Interim / Quarterly Report • Sep 30, 2015
Interim / Quarterly Report
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Interim Results For the period ended 30 September 2015
| Page | |
|---|---|
| Key highlights | 4 |
| Financial summary | 5 |
| Chief Executive's Review | 6 |
| Financial Review | 9 |
| Business and Risk Report | 18 |
| Consolidated interim financial statements | 66 |
| Notes to the consolidated interim financial statements | 72 |
| Responsibility statement | 97 |
| Independent review report | 98 |
| Other information and glossary | 100 |
| Contacts | 101 |
Profit before tax shown on a statutory and underlying basis is set out on page 5. Statutory profit before tax of £802 million has been adjusted for a number of items, consistent with prior years, to derive an underlying profit before tax of £801 million. The purpose of this measure is to reflect management's view of the Group's underlying performance and to assist with like for like comparisons of performance across periods. Underlying profit is not designed to measure sustainable levels of profitability as that potentially requires exclusion of non-recurring items even though they are closely related to (or even a direct consequence of) the Group's core business activities.
Certain statements in this document are forward looking with respect to plans, goals and expectations relating to the future financial position, business performance and results of Nationwide. Although Nationwide believes that the expectations reflected in these forward looking statements are reasonable, Nationwide can give no assurance that these expectations will prove to be an accurate reflection of actual results. By their nature, all forward looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond the control of Nationwide including, amongst other things, UK domestic and global economic and business conditions, market related risks such as fluctuation in interest rates and exchange rates, inflation/deflation, the impact of competition, changes in customer preferences, risks concerning borrower credit quality, delays in implementing proposals, the timing, impact and other uncertainties of future acquisitions or other combinations within relevant industries, the policies and actions of regulatory authorities, the impact of tax or other legislation and other regulations in the jurisdictions in which Nationwide operates. As a result, Nationwide's actual future financial condition, business performance and results may differ materially from the plans, goals and expectations expressed or implied in these forward looking statements. Due to such risks and uncertainties Nationwide cautions readers not to place undue reliance on such forward looking statements.
Nationwide undertakes no obligation to update any forward looking statements whether as a result of new information, future events or otherwise.
This document does not constitute or form part of an offer of securities for sale in the United States. Securities may not be offered or sold in the United States absent registration or an exemption from registration. Any public offering to be made in the United States will be made by means of a prospectus that may be obtained from the Society and will contain detailed information about the Society and management as well as financial statements.
"This has been our best ever half year of mortgage lending along with a strong inflow of savings and the opening of over a quarter of a million new current accounts. Our first half performance reflects the growing strength and security of the Society with all of our core product areas delivering standout results.
"We have also continued to deliver better customer satisfaction than our high street peer group1 , achieved excellent financial results and further improved our capital position. All this has been achieved in the face of fierce competition and by continuing to invest in innovative services and long term good value products for new and existing members.
"This confirms that we are the genuine alternative to the banks for those customers looking for a broad range of good quality products and leading customer service. Mutuals, like Nationwide, are different from the banks. We serve a social purpose by providing a safe home for savings and finance for home ownership. Nationwide is evidence that you can be successful by doing the right thing."
Graham Beale Chief Executive
1 Source: GfK Financial Research Survey (FRS) measure, as defined in the Glossary on page 100
2 Source: GfK Financial Research Survey (FRS) measure, as defined in the Glossary on page 100
| 30 September 2015 Financial performance £m Total underlying income 1,683 Underlying profit before tax 801 Statutory profit before tax 802 Mortgage lending £bn Group residential – gross/gross market share 14.9 Group residential – net/net market share 4.1 % Average loan to value of new residential lending (by value) 69 Member deposits (note ii) £bn Balance movement/market share 2.6 Net receipts 2.1 Key ratios % Cost income ratio – underlying basis 51.0 Cost income ratio – statutory basis 51.0 Net interest margin 1.58 At 30 September 2015 Balance sheet £bn Total assets 203.1 Loans and advances to customers 174.1 Member deposits (shares) (note ii) 135.0 Asset quality % Proportion of residential mortgage accounts 3 months+ in arrears 0.46 |
% 13.2 21.2 % 8.5 |
30 September 2014 (note i) £m 1,589 632 598 £bn 13.1 3.6 % 69 £bn 3.5 3.0 % 49.3 51.4 1.51 At |
% 12.2 24.8 % 13.8 |
|---|---|---|---|
| 4 April | |||
| 2015 | |||
| £bn | |||
| 195.6 | |||
| 170.6 | |||
| 132.4 | |||
| % | |||
| 0.49 | |||
| Average indexed loan to value of residential mortgage book (by value) 55 |
56 | ||
| Total provision as % of impaired balances on residential mortgage | |||
| lending 10.4 |
12.3 | ||
| Total provision as % of impaired balances on commercial real estate | |||
| lending 45 |
53 | ||
| Key ratios % |
% | ||
| Capital - CRD IV | |||
| Common Equity Tier 1 ratio (note iii) 21.9 |
19.8 | ||
| Leverage ratio (note iii) 4.2 |
4.1 | ||
| Liquidity coverage ratio 130.0 |
119.3 | ||
| Wholesale funding ratio 25.1 |
|||
| Loan to deposit ratio (note iv) 115.7 |
23.3 | ||
| Other balance sheet ratios |
Notes:
i. Comparatives have been restated for the reclassification of foreign currency retranslation amounts from net interest income to gains on derivatives and hedge accounting as described in note 2 to the consolidated interim financial statements.
ii. Member deposits include current account credit balances.
iii. Reported under CRD IV on an end point basis. 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.
iv. The loan to deposit ratio represents loans and advances to customers divided by (shares + other deposits + amounts due to customers).
During the first six months of this financial year Nationwide has continued to demonstrate that it is possible to offer a mutual alternative to the established banks. We delivered a record level of mortgage lending, up 14% on the same period last year at £14.9 billion, increased our savings balances by £2.6 billion and opened over a quarter of a million new personal current accounts.
We have done this without compromising our commitment to exceptional service and fairness for our members. We have remained first for customer satisfaction amongst our high street peer group3 and represent only 2.1%4 of industry complaints reported to the Financial Conduct Authority despite our size and share of market activity.
As part of our £500 million investment in our branch network we have opened the first of three brand new branches in our new design in London Victoria, with Tottenham Court Road and Stratford Westfield planned for early 2016 and Spring 2016 respectively. We have continued to expand Nationwide Now, our innovative service that connects members to mortgage, personal banking and financial consultants via a high definition video link in our branches, and we are on schedule to hit our target of 400 locations by the calendar year end.
In the past six months we became one of the first financial services providers in the UK to offer customers the facility to use Apple Pay, our customers are now able to access balance information on an Apple watch, and we also introduced Paym, which allows payments to be made using just a mobile number.
Underlying profit for the six months was up 27% to £801 million, and statutory profit was up 34% to £802 million. As a result of this and the high quality nature of our loan book, our Common Equity Tier 1 (CET1) capital ratio now stands at 21.9% (4 April 2015: 19.8%) and our leverage ratio has risen to 4.2% (4 April 2015: 4.1%).
We have reinforced our position as the UK's second largest mortgage lender by outperforming our natural par shares of lending and have been named as the Best Mortgage Lender 2015 in the Money Marketing Financial Services Awards. Our gross lending was the highest ever in a half year period, up 14% at £14.9 billion (H1 2014/15: £13.1 billion), and our net lending was also up 14% at £4.1 billion (H1 2014/15: £3.6 billion), representing market shares of 13.2% and 21.2% respectively (H1 2014/15: 12.2% and 24.8%).
We have continued our longstanding support for first time buyers, helping 25,700 people to take their first step onto the property ladder, an increase of 8% on the same period last year. To broaden our reach in this important segment we have recently launched a range of mortgages that require a deposit of only 5%. We have also continued to participate in the Government's Help to Buy shared equity scheme, for which we account for over a third of all cases. We will support the Government's Help to Buy ISA initiative, and will deliver a product when it comes into effect on 1 December.
We have continued to place emphasis on rewarding our existing mortgage members through our Loyalty Rate Mortgages initiative. This guarantees that for any mortgage member coming to the end of their existing deal, we will have a product for them that will be the best available on the high street compared with our peer group of lenders.
In addition to lending to owner occupiers, we are one of the leading providers of loans to the buy to let sector through our subsidiary The Mortgage Works (TMW). Over the first half of the year, TMW gross advances accounted for £2.9 billion of our total mortgage lending, up 32% and representing a 14.9% share of gross buy to let lending in the UK.
3 Source: GfK Financial Research Survey (FRS) measure, as defined in the Glossary on page 100
4 Financial Conduct Authority complaints data H1 2015
The savings market in the early part of the financial year was dominated by NS&I Pensioner Bonds, which continued to attract deposits that would otherwise have been placed with traditional savings providers, including Nationwide. However, since their withdrawal in May, we have recovered our position and over the half year our member deposit balances have increased by £2.6 billion.
We remain committed to rewarding member loyalty and have over 1.3 million members benefiting from our Loyalty Saver and Loyalty Bond products. We have had a particularly strong ISA season, accounting for 33% of the total market change in cash ISA balances over the first six months of the year. Our performance and commitment to delivering long term good value is reflected in Nationwide being named as the High Street Savings Provider of the Year in the Consumer Moneyfacts Awards 2015.
We have expanded our current account base, opening over a quarter of a million new accounts during the past six months, up 13% on the same period last year (H1 2014/15: 225,000).
We have been a net beneficiary of the seven day account switching service, accounting for around 9.8% of all switchers over the first half of the year. We now have nearly six million current accounts, our market share of main and standard packaged accounts has increased to 6.9% (4 April 2015: 6.8%) and our market share of all accounts is 8.1% (4 April 2015: 7.9%).
FlexOne, our current account aimed at the youth market, has enjoyed huge success and in the last six months has represented over 18% of all youth account openings.
The quality of our current accounts has been recognised by us being named as the 'Best Online Current Account Provider 2015' by Your Money, with our FlexPlus account awarded 'Best Packaged Current Account' for 2015 by Moneynet.
The Competition and Markets Authority, in its review of the UK current account market, addressed four key themes aimed at improving competition in the retail banking current account market: barriers to accessing and assessing information on current accounts; barriers to switching current accounts; low levels of customer engagement; and, incumbency advantages. We endorse those themes, particularly the desire to increase greater levels of comparability based on price and service. The CMA identified that Nationwide offers one of the lowest cost products coupled with high satisfaction relative to other providers5 , yet despite these qualities it continues to be difficult to make meaningful progress in growing our overall market share due to inertia amongst consumers and the entrenched position of the large, incumbent banks.
Our service proposition continues to be better than that of our banking peers. We were ranked number one for customer satisfaction amongst our high street peer group and our lead over our nearest competitor now stands at 4.1% (March 2015: 4.5%)6 . We were the only high street financial services provider in the top ten in the 2015 UK Customer Satisfaction Index7 , which ranks 225 organisations. We also continue to account for only a fraction of total industry complaints (2.1%) despite our size, and 78% of all cases referred to the Financial Ombudsman Service are upheld in our favour, compared with industry average of 43%8 .
5 CMA Retail Banking Investigation Provisional Findings and Notice of Possible Remedies Briefing October 2015, slide 10
6 Source: GfK Financial Research Survey (FRS) measure, as defined in the Glossary on page 100
7 Source: The Institute of Customer Service 'UK Customer Satisfaction Index July 2015'
8 Financial Ombudsman Service complaints data H1 2015
The Society's financial strategy is to deliver profitability in an "optimal range"; that is, sufficient to support our regulatory capital needs, invest for the future and provide a safe and secure home for our members' money. Our first half performance has delivered strongly against this objective with a record underlying profit up 27% to £801 million, and statutory profit up 34% at £802 million. As a result of this and the high quality nature of our loan book, our Common Equity Tier 1 (CET1) ratio now stands at 21.9% (4 April 2015: 19.8%) and our leverage ratio has risen to 4.2% (4 April 2015: 4.1%). Our underlying cost income ratio was 51.0% (H1 2014/15: 49.3%).
We are pleased that our credit ratings from each of the main ratings agencies were affirmed or improved during the first half of the year, including upgrades in our long term rating from Moody's from A2 to A1 and Standard & Poor's changing our outlook to stable.
We are very disappointed that the Chancellor has decided to include Nationwide in the introduction of the tax surcharge on banking companies announced in the Budget. Nationwide is not a bank and serves a social purpose of facilitating home ownership and promoting a savings culture. The tax surcharge will have a disproportionate effect on building societies and we believe that it represents a missed opportunity to support diversity in UK financial services.
After trending down through 2014, housing market activity has increased modestly over the course of 2015. Mortgage approvals have broadly tracked this trend, while remortgage approvals have risen more strongly, encouraged by the prospect of the potential for interest rates to increase. Whilst shifts in interest rate expectations may have some impact on the housing market, a strengthening labour market underpinning a continued economic recovery should support both activity and house prices, with the latter also receiving support from the chronic under-supply of houses for sale.
In recent months the annual growth of house prices in the UK has remained in a fairly narrow range between 3% and 4%. However, prices in London have continued to rise more rapidly, and in Q3 2015 were over 10% higher than at Q3 2014. While healthy employment growth and robust demand from investors – including buy to let – helps to explain this trend, such outperformance is unlikely to be sustained over the long term, given that key measures of affordability are already stretched.
Buy to let lending has remained robust in recent months. Although this is likely to continue, it remains too early to quantify the impact of recent tax changes and higher interest rates on long term future demand.
Competition in the lending markets has remained robust and, as a consequence, we expect to see some downward pressure on margins in the second half of the year and into 2016/17.
As a building society our aim is to optimise our profitability to allow us to grow and invest in the business while at the same time maintaining our capital strength. As a modern mutual it is important that we continue to invest in order to meet our members' current and future needs by providing good long term value products, services and security. Such investment comes at a cost, but we believe this is the right thing to do, particularly at a time when digital innovation and other initiatives are having a major impact on consumer behaviour and expectations of service and digital access.
On 16 November 2015 the Board announced Joe Garner, the current CEO of Openreach, as my successor. Joe is committed to delivering exceptional service to customers across the financial services and retail sectors and this is a great appointment for Nationwide as we continue to focus on providing exceptional products and services to our members. We anticipate that Joe will take up his duties in Spring 2016.
Our interim financial results demonstrate the benefits of being a low risk, safe and secure mutual focused on doing the right thing for our members. Statutory profit before tax for the period ended 30 September 2015 is up 34% at £802 million and is reflective of a strong trading performance, which has seen an 8% growth in net interest income and a £169 million reduction in impairment losses. Our increased profit is allowing us to improve our capital strength (with the CET1 ratio increasing by 2.1% to 21.9%), improve the competitiveness of our products, reward loyalty and increase investment into new services such as Apple Pay and Nationwide Now.
Total assets have grown 4% in the period to £203 billion reflecting a strong lending performance where Nationwide took more than 20% market share of the growth in residential net lending. In addition, we have strengthened our liquidity position, with the Liquidity Coverage Ratio (LCR) increasing by 10.7% to 130.0% at 30 September 2015.
Profit after tax on a statutory basis and a reconciliation to underlying profit are set out below. Underlying profit represents management's view of underlying performance and is presented to aid comparability across reporting periods; it equates to statutory profit before tax adjusted for charges in respect of the Financial Services Compensation Scheme (FSCS), transformation costs and gains from derivatives and hedge accounting.
| Half year to 30 September 2015 | Statutory profit |
FSCS | Transformation costs |
Gains from derivatives and hedge accounting |
Underlying profit |
|---|---|---|---|---|---|
| £m | £m | £m | £m | £m | |
| Net interest income | 1,557 | - | - | - | 1,557 |
| Net other income | 126 | - | - | - | 126 |
| Gains from derivatives and hedge | |||||
| accounting | 14 | - | - | (14) | - |
| Total income | 1,697 | - | - | (14) | 1,683 |
| Administrative expenses | (866) | - | 8 | - | (858) |
| Impairment losses | - | - | - | - | - |
| Provisions for liabilities and charges | (29) | 5 | - | - | (24) |
| Profit before tax | 802 | 5 | 8 | (14) | 801 |
| Tax | (166) | ||||
| Profit after tax | 636 |
| Half year to 30 September 2014* | Statutory profit |
FSCS | Transformation costs |
Gains from derivatives and hedge accounting |
Underlying profit |
|---|---|---|---|---|---|
| £m | £m | £m | £m | £m | |
| Net interest income | 1,446 | - | - | - | 1,446 |
| Net other income | 143 | - | - | - | 143 |
| Gains from derivatives and hedge | |||||
| accounting | 6 | - | - | (6) | - |
| Total income | 1,595 | - | - | (6) | 1,589 |
| Administrative expenses | (820) | - | 36 | - | (784) |
| Impairment losses | (169) | - | - | - | (169) |
| Provisions for liabilities and charges | (8) | 4 | - | - | (4) |
| Profit before tax | 598 | 4 | 36 | (6) | 632 |
| Tax | (112) | ||||
| Profit after tax | 486 |
*Comparatives have been restated for the reclassification of foreign currency retranslation amounts from net interest income to gains from derivatives and hedge accounting as described in note 2 to the consolidated interim financial statements.
Underlying profit for the six months was £801 million, up 27% compared to the same period last year (H1 2014/15: £632 million). The increase in profitability is primarily due to reduced impairment losses as a result of improved asset quality, and an increase in net interest income driven by lower retail funding costs. This has been in part offset by increased administrative costs and a small reduction in other income. Over the short to medium term, evidence of more sustained competition in the mortgage and savings market is likely to result in modest reductions in our net interest margin.
| Net interest income | Half year to | Half year to |
|---|---|---|
| 30 September | 30 September | |
| 2015 | 2014* | |
| £m | £m | |
| Net interest income | 1,557 | 1,446 |
| Weighted average total assets | 200,112 | 194,066 |
| % | % | |
| Net interest margin (NIM) | 1.58 | 1.51 |
*Comparatives have been restated for the reclassification of foreign currency retranslation amounts from net interest income to gains from derivatives and hedge accounting as described in note 2 to the consolidated interim financial statements.
The Group's margin continues to perform strongly with net interest income at £1,557 million, 8% higher than the same period last year. After taking account of growth in average assets of 3%, reflecting our 21% share of the net residential lending market during the period, this translates into an annualised increase in net interest margin (NIM) of 7 bps to 158 bps, predominantly due to lower funding costs.
The market cost of retail funding has fallen over the last 12 months driven by reduced demand for funding as natural retail deposit growth continues to exceed demand for lending in a constrained housing market, and the large banks in particular have sought to protect margins in the face of increasing competition for new lending. Nationwide has maintained a strong retail savings proposition in line with its mutual principles and has tended to lag the large banks in reducing the rates we offer. Notwithstanding this approach, however, it has been necessary to adjust our pricing progressively in line with wider market trends, resulting in a 20 bps overall reduction in our retail funding costs since 30 September 2014.
Competition in the mortgage market continues to intensify with gross margins on new business falling by approximately 25 bps over the last 12 months. This has had limited impact on NIM in the period to 30 September 2015 but, combined with increasing levels of customer switching from higher margin variable rate products as speculation rises over bank base rate, is expected to lead to pressure on margins during the second half of the financial year and into 2016/17.
| Net other income | Half year to 30 September 2015 £m |
Half year to 30 September 2014* £m |
|---|---|---|
| Current account and savings | 38 | 50 |
| Protection and investments | 37 | 37 |
| General insurance | 37 | 39 |
| Mortgage | 4 | 6 |
| Credit card | 8 | 15 |
| Commercial | 7 | 8 |
| Other | (5) | (12) |
| Total underlying net other income | 126 | 143 |
| Gains from derivatives and hedge accounting | 14 | 6 |
| Total statutory net other income | 140 | 149 |
*Comparatives have been restated for the reclassification of foreign currency retranslation amounts from net interest income to gains from derivatives and hedge accounting as described in note 2 to the consolidated interim financial statements.
Total underlying net other income for the period of £126 million is £17 million lower than the same period last year. The Group has seen reductions within current accounts and credit card product lines, reflecting the decision to remove unauthorised overdraft charges and the impact of lower interchange income as a result of caps on charges imposed at an industry level.
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 relating to derivatives and hedge accounting are provided in note 5 of the consolidated interim financial statements.
| Administrative expenses | Half year to 30 September |
Half year to 30 September |
|---|---|---|
| 2015 £m |
2014 £m |
|
| Employee costs | 349 | 327 |
| Other administrative expenses | 354 | 316 |
| Depreciation and amortisation | 155 | 141 |
| Total underlying administrative expenses | 858 | 784 |
| Transformation costs | 8 | 36 |
| Total statutory administrative expenses | 866 | 820 |
| % | % | |
| Cost income ratio – underlying basis* | 51.0 | 49.3 |
| Cost income ratio – statutory basis | 51.0 | 51.4 |
*Comparatives have been restated for the transfer of foreign currency retranslation amounts from net interest income to gains from derivatives and hedge accounting as described in note 2 to the consolidated interim financial statements.
Total underlying administrative expenses have increased by 9% to £858 million, driven by continued investment in the business and increasing employee costs. At a statutory level administrative expenses have increased by 6% to £866 million.
Employment cost increases include the impact of annual pay awards averaging 3.0% and 2.5% in each of the last two years. In addition, employee numbers have increased by 1.9% compared to the same period last year as the Group continues to strengthen risk and control functions and build greater capacity to support our growing business.
Other administrative expenses have increased by £38 million. This reflects enhancements in digital capability, including Nationwide Now, Apple Pay and Paym, together with investment in IT resilience, regulatory change and brand development. The reported period on period increase is net of cost savings realised through a reduction in administration costs in relation to customer complaints.
Transformation costs in the period include investment to enable IT change to be delivered in a more efficient, flexible and resilient manner. Costs are significantly lower than the prior period reflecting the successful completion of the integration of the Dunfermline, Cheshire and Derbyshire brands.
The cost income ratio on an underlying basis has increased from 49.3% to 51.0% at 30 September 2015. Whilst we remain focused on improving the efficiency of the organisation, this trend is expected to continue in the short and medium term in line with our strategic aim of creating a modern mutual. Our focus will be on improving the service we deliver to members and will result in continued investment in our distribution capability including our branches, digital technology and Nationwide Now. In addition, we will invest in the automation of back office administration to improve the speed, reliability and efficiency of key processes, as well as improving the resilience and availability of our services. We will also make further investment in our brand to broaden our appeal and support business growth.
| Impairment (reversals)/losses | Half year to 30 September |
Half year to 30 September |
|---|---|---|
| 2015 | 2014 | |
| £m | £m | |
| Residential lending | (7) | 13 |
| Consumer banking | 33 | 49 |
| Retail lending | 26 | 62 |
| Commercial lending | (27) | 73 |
| Other lending | 1 | 21 |
| Impairment losses on loans and advances to customers | - | 156 |
| Impairment losses on investment securities | - | 13 |
| Total | - | 169 |
There was no overall net charge for impairment losses in the period, with improvements seen across all portfolios. The most significant improvement relates to the commercial portfolio, driven by the substantial levels of deleveraging which took place in the 2014/15 financial year and a sustained improvement in market conditions.
With prolonged low interest rates, falling unemployment and wage growth outstripping increases in the cost of living, secured arrears continue to improve as a result of both these positive economic conditions and the prudent nature of our mortgage lending. Combined with moderate house price growth in the period this has resulted in a net release of incurred loss provisions of £7 million.
Consumer banking impairments are 33% lower than for the same period last year. The fall in impairments has been driven by the improving economic environment, improved credit underwriting for personal loans and the removal of unauthorised overdraft fees on current accounts which has had the effect of reducing early arrears.
The first half of 2015/16 has seen continued improvement in market conditions for commercial real estate (CRE) assets. Liquidity for prime and good secondary assets has supported improving asset values which have driven lower provision requirements on impaired assets. The significant deleveraging activity undertaken during 2014/15 has materially reduced our CRE exposure resulting in very low levels of new provisions during the current period. The result of this improving picture is a net provision release of £27 million against a £73 million charge in the comparative period which reflected accelerated disposals as part of deleveraging activity.
The 'other lending' impairment charge relates to an individual treasury asset which is now fully impaired. The impairment charge for period to 30 September 2014 related mainly to a provision in respect of a €100 million loan to a Luxembourg special purpose entity.
| Provisions for liabilities and charges | Half year to | Half year to |
|---|---|---|
| 30 September | 30 September | |
| 2015 | 2014 | |
| £m | £m | |
| Underlying provisions for liabilities and charges – customer redress | 24 | 4 |
| FSCS levy | 5 | 4 |
| Total provisions for liabilities and charges | 29 | 8 |
The Group holds 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 matters. The £24 million charge in the period relates to updated assumptions for provisions previously recognised and includes management's best estimate of the impact relating to the FCA's announcements on 2 October 2015 in relation to the past sale of PPI products.
The charge for the FSCS levy represents an increase in interest for the 2015/16 scheme year, initially estimated and provided at 4 April 2015. The charge for the 2016/17 scheme year will be recognised in the second half of the financial year.
Further information is provided in note 8 to the consolidated interim financial statements.
The statutory reported tax charge for the period of £166 million (H1 2014/15: £112 million) represents an effective tax rate of 20.7% (H1 2014/15: 18.7%), which is higher than the statutory rate in the UK of 20%. The higher effective rate is due principally to expenses not deductible for tax purposes. Further information is provided in note 9 to the consolidated interim financial statements.
On 2 November 2015, Visa Inc. announced the proposed acquisition of Visa Europe Limited ('VE') to create a single global payments business under the VISA brand. The Group is a member and shareholder of VE and in exchange for its ordinary share (currently held at cost of €10) will receive up front consideration in the form of cash (approximately €92 million) and preferred stock (approximately €59 million). The preferred stock is convertible into Class A common stock of Visa Inc, at a future date, subject to conditions. In addition, the Group may receive deferred cash consideration in 2020 which is contingent on certain performance thresholds being met.
On completion of the transaction the Group expects to recognise a gain in the income statement based upon the upfront cash proceeds and a fair value amount in relation to the other consideration. The fair value amount will reflect a number of factors and uncertainties relating to the other consideration. Subject to regulatory approval, completion is currently expected to occur in the first half of our 2016/17 financial year.
The Group's aim of maintaining a low risk balance sheet remains central to our strategy. Total assets have grown by 4% to £203 billion reflecting growth in both residential mortgage assets and high grade liquidity.
Liquidity balances have grown due to proactive prefunding of wholesale maturities due in the second half of the financial year, resulting in a Liquidity Coverage Ratio (LCR) of 130.0% at 30 September 2015 (4 April 2015: 119.3%) and a corresponding increase in our wholesale funding ratio.
Strong retail funding flows, particularly in the second quarter of the financial year, have also underpinned our asset growth with an increase in member deposits totalling £2.6 billion primarily attributable to competitive ISA products, a successful Loyalty 2 Year Fixed Rate Bond and our strong current account proposition.
| ASSETS | 30 September | 4 April | ||
|---|---|---|---|---|
| £m | 2015 % |
£m | 2015 % |
|
| Residential mortgages | 157,015 | 90 | 152,885 | 89 |
| Commercial lending | 13,631 | 8 | 14,594 | 9 |
| Consumer banking | 3,833 | 2 | 3,791 | 2 |
| Other lending | 39 | - | 29 | - |
| 174,518 | 100 | 171,299 | 100 | |
| Impairment provisions | (453) | (652) | ||
| Loans and advances to customers | 174,065 | 170,647 | ||
| Other financial assets | 26,707 | 22,721 | ||
| Other non-financial assets | 2,339 | 2,212 | ||
| Total assets | 203,111 | 195,580 | ||
| Asset quality | ||||
| Residential mortgages: | % | % | ||
| Proportion of residential mortgage accounts 3 months+ in arrears | 0.46 | 0.49 | ||
| Average indexed loan to value of residential mortgage book (by value) | 55 | 56 | ||
| Total provision as % of impaired balances | 10.4 | 12.3 | ||
| Commercial real estate (CRE) lending: | £m | £m | ||
| CRE gross balances | 3,302 | 4,043 | ||
| Impaired CRE balances | 287 | 608 | ||
| CRE provision as a % of impaired CRE balances | 45% | 53% | ||
| Other key ratios | % | % | ||
| Loan to deposit ratio (note i) | 115.7 | 115.6 | ||
| Liquidity coverage ratio | 130.0 | 119.3 |
Note:
i. The loan to deposit ratio represents loans and advances to customers divided by (shares + other deposits + amounts due to customers).
Market levels of gross lending were 7% higher supported by an improving economy and increased competition which has had the impact of reducing new business mortgage rates. This increased competition together with speculation over the first bank base rate rise in seven years has seen greater levels of remortgage activity within the market. Our mortgage proposition has allowed us to compete strongly with gross mortgage lending up 14% in the period to £14.9 billion (H1 2014/15: £13.1 billion), representing a market share of 13.2% (H1 2014/15: 12.2%). The Group remains the second largest mortgage lender in the UK.
Mortgage balances grew by £4.1 billion, of which £2.7 billion was prime lending and £1.4 billion related to specialist lending, in total representing 21.2% of overall net mortgage market growth. The loan to value (LTV) profile of new lending in the period, weighted by value, remained stable at 69%. The rise in house prices has continued in the period, reducing the average LTV of the portfolio at 30 September 2015 to 55% (4 April 2015: 56%). Our residential mortgage arrears have reduced further to 0.46% at 30 September 2015 (4 April 2015: 0.49%) as we continue to benefit from low and falling unemployment and growth in household income. Our arrears levels continue to be significantly lower than the Council of Mortgage Lenders industry average of 1.17%9 demonstrating our low risk appetite and strong underwriting capability.
The improvement in residential mortgage asset quality has led to impaired balances falling by £72 million to £823 million (4 April 2015: £895 million). The lower impaired balances have also resulted in lower impairment provisions being held on the balance sheet.
As a result of deleverage activity undertaken in recent years, our overall commercial portfolio is increasingly weighted towards registered social landlords of £7.7 billion (4 April 2015: £4.0 billion) and a Project Finance loan portfolio of £1.4 billion (4 April 2015: £1.4 billion). The portfolio also comprises our CRE lending of £3.3 billion (4 April 2015: £4.0 billion) and £1.2 billion of fair value adjustments relating to loans where we have hedged associated financial risks, typically interest rate risk.
The registered social landlord and Project Finance portfolios are fully performing and remain stable, reflecting their low risk nature. The Group's principal focus for registered social landlord lending is to reprice long-term facilities, where possible, through ongoing management of strong borrower relationships.
New CRE lending is focused on growing a low risk commercial loan portfolio diversified across geographic locations, property sectors and tenant profiles. The £0.7 billion reduction in CRE loans during the six months to 30 September 2015 reflects our continued strategy of reducing exposures which are outside of the Group's current risk appetite or do not align to our current lending strategy.
There has been a significant reduction in impaired balances within the CRE portfolio which have fallen by £321 million to £287 million (4 April 2015: £608 million). The level of impaired balances as a proportion of our total CRE exposure has fallen to 9% (4 April 2015: 15%) indicating resolution of impaired assets and improved asset quality.
We continue to reduce our exposure to non-core CRE lending through active management of individual cases, although the Group's exposure is now less than £1.2 billion having fallen by £625 million in the first half of the year. These balances are all regularly assessed for evidence of impairment with no significant net provisioning requirement in the year to date.
Consumer banking comprises retail balances relating to personal loans of £1.9 billion (4 April 2015: £1.8 billion), credit cards of £1.8 billion (4 April 2015: £1.7 billion) and current account overdrafts of £0.2 billion (4 April 2015: £0.2 billion). Unsecured lending balances have remained broadly stable reflecting a very competitive market and a tightening of our lending criteria. Asset quality within the consumer banking portfolios has improved, reflecting the favourable economic conditions and improved credit policies.
Further details of our lending risk are provided in the Business and Risk Report.
9 Source: Council of Mortgage Lenders (CML) 'Arrears on mortgages, by number of months in arrears' (12 November 2015)
Other financial assets total £26.7 billion (4 April 2015: £22.7 billion) and comprise liquidity and investment assets held by our Treasury Division amounting to £23.1 billion (4 April 2015: £18.8 billion), derivatives with positive fair values of £3.0 billion (4 April 2015: £3.3 billion) and fair value adjustments and other assets of £0.6 billion (4 April 2015: £0.6 billion). The increase in liquidity and investment assets reflects the prefunding of long term wholesale maturities due later in the financial year and has resulted in an increase in the LCR to 130.0% (4 April 2015: 119.3%).
Further details of our treasury portfolios are included in the 'Treasury assets' section of the Business and Risk Report.
| LIABILITIES | 30 September 2015 |
4 April 2015 |
|---|---|---|
| £m | £m | |
| Member deposits | 134,955 | 132,373 |
| Debt securities in issue | 33,365 | 28,105 |
| Other financial liabilities | 23,081 | 23,767 |
| Other liabilities | 1,483 | 1,594 |
| Total liabilities | 192,884 | 185,839 |
| Members' interests and equity | 10,227 | 9,741 |
| Total members' interests, equity and liabilities | 203,111 | 195,580 |
| Key ratio | % | % |
| Wholesale funding ratio (note i) | 25.1 | 23.3 |
Note:
i. The wholesale funding ratio calculation includes all balance sheet sources of funding (including securitisations) but excludes Funding for Lending Scheme (FLS) drawings.
Member deposits increased by £2.6 billion to £135.0 billion (4 April 2015: £132.4 billion) due to retail inflows and capitalised interest over the period. This demonstrates the success of our fixed term bonds, including our Loyalty Bond, and variable ISA products, which have resulted in the Group maintaining its market share of savings stock at 10.2% (4 April 2015: 10.2%). Of the balance growth, £1.3 billion is attributable to inflows into our current account products which had credit balances totalling £13.9 billion at 30 September 2015 (4 April 2015: £12.6 billion). Our market share of deposit balance growth for the period was 8.5% (H1 2014/15: 13.8%).
Debt securities in issue of £33.4 billion (4 April 2015: £28.1 billion) are used to raise funding in wholesale markets to finance core activities. The increase in outstanding amounts at 30 September 2015 reflects increased issuance activity in the wholesale markets in the first half of the financial year partly to pre-fund forthcoming maturities of long term debt securities and other deposits.
The wholesale funding ratio has increased to 25.1% (4 April 2015: 23.3%), as a result of the wholesale issuance activity described above. Off-balance sheet FLS drawings totalling £8.5 billion are unchanged from the financial year end and are excluded from the calculation of the wholesale funding ratio.
Further details on 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 £17.2 billion (4 April 2015: £17.2 billion), permanent interest bearing shares (PIBS) of £0.4 billion (4 April 2015: £0.4 billion), subordinated debt of £1.8 billion (4 April 2015: £2.1 billion) and derivatives and fair value adjustments of £3.7 billion (4 April 2015: £4.0 billion). Derivatives and fair value adjustments largely comprise interest rate and other derivatives taken out to hedge financial risks inherent in our core lending and funding activities.
| 30 September 2015 £m |
4 April 2015 £m |
|
|---|---|---|
| Capital resources | ||
| Common Equity Tier 1 (CET1) capital | 7,802 | 7,279 |
| Total Tier 1 capital | 8,794 | 8,271 |
| Total regulatory capital | 10,400 | 9,950 |
| Risk weighted assets (RWAs) | 35,628 | 36,804 |
| Leverage exposure | 208,621 | 200,665 |
| CRD IV capital ratios | % | % |
| CET1 ratio | 21.9 | 19.8 |
| Leverage ratio (note i) | 4.2 | 4.1 |
Notes:
CET1 capital resources have increased over the period by approximately £0.5 billion. This is the result of a strong trading performance, with £636 million of profit after tax for the period, partly offset by a reduction in the available for sale reserve and an increase in intangible assets.
Risk weighted assets (RWAs) reduced over the period by approximately £1.2 billion due to continued deleveraging in the commercial portfolio and lower residential lending RWAs as a result of house price inflation.
The movements described above have resulted in an increase in the CET1 ratio to 21.9% (4 April 2015: 19.8%). The leverage ratio has increased to 4.2% (4 April 2015: 4.1%) as growth in Tier 1 capital outweighs the increase in balance sheet exposure which has been driven by increases in mortgage balances, liquidity and investment assets held by Treasury.
The Group continues to monitor regulatory developments that could lead to an increase in capital requirements, including reviews of IRB modelling approaches, proposed revisions to the standardised approach for capital requirements, the capital floor framework, developments around leverage requirements and the Minimum Requirement for Eligible Liabilities (MREL). In assessing the appropriate level of capital, the Group considers such regulatory changes, as well as undertaking regular Group-wide stress tests (including participation in the PRA's annual concurrent stress test) to understand potential vulnerabilities. The Group considers its CET1 and leverage ratios to be well positioned to absorb future regulatory change and/or an economic downturn.
Further details of the capital position are included in the 'Solvency risk' section of the Business and Risk Report.
| Page | |
|---|---|
| Introduction | 19 |
| Principal risks | 20 |
| Top and emerging risks | 21 |
| Lending risk Residential mortgages Consumer banking Commercial lending Other lending Treasury assets |
22 23 32 36 42 43 |
| Financial risk Liquidity and funding risk Solvency risk Pension risk |
47 48 56 61 |
| Operational risk | 62 |
| Conduct and compliance risk | 64 |
This Business and Risk Report explains the Group's business, the risks it is exposed to and how it manages those risks. Where there has been no change to the Group's approach to managing its risks, or there has been no material change to the relevant risk environment from that disclosed at the financial year end, then this information has not been repeated in the 2015/16 Interim Results and can be found in the Business and Risk Report in the Annual Report and Accounts 2015.
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 model 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 30 September 2015. Please see the 'Solvency risk' section of this report for further details regarding the Group's capital position.
| Nationwide Building Society | ||||
|---|---|---|---|---|
| Operating segment | Retail | Commercial | Head office functions | |
| Business activities | Prime residential lending Specialist residential lending Consumer banking Savings products Insurance Investments |
Commercial real estate lending Social housing lending Project Finance lending |
Treasury including funding, liquidity and market risk management Central support functions |
|
| Regulatory risk weighted assets as at 30 September 2015* |
£m Credit risk 20,859 Operational risk 4,124 |
£m Credit risk 6,752 Operational risk 54 |
£m Credit risk 3,789 Operational risk 50 |
*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 business activities involve risk, it seeks to protect members by actively managing the risks that arise from business activities. The principal risks inherent within the business are:
| Risk category | Definition |
|---|---|
| Lending | The risk that a borrower or counterparty fails to pay interest or to repay principal on a loan or other financial instrument (such as a bond) on time. Lending risk also encompasses extension risk and concentration risk. |
| Financial | The risk of the Group having inadequate earnings, cash flow or capital to meet current or future requirements and expectations. It includes loss or damage to the earnings capacity, market value or liquidity of the Group, arising from mismatches between the Group's assets, funding and other commitments, which may be exposed by changes in market rates, market conditions or the Group's own credit profile. |
| Operational | The risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. |
| 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. |
| 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. |
In addition to these principal categories of risk, model risk, which the Group is exposed to, is managed under a separate framework across all risk categories and business areas where models are used.
Further details on lending risk, financial risk, operational risk and conduct and compliance risk are provided on the following pages. The Group's strategic risk and model risk environments have not changed significantly since the financial year end. Further information is available in the Business and Risk Report in the Annual Report and Accounts 2015.
The Compliance Committee and the Customer Committee have been combined to form the Conduct and Compliance Committee, reporting to the Executive Risk Committee, in order to co-ordinate management of these risks. All other definitions and committees remain unchanged.
The Group's emerging risks are identified through the process outlined in the 'Managing risk' section of the Annual Report and Accounts 2015 and are closely tracked within the Group's governance structure.
As outlined in the Annual Report and Accounts 2015, the Group's top and emerging risks relate to four key themes:
Developments during the period have brought increased focus on specific elements of two of these themes as set out below.
Growing competition in the Group's core savings and mortgage markets is anticipated to generate downward pressure on future levels of net interest margin. In addition, the Group expects to see increasing levels of customer switching from higher margin variable rate products driven by the speculation over bank base rate increases.
While uncertainty continues as to when and by how quickly UK base rates will move, the Group keeps under review the impact of sustained low interest rates or interest rate rises. In particular, the Group regularly reviews its operational plans to understand how it might respond to the needs of customers dealing with rises in interest rates, which have been at a historic low since 2009.
The Group is also carefully monitoring the impact on the buy to let market of tax changes due to be phased in from 2017, and changes to the payment of housing benefits, to understand any effects on either the size of the market or credit performance.
Recent high profile cyber attacks have underlined the risk faced by banks and other organisations which hold sensitive customer information. The Group is committed to maintaining the security of customer data and, as a result, continues to invest in security and detection capabilities designed to ensure it can respond to security threats effectively.
Similarly, over the last six months there has continued to be well-publicised instances of failures in industry banking and payments infrastructures. The increased use of digital banking services renders such resilience issues more important and so the Group continues to invest in improving the operational resilience of its banking infrastructure to protect customer service experience.
The Group manages lending risk for each of the following portfolios. Further information on lending risk for each of these portfolios is included in the subsequent sections of this report.
| Portfolio | Definition |
|---|---|
| Residential mortgages Loans secured on residential property, split between 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 86.9% (4 April 2015: 88.5%) of the Group's total lending portfolios. Within this, the Group's exposure relates primarily to residential mortgages which account for 90.0% (4 April 2015: 89.3%) of gross loans and advances to customers and which are comprised of high quality assets with low occurrences of arrears and possessions.
The table below summarises the Group's assets subject to lending risk.
| Balances subject to lending risk | Gross balance | Less: Impairment provisions |
Carrying value | % of total |
|---|---|---|---|---|
| 30 September 2015 | £m | £m | £m | % |
| Loans and advances to customers: | ||||
| Residential mortgages | 157,015 | (86) | 156,929 | 78 |
| Consumer banking | 3,833 | (234) | 3,599 | 2 |
| Commercial lending | 13,631 | (128) | 13,503 | 7 |
| Other lending | 39 | (5) | 34 | - |
| 174,518 | (453) | 174,065 | 87 | |
| Treasury assets: | ||||
| Cash | 7,899 | - | 7,899 | 4 |
| Loans and advances to banks | 3,763 | - | 3,763 | 2 |
| Available for sale investment securities | 11,487 | - | 11,487 | 6 |
| Investment in equity shares | 26 | - | 26 | - |
| Derivative financial instruments | 2,988 | - | 2,988 | 1 |
| 26,163 | - | 26,163 | 13 | |
| Total | 200,681 | (453) | 200,228 | 100 |
| Balances subject to lending risk | Gross balance | Less: Impairment |
Carrying value | % of total |
| provisions | ||||
|---|---|---|---|---|
| 4 April 2015 | £m | £m | £m | % |
| Loans and advances to customers: | ||||
| Residential mortgages | 152,885 | (110) | 152,775 | 79 |
| Consumer banking | 3,791 | (216) | 3,575 | 2 |
| Commercial lending | 14,594 | (322) | 14,272 | 8 |
| Other lending | 29 | (4) | 25 | - |
| 171,299 | (652) | 170,647 | 89 | |
| Treasury assets: | ||||
| Cash | 4,325 | - | 4,325 | 2 |
| Loans and advances to banks | 3,392 | - | 3,392 | 2 |
| Available for sale investment securities | 11,037 | - | 11,037 | 5 |
| Investment in equity shares | 26 | - | 26 | - |
| Derivative financial instruments | 3,337 | - | 3,337 | 2 |
| 22,117 | - | 22,117 | 11 | |
| Total | 193,416 | (652) | 192,764 | 100 |
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 through The Mortgage Works (UK) plc (TMW).
The mix between prime and specialist lending has remained stable over the period; within specialist lending the proportion of buy to let lending has increased to 87% (4 April 2015: 86%) as all other types of specialist lending are closed to new business.
Reflecting the continuing favourable economic environment, prime residential mortgage arrears have fallen slightly during the period. Arrears are expected to show a modest increase when interest rates start to rise even if, as the Group expects, they increase gradually, with the first rate increase expected in 2016. However, as a result of the robust credit assessment and affordability controls in place at the point of lending it is expected that members will be largely resilient to rising interest rates. An expectation for further declines in unemployment and steady increases in the pace of wage growth will also provide ongoing support for credit quality. Where members do start to feel the pressure of increased mortgage payments the Group will work with them, in line with its lending policies, to ensure the right outcome for the customer.
The private rental sector is an integral part of the housing market and now represents around 20% of UK housing stock. The Group's buy to let lending continues to benefit from enhanced controls around asset quality and interest cover ratios introduced from 2011 onwards. This has resulted in a more than three months in arrears percentage of 0.27%. There are a number of factors which will affect the buy to let market in the short to medium term, including expected movements in base rates, changes to taxation laws (from 2017) and the introduction of local property rental licensing standards. The Group will continue to carefully monitor these matters to understand the impact on the wider buy to let market.
At a national level, house prices have continued to rise on an annualised basis, though the pace of growth has been on a downward trend since the middle of 2014. Annual house price growth was 3.8% in September, down from almost 12% in mid-2014. There is still significant regional variation, with the strongest rates of annual house price growth occurring in the south of England, whilst Wales and Scotland saw small declines.
| Residential mortgage lending | 30 September 2015 4 April 2015 |
||||
|---|---|---|---|---|---|
| £m | % | £m | % | ||
| Prime | 127,230 | 81 | 124,549 | 81 | |
| Specialist lending: | |||||
| Buy to let | 26,020 | 16 | 24,370 | 16 | |
| Self-certified | 2,493 | 2 | 2,634 | 2 | |
| Near prime | 906 | 1 | 952 | 1 | |
| Sub prime | 366 | - | 380 | - | |
| 29,785 | 19 | 28,336 | 19 | ||
| Total residential mortgages | 157,015 | 100 | 152,885 | 100 |
The table below summarises the Group's gross residential mortgage lending balances:
Note: New lending for self-certified, near prime and sub prime was discontinued in 2009.
| Distribution of new business by borrower type (by value) | Half year to 30 September 2015 % |
Half year to 30 September 2014 % |
|---|---|---|
| Prime: | ||
| Home movers | 32 | 33 |
| First time buyers | 27 | 27 |
| Remortgagers | 20 | 22 |
| Other | 1 | 1 |
| 80 | 83 | |
| Specialist: | ||
| Buy to let (note i) | 20 | 17 |
| Total | 100 | 100 |
Note:
i. Includes buy to let remortgages.
In prime lending, lending to first time buyers remains stable as the Group continues to support this segment of the market. Affordability remains a key focus; in the six month period the proportion of new lending where the ratio of the loan to the borrower's income is greater than or equal to 4.5 is 5.3%. This is significantly below the limit of 15% set by the Financial Policy Committee. This reflects the Group's strategy of responsible lending which is supported by a robust affordability assessment and credit scoring process that ensures asset quality remains within the Group's risk appetite.
The proportion of remortgagers has reduced in value terms; however, on a volume basis the proportion has increased to 24% (H1 2014/15: 23%). The gradual reduction in mortgage rates in 2015, combined with growing speculation about a base rate increase has led to a rise in customers choosing new deals, as opposed to remaining on lenders' standard variable rates. This has also been reflected in higher levels of product switching for existing Group customers, which are not included in the new business figures above.
As a result of growth in the buy to let market, the proportion of the Group's new business lending to the buy to let sector has increased to 20% (H1 2014/15: 17%).
Residential mortgage lending in the Group continues to have a low risk profile as demonstrated by the 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.
The Group monitors the following lead indicators and performance statistics for residential lending:
There have been no significant changes to the number of possessions or value of negative equity loans disclosed in the Annual Report and Accounts 2015. Accordingly no update of these amounts has been provided in this report.
The Group calculates LTV by weighting the borrower level LTV by the individual loan balance to arrive at an average LTV as this approach most accurately reflects the exposure at risk to the Group.
| LTV of loan stock | 30 September 2015 % |
4 April 2015 % |
|---|---|---|
| Average loan to value of stock (indexed) | 55 | 56 |
| LTV of new business | Half year to 30 September 2015 % |
Half year to 30 September 2014 % |
Average loan to value of new business 69 69
Note: The LTV of new business excludes further advances.
The average LTV on the overall stock has reduced by 1% to 55% (4 April 2015: 56%), primarily due to the modest growth in house prices. Average LTV for new business has remained stable over the period.
| LTV distribution of new business | Half year to 30 September 2015 |
Half year to 30 September 2014 |
|---|---|---|
| % | % | |
| 0% to 60% | 26 | 25 |
| 60% to 75% | 43 | 43 |
| 75% to 80% | 9 | 9 |
| 80% to 85% | 11 | 9 |
| 85% to 90% | 10 | 13 |
| 90% to 95% | 1 | 1 |
| Over 95% | - | - |
| Total | 100 | 100 |
The proportions of new business lending across LTV segments is, in part, driven by increased lending in the buy to let sector, the vast majority of which is at LTVs of up to 75%.
The analysis of the Group's residential mortgage portfolio split between performing and non-performing loans and by geographical segment is set out below.
| Residential mortgage balances by LTV and region |
Greater London |
Central England |
Northern England |
South East England (excluding London) |
South West England |
Scotland | Wales & Northern Ireland |
Total | |
|---|---|---|---|---|---|---|---|---|---|
| 30 September 2015 | £m | £m | £m | £m | £m | £m | £m | £m | % |
| Performing loans Fully collateralised LTV ratio: |
|||||||||
| Up to 50% | 25,194 | 8,562 | 5,970 | 7,406 | 4,993 | 2,727 | 2,131 | 56,983 | |
| 50% to 60% | 12,268 | 4,706 | 3,398 | 3,948 | 2,660 | 1,533 | 1,073 | 29,586 | |
| 60% to 70% | 8,584 | 6,709 | 5,158 | 4,449 | 3,434 | 2,117 | 1,470 | 31,921 | |
| 70% to 80% | 3,497 | 5,399 | 6,177 | 2,444 | 2,300 | 2,805 | 1,532 | 24,154 | |
| 80% to 90% | 1,202 | 1,960 | 2,823 | 715 | 687 | 1,223 | 686 | 9,296 | |
| 90% to 100% | 12 | 159 | 679 | 21 | 19 | 232 | 176 | 1,298 | |
| 50,757 27,495 | 24,205 | 18,983 | 14,093 | 10,637 | 7,068 | 153,238 | 97.6 | ||
| Not fully collateralised | |||||||||
| - Over 100% LTV (A) | 7 | 7 | 72 | 2 | 3 | 32 | 292 | 415 | 0.3 |
| - Collateral value on A | 5 | 6 | 66 | 2 | 3 | 30 | 244 | 356 | |
| - Negative equity on A | 2 | 1 | 6 | - | - | 2 | 48 | 59 | |
| Total performing loans | 50,764 27,502 | 24,277 | 18,985 | 14,096 | 10,669 | 7,360 | 153,653 | 97.9 | |
| Non-performing loans Fully collateralised |
|||||||||
| LTV ratio: | |||||||||
| Up to 50% | 517 | 167 | 108 | 124 | 73 | 44 | 56 | 1,089 | |
| 50% to 60% | 273 | 103 | 69 | 80 | 51 | 26 | 29 | 631 | |
| 60% to 70% | 153 | 144 | 118 | 80 | 63 | 42 | 39 | 639 | |
| 70% to 80% | 33 | 126 | 142 | 55 | 47 | 49 | 37 | 489 | |
| 80% to 90% | 7 | 79 | 104 | 12 | 19 | 31 | 31 | 283 | |
| 90% to 100% | 1 | 17 | 74 | 1 | 1 | 12 | 24 | 130 | |
| 984 | 636 | 615 | 352 | 254 | 204 | 216 | 3,261 | 2.0 | |
| Not fully collateralised | |||||||||
| - Over 100% LTV (B) | 1 | 4 | 24 | 2 | 1 | 3 | 66 | 101 | 0.1 |
| - Collateral value on B | - | 4 | 21 | 1 | 1 | 3 | 52 | 82 | |
| - Negative equity on B | 1 | - | 3 | 1 | - | - | 14 | 19 | |
| Total non-performing loans | 985 | 640 | 639 | 354 | 255 | 207 | 282 | 3,362 | 2.1 |
| 51,749 28,142 | 24,916 | 19,339 | 14,351 | 10,876 | 7,642 | 157,015 | 100 | ||
| Total residential mortgages | |||||||||
| Geographical concentrations | 33% | 18% | 16% | 12% | 9% | 7% | 5% | 100% |
| Residential mortgage balances by LTV and region |
Greater London |
Central England |
Northern England |
South East England (excluding London) |
South West England |
Scotland | Wales & Northern Ireland |
Total | |
|---|---|---|---|---|---|---|---|---|---|
| 4 April 2015 | £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 | 1,924 | 51,254 | |
| 50% to 60% | 11,785 | 4,345 | 3,164 | 3,479 | 2,283 | 1,481 | 900 | 27,437 | |
| 60% to 70% | 9,490 | 6,470 | 4,864 | 4,594 | 3,191 | 2,102 | 1,211 | 31,922 | |
| 70% to 80% | 4,582 | 5,535 | 6,079 | 2,788 | 2,592 | 2,688 | 1,595 | 25,859 | |
| 80% to 90% | 1,476 | 2,148 | 3,000 | 821 | 952 | 1,192 | 912 | 10,501 | |
| 90% to 100% | 42 48,763 |
228 26,894 |
860 23,745 |
41 18,475 |
76 13,622 |
249 10,428 |
323 | 1,819 6,865 148,792 |
97.3 |
| Not fully collateralised | |||||||||
| - LTV more than 100% (A) | 9 | 13 | 105 | 3 | 5 | 36 | 389 | 560 | 0.4 |
| - Collateral value on A | 7 | 11 | 97 | 3 | 4 | 34 | 322 | 478 | |
| - Negative equity on A | 2 | 2 | 8 | - | 1 | 2 | 67 | 82 | |
| Total performing loans | 48,772 | 26,907 | 23,850 | 18,478 | 13,627 | 10,464 | 7,254 149,352 | 97.7 | |
| Non-performing loans | |||||||||
| Fully collateralised | |||||||||
| LTV ratio: | |||||||||
| Up to 50% | 441 | 156 | 111 | 115 | 68 | 44 | 52 | 987 | |
| 50% to 60% | 287 | 98 | 69 | 70 | 44 | 26 | 25 | 619 | |
| 60% to 70% | 210 | 141 | 115 | 90 | 66 | 43 | 33 | 698 | |
| 70% to 80% | 78 | 138 | 148 | 69 | 56 | 53 | 37 | 579 | |
| 80% to 90% | 12 | 93 | 116 | 24 | 35 | 32 | 35 | 347 | |
| 90% to 100% | 1 | 26 | 91 | 1 | 4 | 14 | 31 | 168 | |
| 1,029 | 652 | 650 | 369 | 273 | 212 | 213 | 3,398 | 2.2 | |
| Not fully collateralised | |||||||||
| - LTV more than 100% (B) | 1 | 7 | 33 | 2 | 1 | 4 | 87 | 135 | 0.1 |
| - Collateral value on B | 1 | 6 | 29 | 2 | 1 | 3 | 67 | 109 | |
| - Negative equity on B | - | 1 | 4 | - | - | 1 | 20 | 26 | |
| Total non-performing loans | 1,030 | 659 | 683 | 371 | 274 | 216 | 300 | 3,533 | 2.3 |
| Total residential mortgages | 49,802 | 27,566 | 24,533 | 18,849 | 13,901 | 10,680 | 7,554 152,885 | 100 | |
| Geographical concentrations | 33% | 18% | 16% | 12% | 9% | 7% | 5% | 100% |
The geographical concentration of the portfolio has remained stable during the period.
The value of partially collateralised non-performing loans has reduced by 25% to £101 million (4 April 2015: £135 million), following the growth in house prices and a reduction in arrears cases.
| Number of cases more than 3 months in arrears as % of total book |
30 September 2015 % |
4 April 2015 % |
|---|---|---|
| Prime | 0.35 | 0.36 |
| Specialist | 1.00 | 1.12 |
| Group | 0.46 | 0.49 |
| CML industry average | 1.17 | 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 more than three months in arrears percentage of 0.46% compares favourably with the CML industry average of 1.17%10.
10 Source: Council of Mortgage Lenders (CML) 'Arrears on mortgages, by number of months in arrears' (12 November 2015).
The table below summarises the portfolio by payment due status. Please refer to the Annual Report and Accounts 2015 for details of the Group's policies for classifying its loans.
| Residential mortgages by payment due status | 30 September 2015 | |||
|---|---|---|---|---|
| Prime lending |
Specialist lending |
Total | ||
| £m | £m | £m | % | |
| Performing: | ||||
| Neither past due nor impaired | 125,158 | 28,495 | 153,653 | 97.9 |
| Non-performing | ||||
| Past due up to 3 months | 1,700 | 839 | 2,539 | 1.6 |
| Impaired: | ||||
| Past due 3 to 6 months | 178 | 194 | 372 | 0.2 |
| Past due 6 to 12 months | 120 | 123 | 243 | 0.2 |
| Past due over 12 months | 66 | 94 | 160 | 0.1 |
| Possessions | 8 | 40 | 48 | 0.0 |
| Total impaired loans | 372 | 451 | 823 | 0.5 |
| Total residential mortgages | 127,230 | 29,785 | 157,015 | 100.0 |
| Impaired balances as a % of total residential mortgages | 0.3% | 1.5% | 0.5% | |
| Impairment provisions (£m) | 18 | 68 | 86 | |
| Impairment provisions as a % of impaired balances | 4.8% | 15.1% | 10.4% |
| Residential mortgages by payment due status | 4 April 2015 | |||
|---|---|---|---|---|
| Prime | Specialist | Total | ||
| lending | lending | |||
| £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 | 0.0 |
| Total impaired loans | 396 | 499 | 895 | 0.6 |
| Total residential mortgages | 124,549 | 28,336 | 152,885 | 100.0 |
| Impaired balances as a % of total residential mortgages | 0.3% | 1.8% | 0.6% | |
| Impairment provisions (£m) | 22 | 88 | 110 | |
| Impairment provisions as a % of impaired balances | 5.6% | 17.6% | 12.3% |
The fall in arrears has meant that during the period the Group's proportion of impaired loans has fallen to 0.5% (4 April 2015: 0.6%).
| Impairment (reversal)/loss for the period | Half year to | Half year to |
|---|---|---|
| 30 September 2015 | 30 September 2014 | |
| £m | £m | |
| Prime | (1) | - |
| Specialist | (6) | 13 |
| Total | (7) | 13 |
The impairment reversal for the period for prime and specialist residential loans primarily results from the improved arrears performance of the book driving lower impaired loans. Overall provision balances have reduced, in line with this improved arrears performance and a strong housing market.
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 majority of buy to let lending is advanced on an interest only basis, as is standard practice for this type of lending.
The maturity profile of interest only loans is set out below. Please refer to the Annual Report and Accounts 2015 for further details of the Group's policies for managing maturities on interest only mortgages.
| 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 |
|---|---|---|---|---|---|---|---|
| 30 September 2015 | £m | £m | £m | £m | £m | £m | % |
| Prime | 58 | 395 | 508 | 1,787 | 17,679 | 20,427 | 16.1 |
| Specialist | 96 | 144 | 240 | 967 | 24,852 | 26,299 | 88.3 |
| Total | 154 | 539 | 748 | 2,754 | 42,531 | 46,726 | 29.8 |
| 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 |
| 4 April 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 |
Note: The amounts above include the full loan balance where only a proportion of a loan is on an interest only basis.
Total interest only lending has fallen to 29.8% (4 April 2015: 30.7%) of total residential mortgage lending as a result of existing prime balances running off and no new prime interest only business being issued. Specialist balances continue to grow as buy to let lending increases, with interest only mortgages being standard practice for this type of lending.
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.
Where residential mortgage customers face financial difficulty the Group seeks to find a solution to mitigate losses and, where possible, to support customers through a change in terms, forbearance or repair. Collectively, loans subject to these actions are classified as renegotiated. Please refer to the Annual Report and Accounts 2015 for details of the Group's policies for renegotiating loans.
The following table provides the value of loans still on the books at the period end which have been subject to renegotiation (change in terms, forbearance or repair) at any point since 2008:
| Residential mortgage balances | Greater | Central | Northern | South East | South | Scotland | Wales & | Total |
|---|---|---|---|---|---|---|---|---|
| subject to renegotiation since | London | England | England | England | West | Northern | ||
| January 2008 (note i) | (excluding London) |
England | Ireland | |||||
| 30 September 2015 | £m | £m | £m | £m | £m | £m | £m | £m |
| Change in terms: | ||||||||
| Payment holidays | 947 | 732 | 667 | 487 | 308 | 247 | 255 | 3,643 |
| Term extensions | 2,037 | 1,294 | 1,126 | 901 | 644 | 440 | 451 | 6,893 |
| Payment concessions | 297 | 187 | 193 | 112 | 78 | 42 | 66 | 975 |
| Interest only conversions | 656 | 325 | 303 | 234 | 172 | 84 | 145 | 1,919 |
| 3,937 | 2,538 | 2,289 | 1,734 | 1,202 | 813 | 917 | 13,430 | |
| Elimination of multiple events | (413) | (299) | (254) | (196) | (127) | (74) | (116) | (1,479) |
| Total change in terms | 3,524 | 2,239 | 2,035 | 1,538 | 1,075 | 739 | 801 | 11,951 |
| Forbearance: | ||||||||
| Temporary interest only | ||||||||
| concessions | 367 | 349 | 361 | 190 | 121 | 99 | 119 | 1,606 |
| Repair: | ||||||||
| Capitalisations | 186 | 108 | 110 | 73 | 44 | 16 | 32 | 569 |
| Term extensions | 175 | 93 | 70 | 64 | 51 | 37 | 36 | 526 |
| 361 | 201 | 180 | 137 | 95 | 53 | 68 | 1,095 | |
| Elimination of multiple events | (3) | (1) | - | - | (1) | - | - | (5) |
| Total repairs | 358 | 200 | 180 | 137 | 94 | 53 | 68 | 1,090 |
| Elimination of multiple events | (298) | (242) | (242) | (135) | (90) | (54) | (89) | (1,150) |
| Total renegotiated loans | 3,951 | 2,546 | 2,334 | 1,730 | 1,200 | 837 | 899 | 13,497 |
| Of which prime/specialist | ||||||||
| lending: | ||||||||
| Prime | 3,306 | 2,206 | 1,982 | 1,498 | 1,028 | 779 | 772 | 11,571 |
| Specialist | 645 | 340 | 352 | 232 | 172 | 58 | 127 | 1,926 |
| Total | 3,951 | 2,546 | 2,334 | 1,730 | 1,200 | 837 | 899 | 13,497 |
| Of which loans are still on | ||||||||
| special terms: (note ii) | ||||||||
| Prime | 43 | 41 | 29 | 25 | 14 | 12 | 11 | 175 |
| Specialist | 7 | 7 | 6 | 2 | 1 | - | 2 | 25 |
| Total | 50 | 48 | 35 | 27 | 15 | 12 | 13 | 200 |
| Impairment provisions on | ||||||||
| renegotiated loans: | ||||||||
| Individually assessed | - | 1 | 1 | - | - | - | 1 | 3 |
| Collectively assessed | - | 2 | 5 | 1 | 1 | 1 | 5 | 15 |
| Total impairment provisions | - | 3 | 6 | 1 | 1 | 1 | 6 | 18 |
| Residential mortgage balances subject to renegotiation since January 2008 (note i) |
Greater London |
Central England |
Northern England |
South East England (excluding London) |
South West England |
Scotland | Wales & Northern Ireland |
Total |
|---|---|---|---|---|---|---|---|---|
| 4 April 2015 (note iii) | £m | £m | £m | £m | £m | £m | £m | £m |
| Change in terms: | ||||||||
| Payment holidays | 1,011 | 781 | 712 | 522 | 329 | 265 | 270 | 3,890 |
| Term extensions | 2,059 | 1,337 | 1,159 | 927 | 662 | 453 | 468 | 7,065 |
| Payment concessions | 302 | 191 | 194 | 114 | 79 | 41 | 68 | 989 |
| Interest only conversions | 693 | 339 | 315 | 253 | 186 | 89 | 152 | 2,027 |
| Elimination of multiple events | 4,065 (438) |
2,648 (316) |
2,380 (267) |
1,816 (208) |
1,256 (134) |
848 (78) |
958 (122) |
13,971 (1,563) |
| Total change in terms | 3,627 | 2,332 | 2,113 | 1,608 | 1,122 | 770 | 836 | 12,408 |
| Forbearance: Temporary interest only |
||||||||
| concessions | 379 | 361 | 371 | 196 | 125 | 102 | 125 | 1,659 |
| Repair: | ||||||||
| Capitalisations | 188 | 110 | 113 | 74 | 46 | 17 | 32 | 580 |
| Term extensions | 172 | 91 | 68 | 63 | 48 | 34 | 35 | 511 |
| 360 | 201 | 181 | 137 | 94 | 51 | 67 | 1,091 | |
| Elimination of multiple events | (3) | - | (1) | (1) | (1) | - | - | (6) |
| Total repairs | 357 | 201 | 180 | 136 | 93 | 51 | 67 | 1,085 |
| Elimination of multiple events | (303) | (251) | (246) | (139) | (91) | (56) | (92) | (1,178) |
| Total renegotiated loans | 4,060 | 2,643 | 2,418 | 1,801 | 1,249 | 867 | 936 | 13,974 |
| Of which prime/specialist lending: |
||||||||
| Prime | 3,421 | 2,309 | 2,071 | 1,568 | 1,076 | 810 | 807 | 12,062 |
| Specialist | 641 | 334 | 347 | 232 | 173 | 57 | 128 | 1,912 |
| Total | 4,062 | 2,643 | 2,418 | 1,800 | 1,249 | 867 | 935 | 13,974 |
| Of which loans are still on | ||||||||
| special terms: (note i) | ||||||||
| Prime | 72 | 50 | 47 | 33 | 23 | 15 | 18 | 258 |
| Specialist | 13 | 13 | 14 | 7 | 4 | 1 | 6 | 58 |
| Total | 85 | 63 | 61 | 40 | 27 | 16 | 24 | 316 |
| Impairment provisions on | ||||||||
| renegotiated loans: | ||||||||
| Individually assessed | - | 1 | 1 | - | - | - | 2 | 4 |
| Collectively assessed | - | 2 | 5 | 1 | 1 | 1 | 6 | 16 |
| Total impairment provisions | - | 3 | 6 | 1 | 1 | 1 | 8 | 20 |
Notes:
i. Renegotiated balances information for residential mortgages 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 total balance of loans that have been renegotiated since January 2008 has reduced to £13,497 million (4 April 2015: £13,974 million) as the number of new cases has fallen under the favourable economic conditions and older accounts continue to redeem. The value of loans that remain on special terms has also fallen to £200 million (4 April 2015: £316 million).
The Group's consumer banking portfolio comprises unsecured balances for overdrawn current accounts, credit cards and personal loans. Total balances have grown by 1.1% during the period to £3,833 million (4 April 2015: £3,791 million) despite a highly competitive market, evidenced by the increasing duration of introductory offers for credit cards, switching incentives for current accounts and lower interest rates for personal loans.
The performance and risk profile of the portfolio have improved with non-performing balances (excluding charged off amounts) nearly 13% lower than at the financial year end, impairment losses down by 33% and stable levels of forbearance. Impairment provisions as a percentage of non-performing loans (including charged off balances) have increased from 67% at 4 April 2015 to 72% at 30 September 2015.
This improvement reflects the current favourable economic environment together with a number of operational initiatives implemented in 2014. These include improved credit policies, particularly personal loans underwriting.
The Group continues to actively monitor and manage emerging risks which may affect its exposure to lending risk. These include the potential effect on unsecured borrowers of interest rate rises and a reversal in current trends for UK unemployment. It is anticipated that enhancing pre-delinquency activities and appropriate use of forbearance options will moderate the impact of these events.
The regulatory environment for unsecured lending continues to evolve with the full findings of the Competition Market Authority review due for publication in April 2016 alongside the FCA market study of competitive practices, fees charged and assistance for vulnerable customers. 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.
| Consumer banking balances | 30 September 2015 | |||
|---|---|---|---|---|
| £m | % | 4 April 2015 £m |
% | |
| Overdrawn current accounts | 207 | 5 | 248 | 7 |
| Personal loans | 1,857 | 49 | 1,799 | 47 |
| Credit cards | 1,769 | 46 | 1,744 | 46 |
| Total consumer banking | 3,833 | 100 | 3,791 | 100 |
The difference in overdrawn current account balances between 4 April 2015 and 30 September 2015 is predominantly due to the position of the reporting date within the calendar month.
The Group monitors the following lead indicators and performance statistics for consumer banking:
The table below summarises the portfolio by payment due status.
| Consumer banking by payment due status | Overdrawn current accounts |
Personal loans |
30 September 2015 Credit cards |
Total | |
|---|---|---|---|---|---|
| £m | £m | £m | £m | % | |
| Performing: Neither past due nor impaired |
173 | 1,700 | 1,633 | 3,506 | 91 |
| Non-performing: Past due up to 3 months Impaired: |
13 | 45 | 29 | 87 | |
| Past due 3 to 6 months Past due 6 to 12 months |
3 2 |
11 15 |
10 3 |
24 20 |
|
| Past due over 12 months | 3 21 |
15 86 |
- 42 |
18 149 |
4 |
| Charged off (note i) | 13 | 71 | 94 | 178 | 5 |
| Total non-performing | 34 | 157 | 136 | 327 | |
| Total consumer banking lending | 207 | 1,857 | 1,769 | 3,833 | 100 |
| Non-performing loans as % of total (excluding charged off balances) |
10% | 5% | 2% | 4% | |
| Impairment provisions excluding charged off balances Impairment provisions on charged off balances |
10 11 |
33 67 |
27 86 |
70 164 |
|
| Total impairment provisions | 21 | 100 | 113 | 234 | |
| Impairment provisions as % of non-performing loans (excluding charged off balances) Impairment provisions as % of non-performing loans |
48% | 38% | 64% | 47% | |
| (including charged off balances) | 62% | 64% | 83% | 72% |
| Consumer banking by payment due status | 4 April 2015 | ||||
|---|---|---|---|---|---|
| Overdrawn | Personal | Credit | Total | ||
| current | loans | cards | |||
| accounts | |||||
| £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 | 248 | 1,799 | 1,744 | 3,791 | 100 |
| Non-performing loans as % of total (excluding charged off | |||||
| balances) | 11% | 6% | 3% | 5% | |
| 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 | |
| Impairment provisions as % of non-performing loans | |||||
| (excluding charged off balances) | 41% | 37% | 64% | 45% | |
| Impairment provisions as % of non-performing loans | |||||
| (including charged off balances) | 62% | 57% | 81% | 67% |
Note:
i. Charged off balances are balances on accounts which are closed to future transactions. These balances are held on the balance sheet for an extended period (between 24 and 36 months, depending on the product) whilst recovery procedures take place.
Non-performing balances excluding charged off balances have decreased to £149 million (4 April 2015: £171 million). This is largely due to improved quality of lending across the current account and personal loan portfolios following the implementation of enhanced pricing and risk policies.
Charged off balances for overdrawn current accounts have reduced as a result of amounts written off being only partly offset by new charge offs due to improving performance. Charged off balances have grown across the personal loan and credit card portfolios as accounts are typically held in charge off for longer, with only small amounts being written off during the period. These movements reflect the change in write off policy, as explained in the Annual Report and Accounts 2015.
| Impairment losses for the period | Overdrawn current accounts |
Personal loans |
Credit cards |
Total | |
|---|---|---|---|---|---|
| £m | £m | £m | £m | ||
| Impairment losses for the half year to 30 September 2015 | 5 | 12 | 16 | 33 | |
| Impairment losses for the half year to 30 September 2014 | 9 | 19 | 21 | 49 |
Due to a combination of enhanced credit risk policies and the improved economic climate, the charge for impairment losses has reduced to £33 million (H1 2014/15: £49 million).
When a customer faces financial difficulty the Group seeks to provide support, finding a solution to mitigate losses through either a change in terms, forbearance or arrears management. Collectively, loans subject to these actions are classified as renegotiated. Please refer to the Annual Report and Accounts 2015 for details of the Group's processes for renegotiating loans.
The following table provides the value of loans still on the books at the period end which have been subject to renegotiation (change in terms, forbearance or repair) at any point since 2010:
| Balances subject to renegotiation | 30 September 2015 | ||||||
|---|---|---|---|---|---|---|---|
| since March 2010 (note i) | Overdrawn | Personal | Credit | Total | |||
| current | loans | cards | |||||
| accounts | |||||||
| £m | £m | £m | £m | ||||
| Change in terms | 32 | 131 | 9 | 172 | |||
| Forbearance | 15 | 28 | 24 | 67 | |||
| Repair | 20 | 1 | 20 | 41 | |||
| Elimination of multiple events | (34) | (18) | (10) | (62) | |||
| Total | 33 | 142 | 43 | 218 |
| Balances subject to renegotiation | 4 April 2015 | ||||||
|---|---|---|---|---|---|---|---|
| since March 2010 (note i) | Overdrawn | Personal | Credit | Total | |||
| current | loans | cards | |||||
| accounts | (note ii) | ||||||
| £m | £m | £m | £m | ||||
| Change in terms | 31 | 131 | 11 | 173 | |||
| Forbearance | 15 | 27 | 24 | 66 | |||
| Repair | 18 | 1 | 20 | 39 | |||
| Elimination of multiple events | (30) | (18) | (10) | (58) | |||
| Total | 34 | 141 | 45 | 220 |
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 (previous total £87 million) to exclude accounts which had been written off, which were previously included in this total.
Over the period the commercial property market has seen a sustained recovery, with investor confidence holding up well, supported by continued economic improvement and availability of lending for commercial real estate.
The Group has continued its strategy of reducing exposures which are outside of its current risk appetite or do not align to its existing lending strategy and has taken a number of opportunities to exit some non-core, higher risk commercial loans.
The Group's commercial loan portfolio comprises the following:
| Commercial lending balances | 30 September 2015 | 4 April 2015 | |||
|---|---|---|---|---|---|
| £m | % | £m | % | ||
| Commercial real estate (CRE) | 3,302 | 27 | 4,043 | 31 | |
| Registered social landlords | 7,722 | 62 | 7,786 | 59 | |
| Project Finance | 1,361 | 11 | 1,383 | 10 | |
| Total commercial lending | 12,385 | 100 | 13,212 | 100 | |
| Fair value adjustment for micro hedged risk | 1,246 | 1,382 | |||
| Total | 13,631 | 14,594 |
CRE loans have reduced by £741 million, net of new lending, to £3,302 million (4 April 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 73% (4 April 2015: 69%).
The registered social landlord and Project Finance portfolios are fully performing and remain stable, reflecting their long-term, low risk nature.
The registered social landlord portfolio is secured against portfolios of residential real estate owned and let by UK Housing Associations. Collateral is typically re-valued 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 view of this, meaningful loan to value comparisons across the CRE and registered social landlord portfolios cannot be made and hence the registered social landlord exposures are not included in the LTV and credit risk concentration analysis detailed later in this disclosure. However, in all cases, registered social landlord security 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.
Both the registered social landlord and Project Finance portfolios are risk rated using the Group's internal rating models. The risk rating profile for both portfolios has remained low even through the 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. Consequently these exposures do not feature in the remainder of this section which focuses exclusively on the CRE portfolio.
The Group monitors the following lead indicators and performance statistics, where appropriate, for commercial lending:
Information for each of these lead indicators and performance statistics is included within the following pages.
| CRE lending balances by LTV and region | London | South East |
Rest of UK (note i) |
Non-UK | Total | |
|---|---|---|---|---|---|---|
| 30 September 2015 | £m | £m | £m | £m | £m | % |
| Performing loans | ||||||
| Fully collateralised | ||||||
| LTV ratio (note ii) | ||||||
| Less than 25% 25% to 50% |
126 993 |
17 189 |
61 404 |
- - |
204 1,586 |
|
| 51% to 75% | 377 | 134 | 431 | - | 942 | |
| 76% to 90% | 81 | 14 | 117 | - | 212 | |
| 91% to 100% | 6 | 1 | 8 | - | 15 | |
| 1,583 | 355 | 1,021 | - | 2,959 | 90 | |
| Not fully collateralised | ||||||
| - Over 100% LTV (A) | - | 5 | 6 | - | 11 | - |
| - Collateral value on A | - | 3 | 5 | - | 8 | |
| - Negative equity on A | - | 2 | 1 | - | 3 | |
| Total performing loans | 1,583 | 360 | 1,027 | - | 2,970 | 90 |
| Non-performing loans (note iii) | ||||||
| Fully collateralised | ||||||
| LTV ratio | ||||||
| Less than 25% | - | - | 2 | - | 2 | |
| 25% to 50% | 6 | 3 | 18 | - | 27 | |
| 51% to 75% | 5 | 3 | 21 | - | 29 | |
| 76% to 90% | - | 4 | 32 | - | 36 | |
| 91% to 100% | 1 12 |
8 18 |
10 83 |
- - |
19 113 |
3 |
| Not fully collateralised | ||||||
| - Over 100% LTV (B) | 1 | 59 | 153 | 6 | 219 | 7 |
| - Collateral value on B | - | 41 | 85 | 5 | 131 | |
| - Negative equity on B | 1 | 18 | 68 | 1 | 88 | |
| Total non-performing loans | 13 | 77 | 236 | 6 | 332 | 10 |
| Total CRE loans | 1,596 | 437 | 1,263 | 6 | 3,302 | 100 |
| Geographical concentration | 49% | 13% | 38% | - | 100% | |
| CRE lending balances by LTV and region | London | South East |
Rest of UK (note i) |
Non-UK | Total | |
|---|---|---|---|---|---|---|
| 4 April 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 based 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 period.
In particular, non-performing loans have reduced and now represent 10% of CRE balances (4 April 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 deleveraging activity in 2014/15 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.
| CRE lending balances and impairment provisions by | London | South | Rest of UK | Non-UK | Total |
|---|---|---|---|---|---|
| type and region | East | (note i) | |||
| 30 September 2015 | £m | £m | £m | £m | £m |
| Retail | 487 | 223 | 370 | - | 1,080 |
| Office | 218 | 52 | 294 | 6 | 570 |
| Residential | 620 | 91 | 269 | - | 980 |
| Industrial and warehouse | 39 | 42 | 193 | - | 274 |
| Leisure and hotel | 111 | 27 | 125 | - | 263 |
| Other | 121 | 2 | 12 | - | 135 |
| Total CRE lending | 1,596 | 437 | 1,263 | 6 | 3,302 |
| Impairment provision | |||||
| Retail | 2 | 8 | 23 | - | 33 |
| Office | 1 | 11 | 36 | 4 | 52 |
| Residential | 1 | 1 | 10 | - | 12 |
| Industrial and warehouse | - | - | 19 | - | 19 |
| Leisure and hotel | - | 1 | 10 | - | 11 |
| Other | - | - | 1 | - | 1 |
| Total impairment provisions | 4 | 21 | 99 | 4 | 128 |
| CRE lending balances and impairment provisions by type and region |
London | South East |
Rest of UK (note i) |
Non-UK | Total |
|---|---|---|---|---|---|
| 4 April 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 provision | |||||
| 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.
The table below sets out the payment due status and impairment provisions for the CRE portfolio:
| CRE lending balances by payment due status | 30 September 2015 | 4 April 2015 | ||
|---|---|---|---|---|
| £m | % | £m | % | |
| Performing: | ||||
| Neither past due nor impaired | 2,970 | 90 | 3,358 | 83 |
| Non-performing: | ||||
| Past due up to 3 months | 45 | 1 | 77 | 2 |
| Impaired: (note i) | ||||
| Past due up to 3 months | 185 | 5 | 413 | 10 |
| Past due 3 to 6 months | 21 | 1 | 59 | 1 |
| Past due 6 to 12 months | 22 | 1 | 56 | 1 |
| Past due over 12 months | 55 | 2 | 79 | 2 |
| Possessions (note ii) | 4 | - | 1 | - |
| Total impaired balances | 287 | 9 | 608 | 15 |
| Total | 3,302 | 100 | 4,043 | 100 |
| Impairment provisions | ||||
| Individual | 121 | 95 | 313 | 97 |
| Collective | 7 | 5 | 9 | 3 |
| Total impairment provisions | 128 | 100 | 322 | 100 |
| Provision coverage ratios | ||||
| Individual provisions as % of impaired balances | 42 | 51 | ||
| Total provisions as % of impaired balances | 45 | 53 | ||
| Total provisions as % of total gross balances | 4 | 8 | ||
| Estimated collateral | ||||
| Against loans past due but not impaired | 45 | 100 | 77 | 100 |
| Against impaired loans | 199 | 69 | 367 | 60 |
| Total collateral | 244 | 73 | 444 | 65 |
| Half year to | Half year to | |||
| Impairment losses | 30 September 2015 | 30 September 2014 | ||
| Impairment (reversals)/losses for the period | £m (27) |
£m 73 |
||
Notes:
i. Impaired loans include those balances which are more than three months in arrears, or against which a provision is held.
ii. 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 impaired loans, before provisions, have reduced by £321 million to £287 million, with a corresponding reduction of £194 million in total impairment provisions reflecting the deleveraging activity in 2014/15 and an improvement in market conditions. These loans now represent 9% of the total CRE exposure compared to 15% at 4 April 2015.
Improved CRE market conditions, including increased liquidity and capital values, have resulted in a net impairment reversal of £27 million. The £73 million charge in the prior period reflected accelerated disposals as part of the deleveraging activity.
The table below provides details of lending balances that have been subject to forbearance at any point since September 2012.
| CRE lending subject to forbearance | 30 September 2015 | 4 April 2015 | ||
|---|---|---|---|---|
| since September 2012 (note i) | £m | % | £m | % |
| Covenant breach | 135 | 20 | 180 | 18 |
| Extension at maturity | 79 | 12 | 87 | 9 |
| Multiple forbearance events | 408 | 61 | 639 | 63 |
| Other | 46 | 7 | 106 | 10 |
| Total | 668 | 100 | 1,012 | 100 |
Note:
i. Forbearance information for commercial lending is reported since September 2012, reflecting the point in time from which this data was captured for reporting purposes.
CRE exposures subject to forbearance have decreased to £668 million, principally as a result of the controlled exit from non-core, higher risk loans, and now represent 20% of CRE loan balances (4 April 2015: 25%).
The total other lending portfolio of £39 million (4 April 2015: £29 million) represents 0.02% (4 April 2015: 0.02%) of the Group's loans and advances. This exposure largely consists of lending in the form of margin calls to support repo and derivative transactions and a £17 million portfolio of secured loans relating to a European commercial loan facility held by one of the Group's subsidiaries, Cromarty CLO Ltd (Cromarty), which remains in run-off. The increase in exposure relates to the margin calls, details of which are provided in the 'Liquidity and funding risk' section of this Report. The table below summarises the Group's Other lending portfolio by payment due status.
| Other lending balances by payment due status |
30 September 2015 | 4 April 2015 | ||
|---|---|---|---|---|
| £m | % | £m | % | |
| Performing: | ||||
| Neither past due nor impaired | 29 | 74 | 19 | 66 |
| Non-performing: | ||||
| Past due but not impaired | - | - | - | - |
| Impaired (note i) | 10 | 26 | 10 | 34 |
| Total | 39 | 100 | 29 | 100 |
| Impairment provisions | 5 | 4 | ||
| Provision coverage on non-performing loans | 50 | 40 |
Note:
i. Of impaired loans, £5 million (4 April 2015: £5 million) relates to balances past due by more than 12 months.
| Impairment losses for the period | Half year to 30 September 2015 £m |
Half year to 30 September 2014 £m |
|---|---|---|
| Impairment losses for the period | 1 | 21 |
The Group's treasury portfolio is held primarily for liquidity management purposes and, in the case of derivatives, for market risk management. As at 30 September 2015 treasury assets represent 12.9% (4 April 2015: 11.3%) of Group assets.
| Treasury asset balances | 30 September 2015 £m |
4 April 2015 £m |
|---|---|---|
| Cash | 7,899 | 4,325 |
| Loans and advances to banks | 3,763 | 3,392 |
| Investment securities | 11,513 | 11,063 |
| Treasury liquidity and investment portfolio | 23,175 | 18,780 |
| Derivative assets (note i) | 2,988 | 3,337 |
| Total treasury portfolio | 26,163 | 22,117 |
Note:
i. Derivatives are classified as assets where their fair value is positive and liabilities where their fair value is negative. As at 30 September 2015 the Group had derivative liabilities of £3,661 million (4 April 2015: £4,048 million).
The risk profile of the portfolio continues to improve with the disposal and continued amortisation of legacy 'out of policy' assets; investment activity remains restricted to highly rated assets to support the Group's liquidity requirements.
Credit risk within the Treasury division 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, details of which are provided in the Annual Report and Accounts 2015.
The Group's liquidity and investment portfolio held on the balance sheet at 30 September 2015 of £23,175 million (4 April 2015: £18,780 million) is held in three separate portfolios: primary liquidity, other Central Bank eligible assets and other securities.
Primary liquidity comprises cash 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 following table provides an analysis of the on-balance sheet portfolios by credit rating and geographical location of the issuers.
| Liquidity and investment portfolio by credit rating |
AAA | AA | A | Other | UK | US Europe | Other | ||
|---|---|---|---|---|---|---|---|---|---|
| 30 September 2015 | £m | % | % | % | % | % | % | % | % |
| Primary liquidity: | |||||||||
| Cash | 7,899 | 100 | - | - | - | 100 | - | - | - |
| Gilts | 4,822 | 100 | - | - | - | 100 | - | - | - |
| Non-domestic government bonds | 1,540 | 15 | 85 | - | - | - | 44 | 56 | - |
| Supranational bonds Primary liquidity total |
603 14,864 |
92 91 |
8 9 |
- - |
- - |
- 85 |
- 5 |
- 6 |
100 4 |
| Other Central Bank eligible: | |||||||||
| Residential mortgage backed securities (RMBS) | 1,465 | 88 | 8 | 3 | 1 | 53 | - | 47 | - |
| Covered bonds | 1,065 | 97 | - | 3 | - | 49 | - | 40 | 11 |
| Other (secondary liquidity) | 369 | 100 | - | - | - | 56 | - | 44 | - |
| Other Central Bank eligible total | 2,899 | 92 | 4 | 3 | 1 | 52 | - | 44 | 4 |
| Other securities: | |||||||||
| Loans and advances | 3,763 | 19 | 21 | 41 | 19 | 60 | 9 | 15 | 16 |
| RMBS Commercial mortgage backed securities (CMBS) |
770 44 |
22 - |
8 19 |
61 67 |
9 14 |
85 13 |
- 87 |
13 - |
2 - |
| Collateralised loan obligations | 530 | 82 | 15 | 3 | - | 74 | 26 | - | - |
| Student loans | 141 | 17 | 54 | 29 | - | - | 100 | - | - |
| Other | 164 | 6 | 31 | 18 | 45 | 39 | 18 | 43 | - |
| Other securities total | 5,412 | 25 | 20 | 39 | 16 | 62 | 13 | 13 | 12 |
| Total | 23,175 | 76 | 11 | 9 | 4 | 76 | 6 | 12 | 6 |
| Liquidity and investment portfolio by credit | AAA | AA | A | Other | UK | US | Europe | Other | |
| rating | |||||||||
| 4 April 2015 | £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) Collateralised loan obligations |
60 556 |
- 75 |
19 21 |
70 4 |
11 - |
15 59 |
78 41 |
7 - |
- - |
| 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 |
Notes:
i. 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.
ii. The above analysis does not include off-balance sheet funding, including £8,510 million (4 April 2015: £8,510 million) 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.
The Group holds £289 million (4 April 2015: £315 million) of securities which are domiciled in the peripheral Eurozone countries. These assets remain outside of current credit policy and continue to be actively managed with opportunities to exit positions assessed against prevailing market conditions and the financial implications for the Group.
The following table summarises the Group's exposure to the peripheral Eurozone countries; the exposures are shown at their balance sheet carrying values. The Group has no sovereign exposure to peripheral Eurozone countries and does not hold any exposure to Greek or emerging markets debt.
| Analysis of country exposures (peripheral Eurozone) | Italy | Portugal | Spain | Total |
|---|---|---|---|---|
| 30 September 2015 | £m | £m | £m | £m |
| Mortgage backed securities | 41 | 24 | 192 | 257 |
| Covered bonds | - | - | 29 | 29 |
| Other corporate | 3 | - | - | 3 |
| Total | 44 | 24 | 221 | 289 |
| Analysis of country exposures (peripheral Eurozone) | Italy | Portugal | Spain | Total |
|---|---|---|---|---|
| 4 April 2015 | £m | £m | £m | £m |
| Mortgage backed securities | 45 | 32 | 206 | 283 |
| Covered bonds | - | - | 29 | 29 |
| Other corporate | 3 | - | - | 3 |
| Total | 48 | 32 | 235 | 315 |
Note: 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 exposure in respect of the other Eurozone and rest of the world countries is shown below at the balance sheet carrying value.
| Analysis of country exposures (other than peripheral Eurozone) |
Finland | France | Germany Netherlands | USA | Rest of the world |
Total | |
|---|---|---|---|---|---|---|---|
| 30 September 2015 | £m | £m | £m | £m | £m | £m | £m |
| Government bonds | 228 | - | 237 | 404 | 672 | - | 1,541 |
| Mortgage backed securities | - | - | - | 528 | 39 | 19 | 586 |
| Covered bonds | 20 | 97 | 19 | 26 | - | 353 | 515 |
| Senior debt | - | - | - | - | - | 603 | 603 |
| Loans to banks | - | 155 | 178 | - | 363 | 825 | 1,521 |
| Other assets | - | 83 | 151 | - | 310 | - | 544 |
| Other corporate | - | 7 | - | 3 | - | - | 10 |
| Total | 248 | 342 | 585 | 961 | 1,384 | 1,800 | 5,320 |
| Analysis of country exposures (other than peripheral Eurozone) |
Finland | France | Germany | Netherlands | USA | Rest of the world |
Total |
|---|---|---|---|---|---|---|---|
| 4 April 2015 | £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 assets | - | 88 | 169 | - | 420 | - | 677 |
| Other corporate | 2 | 7 | 5 | 3 | - | - | 17 |
| Total | 254 | 370 | 693 | 992 | 1,301 | 1,660 | 5,270 |
The Group remains active in the above Eurozone jurisdictions and in the USA; the Rest of the World exposure is predominantly Canada, Sweden, Norway and Denmark.
The Group does not use any derivatives for trading or speculative purposes. As part of the Group's risk management, derivatives are used 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 30 September 2015 was £2,988 million (4 April 2015: £3,337 million) and the fair value of derivative liabilities was £3,661 million (4 April 2015: £4,048 million).
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. Collateral is paid or received on a regular basis (typically daily) to mitigate the mark to market exposures on derivatives.
The Group's 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 contracts 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 agreements, outstanding transactions with the same counterparty can be offset and settled net following a default or other predetermined event. To offset gross exposures of £2,988 million (4 April 2015 £3,337 million) under CSA arrangements, netting benefits of £1,829 million (4 April 2015: £1,901 million) are available and £1,148 million of collateral is held (4 April 2015: £1,385 million). Cash is the only collateral currently held.
The following table shows the exposure to derivative contracts after netting benefits and collateral.
| Derivative exposure | 30 September 2015 | 4 April 2015 | ||||
|---|---|---|---|---|---|---|
| counterparty credit quality | AA | A | Total | AA | A | Total |
| £m | £m | £m | £m | £m | £m | |
| Gross positive fair value of contracts | 639 | 2,349 | 2,988 | 472 | 2,865 | 3,337 |
| Netting benefits | (264) | (1,565) | (1,829) | (285) | (1,616) | (1,901) |
| Net current exposure | 375 | 784 | 1,159 | 187 | 1,249 | 1,436 |
| Collateral held | (375) | (773) | (1,148) | (184) | (1,201) | (1,385) |
| Net derivative exposure | - | 11 | 11 | 3 | 48 | 51 |
The risk profile of the portfolio continues to improve with new investment activity restricted to highly rated assets to support the Group's liquidity requirements; opportunities to exit legacy positions will continue to be assessed against prevailing market conditions.
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 raise cash to settle its financial obligations as they fall due and maintain public and stakeholder confidence. Funding risk is the risk that the Group is unable to replace maturing funding or otherwise raise funds on reasonable terms and/or within reasonable timescales. |
| 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, members, 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 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. |
The Group's market and earnings risk environments have not changed significantly since the financial year end. Further information is available in the Business and Risk Report in the Annual Report and Accounts 2015.
The Group's liquidity levels continue to be in excess of both current and future regulatory requirements as well as being within Board risk appetite.
The Group continues to monitor its position relative to the regulatory short-term liquidity stress metric, the Liquidity Coverage Ratio (LCR), which was implemented on 1 October 2015, and the longer-term funding metric, the Net Stable Funding Ratio (NSFR), which is due to be implemented in 2018.
The Group had a LCR at 30 September 2015 of 130.0% (4 April 2015: 119.3%) and, based on current interpretations of regulatory requirements and guidance, a NSFR of 124.8% (4 April 2015: 121.9%). The LCR represents a surplus to both European and UK regulatory minimum requirements of 60% and 80% respectively and reflects the Group's strategy of maintaining a LCR of at least 100%. The NSFR exceeds the 100% ratio requirement which is due to come into force in 2018.
The Group continues to monitor emerging European and UK regulatory resolution tools which aim to avoid bail-outs by introducing a requirement for banks and building societies to hold a minimum level of liabilities which can be 'bailed-in' to recapitalise a bank or building society in the event of failure. This may have an impact on the future cost of term unsecured wholesale funding.
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 commercial customer loans, primary liquidity and other treasury assets is largely funded by wholesale debt and equity.
| Funding profile | |||||
|---|---|---|---|---|---|
| Assets | 30 September | 4 April | Liabilities | 30 September | 4 April |
| 2015 | 2015 | 2015 | 2015 | ||
| £bn | £bn | £bn | £bn | ||
| Retail mortgages | 156.9 | 152.8 Retail funding | 141.2 | 138.5 | |
| Treasury (including liquidity portfolio) | 23.1 | 18.8 Wholesale funding | 44.3 | 39.2 | |
| Other retail | 3.6 | 3.6 Capital and reserves | 12.4 | 12.3 | |
| Commercial/Other lending | 13.5 | 14.2 Other liabilities | 5.2 | 5.6 | |
| Other assets | 6.0 | 6.2 | |||
| 203.1 | 195.6 | 203.1 | 195.6 |
The Group's loan to deposit ratio at 30 September 2015 was 115.7% (4 April 2015: 115.6%).
On-balance sheet wholesale funding has increased by £5.1 billion to £44.3 billion, as set out in the table below, which reflects the pre-funding of upcoming maturities in the second half of the year. 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 and maturities.
| Wholesale funding – currency | 30 September 2015 4 April 2015 |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| GBP | EUR | USD | Other | Total | GBP | EUR | USD | Other | Total | |
| £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | |
| Repo and other secured agreements | - | 0.1 | - | - | 0.1 | - | - | - | - | - |
| Deposits (including PEB balances) | 9.8 | 0.8 | 0.2 | - | 10.8 | 10.1 | 0.6 | 0.3 | - | 11.0 |
| Certificates of deposit | 3.9 | - | 0.1 | - | 4.0 | 2.9 | 0.1 | 0.1 | - | 3.1 |
| Commercial paper | 0.3 | - | 3.4 | - | 3.7 | 0.1 | 0.6 | 1.7 | - | 2.4 |
| Covered bonds | 2.6 | 9.5 | - | 0.1 | 12.2 | 1.8 | 9.4 | - | 0.1 | 11.3 |
| Medium term notes | 1.7 | 3.3 | 2.0 | 0.6 | 7.6 | 1.2 | 2.4 | 1.4 | 0.2 | 5.2 |
| Securitisations | 1.7 | 1.3 | 1.8 | - | 4.8 | 1.7 | 1.3 | 1.8 | - | 4.8 |
| Other | 0.2 | 0.8 | 0.1 | - | 1.1 | 0.3 | 1.0 | 0.1 | - | 1.4 |
| Total | 20.2 | 15.8 | 7.6 | 0.7 | 44.3 | 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 |
|---|---|---|---|---|---|---|---|---|
| 30 September 2015 | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn |
| Repo and other secured | ||||||||
| agreements | 0.1 | - | - | - | 0.1 | - | - | 0.1 |
| Deposits (including PEB | ||||||||
| balances) | 4.9 | 1.5 | 1.9 | 1.3 | 9.6 | 1.0 | 0.2 | 10.8 |
| Certificates of deposit | 1.1 | 1.8 | 0.9 | 0.2 | 4.0 | - | - | 4.0 |
| Commercial paper | 0.5 | 2.7 | 0.5 | - | 3.7 | - | - | 3.7 |
| Covered bonds | - | 1.5 | - | - | 1.5 | 1.9 | 8.8 | 12.2 |
| Medium term notes | - | - | - | - | - | 0.9 | 6.7 | 7.6 |
| Securitisations | 1.2 | - | - | - | 1.2 | 1.7 | 1.9 | 4.8 |
| Other | - | - | - | - | - | - | 1.1 | 1.1 |
| Total | 7.8 | 7.5 | 3.3 | 1.5 | 20.1 | 5.5 | 18.7 | 44.3 |
| Of which secured | 1.3 | 1.5 | - | - | 2.8 | 3.6 | 11.8 | 18.2 |
| Of which unsecured | 6.5 | 6.0 | 3.3 | 1.5 | 17.3 | 1.9 | 6.9 | 26.1 |
| % of total | 17.6 | 16.9 | 7.5 | 3.4 | 45.4 | 12.4 | 42.2 | 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 |
|---|---|---|---|---|---|---|---|---|
| 4 April 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 |
Note: Classifications are made on a final contractual maturity point and based on the balance sheet amount.
The Group's wholesale funding ratio was 25.1% at 30 September 2015 (4 April 2015: 23.3%).
The proportion of on-balance sheet funding categorised as long-term (more than one year to maturity) is 54.6% (4 April 2015: 53.3%).
FLS drawings, which are held off-balance sheet, have a flexible and maximum maturity of four years. After including FLS drawings, the residual maturity profile of the Group's wholesale funding portfolio was 38 months (4 April 2015: 39 months) and the total proportion of funding that is categorised as long-term has increased to 61.9% (4 April 2015: 61.6%).
At 30 September 2015, the primary liquidity pool, including FLS, represented 116% (4 April 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 across multiple time horizons.
The table below sets out the sterling equivalent fair value of the liquidity portfolio, categorised by issuing currency. Assets available for liquidity include off-balance sheet liquidity (FLS treasury bills).
| Liquid assets | 30 September 2015 | 4 April 2015 | ||||||
|---|---|---|---|---|---|---|---|---|
| GBP | EUR | USD | Total | GBP | EUR | USD | Total | |
| £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | |
| Primary liquidity (note i) | 21.9 | 0.7 | 0.7 | 23.3 | 18.4 | 0.8 | 0.4 | 19.6 |
| Other Central Bank eligible assets | 1.4 | 1.4 | 0.1 | 2.9 | 0.7 | 1.5 | 0.1 | 2.3 |
| Other securities | 1.3 | 0.6 | 0.4 | 2.3 | 1.5 | 0.6 | 0.5 | 2.6 |
| Whole mortgage loan pools pre-positioned at the | ||||||||
| BoE | 11.5 | - | - | 11.5 | 13.5 | - | - | 13.5 |
| Total | 36.1 | 2.7 | 1.2 | 40.0 | 34.1 | 2.9 | 1.0 | 38.0 |
Note:
i. Primary liquidity includes £8.5 billion of off-balance sheet items, primarily treasury bills held through FLS participation. The average month end balance for primary liquidity during the period was £21.7 billion (4 April 2015: £22.0 billion).
The table below segments the carrying value of financial assets and financial liabilities into maturity time periods based on the contractual maturity date. In practice, customer behaviours mean that liabilities are often retained for longer than their contractual maturities and assets are repaid faster.
The balance sheet structure is managed by the Group's Assets and Liabilities Committee (ALCO) and Weekly Trading Committee (WTC) and is referenced in designing new product propositions. 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.
| Residual maturity 30 September |
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 |
|---|---|---|---|---|---|---|---|---|---|
| 2015 | £m | £m | £m | £m | £m | £m | £m | £m | £m |
| Financial assets: | |||||||||
| Cash | 7,899 | - | - | - | - | - | - | - | 7,899 |
| Loans and | |||||||||
| advances to banks | 3,239 | 62 | 68 | 87 | - | - | - | 307 | 3,763 |
| Available for sale | |||||||||
| investment | |||||||||
| securities | 3 | 16 | 118 | 2 | 3 | 319 | 3,124 | 7,902 | 11,487 |
| Loans and | |||||||||
| advances to | |||||||||
| customers | 2,455 | 1,254 | 1,794 | 1,838 | 1,966 | 7,065 | 19,676 | 138,017 | 174,065 |
| Derivative financial | |||||||||
| instruments | 98 | 351 | 117 | 113 | 94 | 268 | 486 | 1,461 | 2,988 |
| Other financial | |||||||||
| assets | - | 22 | 17 | 22 | 32 | 149 | 92 | 236 | 570 |
| Total financial | |||||||||
| assets | 13,694 | 1,705 | 2,114 | 2,062 | 2,095 | 7,801 | 23,378 | 147,923 | 200,772 |
| Financial | |||||||||
| liabilities: | |||||||||
| Shares Deposits from |
97,064 | 3,176 | 6,517 | 5,483 | 5,774 | 9,888 | 5,976 | 1,077 | 134,955 |
| banks | 1,364 | 188 | 108 | 5 | 2 | 16 | 23 | - | 1,706 |
| Of which repo | 90 | - | - | - | - | - | - | - | 90 |
| Other deposits | 3,728 | 1,286 | 1,811 | 680 | 670 | 888 | 161 | - | 9,224 |
| Due to customers | 3,654 | 460 | 1,340 | 313 | 274 | 87 | 102 | - | 6,230 |
| Secure funding – | |||||||||
| ABS and covered | |||||||||
| bonds | 1,304 | 1,533 | 103 | 39 | 41 | 3,748 | 3,765 | 7,801 | 18,334 |
| Senior unsecured | |||||||||
| funding | 1,567 | 4,476 | 1,465 | 148 | 46 | 833 | 2,660 | 3,836 | 15,031 |
| Derivative financial | |||||||||
| instruments | 28 | 15 | 11 | 25 | 43 | 340 | 701 | 2,498 | 3,661 |
| Other financial | |||||||||
| liabilities | - | 4 | 5 | 5 | - | (1) | (6) | - | 7 |
| Subordinated | |||||||||
| liabilities | - | - | - | - | - | - | 733 | 1,111 | 1,844 |
| Subscribed capital | - | - | - | - | - | - | - | 409 | 409 |
| Total financial | |||||||||
| liabilities | 108,709 | 11,138 | 11,360 | 6,698 | 6,850 | 15,799 | 14,115 | 16,732 | 191,401 |
| Off-balance sheet | |||||||||
| commitments | 14,378 | - | - | - | - | - | - | - | 14,378 |
| Net liquidity difference |
(109,393) | (9,433) | (9,246) | (4,636) | (4,755) | (7,998) | 9,263 | 131,191 | (5,007) |
| Cumulative | |||||||||
| liquidity | |||||||||
| difference | (109,393) | (118,826) | (128,072) | (132,708) | (137,463) | (145,461) | (136,198) | (5,007) |
| Residual maturity | 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 |
|---|---|---|---|---|---|---|---|---|---|
| 4 April 2015 | £m | £m | £m | £m | £m | £m | £m | £m | £m |
| Financial assets: Cash Loans and |
4,325 | - | - | - | - | - | - | - | 4,325 |
| advances to banks Available for sale |
2,923 | 2 | - | 61 | - | 87 | - | 319 | 3,392 |
| investment securities Loans and advances to |
5 | 14 | 19 | 1 | 122 | 219 | 1,830 | 8,827 | 11,037 |
| customers Derivative financial |
2,450 | 1,198 | 1,713 | 1,893 | 1,739 | 7,272 | 19,361 | 135,021 | 170,647 |
| instruments Other financial |
42 | 115 | 153 | 322 | 110 | 452 | 573 | 1,570 | 3,337 |
| 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 Deposits from |
97,712 | 1,464 | 5,837 | 5,380 | 6,353 | 8,353 | 6,326 | 948 | 132,373 |
| banks | 1,479 | 391 | 10 | 64 | 6 | - | 24 | - | 1,974 |
| Of which repo | - | - | - | - | - | - | - | - | - |
| Other deposits Due to customers Secure funding – |
2,582 3,727 |
1,458 441 |
1,565 1,318 |
923 254 |
584 224 |
1,205 42 |
759 113 |
- - |
9,076 6,119 |
| ABS and covered bonds Senior unsecured |
4 | 15 | 944 | 2,810 | 22 | 2,514 | 3,153 | 8,071 | 17,533 |
| funding Derivative financial |
1,640 | 2,467 | 1,005 | 339 | 235 | 746 | 2,676 | 1,464 | 10,572 |
| instruments Other financial |
64 | 31 | 13 | 27 | 25 | 345 | 791 | 2,752 | 4,048 |
| liabilities Subordinated |
1 | 2 | - | 1 | 1 | 1 | 8 | - | 14 |
| liabilities (note ii) Subscribed capital |
- | - | 266 | - | - | - | 122 | 1,733 | 2,121 |
| (note ii) | - | - | - | - | - | - | - | 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 |
|||||||||
| (note iii) | 13,690 | - | - | - | - | - | - | - | 13,690 |
| Net liquidity difference |
(111,154) | (4,928) | (9,073) | (7,519) | (5,469) | (5,050) | 8,016 | 130,610 | (4,567) |
| Cumulative liquidity difference |
(111,154) | (116,082) | (125,155) | (132,674) | (138,143) | (143,193) | (135,177) | (4,567) |
Notes:
i. Due less than one month includes amounts repayable on demand.
ii. 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. The principal amount for undated subscribed capital is included within the due 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. Classifications are made on a final contractual maturity point and based on the balance sheet amount.
v. The analysis above 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.
The net surplus of financial assets over financial liabilities increased by £248 million to £9,371 million, which is primarily attributable to retained profits for the period. Liquid assets include cash, loans and advances to banks, and available for sale investment securities, which in aggregate have increased by £4,395 million to £23,149 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 total differs from the analysis of residual maturity as it includes interest, accrued at current rates for the average period until maturity, on the balances outstanding at the balance sheet date.
| Gross contractual cash | Due less | Due | Due | Due | Due | Due | Due | Due after | Total |
|---|---|---|---|---|---|---|---|---|---|
| flows | than one | between | between | between | between | between | between | more than | |
| month | one and | three and | six and | nine and | one and | two and | five years | ||
| (note i) | three | six | nine | twelve | two years | five years | |||
| months | months | months | months | ||||||
| 30 September 2015 | £m | £m | £m | £m | £m | £m | £m | £m | £m |
| Shares | 97,101 | 3,246 | 6,608 | 5,557 | 5,832 | 10,027 | 6,118 | 1,108 | 135,597 |
| Deposits from banks | 1,365 | 189 | 108 | 5 | 2 | 16 | 23 | - | 1,708 |
| Other deposits | 3,734 | 1,297 | 1,822 | 687 | 675 | 896 | 164 | - | 9,275 |
| Due to customers | 3,657 | 465 | 1,345 | 315 | 275 | 89 | 104 | - | 6,250 |
| Secure funding – ABS and | |||||||||
| covered bonds | 1,313 | 1,532 | 187 | 89 | 64 | 4,039 | 4,409 | 7,880 | 19,513 |
| Senior unsecured funding | 1,568 | 4,482 | 1,521 | 184 | 120 | 1,045 | 3,164 | 4,275 | 16,359 |
| Derivative financial | |||||||||
| instruments | 70 | 124 | 192 | 190 | 188 | 658 | 1,131 | 1,781 | 4,334 |
| Subordinated liabilities | - | 4 | 50 | 4 | 38 | 96 | 944 | 1,223 | 2,359 |
| Subscribed capital | 1 | 5 | 4 | 7 | 4 | 22 | 68 | 363 | 474 |
| Total financial liabilities | 108,809 | 11,344 | 11,837 | 7,038 | 7,198 | 16,888 | 16,125 | 16,630 | 195,869 |
| Gross contractual cash flows |
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 |
|---|---|---|---|---|---|---|---|---|---|
| 4 April 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 |
| Derivative financial | |||||||||
| instruments | 101 | 166 | 226 | 181 | 204 | 698 | 1,325 | 2,056 | 4,957 |
| Subordinated liabilities | |||||||||
| (note ii) | - | 4 | 315 | 4 | 50 | 96 | 390 | 1,811 | 2,670 |
| Subscribed capital (note ii) | 1 | 5 | 4 | 7 | 4 | 22 | 68 | 363 | 474 |
| Total financial liabilities | 107,278 | 6,551 | 11,405 | 10,091 | 8,015 | 14,271 | 15,998 | 14,915 | 188,524 |
Notes:
i. Due less than one month includes amounts repayable on demand.
ii. 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. The principal amount for undated subscribed capital is included within the due more than five years column.
iii. Amounts are allocated to the relevant maturity band based on the timing of individual contractual cash flows.
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 designed to identify assets that would be available in the event of a resolution or bankruptcy.
| Asset encumbrance | Encumbered | Unencumbered | Total | |||
|---|---|---|---|---|---|---|
| Pledged as | Other Available as | Other | ||||
| collateral | collateral | |||||
| 30 September 2015 | £m | £m | £m | £m | £m | |
| Cash | - | 2,638 | 5,029 | 232 | 7,899 | |
| Loans and advances to banks | 2,277 | 314 | - | 1,172 | 3,763 | |
| Available for sale investment securities | 171 | - | 11,192 | 124 | 11,487 | |
| Loans and advances to customers | 44,467 | - | 82,562 | 47,036 | 174,065 | |
| Derivative financial instruments | - | - | - | 2,988 | 2,988 | |
| Other financial assets | - | - | - | 570 | 570 | |
| Non-financial assets | - | - | - | 2,339 | 2,339 | |
| Total | 46,915 | 2,952 | 98,783 | 54,461 | 203,111 |
| Asset encumbrance | Encumbered | Unencumbered | Total | ||
|---|---|---|---|---|---|
| Pledged as | Other | Available as | Other | ||
| collateral | collateral | ||||
| 4 April 2015 | £m | £m | £m | £m | £m |
| Cash | - | 2,218 | 1,947 | 160 | 4,325 |
| Loans and advances to banks | 2,308 | 327 | - | 757 | 3,392 |
| Available for sale investment securities | 266 | - | 10,654 | 117 | 11,037 |
| Loans and advances to customers | 45,518 | - | 78,890 | 46,239 | 170,647 |
| Derivative financial instruments | - | - | - | 3,337 | 3,337 |
| Other financial assets | - | - | - | 632 | 632 |
| Non-financial assets | - | - | - | 2,210 | 2,210 |
| Total | 48,092 | 2,545 | 91,491 | 53,452 | 195,580 |
Please refer to the Annual Report and Accounts 2015 for further details of the Group's policies for asset encumbrance.
The Group's short and long term credit ratings from the major rating agencies at 19 November 2015 are as detailed below. During the period all of the main ratings agencies reviewed the Group's credit ratings, resulting in the long term rating from Moody's being upgraded from A2 to A1 as a result of the introduction of Moody's new bank rating methodology and the outlook from Standard & Poor's being improved to stable.
| Credit ratings | Long term | Short term | Subordinated | Date of last rating action |
|---|---|---|---|---|
| Standard & Poor's | A | A-1 | BBB | July 2015 |
| Moody's | A1 | P-1 | Baa1 | June 2015 |
| Fitch | A | F1 | A- | June 2015 |
The outlook is stable for all rating agencies.
Capital is held by the Group to protect its depositors, to cover its inherent risks, to provide a cushion for stress events and to 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 capital disclosures included in this report are reported on a CRD IV end point basis unless otherwise stated and do not include grandfathered Tier 1 PIBS and Tier 2 subordinated debt. In addition, the disclosures are on a Group (consolidated basis), including all subsidiary entities, unless otherwise stated.
The Common Equity Tier 1 (CET1) ratio has increased by 2.1% to 21.9% (4 April 2015: 19.8%) as a result of a strong trading performance and a reduction in commercial and retail risk weighted assets (RWAs). The table below reconciles the general reserves to total regulatory capital:
| Total regulatory capital | 30 September 2015 £m |
4 April 2015 £m |
|---|---|---|
| General reserve (note i) | 8,612 | 7,995 |
| Core capital deferred shares (CCDS) | 531 | 531 |
| Revaluation reserve | 68 | 68 |
| Available for sale reserve | (8) | 26 |
| Regulatory adjustments and deductions: | ||
| Foreseeable distributions (note ii) | (43) | (44) |
| Prudent valuation adjustment (note iii) | (3) | (1) |
| Own credit and debit valuation adjustments (note iv) | (4) | (11) |
| Intangible assets (note v) | (1,042) | (982) |
| Goodwill (note v) | (12) | (12) |
| Excess of regulatory expected losses over impairment provisions (note vi) | (297) | (291) |
| Total regulatory adjustments and deductions | (1,401) | (1,341) |
| Common Equity Tier 1 capital | 7,802 | 7,279 |
| Additional Tier 1 capital securities (AT1) | 992 | 992 |
| Total Tier 1 capital | 8,794 | 8,271 |
| Dated subordinated debt (note vii) | 1,581 | 1,653 |
| Excess of impairment provisions over regulatory expected loss (note vi) | 3 | - |
| Collectively assessed impairment allowances | 22 | 26 |
| Tier 2 capital | 1,606 | 1,679 |
| Total regulatory capital | 10,400 | 9,950 |
| Solvency ratios: (note viii) | ||
| Common Equity Tier 1 ratio | 21.9% | 19.8% |
| Total Tier 1 capital ratio | 24.7% | 22.5% |
| Total regulatory capital ratio | 29.2% | 27.0% |
Notes:
iii. A prudent valuation adjustment is applied in respect of fair valued instruments as required under regulatory capital rules.
The CET1 ratio on an Individual (solo) consolidated basis at 30 September 2015 is 21.7% (4 April 2015: 19.6%). More detail on the Group's capital position measured on an Individual consolidated basis can be found in the Group's 2015 Pillar 3 disclosures at nationwide.co.uk
CET1 capital has increased by £523 million to £7,802 million (4 April 2015: £7,279 million) due to profits of £636 million in the six months, offset by a £60 million increase in intangible assets and a reduction in the available for sale (AFS) reserve of £34 million. Total capital has increased by £450 million reflecting this increase in CET1 resources, partly offset by a lower Tier 2 value for dated subordinated debt due to fair value and amortisation movements.
The key movements in the Group's capital position during the period are summarised in the table below:
| £m | |
|---|---|
| Common Equity Tier 1 capital at 5 April 2015 | 7,279 |
| Profit for the period | 636 |
| Other movement in general reserves (note i) | (19) |
| Movement in foreseeable distributions | 1 |
| Movement in available for sale reserve | (34) |
| (Increase)/decrease in: | |
| Prudent valuation adjustment | (2) |
| Own credit risk adjustment | 7 |
| Intangible assets and goodwill | (60) |
| Excess of regulatory expected loss over impairment provisions | (6) |
| Common Equity Tier 1 capital at 30 September 2015 | 7,802 |
| Additional Tier 1 capital at 4 April 2015 and 30 September 2015 | 992 |
| Total Tier 1 capital at 30 September 2015 | 8,794 |
| Tier 2 capital at 5 April 2015 | 1,679 |
| Amortisation on dated subordinated debt | (42) |
| Fair value adjustments on dated subordinated debt | (30) |
| (Decrease)/increase in: | |
| Collectively assessed impairment allowances | (4) |
| Excess of impairment provisions over regulatory expected loss | 3 |
| Tier 2 capital at 30 September 2015 | 1,606 |
| Total regulatory capital at 5 April 2015 | 9,950 |
| Total regulatory capital at 30 September 2015 | 10,400 |
Note:
i. Includes all movements in general reserves, other than profit for the period.
Nationwide's latest Pillar 2A Individual Capital Guidance (ICG) was received in September 2015 following an Individual Capital Adequacy Assessment Process (ICAAP) and a Supervisory Review and Evaluation Process (SREP). It equates to approximately £2.2 billion, of which at least £1.2 billion must be met by CET1 capital (previously approximately £1.9 billion, of which at least £1.1 billion must be met by CET1 capital). This amount is equivalent to 6.2% of RWAs as at 30 September 2015, reflecting the Group's low average risk weight, given that approximately 75% of the Group's exposure is in the form of secured residential mortgages. The ICG is a point in time estimate by the PRA (which may change over time) of the amount of capital required to be held to meet risks not fully covered by Pillar 1 such as credit concentration and operational risk, and those risks not included in Pillar 1 such as pensions and interest rate risk.
CRD IV requires firms to calculate a non-risk-based leverage ratio, to supplement risk-based capital requirements. The Group's 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 and is reported on an end point basis.
The leverage ratio increased by 0.1% to 4.2% (4 April 2015: 4.1%), with growth in Tier 1 capital outweighing the increase in exposures. The increase in the leverage exposure is mainly due to balance sheet growth of £7.5 billion from increases in mortgage balances and liquidity and investment assets held by Treasury.
The table below provides further detail on the components of the leverage ratio measure:
| Leverage ratio | 30 September 2015 | 4 April 2015 |
|---|---|---|
| £m | £m | |
| On-balance sheet exposures (note i) | 203,111 | 195,580 |
| Adjustments for derivative exposures | (3,166) | (3,954) |
| Securities financing transaction (SFT) exposures (note ii) | 4,081 | 3,646 |
| Off-balance sheet exposures (note iii) | 5,949 | 6,678 |
| Adjustments for Tier 1 deductions | (1,354) | (1,285) |
| Total exposures | 208,621 | 200,665 |
| Tier 1 capital | 8,794 | 8,271 |
| Leverage ratio | 4.2% | 4.1% |
Notes:
i. Total assets as per the consolidated interim financial statements.
ii. SFT exposures relate to repurchase agreements and reverse repurchase agreements transacted by the Group.
iii. Off-balance sheet exposures are after the application of credit conversion factors, as allowed by the Delegated Act.
The table below shows the breakdown of the Group's RWAs and the movements in credit risk RWAs over the period:
| Credit risk RWA flow statement | RWAs at 5 April 2015 |
Growth/ (reduction) in book size |
(Improvement)/ deterioration in book quality |
RWAs at 30 September 2015 |
|---|---|---|---|---|
| £m | £m | £m | £m | |
| Credit risk: | ||||
| Retail mortgages | 14,372 | 462 | (810) | 14,024 |
| Retail unsecured lending | 7,023 | 57 | (245) | 6,835 |
| Commercial loans | 7,646 | (592) | (302) | 6,752 |
| Treasury | 1,375 | 273 | (127) | 1,521 |
| Counterparty credit risk (note i) | 826 | (58) | 194 | 962 |
| Other (note ii) | 1,334 | (28) | - | 1,306 |
| Total credit risk | 32,576 | 114 | (1,290) | 31,400 |
| Operational risk | 4,228 | 4,228 | ||
| Market risk (note iii) | - | - | ||
| Total risk weighted assets | 36,804 | 35,628 |
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 has elected to set this to zero, as permitted by the CRR, as exposure was below the threshold of 2% of own funds.
RWAs reduced by £1.2 billion to £35.6 billion (4 April 2015: £36.8 billion) due to lower credit risk RWAs. This is driven by continued run-off of the non-core commercial book and improvements in the credit quality of remaining exposures which have reduced commercial RWAs. Credit risk RWAs have also been further reduced by an improvement in credit quality, notably in specialist mortgage assets, due to the continued increase in the house price index; this has more than offset the RWA increase from the portfolio growth.
The Pillar 1 credit RWA amounts used as the basis for capital requirements are calculated using:
Pillar 1 capital requirements are calculated at 8% of the RWAs, so the Group's credit RWAs of £31,400 million becomes a Pillar 1 capital requirement of £2,512 million. The following table shows how the capital requirements for Pillar 1 credit risk are attributed to exposure classes (as defined by the regulator) by risk calculation approach at 30 September 2015.
| Minimum Pillar 1 capital requirement for credit risks | 30 September 2015 £m |
4 April 2015 £m |
|---|---|---|
| Internal Ratings Based (IRB) exposure classes: | ||
| Institutions | 51 | 59 |
| Corporates (commercial lending) | 518 | 589 |
| Retail mortgages | 901 | 918 |
| Qualifying revolving retail (credit card and Flex) | 331 | 343 |
| Other retail (unsecured personal loans) | 216 | 218 |
| Securitisation positions | 49 | 33 |
| Non-credit obligation assets (fixed assets and other) | 91 | 90 |
| Counterparty credit risk (derivatives) | 77 | 66 |
| Total IRB exposure classes | 2,234 | 2,316 |
| Standardised exposure classes: | ||
| Central government and central banks (note i) | - | - |
| Regional governments and local authorities | 1 | 1 |
| Multilateral development banks (note i) | - | - |
| Corporates (non-commercial) | 9 | 9 |
| Retail mortgages (secured against residential property) (note ii) | 201 | 210 |
| Commercial lending (secured against property) | 7 | 7 |
| Commercial lending (other) | 11 | 11 |
| Past due | 24 | 26 |
| Other | 25 | 26 |
| Total standardised exposure classes | 278 | 290 |
| Total capital requirements for credit risk | 2,512 | 2,606 |
Notes:
i. Exposures within these asset classes are zero risk weighted.
ii. Also includes less than £1 million of capital requirement relating to other retail exposures.
The most material movement in the table above is the reduction in IRB commercial lending capital requirements due to continued run-off of the non-core book and the improving credit quality of remaining exposures.
The Group continues to monitor regulatory developments that could lead to an increased level of capital requirements to ensure it is well positioned for any changes. These include the current reviews of IRB modelling approaches, the consultations on revisions to the standardised approach and capital floor framework and changes to the Pillar 2 framework set out in the July 2015 Policy Statement (the latter of which will take effect from January 2016).
The PRA published its approach to implementing the Financial Policy Committee's (FPC) direction and recommendation on a UK leverage ratio framework in July 2015. This introduced requirements of up to 4.95% from 2019 constituting a 3% minimum requirement in addition to a supplementary leverage ratio buffer and countercyclical leverage ratio buffer. The Group expects the FPC to consult on the level of the systemic risk buffer for each individual institution (which forms part or all of the supplementary leverage ratio buffer) by the end of 2015. The supplementary leverage ratio buffer will be no higher than 1.05%. The countercyclical leverage ratio buffer will likely be based upon the risk-based countercyclical buffer, which is currently set at 0% for UK exposures.
As part of the European Bank Recovery and Resolution Directive (BRRD), the Bank of England, in its capacity as the UK resolution authority, will be required to set a Minimum Requirement for Eligible Liabilities (MREL) for each firm, including Nationwide. The Bank of England is expected to consult on the calibration of MREL as it becomes a requirement under European regulation from January 2016. The Group is confident it has a strong foundation from which to meet future MREL requirements.
During the summer of 2015, the major UK banks and building societies, including Nationwide, took part in the second of the PRA's annual concurrent stress tests. The scenario described a global downturn, with a less severe impact on the UK housing market than the 2014 scenario. The results of the 2015 concurrent stress test are currently intended to be published by the PRA on 1 December 2015. In September the Bank of England published details of its approach to stress testing the UK banking system over the coming years, focusing in particular on the period to 2018. A key feature of the new guidance is a higher CET1 hurdle rate which includes Pillar 2A and systemic risk buffer requirements. The Group's robust approach to internal and industry stress testing exercises is well positioned to meet changing regulatory requirements.
The Group has a number of defined benefit pension schemes, the most significant of which is the Nationwide Pension Fund (the Fund), which is closed to new employees. 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).
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.
In line with the Fund's current deficit recovery plan, a £49 million employer deficit contribution was paid in July 2015. Further annual deficit contributions of £49 million are payable over each of the next five years, although in certain circumstances the next annual contribution may not be paid.
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 £199 million, as set out below:
| Changes in the value of the net retirement benefit obligation | £m |
|---|---|
| Deficit at 5 April 2015 | (286) |
| Pension charge | (33) |
| Net interest cost | (4) |
| Actuarial remeasurement | 46 |
| Employer contributions (including deficit contributions noted above) | 78 |
| Deficit at 30 September 2015 | (199) |
The actuarial remeasurement quantifies the impact on the deficit from the updating of economic assumptions which value the pension fund assets and liability. An increase in long-term bond yields is partially offset by higher inflation expectations and negative asset performance resulting in a net positive impact on the Fund's deficit.
As set out in the Annual Report and Accounts 2015, the Trustee's long-term objective is to significantly reduce the Fund's investment strategy risk; the Group actively engages with the Trustee to ensure broad alignment on strategic investment objectives and implementation.
This broad alignment is supported by permanent representation by the Group at the Trustee's investment committee, the sharing of management information and the recent establishment of a monthly investment working group (which includes representatives from the Trustee and Group) to consider specific risk management initiatives.
Potential risk management initiatives include, but are not limited to, adjusting the mix of asset types held (for example less equities and more bonds), increasing interest rate and inflation hedging and adjusting contribution levels.
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. The Group's operational risk profile continues to be informed by risk assessments from the business and by review and challenge from internal teams and committees.
Over the last six months, the operational risk environment has seen a number of high profile cyber attacks and failures of payments infrastructures.
New payments technology, whilst increasing payment options for customers, is increasing the operational complexity of payments infrastructures across the industry. At the same time, the increased use of digital banking services means that the financial services sector is seeing increased expectations of an "always on" 24/7 service and lower tolerance of system unavailability combined with heightened concerns over the security of banking systems.
Consistent with the position at the financial year end, the majority of the Group's operational risk events continue to be recorded against two of the Basel II categories: 'External Fraud' and 'Clients, Products and Business Practices' and are categorised as having minor impact. No significant operational risk events have occurred during the period.
The Group is committed to protecting both the Society and its members from the threat of fraudulent attacks by increasingly sophisticated cyber criminals and continues to invest in security and detection capabilities, designed to ensure it can respond to security threats effectively.
In addition, the Group employs third parties to provide services to our members. It expects those third parties to adhere to the Group's security conduct standards to ensure that members are protected and that good customer outcomes and a superior customer service experience are delivered. To underpin this, the Group has made enhancements to the framework for managing third party suppliers, including revisions to policy, controls and training.
IT and business resilience (including the payments infrastructure) is acknowledged as a key component of the Group's strategic focus and an important commitment to members. The Group maintains a strong focus on transformation governance and programme management disciplines, and has a programme of activities and systems enhancements to improve resilience, ensuring the Group can reduce the likelihood of incidents arising, improve the time to resolve any incidents that do occur and minimise any potential impact on our customers.
In order to ensure that it can offer members a range of service options, the Group continues to make significant investment in transforming its products and delivery channels to embrace advances in digital technology, whilst still offering more traditional products and services that are important to many of the Group's members. The pace of change, together with the introduction of new systems, introduces operational complexity which could lead to disruption of the Group's operating environment and impact service experience.
The uncertainty around the timing of interest rate changes is continually under review. The Group regularly reviews its operational plans to understand how it might respond to the needs of customers dealing with rises in interest rates, which have been at a historic low since 2009.
The operational risk outlook focuses on the environment in which the Group operates. The Group expects the key focus for the remainder of 2015/16 to be:
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 conduct risk management framework has not substantially changed in the period since the Annual Report and Accounts 2015. However, there is ongoing review and challenge of the framework to ensure it remains fit for purpose, with changes made where necessary.
In July 2015 the Board revised the Group's conduct risk appetite and approved a Group-wide set of conduct 'outcome' statements which are to be considered when making judgements in the execution of business activities. The statements are designed to ensure that fair customer outcomes are put at the heart of decision making. The five outcome statements are as follows:
In addition the explicit reference to customer experience risk has been removed from the risk definition to create a clearer delineation between 'fair' conduct outcomes and customer satisfaction.
These efforts have been supported by focused activity to embed best practice conduct risk management and awareness through enhanced policies and frameworks and revised training, including tailored face to face workshops for all key decision makers. These actions will further enhance the proactive consideration of risks to customers and markets stemming from the strategic, business model and operational judgements made daily across the Group.
As reported in the Annual Reports and Accounts 2015, the conduct and compliance environment remains challenging and the conduct risk regulatory landscape continues to evolve. The increasing regulatory expectations with respect to conduct standards increase the risk of future sanctions, fines or customer redress and it is possible that, in consideration of how past business was conducted, the Group may be judged as not having complied fully with law and regulation or be regarded as not having been fair or reasonable in the treatment of customers. In addition, unforeseen conduct issues may arise in existing products or from new processes being supported by legacy systems.
The Group is reviewing its compliance with various regulatory matters, including consumer credit legislation, and during the period has made a provision of £24 million in respect of potential customer redress to reflect its latest estimate of likely exposure.
The total provision held at 30 September 2015 of £152 million continues to include amounts for the misselling of payment protection insurance (PPI). The Group continues to assess, on an ongoing basis, the level of complaints expected against those levels actually received and the appropriateness of the previous provisions, which reflect the redress and associated administration that will be payable in relation to claims it expects to uphold. Costs in relation to invalid claims are recognised in administrative expenses as incurred. The Group continues to monitor industry and regulatory developments, including the UK Supreme Court's decision in the case of Plevin v Paragon Personal Finance Limited and the FCA's statement in relation to PPI, and has taken these into account in estimating its provisions at 30 September 2015.
The Strengthening Individual Accountability in Banking Regulations come into force on 7 March 2016 and introduce a tiered approach comprising three new Regimes – Senior Manager, Certification and Conduct Rules. These Regulations allow both the Regulator and the Group to hold individuals to account and are designed to restore public trust. The Group continues to work closely with the regulators and, as a result, is well positioned to be ready to embrace and operate in accordance with the new regulations. The Group has a history of making good decisions to protect members' interests and the new regulations resonate with the Group's fundamental values where doing the right thing for members is ingrained in everything Nationwide does.
The Group has made significant progress in its readiness for the implementation of the Mortgage Credit Directive (MCD) in March 2016, following successful implementation of the Mortgage Market Review in 2014. The Group welcomes the increased consumer protection that MCD brings to the mortgage market, particularly the inclusion of the new consumer buy to let requirements.
Changes to the way complaints are recognised and handled will come into force in 2016, including the requirement to report all complaints received irrespective of when they are resolved, an increase in the informal complaints handling period from one to three business days, and changes to telephone call charges for post-sale enquiries. The Group has replaced all fee-charging telephone numbers with free-to-customer alternatives and is investing in a new complaints handling system and staff training to enhance overall customer experience and to ensure that signs of customer dissatisfaction are tackled quickly and efficiently.
The digitalisation of the Group's proposition has the potential to deliver better outcomes for customers. Realising that potential will require understanding how customers interact with digital channels to avoid technology negatively impacting a customer's ability to identify and access the products and services that suit them best. However, there are challenges in the delivery of this proposition where historic legislation and processes are carried forward into the digital age. The Group is continuing to design and implement appropriate controls and processes in order to continue to provide the services that its members value against the evolving regulatory backdrop.
| Page | |
|---|---|
| Consolidated income statement | 67 |
| Consolidated statement of comprehensive income | 68 |
| Consolidated balance sheet | 69 |
| Consolidated statement of movements in members' interests and equity | 70 |
| Consolidated cash flow statement | 71 |
| Notes to the consolidated interim financial statements | 72 |
| Notes | Half year to 30 September |
Half year to 30 September |
|
|---|---|---|---|
| 2015 | 2014* | ||
| £m | £m | ||
| Interest receivable and similar income | 3 | 2,613 | 2,684 |
| Interest expense and similar charges | 4 | (1,056) | (1,238) |
| Net interest income | 1,557 | 1,446 | |
| Fee and commission income | 212 | 220 | |
| Fee and commission expense | (91) | (81) | |
| Income from investments | 2 | 2 | |
| Other operating income | 3 | 2 | |
| Gains from derivatives and hedge accounting | 5 | 14 | 6 |
| Total income | 1,697 | 1,595 | |
| Administrative expenses | 6 | (866) | (820) |
| Impairment losses on loans and advances to customers | 7 | - | (156) |
| Impairment losses on investment securities | - | (13) | |
| Provisions for liabilities and charges | 8 | (29) | (8) |
| Profit before tax | 802 | 598 | |
| Taxation | 9 | (166) | (112) |
| Profit after tax | 636 | 486 |
*Comparatives have been restated as detailed in note 2.
| Half year to | Half year to | |
|---|---|---|
| 30 September | 30 September | |
| 2015 | 2014 | |
| £m | £m | |
| Profit after tax | 636 | 486 |
| Other comprehensive income/(expense): | ||
| Items that will not be reclassified to the income statement | ||
| Remeasurements of retirement benefit obligations: | ||
| Retirement benefit remeasurements before tax | 46 | (50) |
| Taxation | (9) | 4 |
| 37 | (46) | |
| Revaluation of property: | ||
| Effect of tax rate change on the revaluation reserve | - | 1 |
| Other items through the general reserve, including effect of | ||
| corporation tax rate change | - | (2) |
| 37 | (47) | |
| Items that may subsequently be reclassified to the income | ||
| statement | ||
| Cash flow hedge reserve: | ||
| Fair value movements taken to members' interests and equity | (54) | - |
| Amount transferred to income statement | (67) | - |
| Taxation | 24 | - |
| (97) | - | |
| Available for sale reserve: | ||
| Fair value movements taken to members' interests and equity | (54) | 60 |
| Amount transferred to income statement | 6 | 27 |
| Taxation | 14 | (19) |
| (34) | 68 | |
| Other comprehensive (expense)/income | (94) | 21 |
| Total comprehensive income | 542 | 507 |
| Notes | 30 September | 4 April | |
|---|---|---|---|
| 2015 | 2015 | ||
| £m | £m | ||
| Assets | |||
| Cash | 7,899 | 4,325 | |
| Loans and advances to banks | 3,763 | 3,392 | |
| Available for sale investment securities | 11,487 | 11,037 | |
| Derivative financial instruments | 2,988 | 3,337 | |
| Fair value adjustment for portfolio hedged risk | 531 | 592 | |
| Loans and advances to customers | 10 | 174,065 | 170,647 |
| Investments in equity shares | 26 | 26 | |
| Intangible assets Property, plant and equipment |
1,096 852 |
1,040 856 |
|
| Investment properties | 8 | 8 | |
| Accrued income and expenses prepaid | 239 | 192 | |
| Deferred tax | 30 | 38 | |
| Other assets | 127 | 90 | |
| Total assets | 203,111 | 195,580 | |
| Liabilities | |||
| Shares | 134,955 | 132,373 | |
| Deposits from banks | 1,706 | 1,974 | |
| Other deposits | 9,224 | 9,076 | |
| Due to customers | 6,230 | 6,119 | |
| Fair value adjustment for portfolio hedged risk | 7 | 14 | |
| Debt securities in issue | 33,365 | 28,105 | |
| Derivative financial instruments | 3,661 | 4,048 | |
| Other liabilities | 622 | 475 | |
| Provisions for liabilities and charges | 8 | 207 | 295 |
| Accruals and deferred income | 279 | 369 | |
| Subordinated liabilities | 11 | 1,844 | 2,121 |
| Subscribed capital | 11 | 409 | 415 |
| Deferred tax Current tax liabilities |
25 151 |
53 116 |
|
| Retirement benefit obligations | 199 | 286 | |
| Total liabilities | 192,884 | 185,839 | |
| Members' interests and equity | |||
| Core capital deferred shares | 12 | 531 | 531 |
| Other equity instruments | 13 | 992 | 992 |
| General reserve | 8,612 | 7,995 | |
| Revaluation reserve | 68 | 68 | |
| Cash flow hedge reserve | 32 | 129 | |
| Available for sale reserve | (8) | 26 | |
| Total members' interests and equity | 10,227 | 9,741 | |
| Total members' interests, equity and liabilities | 203,111 | 195,580 |
| Core capital deferred |
Other equity instruments |
General reserve |
Revaluation reserve |
Cash flow hedge |
Available for sale reserve |
Total | |
|---|---|---|---|---|---|---|---|
| shares £m |
£m | £m | £m | reserve £m |
£m | £m | |
| At 5 April 2015 | 531 | 992 | 7,995 | 68 | 129 | 26 | 9,741 |
| Profit for the period Net movement in available for sale |
- | - | 636 | - | - | - | 636 |
| reserve | - | - | - | - | - | (34) | (34) |
| Net movement in cash flow hedge reserve Net remeasurements of retirement benefit |
- | - | - | - | (97) | - | (97) |
| obligations | - | - | 37 | - | - | - | 37 |
| Total comprehensive income Distribution to the holders of core capital |
- | - | 673 | - | (97) | (34) | 542 |
| deferred shares Distribution to the holders of Additional |
- | - | (28) | - | - | - | (28) |
| Tier 1 capital* | - | - | (28) | - | - | - | (28) |
| At 30 September 2015 | 531 | 992 | 8,612 | 68 | 32 | (8) | 10,227 |
| Core capital deferred shares |
Other equity instruments |
General reserve |
Revaluation reserve |
Available for sale reserve |
Total | |
|---|---|---|---|---|---|---|
| £m | £m | £m | £m | £m | £m | |
| At 5 April 2014 | 531 | 992 | 7,363 | 71 | (51) | 8,906 |
| Profit for the period Net movement in |
- | - | 486 | - | - | 486 |
| available for sale reserve Effect of tax rate change |
- | - | - | - | 68 | 68 |
| on other items through reserves Net remeasurements of retirement benefit |
- | - | (2) | 1 | - | (1) |
| obligations | - | - | (46) | - | - | (46) |
| Total comprehensive income Distribution to the |
- | - | 438 | 1 | 68 | 507 |
| holders of core capital deferred shares Distribution to the |
- | - | (30) | - | - | (30) |
| holders of Additional Tier 1 capital* |
- | - | (15) | - | - | (15) |
| At 30 September 2014 | 531 | 992 | 7,756 | 72 | 17 | 9,368 |
*The distribution to the holders of Additional Tier 1 capital is shown net of an associated tax credit of £6 million (H1 2014/15: £4 million).
| Notes | Half year to 30 | Half year to 30 | |
|---|---|---|---|
| September | September | ||
| 2015 | 2014* | ||
| £m | £m | ||
| Cash flows generated from/(used in) operating | |||
| activities | |||
| Profit before tax | 802 | 598 | |
| Adjustments for: | |||
| - Non-cash items included in profit before tax | 14 | (86) | (73) |
| - Changes in operating assets | 14 | (2,802) | (2,225) |
| - Changes in operating liabilities | 14 | 2,069 | 5,070 |
| - Interest paid on subordinated liabilities | (48) | (54) | |
| - Interest paid on subscribed capital | (11) | (19) | |
| Taxation | (115) | (56) | |
| Net cash flows (used in)/generated from operating | (191) | 3,241 | |
| activities | |||
| Cash flows (used in)/generated from investing | |||
| activities | |||
| Purchase of investment securities | (2,443) | (2,213) | |
| Sale and maturity of investment securities | 1,893 | 1,425 | |
| Purchase of property, plant and equipment | (80) | (76) | |
| Sale of property, plant and equipment | 7 | 8 | |
| Purchase of intangible assets | (143) | (94) | |
| Dividends received from non-Group entities | 2 | 4 | |
| Net cash flows used in investing activities | (764) | (946) | |
| Cash flows (used in)/generated from financing | |||
| activities | |||
| Distributions paid to the holders of core capital deferred | (28) | (30) | |
| shares | |||
| Distributions paid to the holders of additional tier 1 capital | (34) | (19) | |
| Issue of debt securities | 15,974 | 12,492 | |
| Redemption of debt securities in issue | (10,751) | (11,259) | |
| Redemption of subordinated liabilities | (256) | - | |
| Net cash flows generated from financing activities | 4,905 | 1,184 | |
| Net increase in cash and cash equivalents | 3,950 | 3,479 | |
| Cash and cash equivalents at start of period | 7,250 | 6,989 | |
| Cash and cash equivalents at end of period | 14 | 11,200 | 10,468 |
*Comparatives have been restated as detailed in note 2.
Nationwide Building Society ('the Society') and its subsidiaries (together, 'the Group') provide financial services to retail and commercial customers within the United Kingdom.
Nationwide is a building society incorporated and domiciled in the United Kingdom. The address of its registered office is Nationwide House, Pipers Way, Swindon, Wiltshire SN38 1NW.
There were no material changes in the composition of the Group in the half year to 30 September 2015.
These condensed consolidated interim financial statements ("consolidated interim financial statements") have been prepared as at 30 September 2015 and show the financial performance for the period from, and including, 5 April 2015 to this date. They were approved for issue on 19 November 2015.
These consolidated interim financial statements have been reviewed, not audited.
The consolidated interim financial statements of Nationwide Building Society for the half year ended 30 September 2015 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with International Accounting Standard (IAS) 34 'Interim Financial Reporting' as issued by the International Accounting Standards Board (IASB) and as endorsed by the European Union (EU). The consolidated interim financial statements should be read in conjunction with the annual financial statements for the year ended 4 April 2015, which have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU.
Terminology used in these consolidated interim financial statements is consistent with that used in the Annual Report and Accounts 2015, where a full glossary of terms can be found. Additional items relevant to this period are defined in the glossary section at the end of this document.
There were no new standards applied during the half year to 30 September 2015. The following amendments to IFRSs and IASs were effective for the first half of the financial year:
The accounting policies adopted by the Group in the preparation of the 30 September 2015 consolidated interim financial statements and those which the Group currently expects to adopt in the Annual Report and Accounts 2016 are consistent with those disclosed in the Annual Report and Accounts 2015, 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 accounting policies and disclosures adopted reflect the Group's current view of best practice. Copies of the Annual Report and Accounts 2015 are available on the Group's website at: nationwide.co.uk/about_nationwide/results_and_accounts/default.htm
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 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 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 | ||
| Consolidated income statement extract for the period ended 30 September 2014 |
||||
| Interest expense and similar charges | 4 | (1,264) | 26 | (1,238) |
| Gains from derivatives and hedge accounting | 5 | 32 | (26) | 6 |
| Profit before tax | 598 | - | 598 |
This reclassification has no impact on the Group's net assets or members' interests and equity at 4 April 2015 and no impact on the Group's net cash flows generated from operating activities or cash and cash equivalents for the period ended 30 September 2014.
Within the consolidated cash flow statement, the Group has reclassified certain cash flows to 'net cash flows generated from financing activities' in relation to debt securities in issue. Previously, these cash flows were presented incorrectly within 'net cash flows generated from operating activities'. This reclassification has no impact upon cash and cash equivalents for the Group.
Comparatives have been restated to reflect this reclassification as shown below:
| Previously published |
Adjustment | Restated | |
|---|---|---|---|
| £m | £m | £m | |
| Consolidated cash flow statement extract for the | |||
| period ended 30 September 2014 | |||
| Net cash flows generated from operating activities | 6,352 | (3,111) | 3,241 |
| Net cash flows (used in)/generated from financing activities | (1,927) | 3,111 | 1,184 |
Off-balance sheet commitments at 4 April 2015, shown in the residual maturity table within the 'Liquidity and funding risk' section of the Business and Risk Report, have been restated from £7,162 million to £13,690 million. The original disclosure omitted commitments of £6,528 million which relate to customer overpayments on residential mortgages where the borrower is entitled to drawdown amounts overpaid.
An overview of pronouncements that will be relevant to the Group in future periods was provided in the Annual Report and Accounts 2015.
During July 2015, the IASB confirmed the deferral of the effective date of IFRS 15 'Revenue from Contracts with Customers' from 1 January 2017 to 1 January 2018. In addition, on 30 July 2015 a further exposure draft was issued proposing targeted amendments to the standard.
The Group has to make judgements in applying its accounting policies which affect the amounts recognised in these consolidated interim financial statements. In addition, estimates and assumptions are made that could affect the reported amounts of assets and liabilities within the following financial period.
There have been no changes to the areas of significant judgement and estimate from those disclosed in the Annual Report and Accounts 2015 which comprised:
The Group's business activities and financial position, the factors likely to affect its future development and performance, its objectives and policies in managing the financial risks to which it is exposed, and its capital, funding and liquidity positions are discussed in the Business and Risk Report.
In the light of current and anticipated economic conditions, the directors have assessed the Group's ability to continue as a going concern. The directors confirm they are satisfied that the Group has adequate resources to continue in business for the foreseeable future and that it is therefore appropriate to adopt the going concern basis in preparing these consolidated interim financial statements.
| Half year to | Half year to | |
|---|---|---|
| 30 September | 30 September | |
| 2015 | 2014 | |
| £m | £m | |
| On residential mortgages | 2,462 | 2,451 |
| On other loans | 412 | 470 |
| On investment securities | 173 | 175 |
| On other liquid assets | 10 | 17 |
| Net expense on financial instruments hedging assets | (444) | (429) |
| Total | 2,613 | 2,684 |
Included within interest receivable and similar income is interest of £14 million (H1 2014/15: £21 million) accrued on loans which are more than three months in arrears and the unwind of the discount on impairment provisions of £7 million (H1 2014/15: £29 million).
| Half year to | Half year to | |
|---|---|---|
| 30 September | 30 September | |
| 2015 | 2014* | |
| £m | £m | |
| On shares held by individuals | 762 | 947 |
| On subscribed capital | 13 | 21 |
| On deposits and other borrowings: | ||
| Subordinated liabilities |
51 | 57 |
| Other |
240 | 65 |
| On debt securities in issue | 335 | 370 |
| Net income on financial instruments hedging liabilities | (349) | (226) |
| Interest on net defined benefit pension liability | 4 | 4 |
| Total | 1,056 | 1,238 |
*Comparatives have been restated as detailed in note 2.
Interest expense includes amounts in relation to the redemption and maturity of PEB deposits, which have returns linked to the performance of specified stock market indices. The deposits are held at fair value and are economically hedged using equity-linked derivatives. During the life of the PEB deposits, movements in their fair value are offset against the movements in the fair value of the corresponding derivatives within the gains on derivatives and hedge accounting line in the income statement. On maturity or redemption of PEBs, these movements are reclassified to interest expense and similar charges; the PEBs movements are reported in other interest expense on deposits and other borrowings with a corresponding offsetting amount included within net income on financial instruments hedging liabilities. An amount of £177 million (H1 2014/15: £6 million) has been reclassified in the period and is included in the figures above.
| Half year to 30 September |
Half year to 30 September |
|
|---|---|---|
| 2015 | 2014* | |
| £m | £m | |
| Gains from fair value hedge accounting (note i) | 40 | 4 |
| Ineffectiveness from cash flow hedge accounting (note ii) | 4 | - |
| Net loss from mortgage pipeline (note iii) | (29) | (4) |
| Fair value (loss)/gain from other derivatives (note iv) | (26) | 32 |
| Foreign exchange differences | 25 | (26) |
| Total | 14 | 6 |
*Comparatives have been restated as detailed in note 2.
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 not achievable. This volatility is therefore largely attributable to accounting rules which do not fully reflect the economic reality of the Group's hedging strategy. The volatility will continue period on period but, on a cumulative basis, will broadly trend back to zero over time.
Included within the gain of £14 million (H1 2014/15: £6 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.
| Half year to 30 September 2015 £m |
Half year to 30 September 2014 £m |
|
|---|---|---|
| Employee costs: | ||
| Wages, salaries and bonuses |
269 | 261 |
| Social security costs |
26 | 27 |
| Pension costs |
54 | 42 |
| 349 | 330 | |
| Other administrative expenses | 362 | 346 |
| 711 | 676 | |
| Depreciation and amortisation | 155 | 144 |
| Total | 866 | 820 |
Other administrative expenses include £8 million (H1 2014/15: £36 million) of transformation costs. In the prior period, these costs were driven primarily by integration activity for the Derbyshire, Cheshire and Dunfermline brands which has now been completed.
The following tables set out impairment losses and reversals during the period and the closing provision balances which are deducted from the appropriate asset values in the balance sheet:
| Half year to | Half year to | |
|---|---|---|
| 30 September | 30 September | |
| 2015 | 2014 | |
| £m | £m | |
| Impairment (reversals)/losses for the period | ||
| Prime residential | (1) | - |
| Specialist residential | (6) | 13 |
| Consumer banking | 33 | 49 |
| Commercial lending | (27) | 73 |
| Other lending | 1 | 21 |
| Total | - | 156 |
| 30 September | 4 April | |
| 2015 | 2015 | |
| £m | £m | |
| Impairment provision at the end of the period | ||
| Prime residential | 18 | 22 |
| Specialist residential | 68 | 88 |
| Consumer banking | 234 | 216 |
| Commercial lending | 128 | 322 |
| Other lending | 5 | 4 |
The Group impairment provision of £453 million at 30 September 2015 (4 April 2015: £652 million) comprises individual provisions of £149 million (4 April 2015: £341 million) and collective provisions of £304 million (4 April 2015: £311 million).
The decrease in impairment provisions on prime and specialist residential loans arises from moderate house price growth in the period, together with the improved performance of the book driven by prolonged low interest rates, falling unemployment and wage growth inflation above the increase in the cost of living.
The decrease in impairment provisions held against commercial lending is driven by continued improvement in market conditions for commercial real estate, together with significant deleveraging activity undertaken during the prior year which has resulted in a reduction in the size of the commercial real estate book.
Further credit risk related information on loans and advances to customers is included in the Business and Risk Report.
| Bank levy |
FSCS | Customer redress |
Other provisions |
Total | |
|---|---|---|---|---|---|
| £m | £m | £m | £m | £m | |
| At 5 April 2015 | 13 | 126 | 140 | 16 | 295 |
| Provisions utilised | (13) | (88) | (12) | (4) | (117) |
| Charge for the period | - | 5 | 32 | 1 | 38 |
| Release for the period | - | - | (8) | (1) | (9) |
| Net income statement charge | - | 5 | 24 | - | 29 |
| At 30 September 2015 | - | 43 | 152 | 12 | 207 |
| At 5 April 2014 | 6 | 142 | 124 | 38 | 310 |
| Provisions utilised | (6) | (100) | (25) | (14) | (145) |
| Charge for the period | - | 4 | 17 | - | 21 |
| Release for the period | - | - | (13) | - | (13) |
| Net income statement charge | - | 4 | 4 | - | 8 |
| At 30 September 2014 | - | 46 | 103 | 24 | 173 |
The income statement charge for provisions for liabilities and charges of £29 million (H1 2014/15: £8 million) includes the FSCS charge of £5 million (H1 2014/15: £4 million) and the customer redress charge of £24 million (H1 2014/15: £4 million).
The net income statement charge for other provisions above is included within administrative expenses in the income statement.
The FSCS provision of £43 million represents the Group's interest levy in respect of the 2015/16 scheme year (4 April 2015: £126 million in respect of the 2015/16 and 2014/15 scheme years). The charge for the 2016/2017 scheme year will be recognised in the second half of this financial year.
The Group holds provisions of £152 million (4 April 2015: £140 million) in respect of the potential 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 matters. This includes amounts for past sales of PPI.
The income statement charge in the period relates to updated assumptions for provisions previously recognised and includes management's best estimate of the impacts of the FCA's announcement on 2 October 2015 in relation to past sales of PPI products.
Other provisions include amounts for severance costs and a number of property related matters.
| Half year to 30 September 2015 £m |
Half year to 30 September 2014 £m |
|
|---|---|---|
| Current tax: | ||
| UK corporation tax | 170 | 113 |
| Corporation tax – adjustment in respect of prior periods | - | (14) |
| Total current tax | 170 | 99 |
| Deferred tax: | ||
| Current period | (4) | 20 |
| Effect of corporation tax rate change | - | (7) |
| Total deferred tax | (4) | 13 |
| Tax charge | 166 | 112 |
The actual tax charge differs from the theoretical amount that would arise using the standard rate of corporation tax in the UK as follows:
| Half year to 30 September |
Half year to 30 September |
|
|---|---|---|
| 2015 | 2014 | |
| £m | £m | |
| Profit before tax | 802 | 598 |
| Tax calculated at a tax rate of 20% (2014: 21%) | 160 | 126 |
| Adjustments in respect of prior periods | - | (14) |
| Expenses not deductible for tax purposes | 6 | 7 |
| Effect of corporation tax rate change | - | (7) |
| Total | 166 | 112 |
The following measures were announced as part of the Budget on 8 July 2015:
As the legislation detailing these changes had not been substantively enacted at the balance sheet date the impacts are not included in these consolidated interim financial statements.
Had the legislation been enacted by the balance sheet date, the net impact on deferred tax assets and liabilities would have been less than £1 million.
The reductions in the bank levy would be recognised from the final quarter of 2015/16 and it is not possible at this point to quantify the effects of the rate change from 20% to 18%.
Loans and advances to customers in the table below are shown net of impairment provisions held against them. The fair value adjustment for micro hedged risk relates to commercial lending.
| 30 September | 4 April | |
|---|---|---|
| 2015 | 2015 | |
| £m | £m | |
| Prime residential mortgages | 127,212 | 124,527 |
| Specialist residential mortgages | 29,717 | 28,248 |
| Consumer banking | 3,599 | 3,575 |
| Commercial lending | 12,257 | 12,890 |
| Other lending | 34 | 25 |
| 172,819 | 169,265 | |
| Fair value adjustment for micro hedged risk | 1,246 | 1,382 |
| Total | 174,065 | 170,647 |
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.
The Group established the Nationwide Covered Bond programme in November 2005. Mortgages pledged provide security for issues of covered bonds made by the Group. During the period ended 30 September 2015 €1.3 billion of notes matured (£0.9 billion sterling equivalent). The issuances in the period ended 30 September 2015 were €1.4 billion (£1.0 billion sterling equivalent) and £0.8 billion.
The Group 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 Group. The remaining beneficial interest in the pledged mortgages of £8.05 billion (4 April 2015: £8.15 billion) stays with the Group 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 period ended 30 September 2015 no notes were redeemed early or matured and no new notes were issued.
The securitisation programme notes are issued by Silverstone Master Issuer plc which is fully consolidated by the Group.
Mortgages pledged and the nominal values of the notes in issue are as follows:
| 30 September 2015 | Mortgages pledged |
||||
|---|---|---|---|---|---|
| Held by third parties |
Held by the Group | ||||
| Drawn | Undrawn | issue | |||
| £m | £m | £m | £m | £m | |
| Covered bond programme | 18,737 | 12,170 | - | - | 12,170 |
| Securitisation programme | 13,658 | 4,804 | - | 1,839 | 6,643 |
| Whole mortgage loan pools | 12,072 | - | 11,938 | 134 | 12,072 |
| Total | 44,467 | 16,974 | 11,938 | 1,973 | 30,885 |
| 4 April 2015 | Mortgages pledged |
||||
|---|---|---|---|---|---|
| Held by third parties |
Held by the Group | Total notes in issue |
|||
| Drawn | Undrawn | ||||
| £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 |
Mortgages pledged include £10.1 billion (4 April 2015: £9.5 billion) in 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 balance sheet as the Group has retained substantially all the risks and rewards of ownership. The Group continues 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, held by the Group and drawn are:
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 FLS but not utilised. The majority of these are held to provide collateral for potential future use in repurchase agreements or central bank operations.
In accordance with accounting standards, notes in issue and held by the Group are not recognised by the Group in its balance sheet.
| 30 September | 4 April | |
|---|---|---|
| 2015 | 2015 | |
| £m | £m | |
| Subordinated liabilities | ||
| Subordinated notes | 1,779 | 2,043 |
| Fair value adjustment for micro hedged risk | 75 | 89 |
| Unamortised premiums and issue costs | (10) | (11) |
| Total | 1,844 | 2,121 |
| Subscribed capital | ||
| Permanent interest bearing shares | 362 | 362 |
| Fair value adjustment for micro hedged risk | 66 | 74 |
| Unamortised premiums and issue costs | (19) | (21) |
| Total | 409 | 415 |
The decrease in subordinated liabilities in the period is primarily as a result of the redemption of \$400 million (£256 million) of subordinated notes at par.
All of the Group's subordinated notes and permanent interest bearing shares (PIBS) are unsecured. The Group may, with the prior consent of the Prudential Regulation Authority (PRA), redeem the PIBS and the subordinated notes early.
The subordinated notes rank pari passu with each other and behind claims against the Group of all depositors, creditors and investing members, other than the holders of PIBS, Additional Tier 1 (AT1) capital and core capital deferred shares (CCDS).
The PIBS rank pari passu with each other and the AT1 instruments, behind claims against the Society of the subordinated noteholders, depositors, creditors and investing members but ahead of claims by the holders of CCDS.
| CCDS | Share | Total | |
|---|---|---|---|
| premium | |||
| £m | £m | £m | |
| At 30 September 2015 | 6 | 525 | 531 |
| At 5 April 2015 | 6 | 525 | 531 |
In December 2013, the Society issued 5,500,000 of £1 CCDS at £100 per share. The gross proceeds of the issuance were £550 million (£531 million net of issuance costs).
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 £15.24 per CCDS and is adjusted annually in line with CPI.
A final distribution of £28 million for the financial year ended 4 April 2015 was paid on 22 June 2015. This distribution has been recognised in the statement of movements in members' interests and equity.
The directors have declared a distribution of £5.125 per CCDS, amounting in aggregate to £28 million in respect of the period to 30 September 2015. The distribution will be paid on 21 December 2015 and will be recognised through the consolidated statement of movements in members' interests and equity by reference to the date at which it was approved.
| Total | |
|---|---|
| £m | |
| At 30 September 2015 | 992 |
| At 5 April 2015 | 992 |
In March 2014, the Society issued £1,000 million (£992 million net of issuance costs) of Additional Tier 1 (AT1) capital.
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 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 a rate of one CCDS for every £80 of AT1 holding.
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.
An amount of £34 million, covering the period to 19 June 2015, was paid on 22 June 2015. This payment has been recognised in the statement of movements in members' interests and equity.
An amount of £34 million in respect of the period to 20 December 2015 is expected to be paid on 21 December 2015 and will be recognised through the consolidated statement of movements in members' interests and equity by reference to the date at which it was approved.
| 30 September 2015 £m |
30 September 2014* £m |
|---|---|
| Non-cash items included in profit before tax | |
| Net decrease in impairment provisions (199) |
(165) |
| Net decrease in provisions for liabilities and charges (88) |
(137) |
| Impairment losses on investment securities - |
13 |
| Depreciation and amortisation 155 |
144 |
| Profit from sale of property plant and equipment (1) |
- |
| Interest on subordinated liabilities 50 |
57 |
| Interest on subscribed capital 11 |
21 |
| Gains from derivatives and hedge accounting (14) |
(6) |
| Total (86) |
(73) |
| Changes in operating assets | |
| Loans and advances to banks 5 |
3 |
| Derivative financial instruments and fair value adjustment for portfolio | |
| hedged risk 424 |
(235) |
| Deferred tax assets 8 |
8 |
| Loans and advances to customers (3,219) |
(1,841) |
| Other operating assets (20) |
(160) |
| Total (2,802) |
(2,225) |
| Changes in operating liabilities | |
| Shares 2,582 |
3,510 |
| Deposits from banks, customers and others (9) |
1,355 |
| Derivative financial instruments and fair value adjustment for portfolio | |
| hedged risk (394) |
377 |
| Debt securities in issue 37 |
(284) |
| Deferred tax liabilities (28) |
1 |
| Retirement benefit obligations (87) |
(37) |
| Other operating liabilities (32) |
148 |
| Total 2,069 |
5,070 |
| Cash and cash equivalents | |
| Cash 7,899 |
8,463 |
| Loans and advances to banks repayable in 3 months or less 3,301 |
2,005 |
| Total 11,200 |
10,468 |
*Comparatives have been restated as detailed in note 2.
The Group is required to maintain balances with the Bank of England which, at 30 September 2015, amounted to £307 million (30 September 2014: £311 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.
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 probable 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.
For management reporting purposes, the Group is organised into the following operating segments, determined according to similar economic characteristics and customer base:
Details of the operating segments and the funds transfer pricing methodology are contained in note 12 of the Annual Report and Accounts 2015.
| Half year to 30 September 2015 | Retail | Commercial | Head office functions |
Total |
|---|---|---|---|---|
| £m | £m | £m | £m | |
| Net income/(expense) from external customers | 1,814 | 229 | (486) | 1,557 |
| (Charge)/revenue from other segments | (296) | (174) | 470 | - |
| Net interest income | 1,518 | 55 | (16) | 1,557 |
| Net other income (note i) | 126 | 7 | (7) | 126 |
| Total revenue | 1,644 | 62 | (23) | 1,683 |
| Administrative expenses (note ii) | (807) | (19) | (32) | (858) |
| Impairment and other provisions (note iii) | (50) | 28 | (2) | (24) |
| Underlying profit/(loss) before tax | 787 | 71 | (57) | 801 |
| FSCS levies | (5) | - | - | (5) |
| Transformation costs | (2) | - | (6) | (8) |
| Gains from derivatives and hedge accounting | - | - | 14 | 14 |
| Profit/(loss) before tax | 780 | 71 | (49) | 802 |
| Taxation | (166) | |||
| Profit after tax | 636 | |||
| Total assets (note iv) | 160,540 | 13,503 | 29,068 | 203,111 |
| Total liabilities | 140,886 | 2,373 | 49,625 | 192,884 |
| Half year to 30 September 2014 | Retail | Commercial | Head office functions |
Total |
|---|---|---|---|---|
| £m | £m | £m | £m | |
| Net income/(expense) from external customers (note v) | 1,626 | 291 | (471) | 1,446 |
| (Charge)/revenue from other segments | (142) | (229) | 371 | - |
| Net interest income (note v) | 1,484 | 62 | (100) | 1,446 |
| Net other income (note i) | 144 | 8 | (9) | 143 |
| Total revenue | 1,628 | 70 | (109) | 1,589 |
| Administrative expenses (note ii) | (738) | (23) | (23) | (784) |
| Impairment and other provisions (note iii) | (66) | (73) | (34) | (173) |
| Underlying profit/(loss) before tax | 824 | (26) | (166) | 632 |
| FSCS levies | (4) | - | - | (4) |
| Transformation costs | (19) | - | (17) | (36) |
| Gains from derivatives and hedge accounting (note v) | - | - | 6 | 6 |
| Profit/(loss) before tax | 801 | (26) | (177) | 598 |
| Taxation | (112) | |||
| Profit after tax | 486 | |||
| Total assets (note iv) | 152,850 | 15,625 | 28,147 | 196,622 |
| Total liabilities | 139,220 | 1,198 | 46,836 | 187,254 |
Notes:
i. Net other income excludes gains from derivatives and hedge accounting which are shown separately.
ii. Administrative expenses exclude transformation costs which are shown separately.
iii. Impairment and other provisions includes impairment losses on loans and advances to customers, provisions for liabilities and charges (excluding FSCS) and impairment losses on investment securities.
iv. Retail assets include £12 million of goodwill arising on the acquisition of The Mortgage Works (UK) plc.
v. Comparatives have been restated as detailed in note 2.
IFRS 13 requires an entity to classify financial instruments 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:
Financial instruments 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.
Financial instruments 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.
Financial instruments 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.
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:
| 30 September 2015 | Fair values based on | |||
|---|---|---|---|---|
| Level 1 | Level 2 | Level 3 | Total | |
| £m | £m | £m | £m | |
| Financial assets | ||||
| Government and supranational investments | 6,965 | - | - | 6,965 |
| Other debt investment securities | - | 4,522 | - | 4,522 |
| Total available for sale investment | ||||
| securities | 6,965 | 4,522 | - | 11,487 |
| Investments in equity shares (note i) | - | - | 25 | 25 |
| Interest rate swaps | - | 1,836 | - | 1,836 |
| Cross currency interest rate swaps | - | 425 | - | 425 |
| Forward foreign exchange | - | 135 | - | 135 |
| Equity index swaps | - | - | 592 | 592 |
| Total derivative financial instruments | - | 2,396 | 592 | 2,988 |
| Other financial assets (note ii) | - | 13 | - | 13 |
| Total financial assets | 6,965 | 6,931 | 617 | 14,513 |
| Financial liabilities | ||||
| Interest rate swaps | - | (2,756) | - | (2,756) |
| Cross currency interest rate swaps | - | (884) | - | (884) |
| Forward foreign exchange | - | (4) | - | (4) |
| Swaptions | - | (8) | - | (8) |
| Index linked swaps | - | (8) | - | (8) |
| Equity index swaps | - | - | (1) | (1) |
| Total derivative financial instruments | - | (3,660) | (1) | (3,661) |
| Other deposits - PEBs (note iii) | - | - | (2,650) | (2,650) |
| Total financial liabilities | - | (3,660) | (2,651) | (6,311) |
| Fair values based on | ||||
|---|---|---|---|---|
| 4 April 2015 | Total | |||
| Level 1 | Level 2 | Level 3 | ||
| £m | £m | £m | £m | |
| Financial assets | ||||
| Government and supranational investments | 6,726 | - | - | 6,726 |
| Other debt investment securities | - | 4,299 | 12 | 4,311 |
| Total available for sale investment | ||||
| securities | 6,726 | 4,299 | 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 | 6,726 | 6,737 | 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) |
| Index linked swaps | - | (9) | - | (9) |
| Equity index swaps | - | - | (1) | (1) |
| 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 comprise amounts held at fair value and exclude £1 million of investments in equity shares which are held at cost and which are included in note 19.
ii. Other financial assets represent fair value movements in mortgage commitments entered into where a loan has not yet been made.
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 19.
The Group's Level 1 portfolio comprises highly rated government securities for which traded prices are readily available.
Asset valuations for Level 2 available for sale investment securities are sourced from consensus pricing or other observable market prices. None of the Level 2 available for sale assets are valued from models. Level 2 other financial assets and derivative assets and liabilities are valued from discounted cash flow models using yield curves based on observable market data.
Further detail on the Level 3 portfolio is provided in note 18.
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 Level 1 and Level 2 portfolios during the period.
The main constituents of the Level 3 portfolio are as follows:
The Level 3 investments in equity shares of £25 million at 30 September 2015 consist primarily of 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 the instrument.
The Level 3 assets and liabilities in this category are equity linked derivatives with external counterparties and predominantly they economically match the investment return payable by the Group to investors in the PEB product. The derivatives are linked to the performance of specified stock market indices and have been valued by an external third party.
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 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 derived from the valuation of the associated equity linked derivative as valued by an external third party.
The tables below set out movements in the Level 3 portfolio, including transfers in and out of Level 3.
During the period ended 30 September 2015 one investment was transferred from Level 3 to Level 2 due to changes in the availability of observable market prices.
| Movements in Level 3 portfolio | Available for sale investment securities £m |
Investments in equity shares £m |
Net derivative financial instruments £m |
Other deposits - PEBs £m |
|---|---|---|---|---|
| At 5 April 2015 Gains/(losses) recognised in the income |
12 | 25 | 910 | (3,332) |
| statement: | ||||
| Net interest income/(expense) | - | - | 136 | (177) |
| (Losses)/gains from derivatives and hedge accounting |
- | - | (319) | 311 |
| Settlements | - | - | (136) | 548 |
| Transfers out of Level 3 portfolio | (12) | - | - | - |
| At 30 September 2015 | - | 25 | 591 | (2,650) |
| Available for sale investment securities £m |
Investments in equity shares £m |
Net derivative financial instruments £m |
Other deposits - PEBs £m |
|
|---|---|---|---|---|
| At 5 April 2014 (Losses)/gains recognised in the income statement: |
71 | 28 | 669 | (3,222) |
| Net interest expense Gains/(losses) from derivatives and hedge |
- | - | (18) | - |
| accounting Loss recognised in other comprehensive income - fair value movement taken to members' |
- | - | 90 | (99) |
| interests and equity | (2) | - | - | - |
| Settlements | - | - | 18 | 30 |
| Transfers out of Level 3 portfolio | (12) | - | - | - |
| At 30 September 2014 | 57 | 28 | 759 | (3,291) |
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 using 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 these fair values to reasonable alternative assumptions (as set out in the table of significant unobservable inputs that follows) and the resultant impact of such changes in fair value on the income statement or members' interests and equity:
| Members' interests and equity | |||
|---|---|---|---|
| Fair value £m |
Favourable changes £m |
Unfavourable changes £m |
|
| Investments in equity shares | 25 | 2 | (1) |
| Net derivative financial instruments (note i) | 591 | - | - |
| Other deposits – PEBs (note i) | (2,650) | - | - |
| Total | (2,034) | 2 | (1) |
At 4 April 2015
| Members' interests and equity | ||||||
|---|---|---|---|---|---|---|
| Fair value £m |
Favourable changes £m |
Unfavourable changes £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 so these sensitivities have therefore been excluded from the table above.
The Level 3 portfolio at 30 September 2015 did not include any impaired assets (4 April 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. For available for sale investment securities, sensitivities on these assets where there are no alternative pricing sources, have been calculated by applying a range of probable scenarios against the Group's current valuation process, resulting in a range of possible prices. Scenarios for investments in equity shares reflect prices seen in these holdings in the preceding 12 months.
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.
| Significant | Range | |||||||
|---|---|---|---|---|---|---|---|---|
| At 30 September 2015 | Total assets £m |
Total liabilities £m |
Valuation technique |
unobservable inputs (note iv) |
Min | Max | Weighted average (note i) |
Units (note ii) |
| Mark to | ||||||||
| Investments in equity shares | 25 | market | Price | 98.25 | 113.00 | 103.50 | Points | |
| Net derivative financial | ||||||||
| Instruments (note iii) | 591 | |||||||
| Other deposits – PEBs (note iii) | (2,650) |
| Significant | Range | |||||||
|---|---|---|---|---|---|---|---|---|
| At 4 April 2015 | Total | Total | Valuation | unobservable | Min | Max | Weighted | |
| assets | liabilities | technique | inputs | average | Units | |||
| £m | £m | (note iv) | (note i) | (note ii) | ||||
| Available for sale investment | ||||||||
| securities: | Mark to | |||||||
| Collateralised debt obligations | 12 | market | Price | 66.00 | 75.00 | 69.00 | Points | |
| Mark to | ||||||||
| Investments in equity shares | 25 | market | Price | 99.00 | 114.00 | 104.00 | Points | |
| Net derivative financial | ||||||||
| Instruments (note iii) | 910 | |||||||
| Other deposits – PEBs (note iii) | (3,332) |
Notes:
i. Weighted average represents the input values used in calculating the fair values for the above financial instruments.
ii. 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%.
iii. 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 so these sensitivities have therefore been excluded from the table above.
iv. 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 following table summarises the carrying value and fair value of financial assets and liabilities measured at amortised cost on the Group's balance sheet.
| 30 September 2015 | Carrying | Fair values based on | Total fair | ||
|---|---|---|---|---|---|
| value | Level 1 | Level 2 | Level 3 | value | |
| £m | £m | £m | £m | £m | |
| Financial assets | |||||
| Loans and advances to banks | 3,763 | 3,763 | - | - | 3,763 |
| Loans and advances to customers: | |||||
| Residential mortgages | 156,929 | - | - | 155,057 | 155,057 |
| Consumer banking | 3,599 | - | - | 3,447 | 3,447 |
| Commercial lending | 13,503 | - | - | 13,051 | 13,051 |
| Other lending | 34 | - | - | 34 | 34 |
| Investments in equity shares (note i) | 1 | - | - | 1 | 1 |
| Total | 177,829 | 3,763 | - | 171,590 | 175,353 |
| Financial liabilities | |||||
| Shares | 134,955 | - | 135,104 | - | 135,104 |
| Deposits from banks | 1,706 | - | 1,707 | - | 1,707 |
| Other deposits (note ii) | 6,574 | - | 6,575 | - | 6,575 |
| Due to customers | 6,230 | - | - | 6,232 | 6,232 |
| Debt securities in issue | 33,365 | - | 33,768 | - | 33,768 |
| Subordinated liabilities Subscribed capital |
1,844 409 |
- - |
2,013 388 |
- - |
2,013 388 |
| Total | 185,083 | - | 179,555 | 6,232 | 185,787 |
| 4 April 2015 | Carrying | Fair values based on | Total fair | ||
| value | Level 1 | Level 2 | Level 3 | 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 |
| Investments in equity shares (note i) Total |
1 174,040 |
- 3,392 |
- - |
1 166,405 |
1 169,797 |
| Financial liabilities | |||||
| Shares | 132,373 | - | 132,505 | - | 132,505 |
| Deposits from banks Other deposits (note ii) |
1,974 5,744 |
- - |
1,976 5,745 |
- - |
1,976 5,745 |
| Due to customers | - | 6,122 | 6,122 | ||
| 6,119 | - | ||||
| Debt securities in issue | 28,105 | - | 28,733 | - | 28,733 |
| Subordinated liabilities Subscribed capital |
2,121 415 |
- - |
2,295 387 |
- - |
2,295 387 |
Notes:
i. Investments in equity shares comprise amounts held at cost and exclude £25 million of investments in equity shares which are included in the balance sheet at fair value and which are included in note 17.
ii. Other deposits exclude PEBs which are held at fair value through the income statement and which are included in note 17.
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 valued 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 residential BMR mortgage book generates a fair value lower than the amortised cost value as those mortgages are priced below the SVR. For variable rate commercial loans, separate market interest rates are utilised to discount the Group's commercial real estate, registered social landlord and Project Finance lending portfolios.
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 these fixed rate items, the estimated future cash flows are discounted based on market offer rates currently available for equivalent deposits. For variable rate deposits, estimated future cash flows are discounted using current market interest rates for new debt with similar remaining maturity.
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 where 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, total return swaps and repurchase agreements 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.
| At 30 September 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 | 2,988 | (1,829) | (1,148) | 11 |
| Total return swaps | 332 | - | (332) | - |
| Total assets | 3,320 | (1,829) | (1,480) | 11 |
| Financial liabilities | ||||
| Derivative financial liabilities | 3,661 | (1,829) | (1,788) | 44 |
| Repurchase agreements | 90 | - | (90) | - |
| Total liabilities | 3,751 | (1,829) | (1,878) | 44 |
| At 4 April 2015 | Gross and net | Master netting | Financial | Net amounts |
| amounts reported | arrangements | collateral | after offsetting | |
| on the balance | under IFRS 7 | |||
| sheet | ||||
| £m | £m | £m | £m | |
| Financial assets | ||||
| Derivative financial instruments | 3,337 | (1,900) | (1,386) | 51 |
| Total return swaps | 149 | - | (149) | - |
| Total assets | 3,486 | (1,900) | (1,535) | 51 |
| Financial liabilities | ||||
| Derivative financial instruments Total liabilities |
4,048 4,048 |
(1,900) (1,900) |
(2,129) (2,129) |
19 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 £435 million (4 April 2015: £210 million) and the repurchase agreements collateral which has a fair value of £112 million (4 April 2015: £nil).
There have been no significant related party transactions in the period ended 30 September 2015. Loans to key management personnel at 30 September 2015, undertaken on normal commercial terms, were £1.0 million (4 April 2015: £0.9 million).
Full details of the Group's related party transactions for the year to 4 April 2015 can be found in note 40 of the Annual Report and Accounts 2015.
On 2 November 2015, Visa Inc. announced the proposed acquisition of Visa Europe Limited ("VE") to create a single global payments business under the VISA brand. The Group is a member and shareholder of VE and in exchange for its ordinary share (currently held at cost of €10) will receive upfront consideration in the form of cash (approximately €92 million) and preferred stock (approximately €59 million). The preferred stock is convertible into Class A common stock of Visa Inc, at a future date, subject to conditions. In addition, the Group may receive deferred cash consideration in 2020 which is contingent on certain performance thresholds being met.
On completion of the transaction, the Group expects to recognise a gain in the income statement based on the upfront cash proceeds and a fair value amount in relation to the other consideration. The fair value amount will reflect a number of factors and uncertainties relating to the other consideration. Subject to regulatory approval, completion is currently expected to occur in the first half of the 2016/17 financial year.
The directors confirm that, to the best of their knowledge, the consolidated interim financial statements have been prepared in accordance with IAS 34, as adopted by the European Union. The consolidated interim financial statements include a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R, namely:
A full list of the board of directors can be found in the Annual Report and Accounts 2015, with the following updates in respect of changes that have occurred during the period to 30 September 2015:
Signed on behalf of the Board by
Mark Rennison Group Finance Director
19 November 2015
We have reviewed Nationwide Building Society's consolidated interim financial statements (the "interim financial statements") in the interim results of Nationwide Building Society for the six month period ended 30 September 2015. Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority.
The interim financial statements comprise:
The interim financial statements included in the interim results have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority.
As disclosed in note 2 to the interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.
The interim results, including the interim financial statements, are the responsibility of, and have been approved by, the directors. The directors are responsible for preparing the interim results in accordance with the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority.
Our responsibility is to express a conclusion on the interim financial statements in the interim results based on our review. This report, including the conclusion, has been prepared for and only for the Society for the purpose of complying with the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, 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.
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.
A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the interim results and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.
PricewaterhouseCoopers LLP Chartered Accountants London 19 November 2015
Notes:
The interim results information set out in this announcement is unaudited and does not constitute accounts within the meaning of section 73 of the Building Societies Act 1986.
The financial information for the year ended 4 April 2015 has been extracted from the Annual Report and Accounts 2015. The Annual Report and Accounts 2015 have been filed with the Financial Conduct Authority, the Prudential Regulation Authority and the Registrar of Companies. The Auditors' Report on the Annual Report and Accounts 2015 was unqualified.
Nationwide has adopted the British Bankers' Association Code on Financial Reporting Disclosure ('the BBA code') in its Annual Report and Accounts 2015. The code sets out five disclosure principles together with supporting guidance. Full details of the principles are included in the Annual Reports and Accounts 2015. These principles have been applied, as appropriate, in the context of these interim results.
A copy of the Interim Results is placed on the website of Nationwide Building Society. The directors are responsible for the maintenance and integrity of information on the Society's website. Information published on the internet is accessible in many countries with different legal requirements. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Definitions used in the Interim Results for the period ended 30 September 2015 are in line with the glossary in the Annual Report and Accounts 2015. In addition, further items relevant to the Interim Results are defined below.
| Customer satisfaction measure | Definition |
|---|---|
| "We have also continued1 to deliver better |
Customer service satisfaction in all instances is measured as |
| customer satisfaction than our high street | the proportion of extremely/very satisfied customers minus |
| peer group" | proportion of extremely/very/fairly dissatisfied customers |
| (page 3) | summed across current account, mortgage and savings. |
| "First for customer service satisfaction | |
| amongst our high street peer group: lead | The high street peer group is defined as providers with main |
| of 4.1%2 " |
current account market share >6% (Barclays, Halifax, HSBC, |
| (page 4) | Lloyds Bank (inc C&G), NatWest and Santander). Prior to |
| "We have remained1 first for customer |
April 2015, Lloyds Bank and TSB combined as Lloyds TSB |
| satisfaction amongst our high street peer | Group (including Lloyds Bank, TSB and C&G). |
| group" | |
| (page 6) | 1 © GfK 2015 (FRS), Financial Research Survey (FRS), 3 |
| "We were ranked number one for |
months ending March 2015, September 2015, c15,000 adults |
| customer satisfaction amongst our high | interviewed per quarter. |
| street peer group and our lead over our | 2 © GfK 2015 (FRS), Financial Research Survey (FRS), 3 |
| nearest competitor now stands at 4.1%2 | |
| (March 2015: 4.5%3 )." |
months ending September 2015. |
| (page 7) | 3 © GfK 2015 (FRS), Financial Research Survey (FRS), 3 |
| months ending March 2015. |
Media queries:
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Sarah Hill Tel: 0845 602 9053 Mobile: 07720 426 180 [email protected]
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