475 | 4,760 | 5,828 | |
| Provisions for liabilities and charges | 28 | 343 | 295 | 340 | 292 |
| Accruals and deferred income | 288 | 369 | 287 | 369 | |
| Subordinated liabilities | 20 | 1,817 | 2,121 | 1,823 | 2,124 |
| Subscribed capital | 21 | 413 | 415 | 413 | 415 |
| Deferred tax | 10 | 186 | 53 | 43 | 11 |
| Current tax liabilities | 128 | 116 | 83 | 90 | |
| Retirement benefit obligations | 31 | 213 | 286 | 211 | 283 |
| Total liabilities | 198,009 | 185,839 | 198,490 | 186,288 | |
| Members' interests and equity | |||||
| Core capital deferred shares | 32 | 531 | 531 | 531 | 531 |
| Other equity instruments | 33 | 992 | 992 | 992 | 992 |
| General reserve | 8,921 | 7,995 | 7,554 | 6,921 | |
| Revaluation reserve | 64 | 68 | 64 | 68 | |
| Cash flow hedge reserve | 430 | 129 | (2) | (6) | |
| Available for sale reserve | (8) | 26 | (7) | 27 | |
| Total members' interests and equity | 10,930 | 9,741 | 9,132 | 8,533 | |
| Total members' interests, equity and liabilities | 208,939 | 195,580 | 207,622 | 194,821 |
The notes on pages 208 to 286 form part of these Accounts.
Approved by the board of directors on 23 May 2016.
D L Roberts Chairman, J D Garner Director and Chief Executive, M M Rennison Group Finance Director
| For the year ended 4 April 2016 | |||||||
|---|---|---|---|---|---|---|---|
| Core capital deferred shares |
Other equity instruments |
General reserve |
Revaluation reserve |
Cash flow hedge reserve |
Available for sale reserve |
Total | |
| £m | £m | £m | £m | £m | £m | £m | |
| At 5 April 2015 | 531 | 992 | 7,995 | 68 | 129 | 26 | 9,741 |
| Profit for the year | - | - | 985 | - | - | - | 985 |
| Net movement in available for sale reserve |
- | - | - | - | - | (34) | (34) |
| Net movement in cash flow hedge reserve |
- | - | - | - | 301 | - | 301 |
| Net revaluation of property | - | - | - | (3) | - | - | (3) |
| Reserve transfer | - | - | 1 | (1) | - | - | - |
| Effect of tax rate change on other items through the general reserve |
- | - | (1) | - | - | - | (1) |
| Net remeasurements of retirement benefit obligations |
- | - | 51 | - | - | - | 51 |
| Total comprehensive income | - | - | 1,036 | (4) | 301 | (34) | 1,299 |
| Distribution to the holders of core capital deferred shares |
- | - | (56) | - | - | - | (56) |
| Distribution to the holders of Additional Tier 1 capital* |
- | - | (54) | - | - | - | (54) |
| At 4 April 2016 | 531 | 992 | 8,921 | 64 | 430 | (8) | 10,930 |
| For the year ended 4 April 2015 | |||||||
|---|---|---|---|---|---|---|---|
| Core capital deferred shares |
Other equity instruments |
General reserve |
Revaluation reserve |
Cash flow hedge reserve |
Available for sale reserve |
Total | |
| £m | £m | £m | £m | £m | £m | £m | |
| At 5 April 2014 | 531 | 992 | 7,363 | 71 | - | (51) | 8,906 |
| Profit for the year | - | - | 839 | - | - | - | 839 |
| Net movement in available for sale reserve |
- | - | - | - | - | 77 | 77 |
| Net movement in cash flow hedge reserve |
- | - | - | - | 129 | - | 129 |
| Net revaluation of property | - | - | - | 6 | - | - | 6 |
| Reserve transfer | - | - | 9 | (9) | - | - | - |
| Effect of tax rate change on other items through the general reserve |
- | - | (1) | - | - | - | (1) |
| Net remeasurements of retirement benefit obligations |
- | - | (115) | - | - | - | (115) |
| Total comprehensive income | - | - | 732 | (3) | 129 | 77 | 935 |
| Distribution to the holders of core capital deferred shares |
- | - | (58) | - | - | - | (58) |
| Distribution to the holders of Additional Tier 1 capital* |
- | - | (42) | - | - | - | (42) |
| At 4 April 2015 | 531 | 992 | 7,995 | 68 | 129 | 26 | 9,741 |
*The distribution to the holders of Additional Tier 1 capital is shown net of an associated tax credit of £14 million (2015: £11 million).
| For the year ended 4 April 2016 | |||||||
|---|---|---|---|---|---|---|---|
| Core capital deferred shares |
Other equity instruments |
General reserve |
Revaluation reserve |
Cash flow hedge reserve |
Available for sale reserve |
Total | |
| £m | £m | £m | £m | £m | £m | £m | |
| At 5 April 2015 | 531 | 992 | 6,921 | 68 | (6) | 27 | 8,533 |
| Profit for the year | - | - | 691 | - | - | - | 691 |
| Net movement in available for sale reserve |
- | - | - | - | - | (34) | (34) |
| Net movement in cash flow hedge reserve |
- | - | - | - | 4 | - | 4 |
| Net revaluation of property | - | - | - | (3) | - | - | (3) |
| Reserve transfer | - | - | 1 | (1) | - | - | - |
| Net remeasurements of retirement benefit obligations |
- | - | 51 | - | - | - | 51 |
| Total comprehensive income | - | - | 743 | (4) | 4 | (34) | 709 |
| Distribution to the holders of core capital deferred shares |
- | - | (56) | - | - | - | (56) |
| Distribution to the holders of Additional Tier 1 capital* |
- | - | (54) | - | - | - | (54) |
| At 4 April 2016 | 531 | 992 | 7,554 | 64 | (2) | (7) | 9,132 |
| For the year ended 4 April 2015 | |||||||
|---|---|---|---|---|---|---|---|
| Core capital deferred shares |
Other equity instruments |
General reserve |
Revaluation reserve |
Cash flow hedge reserve |
Available for sale reserve |
Total | |
| £m | £m | £m | £m | £m | £m | £m | |
| At 5 April 2014 | 531 | 992 | 6,541 | 71 | - | (51) | 8,084 |
| Profit for the year | - | - | 586 | - | - | - | 586 |
| Net movement in available for sale reserve |
- | - | - | - | - | 78 | 78 |
| Net movement in cash flow hedge reserve |
- | - | - | - | (6) | - | (6) |
| Net revaluation of property | - | - | - | 6 | - | - | 6 |
| Reserve transfer | - | - | 9 | (9) | - | - | - |
| Effect of tax rate change on other items through the general reserve |
- | - | (1) | - | - | - | (1) |
| Net remeasurements of retirement benefit obligations |
- | - | (114) | - | - | - | (114) |
| Total comprehensive income | - | - | 480 | (3) | (6) | 78 | 549 |
| Distribution to the holders of core capital deferred shares |
- | - | (58) | - | - | - | (58) |
| Distribution to the holders of Additional Tier 1 capital* |
- | - | (42) | - | - | - | (42) |
| At 4 April 2015 | 531 | 992 | 6,921 | 68 | (6) | 27 | 8,533 |
*The distribution to the holders of Additional Tier 1 capital is shown net of an associated tax credit of £14 million (2015: £11 million).
| Group | Society | ||||
|---|---|---|---|---|---|
| 2016 | 2015* | 2016 | 2015* | ||
| Notes | £m | £m | £m | £m | |
| Cash flows (used in)/generated from operating activities |
|||||
| Profit before tax | 1,279 | 1,044 | 919 | 740 | |
| Adjustments for: | |||||
| Non-cash items included in profit before tax 37 |
240 | (164) | 161 | (110) | |
| Changes in operating assets and liabilities 37 |
(2,413) | 427 | (2,298) | (1,551) | |
| Interest paid on subordinated liabilities | (102) | (117) | (102) | (117) | |
| Interest paid on subscribed capital | (26) | (38) | (26) | (38) | |
| Taxation | (254) | (165) | (178) | (103) | |
| Net cash flows (used in)/generated from operating activities |
(1,276) | 987 | (1,524) | (1,179) | |
| Cash flows generated from/(used in) investing activities |
|||||
| Purchase of investment securities | (4,202) | (4,385) | (4,202) | (4,385) | |
| Sale and maturity of investment securities | 4,905 | 4,204 | 4,905 | 4,204 | |
| Purchase of property, plant and equipment | (134) | (142) | (134) | (142) | |
| Sale of property, plant and equipment | 14 | 20 | 14 | 20 | |
| Purchase of intangible assets | (334) | (246) | (334) | (246) | |
| Dividends received from non-Group entities | 3 | 4 | 3 | 2 | |
| Net cash flows generated from/(used in) investing activities |
252 | (545) | 252 | (547) | |
| Cash flows generated from/(used in) financing activities |
|||||
| Distributions paid to the holders of core capital deferred shares |
(56) | (58) | (56) | (58) | |
| Distributions paid to the holders of Additional Tier 1 capital | (68) | (53) | (68) | (53) | |
| Issue of debt securities | 35,350 | 32,465 | 34,367 | 30,935 | |
| Redemption of debt securities in issue | (28,983) | (32,335) | (27,766) | (28,626) | |
| Redemption of subordinated liabilities | (406) | - | (406) | - | |
| Redemption of subscribed capital | - | (200) | - | (200) | |
| Net cash flows generated from/(used in) financing activities |
5,837 | (181) | 6,071 | 1,998 | |
| Net increase in cash and cash equivalents | 4,813 | 261 | 4,799 | 272 | |
| Cash and cash equivalents at start of year | 7,250 | 6,989 | 7,215 | 6,943 | |
| Cash and cash equivalents at end of year 37 |
12,063 | 7,250 | 12,014 | 7,215 | |
*Comparatives have been restated as detailed in note 1.
1 Statement of accounting policies
These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and interpretations (IFRICs) issued by the Interpretations Committee, as published by the International Accounting Standards Board (IASB), and adopted by the European Union, and with those parts of the Building Societies (Accounts and Related Provisions) Regulations 1998 (as amended) applicable to organisations reporting under IFRS.
The financial statements have been prepared under the historical cost convention as modified by the revaluation of investment properties, branches and non-specialised buildings, available for sale assets, derivatives, certain mortgage commitments for which a fair value election is made, certain investments in equity shares and certain other deposits. As stated in the Directors' report, the directors consider that it is appropriate to continue to adopt the going concern basis in preparing the accounts. A summary of the Group's accounting policies is set out below. The accounting policies have been consistently applied, except for a voluntary change in accounting policy to reclassify gains and losses arising from the retranslation of foreign currency items, as described below.
The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates. Further details on critical accounting estimates are given in note 2.
The following IFRS pronouncements, relevant to the Group, were adopted with effect from 5 April 2015:
1 Statement of accounting policies continued
The Group holds monetary items denominated in foreign currencies which are retranslated to sterling at the reporting date. Any resulting foreign exchange gains and losses from the retranslation have previously been presented within 'interest expense and similar charges' in the income statement. The Group utilises derivatives to economically hedge this foreign exchange exposure with fair value gains and losses on these derivatives presented within 'gains/losses from derivatives and hedge accounting' in the income statement. To provide a more meaningful presentation of the Group's residual
economic foreign exchange exposure, amounts in relation to the retranslation of foreign currency monetary items have been reclassified from 'interest expense and similar charges' to 'gains/losses from derivatives and hedge accounting' in the income statement to offset against the movement in derivative values.
Comparatives have been restated to reflect this reclassification as shown below:
| Notes | Previously published |
Adjustment | Restated | |
|---|---|---|---|---|
| £m | £m | £m | ||
| Group | ||||
| Interest expense and similar charges | 4 | (2,486) | 11 | (2,475) |
| Losses from derivatives and hedge accounting | 6 | (9) | (11) | (20) |
| Society | ||||
| Interest expense and similar charges | 4 | (2,696) | 16 | (2,680) |
| Losses from derivatives and hedge accounting | 6 | (58) | (16) | (74) |
This reclassification has no impact on the Group's or Society's net assets or members' interests and equity at 4 April 2015 and no impact on the Group's or Society's net cash flows generated from operating activities or cash and cash equivalents for the year ended 4 April 2015.
Off balance sheet commitments at 4 April 2015, shown in the 'maximum exposure to lending risk' and the 'residual maturity' tables within the 'Lending risk' and 'Liquidity and funding risk'
sections of the Business and Risk Report respectively, have been updated to include commitments of £6,120 million which relate to customer overpayments on residential mortgages where the borrower is entitled to drawdown amounts overpaid. Commitments in respect of loans and advances to customers have been restated from £7,162 million to £13,282 million and total commitments have been restated from £7,570 million to £13,690 million.
The following pronouncements, relevant to the Group, have been adopted by the EU but are not effective at 4 April 2016 and have therefore not been applied in preparing these financial statements:
| Pronouncement | Nature of change | Effective date |
|---|---|---|
| Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38) |
The amendment clarifies that the use of revenue based methods to calculate depreciation and amortisation are not appropriate. |
Accounting periods (AP) beginning on or after 1 January 2016 |
| Annual improvements to IFRSs 2012–2014 cycle |
Amendments to four standards: - IFRS 5 Non-current Assets Held for Sale and Discontinued Operations; - IFRS 7 Financial Instruments: Disclosures; - IAS 19 Employee Benefits; and - IAS 34 Interim Financial Reporting. |
AP beginning on or after 1 January 2016 |
| Disclosure Initiative (Amendments to IAS 1) |
Amendments to IAS 1 Presentation of Financial Statements to address perceived impediments to preparers exercising their judgement in presenting their financial reports by providing guidance on the application of the concept of materiality. |
AP beginning on or after 1 January 2016 |
None of the amendments listed in the table above are expected to have a significant impact for the Group.
There are a number of pronouncements, relevant to the Group, that are neither adopted by the EU nor effective at 4 April 2016 and have therefore not been applied in preparing these financial statements. Of these pronouncements the most significant is IFRS 9 Financial Instruments, which will lead to substantial changes in the accounting for financial instruments. This is described below, along with details of other pronouncements.
IFRS 9 will be implemented in the financial statements for the year ending 4 April 2019 and will replace IAS 39 Financial Instruments: Recognition and Measurement. It includes requirements for the classification and measurement of financial instruments, impairment of financial assets and hedge accounting.
The principal requirements of IFRS 9 are as follows:
The classification of financial assets will be based on the objectives of the Group's business model and the contractual cash flow characteristics of the instruments. Financial assets will then be classified as held at amortised cost, at fair value through other comprehensive income (FVOCI), or at fair value through profit or loss (FVTPL). The changes from the accounting treatment under IAS 39 are not expected to be significant. There are a limited number of financial assets with contractual cash flow characteristics that will result in a reclassification from amortised cost to FVTPL. The only changes to the classification and measurement of financial liabilities are where liabilities are elected to be measured at fair value, in which case changes in valuation relating to changes in the entity's own credit risk will be presented separately in other comprehensive income rather than in the income statement.
IFRS 9 changes the basis of recognition of impairment on financial assets from an incurred loss to an expected credit loss (ECL) approach for amortised cost and FVOCI financial assets. This introduces a number of new concepts and changes to the approach to provisioning compared with the current methodology under IAS 39:
211
The hedge accounting requirements of IFRS 9 are designed to create a stronger link with financial risk management. A separate financial reporting standard will be developed on accounting for dynamic risk management (macro hedge accounting) and IFRS 9 allows the option to continue to apply the existing hedge accounting requirements of IAS 39 until this is implemented. Therefore no changes are currently being implemented to hedge accounting policies and methodologies.
The Group's implementation strategy for IFRS 9 is based on an integrated solution using common systems, tools and data to assess credit risk and account for ECLs. This is consistent with guidance issued by the Basel Committee on Banking Supervision which sets an expectation of a high quality strategic implementation, and will entail changes to the governance, controls, models and business processes relating to credit loss provisioning. An extensive period of internal dual reporting is planned in advance of the implementation date.
The Group has an established IFRS 9 implementation programme with formal governance reporting to the Group Finance Director and Chief Risk Officer. Progress is reported regularly to the Audit Committee. Extensive work is being carried out to complete technical analysis, including methodologies for ECL models, develop models and design the required changes to systems, data, business processes, reporting and governance of impairment provisions. During the next financial year work will include building and testing of models and validating outputs, development of management information and implementation of business process changes. The financial impact of IFRS 9 will be quantified once models and systems allow the Group to provide reliable estimates, and expected impacts will be disclosed in the financial statements no later than the year ending 4 April 2018.
| Other pronouncements | ||
|---|---|---|
| Pronouncement | Nature of change | Effective date |
| Disclosure Initiative (Amendments to IAS 7) |
The initiative amends IAS 7 Statement of Cash Flows to clarify that entities shall provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities. |
AP beginning on or after 1 January 2017 |
| The Group is currently assessing the impact of this amendment. |
||
| Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to IAS 12) |
In January 2016, the IASB amended IAS 12 Income Taxes to clarify the recognition of deferred tax assets in respect of unrealised losses. |
AP beginning on or after 1 January 2017 |
| The amendment is not expected to have a significant impact for the Group. |
||
| IFRS 15 Revenue from Contracts with Customers |
IFRS 15 was issued in May 2014. The new standard provides a principles-based approach for revenue recognition, and introduces the concept of recognising revenue for obligations as they are satisfied. The standard requires retrospective application, with certain practical expedients available. |
AP beginning on or after 1 January 2018 |
| During July 2015, the IASB confirmed the deferral of the effective date by one year to 1 January 2018. |
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| During April 2016 the IASB issued amendments to IFRS 15 to clarify the guidance on identifying performance obligations, licences of intellectual property and principal versus agent considerations. |
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| The Group is currently assessing the impact of this standard; however, it is expected that it will result in the earlier recognition of certain types of income. |
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| IFRS 16 Leases | In January 2016, the IASB issued IFRS 16 to replace IAS 17 Leases. |
AP beginning on or after 1 January 2019 |
| Under IFRS 16, accounting for finance leases will remain substantially the same. |
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| Operating leases will be brought on balance sheet through the recognition of assets representing the contractual rights of use and liabilities will be recognised for the contractual payments. |
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| The Group is currently assessing the impact of this standard. |
The assets, liabilities and results of the Society and its undertakings, which include subsidiaries and structured entities, are included in the financial statements on the basis of accounts made up to the reporting date.
The Group consolidates an entity from the date on which the Group: (i) has power over the entity; (ii) is exposed to, or has rights to variable returns from its involvement with the entity; and (iii) has the ability to affect those returns through the exercise of its power. The assessment of control is based on all facts and circumstances. The Group reassesses whether it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. The Group deconsolidates subsidiaries from the date that control ceases.
A structured entity is an entity in which voting or similar rights are not the dominant factor in deciding control. Structured entities are consolidated when the substance of the relationship indicates control. The Group considers factors such as the purpose and design of the entity, size and exposure to variability of returns and nature of the relationship.
Upon consolidation, intra-Group transactions, balances and unrealised gains are eliminated.
Investments in subsidiary undertakings are stated in the Society accounts at cost less provisions for any impairment in value. The directors consider it appropriate for administrative and commercial reasons that subsidiary undertakings have financial years ending on 31 March. Certain structured entities have year ends other than 31 March and are therefore consolidated using internal management accounts prepared to that date. Adjustment is made for individually significant transactions arising between 31 March and the Society's year end.
The Group has securitised certain mortgage loans by the transfer of the loans to structured entities controlled by the Group. The securitisation enables a subsequent issuance of debt, either by the Society or the structured entities, to investors who gain the security of the underlying assets as collateral. Those structured entities are fully consolidated into the Group accounts.
The transfers of the mortgage loans to the structured entities are not treated as sales by the Society. The Society continues to recognise the mortgage loans on its own balance sheet after the transfer because it retains their risks and rewards through the receipt of substantially all of the profits or losses of the structured entities. In the accounts of the Society, the proceeds received from the transfer are accounted for as a deemed loan repayable to the structured entities.
As explained in note 15, the Group has also entered into self issuances of debt to be used as collateral for repurchase ('repo') and similar transactions. Investments in self issued debt and the equivalent deemed loan, together with the related income, expenditure and cash flows, are not recognised in the Society's or Group's financial statements. This avoids the 'grossing-up' of the financial statements that would otherwise arise.
To manage interest rate risk, the Society enters into derivative transactions with the structured entities, receiving a rate of interest based on the securitised mortgages and paying a rate inherent in the debt issuances. In accordance with IAS 39, these internal derivatives are treated as part of the deemed loan and not separately fair valued because the relevant mortgage loans are not derecognised. All other derivatives relating to securitisations are treated as explained in the derivatives and hedge accounting policy below.
For instruments measured at amortised cost the effective interest rate method is used to measure the carrying value of a financial asset or liability and to allocate associated interest income or expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability.
In calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument (for example, early redemption penalty charges) and anticipated customer behaviour but does not consider future credit losses. The calculation includes all fees received and paid and costs borne that are an integral part of the effective interest rate and all other premiums or discounts above or below market rates.
Interest income on available for sale assets, derivatives and other financial assets at fair value through the income statement is included in interest receivable and similar income. Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.
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Fees and commissions not directly attributable to generating a financial instrument are recognised on the accruals basis as services are provided, or on the performance of a significant act.
Operating segments are reported in a manner consistent with the internal reporting provided to the Executive Committee. The Executive Committee, which is responsible for allocating resources and assessing performance of operating segments, has been identified as the chief operating decision maker. Further information is included in note 11.
No segmental analysis is presented on geographical lines as substantially all of the Group's activities are in the United Kingdom, with limited deposit taking operations in the Isle of Man and the Republic of Ireland.
Goodwill represents the excess of the consideration transferred for an acquisition over the fair value of the Group's share of the net identifiable assets (including the fair value of contingent liabilities) of the acquired business at the date of acquisition. Goodwill on acquisitions is held at cost less accumulated impairment and is included as an intangible asset.
Goodwill is tested for impairment at least annually. For the purpose of impairment testing, goodwill is allocated to cash generating units. If the carrying value of the cash generating unit exceeds its recoverable value, goodwill is considered impaired. The estimation of recoverable value is based on value in use calculations incorporating forecasts by management of post tax profits for the subsequent five years, discounted at a risk-adjusted interest rate appropriate to the cash generating unit. While forecasts are compared with actual performance, expected profits reflect management's view of future performance.
IAS 38 Intangible Assets requires the capitalisation of certain costs relating to software development. Software development costs are capitalised if it is probable that the asset created will generate future economic benefits and are held at cost less accumulated amortisation and impairment. Costs incurred to establish technological feasibility or to maintain existing levels of performance are recognised as an expense.
Web development costs are capitalised where the expenditure is incurred on developing an income generating website.
Computer software is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Where the carrying amount is not recoverable the asset is written down immediately to the estimated recoverable amount, based on value in use calculations.
Where applicable, directly attributable borrowing costs incurred in the construction of qualifying assets are capitalised.
Other intangible assets, which largely represent core deposit intangibles acquired by the Group, are held at cost less accumulated amortisation and impairment and are amortised using the straight line method over their estimated useful lives of between 5 and 10 years. The amortisation period is reviewed annually.
Other intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Where the carrying amount is not recoverable the asset is written down immediately to the estimated recoverable amount, based on value in use calculations.
The Group has entered into operating leases for land and buildings. Operating leases are leases that do not transfer substantially all the risks and rewards incidental to ownership to the lessee. Operating lease payments and receipts are charged or credited to the income statement on a straight line basis over the life of the lease.
Current tax payable on profits, based on the applicable tax law in each jurisdiction, is recognised as an expense in the period in which profits arise. The tax effects of tax losses available for carry forward are recognised as an asset when it is probable that future taxable profits will be available against which these losses can be utilised.
Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax is determined using tax rates and laws that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.
Deferred tax assets are recognised where it is probable that future taxable profits will be available against which the temporary differences can be utilised. Deferred tax is provided on temporary differences arising from investments in subsidiaries, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the difference will not reverse in the foreseeable future.
Tax related to the fair value remeasurement of available for sale assets, which is charged or credited to other comprehensive income, is also credited or charged to other comprehensive income and is subsequently reclassified from other comprehensive income to the income statement together with the deferred loss or gain.
Tax related to movements in the fair value of derivatives that are subject to cash flow hedge accounting, which are charged or credited to other comprehensive income and accumulated in the cash flow hedge reserve, is also credited or charged to other comprehensive income and is subsequently reclassified from other comprehensive income to the income statement together with the associated deferred loss or gain from cash flow hedge accounting.
Tax related to movements in the valuation of property, which are charged or credited to other comprehensive income and accumulated in the revaluation reserve, is also credited or charged to other comprehensive income and accumulated in the revaluation reserve.
Tax related to remeasurements of retirement benefit obligations, which are charged or credited to other comprehensive income, is also credited or charged to other comprehensive income.
Deferred tax assets and liabilities are offset where there is a legally enforceable right to offset current tax assets against current tax liabilities and where the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle on a net basis.
Freehold and long leasehold properties comprise mainly branches and office buildings.
Branches and non-specialised buildings are stated at revalued amounts, being the fair value, determined by market based evidence at the date of the valuation, less any subsequent accumulated depreciation and subsequent impairment. Valuations are completed annually, as at 4 April, by independent surveyors.
Increases in the valuations of branches and non-specialised buildings are credited to other comprehensive income except where they reverse decreases for the same asset previously recognised in the income statement, in which case the increase in the valuation is recognised in the income statement. Decreases in valuations are recognised in the income statement except where they reverse amounts previously credited to other comprehensive income for the same asset, in which case the decrease in valuation is recognised in other comprehensive income.
Other property, plant and equipment, including specialised administration buildings and short leasehold buildings, are included at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items, major alterations and refurbishments.
Where applicable, directly attributable borrowing costs incurred in the construction of qualifying assets are capitalised.
Land is not depreciated. The depreciation of other assets commences when the assets are ready for their intended use and is calculated using the straight line method to allocate their cost or valuation over the following estimated useful lives:
| Branches and non-specialised buildings |
60 years |
|---|---|
| Specialised administration buildings |
up to 60 years |
| Short leasehold buildings | the period of the lease |
| Plant and machinery | 5 to 15 years |
| Equipment, fixtures, fittings and vehicles |
3 to 10 years |
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Estimated useful lives and residual values are reviewed annually and adjusted, if appropriate, in the light of technological developments, usage and other relevant factors.
Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Where the carrying amount is not recoverable the asset is written down immediately to the estimated recoverable amount.
Gains and losses on disposals are included in other operating income in the income statement.
Investment properties, which comprise properties held for rental, are stated at fair value, determined by market based evidence at the date of the valuation. Valuations are completed annually, as at 4 April, by independent surveyors. Changes in fair value are included in the income statement. Depreciation is not charged on investment properties.
The Group operates a number of defined benefit and defined contribution pension arrangements. A defined benefit plan is one that defines the benefit an employee will receive on retirement, depending on such factors as age, length of service and salary.
The liability recognised on the balance sheet in respect of the defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets. The defined benefit obligation is calculated by independent actuaries using the projected unit credit method and assumptions agreed with the Group. The present value of the defined benefit obligation is determined by discounting the estimated future cash flows using interest rates of high quality corporate bonds that have terms to maturity approximating to the terms of the related pension liability.
Actuarial remeasurements arise from experience adjustments (the effects of differences between previous actuarial assumptions and what has actually occurred) and changes in forward looking actuarial assumptions. Actuarial remeasurements are recognised in full, in the year they occur, in other comprehensive income.
The Group also operates defined contribution arrangements. A defined contribution arrangement is one into which the Group and the employee pay fixed contributions, without any further obligation to pay
additional contributions. Payments to defined contribution schemes are charged to the income statement as they fall due.
Past service costs are recognised immediately in the income statement.
The Group provides post retirement healthcare to a small number of former employees. The Group recognises this obligation and the actuarial remeasurement in a similar manner to the defined benefit pension plans.
The cost of bonuses payable 12 months or more after the end of the year in which they are earned is recognised in the year in which the employees render the related service and when there is an obligation to pay a bonus under the terms of the scheme.
The cost of short term employee benefits, including wages and salaries, social security costs and healthcare for current employees, is recognised in the year of service.
A provision is recognised where there is a present obligation as a result of a past event, it is probable that the obligation will be settled and it can be reliably estimated. This includes management's best estimate of amounts payable for customer redress.
Nationwide has an obligation to contribute to the Financial Services Compensation Scheme (FSCS) to enable the FSCS to meet compensation claims from, in particular, retail depositors of failed banks. A provision is recognised, to the extent that it can be reliably estimated, when Nationwide has an obligation in accordance with IAS 37 and the levy is legally enforceable in line with IFRIC 21. The amount provided is based on information received from the FSCS, forecast future interest rates and the Group's historic share of industry protected deposits.
The Group classifies its financial assets at inception into the following three categories:
This category consists of derivative financial assets used for risk management purposes. The Group does not hold any other financial assets classified as held for trading.
Assets in this category are carried at fair value. The fair values of derivative instruments are calculated by discounted cash flow models using yield curves that are based on observable market data or are based on valuations obtained from counterparties. Gains and losses arising from the changes in the fair values are recognised in the income statement.
The Group recognises the fair value of certain mortgage commitments on the balance sheet to alleviate an accounting mismatch. The fair value of mortgage commitments is included within other assets or other liabilities. Movements in the fair value are included within gains/losses from derivatives and hedge accounting in the income statement.
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The Group's residential and commercial mortgage loans, unsecured lending, loans and advances to banks and cash are classified as loans and receivables.
Loans are recognised when the funds are advanced to customers. Loans and receivables are carried at amortised cost using the effective interest rate method less provisions for impairment.
Loans and receivables acquired through a business combination or portfolio acquisition are recognised at fair value at the acquisition date. The fair value at acquisition becomes the new amortised cost for acquired loans and receivables. Fair value adjustments are made to reflect both credit and interest rate risk associated with the acquired loan assets.
Available for sale assets are non-derivative financial assets that are not classified into either of the two categories above. The majority of available for sale assets are measured at fair value using, in the majority of cases, market prices or, where markets have become inactive, prices obtained from market participants. In sourcing valuations, the Group makes use of a consensus pricing
service, in line with standard industry practice. In cases where market prices or prices obtained from market participants are not available, discounted cash flow models are used. Further information is provided in notes 22 and 23. Investments in equities that do not have a quoted market price in an active market and whose value cannot be reliably measured are recognised at cost.
Interest on available for sale assets is recognised using the effective interest rate method.
Unrealised gains and losses arising from changes in the fair values are recognised in other comprehensive income, except for amounts relating to impairment losses and foreign exchange gains and losses, which are recognised in the income statement. Gains and losses arising on the sale of available for sale assets are recognised in the income statement, including any cumulative gains or losses previously recognised in other comprehensive income, which are reclassified to the income statement.
The Group has not classified any financial assets into the held to maturity category and has not reclassified any financial assets between categories.
Purchases and sales of financial assets are accounted for at trade date. Financial assets are derecognised when the rights to receive cash flows have expired or where the assets have been transferred and substantially all of the risks and rewards of ownership have been transferred. The impact of hedging on the measurement of financial assets is detailed in the derivatives and hedge accounting policy below.
The Group assesses at each balance sheet date whether, as a result of one or more events that occurred after initial recognition, there is objective evidence that a financial asset or group of financial assets is impaired. Evidence of impairment may include:
The Group first assesses whether objective evidence of impairment exists either individually for assets that are separately significant or individually or collectively for assets that are not separately significant. If there is no objective
217
evidence of impairment for an individually assessed asset it is included in a group of assets with similar credit risk characteristics and collectively assessed for impairment.
If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the asset's original effective interest rate. For loans in a hedge relationship, the effective interest rate used for discounting is calculated using the carrying value of the loan including the hedge adjustment. The resultant provisions are deducted from the appropriate asset values on the balance sheet.
The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce any differences between loss estimates and actual loss experience.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the provision is adjusted and the amount of the reversal is recognised in the income statement.
Loans remain on the balance sheet net of associated provisions until they are deemed no longer recoverable. Where a loan is not recoverable, it is written off against the related provision for loan impairment once all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of impairment losses recorded in the income statement.
For retail loans cash flows are estimated based on past experience combined with the Group's view of the future considering the following factors:
The Group's provision methodology recognises previous arrears as a driver of future possible default and therefore accounts which have either capitalised arrears or have been in arrears in the last 12 months typically attract a higher provision level.
In assessing objective evidence of a loss event for commercial loans, the following key indicators are considered:
Where there is objective evidence of impairment, cash flows are assessed on a case by case basis considering the following factors:
ix) when available, the secondary market price of the debt.
Loans subject to individual impairment assessment, whose terms have been renegotiated, are subject to ongoing review to determine whether they remain impaired or are considered to be past due.
Where a loan is renegotiated on different terms such that it is substantially a different loan, the loan is derecognised and a new loan is recognised at its fair value.
For those loans, for which no individual impairment is recognised, a collective impairment assessment is made, taking account of the following factors:
The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. If any such evidence exists for available for sale assets, the cumulative loss, measured as the difference between the current amortised cost and the current fair value, less any impairment loss on that asset previously recognised, is recognised in impairment losses/recoveries on investment securities in the income statement.
A subsequent decline in the fair value of an available for sale asset is recognised in the income statement when there is further objective evidence of impairment as a result of further decreases in the estimated future cash flows of the financial asset. Where there is no further objective evidence of impairment, the decline in the fair value of the financial asset is recognised in other comprehensive income.
If the fair value of an available for sale asset increases in a subsequent period, and the increase can be objectively related to an event occurring after the impairment loss was recognised in the income statement, the impairment loss is reversed through the income statement to the extent it reverses the previously recognised impairment. Any gain in fair value in excess of the original impairment is recognised in other comprehensive income. On disposal, where sales proceeds exceed the carrying amount of an impaired asset, the proportion of the gain which offsets the previously recognised impairment loss is recognised as a credit in impairment losses/recoveries on investment securities in the income statement.
Impairment losses recognised in the income statement on available for sale equity shares are not reversed through the income statement.
Borrowings, including shares, deposits, debt securities in issue and subordinated liabilities are recognised initially at fair value, being the issue proceeds net of premiums, discounts and transaction costs incurred.
With the exception of deposits relating to the sale of protected equity bonds (PEBs) all borrowings are subsequently measured at amortised cost using the effective interest rate method. Amortised cost is adjusted for the amortisation of any premiums, discounts and transaction costs. The amortisation is recognised in interest expense and similar charges using the effective interest rate method.
Derivative financial liabilities are classified as fair value through the income statement. The Group does not hold any other financial liabilities classified as held for trading.
Permanent interest bearing shares (subscribed capital) are classified as financial liabilities.
Financial liabilities are derecognised when the obligation is discharged, cancelled or has expired.
Borrowings that are designated as hedged items are subject to measurement under the hedge accounting requirements described in the derivatives and hedge accounting policy below.
The financial liabilities of dormant shares and deposit accounts have been extinguished when balances have been transferred to the Government backed unclaimed asset scheme under the terms of the Dormant Accounts and Building Society Accounts Act 2008 with no impact on the income statement.
IFRS 13 requires an entity to classify assets and liabilities held at fair value and those not measured at fair value but for which the fair value is disclosed according to a hierarchy that reflects the significance of observable market inputs in calculating those fair values. The three levels of the fair value hierarchy are defined below:
Assets and liabilities are classified as Level 1 if their value is observable in an active market. Such instruments are valued by reference to unadjusted quoted prices for identical assets or liabilities in active markets where the quoted price is readily available, and the price reflects actual and regularly occurring market transactions on an arm's length basis. An active market is one in which transactions occur with sufficient volume and frequency to provide pricing information on an ongoing basis.
219
Assets and liabilities classified as Level 2 have been valued using models whose inputs are observable in an active market. Valuations based on observable inputs include derivative financial instruments such as swaps and forwards which are valued using market standard pricing techniques, and options that are commonly traded in markets where all the inputs to the market standard pricing models are observable. They also include investment securities valued using consensus pricing or other observable market prices.
Assets and liabilities are classified as Level 3 if their valuation incorporates significant inputs that are not based on observable market data ('unobservable inputs'). A valuation input is considered observable if it can be directly observed from transactions in an active market, or if there is compelling external evidence demonstrating an executable exit price. An input is deemed significant if it is shown to contribute more than 10% to the valuation of a financial instrument. Unobservable input levels are generally determined based on observable inputs of a similar nature, historical observations or other analytical techniques.
Certain non-derivative financial liabilities relating to the sale of PEBs by the Group on behalf of Legal & General, included within other deposits, have been designated at fair value upon initial recognition. Changes in fair value are recognised through the income statement in gains/losses from derivatives and hedge accounting. The PEBs are economically matched using equity-linked derivatives, which do not meet the requirements for hedge accounting. Recording changes in fair value of both the derivatives and the related liabilities through the income statement most closely reflects the economic reality of the transactions. In so doing, this accounting treatment eliminates a measurement inconsistency that would otherwise arise from valuing the PEBs at amortised cost and the derivatives at fair value.
In measuring fair value, separate debit valuation adjustments are made for own credit risk to the extent not already included in the PEBs valuation.
Income received from Legal & General upon inception of a PEB transaction is deferred and recognised in interest expense and similar charges in the income statement on an effective interest basis over the term of the product where it partially offsets interest incurred on the equity-linked derivatives.
Derivatives are entered into to reduce exposures to fluctuations in interest rates, exchange rates, market indices and credit risk and are not used for speculative purposes.
Derivatives are carried at fair value with movements in fair values recorded in the income statement. Derivative financial instruments are principally valued by discounted cash flow models using yield curves that are based on observable market data or are based on valuations obtained from counterparties. For collateralised positions the Group uses discount curves based on overnight indexed swap rates, and for non-collateralised positions the Group uses discount curves based on term Libor rates.
In the first instance fair values are calculated using mid prices. With the exception of derivatives hedging liabilities relating to the sale of PEBs, an adjustment is then made to derivative assets and liabilities to value them on a bid and offer basis respectively. The bid-offer adjustment is calculated on a portfolio basis and reflects the costs that would be incurred if substantially all residual net portfolio market risks were closed out using available hedging instruments or by disposing of or unwinding actual positions. The methodology for determining the bid-offer adjustments involves netting between long and short positions and the grouping of risk by type, in accordance with hedging strategy. Bid-offer spreads are derived from market sources such as broker data and are reviewed periodically. The derivatives hedging PEBs are not traded in an active market and are therefore valued at mid price.
In measuring fair value, separate credit valuation and debit valuation adjustments are made for counterparty or own credit risk to the extent not already included in the valuation.
All derivatives are classified as assets where their fair value is positive and liabilities where their fair value is negative. Where there is the legal ability and intention to settle net, then the derivative is classified as a net asset or liability, as appropriate.
Where cash collateral is received, to mitigate the risk inherent in amounts due to the Group, it is included as a liability within deposits from banks. Where cash collateral is given, to mitigate the risk inherent in amounts due from the Group, it is included as an asset in loans and advances to banks. Where securities collateral is received the securities are not recognised in the accounts as the Group does not obtain the risks and rewards of the securities. Where
securities collateral is given, the securities have not been derecognised as the Group has retained substantially all the risks and rewards of ownership.
A number of complex contracts contain both a derivative and a non-derivative component, in which case the derivative is termed an embedded derivative. If the economic characteristics and risks of embedded derivatives are not closely related to those of the host contract, and the overall contract itself is not carried at fair value, the embedded derivative is accounted for separately and reported at fair value with gains and losses being recognised in the income statement.
When transactions meet the criteria specified in IAS 39, the Group can apply two types of hedge accounting: either hedges of the changes in fair value of the financial asset or liability or hedges of the variability in cash flows of the financial asset or liability:
In a micro hedge relationship, the carrying value of the underlying asset or liability ('the hedged item') is adjusted to reflect changes in fair value attributable to the risk being hedged. This creates an offset to the fair value movement of the derivative ('the hedging instrument'). In the case of a portfolio hedge, this fair value adjustment is recorded at a portfolio level in the fair value adjustments for portfolio hedged risk category on the balance sheet. Changes in the fair value of hedged items and hedging instruments are recorded in the income statement.
In a cash flow hedge accounting relationship, the portion of the derivative's fair value movement that is deemed to be an effective hedge is deferred to the cash flow hedge reserve, instead of being immediately recognised in the income statement. The ineffective portion of the derivative fair value movement is recognised immediately in the income statement. Amounts deferred to the cash flow hedge reserve are subsequently recycled to the income statement. This recycling occurs when the underlying asset or liability being hedged impacts the income statement, for example when interest payments are recognised.
To qualify for hedge accounting the hedge relationship must be clearly documented at inception and the derivative must be expected to be highly effective in offsetting the hedged risk. Prospective and retrospective effectiveness must be tested throughout the life of the hedge relationship.
The Group discontinues hedge accounting when:
The Group may also decide to cease hedge accounting even though the hedge relationship continues to be highly effective by ceasing to designate the financial instrument as a hedge.
If the derivative no longer meets the criteria for hedge accounting, the cumulative fair value hedge adjustment is amortised over the period to maturity of the previously designated hedge relationship. If the underlying item is sold or repaid, the unamortised fair value adjustment is immediately recognised in the income statement.
If the derivative no longer meets the criteria for hedge accounting, the cumulative gain or loss from the effective portion of the movement in the fair value of the derivative remains in other comprehensive income until the cash flows from the underlying hedged item are recognised in the income statement. If the underlying item is sold or repaid, the cumulative gain or loss in other comprehensive income is immediately recognised in the income statement.
Financial assets and liabilities are offset and the net amount reported on the balance sheet if, and only if, there is a currently enforceable legal right to set off the recognised amounts and there is an intention to settle on a net basis, or to realise an asset and settle the liability simultaneously.
Investment and other securities may be lent or sold subject to a commitment to repurchase them at a predetermined price (a repo) or a right to continue to receive all future cash flows and changes in capital value on collateral pledged (a total return swap). Such securities are retained on the balance sheet when substantially all the risks and rewards of ownership (typically, the interest rate risk and credit risk on the asset) remain within the Group, and the counterparty liability is included separately on the balance sheet as appropriate.
Similarly, where the Group borrows or purchases securities subject to a commitment to resell them (a reverse repo) or settle all future cash flows and changes in capital value to a third party on collateral held (a reverse total return swap) but does not acquire the risks and rewards of ownership, the transactions are treated as collateralised loans, and the securities are not included on the balance sheet.
The difference between sale and repurchase price is accrued over the life of the agreements using the effective interest rate method.
Issued financial instruments are classified as equity instruments where the contractual arrangement with the holder does not result in the Group having a present obligation to deliver cash, another financial asset or a variable number of equity instruments. Where the Group does have a present obligation, the instrument is classified as a financial liability.
The proceeds of the issuance of equity instruments are included in equity. Costs incurred that are incremental and directly attributable to the issuance are deducted from the proceeds (net of applicable tax).
Distributions to holders of equity instruments are recognised when they become irrevocable and are deducted, net of tax where applicable, from the general reserve.
The consolidated financial statements are presented in sterling, which is the functional currency of the Society. Items included in the financial statements of each of the Group's entities are measured using their functional currency. Foreign currency transactions are translated into sterling using the exchange rates prevailing at the dates of the transactions.
Monetary items denominated in foreign currencies are retranslated at the rate prevailing at the year end. Foreign exchange gains and losses resulting from the retranslation and settlement of these items are recognised in the income statement as disclosed in note 6.
The Group implemented cash flow hedge accounting in December 2014. This has been applied to a portfolio of derivatives which are economically hedging foreign currency items. For derivatives included in effective cash flow hedges, the change in fair value caused by foreign exchange movements is deferred to the cash flow hedge reserve instead of being immediately reported in the income statement. If cash flow hedges are ineffective, the ineffective portion of the change in fair value is recognised within the income statement. Amounts deferred to the cash flow hedge reserve are recycled to the income statement when the related movements in the underlying hedged item impacts the income statement.
For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months maturity from the date of acquisition, included within cash and loans and advances to banks on the balance sheet.
Contingent liabilities are possible obligations whose existence is dependent on the outcome of uncertain future events, or those where the outflow of resources are uncertain or cannot be measured reliably.
During the ordinary course of business the Group is subject to threatened or actual legal proceedings. All such material cases are periodically reassessed, with the assistance of external professional advisers where appropriate, to determine the likelihood of incurring a liability. The Group does not disclose amounts in relation to contingent liabilities associated with such claims where the likelihood of any payment is remote or where such disclosure could be seriously prejudicial to the conduct of the claims.
The audited sections in the Business and Risk Report for Lending risk and Financial risk and the Report of the directors on remuneration form an integral part of these financial statements.
These disclosures (where marked as 'audited') are covered by the Independent auditors' report for this Annual Report and Accounts.
The Group has to make judgements in applying its accounting policies which affect the amounts recognised in the accounts. In addition, estimates and assumptions are made that could affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates. The most significant areas where judgements and estimates are made
are disclosed in the following notes:
| Area of significant judgement and estimate | Note |
|---|---|
| Impairment provisions on loans and advances | 9 |
| Provisions for customer redress | 28 |
| Retirement benefit obligations (pensions) | 31 |
| Group | Society | |||||
|---|---|---|---|---|---|---|
| 2016 | 2015 | 2016 | 2015 | |||
| £m | £m | £m | £m | |||
| On residential mortgages | 5,009 | 4,981 | 3,818 | 3,830 | ||
| On other loans: | ||||||
| Connected undertakings | - | - | 855 | 1,024 | ||
| Other | 835 | 953 | 820 | 935 | ||
| On investment securities | 403 | 412 | 403 | 417 | ||
| On other liquid assets | 33 | 28 | 33 | 28 | ||
| Net expense on financial instruments hedging assets | (986) | (1,027) | (986) | (1,027) | ||
| Total | 5,294 | 5,347 | 4,943 | 5,207 | ||
Included within interest receivable and similar income is interest income on impaired financial assets of £41 million in the Group and £23 million in the Society (2015: Group £82 million, Society £62 million).
| Group | Society | |||
|---|---|---|---|---|
| 2016 | 2015* | 2016 | 2015* | |
| £m | £m | £m | £m | |
| On shares held by individuals | 1,577 | 1,897 | 1,577 | 1,896 |
| On subscribed capital | 26 | 42 | 26 | 42 |
| On deposits and other borrowings: | ||||
| Subordinated liabilities | 99 | 115 | 99 | 115 |
| Connected undertakings | - | - | 98 | 142 |
| Other | 577 | 171 | 576 | 166 |
| On debt securities in issue | 690 | 725 | 592 | 587 |
| Net income on financial instruments hedging liabilities | (768) | (481) | (608) | (274) |
| Interest on net defined benefit pension liability (note 31) | 7 | 6 | 7 | 6 |
| Total | 2,208 | 2,475 | 2,367 | 2,680 |
*Comparatives have been restated as detailed in note 1.
Other interest on deposits and other borrowings includes an expense of £439 million (2015: £50 million) in relation to the redemption and maturity of PEB deposits which have returns linked to the performance of specified stock market indices. The PEBs are economically hedged using equity-linked derivatives. Net income on financial instruments hedging liabilities includes income of £398 million (2015: £1 million) in relation to the associated derivatives. Further details are included in note 23.
5 Fee and commission income and expense
| Group | ||||||
|---|---|---|---|---|---|---|
| 2016 | 2015 | |||||
| Income | Expense | Net | Income | Expense | Net | |
| £m | £m | £m | £m | £m | £m | |
| Current account and savings | 199 | (126) | 73 | 191 | (108) | 83 |
| General insurance | 78 | - | 78 | 88 | - | 88 |
| Protection and investments | 73 | - | 73 | 75 | - | 75 |
| Mortgage | 20 | (3) | 17 | 21 | (1) | 20 |
| Credit card | 46 | (36) | 10 | 67 | (41) | 26 |
| Other fees and commissions | 12 | (27) | (15) | 5 | (19) | (14) |
| Fee and commission | 428 | (192) | 236 | 447 | (169) | 278 |
| Society | ||||||
|---|---|---|---|---|---|---|
| 2016 | 2015 | |||||
| Income | Expense | Net | Income | Expense | Net | |
| £m | £m | £m | £m | £m | £m | |
| Current account and savings | 199 | (126) | 73 | 191 | (108) | 83 |
| General insurance | 78 | - | 78 | 88 | - | 88 |
| Protection and investments | 73 | - | 73 | 75 | - | 75 |
| Mortgage | 13 | - | 13 | 16 | - | 16 |
| Credit card | 46 | (36) | 10 | 67 | (41) | 26 |
| Other fees and commissions | 12 | (27) | (15) | 5 | (19) | (14) |
| Fee and commission | 421 | (189) | 232 | 442 | (168) | 274 |
| Group | Society | |||
|---|---|---|---|---|
| 2016 | 2015* | 2016 | 2015* | |
| £m | £m | £m | £m | |
| Derivatives designated as fair value hedges | (38) | (726) | 141 | (1,038) |
| Fair value movement attributable to hedged risk | 123 | 680 | (64) | 1,005 |
| Gains/(losses) from fair value hedge accounting (note i) | 85 | (46) | 77 | (33) |
| Derivatives designated as cash flow hedges | 434 | 157 | 5 | (8) |
| Deferral to cash flow hedge reserve | (433) | (160) | (5) | 8 |
| Ineffectiveness from cash flow hedge accounting (note ii) | 1 | (3) | - | - |
| Derivatives economically hedging mortgage commitments | (61) | (135) | (61) | (135) |
| Fair value movement attributable to mortgage commitments | 15 | 82 | 15 | 82 |
| Net loss from mortgage pipeline (note iii) | (46) | (53) | (46) | (53) |
| 82 | ||||
| Fair value (losses)/gains from other derivatives (note iv) | (37) | 93 | 27 | 28 |
| Foreign exchange differences | 36 | (11) | 71 | (16) |
| Total | 39 | (20) | 129 | (74) |
*Comparatives have been restated as detailed in note 1.
Notes:
Although the Group only uses derivatives for the hedging of 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 does not reflect the economic reality of the Group's hedging strategy.
Included within the gain of £39 million (2015: loss of £20 million) was the impact of the following:
The overall impact of derivatives will remain volatile from period to period as new derivative transactions replace those which mature to ensure that interest rate and other market risks are continually managed.
| Group | Society | |||
|---|---|---|---|---|
| 2016 | 2015 | 2016 | 2015 | |
| £m | £m | £m | £m | |
| Employee costs: | ||||
| Wages and salaries | 486 | 456 | 479 | 448 |
| Bonuses | 76 | 74 | 76 | 74 |
| Social security costs | 55 | 54 | 55 | 54 |
| Pension costs (note 31) | 119 | 87 | 118 | 87 |
| 736 | 671 | 728 | 663 | |
| Other administrative expenses | 745 | 713 | 725 | 696 |
| Bank levy (note 28) | 41 | 28 | 41 | 28 |
| 1,522 | 1,412 | 1,494 | 1,387 | |
| Depreciation, amortisation and impairment | 325 | 294 | 325 | 293 |
| Total | 1,847 | 1,706 | 1,819 | 1,680 |
| Other administrative expenses include: | ||||
| Property operating lease rental | 33 | 34 | 33 | 35 |
| Other property costs | 76 | 76 | 76 | 76 |
| Postage and communications | 68 | 68 | 68 | 68 |
| Computer costs | 174 | 153 | 174 | 153 |
| Marketing and advertising | 35 | 30 | 35 | 30 |
| Money transmission and other bank costs | 44 | 43 | 43 | 43 |
| Legal, professional and consultancy | 53 | 60 | 52 | 58 |
| Training, education and other staff related costs | 131 | 125 | 129 | 122 |
| Other | 131 | 124 | 115 | 111 |
| Total | 745 | 713 | 725 | 696 |
Administrative expenses include £10 million (2015: £52 million) of transformation costs. The reduction in transformation costs is driven primarily by the completion of the integration of the Derbyshire, Cheshire and Dunfermline brands and activities relating to the strategic change to the Group's IT service delivery model.
The bonus charges within employee costs in the above table include elements of long term bonuses which will be paid more than one year from the balance sheet date of £8 million (2015: £5 million). In accordance with accounting standards, some elements of deferred bonuses will be recognised in future periods.
Up until the year ended 4 April 2014, Group directors and certain senior executives were entitled to Medium Term Performance Pay Plan (MTPPP) payments in addition to an annual performance payment amount. Under the MTPPP,
bonuses are paid to directors and certain senior executives based on results over the preceding three year performance cycle. In accordance with Prudential Regulation Authority (PRA) requirements, one third of the MTPPP bonus award is subject to deferral for a period of more than one year.
This deferred element may be reduced at the Remuneration Committee's discretion if it emerges that the original assessment of performance was misleading or if performance against the scheme measures declines substantially over the one year deferral period. Deferred bonuses are awarded in cash. The MTPPP bonus is recognised in the income statement in the final year of the three year performance cycle. The MTPPP scheme has now been discontinued, though elements of historic MTPPP awards under the 2012-15 and 2013-16 award cycles remain due for payment until June 2016 and June 2017 respectively.
227
New bonus schemes for directors and certain senior executives, which combine the annual and long term elements under a single scheme, were introduced in the year ended 4 April 2015. Under these new schemes, awards are based on current year results but are paid over a period of up to five years, with part of the awards linked to the value of Nationwide core capital deferred shares (CCDS). The payment of deferred elements remains subject to further discretion by the Remuneration Committee.
These bonuses are recognised in the income statement over the period from the start of the performance year until all relevant criteria have been met. The table below shows actual and expected charges to the income statement in respect of all MTPPP bonuses for all remaining scheme cycles, and all new long term bonuses in respect of the 2014/15 and 2015/16 years:
| Income statement charge for long term bonuses | ||||||||
|---|---|---|---|---|---|---|---|---|
| Group and Society | ||||||||
| Actual | Actual | Expected | Expected | Expected | Expected | |||
| 2014/15 (note ii) |
2015/16 (note ii) |
2016/17 | 2017/18 | 2018/19 | 2019/20 | |||
| £m | £m | £m | £m | £m | £m | |||
| Medium Term Performance Pay Plan: | ||||||||
| 2012-2015 | 9.8 | - | - | - | - | - | ||
| 2013-2016 | - | 9.7 | - | - | - | - | ||
| 2014/15 long term bonus scheme (note i) | 7.2 | 4.1 | 1.7 | 1.3 | 0.3 | - | ||
| 2015/16 long term bonus scheme (note i) | - | 9.1 | 3.8 | 1.8 | 1.3 | 0.5 | ||
| Income statement charge for long term bonuses | 17.0 | 22.9 | 5.5 | 3.1 | 1.6 | 0.5 | ||
Notes:
i. The amount expected is an estimate based on past performance together with current assumptions of future leaver rates and future CCDS performance.
ii. In the year ended 4 April 2016, £4 million (2015: £2 million) was recognised in the income statement in relation to awards linked to share based payments. An outstanding deferred amount of £4 million at 4 April 2016 (2015: £2 million) was included in accruals and deferred income on the balance sheet in relation to such awards.
Directors' emoluments, including details of the long term bonus scheme, are shown as part of the Report of the directors on remuneration in accordance with Schedule 10A, paragraphs 1 to 9 of the Building Societies Act 1986.
7 Administrative expenses continued
The remuneration of the external auditors, PricewaterhouseCoopers LLP, is set out below:
| External auditors' remuneration | ||||
|---|---|---|---|---|
| Group | Society | |||
| 2016 | 2015 | 2016 | 2015 | |
| £m | £m | £m | £m | |
| Audit fees for the Group and Society statutory audit | 2.3 | 1.9 | 2.3 | 1.9 |
| Fees payable for other services: | ||||
| Audit of Group subsidiaries | 0.3 | 0.3 | - | - |
| Audit-related assurance services | 0.7 | 0.8 | 0.7 | 0.8 |
| Total audit and audit-related assurance services | 3.3 | 3.0 | 3.0 | 2.7 |
| Other non-audit services | 1.1 | 2.4 | 1.1 | 2.4 |
| Total | 4.4 | 5.4 | 4.1 | 5.1 |
Audit fees for the year ended 4 April 2016 include £0.2 million (2015: £nil) in respect of work performed in relation to the PRA's new requirements for auditor reporting which will be fully effective from the year ended 4 April 2017.
The Group's policy in relation to the use of its auditors on non-audit engagements sets out the types of services they are generally precluded from performing. All non-audit services, where the fee is expected to exceed a de minimis limit, are subject to pre-approval by the Audit Committee.
Fees in relation to 'other non-audit services' above relate primarily to work undertaken in relation to the Group's regulatory projects.
| Group | Society | |||||
|---|---|---|---|---|---|---|
| 2016 | 2015 | 2016 | 2015 | |||
| The average number of persons employed during the year was: |
||||||
| Full time | 14,190 | 13,667 | 14,116 | 13,602 | ||
| Part time | 3,919 | 3,955 | 3,905 | 3,946 | ||
| Total | 18,109 | 17,622 | 18,021 | 17,548 | ||
| Society: | ||||||
| Central administration | 10,392 | 9,544 | 10,392 | 9,544 | ||
| Branches | 7,629 | 8,004 | 7,629 | 8,004 | ||
| Subsidiaries | 88 | 74 | - | - | ||
| Total | 18,109 | 17,622 | 18,021 | 17,548 | ||
Central administration employee numbers include
employees engaged in direct customer facing operations in administrative centres.
The following provisions have been deducted from the appropriate asset values in the balance sheet:
| 2016 Group | ||||||
|---|---|---|---|---|---|---|
| Prime residential |
Specialist residential |
Consumer banking |
Commercial lending |
Other lending |
Total | |
| £m | £m | £m | £m | £m | £m | |
| At 5 April 2015 | 22 | 88 | 216 | 322 | 4 | 652 |
| Charge for the year | 8 | 10 | 96 | (34) | 1 | 81 |
| Amounts written off during the year | (6) | (23) | (44) | (242) | (4) | (319) |
| Amounts recovered during the year | 1 | 3 | 18 | 20 | - | 42 |
| Unwind of discount | - | (1) | (5) | (7) | - | (13) |
| At 4 April 2016 | 25 | 77 | 281 | 59 | 1 | 443 |
| 2015 Group | ||||||
|---|---|---|---|---|---|---|
| Prime residential |
Specialist residential |
Consumer banking |
Commercial lending |
Other lending |
Total | |
| £m | £m | £m | £m | £m | £m | |
| At 5 April 2014 | 18 | 84 | 173 | 1,001 | 12 | 1,288 |
| Charge for the year | 13 | 45 | 89 | 52 | 34 | 233 |
| Amounts written off during the year | (10) | (41) | (56) | (276) | (6) | (389) |
| Amounts recovered during the year | 1 | 1 | 15 | 15 | - | 32 |
| Disposal | - | - | - | (428) | (36) | (464) |
| Unwind of discount | - | (1) | (5) | (42) | - | (48) |
| At 4 April 2015 | 22 | 88 | 216 | 322 | 4 | 652 |
The Group impairment provision of £443 million at 4 April 2016 (2015: £652 million) comprises individual provisions of £75 million (2015: £341 million) and collective provisions of £368 million (2015: £311 million).
The impairment provision charges for prime and specialist residential loans include £27 million in relation to a refinement of provision model assumptions to ensure they continue to reflect appropriately the incurred losses within the portfolio.
The impairment charge for consumer banking impairment includes £29 million resulting from a reassessment of provision model assumptions in relation to up to date accounts.
The decrease in impairment provisions held against commercial lending is driven by continued improvement in market conditions for commercial real estate, together with deleveraging activity undertaken during the prior year which has resulted in a reduction in the size of the commercial real estate portfolio.
| 2016 Society | |||||
|---|---|---|---|---|---|
| Prime residential |
Consumer banking |
Commercial lending |
Other lending |
Total | |
| £m | £m | £m | £m | £m | |
| At 5 April 2015 | 22 | 216 | 322 | 3 | 563 |
| Charge for the year | 8 | 96 | (34) | 1 | 71 |
| Amounts written off during the year | (6) | (44) | (242) | (4) | (296) |
| Amounts recovered during the year | 1 | 18 | 20 | - | 39 |
| Unwind of discount | - | (5) | (7) | - | (12) |
| At 4 April 2016 | 25 | 281 | 59 | - | 365 |
| 2015 Society | |||||
|---|---|---|---|---|---|
| Prime residential |
Consumer banking |
Commercial lending |
Other lending |
Total | |
| £m | £m | £m | £m | £m | |
| At 5 April 2014 | 18 | 173 | 1,001 | 3 | 1,195 |
| Charge for the year | 13 | 89 | 52 | 36 | 190 |
| Amounts written off during the year | (10) | (56) | (276) | - | (342) |
| Amounts recovered during the year | 1 | 15 | 15 | - | 31 |
| Disposals | - | - | (428) | (36) | (464) |
| Unwind of discount | - | (5) | (42) | - | (47) |
| At 4 April 2015 | 22 | 216 | 322 | 3 | 563 |
The Society impairment provision of £365 million at 4 April 2016 (2015: £563 million) comprises individual provisions of £58 million (2015: £320 million) and collective provisions of £307 million (2015: £243 million).
The Society's impairment loss on loans and advances in the income statement of £55 million (2015: £159 million) includes a £16 million release of a provision (2015: £31 million) relating
Critical accounting estimates and judgements
Impairment provisions on loans and advances
Impairment is measured as the difference between an asset's carrying amount and the present value of management's estimate of future cash flows.
Key assumptions included in the measurement of impairment include the probability of any account going into default, the probability of defaulted accounts progressing to possession and the eventual loss incurred in the event of forced sale or write off. These assumptions are based on observed historical data and updated as management considers appropriate to reflect current conditions and the Group's strategy for the book. The accuracy of the impairment provision will therefore be affected by unexpected changes in these assumptions.
To the extent that actual cash flows in relation to the Group's retail loans and advances differ from those estimated by 10%, the impairment provision would change by an estimated £41 million.
For residential mortgages the estimate of future house price index (HPI) movements is also a key assumption
to the Society's loan to a subsidiary undertaking. The provision release reflects the subsidiary's repayment of intra-Group loan amounts as a result of disposals and redemptions of amounts outstanding on corporate loans held within the subsidiary. The Group figures above include the impairment of the underlying corporate loans within other lending.
in estimating the eventual loss. The Group does not take account of projected future HPI increases in establishing provisions. If future HPI increases do materialise then this will reduce the amount of actual loss incurred. If provisions were based on an assumption that future HPI would decrease by 10%, the provision at the balance sheet date would increase by an estimated £9 million.
In calculating the provisions for commercial loans, estimates of discounted cash flows are made on the basis of the planned strategy for each loan. These estimates include assumptions for underlying property values and future expected cash flows for rental income and any maintenance, redevelopment or refurbishment expenditure on the properties. To the extent that actual cash flows differ from those estimated by 10% on impaired loans, the impairment provision would change by an estimated £13 million.
| Tax charge in the income statement | ||||
|---|---|---|---|---|
| Group | Society | |||
| 2016 | 2015 | 2016 | 2015 | |
| £m | £m | £m | £m | |
| Current tax: | ||||
| UK corporation tax | 330 | 215 | 236 | 158 |
| Corporation tax – adjustment in respect of prior years | (8) | (22) | (7) | (21) |
| Total current tax | 332 | 193 | 229 | 137 |
| Deferred tax: | ||||
| Current year (credit)/charge | (35) | 13 | (12) | 17 |
| Adjustment in respect of prior years | 5 | 6 | 3 | 6 |
| Effect of corporation tax rate change | - | (7) | - | (6) |
| Effect of banking surcharge on deferred tax balances | 2 | - | 8 | - |
| Total deferred taxation | (28) | 12 | (1) | 17 |
| Tax charge | 294 | 205 | 228 | 154 |
The actual tax charge differs from the theoretical amount that would arise using the standard rate of corporation tax in the UK as follows:
| Reconciliation of tax charge | ||||
|---|---|---|---|---|
| Group | Society | |||
| 2016 | 2015 | 2016 | 2015 | |
| £m | £m | £m | £m | |
| Profit before tax | 1,279 | 1,044 | 919 | 740 |
| Tax calculated at a tax rate of 20% (2015: 21%) | 256 | 219 | 184 | 155 |
| Adjustments in respect of prior years | (3) | (16) | (4) | (15) |
| Banking surcharge | 22 | - | 22 | - |
| Expenses not deductible for tax purposes/(income not taxable): |
||||
| Depreciation on non-qualifying assets | 1 | 2 | 1 | 2 |
| Non-taxable dividends received | - | - | (2) | (2) |
| Bank levy | 8 | 6 | 8 | 6 |
| Other | 8 | 1 | 11 | 14 |
| Effect of corporation tax rate change | - | (7) | - | (6) |
| Effect of banking surcharge on deferred tax balances | 2 | - | 8 | - |
| Tax charge | 294 | 205 | 228 | 154 |
The Finance (No. 2) Act 2015 introduced legislation to impose a surcharge of 8% on the profits of banking companies after 1 January 2016. As a result, a banking surcharge of £22 million is included in the UK corporation tax charge shown above.
The tax on items through other comprehensive income is as follows:
| Tax charge/(credit) on items through other comprehensive income | |||||
|---|---|---|---|---|---|
| Group | Society | ||||
| 2016 | 2015 | 2016 | 2015 | ||
| £m | £m | £m | £m | ||
| Available for sale investment securities | (7) | 27 | (7) | 25 | |
| Cash flow hedges | 132 | 32 | 1 | (2) | |
| Property Revaluation | 7 | (1) | 7 | (1) | |
| Retirement benefit obligations | (9) | (21) | (9) | (21) | |
| Other items through the general reserve, including effect of corporation tax rate change |
1 | 1 | - | 1 | |
| Total | 124 | 38 | (8) | 2 | |
The Group tax credit through the available for sale reserve of £7 million (2015: £27 million charge) is made up of a credit of £35 million (2015: charge of £27 million) through current tax and a charge of £28 million (2015: £nil) through deferred tax.
Deferred tax is provided in full on temporary differences under the liability method at the standard UK corporation tax rate at the balance sheet date including the banking surcharge, where applicable.
Legislation to reduce the main rate of corporation tax from 20% to 19% from 1 April 2017 and from 19% to 18% from 1 April 2020 was introduced in the Finance (No. 2) Act 2015. A further announcement was made in the 2016 Budget reducing the main rate of corporation tax by an additional 1% from 1 April 2020. This further change had not been substantially enacted by the balance sheet date and therefore, is not included in these financial statements.
10 Taxation continued
The movements on the deferred tax account are as follows:
| Movements in deferred taxation | ||||
|---|---|---|---|---|
| Group | Society | |||
| 2016 | 2015 | 2016 | 2015 | |
| £m | £m | £m | £m | |
| At 5 April | (15) | 8 | 15 | 8 |
| Income statement credit/(charge) | 30 | (19) | 9 | (23) |
| Income statement effect of corporation tax rate change | - | 7 | - | 6 |
| Income statement effect of bank surcharge | (2) | - | (8) | - |
| Taxation on items through the income statement | 28 | (12) | 1 | (17) |
| Available for sale investment securities | (20) | - | (20) | - |
| Cash flow hedges | (86) | (34) | (1) | 2 |
| Property revaluation | (1) | 1 | (1) | 1 |
| Retirement benefit obligations | (14) | 28 | (14) | 28 |
| Effect of corporation tax rate change in other comprehensive income | - | (6) | - | (7) |
| Effect of banking surcharge in other comprehensive income | (43) | - | 4 | - |
| Taxation on items through other comprehensive income | (164) | (11) | (32) | 24 |
| At 4 April | (151) | (15) | (16) | 15 |
Deferred tax assets and liabilities are attributable to the following items:
| Deferred tax assets and liabilities | |||||
|---|---|---|---|---|---|
| Group | Society | ||||
| 2016 | 2015 | 2016 | 2015 | ||
| £m | £m | £m | £m | ||
| Deferred tax assets | |||||
| Accelerated capital allowances | (45) | (45) | (45) | (45) | |
| Property revaluation | 1 | 1 | - | - | |
| Cash flow hedges | 1 | 2 | 1 | 2 | |
| Retirement benefit obligations | 58 | 56 | 58 | 56 | |
| Provisions for loan impairment | 3 | 5 | 2 | 2 | |
| Other provisions | 17 | 19 | 11 | 11 | |
| 35 | 38 | 27 | 26 | ||
| Deferred tax liabilities | |||||
| Property revaluation | (14) | (10) | (14) | (10) | |
| Cash flow hedges | (166) | (34) | - | - | |
| Other provisions | (6) | (9) | (29) | (1) | |
| (186) | (53) | (43) | (11) | ||
| Net deferred tax (liability)/asset | (151) | (15) | (16) | 15 | |
The majority of deferred tax assets are anticipated to be recoverable after one year. The Group considers that there will be sufficient future trading profits in excess of profits arising
from the reversal of existing taxable temporary differences to utilise the deferred tax assets.
235
The deferred tax charge in the income statement comprises the following temporary differences:
| Deferred tax charge in the income statement | |||||
|---|---|---|---|---|---|
| Group | Society | ||||
| 2016 | 2015 | 2016 | 2015 | ||
| £m | £m | £m | £m | ||
| Accelerated capital allowances | (13) | (8) | (13) | (7) | |
| Retirement benefit obligations | - | 19 | - | 19 | |
| Provisions for loan impairment | (2) | (2) | (2) | (2) | |
| Effect of corporation tax rate change | - | (7) | - | (6) | |
| Effect of banking surcharge on deferred tax balances | 2 | - | 8 | - | |
| Other | (15) | 10 | 6 | 13 | |
| Total | (28) | 12 | (1) | 17 | |
The table below reconciles the corporation tax charge in the income statement to the taxation paid in the consolidated cash flow statement:
| Group | ||
|---|---|---|
| 2016 | 2015 | |
| £m | £m | |
| Income statement tax charge | 294 | 205 |
| Deferred tax and prior year adjustments | 36 | 10 |
| Current tax liability | 330 | 215 |
| Prior year payments | 116 | 58 |
| Current year tax payments due after the end of the year | (192) | (108) |
| Tax paid per consolidated cash flow statement | 254 | 165 |
For management reporting purposes, the Group is organised into the following business streams:
These business streams reflect how management assesses performance and makes decisions on allocating resources to the business on the basis of product and customers. Revenues from external and internal customers are allocated to the appropriate business segment.
Retail functions include prime residential lending, specialist residential lending, consumer banking, retail funding (savings products), commercial deposits which are managed by the retail business, insurance and investments. The distribution channels supporting these products are also included in this segment.
This segment comprises the commercial lending business, including commercial real estate lending, lending to housing associations and Project Finance lending.
Head office functions include treasury operational and income generation activities, head office and central support functions, commercial deposits received and managed by the Treasury Division and the result arising from the funds transfer pricing methodology relating to the funding of other segments.
Head office and central support functions include executive management, corporate secretariat, legal services, human resources, strategy and planning, finance, risk management, compliance, capital management, corporate affairs, property services and internal audit.
11 Operating segments continued
Funds transfer pricing is the mechanism by which the Group recognises the internal cost of funds and allocates this cost between different product groups and business segments to derive individual product margins and net interest receivable. Under the Group's methodology, a single cost of funds representing the weighted average cost of retail and wholesale funding is allocated across the Group, and is updated on a quarterly basis to reflect the opportunity cost of funding and the relative performance of the different business segments, based on current market cost of funds.
However, within the Commercial Division, the transfer price charged to long term social housing and Project Finance
lending is set to reflect the lower average historic cost of wholesale funding which was available when these loans were originated. This reflects the nature of this lending which did not envisage the current marginal cost of borrowing and is assessed based on the movements in the Group's cost of wholesale funding. All other assets in the Commercial Division will continue to be charged the weighted average current cost of retail and wholesale funds, in line with other assets.
The retail and commercial business segments are charged for the benefit of free capital as part of the funds transfer pricing mechanism, based upon regulatory capital metrics.
Segmental results are as follows:
| 2016 | |||||
|---|---|---|---|---|---|
| Retail | Commercial | Head office functions |
Total | ||
| Notes | £m | £m | £m | £m | |
| Net income/(expense) from external customers | 3,655 | 454 | (1,023) | 3,086 | |
| (Charge)/revenue from other segments | (634) | (341) | 975 | - | |
| Net interest income | 3,021 | 113 | (48) | 3,086 | |
| Other income | i | 251 | 12 | (16) | 247 |
| Total revenue | 3,272 | 125 | (64) | 3,333 | |
| Administrative expenses | ii | (1,674) | (41) | (81) | (1,796) |
| Impairment and other provisions | iii | (241) | 34 | 7 | (200) |
| Underlying profit/(loss) before tax | 1,357 | 118 | (138) | 1,337 | |
| FSCS levies | (46) | - | - | (46) | |
| Transformation costs | (1) | - | (9) | (10) | |
| Bank levy | - | - | (41) | (41) | |
| Gains from derivatives and hedge accounting | - | - | 39 | 39 | |
| Profit/(loss) before tax | 1,310 | 118 | (149) | 1,279 | |
| Taxation | (294) | ||||
| Profit after tax | 985 | ||||
| Total assets | iv | 165,662 | 13,138 | 30,139 | 208,939 |
| Total liabilities | 144,669 | 2,728 | 50,612 | 198,009 | |
11 Operating segments continued
| 2015 | |||||
|---|---|---|---|---|---|
| Retail | Commercial | Head office functions |
Total | ||
| Notes | £m | £m | £m | £m | |
| Net income/(expense) from external customers | v | 3,324 | 555 | (1,007) | 2,872 |
| (Charge)/revenue from other segments | (341) | (443) | 784 | - | |
| Net interest income | v | 2,983 | 112 | (223) | 2,872 |
| Other income | i | 293 | 15 | (17) | 291 |
| Total revenue | 3,276 | 127 | (240) | 3,163 | |
| Administrative expenses | ii | (1,534) | (52) | (40) | (1,626) |
| Impairment and other provisions | iii | (205) | (54) | (51) | (310) |
| Underlying profit/(loss) before tax | v | 1,537 | 21 | (331) | 1,227 |
| FSCS levies | (83) | - | - | (83) | |
| Transformation costs | (32) | - | (20) | (52) | |
| Bank levy | - | - | (28) | (28) | |
| Losses from derivatives and hedge accounting | v | - | - | (20) | (20) |
| Profit/(loss) before tax | 1,422 | 21 | (399) | 1,044 | |
| Taxation | (205) | ||||
| Profit after tax | 839 | ||||
| Total assets | iv | 156,362 | 14,272 | 24,946 | 195,580 |
| Total liabilities | 147,739 | 1,801 | 36,299 | 185,839 | |
Notes:
239
i. Other income excludes gains/losses from derivatives and hedge accounting which are shown separately.
ii. Administrative expenses exclude transformation costs and bank levy which are shown separately.
iii. Impairment and other provisions includes impairment losses on loans and advances, provisions for liabilities and charges (excluding FSCS) and impairment recoveries/losses on investment securities.
iv. Retail assets include goodwill arising on the acquisition of The Mortgage Works (UK) plc.
v. Comparatives have been restated as detailed in note 1.
Given the dominant position of the Society within the Group structure, the disclosures in this note and notes 22 to 25 are on a consolidated basis covering the activities of both the
Group and the Society. The following tables summarise the classification of carrying amounts of the Group's financial assets and liabilities.
| Classification of financial assets and liabilities | 2016 | ||||
|---|---|---|---|---|---|
| Available for sale |
Loans and receivables |
Fair value through income statement |
Liabilities at amortised cost |
Total | |
| Group | £m | £m | £m | £m | £m |
| Financial assets | |||||
| Cash | - | 8,797 | - | - | 8,797 |
| Loans and advances to banks | - | 3,591 | - | - | 3,591 |
| Available for sale investment securities | 10,612 | - | - | - | 10,612 |
| Derivative financial instruments | - | - | 3,898 | - | 3,898 |
| Fair value adjustment for portfolio hedged risk | - | 756 | - | - | 756 |
| Loans and advances to customers | - | 178,807 | - | - | 178,807 |
| Investments in equity shares | 126 | - | - | - | 126 |
| Other financial assets (note i) | - | - | 2 | - | 2 |
| Total financial assets | 10,738 | 191,951 | 3,900 | - | 206,589 |
| Other non-financial assets | 2,350 | ||||
| Total assets | 208,939 | ||||
| Financial liabilities | |||||
| Shares | - | - | - | 138,715 | 138,715 |
| Deposits from banks | - | - | - | 2,095 | 2,095 |
| Other deposits | - | - | 1,885 | 5,750 | 7,635 |
| Due to customers | - | - | - | 6,201 | 6,201 |
| Fair value adjustment for portfolio hedged risk | - | - | - | 13 | 13 |
| Debt securities in issue | - | - | - | 36,085 | 36,085 |
| Derivative financial instruments | - | - | 3,463 | - | 3,463 |
| Subordinated liabilities | - | - | - | 1,817 | 1,817 |
| Subscribed capital | - | - | - | 413 | 413 |
| Total financial liabilities | - | - | 5,348 | 191,089 | 196,437 |
| Other non-financial liabilities | 1,572 | ||||
| Total liabilities | 198,009 |
240
12 Classification and measurement continued
| Classification of financial assets and liabilities | |||||
|---|---|---|---|---|---|
| 2015 | |||||
| Available for sale |
Loans and receivables |
Fair value through income statement |
Liabilities at amortised cost |
Total | |
| Group | £m | £m | £m | £m | £m |
| Financial assets | |||||
| Cash | - | 4,325 | - | - | 4,325 |
| Loans and advances to banks | - | 3,392 | - | - | 3,392 |
| Available for sale investment securities | 11,037 | - | - | - | 11,037 |
| Derivative financial instruments | - | - | 3,337 | - | 3,337 |
| Fair value adjustment for portfolio hedged risk | - | 592 | - | - | 592 |
| Loans and advances to customers | - | 170,647 | - | - | 170,647 |
| Investments in equity shares | 26 | - | - | - | 26 |
| Other financial assets (note i) | - | - | 12 | - | 12 |
| Total financial assets | 11,063 | 178,956 | 3,349 | - | 193,368 |
| Other non-financial assets | 2,212 | ||||
| Total assets | 195,580 | ||||
| Financial liabilities | |||||
| Shares | - | - | - | 132,373 | 132,373 |
| Deposits from banks | - | - | - | 1,974 | 1,974 |
| Other deposits | - | - | 3,332 | 5,744 | 9,076 |
| Due to customers | - | - | - | 6,119 | 6,119 |
| Fair value adjustment for portfolio hedged risk | - | - | - | 14 | 14 |
| Debt securities in issue | - | - | - | 28,105 | 28,105 |
| Derivative financial instruments | - | - | 4,048 | - | 4,048 |
| Subordinated liabilities | - | - | - | 2,121 | 2,121 |
| Subscribed capital | - | - | - | 415 | 415 |
| Total financial liabilities | - | - | 7,380 | 176,865 | 184,245 |
| Other non-financial liabilities | 1,594 | ||||
| Total liabilities | 185,839 |
Notes:
i. Other financial assets relate to the fair value of certain mortgage commitments included within other assets on the balance sheet.
Further information on the fair value of financial assets and liabilities is included in notes 22 to 24.
Amounts classified as due to customers do not confer membership rights.
| 2016 | 2015 |
|---|---|
| £m | £m |
| 6,843 | 6,726 |
| 3,769 | 4,311 |
| 10,612 | 11,037 |
| Group and Society |
At 4 April 2016 no investment securities have been pledged as collateral under UK payment schemes (2015: £267 million).
Investment securities include items with a fair value of £128 million (2015: £nil) which have been sold under sale and repurchase agreements. These assets have not been derecognised, as the Group has retained substantially all the risks and rewards of ownership. The Group is unable to use, sell or pledge the transferred assets for the duration of the transaction and remains exposed to any associated interest rate risk or credit risk of the assets. The counterparty is permitted to sell or re-pledge the collateral in the absence of default by the owner. The cash received and accrued interest in relation to the sale and repurchase agreements of £127 million (2015: £nil) are included within deposits from banks (note 17).
At 4 April 2016 the Group holds collateral under reverse sale and repurchase agreements and reverse total return swaps with a fair value of £577 million (2015: £211 million). In line with accounting standards, the collateral is not recognised in the accounts and therefore is not reflected in the table above. The Group is permitted to sell or re-pledge the collateral in the absence of default by the owner. No amounts have been sold or re-pledged at 4 April 2016 (2015: £nil). The amount of cash outflow and accrued interest of £537 million (2015: £149 million) are included in loans and advances to banks.
£8 million of recoveries on impaired investment securities were recognised in the year ended 4 April 2016 (2015: £18 million losses) in connection with asset disposals.
Further information on available for sale investment securities and treasury credit risk is included in the 'Treasury assets' section of the Business and Risk Report.
| Group and Society | ||
|---|---|---|
| 2016 | 2015 | |
| £m | £m | |
| At 5 April | 26 | 29 |
| Increase/(decrease) in fair value | 100 | (3) |
| At 4 April | 126 | 26 |
Investments in equity shares include investments of £125 million (2015: £25 million) carried at fair value. £107 million (2015: £7 million) of the Group's investments in equity shares relate to participation in industry wide banking and credit card service operations.
The increase in fair value of £100 million (2015: £3 million decrease) includes £81 million (2015: £nil) in relation to the Group's investment in Visa Europe Limited.
On 2 November 2015, Visa Inc. announced the proposed acquisition of Visa Europe Limited. The Group is a principal member and shareholder of Visa Europe Limited and in
exchange for its share will receive a combination of cash and preferred stock. The Group's share of the consideration payable on completion is approximately 1% of the total proceeds. The preferred stock will be convertible into Visa Inc. common stock at a future date provided conditions to the transaction closing are met. The conversion of the preferred stock remains subject to potential reduction for certain litigation losses that may be incurred by Visa Europe Limited. On completion of the transaction, the Group expects to recognise a gain in the income statement.
| Group | Society | |||
|---|---|---|---|---|
| 2016 | 2015 | 2016 | 2015 | |
| £m | £m | £m | £m | |
| Prime residential mortgages | 129,948 | 124,527 | 129,271 | 123,681 |
| Specialist residential mortgages | 32,114 | 28,248 | 806 | 884 |
| Consumer banking | 3,588 | 3,575 | 3,588 | 3,575 |
| Commercial lending | 11,772 | 12,890 | 11,253 | 12,365 |
| Other lending | 19 | 25 | 5 | 7 |
| 177,441 | 169,265 | 144,923 | 140,512 | |
| Fair value adjustment for micro hedged risk | 1,366 | 1,382 | 1,366 | 1,382 |
| Total | 178,807 | 170,647 | 146,289 | 141,894 |
Loans and advances to customers in the table above are shown net of impairment provisions held against them.
The fair value adjustment for micro hedged risk relates to commercial lending.
15 Loans and advances to customers continued
The following table shows the residual maturity of loans and advances to customers, based on their contractual maturity:
| Residual maturity of loans and advances to liabilities | ||||
|---|---|---|---|---|
| Group | Society | |||
| 2016 | 2015 | 2016 | 2015 | |
| £m | £m | £m | £m | |
| Repayable: | ||||
| On demand | 1,997 | 2,064 | 1,994 | 2,018 |
| In not more than three months | 2,094 | 2,236 | 1,977 | 2,107 |
| In more than three months but not more than one year | 5,573 | 5,341 | 5,431 | 5,233 |
| In more than one year but not more than five years | 27,363 | 26,560 | 26,092 | 25,293 |
| In more than five years | 140,857 | 133,716 | 109,794 | 106,424 |
| 177,884 | 169,917 | 145,288 | 141,075 | |
| Impairment provision on loans and advances (note 9) | (443) | (652) | (365) | (563) |
| Fair value adjustment for micro hedged risk | 1,366 | 1,382 | 1,366 | 1,382 |
| Total | 178,807 | 170,647 | 146,289 | 141,894 |
The maturity analysis is produced on the basis that where a loan is repayable by instalments, each such instalment is treated as a separate repayment. The analysis is based on contractual maturity rather than actual redemption levels experienced, which are likely to be materially different. Arrears are spread across the remaining term of the loan.
Certain prime residential mortgages have been pledged to the Group's asset backed funding programmes or utilised as whole mortgage loan pools for the Bank of England's (BoE) Funding for Lending Scheme (FLS). The programmes have enabled the Group to obtain secured funding or to create additional collateral which could be used to source additional funding.
15 Loans and advances to customers continued
Mortgages pledged and the nominal values of the notes in issue are as follows:
| Mortgages pledged to asset backed funding programmes | |||||
|---|---|---|---|---|---|
| 2016 | |||||
| Mortgages pledged | Notes in issue | ||||
| Held by third | Held by the Group | Total notes | |||
| parties | Drawn | Undrawn | in issue | ||
| Group | £m | £m | £m | £m | £m |
| Covered bond programme | 18,996 | 13,709 | - | - | 13,709 |
| Securitisation programme | 12,368 | 4,705 | - | 1,635 | 6,340 |
| Whole mortgage loan pools | 12,344 | - | 10,749 | 1,595 | 12,344 |
| Total | 43,708 | 18,414 | 10,749 | 3,230 | 32,393 |
| Mortgages pledged to asset backed funding programmes | ||||||
|---|---|---|---|---|---|---|
| 2015 | ||||||
| Mortgages pledged | Notes in issue | |||||
| Held by third | Held by the Group | Total notes | ||||
| parties | Drawn | Undrawn | in issue | |||
| Group | £m | £m | £m | £m | £m | |
| Covered bond programme | 17,161 | 11,305 | - | - | 11,305 | |
| Securitisation programme | 14,902 | 4,839 | - | 1,839 | 6,678 | |
| Whole mortgage loan pools | 13,455 | - | 12,080 | 1,375 | 13,455 | |
| Total | 45,518 | 16,144 | 12,080 | 3,214 | 31,438 | |
The securitisation programme notes are issued by Silverstone Master Issuer plc and are not included in the accounts of the Society. Silverstone Master Issuer plc is fully consolidated into the accounts of the Group.
The whole mortgage loan pools are pledged at the BoE under the FLS. Notes are not issued when pledging the mortgage loan pools at the BoE. Instead, the whole loan pool is pledged to the BoE and drawings are made directly against the eligible collateral, subject to a haircut. Therefore, values shown under notes in issue are the whole mortgage loan pool notional balances.
Mortgages pledged include £7.4 billion (2015: £9.5 billion) in the covered bond and securitisation programmes that are in excess of the amount contractually required to support notes in issue.
Mortgages pledged are not derecognised from the Group or Society balance sheets as the Group has retained substantially all the risks and rewards of ownership. The Group and Society continue to be exposed to the liquidity risk, interest rate risk and credit risk of the mortgages. No gain or loss has been recognised on pledging the mortgages to the programmes.
Notes in issue which are held by third parties are included within debt securities in issue (note 19).
Notes in issue, held by the Group and drawn are whole mortgage loan pools securing amounts drawn under the FLS. At 4 April 2016 the Group had outstanding FLS drawings of £8.5 billion (2015: £8.5 billion).
Notes in issue, held by the Group and undrawn, are debt securities issued by the programmes to the Society and mortgage loan pools that have been pledged to the BoE but not utilised.
In accordance with accounting standards, notes in issue and held by the Group are not recognised in the Group's or Society's balance sheets.
The Society established the Nationwide Covered Bond programme in November 2005. Mortgages pledged provide security for issues of covered bonds made by the Society. During the year ended 4 April 2016 €3.3 billion (£2.4 billion sterling equivalent) of notes matured. During the year ended 4 April 2016 £0.8 billion and €4.3 billion (£3.9 billion sterling equivalent) of notes were issued.
The Society established the Silverstone Master Trust securitisation programme in July 2008. Notes are issued under the programme and the issuance proceeds are used to purchase, for the benefit of note holders, a share of the beneficial interest in the mortgages pledged by the Society. The remaining beneficial interest in the pledged mortgages of £6.3 billion (2015: £8.2 billion) stays with the Society and includes its required minimum seller share in accordance with the rules of the programme. The Group is under no obligation to support losses incurred by the programme or holders of the notes and does not intend to provide such further support. The entitlement of note holders is restricted to payment of principal and interest to the extent that the resources of the programme are sufficient to support such payment and the holders of the notes have agreed not to seek recourse in any other form. During the year ended 4 April 2016 £0.2 billion, €1.1 billion and \$0.6 billion (total £1.4 billion sterling equivalent) of notes matured. During the year ended 4 April 2016 £0.3 billion, €0.7 billion and \$0.3 billion (total £1.0 billion sterling equivalent) of notes were issued.
The following table sets out the carrying value and fair value of the transferred assets and liabilities for the Silverstone Master Trust.
| Carrying value | Fair value | |||||
|---|---|---|---|---|---|---|
| Transferred assets |
Associated liabilities |
Total Transferred assets |
Associated liabilities |
Total | ||
| £m | £m | £m | £m | £m | £m | |
| At 4 April 2016 | 12,368 | (6,402) | 5,966 | 12,031 | (6,424) | 5,607 |
| At 4 April 2015 | 14,902 | (6,678) | 8,224 | 13,153 | (6,793) | 6,360 |
The Society holds cash deposited by the covered bond programme of £1.2 billion (2015: £1.8 billion) and by the Silverstone programme of £0.4 billion (2015: £0.4 billion).
All of the Group's derivative financial instruments are held for risk mitigation purposes, although not all of these derivatives are designated as hedging instruments as defined by IAS 39. Interest rate swaps are used in hedge accounting relationships to remove the interest rate risk on fixed rate assets and liabilities. The table below provides an analysis of the notional amount and fair value of derivatives by instrument type:
| Derivatives by instrument type | 2016 | 2015 | ||||
|---|---|---|---|---|---|---|
| Contract/ | Fair value | Contract/ | Fair value | |||
| notional amount |
Assets | Liabilities | notional amount |
Assets | Liabilities | |
| £m | £m | £m | £m | £m | £m | |
| Society: | ||||||
| Interest rate swaps | 150,020 | 1,769 | 4,067 | 117,933 | 1,567 | 3,939 |
| Cross currency interest rate swaps | 28,937 | 1,266 | 825 | 21,812 | 1,110 | 1,004 |
| Caps, collars and floors | 160 | - | - | 213 | - | - |
| Forward foreign exchange | 2,249 | 44 | 4 | 5,819 | 76 | 76 |
| Forward rate agreements | 400 | - | - | 1,644 | - | - |
| Swaptions | 248 | - | 8 | 267 | - | 8 |
| Interest rate futures | 4,225 | - | - | 4,175 | - | - |
| Equity index swaps | 1,460 | 436 | 1 | 2,442 | 911 | 1 |
| Index Linked swaps | 280 | - | 5 | 280 | - | 9 |
| 187,979 | 3,515 | 4,910 | 154,585 | 3,664 | 5,037 | |
| Subsidiaries: | ||||||
| Interest rate swaps | 12,939 | 1,383 | 11 | 11,292 | 1,358 | 8 |
| Cross currency interest rate swaps | 13,575 | 753 | 291 | 13,426 | 351 | 1,040 |
| 26,514 | 2,136 | 302 | 24,718 | 1,709 | 1,048 | |
| Intra Group derivative elimination | (43,221) | (1,753) | (1,749) | (38,133) | (2,036) | (2,037) |
| Group | 171,272 | 3,898 | 3,463 | 141,170 | 3,337 | 4,048 |
Contract/notional amount indicates the amount on which payment flows are derived at the balance sheet date and does not represent amounts at risk.
derivatives, split between those designated in effective hedging relationships at the balance sheet date and those which, whilst being economic hedges, are not subject to hedge accounting at the balance sheet date:
The table below provides an analysis of the fair value of
| Group | ||||
|---|---|---|---|---|
| 2016 | 2015 | |||
| Fair value | Fair value | |||
| Assets | Liabilities | Assets | Liabilities | |
| £m | £m | £m | £m | |
| Designated as fair value hedges at the balance sheet date | 699 | 3,035 | 424 | 2,941 |
| Designated as cash flow hedges at the balance sheet date | 2,603 | 343 | 1,358 | 899 |
| Not subject to hedge accounting at the balance sheet date | 596 | 85 | 1,555 | 208 |
| Total | 3,898 | 3,463 | 3,337 | 4,048 |
| Society | ||||
|---|---|---|---|---|
| 2016 | 2015 | |||
| Fair value | Fair value | |||
| Assets | Liabilities | Assets | Liabilities | |
| £m | £m | £m | £m | |
| Designated as fair value hedges at the balance sheet date | 699 | 3,035 | 582 | 2,941 |
| Designated as cash flow hedges at the balance sheet date | - | 5 | - | 9 |
| Not subject to hedge accounting at the balance sheet date | 2,816 | 1,870 | 3,082 | 2,087 |
| Total | 3,515 | 4,910 | 3,664 | 5,037 |
Derivative assets and liabilities have remaining contractual maturities as follows:
| Derivatives maturities | ||||||
|---|---|---|---|---|---|---|
| 2016 | 2015 | |||||
| Contract/ Fair value |
Contract/ | Fair value | ||||
| Group | notional amount |
Assets | Liabilities | notional amount |
Assets | Liabilities |
| £m | £m | £m | £m | £m | £m | |
| Derivatives have remaining maturities as follows: |
||||||
| In not more than one year | 66,418 | 436 | 180 | 54,402 | 742 | 160 |
| In more than one year | 104,854 | 3,462 | 3,283 | 86,768 | 2,595 | 3,888 |
| Total | 171,272 | 3,898 | 3,463 | 141,170 | 3,337 | 4,048 |
| Derivatives maturities | ||||||
|---|---|---|---|---|---|---|
| 2016 | 2015 | |||||
| Contract/ | Fair value | Contract/ | Fair value | |||
| Society | notional amount |
Assets | Liabilities | notional amount |
Assets | Liabilities |
| £m | £m | £m | £m | £m | £m | |
| Derivatives have remaining maturities as follows: |
||||||
| In not more than one year | 69,572 | 585 | 214 | 54,903 | 887 | 200 |
| In more than one year | 118,407 | 2,930 | 4,696 | 99,682 | 2,777 | 4,837 |
| Total | 187,979 | 3,515 | 4,910 | 154,585 | 3,664 | 5,037 |
16 Deritative financial instruments continued
Cash flow hedge accounting was implemented in December 2014, primarily for derivatives which economically hedge foreign currency debt issuances. The following table shows the maturity profile of the cash flows designated as hedged items.
These cash flows will impact the income statement in the same period in which they are expected to occur and will be offset by cash flows arising from derivative positions.
| Maturity of cash flow hedge accounting cash flows | |||||||
|---|---|---|---|---|---|---|---|
| 2016 | |||||||
| In 0 to 5 years |
In 5 to 10 years |
In 10 to 20 years |
In more than 20 years |
Total | |||
| £m | £m | £m | £m | £m | |||
| Hedged forecast cash flows expected to occur: | |||||||
| Group | |||||||
| Forecast receivable cash flows | 518 | 400 | 235 | 13 | 1,166 | ||
| Forecast payable cash flows | (12,115) | (7,052) | (3,191) | (256) | (22,614) | ||
| Society | |||||||
| Forecast payable cash flows | (3) | (58) | - | - | (61) | ||
| Maturity of cash flow hedge accounting cash flows | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2015 | |||||||||
| In 0 to 5 years |
In 5 to 10 years |
In 10 to 20 years |
In more than 20 years |
Total | |||||
| £m | £m | £m | £m | £m | |||||
| Hedged forecast cash flows expected to occur: | |||||||||
| Group | |||||||||
| Forecast receivable cash flows | 535 | 346 | 148 | 10 | 1,039 | ||||
| Forecast payable cash flows | (5,648) | (4,821) | (1,954) | (125) | (12,548) | ||||
| Society | |||||||||
| Forecast payable cash flows | (3) | (65) | - | - | (68) | ||||
Deposits from banks are repayable from the balance sheet date in the ordinary course of business as follows:
| Group | Society | ||||||
|---|---|---|---|---|---|---|---|
| 2016 | 2015 | 2016 | 2015 | ||||
| £m | £m | £m | £m | ||||
| Accrued interest | 1 | 1 | 1 | 1 | |||
| Repayable: | |||||||
| On demand | 1,657 | 1,401 | 935 | 594 | |||
| In not more than three months | 184 | 468 | 184 | 468 | |||
| In more than three months but not more than one year | 228 | 80 | 228 | 80 | |||
| In more than one year but not more than five years | 25 | 24 | 25 | 24 | |||
| Total | 2,095 | 1,974 | 1,373 | 1,167 | |||
For the Group and Society, deposits from banks include £127 million (2015: £nil) in respect of sale and repurchase agreements. The corresponding carrying value of assets
of £128 million (2015: £nil) sold under sale and repurchase agreements is included within available for sale investment securities (note 13).
18 Other deposits
Other deposits are repayable from the balance sheet date in the ordinary course of business as follows:
| Group | Society | |||
|---|---|---|---|---|
| 2016 | 2015 | 2016 | 2015 | |
| £m | £m | £m | £m | |
| Accrued interest | 5 | 10 | 5 | 10 |
| Repayable: | ||||
| On demand | 1,857 | 1,086 | 3,019 | 2,023 |
| In not more than three months | 2,082 | 2,947 | 2,082 | 2,957 |
| In more than three months but not more than one year | 2,947 | 3,070 | 2,947 | 3,070 |
| In more than one year but not more than five years | 744 | 1,963 | 744 | 1,963 |
| Total | 7,635 | 9,076 | 8,797 | 10,023 |
The Society's other deposits for the year ended 4 April 2016 include £1,162 million (2015: £947 million) of deposits from subsidiary undertakings.
Other deposits comprise wholesale deposits placed with the Treasury Division, commercial deposits which are managed by the retail business and amounts relating to the sale of PEBs by the Group on behalf of Legal & General. Further details of the contractual maturity and valuation methodology of the PEBs are included in note 23.
| Group | Society | |||
|---|---|---|---|---|
| 2016 | 2015 | 2016 | 2015 | |
| £m | £m | £m | £m | |
| Certificates of deposit and commercial paper | 6,409 | 5,449 | 6,409 | 5,449 |
| Fixed and floating rate notes | 23,451 | 16,205 | 23,452 | 16,205 |
| Other debt securities | 5,014 | 5,145 | 286 | 283 |
| 34,874 | 26,799 | 30,147 | 21,937 | |
| Fair value adjustment for micro hedged risk | 1,211 | 1,306 | 374 | 206 |
| Total | 36,085 | 28,105 | 30,521 | 22,143 |
| Debt securities in issue are repayable from the balance sheet date in the ordinary course of business as follows: |
||||
| Accrued interest | 178 | 186 | 151 | 159 |
| Residual maturity repayable: | ||||
| In not more than one year | 9,753 | 9,248 | 8,403 | 8,015 |
| In more than one year | 24,943 | 17,365 | 21,593 | 13,763 |
| 34,874 | 26,799 | 30,147 | 21,937 | |
| Fair value adjustment for micro hedged risk | 1,211 | 1,306 | 374 | 206 |
| Total | 36,085 | 28,105 | 30,521 | 22,143 |
Back to Contents
Debt securities in issue in the Group and Society include £18,414 million (2015: £16,144 million) secured on certain loans and advances to customers. Further information is given in note 15.
| Group | ||
|---|---|---|
| 2016 | 2015 | |
| £m | £m | |
| 5% subordinated notes due 2015 (\$400m) | - | 270 |
| 8.625% subordinated notes due 2018 (£) | 125 | 125 |
| 6.75% subordinated notes due 2020 (€750m) | 598 | 550 |
| 5.25% subordinated notes due 2020 (£) | - | 150 |
| 6.5% callable reset subordinated notes 2022 (£) | 30 | 30 |
| 4.125% subordinated notes due 2023 (€1,250m) | 997 | 918 |
| 1,750 | 2,043 | |
| Fair value hedge accounting adjustment | 77 | 89 |
| Unamortised premiums and issue costs | (10) | (11) |
| Total | 1,817 | 2,121 |
The Society's subordinated liabilities are as shown above for the Group, except that they exclude £6 million (2015: £3 million) of fair value hedge adjustments relating to cash flow hedge accounting, with the total balance sheet value amounting to £1,823 million (2015: £2,124 million).
All of the Society's subordinated liabilities are unsecured. The Society may, with the prior consent of the Prudential Regulation Authority (PRA), redeem some of the subordinated notes early, at par (100%) unless stated, as follows:
During the year, there were two redemptions of subordinated liabilities at par. On 1 August the Group redeemed the \$400 million 5% subordinated notes and on 23 November 2015, the Group redeemed the £150 million 5.25% subordinated notes.
The subordinated notes rank pari passu with each other and behind the claims against the Society of all depositors, creditors and investing members (other than holders of permanent interest bearing shares, Additional Tier 1 (AT1) capital and core capital deferred shares (CCDS)) of the Society.
Interest accrued on subordinated liabilities of £31 million (2015: £33 million) is recognised in the balance sheet, within accruals and deferred income.
The interest rate risk arising from the issuance of fixed rate subordinated liabilities has been mitigated through the use of interest rate swaps.
| Group and Society | ||
|---|---|---|
| 2016 | 2015 | |
| £m | £m | |
| 7.25% permanent interest bearing shares | 33 | 33 |
| 6.25% permanent interest bearing shares | 44 | 44 |
| 5.769% permanent interest bearing shares | 84 | 84 |
| 7.859% permanent interest bearing shares | 38 | 38 |
| 6% permanent interest bearing shares | 140 | 140 |
| 6.875% permanent interest bearing shares | 10 | 10 |
| Floating rate (3 month Libor + 0.5%) permanent interest bearing shares | 3 | 3 |
| Floating rate (6 month Libor + 2.4%) permanent interest bearing shares | 10 | 10 |
| 362 | 362 | |
| Fair value hedge accounting adjustments | 68 | 74 |
| Unamortised premiums and issue costs | (17) | (21) |
| Total | 413 | 415 |
All permanent interest bearing shares (PIBS) are unsecured and denominated in sterling. The PIBS are only repayable with the prior consent of the PRA as follows:
If the above four tranches of PIBS are not repaid on a call date then the interest rate is reset at a margin to the yield on the then prevailing five year benchmark gilt rate.
• The 6% PIBS are repayable at the option of the Society, in whole on 15 December 2016 or any interest coupon date thereafter. If the PIBS are not repaid on their first call date then the interest rate is reset at a margin of 2.49% over 3 month Libor.
PIBS rank pari passu with each other and the Group's AT1 instruments. They are deferred shares of the Society and rank behind the claims against the Society of all subordinated noteholders, depositors, creditors and investing members of the Society, other than the holders of CCDS.
Interest accrued on subscribed capital of £6 million (2015: £5 million) is recognised in the balance sheet, within accruals and deferred income.
The interest rate risk arising from the issuance of fixed rate PIBS has been mitigated through the use of interest rate swaps.
253
Given the dominant position of the Society within the Group structure, the disclosures in notes 22 to 25 are on a consolidated basis covering the activities of both the Group and the Society.
The following tables show the Group's financial assets and liabilities that are held at fair value by fair value hierarchy, balance sheet classification and product type:
| 2016 | ||||
|---|---|---|---|---|
| Fair values based on | ||||
| Level 1 | Level 2 | Level 3 | Total | |
| £m | £m | £m | £m | |
| Financial assets | ||||
| Government and supranational investments | 6,843 | - | - | 6,843 |
| Other debt investment securities | 1,011 | 2,758 | - | 3,769 |
| Available for sale investment securities | 7,854 | 2,758 | - | 10,612 |
| Investments in equity shares (note i) | - | - | 125 | 125 |
| Interest rate swaps | - | 2,180 | - | 2,180 |
| Cross currency interest rate swaps | - | 1,238 | - | 1,238 |
| Forward foreign exchange | - | 44 | - | 44 |
| Equity index swaps | - | - | 436 | 436 |
| Total derivative financial instruments | - | 3,462 | 436 | 3,898 |
| Other financial assets (note ii) | - | 2 | - | 2 |
| Total financial assets | 7,854 | 6,222 | 561 | 14,637 |
| Financial liabilities | ||||
| Interest rate swaps | - | (3,103) | (4) | (3,107) |
| Cross currency interest rate swaps | - | (338) | - | (338) |
| Forward foreign exchange | - | (4) | - | (4) |
| Swaptions | - | (8) | - | (8) |
| Index linked swaps | - | - | (1) | (1) |
| Equity index swaps | - | (5) | - | (5) |
| Total derivative financial instruments | - | (3,458) | (5) | (3,463) |
| Other deposits - PEBs (note iii) | - | - | (1,885) | (1,885) |
| Total financial liabilities | - | (3,458) | (1,890) | (5,348) |
| 2015 | |||||
|---|---|---|---|---|---|
| Fair values based on | |||||
| Level 1 | Level 2 | Level 3 | Total | ||
| £m | £m | £m | £m | ||
| Financial assets | |||||
| Government and supranational investments | 6,726 | - | - | 6,726 | |
| Other debt investment securities (note iv) | 1,033 | 3,266 | 12 | 4,311 | |
| Available for sale investment securities | 7,759 | 3,266 | 12 | 11,037 | |
| Investments in equity shares (note i) | - | - | 25 | 25 | |
| Interest rate swaps | - | 2,022 | - | 2,022 | |
| Cross currency interest rate swaps | - | 328 | - | 328 | |
| Forward foreign exchange | - | 76 | - | 76 | |
| Equity index swaps | - | - | 911 | 911 | |
| Total derivative financial instruments | - | 2,426 | 911 | 3,337 | |
| Other financial assets (note ii) | - | 12 | - | 12 | |
| Total financial assets | 7,759 | 5,704 | 948 | 14,411 | |
| Financial liabilities | |||||
| Interest rate swaps | - | (3,044) | - | (3,044) | |
| Cross currency interest rate swaps | - | (910) | - | (910) | |
| Forward foreign exchange | - | (76) | - | (76) | |
| Swaptions | - | (8) | - | (8) | |
| Equity index swaps | - | - | (1) | (1) | |
| Index linked swaps | - | (9) | - | (9) | |
| Total derivative financial instruments | - | (4,047) | (1) | (4,048) | |
| Other deposits - PEBs (note iii) | - | - | (3,332) | (3,332) | |
| Total financial liabilities | - | (4,047) | (3,333) | (7,380) |
Notes:
i. Investments in equity shares are held at fair value and exclude £1 million of investments in equity shares which are held at cost.
ii. Other financial assets represent the fair value of certain mortgage commitments included within other assets in the balance sheet.
iii. Other deposits comprise PEBs which are held at fair value through the income statement. The remaining other deposits are held at amortised cost and are included in note 24.
iv. The prior year fair value for covered bond investment securities has been reclassified to Level 1, to better reflect the valuation approach, consistent with the current year presentation.
The Group's Level 1 portfolio comprises liquid securities for which traded prices are readily available.
More detail on the Level 3 portfolio is provided in note 23.
Instruments move between fair value hierarchies primarily due to increases or decreases in market activity or changes to the significance of unobservable inputs to valuation. There were no significant transfers between the Level 1 and Level 2 portfolios during the year.
The main constituents of the Level 3 portfolio are as follows:
The Group did not hold any Level 3 available for sale investment securities at 4 April 2016. During the period all investments were transferred from Level 3 to Level 2 due to changes in the availability of observable market prices. For the purpose of reporting movements between levels of the fair value hierarchy, transfers are recognised at the beginning of the reporting period in which they occur.
The Level 3 investments in equity shares of £125 million at 4 April 2016 consist primarily of the investment in Visa Europe Limited, further details of which can be found in Note 14, and an interest in a fund which is supported by zero coupon bonds of an A rated bank. External valuations are used to obtain the fair value of this instrument.
Level 3 assets and liabilities in this category are primarily equity linked derivatives with external counterparties which economically match the investment return payable by the Group to investors in the PEBs product. The derivatives are linked to the performance of specified stock market indices and have been valued by an external third party. Fair value changes are recognised within gains/losses from derivatives and hedge accounting. Upon maturity the gain/loss is transferred to interest expense and similar charges.
This category relates to deposit accounts with the potential for stock market correlated growth linked to the performance of specified stock market indices. The PEBs liability of £1,885 million (2015: £3,332 million) is valued at a discount to reflect the time value of money, overlaid by a fair value adjustment representing the expected return payable to the customer. The fair value adjustment has been constructed from the valuation of the associated derivatives as valued by an external third party. Fair value changes are recognised within gains/ losses from derivatives and hedge accounting. Upon maturity the gain/loss is transferred to interest expense and similar charges.
The minimum amount on an undiscounted basis that the Group and Society are contractually required to pay at maturity for the PEBs is £1,551 million (2015: £2,585 million). The maximum additional amount which would also be payable at maturity in respect of additional investment returns is £636 million (2015: £1,080 million). The payment of additional investment returns is dependent upon performance of certain specified stock indices during the period of the PEBs. As noted above, the Group has entered into equity-linked derivatives with external counterparties which economically match the investment returns on the PEBs.
The tables below set out movements in the Level 3 portfolio, including transfers in and out of Level 3.
| Available for sale investment securities |
Investments in equity shares |
Net derivative financial instruments |
Other deposits - PEBs |
|
|---|---|---|---|---|
| £m | £m | £m | £m | |
| At 5 April 2015 | 12 | 25 | 910 | (3,332) |
| Gains/(losses) recognised in the income statement: | ||||
| Net interest income/(expense) | - | - | 398 | (439) |
| (Losses)/gains from derivatives and hedge accounting | - | - | (476) | 465 |
| Gains/(losses) recognised in other comprehensive income: | ||||
| Fair value movement taken to members' interests and equity | - | 100 | - | - |
| Settlements | - | - | (401) | 1,421 |
| Transfers out of Level 3 portfolio | (12) | - | - | - |
| At 4 April 2016 | - | 125 | 431 | (1,885) |
| Movements in Level 3 portfolio | ||||
|---|---|---|---|---|
| Available for sale investment securities |
Investments in equity shares |
Net derivative financial instruments |
Other deposits - PEBs |
|
| £m | £m | £m | £m | |
| At 5 April 2014 | 71 | 28 | 669 | (3,222) |
| Gains/(losses) recognised in the income statement: | ||||
| Net interest income/(expense) | - | - | 1 | (50) |
| Gains/(losses) from derivatives and hedge accounting | - | - | 241 | (245) |
| Net impairment losses on investment securities | (5) | - | - | - |
| Gains/(losses) recognised in other comprehensive income: | ||||
| Fair value movement taken to members' interests and equity | 1 | (3) | - | - |
| Settlements | (55) | - | (1) | 185 |
| At 4 April 2015 | 12 | 25 | 910 | (3,332) |
The fair value of financial instruments is, in certain circumstances, measured using valuation techniques based on market prices that are not observable in an active market or significant unobservable market inputs.
Reasonable alternative assumptions can be applied for sensitivity analysis, taking account of the nature of valuation techniques used, as well as the availability and reliability of observable proxy and historic data. The following table shows the sensitivity of the Level 3 fair values to reasonable alternative assumptions (as set out in the table of significant unobservable inputs on the following page) and the resultant impact of such changes in fair value on the income statement or members' interests and equity:
| Sensitivity of Level 3 fair values | |||||
|---|---|---|---|---|---|
| Members' interests and equity | |||||
| Fair value | Favourable changes |
Unfavourable changes |
|||
| 2016 | £m | £m | £m | ||
| Investments in equity shares | 125 | 41 | (32) | ||
| Net derivative financial instruments (note i) | 431 | - | - | ||
| Other deposits – PEBs (note i) | (1,885) | - | - | ||
| Total | (1,329) | 41 | (32) | ||
| Sensitivity of Level 3 fair values | |||
|---|---|---|---|
| Members' interests and equity | |||
| Fair value | Favourable changes |
Unfavourable changes |
|
| 2015 | £m | £m | £m |
| Available for sale investment securities: | |||
| Collateralised debt obligations | 12 | 1 | (1) |
| Investments in equity shares | 25 | 2 | (1) |
| Net derivative financial instruments (note i) | 910 | - | - |
| Other deposits – PEBs (note i) | (3,332) | - | - |
| Total | (2,385) | 3 | (2) |
Note:
i. Changes in fair values of the equity index swaps included in net derivative financial instruments will be largely offset by the change in fair value of the PEBs deposits. Any resultant impact is deemed by the Group to be insignificant; therefore these sensitivities have been excluded from the table above.
The Level 3 portfolio at 4 April 2016 did not include any impaired assets (2015: £nil). The sensitivity analysis on fair values in the tables above therefore does not impact on the income statement.
Alternative assumptions are considered for each product and varied according to the quality of the data and variability of the underlying market.
The following table discloses the significant unobservable inputs underlying the above alternative assumptions for
assets and liabilities recognised at fair value and classified as Level 3 along with the range of values for those significant unobservable inputs. Where sensitivities are described the inverse relationship will also generally apply.
| 2016 | ||||||||
|---|---|---|---|---|---|---|---|---|
| Total assets |
Total Valuation Significant Range liabilities technique unobservable (note ii) |
Weighted average |
Units (note iv) |
|||||
| £m | £m | inputs | (note iii) | |||||
| Investments in equity shares | 18 | Mark to market |
Price | 93.30 | 107.00 | 98.00 | Points | |
| Discount rate | 10.00 | 12.00 | 11.00 | % | ||||
| 107 | Discounted cash flows |
Share conversion |
- | 100.00 | 77.30 | % | ||
| Execution risk |
- | 30.00 | 12.41 | % | ||||
| 125 | ||||||||
| Net derivative financial instruments (note i) |
431 | |||||||
| Other deposits – PEBs (note i) | (1,885) | |||||||
| 2015 | ||||||||
|---|---|---|---|---|---|---|---|---|
| Total assets |
Total Valuation Significant Range liabilities technique unobservable (note ii) |
Weighted average |
Units (note iv) |
|||||
| £m | £m | inputs | (note iii) | |||||
| Available for sale investment securities: Collateralised debt obligations |
12 | Mark to market |
Price | 66.00 | 75.00 | 69.00 | Points | |
| Investments in equity shares | 25 | Mark to market |
Price | 99.00 | 114.00 | 104.00 | Points | |
| Net derivative financial instruments (note i) |
910 | |||||||
| Other deposits – PEBs (note i) | (3,332) | |||||||
Notes:
i. Changes in fair values of the equity index swaps included in net derivative financial instruments will be largely offset by the change in fair value of the PEBs deposits. Any resultant impact is deemed by the Group to be insignificant; therefore these sensitivities have been excluded from the table above.
ii. The range represents the values of the highest and lowest levels used in the calculation of favourable and unfavourable changes as presented in the previous table. iii. Weighted average represents the input values used in calculating the fair values for the above financial instruments.
iv. Points are a percentage of par; for example 100 points equals 100% of par. One basis point (bps) equals 0.01%; for example, 125 basis points (bps) equals 1.25%.
Some of the significant unobservable inputs used in fair value measurement are interdependent. Where this is the case, a description of those interrelationships is included below.
23 Fair value of financial assets and liabilities held at fair value – Level 3 portfolio continued
Prices for securities that are marked to market, where the market is illiquid, and supporting price information is scarce, are typically subject to significant uncertainty. An increase in the price will directly cause an increase in fair value and vice versa.
The discount rate is used to determine the present value of future cash flows. The level of the discount rate takes into account the time value of money, but also the risk or uncertainty of future cash flows. Typically, the greater the uncertainty, the higher the discount rate. A higher discount rate leads to a lower valuation and vice versa.
Where the conversion of a security into an underlying instrument is subject to underlying security market pricing and contingent litigation risk, share conversion is factored in to the fair value. The higher the share conversion, the higher the valuation and vice versa.
Where a security's value is dependent on a future transaction taking place, and the occurrence of this is not certain, execution risk is factored into the security's valuation. The greater the execution risk, the lower the valuation and vice versa.
The following table summarises the carrying value and fair value of financial assets and liabilities measured at amortised cost on the Group's balance sheet:
| Fair values based on | |||||
|---|---|---|---|---|---|
| Carrying value |
Level 1 | Level 2 | Level 3 | Total fair value |
|
| £m | £m | £m | £m | £m | |
| Financial assets | |||||
| Loans and advances to banks | 3,591 | 3,591 | - | - | 3,591 |
| Loans and advances to customers: | |||||
| Residential mortgages | 162,062 | - | - | 161,766 | 161,766 |
| Consumer banking | 3,588 | - | - | 3,458 | 3,458 |
| Commercial lending | 13,138 | - | - | 13,077 | 13,077 |
| Other lending | 19 | - | - | 19 | 19 |
| Total | 182,398 | 3,591 | - | 178,320 | 181,911 |
| Financial liabilities | |||||
| Shares | 138,715 | - | 138,896 | - | 138,896 |
| Deposits from banks | 2,095 | - | 2,096 | - | 2,096 |
| Other deposits (note i) | 5,750 | - | 5,752 | - | 5,752 |
| Due to customers | 6,201 | - | - | 6,204 | 6,204 |
| Debt securities in issue | 36,085 | 13,582 | 23,195 | - | 36,777 |
| Subordinated liabilities | 1,817 | - | 1,949 | - | 1,949 |
| Subscribed capital | 413 | - | 381 | - | 381 |
| Total | 191,076 | 13,582 | 172,269 | 6,204 | 192,055 |
| 2015 | |||||
|---|---|---|---|---|---|
| Fair values based on | |||||
| Carrying value |
Level 1 | Level 2 | Level 3 | Total fair value |
|
| £m | £m | £m | £m | £m | |
| Financial assets | |||||
| Loans and advances to banks | 3,392 | 3,392 | - | - | 3,392 |
| Loans and advances to customers: | |||||
| Residential mortgages | 152,775 | - | - | 149,778 | 149,778 |
| Consumer banking | 3,575 | - | - | 3,456 | 3,456 |
| Commercial lending | 14,272 | - | - | 13,145 | 13,145 |
| Other lending | 25 | - | - | 25 | 25 |
| Total | 174,039 | 3,392 | - | 166,404 | 169,796 |
| Financial liabilities | |||||
| Shares | 132,373 | - | 132,505 | - | 132,505 |
| Deposits from banks | 1,974 | - | 1,976 | - | 1,976 |
| Other deposits (note i) | 5,744 | - | 5,745 | - | 5,745 |
| Due to customers | 6,119 | - | - | 6,122 | 6,122 |
| Debt securities in issue (note ii) | 28,105 | 11,539 | 17,194 | - | 28,733 |
| Subordinated liabilities | 2,121 | - | 2,295 | - | 2,295 |
| Subscribed capital | 415 | - | 387 | - | 387 |
| Total | 176,851 | 11,539 | 160,102 | 6,122 | 177,763 |
Notes:
i. Other deposits exclude PEBs which are held at fair value through the income statement and which are included in note 22.
ii. The prior year fair value for covered bond debt securities in issue has been reclassified to Level 1, to better reflect the valuation approach, consistent with the current year presentation.
The fair values of loans and advances to customers may be further analysed, between those impaired and those not impaired, as follows:
| 2016 | ||||||
|---|---|---|---|---|---|---|
| Impaired | Not impaired | Total | ||||
| Carrying value |
Fair value | Carrying value |
Fair value | Carrying value |
Fair value | |
| £m | £m | £m | £m | £m | £m | |
| Residential mortgages | 729 | 707 | 161,333 | 161,059 | 162,062 | 161,766 |
| Consumer banking | 38 | 38 | 3,550 | 3,420 | 3,588 | 3,458 |
| Commercial lending | 117 | 114 | 13,021 | 12,963 | 13,138 | 13,077 |
| Other lending | 4 | 4 | 15 | 15 | 19 | 19 |
| Total | 888 | 863 | 177,919 | 177,457 | 178,807 | 178,320 |
| 2015 | ||||||
|---|---|---|---|---|---|---|
| Impaired | Not impaired | Total | ||||
| Carrying value |
Fair value | Carrying value |
Fair value | Carrying value |
Fair value | |
| £m | £m | £m | £m | £m | £m | |
| Residential mortgages | 820 | 812 | 151,955 | 148,966 | 152,775 | 149,778 |
| Consumer banking | 34 | 34 | 3,541 | 3,422 | 3,575 | 3,456 |
| Commercial lending | 286 | 152 | 13,986 | 12,993 | 14,272 | 13,145 |
| Other lending | 6 | 6 | 19 | 19 | 25 | 25 |
| Total | 1,146 | 1,004 | 169,501 | 165,400 | 170,647 | 166,404 |
The Group estimates the fair value of loans and advances to customers using consistent modelling techniques across the different loan books. The estimates take into account expected future cash flows and future lifetime expected losses, based on historic trends and discount rates appropriate to the loans, to reflect a hypothetical exit price value on an asset by asset basis. Variable rate loans are modelled on estimated future cash flows, discounted at current market interest rates. Variable rate retail mortgages are discounted at the currently available market standard variable interest rate (SVR) which, for example, in the case of the Group's residential base mortgage rate (BMR) mortgage book generates a fair value lower than the amortised cost value as those mortgages are priced below the SVR.
For fixed rate loans, discount rates have been based on the expected funding and capital cost applicable to the book. When calculating fair values on fixed rate loans, no adjustment has been made to reflect interest rate risk management through internal natural hedges or external hedging via derivatives.
The estimated fair value of shares and deposits with no stated maturity, including non-interest bearing deposits, is the amount repayable on demand. The estimated fair value of fixed interest rate shares, deposits and other borrowings without quoted market prices represents the discounted amount of estimated future cash flows based on expectations of future interest rates, customer withdrawals and interest capitalisation. For variable interest rate deposits, estimated future cash flows are discounted using current market interest rates for new debt with similar remaining maturity. For fixed rate shares and deposits, the estimated future cash flows are discounted based on market offer rates currently available for equivalent deposits.
The estimated fair values of longer dated liabilities are calculated based on quoted market prices where available or using similar instruments as a proxy for those liabilities that are not of sufficient size or liquidity to have an active market quote. For those notes for which quoted market prices are not available, a discounted cash flow model is used based on a current yield curve appropriate for the remaining term to maturity.
The Group has financial assets and liabilities for which there is a legally enforceable right to set off the recognised amounts, and which may be settled net. However the netting arrangements do not result in an offset of balance sheet assets and liabilities for accounting purposes as the right to set off is not unconditional in all circumstances. Therefore, in accordance with IAS 32 Financial Instruments: Presentation, there are no financial assets or liabilities which are offset with the net amount presented on the balance sheet. All financial assets and liabilities are presented on a gross basis.
In accordance with IFRS 7 Financial Instruments: Disclosures, the following table shows the impact on derivative financial instruments and total return swaps relating to transactions where:
Master netting arrangements consist of agreements such as an ISDA Master Agreement, global master repurchase agreements and global master securities lending agreements, whereby outstanding transactions with the same counterparty can be offset and settled net following a default or other predetermined event.
Financial collateral on derivative financial instruments consists of cash and securities settled, typically daily or weekly, to mitigate the mark to market exposures. Financial collateral on total return swaps typically comprises highly liquid securities which are legally transferred and can be liquidated in the event of counterparty default.
The net amounts after offsetting under IFRS 7 presented below show the exposure to counterparty credit risk for derivative contracts after netting benefits and collateral, and are not intended to represent the Group's actual exposure to credit risk. This is due to a variety of credit mitigation strategies which are employed in addition to netting and collateral arrangements.
| 2016 | ||||
|---|---|---|---|---|
| Gross and net amounts reported on the balance sheet |
Master netting arrangements |
Financial collateral |
Net amounts after offsetting under IFRS 7 |
|
| £m | £m | £m | £m | |
| Financial assets | ||||
| Derivative financial instruments | 3,898 | (2,020) | (1,804) | 74 |
| Total return swaps | 87 | - | (87) | - |
| Reverse repurchase agreements | 450 | - | (450) | - |
| Total financial assets | 4,435 | (2,020) | (2,341) | 74 |
| Financial liabilities | ||||
| Derivative financial liabilities | 3,463 | (2,020) | (1,391) | 52 |
| Repurchase agreements | 127 | - | (127) | - |
| Total financial liabilities | 3,590 | (2,020) | (1,518) | 52 |
| 2015 | ||||
|---|---|---|---|---|
| Gross and net amounts reported on the balance sheet |
Master netting arrangements |
Financial collateral |
Net amounts after offsetting under IFRS 7 |
|
| £m | £m | £m | £m | |
| Financial assets | ||||
| Derivative financial instruments | 3,337 | (1,900) | (1,386) | 51 |
| Total return swaps | 149 | - | (149) | - |
| Total financial assets | 3,486 | (1,900) | (1,535) | 51 |
| Financial liabilities | ||||
| Derivative financial liabilities | 4,048 | (1,900) | (2,129) | 19 |
| Total financial liabilities | 4,048 | (1,900) | (2,129) | 19 |
The fair value of the financial collateral is the same as the values shown in the table above, except for the total return swaps collateral which has a fair value of £127 million
(2015: £210 million) and the repurchase agreements collateral which has a fair value of £128 million (2015: £nil).
26 Intangible assets
| Total | Other | Goodwill | Total | ||
|---|---|---|---|---|---|
| Externally acquired |
Internally developed |
software | assets | ||
| £m | £m | £m | £m | £m | £m |
| 448 | 996 | 1,444 | 40 | 12 | 1,496 |
| 19 | 320 | 339 | - | - | 339 |
| (18) | (15) | (33) | - | - | (33) |
| 449 | 1,301 | 1,750 | 40 | 12 | 1,802 |
| 456 | |||||
| 186 | |||||
| - | 2 | 2 | - | - | 2 |
| (18) | (15) | (33) | - | - | (33) |
| 154 | 420 | 574 | 37 | - | 611 |
| 1,191 | |||||
| 128 44 295 |
Computer software 294 139 881 |
computer 422 183 1,176 |
intangible 34 3 3 |
- - 12 |
26 Intangible assets continued
| 2015 Group | ||||||
|---|---|---|---|---|---|---|
| Computer software | Total | Other | Goodwill | Total | ||
| Externally acquired |
Internally developed |
computer software |
intangible assets |
|||
| £m | £m | £m | £m | £m | £m | |
| Cost | ||||||
| At 5 April 2014 | 471 | 786 | 1,257 | 42 | 12 | 1,311 |
| Additions | 20 | 236 | 256 | - | - | 256 |
| Disposals | (43) | (26) | (69) | (2) | - | (71) |
| At 4 April 2015 | 448 | 996 | 1,444 | 40 | 12 | 1,496 |
| Accumulated amortisation and impairment |
||||||
| At 5 April 2014 | 125 | 198 | 323 | 32 | - | 355 |
| Amortisation charge | 46 | 122 | 168 | 4 | - | 172 |
| Disposals | (43) | (26) | (69) | (2) | - | (71) |
| At 4 April 2015 | 128 | 294 | 422 | 34 | - | 456 |
| Net book value | ||||||
| At 4 April 2015 | 320 | 702 | 1,022 | 6 | 12 | 1,040 |
Intangible assets at 4 April 2016 include £274 million (2015: £153 million) of assets in the course of construction. These assets relate mainly to the Group's investment in new systems platforms to meet the future needs of the business. To the extent that these new systems platforms are not yet ready for use by the business, no amortisation has been charged against these assets.
Software costs capitalised during the year ended 4 April 2016 relate mainly to new systems platforms and are being amortised over estimated useful lives predominantly of 5 years.
In the year ended 4 April 2016, £4 million (2015: £2 million) of borrowing costs have been capitalised using a capitalisation rate of 1.30% (2015: 1.33%).
The Society's intangible assets are as shown above for the Group, except that they exclude £12 million (2015: £12 million) of goodwill relating to the acquisition of The Mortgage Works (UK) plc, which is only recognised at Group level.
27 Property, plant and equipment
| 2016 Group | |||||||
|---|---|---|---|---|---|---|---|
| Branches and non specialised buildings |
Specialised administration buildings |
Short leasehold buildings |
Total land and buildings |
Plant and machinery |
Equipment, fixtures, fittings and vehicles |
Total | |
| £m | £m | £m | £m | £m | £m | £m | |
| Cost or valuation | |||||||
| At 5 April 2015 | 224 | 183 | 34 | 441 | 157 | 819 | 1,417 |
| Additions | 2 | 6 | - | 8 | 15 | 89 | 112 |
| Revaluation | 1 | - | - | 1 | - | - | 1 |
| Disposals | (6) | - | - | (6) | - | (106) | (112) |
| At 4 April 2016 | 221 | 189 | 34 | 444 | 172 | 802 | 1,418 |
| Accumulated depreciation and impairment |
|||||||
| At 5 April 2015 | - | 82 | 22 | 104 | 93 | 364 | 561 |
| Depreciation charge | - | 3 | 2 | 5 | 17 | 115 | 137 |
| Disposals | - | - | - | - | - | (103) | (103) |
| At 4 April 2016 | - | 85 | 24 | 109 | 110 | 376 | 595 |
| Net book value | |||||||
| At 4 April 2016 | 221 | 104 | 10 | 335 | 62 | 426 | 823 |
| 2015 Group | |||||||
|---|---|---|---|---|---|---|---|
| Branches and non specialised buildings |
Specialised administration buildings |
Short leasehold buildings |
Total land and buildings |
Plant and machinery |
Equipment, fixtures, fittings and vehicles |
Total | |
| £m | £m | £m | £m | £m | £m | £m | |
| Cost or valuation | |||||||
| At 5 April 2014 | 223 | 186 | 38 | 447 | 141 | 895 | 1,483 |
| Additions | 8 | - | - | 8 | 16 | 115 | 139 |
| Revaluation | 5 | - | - | 5 | - | - | 5 |
| Disposals | (12) | (3) | (4) | (19) | - | (191) | (210) |
| At 4 April 2015 | 224 | 183 | 34 | 441 | 157 | 819 | 1,417 |
| Accumulated depreciation and impairment |
|||||||
| At 5 April 2014 | - | 80 | 25 | 105 | 76 | 450 | 631 |
| Depreciation charge | - | 3 | 1 | 4 | 17 | 101 | 122 |
| Disposals | - | (1) | (4) | (5) | - | (187) | (192) |
| At 4 April 2015 | - | 82 | 22 | 104 | 93 | 364 | 561 |
| Net book value | |||||||
| At 4 April 2015 | 224 | 101 | 12 | 337 | 64 | 455 | 856 |
Group property, plant and equipment at 4 April 2016 includes £2 million (2015: £2 million) of land and buildings held by subsidiary undertakings.
Property, plant and equipment includes £13 million (2015: £59 million) of assets in the course of construction.
In the year ended 4 April 2016, £1 million (2015: £nil) of borrowing costs have been capitalised using a capitalisation rate of 1.30% (2015: 1.33%).
Branches and non-specialised buildings are valued annually by external, independent and qualified valuers who have recent experience in the location and categories of the properties.
The current use of all branches and non-specialised buildings equates to highest and best use, and there have been no changes to the valuation technique during the year. Valuations are performed in accordance with the Royal Institution of Chartered Surveyors Appraisal and Valuation Standards and are performed on a vacant possession basis, using a comparative method of valuation with reference to sales prices and observable market rents for similar properties in similar locations.
These valuations are therefore classified within Level 2 of the fair value hierarchy.
28 Provisions for liabilities and charges
| Bank levy £m 13 (32) 41 - |
FSCS £m 126 (88) 46 - |
Customer redress £m 140 (40) 138 |
Other provisions £m 16 (5) 3 |
Total £m 295 (165) 228 |
|---|---|---|---|---|
| (11) | (4) | (15) | ||
| 41 | 46 | 127 | (1) | 213 |
| 22 | 84 | 227 | 10 | 343 |
| 310 | ||||
| (21) | (99) | (43) | (24) | (187) |
| 186 | ||||
| (14) | ||||
| 172 | ||||
| 295 | ||||
| 6 28 - 28 13 |
142 83 - 83 126 |
124 72 (13) 59 140 |
38 3 (1) 2 16 |
The income statement charge for provisions for liabilities and charges of £173 million (2015: £142 million) includes the FSCS charge of £46 million (2015: £83 million) and the customer redress net income statement charge of £127 million (2015: £59 million).
The income statement charge for bank levy of £41 million (2015: £28 million) and other provisions credit of £1 million (2015: charge of £2 million) are included within administrative expenses in the income statement.
The Group provisions for liabilities and charges include £3 million (2015: £3 million) of customer redress held by subsidiary company The Mortgage Works (UK) plc; all other amounts are held by the Society.
The FSCS, the UK's independent statutory compensation fund for customers of authorised financial services firms, pays compensation if a firm is unable to pay claims against it. Following the default of a number of deposit takers, the FSCS borrowed funds from HM Treasury; approximately £16 billion of borrowings remain outstanding relating to the default of Bradford & Bingley plc.
The FSCS recovers the interest cost, together with ongoing management expenses, by way of annual levies on member firms. In addition, over the last three years, member firms have been funding expected shortfalls in recoveries from the failed institutions to repay the borrowings.
All known shortfalls have now been met, resulting in a reduction in the annual charge to £46 million (2015: £83 million). This includes £41 million of interest and management expenses relating to FSCS scheme year 2016/17 and £5 million relating to the final confirmation of previous scheme year charges. The prior year amount included £41 million in relation to expected shortfalls.
The balance sheet amount provided by the Group of £84 million (2015: £126 million) comprises £41 million of levies relating to the 2016/17 FSCS scheme year and £43 million relating to the 2015/16 scheme year. The amount relating to the 2015/16 scheme year is payable by 1 September 2016.
In the March 2016 Budget, HM Treasury confirmed that UK Asset Resolution (UKAR) is exploring the possibility of a major sales programme of Bradford & Bingley plc. The Group will continue to monitor the progress of this and will assess the financial impact as more information becomes available.
During the course of its business, the Group receives complaints from customers in relation to past sales or conduct. The Group is also subject to enquiries from and discussions with its regulators, governmental and other public bodies, including the Financial Ombudsman Service (FOS), on a range of matters. Customer redress provisions are recognised where the Group considers it is probable that payments will be made as a result of such complaints and other matters.
The Group holds provisions of £227 million (2015: £140 million) in respect of the potential costs of remediation and redress in relation to historic sales of financial products and post sales administration. This includes amounts for past sales of PPI, non-compliance with consumer credit legislation and other regulatory matters.
The income statement charge for the year mainly reflects the Group's updated assumptions for provisions previously recognised. This includes a £95 million charge in relation to PPI, largely in response to the announcements made by the Financial Conduct Authority (FCA) during the year and specifically the consultation paper CP15/39 issued in November 2015. In this consultation the FCA proposed an industry-funded communications campaign, combined with a deadline for any further complaints. It also proposed new rules and guidance in light of the Supreme Court's decision in the case of Plevin v Paragon Personal Finance Limited ('Plevin').
In light of these latest developments, it is considered appropriate for the Group to provide for the estimated total amount required to deal with all ongoing and future PPI complaints. The amount provided at 4 April 2016 therefore reflects the compensation and administrative costs associated with cases that the Group expects to uphold and the cost of processing invalid claims which the Group expects to receive. This estimate will be re-assessed on an ongoing basis as the FCA finalises its position and actual claims levels are observed. Previously, costs relating to the processing of invalid claims were expensed as incurred.
The remainder of the charge for the year is in respect of claims relating to consumer credit legislation.
Other provisions include provisions for severance costs and a number of property related provisions. Provisions are made for the expected severance costs in relation to the Group's restructuring activities where there is a present obligation and it is probable that the expenditure will be made.
The amount of the provision related to past sales of PPI is calculated based upon management's best estimate of complaint volumes incorporating the expected impact of the 2015 FCA consultation paper, referral rates to the Financial Ombudsman Service (FOS), uphold rates internally and with the FOS, response rates from customer contact activity relating to previous sales, average redress payments and complaint handling costs.
The total amount provided for PPI represents management's best estimate of the likely future cost. However, there is some uncertainty around the impact of the proposed FCA media campaign on complaint volumes in the lead up to the proposed timebar. If the total volume of PPI complaints was 5% higher than currently estimated, the customer redress provision would increase by £19 million.
Other amounts that are provided as an estimate of the potential costs of remediation are subject to ongoing review of various matters, including consumer credit regulations. For these matters, the ultimate amount of redress that will be payable will depend upon a number of internal and external factors. These include the conclusion of legal interpretations and actions to be taken, the time periods to which any redress should apply, the level of complaints that the Group expects to receive from customers and the estimate of amounts of redress and associated costs that will be payable.
29 Capital and leasing commitments
Capital expenditure contracted for but not accrued is as follows:
| Capital commitments at 4 April | ||
|---|---|---|
| Group and Society | ||
| 2016 | 2015 | |
| £m | £m | |
| Capital expenditure relating to: | ||
| Intangibles | 100 | 55 |
| Property, plant and equipment | 24 | 22 |
| Total | 124 | 77 |
The Group leases various offices, branches and other premises under non-cancellable operating lease arrangements. The leases have various terms, escalation, renewal rights and in some cases contingent rent payable.
Future minimum payments under operating leases relating to land and buildings were as follows:
| Leasing commitments at 4 April | ||
|---|---|---|
| Group | ||
| 2016 | 2015 | |
| £m | £m | |
| Amounts falling due: | ||
| Within one year | 32 | 31 |
| Between one and five years | 96 | 99 |
| After five years | 174 | 198 |
| Total | 302 | 328 |
£2 million of the leasing commitments arise in a subsidiary of the Group (2015: £2 million).
At the balance sheet date, future minimum lease payments receivable under non-cancellable operating leases were as follows:
| Leasing payments receivable as lessor at 4 April | ||
|---|---|---|
| Group and Society | ||
| 2016 | 2015 | |
| £m | £m | |
| Amounts falling due: | ||
| Within one year | 4 | 5 |
| Between one and five years | 11 | 13 |
| After five years | 35 | 32 |
| Total | 50 | 50 |
| At the balance sheet date, future minimum sublease payments receivable under non-cancellable subleases |
12 | 14 |
During the ordinary course of business the Group is subject to complaints and threatened or actual legal proceedings, as well as regulatory reviews, challenges and investigations. All such material matters are periodically reassessed, with the assistance of external professional advisers where appropriate, to determine the likelihood of incurring a liability. Where it is concluded that it is more likely than not that a payment will be made a provision is recognised based on management's
best estimate of the amount that will be payable. For other matters no provision is recognised but disclosure is made of items which are potentially material, either individually or in aggregate, except in cases where the likelihood of a liability crystallising is considered to be remote. Currently the Group does not expect the ultimate resolution of any such matters to have a material adverse impact on its financial position.
| Retirement benefit obligations on the balance sheet | ||
|---|---|---|
| Group | ||
| 2016 | 2015 | |
| £m | £m | |
| Present value of funded obligations | 4,645 | 4,686 |
| Present value of unfunded obligations | 12 | 12 |
| 4,657 | 4,698 | |
| Fair value of fund assets | (4,444) | (4,412) |
| Deficit at 4 April | 213 | 286 |
The Group operates two defined contribution pension schemes in the UK – the Nationwide Group Personal Pension Plan and the Nationwide Temporary Workers Pension Scheme. New employees to Nationwide are automatically enrolled into one of these schemes, with both schemes being administered by Friends Life.
Outside of the UK, there are defined contribution pension schemes for employees in the Isle of Man and Ireland.
The Group operates a number of defined benefit pension arrangements which are administered by trustees, including both representatives from the Group and independent trustees. The trustees are required by law to act in the interest of all relevant beneficiaries and are responsible for the investment policy with regard to the assets as well as the day to day administration of the benefits.
The principal defined benefit pension arrangement is the Nationwide Pension Fund (the 'Fund'). This is a contributory defined benefit pension arrangement, with both final salary and career average revalued earnings (CARE) sections. The Fund was closed to new entrants in 2007. Since that date employees have been able to join the Nationwide Group Personal Pension Plan (a defined contribution arrangement).
Eligible employees in the Fund are entitled to annual pensions on retirement at age 65 of one sixtieth of career average revalued earnings (revalued to retirement) for each year of service after 1 April 2011. Benefits accrued prior to 1 April 2011 varied with the majority being one fifty fourth of final salary for each year of service. Benefits are also payable on death and following other events such as leaving employment. No other post-retirement benefits are provided to these employees.
Approximately 33% of the defined benefit obligations are attributable to current employees, 34% to former employees and 33% to current pensioners and dependants. The average duration of the obligation is approximately 20 years reflecting the split of the obligation between current employees (24 years), deferred members (23 years) and current pensioners (14 years).
The Group's retirement benefit obligations include £2 million (2015: £3 million) recognised in a subsidiary company,
Nationwide (Isle of Man) Limited. This obligation relates to a defined benefit arrangement providing benefits based on both final salary and CARE which was closed to new entrants in 2009.
The Group's retirement benefit obligations also include £12 million in respect of unfunded legacy defined benefit arrangements (2015: £12 million).
The amounts recognised in the income statements are as follows:
| Retirement benefit obligations recognised in the income statement | ||
|---|---|---|
| Group | ||
| 2016 | 2015 | |
| £m | £m | |
| Defined benefit current service cost | 64 | 55 |
| Defined contribution cost | 50 | 30 |
| Past service cost | 3 | 5 |
| Curtailment gains | (2) | (7) |
| Administrative expenses | 4 | 4 |
| Included in employee costs (note 7) | 119 | 87 |
| Interest on net defined benefit liability (note 4) | 7 | 6 |
| Total | 126 | 93 |
Changes in the present value of the net defined benefit liability (including unfunded obligations) are as follows:
| Movements in the net defined benefit liability | ||
|---|---|---|
| Group | ||
| 2016 | 2015 | |
| £m | £m | |
| At 5 April | 286 | 235 |
| Current service cost | 64 | 55 |
| Past service cost | 3 | 5 |
| Curtailment gains | (2) | (7) |
| Interest on net defined benefit liability | 7 | 6 |
| Return on assets less/(greater) than discount rate | 122 | (572) |
| Contributions by employer | (107) | (148) |
| Administrative expenses | 4 | 4 |
| Actuarial (gains)/losses on defined benefit obligations | (164) | 708 |
| At 4 April | 213 | 286 |
Current service cost represents the increase in liabilities resulting from employee service over the period. The past service cost represents the increase in liabilities of the Fund arising from members of the Fund electing to pay additional contributions to receive additional benefits.
The curtailment gains represent a reduction in the defined benefit obligation arising from future pensions increasing in line with the Consumer Price Index (CPI), instead of estimated salary increases (for final salary benefits) or the Retail Prices Index (for CARE benefits), in respect of members made redundant during the year.
The interest on net defined benefit liability includes the interest expense on retirement obligation, representing the annual interest accruing on the liabilities over the period. This is partially offset by the interest income on plan assets.
The £122 million from a return on assets which is less than the discount rate is driven by underperformance of listed equities, partially offset by positive returns from bonds.
The £107 million of employer contributions includes a deficit contribution of £49 million (2015: £91 million), with the remainder relating to employer contributions in respect of future benefit accrual. The Group estimates that its contributions to the defined benefit pension funds (including deficit contributions) during the year ending 4 April 2017 will be £103 million.
The £164 million actuarial gain on the liabilities in the table above is driven by:
Changes in the present value of defined benefit obligations (including unfunded obligations) are as follows:
| Movements in the defined benefit obligations | ||
|---|---|---|
| Group | ||
| 2016 | 2015 | |
| £m | £m | |
| At 5 April | 4,698 | 3,855 |
| Current service cost | 64 | 55 |
| Past service cost | 3 | 5 |
| Curtailment gains | (2) | (7) |
| Interest expense on retirement obligation | 158 | 171 |
| Experience gains on plan assumptions | (49) | (20) |
| Changes in demographic assumptions | (29) | (8) |
| Changes in financial assumptions | (86) | 736 |
| Benefits paid | (100) | (89) |
| At 4 April | 4,657 | 4,698 |
31 Retirement benefit obligations continued
Changes in the fair value of plan assets for the pension funds are as follows:
| Movements in the plan assets | ||
|---|---|---|
| Group | ||
| 2016 | 2015 | |
| £m | £m | |
| At 5 April | 4,412 | 3,620 |
| Interest income on assets | 151 | 165 |
| Return on assets (less)/greater than discount rate | (122) | 572 |
| Administrative expenses | (4) | (4) |
| Contributions by employer | 107 | 148 |
| Benefits paid | (100) | (89) |
| At 4 April | 4,444 | 4,412 |
No employee contributions are recorded as the Group operates a salary sacrifice arrangement. Under this arrangement employees' salaries are reduced by an amount equivalent to their pension contributions and their contributions are then reflected in the employer contributions.
In line with UK pensions legislation, a formal actuarial valuation of the assets and liabilities of the Fund is carried out at least every three years by independent actuaries ('triennial funding valuation'). The latest triennial funding valuation will be carried out as at 31 March 2016. As part of the process, a new schedule of regular and deficit contributions payable by the Group will be agreed with the trustees of the Fund.
31 Retirement benefit obligations continued
The major categories of plan assets for the pension funds, stated at fair value, are as follows:
| Categories of plan assets | ||
|---|---|---|
| Group | ||
| 2016 | 2015 | |
| £m | £m | |
| Listed equities (quoted) | 1,326 | 1,722 |
| Government bonds (quoted) | 1,883 | 1,815 |
| Corporate bonds and other credit investments (quoted) | 470 | 411 |
| Infrastructure (unquoted) | 322 | 268 |
| Property (unquoted) | 371 | 186 |
| Private equity investments (unquoted) | 251 | 243 |
| Cash | 137 | 37 |
| Liability relating to repurchase agreement | (357) | (287) |
| Other assets and liabilities | 41 | 17 |
| Total | 4,444 | 4,412 |
None of the funds' assets are invested in the Group's own financial instruments or property (2015: £nil).
Assets described as quoted are based on unadjusted prices quoted in an active market and represent Level 1 assets as defined by IFRS 13. All private equity, infrastructure and property investments are Level 3 assets as defined by IFRS 13. These assets have been valued using inputs which are not based on observable market data.
The Fund's liabilities are partly hedged by matching assets, primarily index linked government bonds and fixed rate government and corporate bonds. In addition, the Fund invests in alternative matching assets such as ground
rents and property leases (included in property above) that are expected to generate inflation linked income over the long term.
The proceeds of sale and repurchase agreements are included in the table above as a liability of £357 million (2015: £287 million). The securities, which have been sold under these sale and repurchase agreements, are included in government bonds, as the Fund has retained substantially all the risks and rewards of ownership of the securities.
31 Retirement benefit obligations continued
| Principal actuarial assumptions | ||
|---|---|---|
| Group | ||
| 2016 | 2015 | |
| % | % | |
| Discount rate | 3.45 | 3.40 |
| Future salary increases | 2.90 | 2.95 |
| Future pension increases (maximum 5%) | 2.75 | 2.80 |
| Retail price index (RPI) inflation | 2.90 | 2.95 |
| Consumer price index (CPI) inflation | 1.90 | 1.95 |
The assumptions for mortality rates are based on standard mortality tables which allow for future improvements in life expectancies. The assumptions made are illustrated by the following years of life expectancy at age 60:
| 2016 | 2015 | |
|---|---|---|
| years | years | |
| Age 60 at 4 April 2016 | ||
| Males | 28.3 | 28.5 |
| Females | 30.0 | 30.2 |
| Age 60 at 4 April 2036 | ||
| Males | 29.7 | 29.9 |
| Females | 31.5 | 31.7 |
The key assumptions used to calculate the pension obligation are the discount rate, future salary increases and pension changes driven by inflation and mortality. If different assumptions were used, this could have a material effect on the reported obligation. The sensitivity of the results to these assumptions are as follows:
| Change in key assumptions at 4 April 2016 | |
|---|---|
| (Decrease)/increase in deficit from assumption change £m |
|
| 0.1% increase in discount rate | (90) |
| 0.1% increase in inflation assumption | 79 |
| One year increase in life expectancy at age 60 in respect of all members | 169 |
The above sensitivities apply to changing individual assumptions in isolation; in practice assumptions are likely to be related, especially between the discount rate and inflation. Furthermore, a change in market yields could impact asset values (in particular bonds) in the opposite direction to the obligations. The sensitivity to the inflation assumption includes a corresponding 0.1% increase in future salary increases and pension increases assumptions.
| Group and Society | ||||
|---|---|---|---|---|
| Number of shares |
CCDS | Share premium | Total | |
| £m | £m | £m | ||
| At 4 April 2016 | 5,500,000 | 6 | 525 | 531 |
| At 4 April 2015 | 5,500,000 | 6 | 525 | 531 |
CCDS are a form of Common Equity Tier 1 (CET1) capital which have been developed to enable the Group to raise capital from the capital markets. Previously issued Tier 1 capital instruments, PIBS, no longer meet the regulatory capital requirements of CRD IV and are being gradually phased out of the calculation of capital resources under transitional rules.
CCDS are perpetual instruments. They rank pari passu to each other and are junior to claims against the Society of all depositors, creditors and investing members. Each holder of CCDS has one vote, regardless of the number of CCDS held.
In the event of a winding up or dissolution of the Society and if there was surplus available, the amount that the investor would receive for each CCDS held is limited to the average principal amount in issue, which is currently £100 per share.
There is a cap placed on the amount of distributions that can be paid to holders of CCDS in any financial year. The cap is
currently set at £15.32 per share and is adjusted annually in line with CPI.
A final distribution of £28 million (£5.125 per share) for the financial year ended 4 April 2015 was paid on 22 June 2015 and an interim distribution of £28 million (£5.125 per share) in respect of the period to 30 September 2015 was paid on 21 December 2015. These distributions have been recognised in the statement of movements in members' interests and equity.
The directors have declared an unconditional final distribution of £5.125 per share in respect of the financial year ended 4 April 2016, amounting in aggregate to £28 million. The distribution will be recognised in the statement of movements in members' interests and equity in the financial year ended 4 April 2017.
| Group and Society | |
|---|---|
| Total | |
| £m | |
| At 4 April 2016 | 992 |
| At 4 April 2015 | 992 |
AT1 instruments rank pari passu to each other and to PIBS. They are junior to claims against the Society of all depositors, creditors and investing members, other than the holders of CCDS.
AT1 instruments pay a fully discretionary, non-cumulative fixed coupon at an initial rate of 6.875% per annum. The rate will reset on 20 June 2019 and every five years thereafter to the
five year mid swap rate plus 4.88%. Coupons are paid semi-annually in June and December.
A coupon of £34 million, covering the period to 19 June 2015, was paid on 22 June 2015 and a coupon of £34 million, covering the period to 20 December 2015, was paid on 21 December 2015. These payments have been recognised in the statement of movements in members' interests and equity.
A coupon payment of £34 million, covering the period to 20 June 2016, is expected to be paid on 20 June 2016 and will be recognised in the statement of movements in members' interests and equity in the financial year ended 4 April 2017.
The coupons paid and declared represent the maximum non-cumulative fixed coupon of 6.875%.
AT1 instruments have no maturity date. They are repayable at the option of the Society on 20 June 2019 and on every fifth
anniversary thereafter. AT1 instruments are only repayable with the consent of the PRA.
If the fully-loaded CET1 ratio for the Society, on either a consolidated or unconsolidated basis, falls below 7% the AT1 instruments convert to CCDS instruments at the rate of one CCDS share for every £80 of AT1 holding.
34 Investments in subsidiary undertakings
The Society's investments in Group undertakings are as follows:
| Shares | Loans | Total | |
|---|---|---|---|
| £m | £m | £m | |
| At 5 April 2015 | 313 | 27,419 | 27,732 |
| Additions | - | 4,391 | 4,391 |
| Release of impairment | - | 16 | 16 |
| Redemptions and repayments | - | (737) | (737) |
| At 4 April 2016 | 313 | 31,089 | 31,402 |
| Shares | Loans | Total | |
|---|---|---|---|
| £m | £m | £m | |
| At 5 April 2014 | 324 | 26,048 | 26,372 |
| Additions | - | 4,988 | 4,988 |
| Release of impairment | - | 31 | 31 |
| Redemptions and repayments | (11) | (3,648) | (3,659) |
| At 4 April 2015 | 313 | 27,419 | 27,732 |
During the year ended 4 April 2016 the Society received dividend payments of £10 million (2015: £nil). In the year ended 4 April 2015 the Society received £11 million relating to capital reductions from subsidiary undertakings.
The impairment release of £16 million (2015: £31 million) relates to a Group undertaking that holds a corporate loan portfolio.
Audited accounts are prepared for all of the Group's principal subsidiaries. The interests of the Society in its principal
subsidiary undertakings as at 4 April 2016 are set out below:
| Subsidiary name | Principal place of business and incorporation |
Ownership interest 2016 and 2015 |
|---|---|---|
| Derbyshire Home Loans Limited | UK | 100% |
| E-MEX Home Funding Limited | UK | 100% |
| Nationwide Syndications Limited | UK | 100% |
| The Mortgage Works (UK) plc | UK | 100% |
| UCB Home Loans Corporation Limited | UK | 100% |
The above subsidiary undertakings, with the exception of Nationwide Syndications Limited, are regulated entities subject to regulations which require them to maintain capital at agreed levels and therefore govern the availability of funds for distribution as dividends.
The Group has adopted the audit exemption for the following subsidiary undertakings for the year ended 4 April 2016 under Section 479A of the Companies Act 2006:
| Subsidiary name | Principal place of business and incorporation |
Ownership interest 2016 and 2015 |
|---|---|---|
| At.Home Nationwide Limited | UK | 100% |
| Confederation Mortgage Services Limited | UK | 100% |
| Dunfermline BS Nominees Limited | UK | 100% |
| First Nationwide | UK | 100% |
| Jubilee Mortgages Limited | UK | 100% |
| Monument (Sutton) Limited | UK | 100% |
| Nationwide Anglia Property Services Limited | UK | 100% |
| Nationwide Housing Trust Limited | UK | 100% |
| Nationwide Investments (No 1) Limited | UK | 100% |
| Nationwide Mortgage Corporation Limited | UK | 100% |
| Nationwide Trust Limited | UK | 100% |
| NBS Fleet Services Limited | UK | 100% |
| Staffordshire Leasing Limited | UK | 100% |
| The Derbyshire (Premises) Limited | UK | 100% |
In order to fulfil the requirements of these regulations the Society will guarantee all outstanding liabilities of the exempted subsidiary undertakings.
34 Investments in subsidiary undertakings continued
The interests of the Society in its other subsidiary undertakings, as at 4 April 2016, are set out below:
| Subsidiary name | Place of incorporation | Ownership interest 2016 and 2015 |
|---|---|---|
| Ashton Employment Limited | Republic of Ireland | 100% |
| Ethos Independent Financial Services Limited | UK | 100% |
| Exeter Trust Limited | UK | 100% |
| LBS Mortgages Limited | UK | 100% |
| Moulton Finance Overseas B.V. | Netherlands | 100% |
| Nationwide (Isle of Man) Limited | Isle of Man | 100% |
| Nationwide (Overseas) UK Limited | UK | 100% |
| Nationwide Financial Services Limited | UK | 100% |
| Nationwide Home Loans Limited | UK | 100% |
| Nationwide International Limited | UK | 100% |
| Nationwide Lease Finance Limited | UK | 100% |
| Nationwide Property Services (NBS) Limited | UK | 100% |
The UK based subsidiary undertakings in the table above were dormant companies during the year end 4 April 2016.
All of the subsidiary undertakings are limited liability companies, with the exception of First Nationwide which is an unlimited company.
The Group does not have any material non-controlling interests in respect of its subsidiaries. The Group does not have significant restrictions on its ability to access or use its assets and settle its liabilities other than those resulting from regulatory frameworks within which certain subsidiaries operate. These regulatory frameworks require certain subsidiaries to keep levels of regulatory capital and liquid assets.
The Group has no material shares in associates. See note 14 for further details regarding the Group's interests in equity shares.
Details of consolidated and unconsolidated structured entities are provided in note 35.
A structured entity is an entity in which voting or similar rights are not the dominant factor in deciding control. Structured entities are consolidated when the substance of the relationship indicates control.
Structured entities are assessed for consolidation in accordance with the accounting policy set out in note 1. The following structured entities are consolidated in the Group's results.
| Structured entity name | Nature of business | Principal place of business and incorporation |
|---|---|---|
| Nationwide Covered Bonds LLP | Mortgage acquisition and guarantor of covered bonds | UK |
| Silverstone Master Issuer plc | Funding vehicle | UK |
| Silverstone Funding No.1 Limited | Funding vehicle | UK |
| Cromarty CLO Limited | Investment in a portfolio of European loans | Republic of Ireland |
Further details on the activities of Nationwide Covered Bonds LLP, Silverstone Master Issuer plc and Silverstone Funding No.1 Limited are given in note 15. As at 4 April 2016 the total assets of Cromarty CLO Limited were £14 million (2015: £19 million). The Group has no contractual arrangements that would require it to provide financial or other support to Cromarty CLO Limited, nor does the Group have current intentions to provide such support to the entity.
The Group has interests in structured entities which it does not sponsor or control. These largely consist of holdings of mortgage backed securities, covered bonds and CLOs issued by entities that are sponsored by other unrelated financial institutions. The entities are financed primarily by investments from investors.
The Group's direct interests in unconsolidated structured entities comprise primarily investments in asset
backed securities which are reported within available for sale investment securities on the balance sheet. The total carrying value of these interests at 4 April 2016 is £3,764 million (2015: £4,353 million). Further details on the lending risk that the Group is exposed to in respect of these asset backed securities can be found in the 'Treasury assets' section of the Business and Risk Report.
Management has concluded that the Group has no control or significant influence over these entities and that the carrying value of the interests held in these entities represents the maximum exposure to loss. During the year the Group has not provided any non-contractual financial or other support to these entities and has no current intention of providing any such support. There were no transfers to or from these unconsolidated structured entities during the year.
The Group is controlled by Nationwide Building Society, the ultimate parent, which is registered in England and Wales. Details of subsidiary undertakings can be found in note 34.
The directors of the Society are considered to be the key
management personnel as defined by IAS 24 Related Party Disclosures.
Total compensation for key management personnel for the year by category of benefit was as follows:
| Key management personnel compensation | ||
|---|---|---|
| 2016 | 2015 | |
| £'000 | £'000 | |
| Short term employee benefits (note i) | 4,970 | 4,875 |
| Other long term benefits | 3,263 | 3,273 |
| Share based payments | 1,273 | 1,240 |
| Contractual/other settlements | 1,278 | 94 |
| Total key management personnel compensation for year | 10,784 | 9,482 |
Note:
i. Short term employee benefits for 2015 have been restated to reflect HMRC guidance in relation to taxable benefits for travel and subsistence expenses in situations where directors regularly work from more than one office location.
Other long term benefits for the year ended 4 April 2016 include amounts from current and legacy long term bonus schemes, some of which will be paid in future periods. Share based payments include amounts that are dependent on the performance of the CCDS. Contractual/other settlements include compensation for loss of office. Further information is included in Report of the directors on remuneration.
36 Related party transactions continued
A number of transactions are entered into with related parties in the normal course of business. These include loans, deposits and the payment and recharge of administrative expenses.
The outstanding balances for related party transactions at the year end, and the associated income and expenses for the year are as follows:
| Transactions with related parties | ||||
|---|---|---|---|---|
| Society subsidiaries | Key management personnel | |||
| 2016 | 2015 | 2016 | 2015 | |
| £m | £m | £m | £m | |
| Loans payable to the Society | ||||
| Loans outstanding at 5 April | 27,419 | 26,048 | 0.9 | 0.8 |
| Loans issued during the year | 4,391 | 4,988 | 1.2 | 0.6 |
| Loan impairment release | 16 | 31 | - | - |
| Loan repayments during the year | (737) | (3,648) | (0.7) | (0.5) |
| Loans outstanding at 4 April | 31,089 | 27,419 | 1.4 | 0.9 |
| Deposits payable by the Society | ||||
| Deposits outstanding at 5 April | 948 | 3,335 | 5.9 | 6.1 |
| Deposits issued during the year | 228 | 235 | 9.1 | 7.4 |
| Deposit repayments during the year | (14) | (2,622) | (8.7) | (7.6) |
| Deposits outstanding at 4 April | 1,162 | 948 | 6.3 | 5.9 |
| Net interest income | ||||
| Interest receivable | 855 | 1,024 | - | - |
| Interest expense | 98 | 142 | 0.1 | 0.1 |
| Other income and expenses | ||||
| Dividends payable to the Society | 10 | - | - | - |
| Fees and expenses paid to the Society | 15 | 13 | - | - |
| Other balance sheet items | ||||
| Accrued income and expenses prepaid due to the Society | 258 | 582 | - | - |
| Other liabilities payable by the Society | 4,367 | 5,371 | - | - |
36 Related party transactions continued
Transactions with key management personnel are on the same terms and conditions applicable to other employees within the Group.
In addition to the loans and deposits disclosed in the above table, one non executive director held £106,255 of core capital deferred shares at 4 April 2015 and received dividends of £4,285 during the year.
A register is maintained by the Society containing details of loans, transactions and arrangements made between the Society or its subsidiary undertakings and directors of the Society or persons connected with directors of the Society.
The register will be available for inspection by members at the Annual General Meeting on 21 July 2016 and during normal
office hours at the Society's principal office (Nationwide House, Pipers Way, Swindon) during the period of 15 days prior to the meeting.
Transactions with Group companies arise in the normal course of business. Interest on outstanding loans and deposits accrues at a transfer price rate agreed between the Society and its subsidiary undertakings.
The Society does not charge the net defined benefit cost to the subsidiary undertakings that participate in the Nationwide Pension Fund. The pension cost to these subsidiary undertakings equals the contributions payable to the Fund.
| Group | Society | |||
|---|---|---|---|---|
| 2016 | 2015 | 2016 | 2015 | |
| £m | £m | £m | £m | |
| Non-cash items included in profit before tax | ||||
| Net decrease in impairment provisions | (209) | (636) | (198) | (632) |
| Net increase/(decrease) in provisions for liabilities and charges |
48 | (15) | 48 | (18) |
| Impairment (recoveries)/losses on investment securities |
(8) | 18 | (8) | 18 |
| Depreciation, amortisation and impairment | 325 | 294 | 325 | 293 |
| Profit on sale of property, plant and equipment | (5) | (2) | (5) | (2) |
| Loss on the revaluation of land and buildings | 3 | - | 3 | - |
| Interest on subordinated liabilities | 99 | 115 | 99 | 115 |
| Interest on subscribed capital | 26 | 42 | 26 | 42 |
| (Gains)/losses from derivatives and hedge accounting (note i) |
(39) | 20 | (129) | 74 |
| Total | 240 | (164) | 161 | (110) |
| Changes in operating assets and liabilities | ||||
| Loans and advances to banks | 142 | (4) | 142 | (4) |
| Net derivative financial instruments and fair value adjustment for portfolio hedged risk (note ii) |
(971) | 1,059 | (10) | 424 |
| Loans and advances to customers | (7,951) | (3,470) | (4,197) | (1,912) |
| Other operating assets | (420) | (198) | (4,348) | (1,161) |
| Shares | 6,342 | 1,905 | 6,342 | 1,905 |
| Deposits from banks, customers and others | (1,238) | 1,842 | (938) | (371) |
| Debt securities in issue | 1,613 | (582) | 1,777 | (856) |
| Deferred taxation (note ii) | 136 | 23 | 31 | (7) |
| Retirement benefit obligations | (73) | 51 | (72) | 48 |
| Other operating liabilities | 7 | (199) | (1,025) | 383 |
| Total (note ii) | (2,413) | 427 | (2,298) | (1,551) |
| Cash and cash equivalents | ||||
| Cash | 8,797 | 4,325 | 8,797 | 4,325 |
| Loans and advances to banks repayable in 3 months or less | 3,266 | 2,925 | 3,217 | 2,890 |
| Total | 12,063 | 7,250 | 12,014 | 7,215 |
Notes:
i. Comparatives have been restated as detailed in note 1.
ii. Amounts in relation to derivative financial instruments and fair value adjustment for portfolio hedged risk and deferred taxation are presented on a net basis; comparative information has been reclassified to conform to the current year presentation. Accordingly, changes in operating assets and liabilities are presented on a net basis, whereas in the prior year operating assets and liabilities were presented separately.
The Group is required to maintain balances with the Bank of England and certain other central banks which, at 4 April 2016, amounted to £325 million (2015: £319 million). These balances are included within loans and advances to banks on the balance sheet and are not included in the cash and cash equivalents in the cash flow statement as they are not liquid in nature.
285
The Group is subject to the capital requirements imposed by its regulator the Prudential Regulation Authority (PRA). Regulatory capital comprises the Group's general reserve, revaluation reserve, core capital deferred shares, other equity instruments, permanent interest bearing shares (PIBS) and subordinated debt, subject to various adjustments required by the capital rules.
During the year the Group complied with the capital requirements set by the PRA. Further unaudited details about the Group's capital position can be found in the 'Solvency risk' section of the Business and Risk Report.
Nationwide is a building society, incorporated and domiciled in the United Kingdom. The address of its registered office is:
Nationwide Building Society Nationwide House Pipers Way, Swindon SN38 1NW
| 289 |
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288
For the year ended 4 April 2016
| 1. Statutory percentages | ||
|---|---|---|
| 2016 | Statutory limit | |
| % | % | |
| Lending limit | 7.64 | 25.00 |
| Funding limit | 26.71 | 50.00 |
The above percentages have been calculated in accordance with the provisions of the Building Societies Act 1986 as amended by the Building Societies Act 1997 and the Modification of the Lending Limit and Funding Limit Calculations Order 2004.
The lending limit measures the proportion of business assets not in the form of loans fully secured on residential property and is calculated as (X-Y)/X where:
The funding limit measures the proportion of shares and borrowings not in the form of shares held by individuals and is calculated as (X-Y)/X where:
X = shares and borrowings, being the aggregate of:
The statutory limits are as laid down under the Building Societies Act 1986 as amended by the Building Societies Act 1997 and ensure that the principal purpose of a building society is that of making loans which are secured on residential property and are funded substantially by its members.
| 2. Other percentages | |||
|---|---|---|---|
| 2016 | 2015 | ||
| % | % | ||
| As a percentage of shares and borrowings: | |||
| • Gross capital | 6.9 | 6.9 | |
| • Free capital | 6.0 | 6.0 | |
| • Liquid assets | 12.1 | 10.6 | |
| Profit for the financial year as a percentage of mean total assets | 0.49 | 0.44 | |
| Management expenses as a percentage of mean total assets | 0.91 | 0.89 | |
The above percentages have been prepared from the Society's consolidated accounts and in particular:
| 3. Information relating to directors at 4 April 2016 | |||
|---|---|---|---|
| Name and date of birth |
Occupation | Date of appointment | Other directorships |
| D Roberts BSc (Hons), MBA, PhD (Honorary), CFifs Chairman 12 September 1962 |
Non Executive Director | 1 September 2014 | Campion Willcocks Limited Dr Challoner's Grammar School (Governor) NHS England |
| G J Beale CBE, BSc, FCA 19 October 1958 |
Chief Executive Officer | 5 April 2003 | |
| T P Prestedge 12 February 1970 |
Chief Operating Officer | 28 August 2007 | Nationwide Anglia Property Services Limited Dunfermline BS Nominees Limited Monument (Sutton) Limited The Derbyshire (Premises) Limited Opportunity Now |
| M M Rennison BA, FCA 9 August 1960 |
Group Finance Director | 1 February 2007 | Confederation Mortgage Services Limited Exeter Trust Limited First Nationwide LBS Mortgages Limited Nationwide Anglia Property Services Limited Nationwide Housing Trust Limited Nationwide Investments (No.1) Limited Nationwide Lease Finance Limited Nationwide Mortgage Corporation Limited Nationwide Syndications Limited NBS Fleet Services Limited Staffordshire Leasing Limited Arkose Funding Limited |
| C S Rhodes BSc (Hons), ACA 17 March 1963 |
Group Retail Director | 20 April 2009 | at.home nationwide limited Derbyshire Home Loans Limited E-Mex Home Funding Limited Jubilee Mortgages Limited The Mortgage Works (UK) plc UCB Home Loans Corporation Limited The Nationwide Foundation National Numeracy (Trustee) |
| R K Perkin MA (Cantab), FCA 30 April 1948 |
Company Director | 20 April 2010 | Electra Private Equity plc Electra Private Equity Investments plc Change, Grow, Live Bower Bequest Trustee Company Limited Tullett Prebon plc Sova |
| R A Clifton CBE, MA (Cantab), FRSA 30 January 1958 |
Non Executive Director | 1 July 2012 | Populus Limited Populus Group Limited WWF – UK (Fellow) Henley Festival Limited British United Provident Association Limited (The) The Conservation Volunteers TCV Trading 1 Limited TCV Trading 2 Limited BrandCap Limited Rita Clifton Limited ASOS plc |
| 3. Information relating to directors at 4 April 2016 | |||
|---|---|---|---|
| Name and date of birth |
Occupation | Date of appointment | Other directorships |
| L M Peacock BA (Hons) 26 December 1953 |
Company Director | 18 July 2011 | Hawkins Residents Limited Scottish Water Scottish Water Business Stream Holdings Limited Scottish Water Horizons Holdings Limited Standard Life plc Standard Life Assurance Limited Standard Life Charitable Trust The Westminster Society for People with Learning Disabilities |
| M A Lenson MBA, BA (Hons), ACIB, FSI 17 September 1954 |
Company Director | 18 July 2011 | Eclipse Film Partners No.39 LLP (Designated Member) The Invicta Film Partnership No.37 LLP (Designated Member) Elysian Fuels 1 LLP (Designated Member) Elysian Fuels 2 LLP (Designated Member) MVA Consultant Services Limited The Currency Cloud Group Limited |
| R M Fyfield MA, BA (Hons) 3 May 1969 |
Non Executive Director | 2 June 2015 | Jupiter Entertainment |
| T J W Tookey BSc (Hons), FCA 17 July 1962 |
Non Executive Director | 2 June 2015 | Westmoreland Court Management (Beckenham) Limited Zoological Society of London (Member of Strategy & Development Board) |
Documents may be served on any of the directors c/o The Group Secretary, Nationwide Building Society, Nationwide House, Pipers Way, Swindon, Wiltshire SN38 1SN.
Executive directors' terms and conditions of employment are detailed in their individual contracts which include a notice period of 12 months from the Society to the individual and a notice period of six months from the individual to the Society. The notice period offered to any new recruit would be in line with this approach.
Directors' share options
50% of awards to directors from the 2015/16 Directors' Performance Award and the legacy 2013-16 Medium Term Performance Pay Plan will be linked to the value of the Society's core capital deferred shares, details of which have been provided in the Report of the directors on remuneration. 50% of outstanding awards under the 2014/15 Directors' Performance Pay Plan and the legacy 2012-15 Medium Term Performance Pay Plan are also linked to the value of the Society's core capital deferred shares.
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 the Society and will contain detailed information about the Society and management as well as financial statements.
293
| Additional Tier 1 (AT1) capital |
Capital that meets certain criteria set out in Capital Requirements Directive IV (CRD IV). In particular, the criteria require that upon the occurrence of a trigger event, the AT1 capital instrument converts to Common Equity Tier 1 capital or the principal is written down on a permanent or temporary basis. |
|---|---|
| Additional Tier 1 (AT1) securities |
Securities that pay a fixed annual coupon at the discretion of the Society. In the event of insolvency, AT1 securities rank the same as permanent interest bearing shares (PIBS) but behind the claims of all subordinated debt holders, creditors and investing members of the Society, but ahead of core capital deferred shares (CCDS) investors. These securities are eligible as Tier 1 capital. |
| Arrears | Amounts that are unpaid at their contractual date. A customer is in arrears when they are behind in fulfilling their obligations such that an outstanding loan payment is overdue. Such a customer can also be said to be in a state of delinquency. When a customer is in arrears, the entire outstanding balance is said to be delinquent, meaning that delinquent balances are the total outstanding loans on which payments are overdue. |
| Asset backed securities (ABS) |
Securities that represent an interest in an underlying pool of referenced assets. The referenced pool can comprise any assets which attract a set of associated cash flows, including credit card assets, but are commonly pools of residential or commercial mortgages. Investors in these securities have the right to cash received from future payments (interest and/or principal) on the underlying asset pool. |
| Available for sale (AFS) |
Financial assets that are not classified as loans and receivables, held to maturity investments or financial assets at fair value through the income statement. |
| Bank levy | A levy that applies to certain UK financial institutions (including Nationwide) and the UK operations of foreign banks since 1 January 2011. The levy is based on a percentage of the chargeable equity and liabilities of the institution at the balance sheet date. |
| Base mortgage rate (BMR) |
The Society's standard variable rate, which is guaranteed to be no more than 2% above the Bank of England base rate. This is the revert rate for existing customers at the end of a deal reserved on or before 29 April 2009, at which point the Standard Mortgage Rate (SMR) was introduced. |
| Basel II | The Basel Committee on Banking Supervision's statement of best practice that defines the methods by which firms should calculate their regulatory capital requirements to retain sufficient capital to protect the financial system against unexpected losses. Basel II is comprised of three pillars. |
| Basel III | The Basel Committee rules text, issued in December 2010, which presents the details of strengthened global regulatory standards on bank capital adequacy and liquidity. This has been implemented via the Capital Requirements Directive IV (CRD IV) legislation. |
| Basel III leverage ratio exposure |
The denominator used in the Basel III leverage ratio. Exposure is measured as the sum of on balance sheet exposures, adjusted for derivative and securities financing transaction exposures, and off-balance sheet items. |
| Basis point (bp) | One hundredth of a percent (0.01 percent). 100 basis points is one percent. Used, for example, in quoting movements in interest rates. |
| BIPRU | The prudential sourcebook for banks, building societies and investment firms. |
| Buy to let mortgages | Mortgages offered to customers purchasing residential property as a rental investment. |
| Capital ratios | Key financial ratios measuring the Group's capital adequacy or financial strength. These include the Common Equity Tier 1 ratio, Tier 1 ratio, total capital ratio and leverage ratio. |
| Capital requirements | The amount of capital that the Group is required to hold based upon the risks to which the business is exposed. |
| Capital Requirements Directive (CRD) |
The supervisory framework in the European Commission which reflects the Basel II and Basel III rules on capital measurement and capital standards. |
| Capital Requirements Directive IV (CRD IV) |
European legislation to implement Basel III, which includes the Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD). |
| Capital Requirements Regulation (CRR) |
European regulation that is directly applicable to European Union member states, defining prudential requirements for capital, liquidity and credit risk for credit institutions and investment firms. |
|---|---|
| Capital resources | Capital held, allowable under regulatory rules, less certain regulatory adjustments and deductions that are required to be made. |
| Career average revalued earnings (CARE) |
A defined benefit pension arrangement where the pension accrued is based on pensionable pay across an employee's career. The pension earned each year is based on pensionable pay in that year and is increased by a set revaluation rate, linked to inflation, for each year up to retirement (or, if earlier, the date the employee leaves the scheme). |
| Certificates of deposit | Bearer-negotiable instruments acknowledging the receipt of a fixed term deposit at a specified interest rate. |
| Charge off | The point at which the customer relationship for non-active accounts is transferred to being one of recovery only, due to significant levels of arrears or through placement with a debt collection agency or litigation. |
| Collateral | Security pledged for repayment of a loan. |
| Collateralised debt obligations (CDO) |
Securities issued by a third party which reference ABS and/or certain other related assets purchased by the issuer. The Group has not established any programmes creating CDOs but has invested in instruments issued by other banking groups. |
| Collateralised loan obligations (CLO) |
Securities backed by the repayments from a pool of commercial loans. The payments may be made to different classes of owners (in tranches). |
| Collectively assessed impairments |
Where a portfolio comprises assets with similar characteristics, collective impairment assessment takes place using appropriate statistical techniques. The collective assessment takes account of losses that will have taken place but are not yet identified. |
| Commercial lending | Loans secured on commercial property, loans to registered social landlords and loans relating to Project Finance. |
| Commercial mortgage backed securities (CMBS) |
Securities that represent interests in a pool of commercial mortgages. Investors in these securities have the right to cash received from future mortgage payments (interest and/or principal). |
| Commercial paper (CP) |
An unsecured promissory note issued to finance short term credit needs, which specifies the face amount paid to investors on the maturity date. |
| Commercial real estate (CRE) |
Includes office buildings, industrial property, medical centres, hotels, retail stores, shopping centres, multifamily housing buildings, warehouses, garages and industrial properties. |
| Common Equity Tier 1 capital |
The highest quality form of capital as defined in Capital Requirements Directive IV (CRD IV), comprising accumulated reserves and qualifying instruments after regulatory deductions. |
| Common Equity Tier 1 (CET1) ratio |
Common Equity Tier 1 capital expressed as a percentage of risk weighted assets. |
| Conduct and compliance risk |
The risk that the Group exercises inappropriate judgement or makes errors in the execution of its business activities, leading to non-compliance with regulation or legislation, market integrity being undermined, or an unfair outcome being created for customers. |
| Consumer banking | Comprises credit card, unsecured personal lending and the Group's FlexAccount (current account) products. |
| Consumer Credit Act (CCA) |
The legislation on how firms should market and manage credit for the protection of consumers. |
| Contingency funding plan (CFP) |
A document recording the Group's plan in a range of liquidity and economic factor scenarios, which could have an impact on the Group over multiple time horizons. |
| Contractual maturity | The final payment date of a loan or other financial instrument, at which point the entire remaining outstanding principal and interest is due to be repaid. |
| Core capital deferred shares (CCDS) |
A form of Common Equity Tier 1 (CET1) capital which has been developed to enable the Society to raise capital from the capital markets. Holders of CCDS receive periodic distributions from the Society. Distributions are discretionary and capped in any financial year. In the event of insolvency, CCDS holders rank behind the claims of all other depositors, creditors and investing members of the Society. |
|---|---|
| Core liquidity ratio | The proportion of shares and borrowings, including offshore deposits, that are readily convertible. Readily convertible assets comprise either cash or highly rated debt securities issued by governments or multi-lateral development banks. |
| Cost income ratio (CIR) | A ratio that represents the proportion of administrative expenses to total income. |
| Covered bonds | Debt securities backed by a portfolio of mortgages that are segregated from the issuer's other assets to be solely for the benefit of the holders of the covered bonds. The Group issues covered bonds as part of its funding activities. |
| Credit risk | The risk that a borrower or counterparty fails to pay the interest or to repay the principal on a loan or other financial instrument (such as a bond) on time. |
| Credit spread | The premium over the benchmark or risk-free rate required by the market to accept a lower credit quality. |
| Credit valuation adjustment (CVA) |
The difference between the risk-free value of a portfolio of trades and the market value which takes into account the counterparty's risk of default. The CVA therefore represents an estimate of the change to fair value that a market participant would make to incorporate inherent credit risk. |
| Cross currency interest rate swap |
An arrangement in which two parties exchange specific principal amounts of different currencies at inception and subsequent interest payments on the principal amounts. Often one party will pay a fixed rate of interest, while the other will pay a floating rate (though there are also fixed-fixed and floating-floating arrangements). At the maturity of the swap, the principal amounts are usually re-exchanged. |
| Customer deposits | Money deposited by personal account holders. Such funds are recorded as liabilities in the balance sheet within shares or amounts due to customers. |
| Customer redress | Compensation for loss as a result of past sales or other consequence (including technical breaches) of financial products. |
| Debit valuation adjustment (DVA) |
The difference between the risk-free value of a portfolio of trades and the market value which takes into account the Group's risk of default. The DVA therefore represents an estimate of the adjustment to fair value that a market participant would make to incorporate the credit risk of the Group. |
| Debt securities | See 'Investment securities'. |
| Debt securities in issue | Transferable certificates of indebtedness of the Group to the bearer of the certificates. These are liabilities of the Group and include certificates of deposit. |
| Default | Circumstances in which the probability of default is taken as 100% for the purposes of the calculation of regulatory capital and compliance with the Capital Requirements Directive IV (CRD IV) legislation. This is defined as when a borrower reaches a predefined arrears status or where a borrower is considered unlikely to repay the credit obligation in full without the lender taking action such as realising security. |
| Deferred tax asset | Corporate income taxes recoverable in future periods as a result of deductible temporary differences (being differences between the accounting and tax bases of an asset or liability that will result in tax deductible amounts in future periods) and the carry forward of unused tax credits. |
| Deferred tax liability | Corporate income taxes payable in future periods as a result of taxable temporary differences (being differences between the accounting and tax bases of an asset or liability that will result in taxable amounts in future periods). |
| Defined benefit obligation |
The present value of expected future benefit payments resulting from past service of employees in the defined benefit pension plan. |
| Defined benefit pension plan |
A pension or other post-retirement benefit plan under which the Group has an obligation to provide agreed benefits to current and former employees. The Group bears the risk that its obligation may increase or that the value of the assets in the pension fund may fall. |
|---|---|
| Defined contribution pension plan |
A pension plan under which the Group pays fixed contributions as they fall due into a separate entity (a fund) and has no further legal or constructive obligations. |
| Delinquency | See 'Arrears'. |
| Derivative | A contract or agreement whose value changes with movements in an underlying index such as interest rates, foreign exchange rates, share prices or indices, and which requires no initial investment or an initial investment that is smaller than would be required for other types of contracts with a similar response to market factors. The principal types of derivatives are swaps, forwards, futures and options. |
| Earnings risk | The risk that a source of income or value is unable to continue to add the expected value, due to changes in market, regulatory or other environmental factors. |
| Effective interest rate method (EIR) |
The method used to measure the carrying value of a financial asset or liability. EIR allocates associated income or expense to produce a level yield, either to maturity or to the next re-pricing to a market rate. |
| Effective tax rate | The tax charge in the income statement as a percentage of profit before tax. |
| Encumbered assets | Assets on the balance sheet which are pledged in order to secure, collateralise or credit-enhance a financial transaction from which they cannot be freely withdrawn. |
| End point | Full implementation of Capital Requirements Directive IV (CRD IV) with no transitional provisions. |
| Enterprise Risk Management Framework (ERMF) |
A framework that seeks to provide the context and guidance for cohesive risk management activity across the Group. |
| European Banking Authority (EBA) |
The independent EU authority which works to ensure effective and consistent prudential regulation and supervision across the European banking sector. |
| Expected loss (EL) | A calculation to estimate the potential losses on current exposures due to potential defaults. It is the product of probability of default (PD), loss given default (LGD) and exposure at default (EAD). |
| Exposure | The maximum loss that a financial institution might suffer if a borrower, counterparty or group fails to meet their obligations or if assets and off-balance sheet positions have to be realised. |
| Exposure at default (EAD) |
An estimation of the amount of exposure that will be outstanding at the time of default. |
| Final salary pension arrangements |
A defined benefit pension arrangement where the pension payable is based on the employee's final pensionable salary. |
| Financial Conduct Authority (FCA) |
The statutory body responsible for conduct of business regulation and supervision of UK authorised firms from 1 April 2013. The FCA also has responsibility for the prudential regulation of firms that do not fall within the Prudential Regulation Authority's (PRA's) scope. |
| Financial Ombudsman Service (FOS) |
An independent service in the UK for settling disputes between businesses providing financial services and their customers. |
| Financial Policy Committee (FPC) |
A committee based at the Bank of England, charged with identifying, monitoring and taking action to reduce or remove systemic risks with a view to protect and enhance the resilience of the UK financial system. It is also responsible for supporting the economic policy of the UK Government. |
| Financial risk | The risk of the Group having inadequate earnings, cash flow or capital to meet current or future requirements and expectations. This includes loss or damage to the earnings capacity, market value or liquidity of the Group, arising from mismatches between assets, funding and other commitments, and which may be exposed by changes in market rates, market conditions or the Group's credit profile. |
| Financial Services Compensation Scheme (FSCS) |
The UK's compensation fund of last resort for customers of authorised financial services firms. The FSCS may pay compensation to customers if a firm is unable, or likely to be unable, to pay claims against it, usually because it has stopped trading or has been declared in default. The FSCS is funded by the financial services industry. |
|---|---|
| Fitch | Rating agency, Fitch Ratings Limited. |
| Forbearance | Forbearance takes place when a concession is made on the contractual terms of a loan to a customer as a result of financial difficulties. |
| Foundation internal ratings based (IRB) approach |
A method of calculating credit risk capital requirements using internal probability of default (PD) models but with regulators' supervisory estimates of loss given default (LGD) and conversion factors for the calculation of exposure at default (EAD). |
| Free capital | The aggregate of gross capital and provisions for collective impairment losses on loans and advances to customers less property, plant and equipment and intangible assets. |
| Funding for Lending Scheme (FLS) |
A scheme launched by the Bank of England in July 2012 to incentivise banks and building societies to lend to UK households and non-financial companies through reduced funding costs, the benefits of which are passed on to UK borrowers in the form of cheaper and more easily available loans. |
| Gross capital | The aggregate of general reserve, revaluation reserve, available for sale reserve, core capital deferred shares (CCDS), Additional Tier 1 (AT1) capital, subscribed capital and subordinated liabilities. |
| Gross mortgage lending | New lending advanced to customers during the period. |
| House price index (HPI) |
An index monitoring changes in house prices both monthly and annually, providing a comprehensive view of the property market. |
| Help to Buy shared equity scheme |
A Government scheme which helps house purchasers obtain a mortgage with a 5% deposit. The property is part financed (up to 20% and a minimum of 10%) by an equity loan from the Homes and Communities Agency. |
| Impaired loans | Loans which are more than three months in arrears, or which have individual provisions raised against them. |
| Impairment provisions | Provisions held against assets on the balance sheet. The provisions represent management's best estimate of losses incurred in the loan portfolio at the balance sheet date. |
| Impairment losses | When an impairment review determines that the amount expected to be recovered is less than the current carrying value, an impairment loss is recognised to reduce the asset's value to its recoverable amount. |
| Individual liquidity adequacy assessment (ILAA) |
The process and document that define Nationwide's liquidity management framework, risk appetite and measurement. |
| Individual liquidity guidance (ILG) |
Guidance from the Prudential Regulation Authority (PRA) on a firm's required quantity of liquidity resources and funding profile. |
| Individually assessed impairments |
Residential loans are assessed individually for impairment when they are in possession. Commercial loans are assessed individually for impairment when there is objective evidence that an impairment loss has occurred. |
| Interest rate swap | A contract under which two counterparties agree to exchange periodic interest payments on a predetermined monetary principal, the notional amount. |
| Internal capital adequacy assessment process (ICAAP) |
The Group's own assessment of the levels of capital that it needs to hold in respect of its regulatory capital requirements for credit, market and operational risks as well as for other risks including stress events. |
| Internal ratings based approach (IRB) |
An approach for measuring exposure to credit risks. IRB approaches are more sophisticated and risk sensitive than the Standardised approach and may be Foundation or Advanced. IRB approaches may only be used with Prudential Regulation Authority (PRA) permission. |
|---|---|
| International Accounting Standards Board (IASB) |
The independent standard setting body of the IFRS Foundation. Its members are responsible for the development and publication of International Financial Reporting Standards (IFRSs) and for approving Interpretations of IFRS as developed by the IFRS Interpretations Committee (IFRIC). |
| International Swaps and Derivatives Association (ISDA) master agreement |
A standardised contract developed by ISDA and used to enter into bilateral derivatives transactions. The contracts grant legal rights of set off for derivative transactions with the same counterparty. This reduces the credit risk of the derivatives to the extent that negative values offset positive values. |
| Investment grade | The highest range of credit ratings, from AAA to BBB, as measured by external credit rating agencies. |
| Investment securities | Assets representing certificates of indebtedness of credit institutions, public bodies or other undertakings excluding those issued by central banks. Sometimes referred to as debt securities. |
| Investment Property Databank (IPD) index |
A measurement of the performance of the prime commercial real estate (CRE) market in the UK on a monthly basis, reporting on a number of key data series (including capital value returns, total returns, income returns, rental values and void rates) against the performance of other key asset classes including UK equities and UK gilts. |
| Lending risk | The risk that a borrower or counterparty fails to pay the 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. |
| Level 1 fair values | Fair values derived from unadjusted quoted prices for identical assets or liabilities in active markets where the quoted price is readily available, such as for high quality government securities. |
| Level 2 fair values | Fair values derived from models whose inputs are observable in an active market, such as for most investment grade and liquid bonds, asset backed securities, certain collateralised debt obligations (CDOs), collateralised loan obligations (CLOs) and over the counter (OTC) derivatives. |
| Level 3 fair values | Fair values derived from inputs that are not based on observable market data (unobservable inputs), such as for private equity investments, derivatives including an equity element, deposits including an equity element, some collateralised debt obligations (CDOs) and certain asset backed securities and bonds. |
| Leverage ratio | A ratio defined by regulators which measures Tier 1 capital as a proportion of total exposures. |
| Libor (London Inter bank Offered Rate) |
A benchmark interest rate at which banks can borrow funds from other banks in the London interbank market. |
| Liquid asset buffer (LAB) |
A surplus level of adequate, high quality, unencumbered assets that must be held in order to meet the BIPRU requirements for liquidity resources. |
| Liquidity and funding risk |
Liquidity risk is the risk that the Group is unable to meet its liabilities as they fall due and maintain member and stakeholder confidence. Funding risk is the risk that the Group is unable to maintain diverse funding sources in wholesale and retail markets and manage retail funding risk that can arise from excessive concentrations of higher risk deposits. |
| Liquidity coverage ratio (LCR) |
A liquidity metric which aims to ensure that a firm maintains an adequate level of liquidity to meet its needs for a 30 calendar day time horizon under a severe stress scenario. |
| Loan to deposit ratio | Represents loans and advances to customers divided by the aggregate of shares, other deposits and amounts due to customers. |
| Loan to value ratio (LTV) |
A ratio which expresses the amount of exposure as a percentage of the value of the property on which it is secured. The Group calculates LTV on an indexed basis such that the value of the property is updated on a regular basis to reflect changes in the market using either the house price or commercial real estate indices. |
| Loss given default (LGD) |
An estimate of the difference between exposure at default (EAD) and the net amount of the expected recovery expressed as a percentage of EAD. |
|---|---|
| Loyalty Saver | A distinctive set of savings products which pay enhanced rates as membership length increases. |
| Main current account | The primary or sole current account used by the customer. |
| Market risk | The risk that the net value of, or net income arising from, the Group's assets and liabilities is impacted as a result of market prices or rate changes. |
| Medium term notes | Corporate notes continuously offered by a company to investors, through a dealer, across a range of maturity periods. |
| Member | A person who has a share investment or a mortgage loan with the Society. |
| Moody's | Rating agency, Moody's Investors Service Limited. |
| Mortgage backed securities |
A category of asset backed security that represents interests in a group of mortgages. Investors in these securities have the right to cash received from future mortgage payments (interest and/or principal). |
| Near prime | Loans to borrowers with marginally weakened credit histories such as a County Court Judgement (CCJ) or default of less than or equal to £1,000 or with one missed mortgage payment in the last 12 months. |
| Negative equity | The difference between the outstanding balance on a loan and the current value of any security held where the security value is lower than the outstanding balance. |
| Net assets | The difference between total assets and total liabilities. |
| Net interest income | The difference between interest receivable on assets and similar income and interest paid on liabilities and similar charges. |
| Net interest margin | Net interest income as a percentage of weighted average total assets. |
| Net mortgage lending | The net amount of new lending advanced to customers during the period offset by customer balances settled during the period. |
| Net stable funding ratio (NSFR) |
A funding metric, under Basel III, to calculate the proportion of long term assets that are funded by stable, long term funding sources (customer deposits and long term wholesale funding). |
| Non-performing loans | Loans which are in arrears, including impaired loans with individually assessed impairments. |
| Operational risk | The risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. |
| Overnight indexed swap (OIS) rate |
A rate reflecting the overnight interest typically earned or paid in respect of collateral exchanged. OIS is used in valuing collateralised interest rate derivatives. |
| Over the counter (OTC) |
Contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. They offer flexibility because, unlike standardised exchange-traded products, they can be tailored to fit specific needs. |
| Past due loans | Loans where a counterparty has failed to make a payment when contractually due. |
| Pension risk | The risk that the value of the Fund's assets will be insufficient to meet the estimated liabilities of the Fund. Pension risk can adversely impact the Group's capital position and/or result in increased cash funding obligations to the Fund. |
| Performing loans | Loans which are neither past due nor impaired. |
| Permanent interest bearing shares (PIBS) |
Unsecured, deferred shares of the Society that, in the event of insolvency, rank equally with the claims of Additional Tier 1 (AT1) securities, behind the claims of all subordinated debt holders, depositors, creditors and investing members of the Group, and ahead of the claims of core capital deferred shares (CCDS) investors. PIBS are also known as subscribed capital. |
| Pillar 1/2/2A/3 | Components of the Basel capital framework. Pillar 1 covers the minimum capital requirements, largely in relation to credit and operational risks. Pillar 2/2A covers additional firm-specific capital requirements for risks not covered in full by Pillar 1 requirements. Pillar 3 covers disclosures about the firm's capital and risk position. |
|---|---|
| Prime residential mortgages |
Mainstream residential loans, which typically have a higher credit quality and fit standard underwriting processes. As such, they are likely to have a good credit history, and pass a standard affordability assessment at the point of origination. |
| Private equity investments |
Equity investments in operating companies that are not quoted on a public exchange. |
| Probability of default (PD) |
An estimate of the probability that a borrower will default on their credit obligations in the next 12 months. |
| Protected equity bonds (PEBs) |
Deposit accounts with the potential for stock market correlated growth linked to the performance of specified stock market indices. PEBs protect an investor's original investment amount against reductions in the linked stock market indices, whilst providing potential for upside from movements in the stock markets over a fixed term. |
| Provision coverage ratio |
The ratio of impairment provisions to the corresponding portfolio of loans and advances to which they relate. |
| Prudential Regulation Authority (PRA) |
The statutory body responsible for the prudential supervision of banks, building societies, insurers and a small number of significant investment firms in the UK from 1 April 2013. The PRA is a subsidiary of the Bank of England. |
| Regulatory capital | Capital allowable under regulatory rules, less certain required regulatory adjustments and deductions. |
| Renegotiated loans | Loans and advances may be renegotiated either as part of an ongoing customer relationship with a creditworthy customer or in response to a borrower's financial difficulties. In the latter case, the renegotiated loan may no longer be treated as past due or impaired if there is no change to the estimated present value of future cash flows. Individually significant loans whose terms have been renegotiated are subject to ongoing review to determine if they remain past due or impaired. |
| Repurchase agreement (repo)/reverse repurchase agreement (reverse repo) |
An agreement that allows a borrower to use a financial security as collateral for a cash loan. In a repo, the borrower agrees to sell a security to the lender subject to a commitment to repurchase the asset on a given date. For the party selling the security (and agreeing to repurchase it in the future) it is a repurchase agreement or repo; for the counterparty to the transaction (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement or reverse repo. |
| Residential mortgage backed securities (RMBS) |
A category of asset backed security that represents interests in a group of residential mortgages. Investors in these securities have the right to cash received from future mortgage payments (interest and/or principal). |
| Residual maturity | The remaining period to the contractual maturity date of a financial asset or financial liability. |
| Retail funding | Funding obtained from individuals rather than institutions. |
| Retail internal ratings based (IRB) approach |
An approach for measuring exposure to retail credit risks. The method of calculating credit risk capital requirements uses internal probability of default (PD), loss given default (LGD) and exposure at default (EAD) models. Internal ratings based (IRB) approaches may only be used with Prudential Regulation Authority (PRA) permission. |
| Retail loans | Loans to individuals rather than institutions, including residential mortgage lending and consumer banking. |
| Risk appetite | The level and type of risk that the Group is willing to assume in pursuit of its strategic goals. |
| Risk weighted assets (RWA) |
The value of assets, after adjustment under the capital rules to reflect the degree of risk they represent. |
| Securitisation | A process by which a group of assets, usually loans, are aggregated into a pool, which is used to back the issuance of new securities. A company transfers assets to a special purpose entity (SPE) which then issues securities backed by the assets. The Group has established securitisation structures as part of its funding activities. These securitisation structures use retail mortgages as the asset pool. In addition, the Group invests in various securitisation structures in its treasury portfolio. |
|---|---|
| Shares | Funds deposited by a person in a retail savings or current account with the Society. Such funds are recorded as liabilities for the Society. |
| Shares and borrowings | The total of shares, deposits from banks, other deposits, amounts due to customers and debt securities in issue. |
| Solo surplus | Total capital on an individual consolidated basis less capital requirements. Individual consolidation is a consolidation basis for regulatory purposes which only includes those subsidiaries meeting particular criteria contained within Capital Requirements Directive IV (CRD IV). |
| Solvency risk | The risk that the Group fails to maintain sufficient capital to absorb losses throughout a full economic cycle and sufficient to maintain the confidence of current and prospective investors, members, the Board and regulators. |
| Sovereign exposures | Exposures to governments, ministries, departments of governments, embassies, consulates and exposures on account of cash balances and deposits with central banks. |
| Special purpose entities (SPEs) |
Entities that are created to accomplish a narrow and well defined objective. There are often specific restrictions or limits around their ongoing activities. The Group uses a number of SPEs, including those set up under securitisation programmes. This term is used interchangeably with SPV (special purpose vehicle). |
| Specialist residential lending |
Consists of buy to let, self-certified and other non-standard mortgages. |
| Standard & Poor's (S&P) |
Rating agency, Standard & Poor's Credit Market Services Europe Limited. |
| Standard mortgage rate (SMR) |
The revert rate for existing mortgage customers at the end of a deal reserved on or after 30 April 2009. |
| Standardised approach |
The basic method used to calculate credit risk capital requirements. In this approach the risk weights used in the capital calculation are determined by regulators' supervisory parameters. The Standardised approach is less risk-sensitive than the internal ratings based (IRB) approach. |
| Strategic risk | The risk of significant loss or damage arising from business decisions that impact the long-term interests of the membership, or from an inability to adapt to external developments. |
| Stress testing | A process which involves identifying possible future adverse events or changes in economic conditions that could have unfavourable effects on the Group (either financial or non-financial), assessing the Group's ability to withstand such changes, and identifying management actions to mitigate the impact. |
| Structured entity (SE) | An entity in which voting or similar rights are not the dominant factor in deciding control. Structured entities are consolidated when the substance of the relationship indicates control. |
| Subordinated debt/ liabilities |
A form of Tier 2 capital that is unsecured and ranks behind the claims of all depositors, creditors and investing members but before the claims of holders of Additional Tier 1 (AT1) securities, permanent interest bearing shares (PIBS) and core capital deferred shares (CCDS). |
| Sub prime | Loans to borrowers that typically have weakened credit histories such as payment delinquencies and potentially more severe problems such as County Court Judgements (CCJs) or default greater than £1,000, more than one missed mortgage payment in the last 12 months or discharged bankruptcies. Sub prime borrowers may also display higher risk characteristics as measured by credit scores, or other criteria indicating heightened risk of default. |
| Subscribed capital | See 'Permanent interest bearing shares (PIBS)'. |
|---|---|
| Swap rate | The fixed interest rate in a fixed to floating interest rate swap. |
| Tier 1 capital | A measure of the Group's financial strength prior to the introduction of the Capital Requirements Directive IV (CRD IV) legislation. The Group's general reserves, core capital deferred shares (CCDS) and Additional Tier 1 (AT1) qualify as Tier 1 capital. |
| Tier 1 capital ratio | Tier 1 capital as a percentage of risk weighted assets. |
| Tier 2 capital | A further measure of the Group's financial capital that meets the Tier 2 requirements set out in the Capital Requirements Regulation (CRR), comprising qualifying subordinated debt and other securities and eligible impairment allowances after regulatory deductions. |
| Trading book | A regulatory classification consisting of positions in financial instruments or commodities held by a bank with intention to trade. The Group does not run a trading book. |
| Transformation costs | Costs, included within administrative expenses, which are directly related to business combinations or the restructuring of parts of the business to transform the way activities are performed. |
| Unaudited | Financial information that has not been subjected to the audit procedures undertaken by the Group's external auditor. |
| Underlying profit | A measure which aims to present management's view of the Group's underlying performance for the reader of the Annual Report and Accounts with like for like comparisons of performance across years without the distortion of one off volatility and items which are not reflective of the Group's ongoing business activities. Underlying profit is not designed to measure sustainable levels of profitability as that potentially requires exclusion of non-recurring items even though they are closely related to (or even a direct consequence of) the Group's core business activities. |
| Value at risk (VaR) | A technique that estimates the potential loss that could occur on risk positions as a result of future movements in market rates and prices over a specified time horizon and to a given level of statistical confidence. In its day to day monitoring, the Group uses a 10 day horizon and a 99% confidence level. |
| Wholesale funding | Funding received from larger businesses, financial institutions and sovereign entities. |
| Wholesale funding ratio | Wholesale funding as a percentage of total funding. |
| Wholesale lending | Lending to larger businesses, financial institutions and sovereign entities. |
| Write off | The point where it is determined that an asset is irrecoverable, or it is no longer considered economically viable to try and recover the asset or final settlement is reached and the shortfall written off. In the event of write off, the customer balance and any related impairment balance are removed from the balance sheet. |
| Accounting policies, Statement of (note 1) | 208 |
|---|---|
| Additional Tier 1 capital (note 33) | 278 |
| Administrative expenses (note 7) | 227 |
| Annual business statement | 289 |
| Audit Committee report | 83 |
| Auditors' report, Independent | 195 |
| Balance sheets | 204 |
| Board of directors | 57 |
| Board Risk Committee report | 87 |
| Business and Risk Report | 105 |
| Business model | 19 |
| Capital and leasing commitments (note 29) | 271 |
| Capital management (note 38) | 286 |
| Cash flow statements | 207 |
| Chairman's statement | 7 |
| Chief Executive's review | 11 |
| Citizenship report | 43 |
| Classification and measurement (note 12) | 240 |
| Commercial lending risk | 135 |
| Conduct and compliance risk | 186 |
| Consumer banking and lending risk | 129 |
| Contingent liabilities (note 30) | 272 |
| Core capital deferred shares (CCDS) (note 32) | 278 |
| Corporate governance, Report of the directors on | 69 |
| Customer redress (note 28) | 270 |
| Debt securities in issue (note 19) | 251 |
| Deposits from banks (note 17) | 250 |
| Derivative financial instruments (note 16) | 247 |
| Derivatives and hedge accounting, Gains/losses from (note 6) | 226 |
| Directors, Information relating to | 291 |
| Directors' report | 63 |
| Directors' service contracts | 292 |
| Directors' share options | 292 |
| Earnings risk | 182 |
|---|---|
| Employees (note 8) | 229 |
| Fair value hierarchy of financial assets and liabilities held at fair value (note 22) | 254 |
| Fair value of financial assets and liabilities held at fair value – Level 3 portfolio (note 23) | 256 |
| Fair value of financial assets and liabilities measured at amortised cost (note 24) | 261 |
| Fee and commission income and expense (note 5) | 225 |
| Financial review | 27 |
| Financial risk | 151 |
| Financial services compensation scheme (FSCS) (note 28) | 269 |
| Forward looking statements | 293 |
| Glossary | 294 |
| Group directors | 61 |
| Highlights, 2016 Society | 5 |
| Impairment provisions on loans and advances to customers (note 9) | 230 |
| Income statements | 202 |
| Intangible assets (note 26) | 265 |
| Interest expense and similar charges (note 4) | 224 |
| Interest receivable and similar income (note 3) | 223 |
| Investment securities, Available for sale (note 13) | 242 |
| Investments in equity shares (note 14) | 243 |
| Investments in subsidiary undertakings (note 34) | 279 |
| Judgements in applying accounting policies and critical accounting estimates (note 2) | 223 |
| Leasing commitments, Capital and (note 29) | 271 |
| Lending risk | 111 |
| Liquidity and funding risk | 152 |
| Loans and advances to customers (note 15) | 243 |
| Market risk | 173 |
| Nationwide Foundation, The | 53 |
| Nomination and Governance Committee report | 89 |
| Notes to the accounts | 208 |
| Notes to the cash flow statements (note 37) | 285 |
| Offsetting financial assets and financial liabilities (note 25) | 264 |
| Operating segments (note 11) | 237 |
| Operational risk | 183 |
|---|---|
| Other deposits (note 18) | 250 |
| Other equity instruments (note 33) | 278 |
| Other lending risk | 143 |
| Pension risk | 180 |
| People, Our | 39 |
| Principal risks | 108 |
| Property, plant and equipment (note 27) | 267 |
| Provisions for liabilities and charges (note 28) | 269 |
| Registered office (note 39) | 286 |
| Related party transactions (note 36) | 282 |
| Remuneration, Report of the directors on | 93 |
| Residential mortgages and lending risk | 115 |
| Retirement benefit obligations (note 31) | 272 |
| Risk management | 189 |
| Risk overview | 37 |
| Solvency risk | 167 |
| Statements of comprehensive income | 203 |
| Statements of movements in members' interests and equity | 205 |
| Statutory percentages | 289 |
| Strategic review | 17 |
| Strategic risk | 188 |
| Structured entities (note 35) | 281 |
| Subordinated liabilities (note 20) | 252 |
| Subscribed capital (note 21) | 253 |
| Taxation (note 10) | 233 |
| Top and emerging risks | 109 |
| Treasury assets and treasury credit risk | 144 |
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Nationwide Building Society Head Office: Nationwide House, Pipers Way, Swindon, SN38 1NW
G101 (A) 2016
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