Regulatory Filings • Dec 18, 2015
Regulatory Filings
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NATIONWIDE BUILDING SOCIETY
(incorporated in England and Wales under the UK Building Societies Act 1986, as amended) \$20,000,000,000 Senior and Subordinated Medium-Term Notes Due Twelve Months or More from Date of Issue
______________ We may issue at various times up to \$20,000,000,000 aggregate principal amount outstanding at any time of senior or subordinated medium-term notes denominated in U.S. dollars or in other currencies or composite currencies. The notes will be issued in series and each series will be the subject of final terms (each "Final Terms"). We are privately placing the notes on a delayed or continuous basis to the placement agents named below (the "Placement Agents") or through the Placement Agents to qualified institutional buyers as described in this Base Prospectus under the section entitled "Plan of Distribution." This document constitutes a base prospectus ("Base Prospectus") for the purposes of Directive 2003/71/EC (as amended, including by Directive 2010/73/EU) and includes any relevant implementing measure in a relevant Member State of the European Economic Area) (the "Prospectus Directive"). Application has been made to the United Kingdom Financial Conduct Authority (the "FCA"), in its capacity as competent authority for the purposes of the Prospectus Directive and relevant implementing measures in the United Kingdom (the "UK Listing Authority") for the document to be approved as a Base Prospectus issued in compliance with the Prospectus Directive and relevant implementing measures in the United Kingdom for the purpose of giving information with regard to the issue of notes issued under this program. Application has been made to admit such notes during the period of twelve months after the date hereof to listing on the Official List of the UK Listing Authority (the "Official List"). Application has also been made to the London Stock Exchange plc (the "London Stock Exchange") for the notes to be admitted to trading on the London Stock Exchange's regulated market, which is a regulated market for the purpose of Directive 2004/39/EC (the "Markets in Financial Instruments Directive").
See the section entitled "Risk Factors" commencing on page 14 for a discussion of certain risks that you should consider prior to making an investment in the notes.
By its acquisition of the notes, each noteholder (including each beneficial owner) acknowledges, agrees to be bound by and consents to the exercise of any UK bail-in power (as defined below) by the relevant UK resolution authority (as defined below) that may result in (i) the cancellation, write-down or reduction of all, or a portion, of the principal amount of, or interest on, the notes (including by variation of the notes) and/or (ii) any other modification of the notes and/or (iii) the conversion of all, or a portion, of the principal amount of, or interest on, the notes into our Core Capital Deferred Shares ("CCDS") or our or another person's shares or other securities or other obligations (including by variation of the notes) to give effect to the exercise by the relevant UK resolution authority of such UK bail-in power, and the rights of the holders of the notes will be subject to the provisions of any UK bail-in power which are expressed to implement such a reduction, write-down, cancellation, modification or conversion. Each noteholder further acknowledges and agrees that the rights of the noteholders are subject to, and will be varied, if necessary, so as to give effect to, the exercise by the relevant UK resolution authority of such UK bail-in power.
For purposes of the notes, a "UK bail-in power" is any statutory power to effect a cancellation, write-down, reduction, modification and/or conversion of a liability existing from time to time under any laws, regulations, rules or requirements relating to the resolution of credit institutions, investment firms and certain banking group companies (including relevant parent undertakings, subsidiaries and/or affiliates) incorporated in the United Kingdom in effect and applicable to the issuer or any member of the Group (as defined herein), including but not limited to the UK Banking Act 2009, as the same may be amended from time to time (whether pursuant to the UK Financial Services (Banking Reform) Act 2013 or otherwise), and any laws, regulations, rules or requirements in the United Kingdom which are adopted or enacted in order to implement Directive 2014/59/EU of the European Parliament and of the Council of May 15, 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council (the "BRRD"), pursuant to which liabilities of a credit institution, investment firm, certain of its parent undertakings and/or certain of its affiliates can be cancelled, written down, reduced, modified and/or converted into shares or other securities or obligations of the issuer or any other person (and a reference to the "relevant UK resolution authority" is to any authority with the ability to exercise a UK bail-in power).
By purchasing the notes, each noteholder (including each beneficial owner) waives any and all claims against The Bank of New York Mellon, as trustee, for, agrees not to initiate a suit against the trustee in respect of, and agrees that the trustee will not be liable for, any action that the trustee takes, or abstains from taking, in either case in accordance with the exercise of the UK bail-in power by the relevant UK resolution authority with respect to the notes.
The notes have not been and will not be registered under the U.S. Securities Act of 1933, as amended (the "Securities Act"), or any state securities laws, and we are only offering notes outside the United States to non-U.S. persons in reliance on Regulation S under the Securities Act ("Regulation S") and within the United States to qualified institutional buyers (as defined in Rule 144A under the Securities Act ("Rule 144A")) in reliance on Rule 144A or in other transactions exempt from registration under the Securities Act and, in each case, in compliance with applicable securities laws.
In the United Kingdom, this communication is directed only at persons who (i) have professional experience in matters relating to investments or (ii) are persons falling within Article 49(2)(a) to (d) ("high net worth companies, unincorporated associations etc") of the Financial Services and Markets Act 2000 ("Financial Promotion") Order 2005 (all such persons together being referred to as "relevant persons"). This communication must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this communication relates is available only to relevant persons and will be engaged in only with relevant persons.
Each initial and subsequent purchaser of a note will be deemed, by its acceptance or purchase thereof, to have made certain acknowledgements, representations and agreements intended to restrict the resale or other transfer of such note, as described in this Base Prospectus, and, in connection therewith, may be required to provide confirmation of its compliance with such resale or other transfer restrictions in certain cases. See the section entitled "Transfer Restrictions" for a further description of these restrictions.
One or more Placement Agents may purchase notes, as principal, from us for resale to investors and other purchasers at varying prices relating to prevailing market prices as determined by any such Placement Agent at the time of resale or, if so agreed, at a fixed offering price. We reserve the right to cancel or modify the medium-term note program described in this Base Prospectus without notice. We, or a Placement Agent if it solicits an offer on an agency basis, may reject any offer to purchase notes in whole or in part. For further information, see the section entitled "Plan of Distribution."
The Placement Agents expect to deliver the notes in book-entry form only through the facilities of The Depository Trust Company ("DTC"). Beneficial interests in the notes will be shown on, and transfers thereof will be effected only through, records maintained by DTC and its participants, including Clearstream Banking, société anonyme, and Euroclear Bank S.A./N.V.
The rating of certain series of notes to be issued under the program may be specified in the applicable Final Terms. Each of Moody's Investors Service Limited ("Moody's"), Standard & Poor's Credit Market Services Europe Limited ("S&P") and Fitch Rating Ltd. ("Fitch") is established in the European Union and is registered under Regulation (EC) No. 1060/2009 (as amended) (the "CRA Regulation"). As such, each of Moody's, S&P and Fitch is included in the list of credit rating agencies published by the European Securities and Markets Authority on its website in accordance with such Regulation. DBRS, Inc. ("DBRS") is not established in the European Union, and has not applied for registration under the CRA Regulation, but its ratings have been, or are expected to be, endorsed by DBRS Ratings Limited, which is established in the European Union and registered under the CRA Regulation. Each of Moody's, S&P, Fitch and DBRS Ratings Limited is included in the list of credit rating agencies published by the European Securities and Markets Authority on its website in accordance with the CRA Regulation. The European Securities and Markets Authority has indicated that ratings issued in the United States which have been endorsed by DBRS Ratings Limited may be used in the EU by the relevant market participants.
BARCLAYS
BOFAMERRILL LYNCH
CITIGROUP
CREDIT SUISSE
DEUTSCHE BANK SECURITIES HSBC
J.P.MORGAN
MORGAN STANLEY
UBSINVESTMENT BANK
___________ The date of this Base Prospectus is December 18, 2015
| Notice to Investors 2 | |
|---|---|
| Notice to New Hampshire Residents 3 | |
| Notice to Canadian Investors 3 | |
| Forward-Looking Statements 5 | |
| Private Placement of Medium-Term Notes 5 | |
| Enforcement of Civil Liabilities 5 | |
| Documents Incorporated by Reference 6 | |
| Presentation of Financial Information 8 | |
| Where You Can Find More Information 8 | |
| Overview 9 | |
| Risk Factors 13 | |
| Use of Proceeds 37 | |
| Exchange Rates 388 | |
| Capitalization and Indebtedness 39 | |
| Selected Consolidated Financial and Operating Information 40 | |
| Management's Discussion and Analysis of Financial Condition and Results of Operations 45 | |
| Description of Business 1266 | |
| Selected Statistical Information 136 | |
| Financial Risk Management 144 | |
| Management 166 | |
| Competition 174 | |
| Supervision and Regulation 177 | |
| Exchange Controls and other Limitations Affecting Holders of Notes 182 | |
| Terms and Conditions of the Notes 190 | |
| Description of the Global Notes 226 | |
| Form of Final Terms 229 | |
| Taxation 234 | |
| Transfer Restrictions 245 | |
| Plan of Distribution 248 | |
| Settlement 250 | |
| Independent Auditors 250 | |
| Legal Matters 250 | |
| General Information 251 | |
| Glossary of Financial Terms 253 |
We are furnishing this Base Prospectus in connection with an offering exempt from registration under the Securities Act and applicable state securities laws solely for the purpose of enabling a prospective investor to consider the purchase of the notes. Delivery of this Base Prospectus to any person or any reproduction of this Base Prospectus, in whole or in part, without our consent is prohibited. The information contained in this Base Prospectus has been provided by us and other sources identified in this Base Prospectus. The source of thirdparty information is identified where used. Any information provided by a third-party has been accurately reproduced and as far as we are aware and are able to ascertain from information published by that third-party, no facts have been omitted which would render the reproduced information inaccurate or misleading. The Placement Agents or their respective representatives make no representation or warranty, express or implied, as to the accuracy or completeness of the information contained in this Base Prospectus, nor regarding the legality of any investment in the notes. None of the information contained in this Base Prospectus is, or should be relied upon as, a promise or representation by the Placement Agents. You should be aware that since the date of this Base Prospectus there may have been changes in our affairs or otherwise that could affect the accuracy or completeness of the information set forth in this Base Prospectus.
The notes are subject to restrictions on transferability and resale and may not be transferred or resold except as permitted under the Securities Act and applicable state securities laws pursuant to registration or exemption from registration. You should be aware that you may be required to bear the financial risk of an investment in the notes for an indefinite period of time.
You must comply with all applicable laws and regulations in force in any jurisdiction in connection with the distribution of this Base Prospectus and the offer or sale of the notes. If you decide to invest in the notes, you and any subsequent purchaser will be deemed, by acceptance or purchase of a note, to have made certain acknowledgements, representations and agreements to and with us and any applicable Placement Agent intended to restrict the resale or other transfer of the note as described in this Base Prospectus. In addition, you and any subsequent purchaser may be required to provide confirmation of compliance with resale or other transfer restrictions in certain cases. See the section entitled "Transfer Restrictions" for more information on these restrictions.
In making your decision whether to invest in the notes, you must rely on your own examination of us and the terms of this offering, including the merits and risks involved. You should not construe the contents of this Base Prospectus as legal, business, financial advice or tax advice. You should consult your own attorney, business advisor, financial advisor or tax advisor.
Each potential investor in any notes must determine the suitability of that investment in light of its own circumstances. In particular, each potential investor should:
Some notes are complex financial instruments and such instruments may be purchased as a way to reduce risk or enhance yield with an understood, measured, appropriate addition of risk to their overall portfolios. A potential investor should not invest in notes which are complex financial instruments unless it has the expertise (either alone or with the help of a financial adviser) to evaluate how the notes will perform under changing conditions, the resulting effects on the value of such notes and the impact this investment will have on the potential investor's overall investment portfolio.
The notes have not been approved or disapproved by the U.S. Securities and Exchange Commission or any state or foreign securities commission or any regulatory authority. The foregoing authorities have not confirmed the accuracy or determined the adequacy of this Base Prospectus. Any representation to the contrary is a criminal offence.
You should direct any inquiries that you have relating to us, this Base Prospectus or the medium-term note program described in this Base Prospectus to the Placement Agents.
Nationwide Building Society accepts responsibility for the information contained in this Base Prospectus, and to the best of its knowledge and belief (and it has taken all reasonable care to ensure that such is the case), the information contained in this Base Prospectus is in accordance with the facts and does not omit anything likely to affect the import of such information.
In connection with the issue of any tranche of notes, one or more relevant Placement Agents acting as the stabilizing manager(s) (or persons acting on behalf of any stabilizing manager(s)) may over-allot notes (provided that, in the case of any tranche of notes to be admitted to trading on the London Stock Exchange or any other regulated market (within the meaning of the Markets in Financial Instruments Directive) in the European Economic Area, the aggregate principal amount of notes allotted does not exceed 105% of the aggregate principal amount of the relevant tranche) or effect transactions with a view to supporting the market price of the notes at a level higher than that which might otherwise prevail. However, there is no assurance that the stabilizing manager(s) (or persons acting on behalf of a stabilizing manager) will undertake stabilization action. Any stabilization action may begin on or after the date on which adequate public disclosure of the final terms of the offer of the relevant tranche of notes is made and, if begun, may be ended at any time, but it must end no later than the earlier of 30 days after the issue date of the relevant tranche of notes and 60 days after the date of the allotment of the relevant tranche of notes. Any stabilization action or over-allotment must be conducted by the relevant stabilizing manager(s) (or persons acting on behalf of any stabilizing manager(s)) in accordance with all applicable laws and rules.
NEITHER THE FACT THAT A REGISTRATION STATEMENT NOR AN APPLICATION FOR A LICENSE HAS BEEN FILED UNDER RSA 421-B WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF NEW HAMPSHIRE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR TRANSACTION MEANS THAT THE SECRETARY OF STATE OF NEW HAMPSHIRE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY, OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT, ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
The notes may be sold only to purchasers in Canada purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the notes must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws.
Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this Drawdown Prospectus (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser's province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser's province or territory for particulars of these rights or consult with a legal advisor.
Pursuant to section 3A.3 of National Instrument 33-105 Underwriting Conflicts ("NI 33-105"), the Joint Lead Managers are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.
This Base Prospectus contains projections of some financial data and discloses plans and objectives for the future. This forward-looking information, as defined in the United States Private Securities Litigation Reform Act of 1995, reflects our views regarding future events and financial performance.
The words "believe," "expect," "anticipate," "intend" and "plan" and similar expressions identify forward-looking statements. We caution you not to place undue reliance on these forward-looking statements, which in any event speak only as of the date of this Base Prospectus. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The risk factors beginning on page 14 of this Base Prospectus and many other factors could cause actual events and results to differ materially from historical results or those anticipated. See the sections entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Description of Business."
We have appointed Barclays Capital Inc., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., HSBC Securities (USA) Inc., J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. LLC and UBS Securities LLC as Placement Agents for the offering, from time to time, of the notes. We will limit the aggregate principal amount of the notes to \$20,000,000,000, or the equivalent of that amount in one or more other currencies or composite currencies, outstanding at any time, subject to increase without the consent of the holders of the notes. We have not registered, and will not register, the notes under the Securities Act and purchasers of the notes may not offer or sell them in the United States or to, or for the account or benefit of, U.S. persons as defined in Regulation S except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. The notes will be offered in the United States only to qualified institutional buyers, as defined in Rule 144A, in transactions exempt from registration under the Securities Act. The notes may be offered outside the United States to non-U.S. persons in accordance with Regulation S. We hereby notify you that the sellers of the notes, other than ourselves, may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A.
You may not transfer notes sold in the United States, except in accordance with the restrictions described under the section entitled "Transfer Restrictions" of this Base Prospectus. We will deem each purchaser of the notes in the United States to have made the representations and agreements contained in this Base Prospectus.
We may issue additional notes of any series having identical terms to that of the original notes of that series but for the original issue discount (if any) and the public offering price. The period of the resale restrictions applicable to any notes previously offered and sold in reliance on Rule 144A shall automatically be extended to the last day of the period of any resale restrictions imposed on any such additional notes.
We will furnish each initial purchaser of the notes with a copy of this Base Prospectus and each applicable amendment and supplement, including the Final Terms to the Base Prospectus describing the terms related to that series of the medium-term notes. Unless the context otherwise requires, references to the Base Prospectus include this Base Prospectus, together with any amendment and supplements applicable to a particular series of the notes.
We are a building society incorporated under the laws of England and Wales. All of our directors and some of the experts named in this Base Prospectus reside outside the United States. All or a substantial portion of our assets and the assets of these individuals are located outside the United States. As a result, it may not be possible for you to effect service of process within the United States upon these individuals or upon us or to enforce against them judgments obtained in U.S. courts based upon the civil liability provisions of the U.S. securities laws. Our English solicitors, Allen & Overy LLP, have advised us that there is also doubt as to the enforceability in the United Kingdom in original actions or in actions for the enforcement of judgments of U.S. courts predicated upon the civil liability provisions of the U.S. securities laws. In addition, awards of punitive damages in actions brought in the United States or elsewhere may be unenforceable in the United Kingdom.
The following documents have previously been published or are published simultaneously with this Base Prospectus and have been admitted to and filed with the FCA and shall be deemed to be incorporated in, and form part of, this Base Prospectus:
Following the publication of this Base Prospectus a supplement may be prepared by us and approved by the UK Listing Authority in accordance with Article 16 of the Prospectus Directive. Statements contained in any such supplement (or contained in any document incorporated by reference therein) shall, to the extent applicable (whether expressly, by implication or otherwise), be deemed to supersede statements contained in this Base Prospectus or in a document which is incorporated by reference in this Base Prospectus.
We will provide, without charge, to each person to whom a copy of this Base Prospectus has been delivered, upon the request of such person, a copy of any or all of the documents deemed to be incorporated herein by reference. Written requests for such documents should be directed to our Treasury Division at Nationwide Building Society, One Threadneedle Street, London EC2R 8AW, England. In addition, copies of this Base Prospectus and each document incorporated by reference herein are available on the website of the London Stock Exchange through a regulatory information service (http://www.londonstockexchange.com/exchange/news/market-news/market-news-home.html).
We will, in the event of any significant new factor, material mistake or inaccuracy relating to information included or incorporated by reference in this Base Prospectus which is capable of affecting the assessment of any notes, prepare a supplement to this Base Prospectus or publish a new prospectus for use in connection with any subsequent issue of notes.
The table below sets out the relevant page references for our Interim Results.
Unaudited consolidated financial statements as of and for the six months ended September 30,
| Income statement | Page 67 |
|---|---|
| Statement of comprehensive income | Page 68 |
| Balance sheet | Page 69 |
| Statement of movements in members' interests and equity |
Page 70 |
| Cash flow statement | Page 71 |
| Notes to the consolidated interim financial statements |
Page 72-96 |
The table below sets out the relevant page references for our audited consolidated financial statements for the financial years ended April 4, 2015, 2014 and 2013 and the auditors' reports thereon.
Audited consolidated annual financial statements as of and for the financial year ended April 4,
2015
| Independent Auditors' Report | Page 188-194 | |
|---|---|---|
| Income statement | Page 195 | |
| Statement of comprehensive income | Page 196 | |
| Balance sheet | Page 197 | |
| and equity | Group statement of movements in members' interests | Page 198 |
| and equity | Society statement of movements in members' interests | Page 199 |
| Cash flow statement | Page 200 | |
| Notes to the consolidated annual financial statements | Page 201-269 |
Audited consolidated annual financial statements as of and for the financial year ended April 4,
| Independent Auditors' Report | Page 172 |
|---|---|
| Income statement | Page 177 |
| Statement of comprehensive income | Page 178 |
| Balance sheet | Page 179 |
| Group statement of movements in members' interests | Page 180 |
| Society statement of movement in members' interests | Page 181 |
| Cash flow statement | Page 182 |
| Notes to the consolidated annual financial statements | Page 183-253 |
| Independent Auditors' Report | Page 130 |
|---|---|
| Income statement | Page 131 |
| Statement of comprehensive income | Page 132 |
| Balance sheet | Page 133 |
| Group statement of movements in members' interests | Page 134 |
| Society statement of movements in members' interests | Page 135 |
| Cash flow statement | Page 136 |
| Notes to the consolidated annual financial statements | Page 137-193 |
Any non-incorporated parts of a document referred to herein are either deemed not relevant for an investor or are otherwise covered elsewhere in this Base Prospectus.
The financial information incorporated by reference in this Base Prospectus as of and for the financial years ended April 4, 2015, 2014 and 2013 has been extracted from our audited consolidated financial statements prepared in accordance with the International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board, as adopted by the European Commission for use in the European Union ("EU"). The financial information incorporated by reference in this Base Prospectus as of and for the six month period ended September 30, 2015 has been extracted from our unaudited condensed consolidated financial statements prepared in accordance with IAS 34 as adopted by the EU.
The consolidated financial statements have been audited by PricewaterhouseCoopers LLP, independent auditors, as stated in their reports incorporated by reference herein.
Certain amounts have been reclassified in respect of the six months ended September 30, 2014. A summary of such reclassifications is provided in note 2 to the unaudited consolidated financial statements as of and for the six months ended September 30, 2015. There has been no impact on our consolidated net assets or members' interest and equity at April 4, 2015 and no impact on our net cash flows generated from operating activities or cash and cash equivalents for the period ended September 30, 2014 as a result of the reclassifications as a consequence of the foregoing.
We have made rounding adjustments to reach some of the figures included in this Base Prospectus. Accordingly, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceded them.
Unless otherwise indicated, all references in this Base Prospectus to "pounds sterling," "sterling" and "£" are to the lawful currency of the United Kingdom, all references to "U.S. dollars," "dollars," "USD" and "\$" are to the lawful currency of the United States, all references to "Canadian dollars" or "C\$" are to the lawful currency of Canada and all references to "euro," "EUR" or "€" are to the single currency of the participating member states of the European and Monetary Union of the Treaty Establishing the European Community, as amended from time to time.
Our audited consolidated financial statements are incorporated by reference in this Base Prospectus. We will not distribute these financial statements to holders of notes, but we will make them available to these holders upon request. You should direct requests for copies of these financial statements to the Treasury Division, Nationwide Building Society, One Threadneedle Street, London EC2R 8AW, England.
As of the date of this Base Prospectus, we do not file reports or other information with the U.S. Securities and Exchange Commission. To preserve the exemption for resales and other transfers under Rule 144A, we have agreed to furnish the information required pursuant to Rule 144A(d)(4) of the Securities Act if a holder of notes, or a prospective purchaser specified by a holder of notes, requests such information. We will continue to provide such information for so long as we are neither subject to the reporting requirements of Section 13 or 15(d) of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") nor exempt from such reporting requirements pursuant to Rule 12g3-2(b) of the Exchange Act.
This overview highlights important information regarding, but is not a complete description of, our medium-term note program. We urge you to read the remainder of this Base Prospectus where we set out a description of our medium-term note program in more detail. You should also review the applicable Final Terms for additional information about the particular series of notes that you are considering purchasing. The following overview does not purport to be complete and is taken from, and is qualified in its entirety by, the remainder of this Base Prospectus and, in relation to the terms and conditions of any particular tranche of notes, the applicable Final Terms.
We may offer senior or subordinated notes under the medium-term note program described in this Base Prospectus, depending on the terms of the applicable Final Terms for each series. In this Base Prospectus, when we refer to "notes" we mean any senior or subordinated medium-term notes that we may issue under the medium-term note program described in this Base Prospectus, unless it is clear from the context that we mean otherwise. References to "we," "us," "our," "Nationwide," "the Group" or "the Society," mean Nationwide Building Society and its subsidiaries, all of which are consolidated, unless the context otherwise requires.
| Issuer | Nationwide Building Society. We are a building society incorporated in England and Wales under the Building Societies Act 1986 (as amended) of the United Kingdom (the "UK Building Societies Act"). Our core business is providing personal financial services, including residential mortgage loans, retail savings, general banking services, personal investment products, personal secured and unsecured lending, secured commercial lending, insurance and offshore deposit-taking. We operate through an integrated and diversified distribution network, including branches, ATMs, call centers, mail and the Internet. |
|---|---|
| As a building society, we are a mutual organization managed for the benefit of our "members," who are retail savings customers and residential mortgage customers. |
|
| Placement Agents | Barclays Capital Inc. Citigroup Global Markets Inc. Credit Suisse Securities (USA) LLC Deutsche Bank Securities Inc. HSBC Securities (USA) Inc. J.P. Morgan Securities LLC Merrill Lynch, Pierce, Fenner & Smith Incorporated Morgan Stanley & Co. LLC UBS Securities LLC |
| Trustee | The Bank of New York Mellon (as successor to J.P. Morgan Trust Company, National Association (as successor to Bank One Trust Company, N.A.)). We have entered into an indenture with the trustee relating to the notes. |
| Program Size | We may issue up to \$20,000,000,000, or the equivalent of that amount in one or more other currencies or composite currencies, outstanding at any time. We may increase the program size from time to time without the consent of the holders of the notes. |
| Currencies | Subject to any applicable legal or regulatory restrictions, we may issue notes in any currency as we may agree with the relevant Placement Agent. |
| Issuance in Series | We will issue senior notes and subordinated notes in series under an indenture. Within each series, we will issue tranches of notes subject to terms identical to those of other tranches in that series, except that the issue date, the issue price and the amount of the first payment of interest may vary. |
|---|---|
| Ranking of Senior Notes | The senior notes will constitute our direct, unconditional, unsubordinated and, subject to the provisions set forth in the section entitled "Terms and Conditions of the Notes— Negative Pledge," unsecured obligations without any preference among themselves and will rank equally among themselves, junior to obligations required to be preferred by law (which from 1 January 2015 includes certain member share accounts which are given preferential status by law) and equally with all other unsecured obligations (other than subordinated obligations, if any) of the Issuer. |
| Ranking of Subordinated Notes | The subordinated notes will constitute our direct and unsecured obligations and will rank pari passu and without any preference among themselves. The claims in respect of principal, interest and any other amount (including, without limitation, any damages awarded for breach of our obligations) in respect of the subordinated notes will, in the event of our winding up or dissolution, be subordinated in the manner provided in "Terms and Conditions of the Notes—Status of the Subordinated Notes". |
| Issue Price | We may offer notes at par or at a premium or discount to par as specified in the applicable Final Terms. |
| Maturities | The notes will mature in twelve months or longer as specified in the applicable Final Terms. |
| Redemption at Maturity | Subject to any purchase or early redemption, the notes will be redeemed at par on the maturity date. |
| Early Redemption | We are permitted to redeem the notes prior to maturity for taxation reasons and as specified in the applicable Final Terms. We are also permitted to redeem subordinated notes in the event that they cease, in full or in part (as specified in the applicable Final Terms), to qualify towards meeting our Tier 2 capital resources. Additionally, the applicable Final Terms may provide that the notes of a series are redeemable at our option and/or the option of the holder. |
| Agreement with Respect to the Exercise of UK Bail-in Power |
By its acquisition of the notes, each noteholder (including each beneficial owner) acknowledges, agrees to be bound by and consents to the exercise of any UK bail-in power (as defined below) by the relevant UK resolution authority (as defined below) that may result in (i) the cancellation, write down or reduction of all, or a portion, of the principal amount of, or interest on, the notes (including by variation of the notes) and/or (ii) any other modification of the notes and/or (iii) the conversion of all, or a portion, of the principal amount of, or interest on, the notes into our Core Capital Deferred Shares ("CCDS") or our or another person's shares or other securities or other obligations (including by variation of the notes) to give effect to the exercise by the relevant UK resolution authority of such UK |
bail-in power, and the rights of the holders of the notes will
be subject to the provisions of any UK bail-in power which are expressed to implement such a reduction, write-down, cancellation, modification or conversion. Each noteholder further acknowledges and agrees that the rights of the noteholders are subject to, and will be varied, if necessary, so as to give effect to, the exercise by the relevant UK resolution authority of such UK bail-in power.
For purposes of the notes, a "UK bail-in power" is any statutory power to effect a cancellation, write-down, reduction, modification and/or conversion of a liability existing from time to time under any laws, regulations, rules or requirements relating to the resolution of credit institutions, investment firms and certain banking group companies (including relevant parent undertakings, subsidiaries and/or affiliates) incorporated in the United Kingdom in effect and applicable to the issuer or any member of the Group (as defined herein), including but not limited to the UK Banking Act 2009, as the same may be amended from time to time (whether pursuant to the UK Financial Services (Banking Reform) Act 2013 or otherwise), and any laws, regulations, rules or requirements in the United Kingdom which are adopted or enacted in order to implement Directive 2014/59/EU of the European Parliament and of the Council of May 15, 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council (the "BRRD"), pursuant to which liabilities of a credit institution, investment firm, certain of its parent undertakings and/or certain of its affiliates can be cancelled, written down, reduced, modified and/or converted into shares or other securities or obligations of the issuer or any other person (and a reference to the "relevant UK resolution authority" is to any authority with the ability to exercise a UK bail-in power).
Repayment of principal and payment of interest after exercise of UK bail-in power ..................... No repayment of the principal amount of the notes or payment of interest on the notes will become due and payable after the exercise of any UK bail-in power by the relevant UK resolution authority unless, at the time that such repayment or payment, respectively, is scheduled to become due, such repayment or payment would be permitted to be made by us after the exercise of such UK bail-in power. Interest ................................................................ Interest may accrue at a fixed rate or a floating rate. The floating rate may be determined by reference to a base rate, such as LIBOR, as we agree with the purchaser and describe in the applicable Final Terms. Reset Notes ......................................................... Interest on reset notes will be payable in arrear on the dates specified in the Final Terms at the initial rate specified in the Final Terms, and thereafter the rate may be reset with respect to a specified time period by reference to the Reset Reference Rate as described in "Terms and Conditions of the Notes–Interest–Reset Notes". The rate of interest may be reset on more than one occasion.
| Interest Payments | We may pay interest monthly, quarterly, semi-annually, annually or at such other intervals as we describe in the applicable Final Terms. |
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| Denominations | We will issue the senior notes in minimum denominations of \$200,000 and the subordinated notes in minimum denominations of \$250,000 or, in each case, in integral multiples of \$1,000 in excess of these minimum denominations, or the equivalent of these amounts in other currencies or composite currencies, and in any other denominations in excess of the minimum denominations as we specify in the applicable Final Terms. |
| Taxation……………………………………… | All payments in respect of the notes will be made without deduction for or on account of United Kingdom withholding taxes, unless the withholding is required by law. In that event, we will (subject to certain exceptions as described in "Terms and Conditions of the Notes–Payment of Additional Amounts") pay such additional amounts as will result in the holder of any notes receiving such amounts as they would have received in respect of the notes had no such withholding been required. |
| Events of Default……………………………… | As described in "Terms and conditions of the Notes—Events of Default—Senior Notes" and "Terms and conditions of the Notes—Events of Default—Subordinated Notes". |
| Rating | The rating of certain series of notes to be issued under the program may be specified in the applicable Final Terms. |
| Form, Clearance and Settlement | Notes of a series will initially be represented by a global note or global notes in fully registered form ("Global Notes"). Notes offered in the United States to qualified institutional buyers in reliance on Rule 144A will be represented by one or more U.S. global notes ("U.S. Global Notes") and notes offered outside the United States in reliance on Regulation S will be represented by one or more international global notes ("International Global Notes"). |
| The Global Notes will be issued in fully registered form and will be held by or on behalf of DTC for the benefit of participants in DTC. |
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| No temporary documents of title will be issued. | |
| Notes will bear a legend setting forth transfer restrictions and may not be transferred except in compliance with the transfer restrictions set forth therein. Transfers of interests from a U.S. Global Note to an International Global Note are subject to certification requirements. |
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| Governing Law | The notes and all related contracts will be governed by, and construed in accordance with, the laws of the State of New York, except that the subordination provisions in each of the indenture and the subordinated notes will be governed by, and construed in accordance with, the laws of England and Wales. |
| Sales and Transfer Restrictions | We have not registered the notes under the Securities Act, and they may not be offered or sold within the United States or to or for the benefit of U.S. persons (as defined in Regulation S), except pursuant to an exemption from, or in a transaction not subject to, the registration requirement of the Securities Act. |
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| Listing | Application has been made to the UK Listing Authority for the notes to be admitted to listing on the Official List. Application has also been made to the London Stock Exchange for the notes to be admitted to trading on the London Stock Exchange's regulated market. |
| Risk Factors | There are certain risks related to any issue of notes under the program, which investors should ensure they fully understand. See "Risk Factors" on page 14 of this Base Prospectus. |
We believe that the following factors may affect our ability to fulfill our obligations under the notes. Most of these factors are contingencies which may or may not occur, and we are not in a position to express a view on the likelihood of any such contingency occurring. In addition, risk factors which are specific to the notes are also described below.
In purchasing notes, investors assume the risk that we may become insolvent or otherwise be unable to make all payments due in respect of the notes. There is a wide range of factors which individually or together could result in us becoming unable to make all payments due in respect of the notes. It is not possible to identify all such factors or to determine which factors are most likely to occur, as we may not be aware of all relevant factors and certain factors which we currently deem not to be material may become material as a result of the occurrence of events outside our control. The following is a description of the principal risks associated with the notes and our business as of the date of this Base Prospectus; however, we do not represent that the risks set out in the statements below are exhaustive.
This section of the Base Prospectus is divided into two main sections—"Risks Related to Our Business" and "Risks Related to the Notes."
Our business activities are concentrated in the UK and we offer a range of banking and financial products and services to UK retail and corporate customers. As a consequence, our operating results, financial condition and prospects are significantly affected by the general economic conditions in the UK economy and the economic confidence of consumers and businesses.
Adverse changes in UK economic conditions could lead to a decline in the credit quality of our borrowers and counterparties, which could reduce the recoverability and value of our assets and require an increase in our level of provisions for bad and doubtful debts. Likewise, a significant reduction in the demand for our products and services could negatively impact our business and financial condition. There remains a risk that if low inflation or deflation becomes entrenched in the UK, consumer spending and wage growth will be dampened. These pressures on households may lead to an increase in arrears in our residential and unsecured lending portfolio, and an associated increase in retail impairment. UK economic conditions and uncertainties may also have an adverse effect on the quality of our loan portfolio and may result in a rise in delinquency and default rates. There can be no assurance that we will not have to increase our provisions for loan losses in the future as a result of increases in non-performing loans and/or for other reasons beyond our control. Material increases in our provisions for loan losses and write-offs/charge-offs could have an adverse effect on our operating results, financial condition and prospects.
The durability of the UK economic recovery, along with its concomitant impacts on our profitability, remains a risk. There is potential for activity and prices to decline should the labour market deteriorate markedly, or if strains in the financial system re-emerge and impair the flow of credit to the wider economy. Credit quality could be adversely affected by a renewed increase in unemployment. Any related significant reduction in the demand for our products and services could have a material adverse effect on our operating results, financial condition and prospects.
Poor economic conditions in the UK could also create uncertainty in relation to cash flows of our borrowers in the commercial real estate market and in relation to the value of their collateral, leading to further loan loss provisions against our commercial real estate lending. Any weakening in tenant performance and investor appetite could result in increased commercial loan losses which would adversely impact our financial and operational performance. Any further loan loss provisions recorded against our CRE lending could adversely affect our profitability in the future.
Conversely, a strengthened UK economic performance may increase the possibility of a higher interest rate environment. In such a scenario other market participants might offer more competitive product pricing resulting in increased customer attrition. Under such conditions we may also experience an increase in our cost of funding, as described under "—An increasing interest rate environment could affect the financial condition of our customers, clients and counterparties, including governments and other financial institutions, which could in turn adversely impact our financial and operational performance."
Additionally, house price growth has been accelerating faster than earnings, with housing affordability becoming more stretched. There is a risk that house price growth could outstrip earnings and higher house prices, and potentially higher interest rates, will increase mortgage payments, which could lead to higher retail loan losses.
Downward pressure on profitability and growth could occur as a result of a number of external influences, such as the consequences of a more austere economic environment and the impact of global economic forces on the UK economy. Adverse changes in global growth may pose the risk of a further slowdown in the UK's principal export markets, which would have an adverse effect on the broader UK economy. For further information on the risks arising from general economic conditions abroad, see "—We are vulnerable to disruptions and volatility in the global financial markets and are subject to additional risks arising from general economic conditions in the Eurozone and elsewhere."
We are directly and indirectly subject to inherent risks arising from general economic conditions in the UK and other economies, particularly the Eurozone. The dislocations in financial markets that have occurred since the global financial crisis of 2007-2008 were accompanied by recessionary conditions and trends in the UK and a period of significant turbulence and uncertainty for many financial institutions in the UK and around the world, including us and many of our counterparties. Any future disruptions could again pose systemic risks that negatively affect, among other things, consumer confidence, levels of unemployment, the state of the housing market, the commercial real estate sector, bond markets, equity markets, counterparty risk, the availability and cost of credit, transaction volumes in wholesale and retail markets, the liquidity of the global financial markets and market interest rates, which in turn could have a material adverse effect on our business, operating results, financial conditions and prospects.
In the Eurozone, weak growth and deflationary pressures, together with high levels of private and public debt, outstanding weaknesses in the financial sector and reform fatigue, are a concern. The possibility of prolonged low growth in the Eurozone could inhibit the UK's own economic recovery, given the extensive economic and financial linkages between the UK and the Eurozone. The UK's trade and current account balances with the Eurozone would be likely to deteriorate further, negatively affecting UK growth. The possibility of a sovereign default or the exit of one or more member states from the European Monetary Union could also pose a threat to the stability of financial markets and could cause other risks. For further information, see "—If the UK were to leave the European Union, or if Greece were to leave the eurozone, economic or financial instability or contagion could develop, which could adversely affect us."
Although globally and in the UK, conditions have generally stabilized, in recent years there have been periods of significant volatility in financial markets around the world. This generally has led to more difficult business conditions for the financial sector. Continued or worsening disruption and volatility in the global financial markets could have a material adverse effect on us, including our ability to access capital and liquidity on financial terms acceptable to us, if at all. If capital markets financing ceases to become available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits to attract more customers and we may become unable to maintain certain liability maturities. Any such increase in capital markets funding costs or deposit rates could have a material adverse effect on our interest margins, liquidity and profitability.
Like all major financial institutions, we are dependent on the short- and long-term wholesale funding markets for liquidity. Our business is subject to risks concerning liquidity, which are inherent in financial institutions operations. If access to liquidity is constrained for a prolonged period of time, this could affect our profitability.
Under exceptional circumstances, our ability to fund our financial obligations could be negatively impacted if we are unable to access funding on commercially practicable terms, or at all. While we expect to have sufficient liquidity to meet our funding requirements even in a market-wide stress scenario, under extreme and unforeseen circumstances a prolonged and severe restriction on our access to liquidity (including government and central bank funding and liquidity support) could affect our ability to meet our financial obligations as they fall due, to meet our regulatory minimum liquidity requirements, or to fulfill our commitments to lend. In such extreme circumstances we may not be in a position to continue to operate without additional funding support. Inability to access such support could have a material impact on our solvency. These risks can be exacerbated by many enterprise-specific factors, including an over-reliance on a particular source of funding, changes in credit ratings, or market-wide phenomena such as market dislocation and major disasters. There is also a risk that the funding structure employed by us may prove to be inefficient, giving rise to a level of funding cost that is not sustainable in the long term for us to grow our business or even maintain it at current levels. Our ability to access retail and wholesale funding sources on satisfactory economic terms is subject to a variety of factors, including a number of factors outside of our control, such as liquidity constraints, general market conditions, regulatory requirements and loss of confidence in the UK banking system.
In past years, the UK government ("Government") has provided significant support to UK financial institutions, including the Bank of England's ("BoE") Funding for Lending Scheme ("Funding for Lending"), which commenced on August 1, 2012 and was closed to mortgage lending on January 31, 2014. The withdrawal of government support schemes such as Funding for Lending means that our reliance upon fundraising in the wholesale markets has increased and become increasingly important in the future. There is a risk that we may be unable to raise funds, or that the cost of our funding could increase, reducing our margins and profitability.
The ongoing availability of retail deposit funding is dependent on a variety of factors outside our control, such as general economic conditions and market volatility, the confidence of retail depositors in the economy in general and in the Group in particular, the financial services industry specifically and the availability and extent of deposit guarantees. These or other factors could lead to a reduction in our ability to access retail deposit funding on appropriate terms in the future.
The maintenance and growth of the level of our lending activities depends in large part on the availability of retail deposit funding on appropriate terms. Increases in the cost of such funding in the wake of the financial crisis together with the low base rate environment have had a negative impact on our margins and profit. Such pressures could re-emerge and, in extreme circumstances, a loss of consumer confidence could result in high levels of withdrawals from our retail deposit base, upon which we rely for lending and which could have a material adverse effect on our business, financial position and results of operations.
In addition, given that other financial institutions also have increased needs for funding in the absence of Government support, we expect to face increased competition for funding, particularly retail funding on which we are reliant in the future. This competition could further increase our funding costs and so adversely impact our results of operations and financial position.
It is currently expected that some major central banks, including in the United States and the UK, will soon begin to raise their policy interest rates as their economies continue to recover from the financial crisis. Stimulus measures in the UK and elsewhere has been highly accommodative in recent years, including Funding for Lending and the Help to Buy scheme ("Help to Buy"), a Government scheme designed to enable buyers to put down a 5.0% deposit on a home with the Government guaranteeing up to 20.0% of the mortgage funded by a commercial lender. Such measures have helped to support demand at a time of fiscal tightening and balance sheet repair. Such a long period of stimulus has increased uncertainty over the impact of its reduction, which could lead to generally weaker than expected growth, or even contracting GDP, reduced business confidence, higher levels of unemployment or underemployment, adverse changes to levels of inflation, potentially higher interest rates and falling property prices in the markets in which we operate, and consequently to an increase in delinquency rates and default rates among customers. Moreover, higher prevailing interest rates would affect our cost of funding with depositors and creditors, which could adversely affect our profitability, to the extent our margins decline.
The personal sector in the UK remains heavily indebted and vulnerable to increases in unemployment, rising interest rates and/or falling house prices. As a result of, among other factors, increases and decreases in the BoE base rate, interest rates payable on a significant portion of our outstanding mortgage loan products fluctuate over time. Rising interest rates would put pressure on borrowers whose loans are linked to the BoE base rate because such borrowers may experience financial stress in repaying at increased rates in the future. A significant portion of our outstanding mortgage loan products are potentially subject to changes in interest rates, resulting in borrowers with a mortgage loan subject to a variable rate of interest or with a mortgage loan for which the related interest rate adjusts following an initial fixed rate or low introductory rate, as applicable, being exposed to increased monthly payments as and when the related mortgage interest rate adjusts upward (or, in the case of a mortgage loan with an initial fixed rate or low introductory rate, at the end of the relevant fixed or introductory period). Over the last few years both variable and fixed interest rates have been at relatively low levels, which has benefited borrowers taking out new loans and those repaying existing variable rate loans, regardless of special or introductory rates, and these rates are expected to increase as general interest rates return to historically more normal levels. Future increases in borrowers' required monthly payments, which (in the case of a mortgage loan with an initial fixed rate or low introductory rate) may be compounded by any further increase in the related mortgage interest rate during the relevant fixed or introductory period, ultimately may result in higher delinquency rates and losses in the future.
In an increasing interest rate environment, borrowers seeking to avoid these increased monthly payments by refinancing their mortgage loans may no longer be able to find available replacement loans at comparably low interest rates. Increased unemployment could lead to borrowers who are made redundant being unable to service the loan payments in a timely fashion which would result in higher levels of arrears, both in our secured residential mortgage loan and unsecured consumer loan portfolios which, in turn, would lead to an increase in our impairment charges in respect of these portfolios. Declines in housing prices may also leave borrowers with insufficient equity in their homes to permit them to refinance. These events, alone or in combination, may contribute to higher delinquency rates and losses. For further discussion see "Management's Discussion and Analysis of Financial Condition and Results of Operation—Results of Operations for the Six Months Ended September 30, 2015 Compared with the Six Months Ended September 30, 2014—Operating expenses and similar charges—Impairment losses on loans and advances to customers."
Continuing uncertainty regarding the UK's future in the European Union, including the possibility of a national referendum on continuing UK membership, may affect growth in the UK and in the European Union more broadly.
Moreover, the spectre of the recent negotiations between Greece and the so-called "troika" (the International Monetary Fund, the European Central Bank, and the European Commission) and the potential for continued difficulties Greece faces in remaining in the Eurozone mean risks of renewed market turmoil and the future potential of Greece's exit from the Eurozone. Any default on the sovereign debt of Greece or another Eurozone country could have a negative impact on other Eurozone countries and the UK, and could have a material adverse effect on our business.
The exit of a member state from the European Union and/or European Monetary Union could result in deterioration in the economic and financial environment in the UK and Eurozone that would materially affect the capital and the funding position of participants in the banking industry, including us. This could also give rise to operational disruptions to our business. The effects on the European and global economy of the exit of one or more European Union member states or the redenomination of financial instruments from the Euro to a different currency, are impossible to predict and protect fully against in view of (i) economic and financial instability in the Eurozone, (ii) the severity of the recent global financial crisis, (iii) difficulties in predicting whether the current signs of recovery will be sustained and at what rate, (iv) the uncertain legal position, and (v) the fact that many of the risks related to the business are totally, or in part, outside our control. However, if any such events were to occur they would likely result in significant market dislocation, heightened counterparty risk, an adverse effect on the management of market risk and, in particular, asset and liability management due, in part, to redenomination of financial assets and liabilities, or a material adverse effect on our results of operations, financial condition or prospects.
Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent in a wide range of our businesses. Adverse changes in the credit quality of our borrowers and counterparties or a general deterioration in the UK or global economic conditions, including such changes or deterioration arising from systemic risks in the financial systems, could affect the recoverability and value of our assets and require an increase in our impairment provision for bad and doubtful debts and other provisions.=
The dislocations in the financial markets have resulted in our recording impairment charges and negative fair value adjustments in our results over the last three financial years with respect to securities and other investments held. Asset valuations in future periods, reflecting prevailing market conditions, may result in further negative changes in the fair values of our investment assets and these may also translate into increased impairments, particularly with respect to our exposure through our liquidity and investment portfolios to financial institutions in GIIPS and residential mortgage backed securities ("RMBS") and covered bonds collateralized on assets originated in GIIPS. In addition, the value that we ultimately realize for our securities and other investments may be lower than the current fair value. Any of these factors could require us to record further negative fair value adjustments, which may have a material adverse effect on our operating results, financial condition or prospects.
If sentiment towards banks, building societies and/or other financial institutions operating in the United Kingdom, including us, were to further deteriorate, or if our ratings and/or the ratings of the sector were to be further adversely affected, this may have a materially adverse impact on us. In addition, such change in sentiment or further reduction in ratings could result in an increase in the costs and a reduction in the availability of wholesale market funding across the financial sector which could have a material adverse effect on the liquidity and funding of all UK financial services institutions, including us. Any such events could affect the market value of the notes.
Any future declines in those aspects of our business identified by the rating agencies as significant could adversely affect the rating agencies' perception of our credit and cause them to take further negative ratings actions. Any downgrade in our credit ratings could adversely affect our liquidity and competitive position, particularly through cash outflows to meet collateral requirements on existing contracts, undermine confidence in our business, increase our borrowing costs, limit our access to the capital markets, or limit the range of counterparties willing to enter into transactions with us. We have experienced all of these effects when downgraded in the past, although the precise effects experienced on each downgrade have varied based on the reasons for the particular downgrade and the extent to which the downgrade had been anticipated by the market. Our credit ratings are subject to change and could be downgraded as a result of many factors, including the failure to successfully implement our strategies. A downgrade could also lead to a loss of customers and counterparties which could have a material adverse effect on our business, results of operations and financial condition.
If the ratings analysis of any agency that rates our credit is updated to reflect lower forward-looking assumptions of systemic support in the current environment or higher assumptions of the risks in the financial sector, it could result in a further downgrade to the outlook or to the credit ratings of UK financial institutions, including us, which could have a material adverse effect on the borrowing costs, liquidity and funding of all UK financial services institutions, including us. A further downgrade could also create new obligations or requirements for us under existing contracts with our counterparties that may have a material adverse effect on our business, financial condition, liquidity or results of operations.
In February and April 2013, respectively, Moody's and Fitch reduced the UK's long-term ratings, from Aaa to Aa1 (in the case of Moody's) and from AAA to AA+ (in the case of Fitch) and, subsequently on December 18, 2013, Fitch affirmed its AA+/F1+ long- and short-term unsolicited sovereign credit ratings for the UK. On December 20, 2013, S&P affirmed its AAA/A-1+ long- and short-term unsolicited sovereign credit ratings for the UK, with a negative outlook. Although on May 22, 2014, S&P revised the outlook to stable, on June 12, 2015, S&P changed the outlook back to negative. While these actions have not impacted the respective agencies' ratings of us, and on June 9, 2015, S&P and Moody's last confirmed our existing ratings, any further downgrade of the UK sovereign credit rating or the perception that such a downgrade may occur could destabilize the markets, impact our rating, our borrowing costs and our ability to fund ourselves and have a material adverse effect on our operating results and financial condition. A perceived further downgrade may also negatively impact the marketability and trading value of the notes, our own credit ratings, borrowing costs and our ability to fund ourselves.
A further UK sovereign downgrade or the perception that such a downgrade may occur would be likely to have a material effect in depressing consumer confidence, restricting the availability, and increasing the cost, of funding for individuals and companies, further depressing economic activity, increasing unemployment and/or reducing asset prices. These risks are exacerbated by concerns over the levels of the public debt of, the risk of further sovereign downgrades of, and the weakness of the economies in, GIIPS in particular. Further instability within these countries or others within the eurozone might lead to instability in the UK and in the global financial markets. Our financial performance has been and will continue to be affected by general economic conditions in the UK, the eurozone and elsewhere, and other adverse developments in the UK or global financial markets would cause our earnings and profitability to decline.
We operate in an increasingly competitive UK personal financial services market. We compete mainly with other providers of personal finance services, including banks, building societies and insurance companies, and recent technological advances have heightened the potential for different kinds of competitors to emerge within the traditional financial services arena. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Impact of Economic Conditions in the United Kingdom Generally and Outlook."
In the UK, most major retail banks see the mortgage market as an attractive and high priority focus for expansion. Additionally, smaller institutions are also seeking to build share of the mortgage market, including new ventures and businesses with a base outside the traditional financial services industry. Competition for the highest quality mortgages is intense and is likely to continue, putting downward pressure on returns available for the lowest risk-weighted mortgage assets. At the same time, price comparison websites have become more popular and widely used, allowing customers more easily to compare products and make buying decisions based on price. As a consequence, there is a risk that industry pricing will be forced lower, negatively impacting our ability to deliver our strategic income targets and our financial performance.
Competition for deposits has, on the whole, been less intense, but there is a possibility that this could change were interest rates to rise. The personal current account market is currently the focus of intense competition, both across the private sector and from state-owned entities such as National Savings and Investments, which may offer savings products with government guarantees or subsidies. A range of institutions see this product as the key to broader customer relationships and seek to make inroads into the large established market share of the major banking groups.
Competition may intensify in response to consumer demand, technological changes, the impact of consolidation by our competitors, regulatory actions and other factors. If increased competition were to occur as a result of these or other factors, our business, financial condition and results of operations could be materially adversely affected. For example, the Competition and Markets Authority is investigating the supply of personal current accounts and the supply of banking services to small and medium-sized enterprises. A provisional findings report was published on October 28, 2015, stating that there are features of the relevant markets which, alone or in combination, prevent, restrict or distort competition in the supply of personal current accounts in the UK and in the supply of certain retail banking services to small and medium-sized enterprises in the UK such that there are adverse effects on competition. If this investigation were to lead, directly or indirectly, to regulatory actions designed to promote competition, there can be no assurance that our customer base, levels of deposits or market share would not be adversely affected. Additionally, the implementation of the Independent Commission on Banking's (the "ICB") recommendation to separate retail banking activities from the wholesale and investment banking activities carried out by large banking groups operating in the UK no later than 2019 could reduce the distinctiveness of the building society model, which we consider to be a competitive advantage for us. This may, in time, alter the business models of ring-fenced banks and may therefore alter adversely the competitive position of us and other mutual institutions.
The rise of digital banking is changing customer expectations of the availability of banking services. As digital changes make transactions easier and more convenient, we expect customers to transact more, and in many different ways. We may not be able to manage service provision ahead of rising customer expectations or may have competitors who are more successful in meeting demand for digital banking services.
In addition, if our customer service levels were perceived by the market to be materially below those of competitor UK financial institutions, we could lose existing and potential new business. If we are not successful in retaining and strengthening customer relationships, we may lose market share, incur losses on some or all of our activities or fail to attract new deposits or retain existing deposits, which could have a material adverse effect on our business, financial condition and results of operations.
Our success as a financial institution depends on our ability to manage and control our financial risk, which includes liquidity, market, and credit risk. We are exposed to liquidity risk as a result of mismatches in cash flows from balance sheet assets and liabilities and off-balance sheet financial instruments. We have market risk exposure as a result of changes in interest rates, foreign currency prices, asset prices or other financial contracts. Credit risk is the risk that a borrower or counterparty fails to pay interest or to repay the principal on a loan or other financial instrument (e.g. bond) on time. If we fail to manage and control these risks, we could become unable to meet our own obligations, including those under the notes, resulting in material adverse effects to our business, financial condition and reputation. For additional information about our policies for managing and controlling liquidity, market and credit risk, see the section entitled "Financial Risk Management."
Our businesses are also dependent on our ability to process a very large number of transactions efficiently and accurately. Operational risk and losses can result from fraud, errors by employees, failure to document transactions properly or to obtain proper internal authorization, failure to comply with regulatory requirements and conduct of business rules, equipment failures, natural disasters or the failure of external systems, for example, those of our suppliers or counterparties. Although we have implemented risk controls and loss mitigation actions, and substantial resources are devoted to developing efficient procedures and to staff training, it is not possible to implement procedures which are fully effective in controlling each of the operational risks noted above. Notwithstanding the above, this risk factor should not be taken to imply that we will be unable to comply with our obligations as a company with securities admitted to the Official List or as a supervised firm regulated under the Financial Services and Markets Act 2000, as amended.
Market risk is the risk that the value of, or net income arising from, the Group's assets and liabilities is impacted as a result of market price or rate changes, specifically interest rates, exchange rates or equity prices. Changes in interest rate levels, yield curves and spreads may affect the interest rate margin realized between lending and borrowing costs. Changes in currency rates, particularly in the sterling-dollar and sterling-euro exchange rates, affect the value of assets and liabilities denominated in foreign currencies and may affect income from assets and liabilities denominated in foreign currency.
The performance of financial markets may cause changes in the value of our investment and liquidity portfolios. Although we have implemented risk management methods to seek to mitigate and control these and other market risks to which we are exposed and our exposures are constantly measured and monitored, there can be no assurance that these risk management methods will be effective, particularly in unusual or extreme market conditions. It is difficult to predict with accuracy changes in economic or market conditions and to anticipate the effects that such changes could have on our financial performance and business operations.
Our ability to attract and retain customers and conduct business with our counterparties could be adversely affected if our reputation or the reputation of the Nationwide brand is damaged. Failure to address, or appearing to fail to address, issues that could give rise to reputational risk could cause harm to us and our business prospects. Reputational issues include, but are not limited to: appropriately addressing potential conflicts of interest; breaching, or facing allegations of having breached, legal and regulatory requirements; acting or facing allegations of having acted unethically (including having adopted inappropriate sales and trading practices); adequacy of anti-money laundering and anti-terrorism financing processes; privacy issues; failing or facing allegations of having failed to maintain appropriate standards of customer privacy, customer service and record-keeping; technology failures that impact upon customer services and accounts; sales and trading practices; proper identification of the legal, reputational, credit, liquidity and market risks inherent in products offered; and general company performance. A failure to address these issues appropriately could make customers unwilling to do business with us, which could adversely affect our business, financial condition and results of operations.
There is currently significant regulatory scrutiny of the sales practices and reward structures that financial institutions have used when selling financial products. No assurance can be given that financial institutions, including us, will not incur liability for past actions which are determined to have been inappropriate and any such liability incurred could be significant and materially adversely affect our results of operations and financial position. No assurance can be given that we will not incur liability in connection with any past non-compliance with such legislation or with other similar legislation, and any such non-compliance could be significant and materially adversely affect our results of operations and financial position or our reputation. Primarily:
In addition, we face both financial and reputational risk where legal or regulatory proceedings, or complaints before the FOS, or other complaints are brought against us or members of our industry generally in the UK High Court or elsewhere. For example, a UK High Court judgment in 2011 on the misselling of payment protection insurance ("PPI") resulted in very significant provisions for customer redress made by several UK financial services providers. We made a charge for customer redress of £59 million in the year ended April 4, 2015, with no additional provision made for PPI claims, as compared to a charge for customer redress of £69 million in the year ended April 4, 2014, with no additional provision made for PPI claims. Although our PPI product sales ceased in 2007, we continue to see a number of PPI claims and there can be no assurance that our estimates for potential liability are correct, and our reserves taken to date might prove inadequate.
In November 2014, the UK Supreme Court ruled in Plevin v Paragon Personal Finance Ltd ("Plevin") that a failure to disclose to a client a large commission payment on a single premium PPI policy made the relationship between a lender and the borrower unfair under section 140A of the Consumer Credit Act 1974. As a result, the FCA announced on May 27, 2015 that it was considering whether additional rules or guidance on PPI complaints are required subsequent to the Plevin decision. On October 2, 2015, the FCA announced that it was proposing to consult, by the end of 2015, on the introduction of a deadline by which businesses would need to make their PPI complaints or else lose their rights to have them assessed by the Financial Ombudsman Service. As part of this, the FCA is also consulting on rules and guidance for lenders comply with when handling PPI complaints based on Plevin style unfair relationship claims. The FCA published its consultation paper CP 15/39: Rules and guidance on payment protection insurance complaints on November 26, 2015 and is due to conclude its consultation in February 2016.
The FCA is consulting on a deadline falling two years from the date the proposed rule comes into force – which, subject to Consultation, would not, the FCA anticipates, be before Spring 2016 – hence PPI consumers would have until at least Spring 2018 to complain.
The FCA has also decided to consult at the same time on proposed rules and guidance concerning the handling of PPI complaints in light of the Supreme Court's decision in Plevin.
Further announcements from the FCA are expected in the coming months, and there can be no assurance that additional rules or guidance will not result in further costs or requirements in relation to customer redress by institutions which have historically sold PPI.
In addition, a number of financial institutions, including us, have agreed, following discussions with the FCA, to repay customers who were sold card protection insurance and identity protection products issued by Card Protection Plan Limited ("CPP"). As well as CPP selling directly to customers, a number of third-party financial institutions, including us, introduced customers to CPP's products. Several institutions, including us, agreed to a scheme with the FCA that CPP redress would be paid through a scheme of arrangement that commenced in February 2014, under which customers could submit claims until August. Consequently, the extent of claims we will take under the scheme remains uncertain.
In light of a review of compliance-oriented legislation being undertaken across the industry, we are undertaking a comprehensive revision of our own documentation and processes relating to consumer protection and sales practices. A number of areas which require further enquiry have been identified and while our investigations are still at a relatively early stage, we have recognized the aforementioned charge in the year ended April 4, 2015 of £59 million (£69 million in the year ended April 4, 2014) in respect of potential costs in relation to matters which may require remediation. No assurance can be given that we will not incur liability in connection with any past non-compliance with such legislation or with other similar legislation, and any such non-compliance could be significant and materially adversely affect our results of operations and financial position or our reputation.
Future legislative and regulatory changes could impose operational restrictions on us, causing us to raise further capital, increase our expenses and/or otherwise adversely affect our business, results, financial condition or prospects.
We conduct our business subject to ongoing regulation by the PRA and the FCA, which oversee the sale of residential mortgages, commercial lending, and general insurance products. The regulatory regime requires us to be in compliance across many aspects of activity, including the training, authorization and supervision of personnel, systems, processes and documentation. If we fail to comply with any relevant regulations, there is a risk of an adverse impact on its business due to sanctions, fines or other action imposed by the regulatory authorities.
This is particularly the case in the current market environment, which is witnessing increased levels of Government intervention in the banking, personal finance and real estate sectors. Future changes in regulation, fiscal or other policies are unpredictable and beyond our control and could materially adversely affect our business or operations.
A range of legislative and regulatory changes have been made by regulators and other bodies in the UK and the EU which could impose operational restrictions on us, causing us to raise further capital, increase our expenses and/or otherwise adversely affect our business results, financial condition or prospects. These include, among others:
(ii) elevating the ranking of insured depositors on a winding-up to rank ahead of all other unsecured creditors. Building societies, including us, are potentially subject to the bail-in powers (see "–Risks relating to the UK Banking Act 2009 and the BRRD" below) and are affected by the change to the ranking of insured depositors (see "Certain liabilities of ours will be preferred by law in the event of our winding-up" below).
At this point it is impossible to predict the effect that any of the proposed changes will have on our operations, business and prospects or how any of the proposals discussed above will be implemented in light of the fundamental changes to the regulatory environment proposed by the Government and/or the European Commission. Depending on the specific nature of the requirements and how they are enforced, such changes could have a significant impact on our operations, structure, costs and/or capital requirements. Accordingly, we cannot assure investors that the implementation of any of the foregoing matters or any other regulatory or legislative changes that may be proposed will not have a material adverse effect on our operations, business, results, financial condition or prospects.
We are also investing significantly to ensure that we will be able to comply with developing regulatory requirements. If we are unsuccessful in efficiently adopting the requisite new compliance practices, this will adversely impact our ability to operate in the financial services markets and to deliver an appropriate level of operational and financial performance.
In Europe, the BRRD provides for a package of minimum early intervention and resolution-related tools and powers for relevant authorities and provides for special rules for cross-border groups. The UK implemented the majority of the measures under the BRRD into English law, by way of amendment to the Banking Act 2009 on January 1, 2015.
Under the UK Banking Act 2009 (the "Banking Act") substantial powers have been granted to HM Treasury, the PRA, the FCA and the BoE (the "Authorities") as part of a special resolution regime (the "SRR"). These powers enable the Authorities, among other things, to resolve a bank or building society in circumstances in which the Authorities consider its failure has become highly likely and a threat is posed to the public interest. In respect of UK building societies, the relevant tools (together, the "Stabilization Options") include (i) modified property transfer powers which also refer to cancellation of shares and conferring rights and liabilities in place of such shares, (ii) in place of the share transfer powers, a public ownership tool which may involve (amongst other things) arranging for deferred shares in a building society to be publicly owned, cancellation of private membership rights and the eventual winding up or dissolution of the building society and (iii) modified bail-in powers such that exercise of the tool may be immediately preceded by the demutualisation of the building society through the conversion of it into a company or the transfer of all of the property, rights or liabilities of the society to a company. In each case, the Banking Act grants additional powers to modify contractual arrangements in certain circumstances and powers for HM Treasury to disapply or modify laws (with possible retrospective effect) to enable the powers under the Banking Act to be used effectively. If a bailin power is exercised in respect of the notes, losses may be imposed on noteholders as described under "—Risks related to the Notes—The relevant UK resolution authority could exercise the bail-in power in the Banking Act, once in force, which could impose losses on an investment in the notes."
Secondary legislation which makes provision for Stabilization Option under the SRR to be used in respect of any "banking group company" came into force August 1, 2014. The definition of "banking group company" encompasses certain of our subsidiaries and affiliates. The amendments to the Banking Act allow the Stabilization Options under the SRR and the bail-in stabilization power to be applied to any of our group companies that meet the definition of a "banking group company."
In addition, the Banking Act contains a separate power, often referred to as the "capital write-down tool", enabling the Authorities to write down (including to nil) an institution's Additional Tier 1 and Tier 2 capital instruments, or to convert them into common equity tier 1 instruments, if the Authorities consider that the institution is at the "point of non-viability" and certain other conditions are met. The capital write-down tool may be used separately from the resolution tools, and may be used whether or not the institution enters into resolution. Subordinated notes issued under the program may be Tier 2 capital instruments, and any such subordinated notes would be subject to the capital write-down tool.
Other powers contained in the Banking Act and required by the BRRD may affect the value of an investment in the notes. The exercise of these powers may impact how we are managed as well as, in certain circumstances, the rights of creditors. There can be no assurance that actions taken under the Banking Act will not adversely affect noteholders.
The SRR may be triggered prior to our insolvency. The purpose of the Stabilization Options is to address the situation where all or part of a business of a relevant entity has encountered, or is likely to encounter, financial difficulties, giving rise to wider public interest concerns. Accordingly, the stabilisation options may be exercised if (i) the relevant Authority is satisfied that a relevant entity (such as us) is failing or is likely to fail, (ii) following consultation with the other Authorities, the relevant Authority determines that it is not reasonably likely that (ignoring the stabilising options) action will be taken that will enable the relevant entity to satisfy those conditions, (iii) the Authorities consider the exercise of the stabilisation options to be necessary, having regard to certain public interest considerations (such as the stability of the UK financial system, public confidence in the UK banking system and the protection of depositors) and (iv) the relevant Authority considers that the specific resolution objectives would not be met to the same extent by the winding up of the relevant entity.
It is therefore possible that one or more of the Stabilization Options could be exercised prior to the point at which any insolvency proceedings with respect to the relevant entity could be initiated.
On August 6, 2015, the European Banking Authority (the EBA) published guidelines on the circumstances in which an institution shall be deemed as "failing or likely to fail" by supervisors and resolution authorities. These will apply from January 1, 2016. The guidelines set out the objective criteria which should apply when supervisors and Authorities make such a determination.
Although the Banking Act provides for conditions to the exercise of any resolution powers and the EBA guidelines set out the objective elements for determining whether an institution is failing or likely to fail, it is uncertain how the Authorities would assess such conditions in any particular situation. The relevant Authorities are also not required to provide any advance notice to noteholders of their decision to exercise any resolution power. Therefore, noteholders may not be able to anticipate a potential exercise of any such powers nor the potential effect of any exercise of such powers on us or the notes.
A partial transfer of our business may result in a deterioration of our creditworthiness. If we were made subject to the SRR and a partial transfer of our business to another entity were effected, the quality of the assets and the quantum of the liabilities not transferred and remaining with us (which may include the notes) may result in a deterioration in our creditworthiness and, as a result, increase the risk that we may be unable to meet our obligations in respect of the notes and/or eventually become subject to administration or insolvency proceedings pursuant to the Banking Act. In such circumstances, noteholders may have a claim for compensation under one of the compensation schemes existing under, or contemplated by, the Banking Act, but there can be no assurance that noteholders will have such a claim or, if they do, that they would thereby recover compensation promptly or equal to any loss actually incurred.
As at the date of this Base Prospectus, the Authorities have not made an instrument or order under the Banking Act in our respect or in respect of any of our securities and there has been no indication that they will make any such instrument or order. However, there can be no assurance that this will not change and/or that noteholders will not be adversely affected by any such order or instrument if made.
Noteholders may lose all of their investment in the notes, including the principal amount plus any accrued interest, if the UK bail-in power is acted upon and any remaining outstanding notes or securities into which the notes are converted may be of little value at the time of conversion and thereafter.
We are subject to capital requirements that could have an impact on our operations. Changes to the capital requirements under which we operate could hinder growth by prescribing more stringent requirements than those with which we currently comply. UK regulators and international policymakers are reviewing a number of areas of the regulatory capital framework, with a view to making changes as appropriate. These areas include minimum requirements for firms' loss-absorbing capacity, capital requirements for residential mortgages, use of the standardised approach for credit risk, and review of IRB model framework.
The package of reforms demanded by the Basel Committee on Banking Supervision ("Basel III") to the regulatory capital framework (including additional capital requirements, higher capital ratios, more stringent eligibility requirements for capital instruments, a new leverage ratio and liquidity requirements) was implemented in the European Economic Area (the "EEA") through a regulation (the Capital Requirements Regulation (the "CRR")) and an associated directive (Capital Requirements Directive (the "CRD")) (together, "CRD IV"). The regulation established a single set of harmonized prudential rules which apply directly to all credit institutions in the EEA, with the directive containing less prescriptive provisions to be transposed into national law. The regulation gives express recognition for Common Equity Tier 1 capital instruments for mutual and co-operative entities and permits the use of a cap or restriction to safeguard the interests of members and reserves. Full implementation began from January 1, 2014, with particular elements being phased in over a period of time, to be fully effective by 2024.
Our capital is reported as a ratio of risk-adjusted assets expressed as a percentage in different measures: Common Equity Tier 1 capital, additional Tier 1 capital and total capital. If we fail, or are perceived to be likely to fail, to meet our minimum regulatory capital requirements, this may result in administrative actions or regulatory sanctions.
Effective management of our capital is critical to our ability to operate and grow our business and to pursue our strategy. Any change that limits our ability to effectively manage our balance sheet and capital resources (including, for example, reductions in profits and retained earnings as a result of credit losses, writedowns or otherwise, increases in risk-weighted assets (which may be pro-cyclical under the current capital requirements regulation, resulting in risk weighting increasing in economic downturns), delays in the disposal of certain assets or the inability to raise capital or funding through wholesale markets as a result of market conditions or otherwise) could have a material adverse impact on our business, financial condition, results of operations, liquidity and/or prospects.
In December 2013, the PRA published its policy statement PS7/13 "Strengthening capital standards: implementing CRD IV, feedback and final rules" on the UK rules, as applicable to us, which implement certain permitted national discretions in CRD IV. This included accelerating implementation of CRD IV deductions, with most applying in full from 2014. The PRA also changed the treatment of Pillar 2A from January 1, 2015, where firms are required to meet Pillar 2A with at least 56% in Common Equity Tier 1 capital, no more than 44% in Additional Tier 1 capital and at most 25% in Tier 2 capital.
On July 29, 2015, the PRA published its feedback statement, supervisory statement and statement of policy on changes to its Pillar 2 framework for implementation on January 1, 2016. It outlines methodologies for Pillar 2A capital requirements, introduces new governance and risk management capital buffer requirements, and renames the Capital Planning Buffer as the PRA Buffer. Where the PRA assesses a firm's risk management and governance to be significantly weak, it may also set the PRA buffer to cover the risk posed by those weaknesses until they are addressed. Accordingly, there is a risk that we will be required to hold higher levels of or better quality capital than is currently anticipated or planned for. If and to the extent that the PRA adopts capital or other requirements, this may adversely impact our competitiveness relative to any banks and financial institutions subject to less stringent requirements.
CRD IV also introduced a leverage ratio requirement. The leverage ratio is a non-risk based measure that is designed to act as a supplement to risk based capital requirements. The leverage calculation determines a ratio based on the relationship between tier 1 capital and total exposure (total exposure is the sum of on-balance sheet exposures, derivative exposures, securities financing transaction exposures and off-balance sheet items).
On March 25, 2015 secondary legislation was enacted writing the Financial Policy Committee ("FPC") Leverage recommendations (published October 31, 2014) into law. This grants the FPC powers of direction over the leverage ratio and introduced requirements under which Nationwide would be subject to a minimum leverage ratio of 3%, a supplementary leverage ratio buffer from 2019 and a countercyclical leverage ratio buffer, subject to a 24 month phase-in period. Currently, and over Nationwide's business planning horizon, Nationwide expects to remain above its regulatory leverage ratio requirement. Should Nationwide fail, or be perceived likely to fail, to meet leverage requirements this may result in administrative actions or regulatory sanctions.
In July 2015, the PRA published a consultation paper (C24/15) regarding the implementation of a UK leverage ratio framework. On December 7, 2015, the PRA published the Policy Statement (PS27/15) and final rules, which will be in force from January 1, 2016. In-scope firms will be required to meet a minimum leverage ratio requirement and to consider whether they hold an amount of Common Equity Tier 1 (CET1) that is greater than or equal to their countercyclical leverage ratio buffer (CCLB). There are also requirements for leverage ratio reporting and disclosure.
On June 12, 2014 the BRRD (Directive 2014/59/EU) was published in the Official Journal of the European Union, which outlined provisions for its loss absorbing capacity measure, minimum requirements for own funds and eligible liabilities ("MREL"). MREL is expressed as the ratio of own funds and eligible liabilities to own funds total liabilities.
On July 3, 2015 the EBA published final draft technical standards specifying the criteria used to set MREL (requirements include amounts for loss absorption, recapitalisation, the impact of retail deposit guarantees, adjustment for the eligibility of certain liabilities, and supervisory judgment following the Supervisory Review and Evaluation Process ("SREP")). The final draft technical standards were amended on November 3, 2015. The amendments primarily seek to remove a presumption in favour of a certain minimum requirement, with applicable MREL requirements to be decided on a case by case basis. MREL requirements will be introduced by January 1, 2016, where provisions allow for supervisory discretion in allowing transitional implementation of these requirements.
On December 11, 2015, the PRA published a consultation paper (CP44/15) setting out its proposals regarding the relationship between MREL, regulatory buffers and the PRA's threshold conditions. Alongside this, the BoE published a consultation paper on its proposed approach to setting MREL, including in relation to the calibration of the quantum of externally-issued MREL. Once final rules have been decided, Nationwide may need to raise additional eligible instruments (which may include additional subordinated notes), or reduce total assets. Such measures may have an adverse effect on Nationwide's business activities, including its lending business.
In December 2015, the Basel Committee issued a second consultative document regarding revisions to the standardised approach for credit risk. It proposes to change the approach to risk weighting exposures to banks and corporates. In December 2014 the Basel Committee also consulted on proposals to change the capital floors applicable to institutions on the Internal Ratings Based Approach to risk weighting. Should the two consultations be implemented the effect of the changes could affect the amount of capital required to be held by us against our risk-weighted assets.
The Financial Services and Markets Act 2000 (the "FSMA") established the Financial Services Compensation Scheme (the "FSCS"), which pays compensation to eligible customers of authorized financial services firms which are unable, or are likely to be unable, to pay claims against them. For further information, please refer to the section entitled "Description of Business—Financial Services Compensation Scheme". Based on our share of protected deposits, the Group pays levies to the FSCS to enable the scheme to meet claims against it. While it is anticipated that the substantial majority of claims will be repaid wholly from recoveries from the institutions concerned, there is the risk of a shortfall, such that the FSCS may place additional levies on all FSCS participants, which levies may be in significant amounts that may have a material impact on our profits. For example, in March 2012 the FSCS and HM Treasury agreed the refinancing of £20.4 billion in loans made to the FSCS by HM Treasury to fund the compensation payments made by the FSCS to customers whose savings were put at risk by bank failures in 2008 and 2009. As a result, the FSCS was required to pay a significantly increased amount of interest which it recovers through additional levies on the financial services industry.
In common with other financial institutions which are subject to the FSCS, we also have a potential exposure to future levies resulting from the failure of other financial institutions and consequential claims which arise against the FSCS as a result of such failure. For example, the ongoing administration of the Dunfermline Building Society will result in future levies although the quantum of any such future levies will only become known once any capital loss is crystallized by the administration of Dunfermline Building Society. The total quantification and timing of such losses have yet to be determined; however, FSCS made an initial levy of £100 million on the industry during September 2014 with a further £265 million raised during September 2015. This takes the Group's year to date total cost of the Dunfermline Building Society failure to £42 million. Our share of the future levy could be significant, reflecting the fact that the share is calculated by reference to the level of each institution's protected deposits.
Following agreement between the FSCS and HM Treasury on the terms of a refinancing in March 2012, there was a remaining shortfall of £91 million for the scheme in 2015, which was passed on across all firms holding protected deposits, including us. In addition, there can be no assurance that there will be no further actions taken under the Banking Act that may lead to further claims against the FSCS, and concomitant increased FSCS levies payable by us. Any such increases in our costs and liabilities related to the levy may have a material adverse effect on its results of operations. Further costs and risks may also arise from discussions at national and EU levels around the future design of financial services compensation schemes, including increasing the scope and level of protection and moving to pre-funding of compensation schemes. The amount provided for in our accounts to meet its obligations to the FSCS was £126 million as at April 4, 2015 (£142 million as at April 4, 2014). The amount provided for at April 4, 2015 reflects the Group's expected liability in respect of the 2015/16 scheme year interest charge, expected to be levied during September 2016 and the 2015/16 scheme year capital estimated shortfall described above that was levied in September 2015. The Group estimates a further provision of between £50 million and £100 million in respect of the 2016/17 scheme year during the second half of the financial year ending April 4, 2016.
In April 2014, the new EU directive on deposit guarantee schemes ("DGSD") was adopted and member states were required to implement it into national law on or before July 3, 2015. The revised DGSD requires EU Member States to ensure that by July 3, 2024 the available financial means of the deposit guarantee schemes reach a minimum target level of 0.8% of the covered deposits of credit institutions; the schemes are to be funded through regular contributions before the event (ex-ante) to the deposit guarantee schemes. (The UK has previously operated an ex-post financing where fees are required after a payment to depositors has occurred.) In case of insufficient ex-ante funds, the deposit guarantee scheme will collect immediate after the event (ex-post) contributions from the banking sector, and, as a last resort they will have access to alternative funding arrangements such as loans from public or private third parties. HMT and the PRA have brought in to force final requirements on the UK implementation of the DGSD. These requirements provide for amongst other things, that the ex-ante contributions are met by funds already collected under the UK bank levy (with the ability, in the case of insufficient funds, to collect immediate ex-post contributions) and changes to the UK FSCS include the introduction of temporary high balance deposit protection, up to £1 million (an increase to the current £85,000 deposit protection limit, which will be reduced to £75,000 from 1 January 2016), for up to six months for certain limited types of deposits and changes to the types of depositors that are eligible for compensation. It is possible, as a result of the new directive, that future FSCS levies on us may differ from those we have incurred historically, and such reforms could result in us incurring additional costs and liabilities, which may adversely affect our business, financial conditions and/or results of operations.
By acquiring the notes, each noteholder (including each beneficial owner) acknowledges, agrees to be bound by and consents to the exercise of any UK bail-in power by the relevant UK resolution authority.
For purposes of the notes, a "UK bail-in power" is any statutory power to effect a cancellation, writedown, reduction, modification and/or conversion of a liability existing from time to time under any laws, regulations, rules or requirements relating to the resolution of credit institutions, investment firms and certain banking group companies (including relevant parent undertakings, subsidiaries and/or affiliates) incorporated in the United Kingdom in effect and applicable to the issuer or any member of the Group (as defined herein), including but not limited to the Banking Act, as the same may be amended from time to time (whether pursuant to the UK Financial Services (Banking Reform) Act 2013 or otherwise), and any laws, regulations, rules or requirements in the United Kingdom which are adopted or enacted in order to implement the BRRD, pursuant to which liabilities of a credit institution, investment firm, certain of its parent undertakings and/or certain of its
affiliates can be cancelled, written down, reduced, modified and/or converted into shares or other securities or obligations of the issuer or any other person (and a reference to the "relevant UK resolution authority" is to any authority with the ability to exercise a UK bail-in power).
Exercise of these powers could involve taking various actions in relation to any securities issued by us (including any notes issued under the Program) without the consent of the noteholders, including (among other things):
• writing down (which may be to nil) the notes or converting the notes into another form or class of securities; and/or
• modifying or disapplying certain terms of the notes, which could include modifications to (without limitation) the maturity date (which may be to extend the maturity date), the interest provisions (including reducing the amount of interest payable, the manner in which interest is calculated and/or the scheduled interest payment dates), and/or the redemption provisions (including the timing of any redemption options and/or the amount payable upon redemption), and may result in the disapplication of acceleration rights or events of default under the terms of the notes or the effect thereof.
The relevant Authorities may exercise the bail-in tool under the Banking Act to recapitalise a relevant entity in resolution by allocating losses to (amongst others) its capital providers and unsecured creditors (which would include noteholders) in a manner that (i) ought to respect the hierarchy of claims in an ordinary insolvency and (ii) is consistent with shareholders and creditors not receiving a less favorable treatment than they would have received in ordinary insolvency proceedings of the relevant entity (known as the "no creditor worse off" safeguard). Accordingly, the ranking of notes in insolvency can be expected to have a direct impact on the relative losses imposed on noteholders in a resolution.
The bail-in tool includes the power to cancel a liability or modify the terms of contracts for the purposes of reducing or deferring the liabilities of the relevant entity under resolution and the power to convert a liability from one form or class to another. The exercise of such powers may result in the cancellation of all, or a portion, of the principal amount of, interest on, or any other amounts payable on, the notes and/or the conversion of all or a portion of the principal amount of, interest on, or any other amounts payable on, the notes into equity securities (which, in our case, could be core capital deferred shares) or other securities or other obligations of the Issuer or another person, including by means of a variation to the terms of the notes.
The taking of any such actions could materially adversely affect the rights of noteholders, the price or value of their investment in the notes, the liquidity and/or volatility of any market in the notes and/or our ability to satisfy our obligations under the notes. In such circumstances, noteholders may have a claim for compensation under one of the compensation schemes existing under, or contemplated by, the Banking Act, but there can be no assurance that noteholders will have such a claim or, if they do, that they would thereby recover compensation promptly or equal to any loss actually incurred.
In addition, if the market perceives or anticipates that any action may be taken under the Banking Act in respect of the Issuer or any of its securities (including any notes issued under the Program), this may have a significant adverse effect on the market price of the notes and/or the liquidity and/or volatility of any market in the notes, whether or not such powers are ultimately exercised. In such case, investors may experience difficulty in selling their notes, or may only be able to sell their notes at a loss.
Mandatory write-down and conversion of capital instruments may affect the subordinated notes. As noted above, in addition to the stabilisation options which may be used in a resolution of an institution, the Banking Act contains a capital write-down tool which enables (and, if the institution enters into resolution, requires) the relevant Authorities permanently to write-down, or convert into common equity tier 1 instruments (which, in our case could be core capital deferred shares), any additional Tier 1 capital instruments and Tier 2 capital instruments at the point of non-viability of the relevant entity and before or together with the exercise of any stabilisation power.
For the purposes of the application of such mandatory write-down and conversion power, the point of non-viability is the point at which the relevant Authority determines that the relevant entity meets the conditions for resolution (but no resolution action has yet been taken) or that the relevant entity will no longer be viable unless the relevant capital instruments are written-down or converted or the relevant entity requires extraordinary public support without which, the relevant U.K. resolution authority determines that, the relevant entity would no longer be viable.
Subordinated notes issued under the program may therefore be subject to write-down or conversion into equity on application of such powers (without requiring the consent of the holders thereof), which may result in the holders losing some or all of their investment. The "no creditor worse off" safeguard would not apply in relation to an application of such powers in circumstances where resolution powers are not also exercised.
The exercise of such mandatory write-down and conversion power under the Banking Act could, therefore, materially adversely affect the rights of holders of subordinated notes, and such exercise (or the perception that such exercise may occur) could material adversely affect the price or value of their investment in subordinated notes and/or the ability of the Issuer to satisfy its obligations under the notes, and/or may adversely affect liquidity and/or volatility in any market for such subordinated notes.
The conditions for use of the UK bail-in power are generally that (i) the regulator determines the relevant UK bank is failing or likely to fail, (ii) it is not reasonably likely that any other action can be taken to avoid such a UK bank's failure and (iii) the relevant UK resolution authority determines that it is in the public interest to exercise the bail-in power, although these conditions are subject to change following the UK's implementation of the BRRD.
Pursuant to the Banking Act, the relevant UK resolution authority should have regard to the insolvency treatment principles when exercising the UK bail-in power in respect of the notes. The insolvency treatment principles are that (i) the exercise of the UK bail-in power should be consistent with treating all liabilities of the bank in accordance with the priority that they would enjoy on a liquidation and (ii) (subject to certain exceptions) any creditors who would have equal priority on a liquidation should bear losses on an equal footing with each other. The UK Treasury may, by order, specify further matters or principles to which the relevant UK resolution authority must have regard when exercising the UK bail-in power. These principles may be specified in addition to, or instead of, the insolvency treatment principles. If the relevant UK resolution authority departs from the insolvency treatment principles when exercising the UK bail-in power, it must report to the Chancellor of the Exchequer stating the reasons for its departure.
The UK bail-in power under the Banking Act could be used to impose losses on holders of the notes.
Moreover, to the extent the UK bail-in power is exercised pursuant to the Banking Act or otherwise, we do not expect any securities issued upon conversion of the notes to meet the listing requirements of any securities exchange. Any securities received by holders of the notes upon conversion of the notes (whether debt or equity) may not be listed for at least an extended period of time, if at all, or may be on the verge of being delisted by the relevant exchange. Additionally, there may be limited, if any, disclosure with respect to the business, operations or financial statements of the issuer of any securities issued upon conversion of the notes, or the disclosure with respect to any existing issuer may not be current to reflect changes in the business, operations or financial statements as a result of the exercise of the UK bail-in power. As a result, there may not be an active market for any securities held after the exercise of the UK bail-in power.
There is considerable uncertainty regarding the specific factors beyond the goals of addressing banking crises pre-emptively and minimizing taxpayers' exposure to losses (for example, by writing down relevant capital instruments before the injection of public funds into a financial institution) which the relevant UK resolution authority would consider in deciding whether to exercise the UK bail-in power with respect to the relevant financial institution and/or securities, such as the notes, issued by that institution. While the Banking Act provides some guidance as to how and when the bail-in option may be utilized by the relevant UK resolution authority, the Banking Act and the BRRD (which, as discussed above, has been be transposed by amendments to the Banking Act) allow for discretion and there is no certainty as to how the relevant UK resolution authority will exercise any bail-in power with respect to a financial institution and/or securities, such as the notes, issued by that institution. As there may be many factors, including factors outside of our control or not directly related to us, which could result in such a determination, holders of the notes may not be able to refer to publicly available criteria in order to anticipate a potential exercise of any such UK bail-in power.
Accordingly, the threat of bail-in may affect trading behavior, including prices and volatility, and, as a result, the notes are not necessarily expected to follow the trading behavior associated with other types of securities.
Under the Banking Act, holders of securities will have a right to be compensated under a bail-in compensation order which is based on the principle that such investors should receive no less favorable treatment than they would have received had the bank entered into insolvency immediately before the coming into effect of the UK bail-in power. The holders of the notes otherwise have limited rights to challenge any decision of the relevant UK resolution authority to exercise the UK bail-in power.
The terms and conditions of the notes contain provisions for calling meetings of holders of notes to consider matters affecting their interests generally. These provisions permit defined majorities to bind all holders of notes including holders of notes who did not attend and vote at the relevant meeting and holders of notes who voted in a manner contrary to the majority.
The terms and conditions of the notes also provide that the Trustee may, without the consent of holders of notes, agree to (i) any modification of the terms and conditions of the notes or the Indenture or (ii) the substitution of another company as principal debtor under any notes in place of the Issuer, in the circumstances described in the section entitled "Terms and Conditions of the Notes—Supplemental Indentures."
In the case of any series of Reset Notes, the rate of interest on such Reset Notes will be reset by reference to the Reset Reference Rate, as adjusted for any applicable margin, on the reset dates specified in the relevant Final Terms. This is more particularly described in "Terms and Conditions of the Notes—Interest— Interest on Reset Notes". The reset of the rate of interest in accordance with such provisions may affect the secondary market for and the market value of such Reset Notes. Following any such reset of the rate of interest applicable to the notes, the First Reset Rate of Interest or the Subsequent Reset Rate of Interest on the relevant Reset Notes may be lower than the Initial Rate of Interest, the First Reset Rate of Interest and/or any previous Subsequent Reset Rate of Interest.
Section 1471 through 1474 of the U.S. Internal Revenue Code of 1986 (or "FATCA") impose a new reporting regime and, potentially, a 30% withholding tax with respect to (i) certain payments from sources within the United States and payments of gross proceeds from the disposition of assets that can produce U.S. source interest and dividends, (ii) "foreign passthru payments" made to certain non-U.S. financial institutions that do not comply with this new reporting regime, and (iii) payments to certain investors that do not provide identification information with respect to interests issued by a participating non-U.S. financial institution. While the notes are in global form and held within DTC, in all but the most remote circumstances, it is not expected that FATCA will affect the amount of any payment received by DTC. However, FATCA may affect payments made to custodians or intermediaries in the subsequent payment chain leading to the ultimate investor if any such custodian or intermediary generally is unable to receive payments free of FATCA withholding. It also may affect payment to any ultimate investor that is a financial institution that is not entitled to receive payments free of withholding under FATCA, or an ultimate investor that fails to provide its broker (or other custodian or intermediary from which it receives payment) with any information, forms, other documentation or consents that may be necessary for the payments to be made free of FATCA withholding. Investors should choose the custodians or intermediaries with care (to ensure each is compliant with FATCA or other laws or agreements related to FATCA) and provide each custodian or intermediary with any information, forms, other documentation or consents that may be necessary for such custodian or intermediary to make a payment free of FATCA withholding. The Issuer's obligations under the notes are discharged once it has made payment to, or to the order of, DTC or its nominee (as holder of the notes) and the Issuer has therefore no responsibility for any amount thereafter transmitted through DTC and custodians or intermediaries. Further, foreign financial institutions in a jurisdiction which has entered into an intergovernmental agreement with the United States (an "IGA") are generally not expected to be required to withhold under FATCA or an IGA or any law implementing an IGA) from payments they make. Prospective investors should refer to the section "Taxation— Foreign Account Tax Compliance Act."
We may, without the consent of the holders of outstanding notes, issue additional notes with identical terms. These additional notes, even if they are treated for non-tax purposes as part of the same series as the original notes, in some cases may be treated as a separate series for U.S. federal income tax purposes. In such a case, the additional notes may be considered to have been issued with original issue discount ("OID") even if the original notes had no OID, or the additional notes may have a greater amount of OID than the original notes. These differences may affect the market value of the original notes if the additional notes are not otherwise distinguishable from the original notes.
We will pay principal and interest on the notes in the Specified Currency (as defined below). This presents certain risks relating to currency conversions if an investor's financial activities are denominated principally in a currency or currency unit (the "Investor's Currency") other than the Specified Currency. These include the risk that exchange rates may significantly change (including changes due to devaluation of the Specified Currency or revaluation of the Investor's Currency) and the risk that authorities with jurisdiction over the Investor's Currency may impose or modify exchange controls. An appreciation in the value of the Investor's Currency relative to the Specified Currency would decrease (1) the Investor's Currency equivalent yield on the notes, (2) the Investor's Currency equivalent value of the principal payable on the notes and (3) the Investor's Currency equivalent market value of the notes.
Government and monetary authorities may impose (as some have done in the past) exchange controls that could adversely affect an applicable exchange rate. As a result, investors may receive less interest or principal than expected, or no interest or principal.
We have not registered, and will not register, the notes under the Securities Act or any other applicable securities laws. Accordingly, the notes are subject to certain restrictions on resale and other transfer thereof as set forth in the section entitled "Transfer Restrictions." As a result of these restrictions, we cannot be certain of the existence of a secondary market for the notes or the liquidity of such a market if one develops. Consequently, a holder of notes and an owner of beneficial interests in those notes must be able to bear the economic risk of their investment in the notes for the term of the notes.
The notes are new securities which may not be widely distributed and for which there is currently no active trading market. If the notes are traded after their initial issuance, they may trade at a discount to their initial offering price, depending upon prevailing interest rates, the market for similar securities, general economic conditions and our financial condition. Although we have applied to admit the notes issued from time to time to listing on the Official List and to admit them to trading on the London Stock Exchange, we cannot assure you that the notes will be accepted for listing or that an active trading market will develop. Accordingly, we cannot assure you as to the development or liquidity of any trading market for the notes.
Potential investors should note that, in view of prevailing and widely reported global credit market conditions (which continue at the date hereof), the secondary market for the notes and for instruments of this kind may be illiquid. We cannot predict when and how these circumstances will change. Liquidity in the notes may also be disrupted by the recent market disruptions referred to above.
If we are declared insolvent and a winding up is initiated we will be required to pay the holders of our senior debt and meet our obligations to all of our other creditors (including unsecured creditors but excluding any obligations that we may have with respect to our subordinated debt and deferred shares, including CCDS) and our UK retail member deposits in full before we can make any payments on the subordinated notes. If this occurs, we may not have enough assets remaining after these payments to pay amounts due under the subordinated notes.
As a result of changes to the United Kingdom building societies legislation (as described briefly below), from January 1, 2015 holders of senior notes and other unsubordinated creditors of the Issuer rank in an insolvency of the Issuer junior to member share accounts which are given preferential status (as described below). Subordinated notes continue to rank junior to all such members and creditors, as well as ranking junior to senior notes.
Section 90B of the Building Societies Act 1986, as amended (the "Act") (which was inserted by the Building Societies (Funding) and Mutual Societies (Transfers) Act 2007) was brought into force with effect from November 20, 2014. HM Treasury exercised the power which was granted to it under Section 90B and powers conferred on it by section 2(2) of the European Communities Act 1972 by making the Banks and Building Societies (Depositor Preference and Priorities) Order 2014 (the "Depositor Preference Order"), which entered into force on January 1, 2015. As a result of these changes, provision has been made by HM Treasury for the purpose of ensuring that, on the winding-up, or dissolution by consent, of a building society, any assets available for satisfying the society's liabilities to creditors (other than liabilities in respect of subordinated deposits; liabilities in respect of preferential debts; or any other category of liability which HM Treasury specifies in the order for these purposes) or to member share account holders (other than liabilities in respect of preferential debts and deferred shares) are applied in satisfying those liabilities pari passu.
The Depositor Preference Order (i) extended the scope of preferential debts in respect of deposits and (ii) further aligned creditor hierarchy in United Kingdom building societies with the depositor preference requirements introduced in consequence of the BRRD to ensure that any sums due to building society members in relation to their shareholding in respect of deposits that do not benefit from the depositor preference requirements will nevertheless rank pari passu with all other (non-preferred) senior unsecured creditors.
These changes also have the effect of granting:
(i) a first-ranking preference to those deposits and share accounts (or a relevant part thereof) of natural persons and micro, small and medium enterprises, which are actually protected by the Financial Services Compensation Scheme (the "FSCS") (i.e. are eligible for protection and do not exceed the FSCS coverage limit (currently £85,000 but reducing to £75,000 with effect from January 1, 2016), which will rank equally with all other preferential debts; and
(ii) a second-ranking preference to deposits and share accounts (or a relevant part thereof) of natural persons and micro, small and medium enterprises, which would be eligible for FSCS protection but for the fact that they either (a) exceed the £85,000 (or, from January 1, 2016, £75,000) coverage limit of the FSCS or (b) were made through a branch outside the EU. Such deposits and share accounts (or the relevant part thereof) will rank after the preferential debts referred to in paragraph (i) above but in priority to the claims of ordinary (i.e. non-preferred) unsecured creditors in the event of an insolvency.
The claims of the holders of senior notes (as well as claims in respect of subordinated notes) therefore rank junior to the claims in respect of liabilities afforded preferred status under (i) or (ii) above and, accordingly, in the event of insolvency or resolution of the Issuer, senior notes would all be available to absorb losses ahead of liabilities which benefit from such first-ranking or second-ranking preference (and subordinated notes would be available to absorb losses ahead of senior notes).
As a result, in the event of insolvency or winding up of the Issuer:
(a) our assets would be applied first to satisfying in full all claims in respect of those deposits and share accounts which enjoy preferential status (as described above) before any recovery would be made on claims in respect of senior notes (and the claims in respect of senior notes would rank pari passu with those deposits and share accounts which are not afforded preferential status); and
(b) no recovery would be made on claims in respect of subordinated notes unless and until the claims in respect of all deposit and share accounts, as well as claims in respect of our senior notes and any other unsubordinated liabilities, have first been satisfied in full.
It is further expected that this ranking would be respected in the event that resolution action were to be taken in respect of us pursuant to the Banking Act.
Therefore, in the event of an insolvency, winding up or resolution, there is a real risk that investors in our senior notes and/or subordinated notes would lose some or the entire amount of their investment. Furthermore, the market price of senior notes and subordinated notes can be expected to be materially adversely affected if our financial condition deteriorates such that the market anticipates our insolvency, winding-up or resolution.
The credit ratings of our medium-term note program may not reflect the potential impact of all risks relating to the value of the notes. In addition, real or anticipated changes in our credit ratings or the credit ratings of the notes will generally affect the market value of the notes. These credit ratings could change due to a wide range of factors, including but not limited to those discussed under "—Risks Related to Our Business—Rating downgrade and/or market sentiment with respect to us, our sector, the UK and/or other sovereign issuers may have an adverse effect on our performance and/or the marketability and liquidity of the Notes." A credit rating is not a recommendation to buy, sell or hold securities and may be subject to suspension, reduction or withdrawal at any time by the assigning rating agency.
These notes will be represented by one or more Global Notes. These notes will be deposited with a custodian on behalf of DTC or its nominee. Except in limited circumstances, holders will not be entitled to receive certificated notes. DTC will maintain records of the beneficial interests in the Global Notes. Holders will be able to trade their beneficial interests only through DTC or a participant of DTC such as Euroclear or Clearstream. The laws of some jurisdictions, including some states in the United States, may require that certain purchasers of securities take physical delivery of such securities in certificated form. The foregoing limitations may impair a holder's ability to own, transfer or pledge its beneficial interests. A holder of beneficial interests in the Global Notes in one of these jurisdictions will not be considered the owner or "holder" of the notes.
We will discharge our payment obligations under the notes by making payments to the custodian for distribution to the holders of beneficial interests at DTC or a participant of DTC with respect to interests of indirect participants. We and the initial purchasers of the notes will not have any responsibility or liability for the records relating to, or payments made in respect of, beneficial interests in the Global Notes. A holder of beneficial interests must rely on the procedures of DTC or DTC's participants, through which holders hold their interests, to receive payments under the notes. We cannot assure holders that the procedures of DTC or DTC's nominees, participants or indirect participants will be adequate to ensure that holders receive payments in a timely manner.
A holder of beneficial interests in the Global Notes will not have a direct right under the indenture governing these Notes to act upon solicitations we may request. Instead, holders will be permitted to act only to the extent they receive appropriate proxies to do so from DTC or, if applicable, DTC's participants or indirect participants. Similarly, if we default on our obligations under the notes, as a holder of beneficial interests in the Global Notes, holders will be restricted to acting through DTC, or, if applicable, DTC's participants or indirect participants. We cannot assure holders that the procedures of DTC or DTC's nominees, participants or indirect participants will be adequate to allow them to exercise their rights under the notes in a timely manner.
An optional redemption feature is likely to limit the market value of notes. During any period when we may elect to redeem notes, the market value of those notes generally will not rise substantially above the price at which they can be redeemed. This also may be true prior to any redemption period.
We may be expected to redeem notes with an optional redemption feature when our cost of borrowing is lower than the interest rate on the notes. At those times, an investor generally would not be able to reinvest the redemption proceeds at an effective interest rate as high as the interest rate on the notes being redeemed and may only be able to do so at a significantly lower rate. Additionally, we may redeem the notes at times when prevailing interest rates are relatively low, and accordingly investors may not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as that of the notes. Potential investors should consider reinvestment risk in light of other investments available at that time.
Floating Rate/fixed rate notes may bear interest at a rate that we may elect to convert from a fixed rate to a floating rate, or from a floating rate to a fixed rate. Our ability to convert the interest rate will affect the secondary market and the market value of such Notes since we may be expected to convert the rate when it is likely to produce a lower overall cost of borrowing. If we convert from a fixed rate to a floating rate, the spread on the floating rate/fixed rate notes may be less favorable than then prevailing spreads on comparable floating rate notes tied to the same reference rate. In addition, the new floating rate at any time may be lower than the rates on other notes. If we convert from a floating rate to a fixed rate, the fixed rate may be lower than then prevailing rates on our notes.
The market values of notes issued at a substantial discount or premium to their principal amount tend to fluctuate more in relation to general changes in interest rates than do prices for conventional interest-bearing notes. Generally, the longer the remaining term of the notes, the greater the price volatility as compared to conventional interest-bearing notes with comparable maturities.
The conditions of the notes are based on the laws of the State of New York in effect as at the date of this Base Prospectus, except that the subordination provisions in each of the indenture and the subordinated notes are based on the laws of England and Wales in effect as at the date of this Base Prospectus. No assurance can be given as to the impact of any possible judicial decision or change to law or administrative practice after the date of this Base Prospectus and any such change could materially adversely impact the value of any notes affected by it.
Investment in fixed rate notes involves the risk that if market interest rates subsequently increase above the rate paid on the fixed rate notes, this will adversely affect the value of the fixed rate notes.
We will use the net proceeds of each issue of notes for general corporate purposes and, with regard to subordinated notes, to strengthen our capital base. We may also use a portion of the net proceeds from any note issuance to acquire companies or assets that are complementary to our business, although we do not currently have any acquisitions planned. See the section entitled "Description of Business" for a detailed description of our funding needs.
The following table sets forth, for the periods indicated, the high, low, average and period-end noonbuying rates in the City of New York for cable transfers in sterling as announced by the Federal Reserve Bank of New York for customs purposes, in each case for the purchase of U.S. dollars, all expressed in U.S. dollars per pound sterling (the "Market Exchange Rate"):
| U.S. Dollars Per Pound Sterling | ||||
|---|---|---|---|---|
| For the financial year ended | High | Low | Average(1) | Year End |
| (U.S. dollars per pound sterling) | ||||
| April 4, 2015 | 1.72 | 1.47 | 1.61 | 1.49 |
| April 4, 2014 | 1.68 | 1.49 | 1.59 | 1.66 |
| April 4, 2013 | 1.63 | 1.49 | 1.58 | 1.52 |
| April 4, 2012 | 1.67 | 1.53 | 1.61 | 1.59 |
| April 4, 2011(2) | 1.64 | 1.43 | 1.56 | 1.61 |
| Average(3) |
|---|
| Month End |
| (U.S. dollars per pound sterling) |
| 1.5576 1.5727 |
| 1.5560 1.5634 |
| 1.5578 1.5363 |
| 1.5338 1.5116 |
| 1.5343 1.5445 |
| 1.5194 1.5044 |
| 1.5047 1.5100 |
Notes:
(1) The average of the noon-buying rates on the last business day of each month during the relevant period.
(2) The last business day preceding the financial year end was April 1, 2011.
(3) The average of the daily noon-buying rates during the relevant period.
Solely for the convenience of the reader, this Base Prospectus presents the translation of income statement and balance sheet data from pounds sterling into U.S. dollars at the rate of £1.00 to \$1.5156, the Market Exchange Rate on September 30, 2015 or at the rate of £1.00 to \$1.4818, the Market Exchange Rate on April 4, 2015, as relevant. These translations should not be construed as representations that pound sterling amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated as of any of the dates mentioned in this Base Prospectus, or at all.
The following is a summary of our consolidated capitalization and indebtedness extracted from our unaudited consolidated financial statements as at September 30, 2015:
| As at September |
|
|---|---|
| 30, 2015 | |
| (£ millions) | |
| Consolidated Indebtedness(1) | |
| Deposits from banks | 1,706 |
| Amounts due to customers and other deposits | 15,454 |
| Debt securities in issue | 33,365 |
| Total Senior Debt Subordinated Debt(1)(2) |
50,525 |
| Comprising one issue maturing in 2018, one issue maturing in 2019, two issues maturing in 2020, one issue maturing in 2022 and one issue maturing in 2023. |
1,880 |
| Total Subordinated Debt | 1,880 |
| Permanent Interest Bearing Shares(1)(3) | |
| Comprising nine issues of permanent interest bearing shares callable (subject to relevant supervisory consent) in 2016, 2019, 2021, 2024, 2026 and 2030, respectively. The floating rate |
|
| shares are only repayable in the event of the winding up of the Society. | 415 |
| Total Permanent Interest Bearing Shares | 415 |
| Members' Funds | |
| CCDS | 531 |
| Other equity instruments | 992 |
| General reserve | 8,612 |
| Revaluation reserve | 68 |
| Other reserves | 24 |
| UK retail member deposits(1)(4) | 134,955 |
| Total members' funds | 145,182 |
| Total capitalization(5) | 198,002 |
| __ |
Notes:
Except as otherwise disclosed in this Base Prospectus, there has been no material change in our consolidated capitalization, indebtedness, guarantees or contingent liabilities since September 30, 2015.
(1) If we were to go into liquidation the claims of non-member depositors and other unsubordinated creditors would rank before those of holders of UK retail member deposits, and the claims of holders of UK retail member deposits would rank before those of subordinated debt holders. The claims of holders of permanent interest bearing shares ("PIBS") rank behind those of all other creditors, including subordinated debt holders. Other equity instruments rank the same as PIBS securities holders. CCDS holders rank behind the claims of other equity instruments and PIBS securities holders.
(2) For consistency with other indebtedness, accrued interest of £36 million is included.
(3) For consistency with other indebtedness, accrued interest of £6 million is included.
(4) Our rules provide that members may withdraw all or any of their investments by giving appropriate notice specifying the amount to be withdrawn. Members may also make an immediate withdrawal of their investments subject to a possible loss of interest. Our Board of Directors (the "Board") has the power to suspend or limit the payment of withdrawals when, in its discretion, it considers it necessary.
(5) The nominal value of mortgages pledged as security on debt issuances as at September 30, 2015 totalled £32,395 million, while additional mortgages of £12,072 million have been pledged as a pool as part of Funding for Lending.
The following tables present selected consolidated information which has been extracted from our unaudited consolidated financial statements as at and for the six months ended September 30, 2015 with comparatives as at and for the six months ended September 30, 2014 and audited consolidated financial statements as at and for the years ended April 4, 2015, 2014 and 2013.
The following data should be read in conjunction with our audited consolidated financial statements and the notes thereto incorporated by reference herein as well as the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations":
| For the six month period ended September 30, |
For the financial year ended April 4, |
||||||
|---|---|---|---|---|---|---|---|
| 2015(1) | 2015 | 2014(3) | 2015(2) | 2015 | 2014 | 2013 | |
| (\$ millions) |
(£ | (£ | (\$ | (£ | (£ | (£ | |
| millions) | millions) | millions) | millions) | millions) | millions) | ||
| (unaudited) | (unaudited) | (audited) | |||||
| Income Statement Data: | |||||||
| Interest receivable and similar | |||||||
| income | 3,960 | 2,613 | 2,684 | 7,923 | 5,347 | 5,295 | 5,395 |
| Interest expense and similar | |||||||
| charges | (1,600) | (1,056) | (1,238) | (3,684) | (2,486) | (2,892) | (3,414) |
| Net interest income | 2,360 | 1,557 | 1,446 | 4,239 | 2,861 | 2,403 | 1,981 |
| Fee and commission income | 321 | 212 | 220 | 662 | 447 | 489 | 558 |
| Fee and commission expense | (138) | (91) | (81) | (250) | (169) | (135) | (113) |
| Income from investments | 3 | 2 | 2 | 6 | 4 | 4 | 13 |
| Other operating income | 5 | 3 | 2 | 13 | 9 | 134 | 46 |
| Gains/(losses) from | |||||||
| derivatives and hedge | |||||||
| accounting | 21 | 14 | 6 | (13) | (9) | (51) | (165) |
| Total income | 2,572 | 1,697 | 1,595 | 4,657 | 3,143 | 2,844 | 2,320 |
| Administrative expenses | (1,078) | (711) | (676) | (2,092) | (1,412) | (1,329) | (1,204) |
| Depreciation and | |||||||
| amortization expenses | (235) | (155) | (144) | (436) | (294) | (282) | (216) |
| Impairment losses on loans | |||||||
| and advances to customers | - | - | (156) | (345) | (233) | (380) | (589) |
| Provisions for liabilities and | |||||||
| charges | (44) | (29) | (8) | (210) | (142) | (173) | (141) |
| Impairment losses on | |||||||
| investment securities | - | - | (13) | (27) | (18) | (3) | (2) |
| Profit before tax | 1,215 | 802 | 598 | 1,547 | 1,044 | 677 | 168 |
| Analyzed as: | |||||||
| Underlying profit before | |||||||
| tax and the following items: | 1,214 | 801 | 632 | 1,802 | 1,216 | 924 | 433 |
| Financial Sector | |||||||
| Compensation Scheme | (8) | (5) | (4) | (123) | (83) | (104) | (68) |
| Transformation costs | (12) | (8) | (36) | (77) | (52) | (75) | (16) |
| Bank levy | - | - | - | (42) | (28) | (17) | (16) |
| Gains/(losses) from | |||||||
| derivatives and hedge | |||||||
| accounting | 21 | 14 | 6 | (13) | (9) | (51) | (165) |
| Statutory profit before tax | 1,215 | 802 | 598 | 1,547 | 1,044 | 677 | 168 |
| Taxation | (252) | (166) | (112) | (304) | (205) | (128) | 10 |
| Profit | 963 | 636 | 486 | 1,243 | 839 | 549 | 178 |
_____________
Notes:
(1) Dollar amounts are unaudited and have been derived from our unaudited consolidated financial statements as of and for the six month period ended September 30, 2015 using the exchange rate of \$1.5156 to £1.00.
(2) To provide a more meaningful presentation of the Group's residual economic foreign exchange exposure, amounts in relation to the retranslation of foreign currency monetary items have been reclassified from 'interest expense and similar charges' to 'gains/(losses) from derivatives and hedge accounting' in the income statement.
(3) Dollar amounts are unaudited and have been derived from our audited consolidated financial statements as of and for the year ended April 4, 2015 using the exchange rate of \$1.4818 to £1.00.
| As at the six month period ended September 30, |
As at the financial year ended April 4, |
||||||
|---|---|---|---|---|---|---|---|
| 2015(1) | 2015 | 2014 | 2015(2) | 2015 | 2014 | 2013 | |
| (\$ millions) | (£ millions) |
(£ millions) | (\$ millions) | (£ millions) | (£ millions) | (£ millions) | |
| Balance Sheet Data |
(unaudited) | (unaudited) | (audited) | ||||
| Assets: | |||||||
| Cash Loans and |
11,972 | 7,899 | 8,463 | 6,409 | 4,325 | 5,342 | 7,886 |
| advances to banks Investment securities |
5,703 | 3,763 | 2,465 | 5,026 | 3,392 | 2,110 | 2,522 |
| available for sale Derivative |
17,410 | 11,487 | 11,385 | 16,355 | 11,037 | 10,563 | 13,421 |
| financial instruments Fair value |
4,529 | 2,988 | 3,264 | 4,945 | 3,337 | 3,020 | 4,212 |
| adjustment for portfolio hedged risk Loans and |
805 | 531 | 218 | 877 | 592 | 221 | 872 |
| advances to customers Investments in |
263,813 | 174,065 | 168,547 | 252,865 | 170,647 | 166,541 | 159,587 |
| equity shares | 39 | 26 | 29 | 38 | 26 | 29 | 28 |
| Intangible assets | 1,661 | 1,096 | 965 | 1,541 | 1,040 | 956 | 894 |
| Property, plant and equipment |
1,291 | 852 | 858 | 1,268 | 856 | 852 | 886 |
| Investment properties Accrued income |
12 | 8 | 9 | 12 | 8 | 9 | 8 |
| and expenses prepaid |
362 | 239 | 375 | 285 | 192 | 185 | 147 |
| Deferred tax assets Current tax |
45 | 30 | 25 | 56 | 38 | 33 | 154 |
| assets | - | - | - | - | - | - | 15 |
| Other assets | 193 | 127 | 19 | 133 | 90 | 32 | 86 |
| Total assets | 307,835 | 203,111 | 196,622 | 289,810 | 195,580 | 189,893 | 190,718 |
| Liabilities: UK retail member |
|||||||
| deposits Deposits from |
204,538 | 134,955 | 133,978 | 196,150 | 132,373 | 130,468 | 125,574 |
| banks | 2,585 | 1,706 | 2,320 | 2,925 | 1,974 | 1,984 | 3,230 |
| Other deposits | 13,980 | 9,224 | 8,143 | 13,449 | 9,076 | 7,135 | 6,747 |
| Due to customer Fair value adjustment for portfolio hedged |
9,442 | 6,230 | 6,219 | 9,067 | 6,119 | 6,208 | 5,960 |
| risk | 11 | 7 | 4 | 21 | 14 | 33 | 150 |
| April 4, 2015(1) 2015(2) 2015 2014 2015 2014 2013 (£ (\$ millions) millions) (£ millions) (\$ millions) (£ millions) (£ millions) (£ millions) (unaudited) (unaudited) (audited) Balance Sheet Data Debt securities in issue 50,568 33,365 29,506 41,646 28,105 28,557 33,429 Derivative financial instruments 5,548 3,661 2,797 5,998 4,048 2,391 3,885 Other liabilities 943 622 525 704 475 269 251 Provisions for liabilities and charges 314 207 173 437 295 310 318 Accruals and deferred income 423 279 433 547 369 428 366 Subordinated liabilities 2,795 1,844 2,200 3,143 2,121 2,269 2,540 Subscribed capital 620 409 600 615 415 601 1,304 Deferred tax liabilities 38 25 26 78 53 25 30 Current tax liabilities 229 151 132 172 116 74 - Retirement benefit 302 199 198 424 286 235 354 obligations…… Core capital deferred shares 805 531 531 787 531 531 - (CCDS) Other equity |
As at the six month period ended | As at the financial year ended | |||||
|---|---|---|---|---|---|---|---|
| September 30, | |||||||
| instrument 1,503 992 992 1,470 992 992 - |
|||||||
| General reserve | |||||||
| 13,052 8,612 7,756 11,847 7,995 7,363 6,765 |
|||||||
| Revaluation | |||||||
| reserve 103 68 72 101 68 71 67 |
|||||||
| Cash flow | |||||||
| hedge reserve 48 32 - 191 129 - - |
|||||||
| Available-for (12) (8) 17 38 26 (51) (252) |
|||||||
| sale reserve | |||||||
| Total reserves 307,835 203,111 196,622 289,810 195,580 189,893 190,718 and liabilities |
Notes:
_____________
(1) Dollar amounts are unaudited and have been derived from our audited consolidated financial statements as of and for the six month period ended September 30, 2015 using the exchange rate of \$1.5156 to £1.00.
(2) Dollar amounts are unaudited and have been derived from our audited consolidated financial statements as of and for the year ended April 4, 2015 using the exchange rate of \$1.4818 to £1.00.
| For the six month period ended September 30, |
April 4, | |||
|---|---|---|---|---|
| 2015 | 2014 | 2015 | 2014 | 2013 |
| 0.32% | 0.25% | 0.43% | 0.29% | 0.11% |
| 1.58% | 1.51% | 1.46% | 1.25% | 1.02% |
| 25.1% | 20.7% | 23.3% | 22.7% | 22.5% |
| 115.7% | 113.6% | 115.6% | 115.8% | 115.4% |
| 101.2% | 102.6% | 103.4% | 104.5% | 99.1% |
| 1.76% | 1.47% | 1.34% | 1.19% | 1.06% |
| 4.10% | 3.06% | 2.59% | 1.97% | 1.30% |
| 21.9% | 17.6% | 19.8% | 14.5% | 9.1% |
| 24.7% | 20.2% | 22.5% | 16.9% | 10.9% |
| 29.2% | 25.4% | 27.0% | 22.1% | 15.4% |
| 0.73% | ||||
| 0.43% | 0.42% | (unaudited) 0.87% |
For the financial year ended 0.84% |
Notes:
_____________
(1) Return on average total assets represents profit on ordinary activities after tax as a percentage of average total assets. Average balances are based on the balance as at the end of each month during the financial year.
(2) Net interest margin represents net interest income as a percentage of weighted average total assets.
(3) For this purpose, earnings consist of profit on ordinary activities before tax and fixed charges. Fixed charges consist of interest expense including or excluding interest on retail deposits, as appropriate.
(4) This ratio represents administrative expenses plus depreciation as a percentage of the average of total assets at the start and end of each period.
The following discussion is based on, and should be read in conjunction with, our selected consolidated financial and operating information and our audited consolidated financial statements incorporated by reference herein. We prepared our financial statements in accordance with IFRS, which differs in certain significant respects from generally accepted accounting principles in the United States.
We are a building society, regulated by the FCA in relation to conduct of business matters and by the PRA in relation to prudential requirements. Our core business is providing personal financial services, primarily residential mortgage lending funded largely through retail savings. As a mutual organization, we are managed for the benefit of our members, our retail savings and residential mortgage customers, rather than for equity shareholders. We return value to our members by offering typically higher interest rates on savings and lower interest rates on loans than those offered by our main competitors. As a result, we generally earn lower pre-tax profits than our main competitors, which are primarily banks or other non-mutual organizations. As a mutual organization, we pay no dividends, and our net earnings are put into reserves and constitute Tier 1 capital for our capital adequacy requirements. For information regarding UK capital adequacy requirements, see the subsection entitled "–Financial Condition of the Group—Capital Resources" below.
Consistent with our mutual heritage, we offer a range of products designed to provide transparency, fairness and value. Alongside this, we have delivered a strong financial performance and improved our capital position. As a result, our Common Equity Tier 1 ratio has risen to 21.9% as of September 30, 2015.
Our financial performance builds on our success in developing new products, investing in technologies which provide our members and customers greater choice in the way they manage their financial affairs and rewarding loyal members with exclusive market product offers. Strong business volumes, combined with a strengthening in our net interest margin, have contributed to a 6.4% increase in income to £1,697 million for the six months ended September 30, 2015 from £1,595 million for the six months ended September 30, 2014.
Our underlying profit increased by 26.7% in the six months ended September 30, 2015, growing to £801 million from £632 million in the six months ended September 30, 2014. Statutory profit before tax increased by 34.1% in the six months ended September 30, 2015, growing to £802 million from £598 million in the six months ended September 30, 2014.
The cost income ratio on an underlying basis has increased from 49.3% for the six months ended September 30, 2014 to 51.0% at September 30, 2015.
Underlying administrative expenses have increased by 9.4% to £858 million for the six months ended September 30, 2015 from £784 million for the six months ended September 30, 2014, reflecting ongoing investment in the business and increased employee costs. At a statutory level administrative expenses have increased by 5.6% to £866 million.
There was no overall net charge for impairment losses for the six months ended September 30, 2015, a reduction of £169 million from the six months ended September 30, 2014, reflecting improvements across all portfolios. The biggest improvements have been seen in the commercial portfolio due to the significant levels of deleveraging which took place in the previous financial year and improvements in market conditions.
After trending down through 2014, housing market activity has increased modestly over the course of 2015. Mortgage approvals have broadly tracked this trend, while re-mortgage 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 for the third quarter 2015 were over 10% higher than for the same quarter of 2014. While healthy employment growth and robust demand from investors – including buy to let – help 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 until 2016/17 if this trend is sustained.
As a building society, our aim is to optimise our profitability to allow us to grow and invest in our business while at the same time maintaining our capital strength. Consistent with our objective to be a "modern mutual", it is important that we continue to invest in order to meet our members' current and future needs with a strategy to provide good long term value products, services and security. Our management believes such investment will allow us to continue to compete against a backdrop where digital innovation and other initiatives are having a major impact on consumer behaviour and expectations of service and digital access.
Net interest income was £1,557 million in the six months ended September 30, 2015, an increase of £111 million (7.7%) from £1,446 million in the six months ended September 30, 2014, driven predominantly by reduced costs of retail funding.
| For the six months ended September 30, |
For the year ended April 4, |
|||
|---|---|---|---|---|
| 2015 | 2014 | 2015 | 2014 | |
| (£ millions, except percentages) |
(£ millions, except percentages) |
|||
| Net interest income | 1,557 | 1,446 | 2,861 | 2,403 |
| Weighted average total assets | 200,112 | 194,066 | 195,429 | 191,604 |
| Net interest margin | 1.58% | 1.51% | 1.46% | 1.25% |
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 annualized increase in net interest margin (NIM) of 7 basis points to 158 basis points, 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 basis points 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 basis points over the last 12 months. This has had limited impact on NIM in the period to September 30, 2015, but, combined with increasing levels of customer switching from higher margin variable rate products as speculation rises over bank base rates, may lead to pressure on margins during the second half of the financial year and into 2016 and 2017.
Because the majority of our assets and liabilities are either floating rate instruments or synthetically converted to floating rate instruments using derivatives, variations in market interest rates have a direct impact on our interest income and interest expense. Fluctuations in market interest rates, however, give us the opportunity to manage our interest rate margins and, for most of our assets and liabilities, we can reprice the interest rate that we offer, subject to market and competitive pressures.
The following table sets forth the daily average three-month sterling LIBOR rates (11:00 a.m. British Bankers' Association fixing) and average BoE base rates for the six months ended September 30, 2015 and 2014, and for the years ended April 4, 2015, 2014 and 2013:
| For the six months ended September 30, |
For the year ended April 4, |
||||
|---|---|---|---|---|---|
| 2015 | 2014 | 2015 | 2014 | 2013 | |
| Daily average three-month sterling LIBOR | 0.58% | 0.56% | 0.55% | 0.52% | 0.68% |
| Average BoE base rate | 0.5% | 0.5% | 0.5% | 0.5% | 0.5% |
Interest rate risk arises from the mortgage, savings and other financial services products that we offer. The varying interest rate features and maturities of retail products and wholesale funding create exposures to interest risks. This is due to the imperfect matching of variable interest rates, in particular BoE base rate and LIBOR, and timing differences on the re-pricing of assets and liabilities. The risk is managed through the use of derivatives and other appropriate financial instruments and through product design.
Low and flat interest rates have continued to dominate, driven by reduced expectations for economic growth. Base rates remain unchanged, but underlying rates in longer term debt securities markets, principally gilts, have fallen.
A significant proportion of our mortgages are at our BMR, which we have guaranteed will never be more than 2% above the BoE base rate. This rate is significantly lower than the equivalent standard variable rate charged by peers, or the SMR onto which our more recent mortgage advances mature. This has the effect of compressing our mortgage margins and reducing the flexibility with which these margins can be managed. However, the BMR portfolio is well seasoned, has low loan to value ("LTV"), low arrears rates and low possession rates. The low risk nature of the portfolio partly compensates for the low margin it yields.
We believe that our results indicate a strong performance for the six months ended September 30, 2015 with an underlying profit before tax (as explained below) of £801 million, and a statutory profit before tax of £802 million.
Underlying profit before tax (as explained below) for the six months ended September 30, 2015 is up 26.7% at £801 million from £632 million for the six months ended September 30, 2014. Total underlying income increased by 5.9% to £1,683 million in the six months ended September 30, 2015, as compared to £1,589 million in the six months ended September 30, 2014.
Increased profitability has been driven mainly by the continued improvement in net interest income and reduced impairment losses and provisions for liabilities and charges, offset in part by increased administrative expenses and lower other income.
Underlying administrative expenses have increased by 9.4% to £858 million, driven by continued investment in the business and increased employee costs. At a statutory level administrative expenses have increased by 5.6% to £866 million.
The increase in employee costs reflects the impact of annual pay awards averaging 3.0% and 2.5% respectively. Employee headcount has increased by 1.9% in the six months ended September 30, 2015 as we continue to strengthen Risk and Control functions and build greater capacity to support our growing business.
Other administrative expenses have increased by £38 million for the six months ended September 30, 2015. 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 of £8 million for the six months ended September 30, 2015 relate to investment to enable IT change to be delivered in a more efficient, flexible and resilient manner. Transformation costs are significantly lower than the six months ended September 30, 2014 (£36 million), reflecting the successful completion of the integration of the Dunfermline, Cheshire and Derbyshire brands.
Underlying cost growth exceeded underlying income growth, resulting in a deterioration in the underlying cost income ratio to 51.0% (September 30, 2014: 49.3%). Statutory income growth exceeded statutory cost growth, resulting in an improvement in the statutory cost income ratio to 51.0% (September 30, 2014: 51.4%).
Performance of the mortgage portfolios continues to improve with the number of residential mortgages more than three months in arrears reducing in both the prime and specialist mortgage books. 0.46% of the Group's mortgages are more than three months in arrears, which compares favourably to the Council of Mortgage Lenders (the "CML") industry average of 1.17%.
Profit before tax on a reported basis and underlying basis are set out below. Certain aspects of our results are presented to reflect management's view of the underlying results and to provide a clearer representation of our performance:
| For the six months ended September 30, 2015 | ||||||
|---|---|---|---|---|---|---|
| Statutory profit |
FSCS | Transformation Costs |
Gains from derivatives and hedge accounting |
Underlying profit |
||
| (£ millions) | ||||||
| Net interest income | 1,557 | - - |
- | 1,557 | ||
| Other income | 126 | - - |
- | 126 | ||
| Movements on derivatives and hedge accounting |
14 | - - |
(14) | - | ||
| Total income | 1,697 | - - |
(14) | 1,683 | ||
| Administrative expenses | (866) | - 8 |
- | (858) | ||
| Pre-provision underlying profit | 831 | - 8 |
(14) | 825 | ||
| Impairment losses | - | - - |
- | - | ||
| Provisions for liabilities and | ||||||
| charges | (29) | 5 - |
- | (24) | ||
| Profit before tax | 802 | 5 8 |
(14) | 801 |
| For the six months ended September 30, 2014 | |||||||
|---|---|---|---|---|---|---|---|
| Statutory profit |
FSCS | Transformation Costs |
Gains from derivatives and hedge accounting |
Underlying profit |
|||
| (£ millions) | |||||||
| Net interest income | 1,446 | - | - | - | 1,446 | ||
| Other income | 143 | - | - | - | 143 | ||
| Movements on derivatives and | |||||||
| hedge accounting | 6 | - | - | (6) | - | ||
| Total income | 1,595 | - | - | (6) | 1,589 | ||
| Administrative expenses | (820) | - | 36 | - | (784) | ||
| Pre-provision underlying | |||||||
| profit | 775 | - | 36 | (6) | 805 | ||
| Impairment losses | (169) | - | - | - | (169) | ||
| Provisions for liabilities and | |||||||
| charges | (8) | 4 | - | - | (4) | ||
| Profit before tax | 598 | 4 | 36 | (6) | 632 |
The following discussion considers our results for the six months ended September 30, 2015 compared to our results for the six months ended September 30, 2014:
Our total income increased 6.4% to £1,697 million in the six months ended September 30, 2015 compared to £1,595 million in the six months ended September 30, 2014.
The following table sets forth the components of income for the six months ended September 30, 2015 and 2014, respectively:
| For the six months ended September 30, |
||
|---|---|---|
| 2015 | 2014 | |
| (£ millions) | ||
| Net interest income | 1,557 | 1,446 |
| Net fees and commissions | 121 | 139 |
| Income from investments | 2 | 2 |
| Other operating income | 3 | 2 |
| Gains/(losses) from derivatives and hedge accounting | 14 | 6 |
| Total income | 1,697 | 1,595 |
Net interest income increased by 7.7% to £1,557 million for the six months ended September 30, 2015 compared with £1,446 million for the six months ended September 30, 2014.
The following table sets forth the components of net interest income for the six months ended September 30, 2015 and 2014, respectively:
| For the six months ended September 30, |
||
|---|---|---|
| 2015 | 2014 | |
| (£ millions) | ||
| Interest and similar income: | ||
| 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 interest and similar income | 2,613 | 2,684 |
| Interest expense and similar charges: | ||
| On UK retail member deposits | 762 | 947 |
| On subscribed capital | 13 | 21 |
| On deposits and other borrowings: | ||
| Subordinated liabilities | 51 | 57 |
| Other | 240 | 65 |
| Debt securities in issue | 335 | 370 |
| Net income on financial instruments hedging liabilities | (349) | (226) |
| Pension interest cost | 4 | 4 |
| Total interest expense and similar charges | 1,056 | 1,238 |
| Net interest income | 1,557 | 1,446 |
Interest and similar income decreased by 2.6% to £2,613 million in the six months ended September 30, 2015 from £2,684 million in the six months ended September 30, 2014.
Interest on residential mortgages increased slightly by 0.4% to £2,462 million in the six months ended September 30, 2015 from £2,451 million in the six months ended September 30, 2014.
Interest on other loans includes interest income that we earn from commercial loans, credit card lending, unsecured personal loans and current account overdrafts. Interest on other loans decreased by 12.3% to £412 million in the six months ended September 30, 2015 from £470 million in the six months ended September 30, 2014.
Interest and other income from investment securities comprises interest income earned on the corporate and government investment securities that we purchase for our own account to manage our liquidity portfolios and net realized gains and losses on our sales of these instruments.
Interest and other income from investment securities decreased by 1.1% to £173 million for the six months ended September 30, 2015, compared with £175 million for the six months ended September 30, 2014.
Derivative instruments are used to synthetically convert fixed rate assets to floating rate assets. The floating rate income and fixed rate expense on these derivatives are included as "net expense on financial instruments hedging assets." In the six months ended September 30, 2015, we incurred a net expense of £444 million on financial instruments used to hedge our fixed rate assets, compared with a net expense of £429 million in the six months ended September 30, 2014.
Interest expense and similar charges decreased by 14.7% in the six months ended September 30, 2015 to £1,056 million from £1,238 million in the six months ended September 30, 2014.
Interest on shares held by individuals includes interest that we pay on UK savings and current accounts held by our members. Interest on shares held by individuals decreased to £762 million in the six months ended September 30, 2015 from £947 million in the six months ended September 30, 2014.
The average interest rate that we paid to depositors decreased to 0.57%% for the six months ended September 30, 2015 compared with 0.72% for the six months ended September 30, 2014, which accounted for the majority of the decrease in interest paid. There was also an increase of 0.62% in the average balance of UK retail member deposits held to £133,215 million in the six months ended September 30, 2015 from £132,398 million in the six months ended September 30, 2014.
Over the previous twelve months we have increased our market share of the personal current account market to 6.9% as at September 30, 2015 (September 30, 2014: 6.6%). We have been a supporter and beneficiary of the drive to make account switching quicker and easier, averaging a 9.8% share of all account switching in the six months ended September 30, 2015.
Interest expense on deposits and other borrowings includes interest that we pay on subordinated debt instruments and other deposits and borrowings. In the six months ended September 30, 2015, interest on subordinated liabilities decreased to £51 million from £57 million in the six months ended September 30, 2014. This decrease is primarily a result of a decline in the average balances between the two periods. Average balances decreased to £1,989 million in the six months ended September 30, 2015 from £2,230 million in the six months ended September 30, 2014.
Other interest expense on deposits and other borrowings includes the interest that we pay on retail deposits by non-members, deposits from other banks and other money market deposits. In the six months ended September 30, other interest expense on deposits and other borrowings increased by 269.2% to £240 million from £65 million in the six months ended September 30, 2014. This increase is primarily due to £171 million in relation to the maturity of Protected Equity Bond (PEB) deposits, with a corresponding offsetting interest income amount included within net income on financial instruments hedging liabilities.
PEB deposits contain an element of stock market correlated growth linked to the performance of specified stock market indices. The PEBs are held at fair value and are economically matched using equitylinked derivatives. During the life of the PEB deposits, movements in fair value are offset against the movements in the fair value of the corresponding derivatives within gains on derivatives and hedge accounting in the income statement. On redemption of PEBs these movements are recycled to interest expense and similar charges; the PEBs movements are reported in other interest expense on deposits and other borrowings, the derivatives are reported within net income on financial instruments hedging liabilities.
Debt securities in issue include interest that we pay on certificates of deposit, time deposits, commercial paper and medium-term notes. In the six months ended September 30, 2015, interest expense on debt securities in issue decreased by 9.5% to £335 million from £370 million in the six months ended September 30, 2014. This decrease reflects an 8.8% increase in the average monthly balance of debt securities in issue to £31,773 million in the six months ended September 30, 2015, compared with £29,194 million in the six months ended September 30, 2014.
We use derivative instruments to synthetically convert fixed rate liabilities to floating rate liabilities. The floating rate expense and fixed rate income on these derivatives are included as "net income on financial instruments hedging liabilities." In the six months ended September 30, 2015, net income on financial instruments used to hedge our liabilities was £349 million, compared with a net income of 226 million in the six months ended September 30, 2014. The increase is due to derivatives hedging PEB deposits which matured during the period, as described above in "Interest expense and similar charges—On deposits and other borrowings".
The following table sets forth the components of net fees and commissions for the six months ended September 30, 2015 and 2014 respectively:
| For the six months ended September 30, |
||
|---|---|---|
| 2015 | 2014 | |
| (£ millions) | ||
| Total fee and commission income | 212 | 220 |
| Total fee and commission expense | (91) | (81) |
| Net fee and commission income | 121 | 139 |
Income from net fees and commissions consists of income that we earn from lending, banking and savings fees and insurance sales commissions less lending fees and commission expense.
In the six months ended September 30, 2015, net fees and commissions decreased by 12.9% to £121 million compared with £139 million in the six months ended September 30, 2014.
In the six months ended September 30, 2015, income from investments remained flat at £2 million, compared with £2 million in the six months ended September 30, 2014.
In the six months ended September 30, 2015, other operating income increased to £3 million, compared with £2 million in the six months ended September 30, 2014.
Underlying other income, which includes net fees and commissions, income from investments, and other operating income, is analysed by product type in the table below.
| For the six months ended September 30, |
||
|---|---|---|
| 2015 | 2014 | |
| (£ millions) | ||
| Current account | 38 | 50 |
| Protection and investments | 37 | 37 |
| General insurance | 37 | 39 |
| Mortgage | 4 | 6 |
| Credit card | 8 | 15 |
| Commercial | 7 | 8 |
| Gain on redemption of subscribed capital | - | - |
| Other | (5) | (12) |
| Total underlying other income | 126 | 143 |
Total underlying other income decreased by £17 million to £126 million for the six months ended September 30, 2015.
All derivatives we enter into are recorded on the balance sheet at fair value with any fair value movements accounted for in the income statement. Derivatives, our use of which is regulated by the UK Building Societies Act, are only used to limit the extent to which we could be affected by changes in interest rates, exchange rates or other factors specified in building society legislation. These derivatives are therefore used exclusively to hedge risk exposures and are not used for speculative purposes.
Gains from derivatives and hedge accounting were £14 million in the six months ended September 30, 2015 compared to gains of £6 million in the six months ended September 30, 2014. 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 period on period volatility is therefore largely attributable to accounting rules which do not fully reflect the economic reality of the Group's hedging strategy.
Included within the gain of £14 million (September 30, 2014: £6 million) was the impact of the following:
Operating expenses and similar charges decreased to £895 million in the six months ended September 30, 2015 from £997 million in the six months ended September 30, 2014. The following table sets forth the components of operating expenses and similar charges for the six months ended September 30, 2015 and 2014, respectively:
| For the six months ended September 30, |
||
|---|---|---|
| 2015 | 2014 | |
| (£ millions) | ||
| Administrative expenses | 711 | 676 |
| Depreciation and amortization | 155 | 144 |
| Impairment losses on loans and advances to customers | - | 156 |
| Provisions for liabilities and charges | 29 | 8 |
| Impairment losses on investment securities | - | 13 |
| Total | 895 | 997 |
Administrative expenses increased by 5.2% in the six months ended September 30, 2015 to £711 million from £676 million in the six months ended September 30, 2014 largely driven by ongoing investment in the business and increasing employee costs.
The following table sets forth the components of administrative expenses for the six months ended September 30, 2015 and 2014, respectively:
| For the six months ended September 30, |
|||
|---|---|---|---|
| 2015 | 2014 | ||
| (£ millions) | |||
| Employee costs: | |||
| Salaries, bonuses and social security costs | 295 | 288 | |
| Pension costs | 54 | 42 | |
| Other administrative expenses | 362 | 346 | |
| Total | 711 | 676 |
Employee costs are made up of salaries, bonuses, social security costs (which consist entirely of mandatory UK national insurance contributions) and pension costs.
We operate both defined benefit and defined contribution arrangements. The principal defined benefit pension arrangement is the Nationwide Pension Fund (the "Fund"). This is a contributory defined benefit arrangement, with both final salary and career average revalued earnings ("CARE") sections. The Fund was closed to new entrants in 2007, and since then new employees have been able to join a defined contribution arrangement. The final salary section of the Fund was closed to future service on March 31, 2011. Service already built up in the final salary section will continue to be linked to final salary, while future benefits now accrue within the CARE section.
In the six months ended September 30, 2015, salaries and social security costs increased by 2.4% to £295 million from £288 million in the six months ended September 30, 2014. The six months on six months increase in employee costs reflects the impact of annual pay awards averaging 3.0% and 2.5% respectively in each of the last two years, combined with a 1.9% increase in employee numbers six months on six months.
Within employee costs, the pension charge increased by 28.6% to £54 million for the six months ended September 30, 2015 from £42 million in the six months ended September 30, 2014. Other administrative costs increased by 4.6% to £362 million for the six months ended September 30, 2015 from £346 million for the six months ended September 30, 2014. 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.
For the six months ended September 30, 2015 depreciation and amortization expenses increased by £11 million to £155 million compared to £144 million for the six months ended September 30, 2014. This is primarily driven by the continued investment in key restructuring projects.
We assess at each balance sheet date whether, as a result of one or more events that occurred after initial recognition, there is objective evidence that a financial asset or group of assets is impaired. Evidence of impairment may include indications that a borrower or group of borrowers is experiencing significant financial difficulty or default or delinquency in interest or principal payments.
The following table analyzes the impairment losses on loans and advances to customers for the six months ended September 30, 2015 and 2014, respectively:
| For the six months ended September 30, |
||||
|---|---|---|---|---|
| 2015 | 2014 | |||
| (£ millions) | ||||
| Residential mortgages | (7) | 13 | ||
| Commercial lending | 33 | 49 | ||
| Consumer banking | (27) | 73 | ||
| Other lending | 1 | 21 | ||
| Total | - | 156 |
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 the positive economic conditions and the prudent nature of our mortgage lending. Combined with moderate house price growth in the period, the residential provisions requirement has fallen in the period. This decline in combination with net write offs has resulted in a net release of incurred loss provisions of £7 million in the six months ended September 30, 2015.
Consumer banking impairments of £33 million for the six months ended September 30, 2015 are £16 million lower than for the six months ended September 30, 2014. 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) and improvements made to our collections and recoveries processes.
The six months ended September 30, 2015 have 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 the year ended April 4, 2015 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 reversal of £27 million in the six months ended September 30, 2015 versus a £73 million charge in the six months ended September 30, 2014 which reflected deleveraging activity. The level of impaired balances as a proportion of our total CRE exposure has fallen from 15.0% for the year ended September 30, 2014 to 8.7% for the six months ended September 30, 2015, reflecting the deleveraging and resolution of impaired assets.
The 'other lending' impairment charge of £1 million relates to an individual treasury asset which is now fully impaired.
There were no impairment losses on investment securities for the six months ended September 30, 2015 (six months ended September 30, 2014: £13 million losses).
Provisions for liabilities and charges
| For the six months ended September 30, |
||
|---|---|---|
| 2015 | 2014 | |
| (£ millions) | ||
| FSCS | 5 | 4 |
| Customer redress provision | 24 | 4 |
| Total | 29 | 8 |
The charge for customer redress provisions of £24 million in the six months ended September 30, 2015 (September 30, 2014: £4 million) 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.
We pay levies to the FSCS based upon our share of protected deposits. The charge of £5 million for FSCS levies represents an increase in interest for the 2015/16 scheme year, initially provided at April 4, 2015. The charge for 2016/17 will be recognised in the second half of the year.
The statutory reported tax charge for the year of £166 million in the year ended September 30, 2015 (September 30, 2014: £112 million) represents an effective tax rate of 20.7%, which is higher than the statutory rate in the UK of 20%. The higher rate is due principally to expenses not deductible for tax purposes.
This resulted in an overall statutory tax charge for the six months ended September 30, 2015 of £166 million (six months ended September 30, 2014: £112 million) as set out in the table below:
| For the six months ended September 30, |
||
|---|---|---|
| 2015 | 2014 | |
| (£ millions) | ||
| Charge on profits for the year | 166 | 133 |
| Adjustment in respect of prior years | - | (14) |
| Effect of corporation tax rate change | - | (7) |
| Statutory tax charge | 166 | 112 |
Weighted average total assets grew by 3.1% as the growth in retail lending outstripped reductions in non-core treasury and commercial lending balances.
Lending remains predominantly concentrated on high quality secured products, with residential mortgages accounting for 90.7% of our total loans and advances to customers at September 30, 2015. This is an increase from 90.0% as at April 4, 2015, reflecting the Group's strategy of exiting non-core commercial lending:
| As at September 30, 2015 | As at April 4, 2015 | |||
|---|---|---|---|---|
| (£ billions, except percentages) | ||||
| Prime residential mortgages | 127.3 | 73.5% | 124.6 | 73.4% |
| Specialist residential mortgages | 29.7 | 17.2% | 28.3 | 16.6% |
| Total residential mortgages | 157.0 | 90.7% | 152.9 | 90.0% |
| Commercial lending | 12.4 | 7.1% | 13.2 | 7.8% |
| Other lending | - | - | - | - |
| Consumer banking | 3.8 | 2.2% | 3.8 | 2.2% |
| Gross balances | 173.2 | 100.0% | 169.9 | 100.0% |
| Impairment provisions | (0.4) | (0.7) | ||
| Fair value adjustments for micro hedged risk | 1.3 | 1.4 | ||
| Total | 174.1 | 170.6 |
Prime residential mortgages are primarily Nationwide-branded advances made through our branch network and intermediary channels.
Residential mortgages include prime and specialist loans, with the specialist portfolio primarily comprising buy-to-let lending.
Mortgage balances grew by £4.1 billion in the six months ended September 30, 2015 of which £2.7 billion was prime lending and £1.4 billion related to specialist mortgages.
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 mortgages 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 (September 30, 2014: £13.1 billion), representing a market share of 13.2% (September 30, 2014: 12.2%). The Group remains the second largest mortgage lender in the UK.
In addition to our support for first time buyers, we have continued with our policy of rewarding our members by providing a loyalty discount to our mortgage rates to existing mortgage customers wishing to move homes, switch products or take a further advance. We have also maintained our BMR at 2% above the BoE base rate.
As patterns of housing tenure continue to evolve, with greater numbers of people choosing to rent rather than buy, our subsidiary, The Mortgage Works (UK) plc ("TMW"), has continued to be a leading provider of high quality loans to the specialist mortgages sector. Our total specialist mortgage book now stands at £29.7 billion at September 30, 2015 (April 4, 2014: £28.3 billion), representing 18.9% of our total residential lending portfolio at September 30, 2015 (April 4, 2015: 18.5%).
As at September 30, 2015, buy-to-let mortgages made up 87.4% of total specialist lending, 8.4% related to self-certification mortgages, 3.0% related to near prime and 1.2%, amounting to £0.4 billion, related to subprime.
| As at September |
As at April 4, 2015 |
|
|---|---|---|
| 30, 2015 | ||
| (percentages) | ||
| LTV portfolio of residential mortgages: | ||
| 0% - 60% | 26 | 26 |
| 60% - 75% | 43 | 42 |
| 75% - 80% | 9 | 10 |
| 80% - 85% | 11 | 10 |
| 85% - 90% | 10 | 11 |
| 90% - 95% | 1 | 1 |
| >95% | - | - |
| Total | 100 | 100 |
| Average loan to value of stock (indexed) | 55 | 56 |
| Average loan to value of new business | 69 | 66 |
| New business profile: | ||
| First-time buyers | 27 | 26 |
| Home movers | 32 | 32 |
| Remortgagers | 20 | 23 |
| Buy-to-let | 20 | 18 |
| Other | 1 | 1 |
| Total | 100 | 100 |
The analysis of the new business profile and the average LTV for new business excludes further advances.
Total residential balance sheet provisions at September 30, 2015 are £86 million, compared with £110 million at April 4, 2015.
| As at September |
As at April 4, 2015 |
||
|---|---|---|---|
| 30, 2015 | |||
| Cases three months or more in arrears as % of total book of residential | (percentages) | ||
| mortgages | |||
| Group residential mortgages: | |||
| Prime | 0.35 | 0.36 | |
| Specialist | 1.00 | 1.12 | |
| Total Group residential mortgages | 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% (April 4, 2015: 1.30% as reported by CML).
The table below shows possessions as a percentage of our total residential mortgages as at September 30, 2015 and April 4, 2015:
| As at September 30, 2015 |
As at April 4, 2015 |
||
|---|---|---|---|
| Possessions as % of total residential mortgages (number of properties) |
(percentages) | ||
| Group residential mortgages: | |||
| Prime | 0.01 | 0.01 | |
| Specialist | 0.08 | 0.10 | |
| Total Group residential mortgages | 0.02 | 0.03 |
Our approach to dealing with customers in financial difficulties, combined with our historically cautious approach to lending, means that we only take possession of properties as a last resort. This is illustrated by the number of properties taken into possession compared with the total for the industry. During the six months ended September 30, 2015, the properties taken into possession decreased to 286, representing only 0.02% of the Group's.
The table below provides further information on the residential mortgage portfolio by payment due status as at September 30, 2015 and April 4, 2015:
| As at September 30, 2015 | As at April 4, 2015 | |||||||
|---|---|---|---|---|---|---|---|---|
| Prime lending |
Specialist lending |
Total | Prime lending |
Specialist lending |
Total | |||
| (£ billions, except percentages) | ||||||||
| Not impaired: | ||||||||
| Neither past due nor impaired |
125.2 | 28.4 | 153.6 | 98% | 122.5 | 26.9 | 149.4 | 98% |
| Past due up to 3 months but not |
||||||||
| impaired | 1.7 | 0.8 | 2.5 | 1% | 1.7 | 0.9 | 2.6 | 1% |
| Impaired | 0.4 | 0.5 | 0.9 | 1% | 0.4 | 0.5 | 0.9 | 1% |
| Charged off(1) | - | - | - | - | - | - | - | - |
| Total | 127.3 | 29.7 | 157.0 | 100% | 124.6 | 28.3 | 152.9 | 100% |
Notes:
(1) Charged off balances are balances on accounts which are closed to future transactions. An amendment was made in 2014 to hold these accounts on the balance sheet for an extended period whilst recovery procedures take place (currently these balances are held for a maximum of up to 36 months, depending upon the product).
The status "past due up to 3 months but not impaired" includes any asset where a payment due is received late or missed. The amount included is the entire financial asset balance rather than just the payment overdue. Loans on interest only or payment holiday concessions are initially categorized according to their payment status as at the date of concession, with subsequent revisions to this category assessed against the terms of the concession.
Loans which are not in possession have collective impairment provisions set aside to cover credit losses.
Loans in the analysis above which are less than three months past due have collective impairment allowances set aside to cover credit losses on loans which are in the early stages of arrears. Loans acquired from the Derbyshire, Cheshire and Dunfermline building societies were fair valued on a basis which made credit loss adjustments for anticipated losses over the remaining life of the loans. Impaired retail loans are broken down further in the following table:
| As at September 30, 2015 | As at April 4, 2015 | |||||||
|---|---|---|---|---|---|---|---|---|
| Prime lending |
Specialist lending |
Total | Prime lending |
Specialist lending |
Total | |||
| (£ billions, except percentages) | ||||||||
| Impaired status: | ||||||||
| Past due 3 to 6 | ||||||||
| months………. | 178 | 194 | 372 | 45% | 190 | 207 | 397 | 45% |
| Past due 6 to 12 months………. |
120 | 123 | 243 | 30% | 120 | 143 | 263 | 29% |
| Past due over 12 | ||||||||
| months………. | 66 | 94 | 160 | 19% | 72 | 97 | 169 | 19% |
| Possessions… | 8 | 40 | 48 | 6% | 14 | 52 | 66 | 7% |
| Total . | 372 | 451 | 823 | 100% | 396 | 499 | 895 | 100% |
We offer a number of support options to both secured and unsecured customers. The credit policies and provisioning treatment relating to these activities have been proactively reviewed over the six months ended September 30, 2015 to ensure alignment to good practice as defined by the regulator. The options offered may be classified into three categories:
Changes in terms relate to a concession or permanent change, which results in amended monthly cash flows, these are not offered as a means of forbearance. The options available include:
Performing customers with loans on standard terms and conditions effective before March 2010, who are not experiencing financial difficulty and meet required criteria (including credit score), are permitted to apply for a payment holiday and make reduced or nil payments for an agreed period of time of up to 12 months. £3,643 million of loans have been subject to payment holidays at any point since January 2008 and are still on the balance sheet as at September 30, 2015 (April 4, 2015: £3,890 million). The performance of loans on payment holiday is in line with that of the wider portfolio and therefore no adjustment is made to the Group's provisioning methodology for these loans.
The Group allows performing customers to apply to extend the term of their mortgage; £6,893 million of loans have been subject to term extensions at any point since January 2008 and are still on the balance sheet as at September 30, 2015 (April 4, 2015: £7,065 million). Performance of term extensions is in line with that of the wider portfolio and therefore no adjustment is made to the Group's provisioning methodology for these loans.
Customers in arrears may be offered a temporary payment concession allowing them to make reduced or nil payments for an agreed period of time. £975 million of loans have been subject to payment concessions at any point since January 2008 and are still on the balance sheet as at September 30, 2015 (April 4, 2015: £989 million).
Historically, performing customers who met specific criteria could apply for a permanent interest only conversion, normally reducing their monthly commitment. Following tightening of the Group's policy, this facility was completely withdrawn in March 2012, although a temporary interest only arrangement may be available under forbearance as described below. The performance of interest only conversions is in line with that of the wider portfolio and therefore no adjustment is made to the Group's provisioning methodology for these loans.
The only forbearance option which we offer customers in financial distress is an interest-only concession. Interest-only concessions are offered to customers on a temporary basis with formal periodic review subject to an affordability assessment. The concession allows the customer to reduce monthly payments to cover interest only, typically for six months, and if made, the arrears status of the account will not increase and will remain as at the beginning of the concession.
The Group offers two forms of repair, capitalization and term extension (at term expiry), as set out below.
When a customer emerges from financial difficulty, the Group offers the ability to capitalise arrears, resulting in the account being repaired. Once capitalised, the loans are categorised as not impaired as long as contractual repayments are maintained.
Customers on interest only mortgages who are unable to repay their capital at term expiry may be offered a term extension. These extensions are typically on a capital and interest basis over a relatively short term, normally less than five years, and aim to recover the outstanding balance as quickly as possible whilst ensuring the monthly payment remains manageable to the customer. No provisioning methodology adjustment is made for these accounts as a result of the low balance and LTV profile.
The options outlined above apply predominantly to the prime originated portfolio. The table below shows the stock of loans still on the balance sheet as at September 30, 2015 that have been subject to change in terms, forbearance or repair at some point:
| As at September 30, 2015 (Unaudited) |
As at April 4, 2015 (Unaudited) |
|||
|---|---|---|---|---|
| £ million | % of total prime loans and advances |
£ million | % of total prime loans and advances |
|
| Change in terms | 11,951 | 8 | 12,213 | 8 |
| Forbearance | 1,606 | 1 | 1,598 | 1 |
| Repair | 1,090 | 1 | 910 | 1 |
Our commercial lending portfolio of £12.4 billion as at September 30, 2015 (April 4, 2015: £13.2 billion) comprises £3.3 billion secured on commercial property ("Property Finance") (April 4, 2015: £4.0 billion), £7.7 billion advanced to Registered Social Landlords (April 4, 2015: £7.8 billion) and £1.4 billion advanced under Project Finance, principally via the Private Finance Initiative ("PFI") (April 4, 2015: £1.4 billion). Our Property Finance portfolio is diverse both in terms of sectors and geographic spread.
The portfolio is actively monitored for evidence of impairment by reference to a range of factors, which include significant financial difficulty of the borrower, payment default, granting of a concession in accordance with our forbearance policies or other circumstances indicating the likelihood of a material change in cash flow expectations. Impaired Property Finance loans amounted to £287 million as at September 30, 2015 (April 4, 2015: £608 million) and provisions held against the portfolio amounted to £128 million (April 4, 2015: £322 million) representing a coverage ratio of 45% (April 4, 2015: 53%).
The proportion of our Property Finance balances classified as impaired and the provision coverage against these balances are shown below:
| As at | ||
|---|---|---|
| September 30, 2015 |
As at April 4, 2015 |
|
| (£ million, except percentages) | ||
| Gross balances | 3,302 | 4,043 |
| Impaired balances | 287 | 608 |
| Impaired balances as a % of gross balances | 9% | 15% |
| Commercial provisions: | ||
| Individual | 121 | 313 |
| Collective | 7 | 9 |
| Total provisions | 128 | 322 |
| Provision coverage ratios: | ||
| Individual provisions as a % of impaired balances | 42% | 51% |
| Total provisions as a % of impaired balances | 45% | 53% |
| Total provisions as a % of total gross balances | 4% | 8% |
Estimated (indexed) collateral values in relation to the impaired balances disclosed above amounted to £199 million (69% of impaired balances) as at September 30, 2015 and £367 million (60% of impaired balances) as at April 4, 2015. The registered social landlord and Project Finance portfolios are fully performing and remain stable.
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 Nationwide'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 total other lending portfolio of £39 million as at September 30, 2015 (April 4, 2015: £29 million) represents 0.02% (April 4, 2015: 0.02%) of the Group's loans and advances to customers. 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 table below provides further information on commercial property and other lending operations by payments due status:
| As at September 30, 2015 | As at April 4, 2015 | |||||||
|---|---|---|---|---|---|---|---|---|
| Commercial | Other lending | Commercial | Other lending | |||||
| (£ billion, except percentages) | ||||||||
| Neither past due nor impaired | 3.0 | 91% | - | 100% | 3.3 | 83% | - | 100% |
| Past due up to 3 months but not | ||||||||
| impaired | - | - | - | - | 0.1 | 2% | - | - |
| Impaired | 0.3 | 9% | - | - | 0.6 | 15% | - | - |
| Total | 3.3 | 100% | - | 100% | 4.0 | 100% | - | 100% |
The status "past due up to three months but not impaired" includes any asset where a payment due under strict contractual terms is received late or missed. The amount included is the entire financial asset rather than just the payment overdue.
Loans in the analysis above which are less than three months past due have collective impairment allowances set aside to cover credit losses.
Impaired balances in other operations total £10 million as at September 30, 2015 (April 4, 2015: £10 million).
Impaired commercial and other lending operations assets are further analyzed as follows:
| As at September 30, 2015 | As at April 4, 2015 | |||||||
|---|---|---|---|---|---|---|---|---|
| Other Commercial operations |
Commercial | Other operations |
||||||
| (£ million, except percentages) | ||||||||
| Impaired status: | ||||||||
| Past due 0 to 3 months | 185 | 65% | 5 | 50% | 413 | 68% | 5 | 50% |
| Past due 3 to 6 months | 21 | 7% | - | - | 59 | 10% | - | - |
| Past due 6 to 12 months | 22 | 7% | - | - | 56 | 9% | - | - |
| Past due over 12 months | 55 | 19% | 5 | 50% | 79 | 13% | 5 | 50% |
| Possessions | 4 | 2% | - | - | 1 | - | - | - |
| Total | 287 | 100% | 10 | 100% | 608 | 100% | 10 | 100% |
Impaired loans include those balances which are more than three months in arrears, or have a provision against them.
Possession balances represent loans against which we have taken ownership of properties pending their sale. Assets over which possession has been taken are realized in an orderly manner via open market or auction sales to derive the maximum benefit for all interested parties, and any surplus proceeds are distributed in accordance with the relevant insolvency regulations. The Group does not occupy or otherwise use for any purposes the repossessed assets.
Although collateral can be an important mitigant of credit risk, it is our practice to lend on the basis of the customer's ability to meet their obligations out of cash flow resources rather than rely on the value of the security offered. In the event of default, we may use the collateral as a source of repayment.
Primary collateral is a fixed charge over freeholder or long leasehold properties, but may be supported by other liens, floating charges over company assets and, occasionally, unsupported guarantees. The collateral will have a significant effect in mitigating our exposure to credit risk.
The table below quantifies the estimated value of indexed collateral held against non-performing or impaired assets:
| As at September 30, 2015 |
As at April 4, 2015 |
|||
|---|---|---|---|---|
| (£ million, except percentages) | ||||
| Past due but not impaired | 45 | 100% | 77 | 100% |
| Impaired | 199 | 69% | 367 | 60% |
| Total | 244 | 73% | 444 | 65% |
The percentage, in the table above, is the cover over the asset. The indexed collateral value is based on the most recent valuation indexed using the Investment Property Databank ("IPD") monthly index for the relevant property sector. The indexed value of the collateral is based on the most recent formal valuation. We reserve the right to request a revaluation of any property currently charged in support of facilities advanced or upon an act of default. Although a revaluation is not automatically obtained, the merits of obtaining a revaluation are considered at each facility review and whenever a report is submitted to the Group Risk Division.
Collateral held in relation to secured loans that are either past due or impaired is capped at the amount outstanding on an individual loan basis.
Particular attention is paid to the status of the facilities, for instance whether it is or is likely to require an impairment review, where our assessment of potential loss would benefit from updated valuations, or there are factors affecting the property that might alter the case assessment and the most appropriate action to take.
The table below shows CRE lending balances by loan to value:
| As at September 30, 2015 |
As at April 4, 2015 |
|||||
|---|---|---|---|---|---|---|
| (unaudited) | (£ million, except percentages) | |||||
| Performing loans | ||||||
| Fully collateralized | ||||||
| LTV ratio: | ||||||
| less than 25% | 204 | 321 | ||||
| 25% to 50% | 1,586 | 1,417 | ||||
| 51% to 75% | 942 | 1,208 | ||||
| 76 to 90% | 212 | 362 | ||||
| 91% to 100% | 15 | 23 | ||||
| Total | 2,959 | 90% | 3,331 | 82% | ||
| Partially collateralized | ||||||
| More than 100% (A) | 11 | - | 27 | 1% | ||
| Collateral value of (A) | 8 | 25 | ||||
| Negative equity on (A) | 3 | 2 | ||||
| Total performing loans | 2,970 | 90% | 3,358 | 83% | ||
| Non-performing loans Fully collateralized |
||||||
| LTV ratio: | ||||||
| less than 25% | 2 | 1 | ||||
| 25% to 50% | 27 | 52 | ||||
| 51% to 75% | 29 | 45 | ||||
| 76 to 90% | 36 | 50 | ||||
| 91% to 100% | 19 | 31 | ||||
| Total | 113 | 3% | 179 | 4% | ||
| Partially collateralized | ||||||
| More than 100% (A) | 219 | 7% | 506 | 13% | ||
| Collateral value of (A) | 131 | 265 | ||||
| Negative equity of (A) | 88 | 241 | ||||
| Total non-performing loans | 332 | 10% | 685 | 17% | ||
| Total CRE loans | 3,302 | 100% | 4,043 | 100% |
The overall proportion of partially collateralized non-performing loans has reduced to 7% in the six months ended September 30, 2015 (April 4, 2015: 13%) and the shortfall on collateral for non-performing CRE loans has reduced by £153 million during the six months ended September 30, 2015 to £88 million (April 4, 2015: £241 million).
The level of negative equity based upon the indexation of property values for the non-performing and impaired assets is detailed below:
| As at September 30, 2015 |
As at April 4, 2015 |
|
|---|---|---|
| (£ million) | ||
| Past due but not impaired | - | - |
| Impaired | 84 | 240 |
| Possessions | 4 | 1 |
| Total | 88 | 241 |
Consumer banking comprises retail balances relating to personal loans of £1.8 billion (April 4, 2015: £1.8 billion), credit cards of £1.8 billion (April 4, 2015: £1.8 billion) and current account overdrafts of £0.2 billion (April 4, 2015: £0.2 billion).
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.
| As at September 30, 2015 | ||||||
|---|---|---|---|---|---|---|
| Italy | Portugal | Spain | Total | |||
| (£ million) | ||||||
| Mortgage backed securities | 41 | 24 | 192 | 257 | ||
| Covered bonds | - | - | 29 | 29 | ||
| Other corporate | 3 | - | - | 3 | ||
| Total | 44 | 24 | 221 | 289 |
| As at April 4, 2015 | |||||
|---|---|---|---|---|---|
| Italy | Portugal | Spain | Total | ||
| (£ million) | |||||
| Mortgage backed securities | 45 | 32 | 206 | 283 | |
| Covered bonds | - | - | 29 | 29 | |
| Other corporate | 3 | - | - | 3 | |
| Total | 48 | 32 | 235 | 315 |
Movements in our exposure to peripheral eurozone countries between the years ended April 4, 2015 and September 30, 2015 relate to disposals, maturities and fair value movements. There has been no new investment in the current financial year.
None of our exposures to the peripheral eurozone countries are in default, and we did not incur any impairment on these assets in the six months ended September 30, 2015. We continue to monitor closely the exposures to these countries. In addition, our exposure in respect of other eurozone countries and the rest of the world is shown below at their balance sheet carrying value as at September 30, 2015:
| As at September 30, 2015 (£ million) | ||||||||
|---|---|---|---|---|---|---|---|---|
| Finland | France | Germany | Netherlands | Total eurozone |
USA | Rest of the world |
Total | |
| (£ million) | ||||||||
| Government bonds . | 228 | - | 237 | 404 | 869 | 672 | - | 1,541 |
| Mortgage backed securities |
- | - | - | 528 | 528 | 39 | 19 | 586 |
| Covered bonds | 20 | 97 | 19 | 26 | 162 | - | 353 | 515 |
| Senior debt | - | - | - | - | - | - | 603 | 603 |
| Loans to banks | - | 155 | 178 | - | 333 | 363 | 825 | 1,521 |
| Other assets | - | 83 | 151 | - | 234 | 310 | - | 544 |
| Other corporate | - | 7 | - | 3 | 10 | - | - | 10 |
| Total | 248 | 342 | 585 | 961 | 2,136 | 1,384 | 1,800 | 5,320 |
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.
We believe that our results indicate a strong performance for the year ended April 4, 2015 with an underlying profit before tax (as explained below) of £1,216 million, and a statutory profit before tax of £1,044 million.
Underlying profit before tax (as explained below) for the year ended April 4, 2015 is up 32% at £1,216 million from £924 million for the year ended April 4, 2014. Total income increased by 11% to £3,143 million in the year ended April 4, 2015, as compared to the year ended April 4, 2014.
Increased profitability has been driven mainly by the continued improvement in net interest income and reduced impairment losses and provisions for liabilities and charges, offset in part by increased administrative expenses and lower other income.
Underlying administrative expenses have increased by 7% to £1,626 million, reflecting ongoing investment in the business and increased employee costs. At a statutory level administrative expenses have increased by 6% to £1,706 million.
Between the years ended April 4, 2014 and 2015, the increase in employee costs reflects the impact of annual pay awards averaging 2.4% and 2.5% respectively in each of the last two years, and growth in bonus costs of £14 million driven by improving business performance and higher numbers of employees. Employee headcount has increased by 1.9% in the year ended April 4, 2015 as we continue to strengthen Risk and Control functions in light of the evolving regulatory agenda and build business capability to support our developing digital strategy.
Other administrative expenses have increased by £60 million for the year ended April 4, 2015. This reflects continued enhancement of our digital capability, including Nationwide Now, mobile and tablet banking, together with investment in IT systems, regulatory programs and brand development. The reported year on year increase is net of cost savings realised from integration of the regional brands and a reduction in administration costs for activity in relation to customer complaints.
Transformation costs of £52 million for the year ended April 4, 2015 relate to investment to enable IT support and development to be delivered in a more efficient and resilient manner, combined with investment related to the integration of the Dunfermline, Cheshire and Derbyshire brands. As these investments are nearing completion, related transformation costs are expected to reduce significantly in future periods.
Across the year, underlying income growth has run ahead of cost growth, resulting in an improvement in both the statutory and underlying cost income ratios to 54.3% (2014: 56.6%) and 51.6% (2014: 52.5%) respectively.
Performance of the mortgage portfolios continues to improve with the number of residential mortgages more than three months in arrears reducing in both the prime and specialist mortgage books. 0.49% of the Group's mortgages are more than three months in arrears, which compares favourably to the Council of Mortgage Lenders (the "CML") industry average of 1.30%.
Profit before tax on a reported basis and underlying basis are set out below. Certain aspects of our results are presented to reflect management's view of the underlying results and to provide a clearer representation of our performance:
| For the Year ended April 4, 2015 | ||||||
|---|---|---|---|---|---|---|
| Statutory profit |
FSCS and bank levy |
Transformation Costs |
Losses from derivatives and hedge accounting |
Underlying profit |
||
| (£ millions) | ||||||
| Net interest income | 2,861 | - | - | - | 2,861 | |
| Other income | 291 | - | - | - | 291 | |
| Movements on derivatives and hedge accounting |
(9) | - | - | 9 | - | |
| Total income | 3,143 | - | - | 9 | 3,152 | |
| Administrative expenses | (1,706) | 28 | 52 | - | (1,626) | |
| Pre-provision underlying profit |
1,437 | 28 | 52 | 9 | 1,526 | |
| Impairment losses | (251) | - | - | - | (251) | |
| Provisions for liabilities and charges |
(142) | 83 | - | - | (59) | |
| Profit before tax | 1,044 | 111 | 52 | 9 | 1,216 |
| Statutory profit |
FSCS and bank levy |
Transformation Costs |
Losses from derivatives and hedge accounting |
Underlying profit |
|||
|---|---|---|---|---|---|---|---|
| (£ millions) | |||||||
| Net interest income | 2,403 | - | - | - | 2,403 | ||
| Other income | 492 | - | - | - | 492 | ||
| Movements on derivatives and | |||||||
| hedge accounting | (51) | - | - | 51 | - | ||
| Total income | 2,844 | - | - | 51 | 2,895 | ||
| Administrative expenses | (1,611) | 17 | 75 | - | (1,519) | ||
| Pre-provision underlying | |||||||
| profit | 1,233 | 17 | 75 | 51 | 1,376 | ||
| Impairment losses | (383) | - | - | - | (383) | ||
| Provisions for liabilities and | |||||||
| charges | (173) | 104 | - | - | (69) | ||
| Profit before tax | 677 | 121 | 75 | 51 | 924 |
_____________
The following discussion considers our results for the year ended April 4, 2015 compared to our results for the year ended April 4, 2014:
Our total income increased to £3,143 million in the year ended April 4, 2015 compared to £2,844 million in the year ended April 4, 2014. The following table sets forth the components of income for the years ended April 4, 2015 and 2014, respectively:
| For the year ended April 4, | ||
|---|---|---|
| 2015 | 2014 | |
| (£ millions) | ||
| Net interest income | 2,861 | 2,403 |
| Net fees and commissions | 278 | 354 |
| Income from investments | 4 | 4 |
| Other operating income | 9 | 134 |
| Gains/(losses) from derivatives and hedge accounting | (9) | (51) |
| Total | 3,143 | 2,844 |
Net interest income increased by 19% to £2,861 million for the year ended April 4, 2015 compared with £2,403 million for the year ended April 4, 2014.
The following table sets forth the components of net interest income for the years ended April 4, 2015 and 2014, respectively:
| For the year ended April 4, | ||
|---|---|---|
| 2015 | 2014 | |
| (£ millions) | ||
| Interest and similar income: | ||
| On residential mortgages | 4,981 | 4,825 |
| On other loans | 953 | 1,039 |
| On investment securities | 412 | 396 |
| On other liquid assets | 28 | 38 |
| Net (expense) on financial instruments hedging assets | (1,027) | (1,003) |
| Total interest and similar income | 5,347 | 5,295 |
| Interest expense and similar charges: | ||
| On UK retail member deposits | (1,897) | (2,250) |
| On subscribed capital | (42) | (59) |
| On deposits and other borrowings: | ||
| Subordinated liabilities | (115) | (129) |
| Other | (171) | (167) |
| Debt securities in issue | (725) | (814) |
| Foreign exchange differences | (11) | (28) |
| Net income on financial instruments hedging liabilities | (481) | 570 |
| Pension interest cost | (6) | (15) |
| Total interest expense and similar charges | (2,486) | (2,892) |
| Net interest income | 2,861 | 2,403 |
Interest and similar income increased by 1% to £5,347 million in the year ended April 4, 2014 from £5,295 million in the year ended April 4, 2014.
Interest on residential mortgages increased slightly by 3% to £4,981 million in the year ended April 4, 2015 from £4,825 million in the year ended April 4, 2014. This includes adjustments to reflect the changes in our effective interest rate assumptions, including a charge of £2 million (April 4, 2014: £20 million) in respect of an update of early redemption charges and a credit of £13 million (April 4, 2014: £12 million), which resulted from an update to the effective interest rate assumptions applicable to the recognition of mortgage fee income.
Interest on other loans includes interest income that we earn from commercial loans, credit card lending, unsecured personal loans and current account overdrafts. Interest on other loans decreased by 8% to £953 million in the year ended April 4, 2015 from £1,039 million in the year ended April 4, 2014.
Interest and other income from investment securities comprises interest income earned on the corporate and government investment securities that we purchase for our own account to manage our liquidity portfolios and net realized gains and losses on our sales of these instruments.
Interest and other income from investment securities increased by 4% to £412 million for the year ended April 4, 2015, compared with £396 million for the year ended April 4, 2014.
Derivative instruments are used to synthetically convert fixed rate assets to floating rate assets. The floating rate income and fixed rate expense on these derivatives are included as "net expense on financial instruments hedging assets." In the year ended April 4, 2015, we incurred a net expense of £1,027 million on financial instruments used to hedge our fixed rate assets, compared with a net expense of £1,003 million in the year ended April 4, 2014.
Interest expense and similar charges decreased by 14% in the year ended April 4, 2015 to £2,486 million from £2,892 million in the year ended April 4, 2014.
Interest on UK retail member deposits includes interest that we pay on UK savings and current accounts held by our members. Interest on UK retail member deposits decreased to £1,897 million in the year ended April 4, 2015 from £2,250 million in the year ended April 4, 2014.
The average interest rate that we paid to depositors decreased slightly to 1.4% for the year ended April 4, 2015 compared with 1.7% for the year ended April 4, 2014, which accounted for the majority of the decrease in interest paid. There was also an increase of 2% in the average balance of UK retail member deposits held to £133,095 million in the year ended April 4, 2015 from £130,196 million in the year ended April 4, 2014.
Over the previous twelve months we have increased our market share of the personal current account market to 6.8% as at April 4, 2015 (April 4, 2014: 6.2%). We have been a supporter and beneficiary of the drive to make account switching quicker and easier, averaging an 8.4% share of all account switching in the year ended April 4, 2015.
Interest expense on deposits and other borrowings includes interest that we pay on subordinated debt instruments and other deposits and borrowings. In the year ended April 4, 2015, interest on subordinated liabilities decreased to £115 million from £129 million in the year ended April 4, 2014. This decrease is a result of changes in the mix of subordinated debt and average balances between the two periods. Average balances decreased to £2,202 million in the year ended April 4, 2015 from £2,433 million in the year ended April 4, 2014.
Other interest expense on deposits and other borrowings includes the interest that we pay on retail deposits by non-members, deposits from other banks and other money market deposits. In the year ended April 4, 2015, other interest expense on deposits and other borrowings increased by 2% to £171 million from £167 million in the year ended April 4, 2014. This increase is due to increases in market rates in the year ended April 4, 2015, compared with the year ended April 4, 2014.
Debt securities in issue includes interest that we pay on certificates of deposit, time deposits, commercial paper and medium-term notes. In the year ended April 4, 2015, interest expense on debt securities in issue decreased by 10.9% to £725 million from £814 million in the year ended April 4, 2014. This decrease reflects a 6.5% decrease in the average monthly balance of debt securities in issue to £28,677 million in the year ended April 4, 2015, compared with £30,680 million in the year ended April 4, 2014.
We use derivative instruments to synthetically convert fixed rate liabilities to floating rate liabilities. The floating rate expense and fixed rate income on these derivatives are included as "net income/expense on financial instruments hedging liabilities." In the year ended April 4, 2015, net income on financial instruments used to hedge our fixed rate liabilities was £481 million, compared with a net income of £570 million in the year ended April 4, 2014.
The following table sets forth the components of net fees and commissions for the year ended April 4, 2015 and 2014 respectively:
| Group | 2015 | 2014 | ||||
|---|---|---|---|---|---|---|
| Income | Expense | Net | Income | Expense | Net | |
| (£ millions) | ||||||
| Current account and savings | 191 | (108) | 83 | 196 | (85) | 111 |
| General insurance | 88 | - | 88 | 101 | - | 101 |
| Protection and investments | 75 | - | 75 | 82 | - | 82 |
| Mortgage | 21 | (1) | 20 | 32 | (2) | 30 |
| Credit card | 67 | (41) | 26 | 70 | (41) | 29 |
| Other fees and commissions | 5 | (19) | (14) | 8 | (7) | 1 |
| Fee and commission | 447 | (169) | 278 | 489 | (135) | 354 |
Note:
(i) Certain presentational changes have been made to align the above table to management's view of the Group's operations. Total fee and commission income and fee and commission expense remain as previously stated.
Income from net fees and commissions consists of income that we earn from lending, banking and savings fees and insurance sales commissions less lending fees and commission expense.
In the year ended April 4, 2015, net fees and commissions decreased by 21% to £278 million compared with £354 million in the year ended April 4, 2014.
In the year ended April 4, 2015, other operating income decreased to £9 million, compared with £134 million in the year ended April 4, 2014, following the redemption of subscribed capital and redemption related fees (April 4, 2014: £125 million).
All derivatives we enter into are recorded on the balance sheet at fair value with any fair value movements accounted for in the income statement. Derivatives, our use of which is regulated by the UK Building Societies Act, are only used to limit the extent to which we could be affected by changes in interest rates, exchange rates or other factors specified in building society legislation. These derivatives are therefore used exclusively to hedge risk exposures and are not used for speculative purposes.
Where effective hedge accounting relationships can be established, the movement in the fair value of the derivative instrument is offset in full or in part by opposite movements in the fair value of the underlying asset or liability being hedged. Any ineffectiveness arising from different movements in fair value will likely trend to nil over time.
In addition, we enter into certain derivative contracts which, although efficient economically, cannot be included in effective hedge accounting relationships. Consequently, although the implicit interest cost of the underlying instrument and associated derivatives are included in "Net interest income" in the income statement, fair value movements on such derivatives are included in "Gains from derivatives and hedge accounting."
Losses from derivatives and hedge accounting were £9 million in the year ended April 4, 2015 compared to losses of £51 million in the year ended April 4, 2014. Income statement volatility arises due to accounting ineffectiveness of designated hedges, or because hedge accounting has not been adopted or is not achievable.
Included within the loss in the year ended April 4, 2015 was the impact of the following:
Losses of £46 million (April 4, 2014: £66 million) on fair value hedge relationships. The 2015 charge includes losses of £30 million (April 4, 2014: £1 million) on macro hedges and £16 million (April 4, 2014: £65 million) on micro hedges, resulting from increased sterling interest rate movements throughout the year, bond maturities and disposals;
| For the year ended April 4, | |||
|---|---|---|---|
| 2015 | 2014 | ||
| (£ millions) | |||
| Current account | 83 | 111 | |
| Protection and investments | 75 | 82 | |
| General insurance | 88 | 101 | |
| Mortgage | 20 | 30 | |
| Credit card | 26 | 29 | |
| Commercial | 15 | 17 | |
| Gain on redemption of subscribed capital | - | 125 | |
| Other | (16) | (3) | |
| Total | 291 | 492 |
Total underlying other income decreased by £201 million to £291 million for the year ended April 4, 2015, primarily due to a one-off profit during the prior year of £125 million relating to the redemption of subscribed capital.
Operating expenses and similar charges were stable in the year ended April 4, 2015 at £2,099 million compared to £2,167 million in the year ended April 4, 2014. The following table sets forth the components of operating expenses and similar charges for the years ended April 4, 2015 and 2014, respectively:
| For the year ended April 4, |
|||
|---|---|---|---|
| 2015 | 2014 | ||
| (£ millions) | |||
| Administrative expenses | 1,412 | 1,329 | |
| Depreciation and amortization | 294 | 282 | |
| Impairment losses on loans and advances to customers | 233 | 380 | |
| Provisions for liabilities and charges | 142 | 173 | |
| Impairment losses on investment securities | 18 | 3 | |
| Total | 2,099 | 2,167 |
Administrative expenses increased by 6% in the year ended April 4, 2015 to £1,412 million from £1,329 million in the year ended April 4, 2014 largely driven by ongoing investment in the business, general inflation and increased levels of business activity.
The following table sets forth the components of administrative expenses for the years ended April 4, 2014 and 2013, respectively:
| For the year ended April 4, |
|||
|---|---|---|---|
| 2015 | 2014 | ||
| (£ millions) | |||
| Employee costs: | |||
| Salaries and social security costs | 584 | 550 | |
| Pension costs | 87 | 86 | |
| Other administrative expenses | 741 | 693 | |
| Total | 1,412 | 1,329 |
Employee costs are made up of salaries, social security costs (which consist entirely of mandatory UK national insurance contributions) and pension costs.
We operate both defined benefit and defined contribution arrangements. The principal defined benefit pension arrangement is the Nationwide Pension Fund (the "Fund"). This is a contributory defined benefit arrangement, with both final salary and career average revalued earnings ("CARE") sections. The Fund was closed to new entrants in 2007, and since then new employees have been able to join a defined contribution arrangement. The final salary section of the Fund was closed to future service on March 31, 2011. Service already built up in the final salary section will continue to be linked to final salary, while future benefits now accrue within the CARE section.
In the year ended April 4, 2015, salaries and social security costs increased by 6% to £584 million from £550 million in the year ended April 4, 2014. The year on year increase in employee costs reflects the impact of annual pay awards averaging 2.4% and 2.5% respectively in each of the last two years, combined with a 1.9% increase in employee numbers year on year.
Within employee costs, the pension charge increased by 1% to £87 million for the year ended April 4, 2015 from £86 million in the year ended April 4, 2014. Other administrative costs increased by 7% to £741 million for the year ended April 4, 2015 from £693 million for the year ended April 4, 2014. This reflects continued enhancement of our digital capability, including Nationwide Now, mobile and tablet banking, together with investment in IT systems, regulatory programs and brand development. The reported year on year increase is net of cost savings realised from integration of the regional brands and a reduction in administration costs for activity in relation to customer complaints.
During the year, underlying income growth exceeded cost growth, resulting in an improvement in both the statutory and underlying cost income ratios to 54.3% (2014: 56.6%) and 51.6% (2014: 52.5%) respectively.
For the year ended April 4, 2015 depreciation and amortization expenses increased by £12 million to £294 million compared to £282 million for the year ended April 4, 2014. This is primarily driven by the continued investment in key restructuring projects.
We assess at each balance sheet date whether, as a result of one or more events that occurred after initial recognition, there is objective evidence that a financial asset or group of assets is impaired. Evidence of impairment may include indications that a borrower or group of borrowers is experiencing significant financial difficulty or default or delinquency in interest or principal payments.
Impairment losses on loans and advances to customers for the year ended April 4, 2015 decreased by 39% to £233 million from £380 million for the year ended April 4, 2014, primarily as a result of a significant improvement in the level of impairment suffered on our commercial lending portfolio.
The following table analyzes the impairment losses on loans and advances to customers for the years ended April 4, 2015 and 2014, respectively:
| For the year ended April 4, |
|||
|---|---|---|---|
| 2015 | 2014 | ||
| (£ millions) | |||
| Residential mortgages | 58 | - | |
| Commercial lending | 52 | 309 | |
| Consumer banking | 89 | 60 | |
| Other lending | 34 | 11 | |
| Total | 233 | 380 |
House price growth has decreased to 5.1% for the year ended April 4, 2015 from 9.5% for the year ended April 4, 2015 With interest rates remaining low and improvement in earnings growth, we have seen a continued decline in arrears levels throughout the year. The impairment charge for the year includes £44 million from updates to our credit risk provision assumptions which have been refined to reflect updated segmental analysis of losses across the book, while also taking into account the impact of the prolonged low interest rate environment.
Commercial lending impairments relate exclusively to CRE lending, with no arrears in our social housing and Project Finance portfolios. The decrease in the impairment charge to £52 million (April 4, 2014: £309 million) reflects continued stabilisation of the commercial real estate market and the implementation of our deleveraging strategy which has seen impaired balances reduce by £2.5 billion to £0.6 billion (April 4, 2014: £3.1 billion). The level of impaired balances as a proportion of our total CRE exposure has fallen from 39% for the year ended April 4, 2014 to 15% for the year ended April 4, 2015, reflecting the deleveraging and resolution of impaired assets.
Consumer banking impairments of £89 million are £29 million higher than for the year ended April 4, 2014, primarily as a result of a one-off credit included in 2014 of £27 million relating to an update to model assumptions for late state recoveries on defaulted balances. Excluding this adjustment, the underlying increase in consumer banking impairment is £2 million, consistent with stable underlying portfolio performance.
The 'other lending' impairment charge of £34 million and impairment losses on investment securities of £18 million relate to the out of policy treasury asset deleveraging activity undertaken during the year.
Impairment losses on investment securities of £18 million were recognized for the year ended April 4, 2015 (year ended April 4, 2014: £3 million losses).
Provisions for liabilities and charges
| For the year ended April 4, |
|||
|---|---|---|---|
| 2015 | 2014 | ||
| (£ millions) | |||
| FSCS | 83 | 104 | |
| Customer redress provision | 59 | 69 | |
| Total | 142 | 173 |
We pay levies to the FSCS based upon our share of protected deposits. The charge of £83 million for FSCS levies represents a decrease in interest for the 2014/15 scheme year, initially provided at April 4, 2014. The charge for 2015/16 will be recognised in the second half of the year. Further information is provided in Note 26 to the audited consolidated financial statements for the year ended April 4, 2015.
The charge for customer redress provisions of £59 million in the year ended April 4, 2015 (April 4, 2014: £69 million) relates to estimated 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 statutory reported tax charge for the year of £205 million in the year ended April 4, 2015 (April 4, 2014: £128 million charge) represents an effective tax rate of 19.6%, which is lower than the statutory rate in the UK of 21%. The lower rate is due principally to adjustments with respect to prior periods and the effect of the change in the UK corporation tax rate.
This resulted in an overall statutory tax charge for the year ended April 4, 2015 of £205 million (year ended April 4, 2014: £128 million) as set out in the table below:
| For the year ended April 4, |
||
|---|---|---|
| 2015 | 2014 | |
| (£ millions) | ||
| Charge on profits for the year | 228 | 161 |
| Adjustment in respect of prior years | (16) | (18) |
| Effect of corporation tax rate change | (7) | (15) |
| Statutory tax charge | 205 | 128 |
Weighted average total assets grew by just under 2% as the growth in retail lending outstripped reductions in non-core treasury and commercial lending balances.
Lending remains predominantly concentrated on high quality secured products, with residential mortgages accounting for 89.9% of our total loans and advances to customers at April 4, 2015. This is an increase from 87.3% as at April 4, 2014, reflecting the Group's strategy of exiting non-core commercial lending:
| As at April 4, 2015 | As at April 4, 2014 | ||||
|---|---|---|---|---|---|
| (£ billions, except percentages) | |||||
| Prime residential mortgages | 124.6 | 73.4% | 119.3 | 71.5% | |
| Specialist residential mortgages | 28.3 | 16.6% | 26.3 | 15.8% | |
| Total residential mortgages | 152.9 | 90.0% | 145.7 | 87.3% | |
| Commercial lending | 13.2 | 7.8% | 17.3 | 10.3% | |
| Other lending | - | - | 0.2 | 0.1% | |
| Consumer banking | 3.8 | 2.2% | 3.9 | 2.3% | |
| Gross balances | 169.9 | 100.0% | 167.0 | 100.0% | |
| Impairment provisions | (0.7) | (1.3) | |||
| Fair value adjustments for micro hedged risk | 1.4 | 0.9 | |||
| Total | 170.6 | 166.6 |
Prime residential mortgages are primarily Nationwide-branded advances made through our branch network and intermediary channels.
Residential mortgages include prime and specialist loans, with the specialist portfolio primarily comprising buy-to-let lending. Gross mortgage lending in the period was £27.1 billion (April 4, 2014: £28.1 billion), representing a market share of 13.4% (April 4, 2014: 11.6%).
Mortgage balances grew by £7.2 billion in the year ended April 4, 2015 of which £5.2 billion was prime lending and £2.0 billion related to specialist mortgages.
The past financial year saw a number of competing forces cause the near term outlook for the UK mortgage market to become less predictable and challenge consumer sentiment. The FCA's rules on consumer pre-screening for mortgage affordability ("Mortgage Market Review") went live in April 2014 with the greater requirements of affordability assessments lengthening processes and leading to some capacity constraints. First time buyers continued to benefit from the Government's Help to Buy schemes, while localised concerns of excessive house price inflation in London were addressed by the Financial Policy Committee imposing additional constraints on lenders. Sentiment was further affected by uncertainty over the Scottish Referendum and the UK general election, with the consequence being a marked slowing of activity during the second half of the financial year, despite a supportive macroeconomic background.
First time buyer activity in particular was subdued in the second half of our financial year, down around 13% compared with the first half. Alongside the market slowdown, competition amongst lenders has intensified in recent months, with new mortgage rates driven to record lows.
Total lending in the period reflected a recent flattening of the housing market, actions taken to moderate new mortgage applications during the implementation of mortgage regulation through the Mortgage Market Review to ensure customer service experience was maintained, and a more aggressive competitive environment. At 13.4% our market share of new business is broadly in line with our market share of stock of 12.1% (April 4, 2014: 11.6%). Mortgage balances grew by £7.2 billion in the year ended April 4, 2015 of which £5.2 billion was prime lending and £2.0 billion related to specialist mortgages.
In addition to our support for first time buyers, we have continued with our policy of rewarding our members by providing a loyalty discount to our mortgage rates to existing mortgage customers wishing to move homes, switch products or take a further advance. We have also maintained our BMR at 2% above the BoE base rate.
As patterns of housing tenure continue to evolve, with greater numbers of people choosing to rent rather than buy, our subsidiary, The Mortgage Works (UK) plc ("TMW"), has continued to be a leading provider of high quality loans to the specialist mortgages sector. Our total specialist mortgage book now stands at £28.3 at April 4, 2015 (April 4, 2014: £26.3 billion), representing 18.5% of our total residential lending portfolio at April 4, 2015 (April 4, 2014: 18.1%).
As at April 4, 2015, buy-to-let mortgages made up 86% of total specialist lending, 9% related to selfcertification mortgages, 4% related to near prime and 1%, amounting to £0.4 billion, related to subprime.
| As at April 4, 2015 |
As at April 4, 2014 |
||
|---|---|---|---|
| (percentages) | |||
| LTV portfolio of residential mortgages: | |||
| 0% - 60% | 26 | 19 | |
| 60% - 75% | 42 | 38 | |
| 75% - 80% | 10 | 10 | |
| 80% - 85% | 10 | 15 | |
| 85% - 90% | 11 | 16 | |
| 90% - 95% | 1 | 2 | |
| >95% | - | - | |
| Total | 100 | 100 | |
| Average loan to value of stock (indexed) | 47 | 48 | |
| Average loan to value of new business | 66 | 69 | |
| New business profile: | |||
| First-time buyers | 26 | 31 | |
| Home movers | 32 | 32 | |
| Remortgagers | 23 | 22 | |
| Buy-to-let | 18 | 14 | |
| Other | 1 | 1 | |
| Total | 100 | 100 |
The analysis of the new business profile and the average LTV for new business excludes further advances.
Total residential balance sheet provisions at April 4, 2015 are £110 million, compared with £102 million at April 4, 2014.
| As at April 4, 2015 |
As at April 4, 2014 |
|
|---|---|---|
| Cases three months or more in arrears as % of total book of residential mortgages |
(percentages) | |
| Group residential mortgages: | ||
| Prime | 0.36 | 0.46 |
| Specialist | 1.12 | 1.53 |
| Total Group residential mortgages | 0.49 | 0.63 |
| CML industry average | 1.30 | 1.59 |
Reflecting our low risk profile, performance of the mortgage books has remained strong with the number of residential mortgages more than three months in arrears reducing in both the specialist and prime mortgage books. Our overall arrears percentage of 0.49% compares favourably with the CML industry average of 1.30% (April 4, 2014: 1.59% as reported by CML).
The table below shows possessions as a percentage of our total residential mortgages as at April 4, 2015 and April 4, 2014:
| As at April 4, 2015 |
As at April 4, 2014 |
||
|---|---|---|---|
| Possessions as % of total residential mortgages (number of properties) | (percentages) | ||
| Group residential mortgages: | |||
| Prime | 0.01 | 0.01 | |
| Specialist | 0.10 | 0.14 | |
| Total Group residential mortgages | 0.03 | 0.03 |
Our approach to dealing with customers in financial difficulties, combined with our historically cautious approach to lending, means that we only take possession of properties as a last resort. This is illustrated by the number of properties taken into possession compared with the total for the industry. During the year ended April 4, 2015, the properties taken into possession decreased to 409, representing only 0.03% of the Group's book compared to the industry average of 0.05% (source: CML).
The table below provides further information on the residential mortgage portfolio by payment due status as at April 4, 2015, 2014 and April 4, 2014:
| As at April 4, 2015 | As at April 4, 2014 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Prime lending |
Specialist lending |
Consumer banking |
Total | Prime lending |
Specialist lending |
Consumer banking |
Total | |||
| (£ billions, except percentages) | ||||||||||
| Not impaired: | ||||||||||
| Neither past due nor impaired |
122.4 | 26.9 | 3.5 | 152.8 | 97% | 117.0 | 24.7 | 3.7 | 145.4 | 97% |
| Past due up to 3 months but not |
||||||||||
| impaired | 1.7 | 0.9 | 0.2 | 2.8 | 2% | 1.8 | 1.0 | 0.1 | 2.9 | 2% |
| Impaired | 0.4 | 0.5 | 0.1 | 1.0 | 1% | 0.5 | 0.6 | 0.1 | 1.2 | 1% |
| Charged off(1) | - | - | 0.1 | 0.1 | - | - | - | 0.1 | 0.1 | - |
| Total | 124.5 | 28.3 | 3.8 | 156.6 | 100% | 119.3 | 26.3 | 3.9 | 149.5 | 100% |
Notes:
(1) Charged off balances are balances on accounts which are closed to future transactions. An amendment was made in 2014 to hold these accounts on the balance sheet for an extended period whilst recovery procedures take place (currently these balances are held for a maximum of up to 36 months, depending upon the product).
The status "past due up to 3 months but not impaired" includes any asset where a payment due is received late or missed. The amount included is the entire financial asset balance rather than just the payment overdue. Loans on interest only or payment holiday concessions are initially categorized according to their payment status as at the date of concession, with subsequent revisions to this category assessed against the terms of the concession.
Loans which are not in possession have collective impairment provisions set aside to cover credit losses.
Loans in the analysis above which are less than three months past due have collective impairment allowances set aside to cover credit losses on loans which are in the early stages of arrears. Loans acquired from the Derbyshire, Cheshire and Dunfermline building societies were fair valued on a basis which made credit loss adjustments for anticipated losses over the remaining life of the loans. Impaired retail loans are broken down further in the following table:
| As at April 4, 2015 | As at April 4, 2014 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Prime lending |
Specialist lending |
Consumer banking |
Total | Prime lending |
Specialist lending |
Consumer banking |
Total | |||
| (£ millions, except percentages) | ||||||||||
| Impaired status: | ||||||||||
| Past due 3 to 6 | ||||||||||
| months | 190 | 207 | 30 | 427 | 44% | 225 | 269 | 42 | 536 | 44% |
| Past due 6 to 12 | ||||||||||
| months | 120 | 143 | 25 | 288 | 30% | 164 | 183 | 30 | 377 | 31% |
| Past due over 12 | ||||||||||
| months | 72 | 97 | 17 | 186 | 19% | 100 | 138 | - | 238 | 19% |
| Possessions | 14 | 52 | - | 66 | 7% | 15 | 61 | - | 76 | 6% |
| Total | 396 | 499 | 72 | 967 | 100% | 504 | 651 | 72 | 1,227 | 100% |
We offer a number of support options to both secured and unsecured customers. The credit policies and provisioning treatment relating to these activities have been proactively reviewed over the year ended April 4, 2015 to ensure alignment to good practice as defined by the regulator. The options offered may be classified into three categories:
Changes in terms relate to a concession or permanent change, which results in amended monthly cash flows, these are not offered as a means of forbearance. The options available include:
Performing customers with loans on standard terms and conditions effective before March 2010, who are not experiencing financial difficulty and meet required criteria (including credit score), are permitted to apply for a payment holiday and make reduced or nil payments for an agreed period of time of up to 12 months. £3,890 million of loans have been subject to payment holidays at any point since January 2008 and are still on the books as at April 4, 2015 (2014: £4,360 million); of these only £90 million remain on a payment holiday as at April 4, 2015 (2014: £98 million). The performance of loans on payment holiday is in line with that of the wider portfolio and therefore no adjustment is made to the Group's provisioning methodology for these loans.
The Group allows performing customers to apply to extend the term of their mortgage; £6,989 million of loans have been subject to term extensions at any point since January 2008 and are still on the books as at April 4, 2015 (2014: £7,376 million). During the year ended April 4, 2015, £948 million of loans (2014: £2,082 million) had terms extended. Performance of term extensions is in line with that of the wider portfolio and therefore no adjustment is made to the Group's provisioning methodology for these loans.
Customers in arrears may be offered a temporary payment concession allowing them to make reduced or nil payments for an agreed period of time. £891 million of loans have been subject to payment concessions at any point since January 2008 and are still on the books as at April 4, 2015 (2014: £890 million); of these only £16 million remain subject to payment concessions as at April 4, 2015 (2014: £21 million).
Historically, performing customers who meet specific criteria could apply for a permanent interest only conversion, normally reducing their monthly commitment. Following tightening of the Group's policy, this facility was completely withdrawn in March 2012, although a temporary interest only arrangement may be available under forbearance as described below. £1,990 million of loans have been subject to interest only conversions at any point since January 2008 and are still on the books as at April 4, 2015 (2014: £2,209 million). The performance of interest only conversions is in line with that of the wider portfolio and therefore no adjustment is made to the Group's provisioning methodology for these loans.
The only forbearance option which we offer customers in financial distress is an interest-only concession. Interest-only concessions are offered to customers on a temporary basis with formal periodic review subject to an affordability assessment. The concession allows the customer to reduce monthly payments to cover interest only, typically for six months, and if made, the arrears status of the account will not increase and will remain as at the beginning of the concession.
As at April 4, 2015, £123 million of balances (April 4, 2014: £171 million) representing 0.08 % (April 4, 2014: 0.12%) of total mortgage balances were on this concession. Our provisioning methodology reflects the latest performance on these accounts.
The Group offers two forms of repair, capitalization and term extension (at term expiry), as set out below.
When a customer emerges from financial difficulty, the Group offers the ability to capitalise arrears, resulting in the account being repaired. Once capitalised, the loans are categorised as not impaired as long as contractual repayments are maintained. £430 million of loans have had an arrears capitalisation at any point since January 2008 and are still on the books as at April 4, 2015 (2014: £420 million). At the start of the period the Group introduced a new proactive contact strategy for customers eligible for capitalisation. During the year ended April 4, 2015 £50 million of loans (2014: £7 million) were repaired through capitalisation.
Customers on interest only mortgages who are unable to repay their capital at term expiry may be offered a term extension. These extensions are typically on a capital and interest basis over a relatively short term, normally less than five years, and aim to recover the outstanding balance as quickly as possible whilst ensuring the monthly payment remains manageable to the customer. £484 million of loans have had an extension at term expiry at any point since January 2008 and are still on the books as at April 4, 2015 (2014: £466 million); of these £153 million of loans had an extension at term expiry during the year ended April 4, 2015 (2014: £180 million). No provisioning methodology adjustment is made for these accounts as a result of the low balance and LTV profile.
The options outlined above apply predominantly to the prime originated portfolio. The table below shows the stock of loans still on the books as at April 4, 2015 that have been subject to forbearance at some point:
| As at April 4, 2015 (Unaudited) |
As at April 4, 2014(2) (Unaudited) |
|||
|---|---|---|---|---|
| £ million | % of total prime loans and advances |
£ million | % of total prime loans and advances |
|
| Change in terms(1) | 12,213 | 8 | 13,161 | 9 |
| Forbearance(1) | 1,598 | 1 | 1,667 | 1 |
| Repair(1) _______ |
910 | 1 | 883 | 1 |
Notes:
(1) The three categories above are not mutually exclusive. The information above has been extracted from our management information systems.
(2) 2014 comparatives have been restated following a review of the classifications used. Previously disclosed totals of £13,188 million (change in terms) and £1,555 million (repair) included items which had never been renegotiated.
The following table presents negative equity on residential mortgages:
| As at April 4, 2015 | As at April 4, 2014 | |||||
|---|---|---|---|---|---|---|
| Prime lending |
Specialist lending |
Prime lending |
Specialist lending |
|||
| (£ million) | ||||||
| Past due but not impaired | 2 | 7 | 4 | 6 | ||
| Impaired | 2 | 9 | 3 | 16 | ||
| Possessions | - | 6 | - | 7 | ||
| Total | 4 | 22 | 7 | 29 |
Our commercial lending portfolio of £13.2 billion as at April 4, 2015 (April 4, 2014: £17.3 billion) comprises £4.0 billion secured on commercial property ("Property Finance") (April 4, 2014: £7.8 billion), £7.8 billion advanced to Registered Social Landlords (April 4, 2014: £8.1 billion) and £1.4 billion advanced under Project Finance, principally via the Private Finance Initiative ("PFI") (April 4, 2014: £1.5 billion). Our Property Finance portfolio is diverse both in terms of sectors and geographic spread.
The portfolio is actively monitored for evidence of impairment by reference to a range of factors, which include significant financial difficulty of the borrower, payment default, granting of a concession in accordance with our forbearance policies or other circumstances indicating the likelihood of a material change in cash flow expectations. Impaired Property Finance loans amounted to £608 million as at April 4, 2015 (April 4, 2014: £3,065 million) and provisions held against the portfolio amounted to £332 million (April 4, 2014: £1,001 million) representing a coverage ratio of 53% (April 4, 2014: 33%).
The proportion of our Property Finance balances classified as impaired and the provision coverage against these balances are shown below:
| As at April 4, 2015 |
As at April 4, 2014 |
||||
|---|---|---|---|---|---|
| (£ million, except percentages) | |||||
| Gross balances | 4,043 | 7,764 | |||
| Impaired balances | 608 | 3,065 | |||
| Impaired balances as a % of gross balances | 15% | 39% | |||
| Commercial provisions: | |||||
| Individual | 313 | 921 | |||
| Collective | 9 | 80 | |||
| Total provisions | 322 | 1,001 | |||
| Provision coverage ratios: | |||||
| Individual provisions as a % of impaired balances | 51% | 30% | |||
| Total provisions as a % of impaired balances | 53% | 33% | |||
| Total provisions as a % of total gross balances | 8% | 13% |
Estimated (indexed) collateral values in relation to the impaired balances disclosed above amounted to £367 million (60% of impaired balances) as at April 4, 2015 and £2,216 million (72% of impaired balances) as at April 4, 2014. There are no cases classified as impaired or with payment arrears in our Registered Social Landlord or PFI portfolios.
Economic uncertainty, ongoing funding pressures across the banking sector and a trend towards higher regulatory capital requirements for CRE lending have significantly reduced the availability of credit for refinance within the sector. Furthermore, current depressed property values mean that foreclosure on loans which are operating outside the original terms of their advance is unlikely to provide the best economic outcome, except in those cases where ongoing serviceability is unachievable and/or the prospects of any recovery in cash flow performance or capital value is unlikely. Our strategy remains one of prudent loss mitigation over the medium term in a market which is both cyclical and currently experiencing extremely low investor demand. We make refinancing available for existing exposures where we are satisfied that we continue to have a constructive relationship with the borrower which recognizes our interests, and can achieve a level of expected return which reflects current funding costs or where there is a realistic likelihood that recovery over the medium term in the hands of the borrower represents a better prospect than short-term disposal. To the extent this strategy leads to forbearance on loans which are renewed at "off-market" interest rates or where the most likely outcome remains an ultimate financial loss, impairment provisions are then recognized in accordance with relevant accounting requirements.
The total other lending portfolio of £29 million as at April 4, 2015 (2014: £176 million) represents 0.02% (2014: 0.11%) of the Group's loans and advances to customers. As part of the deleveraging of legacy treasury assets that are outside of current credit policy, the sale of a €100 million loan exposed to a portfolio of senior ranking European ABS assets has been completed. The remaining lending portfolio now primarily consists of secured loans relating to a European commercial loan facility which is held by one of the Group's subsidiaries, Cromarty CLO Ltd ("Cromarty").
The table below provides further information on commercial and other lending operations by payments due status:
| As at April 4, 2015 | As at April 4, 2014 | |||||||
|---|---|---|---|---|---|---|---|---|
| Commercial | Other operations |
Commercial | Other operations |
|||||
| (£ billion, except percentages) | ||||||||
| Neither past due nor impaired | 3.3 | 83% | 0.1 | 100% | 4.6 | 60% | 0.1 | 50% |
| Past due up to 3 months but not | ||||||||
| impaired | 0.1 | 2% | - | - | 0.1 | 1% | - | - |
| Impaired | 0.6 | 15% | - | - | 3.1 | 39% | 0.1 | 50% |
| Total | 4.0 | 100% | 0.1 | 100% | 7.8 | 100% | 0.2 | 100% |
The status "past due up to three months but not impaired" includes any asset where a payment due under strict contractual terms is received late or missed. The amount included is the entire financial asset rather than just the payment overdue.
Loans in the analysis above which are less than three months past due have collective impairment allowances set aside to cover credit losses.
Impaired balances in other operations total £10 million as at April 4, 2015 (April 4, 2014: £107 million). This reduction is due to the €100 million loan exposure that has now been sold.
Impaired commercial and other lending operations assets are further analyzed as follows:
| As at April 4, 2015 | As at April 4, 2014 | |||||||
|---|---|---|---|---|---|---|---|---|
| Commercial | Other operations |
Commercial | Other operations |
|||||
| (£ million, except percentages) | ||||||||
| Impaired status: | ||||||||
| Past due 0 to 3 months | 413 | 68% | 5 | 50% | 2,125 | 69% | 82 | 77% |
| Past due 3 to 6 months | 59 | 10% | - | - | 152 | 5% | - | - |
| Past due 6 to 12 months | 56 | 9% | - | - | 334 | 11% | 8 | 7% |
| Past due over 12 months | 79 | 13% | 5 | 50% | 442 | 15% | 17 | 16% |
| Possessions | 1 | - | - | - | 12 | - | - | - |
| Total | 608 | 100% | 10 | 100% | 3,065 | 100% | 107 | 100% |
Impaired loans include those balances which are more than three months in arrears, or have a provision against them.
Possession balances represent loans against which we have taken ownership of properties pending their sale. Assets over which possession has been taken are realized in an orderly manner via open market or auction sales to derive the maximum benefit for all interested parties, and any surplus proceeds are distributed in accordance with the relevant insolvency regulations. We do not normally occupy repossessed properties for our business use or use assets obtained in our operations.
Although collateral can be an important mitigant of credit risk, it is our practice to lend on the basis of the customer's ability to meet their obligations out of cash flow resources rather than rely on the value of the security offered. In the event of default, we may use the collateral as a source of repayment.
Primary collateral is a fixed charge over freeholder or long leasehold properties, but may be supported by other liens, floating charges over company assets and, occasionally, unsupported guarantees. The collateral will have a significant effect in mitigating our exposure to credit risk.
The table below quantifies the estimated value of indexed collateral held against non-performing or impaired assets:
| As at April 4, 2015 |
As at April 4, 2014 |
|||
|---|---|---|---|---|
| (£ million, except percentages) | ||||
| Past due but not impaired | 77 | 100% | 64 | 98% |
| Impaired | 367 | 60% | 2,216 | 72% |
| Total | 444 | 65% | 2,280 | 73% |
The percentage, in the table above, is the cover over the asset. The indexed collateral value is based on the most recent valuation indexed using the Investment Property Databank ("IPD") monthly index for the relevant property sector. The indexed value of the collateral is based on the most recent formal valuation. We reserve the right to request a revaluation of any property currently charged in support of facilities advanced or upon an act of default. Although a revaluation is not automatically obtained, the merits of obtaining a revaluation are considered at each facility review and whenever a report is submitted to the Group Risk Division.
During the year a revised valuation policy has been implemented which stipulates the maximum period between formal valuations, relative to the risk profile of the lending. Particular attention is paid to the status of the facilities, for instance whether it is, or is likely to require an impairment review where our assessment of potential loss would benefit from updated valuations, or there are factors affecting the property that might alter the case assessment and the most appropriate action to take.
Collateral held in relation to secured loans that are either past due or impaired is capped at the amount outstanding on an individual loan basis.
Particular attention is paid to the status of the facilities, for instance whether it is or is likely to require an impairment review, where our assessment of potential loss would benefit from updated valuations, or there are factors affecting the property that might alter the case assessment and the most appropriate action to take.
| As at April 4, 2015 |
As at April 4, 2014 |
||||
|---|---|---|---|---|---|
| (unaudited) | (£ million, except percentages) | ||||
| Performing loans | |||||
| Fully collateralized | |||||
| LTV ratio: | |||||
| less than 25% | 321 | 257 | |||
| 25% to 50% | 1,417 | 1,122 | |||
| 51% to 75% | 1,208 | 2,014 | |||
| 76 to 90% | 362 | 657 | |||
| 91% to 100% | 23 | 141 | |||
| Total | 3,331 | 82% | 4,191 | 54% | |
| Partially collateralized | |||||
| More than 100% (A) | 27 | 1% | 443 | 6% | |
| Collateral value of (A) | 252 | 373 | |||
| Total performing loans | 3,358 | 83% | 4,634 | 60% | |
| Non-performing loans | |||||
| Fully collateralized | |||||
| LTV ratio: | |||||
| less than 25% | 1 | 42 | |||
| 25% to 50% | 52 | 25 | |||
| 51% to 75% | 45 | 210 | |||
| 76 to 90% | 50 | 144 | |||
| 91% to 100% | 31 | 169 | |||
| Total | 179 | 4% | 590 | 8% | |
| Partially collateralized | |||||
| More than 100% (A) | 506 | 13% | 2,540 | 32% | |
| Collateral value of (A) | 265 | 1,690 | |||
| Negative equity of (A) | 241 | 850 | |||
| Total non-performing loans | 685 | 17% | 3,130 | 40% | |
| Total CRE loans | 4,043 | 100% | 7,764 | 100% |
The overall proportion of partially collateralized non-performing loans has reduced to 13% in the year ended April 4, 2015 (April 4, 2014: 32%) and the shortfall on collateral for non-performing CRE loans has reduced by £609 million during the year ended April 4, 2015 to £241 million (April 4, 2014: £850 million).
The level of negative equity based upon the indexation of property values for the non-performing and impaired assets is detailed below:
| As at April 4, 2015 |
As at April 4, 2014 |
||
|---|---|---|---|
| (£ million) | |||
| Past due but not impaired | - | 1 | |
| Impaired | 240 | 840 | |
| Possessions | 1 | 9 | |
| Total | 241 | 850 |
Consumer banking comprises retail balances relating to personal loans of £1.8 billion (April 4, 2014: £1.9 billion), credit cards of £1.8 billion (April 4, 2014: £1.7 billion) and current account overdrafts of £0.2 billion (April 4, 2014: £0.3 billion). Unsecured lending through personal loans has been lower in the last year following a tightening of our lending criteria and increased competition in the market. Credit card lending continues to grow, reflecting increased growth in consumer borrowing over the period. Delinquency within our unsecured portfolios remains stable.
| As at April 4, 2015 | ||
|---|---|---|
| Delinquent balances |
Balances before provisions |
|
| (£ million) | ||
| FlexAccount (overdraft balances) | 27 | 248 |
| Personal loans | 99 | 1,799 |
| Credit cards | 45 | 1,744 |
| Total | 171 | 3,791 |
The following table presents the percentage of FlexAccounts, personal loans and credit card accounts more than 30 days in arrears:
| As at April 4, 2015 |
As at April 4, 2014 |
||
|---|---|---|---|
| (percentages) | |||
| FlexAccount (overdraft balances) | 10.89 | 7.67 | |
| Personal loans | 5.50 | 3.20 | |
| Credit cards | 2.58 | 2.66 |
Unsecured customers have limited forbearance options. Credit card customers experiencing financial distress may agree a payment plan, which is typically less than the minimum payment. Additionally, credit card and personal loan customers who have maintained the required payment performance over a sustained period may be re-aged. The volume of payment plans and re-aging is low and therefore no specific treatment is made within our provisioning methodology.
The following section summarizes our direct exposure to institutions, corporates, and other issued securities domiciled in the peripheral eurozone countries. The exposures are shown at their balance sheet carrying values.
| As at April 4, 2015 | ||||||
|---|---|---|---|---|---|---|
| Ireland | Italy | Portugal | Spain | Total | ||
| (£ million) | ||||||
| Mortgage backed securities | - | 45 | 32 | 206 | 283 | |
| Covered bonds | - | - | - | 29 | 29 | |
| Other corporate | - | 3 | - | - | 3 | |
| Total | - | 48 | 32 | 235 | 315 |
| As at April 4, 2014 | |||||||
|---|---|---|---|---|---|---|---|
| Ireland | Italy | Portugal | Spain | Total | |||
| (£ million) | |||||||
| Mortgage backed securities | 14 | 75 | 49 | 299 | 437 | ||
| Covered bonds | 39 | - | 22 | 281 | 342 | ||
| Other corporate | - | 3 | - | - | 3 | ||
| Total | 53 | 78 | 71 | 580 | 782 |
Movements in our exposure to peripheral eurozone countries between the years ended April 4, 2014 and 2015 relate to disposals, maturities and fair value movements and there has been no new investment in the current financial year.
None of our exposures to the peripheral eurozone countries are in default, and we did not incur any impairment on these assets in the year ended April 4, 2015. We continue to monitor closely the exposures to these countries. In addition, our exposure in respect of other eurozone countries and the rest of the world is shown below at their balance sheet carrying value as at April 4, 2015:
| As at April 4, 2015 (£ million) | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Finland | France | Germany | Netherlands | Other eurozone |
Total eurozone |
USA | Rest of the world |
Total | |
| (£ million) | |||||||||
| Government bonds . | 231 | - | 253 | 411 | - | 895 | 305 | - | 1,200 |
| Mortgage backed | |||||||||
| securities | - | 4 | - | 551 | - | 555 | 49 | 27 | 631 |
| Covered bonds | 21 | 125 | 37 | 27 | - | 210 | - | 315 | 525 |
| Senior debt | - | - | - | - | - | - | - | 495 | 495 |
| Loans to banks | - | 146 | 229 | - | - | 375 | 527 | 823 | 1,725 |
| Other assets | - | 88 | 169 | - | - | 257 | 420 | - | 677 |
| Other corporate | 2 | 7 | 5 | 3 | - | 17 | - | - | 17 |
| Total | 254 | 370 | 693 | 992 | - | 2,309 | 1,301 | 1,660 | 5,270 |
| As at April 4, 2014 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Finland | France | Germany | Netherlands | Other eurozone |
Total eurozone |
USA | Rest of the world |
Total | |
| (£ million) | |||||||||
| Government bonds | 170 | - | 438 | 778 | - | 1,386 | 388 | - | 1,774 |
| Mortgage backed securities |
- | 12 | 41 | 334 | - | 387 | 109 | 57 | 553 |
| Covered bonds | - | - | - | - | - | - | 27 | - | 27 |
| Senior debt | - | - | - | - | - | - | - | 39 | 39 |
| Loans to banks | - | 103 | 151 | - | - | 254 | 364 | 385 | 1,003 |
| Other assets | - | 99 | 42 | - | - | 141 | 793 | 666 | 1,600 |
| Other corporate | 10 | 24 | 567 | 36 | - | 637 | - | 3 | 640 |
| Total | 180 | 238 | 1,239 | 1,148 | - | 2,805 | 1,681 | 1,150 | 5,636 |
We remain active in the above Eurozone jurisdictions and in the USA. The above balances are affected by asset pay downs, plus fair value and exchange rate movements.
We believe that our results indicate a strong performance for the year ended April 4, 2014 with an underlying profit before tax (as explained below) of £924 million, and a statutory profit before tax of £677 million.
Underlying profit before tax (as explained below) for the year ended April 4, 2014 is up 113% at £924 million from £433 million for the year ended April 4, 2013. Total income increased by 16% to £2,895 million in the year ended April 4, 2014, as compared to the year ended April 4, 2013.
Underlying administrative expenses were £1,519 million for the year ended April 4, 2014, an increase of 9% from the year ended April 4, 2013, largely driven by ongoing investment in the business, general inflation and increased levels of business activity. At a statutory level administrative expenses have increased by 13% to £1,611 million in the year ended April 4, 2014, as compared to the year ended April 4, 2013. Investment spend during for the year ended April 4, 2014 included revenue costs of £23 million associated with the implementation of the Mortgage Market Review and the Current Account Switching Service. In addition, depreciation and amortization for the year ended April 4, 2014 included the first full year's charge of £50 million (April 4, 2013: £11 million) relating to our new banking platform which became operational in October 2012.
Between the years ended April 4, 2013 and 2014, the increase in our cost base reflects the impact of annual pay awards averaging 2.4% and 2.5%, respectively, combined with a 1.5% increase in total numbers of employees in the year ended April 4, 2014 as compared to the year ended April 4, 2013.
Costs for the year ended April 4, 2014 also include £39 million in relation to our strategic transformation, an ongoing program to integrate distribution and account administration relating to our Dunfermline, Derbyshire and Cheshire brands, as announced on May 2, 2013. Under the program the branch network will be unified under a single "Nationwide" brand to eliminate unnecessary duplication while preserving levels of physical access for members as a whole. Account administration will be migrated onto our core systems. Costs were mainly related to asset write downs, provision for ongoing onerous lease contracts and headcount reductions. The program is expected to deliver annualized cost savings in excess of £25 million and additional income of £10 million beginning April 5, 2015.
Income grew 16% in the year ended April 4, 2014, as compared to the year ended April 4, 2013 exceeded cost growth, resulting in a reduction in our statutory cost income ratio to 56.6% in the year ended April 4, 2014 (April 4, 2013: 61.2%) and in our underlying cost ratio of 52.5% in the year ended April 4, 2014 (April 4, 2013: 55.9%). We currently expect cost growth to moderate during the year that began April 5, 2014 because, notwithstanding our focus on efficiency, we continue to see cost pressures within the business arising from sustained levels of technology investment, increased regulation and volume growth, partially as a result of growing market shares. We expect to see these trends continue, although we also expect cost growth in the financial year ending April 4, 2015 to be lower than for the financial year ended April 4, 2014.
Our prudent approach to mortgage lending is evident in our three month mortgage arrears ratio of 0.63%, which compares favorably with the industry average of 1.59%. We have made significant progress in reducing our exposure to non-core commercial real estate by reducing our balances by 24% over the past year; our total exposure now stands at £7.8 billion (2013: £10.2 billion) and since the year end we have reduced our exposure by a further £0.7 billion through the sale of non-UK commercial real estate assets. Alongside this deleveraging, we have seen a modest improvement in the outlook for the commercial real estate sector and, as a consequence, our commercial impairment charge has reduced to £309 million (2013: £493 million). Total provision charges for all impairments have fallen by 35% to £383 million (2013: £591 million).
Profit before tax on a reported basis and underlying basis are set out below. Certain aspects of our results are presented to reflect management's view of the underlying results and to provide a clearer representation of our performance:
| For the year ended April 4, 2014 | |||||||
|---|---|---|---|---|---|---|---|
| As reported | FSCS and bank levy |
Restructuring Costs |
Movements on derivatives and hedge accounting |
Underlying profit before tax |
|||
| (£ millions) | |||||||
| Net interest income | 2,403 | - | - | - | 2,403 | ||
| Other income | 492 | - | - | - | 492 | ||
| Movements on derivatives and hedge accounting |
(51) | - | - | 51 | - | ||
| Total income | 2,844 | - | - | 51 | 2,895 | ||
| Administrative expenses | (1,329) | 17 | 75 | - | (1,237) | ||
| Depreciation and amortization | (282) | - | - | - | (282) | ||
| Pre-provision underlying | |||||||
| profit | 1,233 | 17 | 75 | 51 | 1,376 | ||
| Impairment losses | (383) | - | - | - | (383) | ||
| Provisions for liabilities and | |||||||
| charges | (173) | 104 | - | - | (69) | ||
| Profit before tax | 677 | 121 | 75 | 51 | 924 |
| For the year ended April 4, 2013(1) | ||||||
|---|---|---|---|---|---|---|
| As reported |
FSCS and bank levy |
Restructuring Costs |
Movements on derivatives and hedge accounting |
Underlying profit before tax |
||
| (£ millions) | ||||||
| Net interest income | 1,981 | - | - | - | 1,981 | |
| Other income | 504 | - | - | - | 504 | |
| Movements on derivatives and | ||||||
| hedge accounting | (165) | - | - | 165 | - | |
| Total income | 2,320 | - | - | 165 | 2,485 | |
| Administrative expenses | (1,204) | 16 | 16 | - | (1,172) | |
| Depreciation and amortization | (216) | - | - | - | (216) | |
| Pre-provision underlying profit |
900 | 16 | 16 | 165 | 1,097 | |
| Impairment losses | (591) | - | - | - | (591) | |
| Provisions for liabilities and | ||||||
| charges | (141) | 68 | - | - | (73) | |
| Profit before tax | 168 | 84 | 16 | 165 | 433 |
Note:
(1) Comparatives have been restated in accordance with IAS 19 (Revised) Employee Benefits.
The following discussion considers our results for the year ended April 4, 2014 compared to our results for the year ended April 4, 2013:
_____________
Our total income increased to £2,844 million in the year ended April 4, 2014 compared to £2,320 million in the year ended April 4, 2013. The following table sets forth the components of income for the years ended April 4, 2014 and 2013, respectively:
| For the year ended April 4, | |||
|---|---|---|---|
| 2014 | 2013 | ||
| (£ millions) | |||
| Net interest income | 2,403 | 1,981 | |
| Net fees and commissions | 354 | 445 | |
| Income from investments | 4 | 13 | |
| Other operating income | 134 | 46 | |
| Gains/(losses) from derivatives and hedge accounting | (51) | (165) | |
| Total | 2,844 | 2,320 |
Net interest income increased by 21% to £2,403 million for the year ended April 4, 2014 compared with £1,981 million for the year ended April 4, 2013.
The following table sets forth the components of net interest income for the years ended April 4, 2014 and 2013, respectively:
| For the year ended April 4, | ||
|---|---|---|
| 2014 | 2013 | |
| (£ millions) | ||
| Interest and similar income: | ||
| On residential mortgages | 4,825 | 4,851 |
| On other loans | 1,039 | 1,130 |
| On investment securities | 396 | 1,280 |
| On other liquid assets | 38 | 49 |
| Net (expense) on financial instruments hedging assets | (1,003) | (1,915) |
| Total interest and similar income | 5,295 | 5,395 |
| Interest expense and similar charges: | ||
| On UK retail member deposits | (2,250) | (2,741) |
| On subscribed capital | (59) | (89) |
| On deposits and other borrowings: | ||
| Subordinated liabilities | (129) | (96) |
| Other | (167) | (210) |
| Debt securities in issue | (814) | (944) |
| Foreign exchange differences | (28) | - |
| Net income on financial instruments hedging liabilities | 570 | 689 |
| Pension interest cost | (15) | (23) |
| Total interest expense and similar charges | (2,892) | (3,414) |
| Net interest income | 2,403 | 1,981 |
Interest and similar income decreased by 2% to £5,295 million in the year ended April 4, 2014 from £5,395 million in the year ended April 4, 2013.
Interest on residential mortgages decreased slightly by 0.5% to £4,825 million in the year ended April 4, 2014 from £4,851 million in the year ended April 4, 2013. This includes adjustments to reflect the changes in our effective interest rate assumptions, including a charge of £20 million (April 4, 2013: £18 million) in respect of an update of early redemption charges and a credit of £12 million (April 4, 2013: £2 million), which resulted from an update to the effective interest rate assumptions applicable to the recognition of mortgage fee income.
Interest on other loans includes interest income that we earn from commercial loans, credit card lending, unsecured personal loans and current account overdrafts. Interest on other loans decreased by 8% to £1,039 million in the year ended April 4, 2014 from £1,130 million in the year ended April 4, 2013.
Interest and other income from investment securities comprises interest income earned on the corporate and government investment securities that we purchase for our own account to manage our liquidity portfolios and net realized gains and losses on our sales of these instruments.
Interest and other income from investment securities decreased by 69% to £396 million for the year ended April 4, 2014, compared with £1,280 million for the year ended April 4, 2013. The lower amounts recorded in the financial year for interest receivable on investment securities and net expense on financial instruments hedging assets are driven primarily by a significant number of disposals of investment securities during the year ended April 4, 2014 as part of an exercise to deleverage legacy treasury assets. These disposals generated a net loss of £45 million in the year ended April 4, 2014 as compared to a net gain of £139 million in the year ended April 4, 2013.
Derivative instruments are used to synthetically convert fixed rate assets to floating rate assets. The floating rate income and fixed rate expense on these derivatives are included as "net expense on financial instruments hedging assets." In the year ended April 4, 2014, we incurred a net expense of £1,003 million on financial instruments used to hedge our fixed rate assets, compared with a net expense of £1,915 million in the year ended April 4, 2013.
Interest expense and similar charges decreased by 15% in the year ended April 4, 2014 to £2,892 million from £3,414 million in the year ended April 4, 2013.
Interest on UK retail member deposits includes interest that we pay on UK savings and current accounts held by our members. Interest on UK retail member deposits decreased to £2,250 million in the year ended April 4, 2014 from £2,741 million in the year ended April 4, 2013.
The average interest rate that we paid to depositors decreased slightly to 1.7% for the year ended April 4, 2014 compared with 2.2% for the year ended April 4, 2013, which accounted for the majority of the decrease in interest paid. There was also an increase of 4% in the average balance of UK retail member deposits held to £130,196 million in the year ended April 4, 2014 from £125,264 million in the year ended April 4, 2013.
We have accelerated our drive to diversify our business through the provision of personal banking services to new and existing members in the year ended April 4, 2014. We have opened over 430,000 new current accounts in the year ended April 4, 2014, an 18% increase as compared to 365,000 in the year ended April 4, 2013, with the latest additions to our product range, FlexDirect and FlexPlus, proving popular. We now have 5.5 million current accounts as at April 4, 2014, and our market share of main standard and packaged accounts as at February 2014 had risen over the year ended April 4, 2014 to 6.2% (April 4, 2013: 5.7%).
Interest expense on deposits and other borrowings includes interest that we pay on subordinated debt instruments and other deposits and borrowings. In the year ended April 4, 2014, interest on subordinated liabilities increased to £129 million from £96 million in the year ended April 4, 2013. This increase is a result of changes in the mix of subordinated debt and average balances between the two periods. Average balances increased to £2,433 million in the year ended April 4, 2014 from £1,691 million in the year ended April 4, 2013.
Other interest expense on deposits and other borrowings includes the interest that we pay on retail deposits by non-members, deposits from other banks and other money market deposits. In the year ended April 4, 2014, other interest expense on deposits and other borrowings decreased by 20% to £167 million from £210 million in the year ended April 4, 2013. This reduction is due to decreases in market rates in the year ended April 4, 2014, compared with the year ended April 4, 2013.
Debt securities in issue includes interest that we pay on certificates of deposit, time deposits, commercial paper and medium-term notes. In the year ended April 4, 2014, interest expense on debt securities in issue decreased by 14% to £814 million from £944 million in the year ended April 4, 2013. This decrease reflects a 14% decrease in the average monthly balance of debt securities in issue to £30,680 million in the year ended April 4, 2014, compared with £35,703 million in the year ended April 4, 2013.
We use derivative instruments to synthetically convert fixed rate liabilities to floating rate liabilities. The floating rate expense and fixed rate income on these derivatives are included as "net income/expense on financial instruments hedging liabilities." In the year ended April 4, 2014, net income on financial instruments used to hedge our fixed rate liabilities was £570 million, compared with a net income of £689 million in the year ended April 4, 2013.
The following table sets forth the components of net fees and commissions for the years ended April 4, 2014 and 2013 respectively:
| For the year ended April 4, |
||
|---|---|---|
| 2014 | 2013 | |
| (£ millions) | ||
| Fee and commission income: | ||
| Mortgage related fees | 31 | 34 |
| Banking and savings fees | 254 | 242 |
| General insurance fees | 120 | 160 |
| Other insurance fees | 47 | 43 |
| Other fees and commissions | 37 | 79 |
| Total fee and commission income | 489 | 558 |
| Fee and commission expense: | ||
| Banking and savings fees | 118 | 95 |
| Other fees and commissions | 17 | 18 |
| Total fee and commission expense | 135 | 113 |
| Net fee and commission income | 354 | 445 |
Income from net fees and commissions consists of income that we earn from lending, banking and savings fees and insurance sales commissions less lending fees and commission expense.
In the year ended April 4, 2014, net fees and commissions decreased by 20% to £354 million compared with £445 million in the year ended April 4, 2013. This decrease was driven by a £42 million decrease in other fees and commissions, which was due to a decrease of £21 million in investment fees and a decrease of £21 million in protection fees.
In the year ended April 4, 2014, other operating income increased to £134 million, compared with £46 million in the year ended April 4, 2013. This includes a net gain of £125 million in year ended April 4, 2014 from the redemption of subscribed capital and redemption related fees (April 4, 2013: £43 million).
All derivatives we enter into are recorded on the balance sheet at fair value with any fair value movements accounted for in the income statement. Derivatives, our use of which is regulated by the UK Building Societies Act, are only used to limit the extent to which we could be affected by changes in interest rates, exchange rates or other factors specified in building society legislation. These derivatives are therefore used exclusively to hedge risk exposures and are not used for speculative purposes.
Where effective hedge accounting relationships can be established, the movement in the fair value of the derivative instrument is offset in full or in part by opposite movements in the fair value of the underlying asset or liability being hedged. Any ineffectiveness arising from different movements in fair value will likely trend to nil over time.
In addition, we enter into certain derivative contracts which, although efficient economically, cannot be included in effective hedge accounting relationships. Consequently, although the implicit interest cost of the underlying instrument and associated derivatives are included in "Net interest income" in the income statement, fair value movements on such derivatives are included in "Gains from derivatives and hedge accounting."
Losses from derivatives and hedge accounting were £51 million in the year ended April 4, 2014 compared to gains of £165 million in the year ended April 4, 2013. Income statement volatility arises due to accounting ineffectiveness of designated hedges, or because hedge accounting has not been adopted or is not achievable.
The two main components of the loss in the year ended April 4, 2014 were:
| For the year ended April 4, | ||
|---|---|---|
| 2014 | 2013 | |
| (£ millions) | ||
| Current account | 111 | 114 |
| Protection and investments | 82 | 122 |
| General insurance | 101 | 126 |
| Mortgage | 30 | 41 |
| Credit card | 29 | 28 |
| Commercial | 17 | 18 |
| Gain on redemption of subscribed capital | 125 | 43 |
| Other | (3) | 12 |
| Total | 492 | 504 |
Underlying other income of £492 million is 2% down overall year on year and includes gains from the redemption of subscribed capital of £125 million (April 4, 2013: £43 million). Excluding this non-recurring item, other income has reduced by £94 million, including a £40 million reduction in net protection and investment income as a result of a change to customer pricing on protection policies and the impact of the Retail Distribution Review which came into force on January 1, 2013. The £25 million reduction in general insurance is driven by a one-off commission benefit of around £20 million relating to general insurance which was taken in the prior year. The "Other" category for 2013 includes a £7 million profit on the sale of equity investments relating to participation in an industry wide credit card service operation.
Operating expenses and similar charges were stable in the year ended April 4, 2014 at £2,167 million compared to £2,152 million in the year ended April 4, 2013. The following table sets forth the components of operating expenses and similar charges for the years ended April 4, 2014 and 2013, respectively:
| For the year ended April 4, |
||
|---|---|---|
| 2014 | 2013 | |
| (£ millions) | ||
| Administrative expenses | 1,329 | 1,204 |
| Depreciation and amortization | 282 | 216 |
| Impairment losses on loans and advances to customers | 380 | 589 |
| Provisions for liabilities and charges | 173 | 141 |
| Impairment losses on investment securities | 3 | 2 |
| Total | 2,167 | 2,152 |
Administrative expenses increased by 10% in the year ended April 4, 2014 to £1,329 million from £1,204 million in the year ended April 4, 2013 largely driven by ongoing investment in the business, general inflation and increased levels of business activity. Increased levels of business activity are evident across many aspects of our operations, and in the year ended April 4, 2014 as compared to the year ended April 4, 2013, financial transactions increased 14%, mortgage lending increased 31% and current account sales increased 18%. Included within the total of administrative expenses is a £17 million charge for the bank levy (year ended April 4, 2014: £16 million).
The following table sets forth the components of administrative expenses for the years ended April 4, 2014 and 2013, respectively:
| For the year ended April 4, |
|||
|---|---|---|---|
| 2014 | 2013 | ||
| (£ millions) | |||
| Employee costs: | |||
| Salaries and social security costs | 550 | 527 | |
| Pension costs | 86 | 77 | |
| Other administrative expenses | 693 | 600 | |
| Total | 1,329 | 1,204 |
Employee costs are made up of salaries, social security costs (which consist entirely of mandatory UK national insurance contributions) and pension costs.
We operate both defined benefit and defined contribution arrangements. The principal defined benefit pension arrangement is the Nationwide Pension Fund (the "Fund"). This is a contributory defined benefit arrangement, with both final salary and career average revalued earnings ("CARE") sections. The Fund was closed to new entrants in 2007, and since then new employees have been able to join a defined contribution arrangement. The final salary section of the Fund was closed to future service on March 31, 2011. Service already built up in the final salary section will continue to be linked to final salary, while future benefits now accrue within the CARE section.
In the year ended April 4, 2014, salaries and social security costs increased by 4% to £550 million from £527 million in the year ended April 4, 2013. The year on year increase in employee costs reflects the impact of annual pay awards averaging 2.4% and 2.5% respectively in each of the last two years, combined with a 1.5% increase in employee numbers year on year.
Within employee costs, the pension charge increased by 12% to £86 million for the year ended April 4, 2014 from £77 million in the year ended April 4, 2013.
Other administrative costs increased by 16% to £693 million for the year ended April 4, 2014 from £600 million for the year ended April 4, 2013. The increase in other administrative expenses is largely driven by ongoing investment in the business, general inflation and increased levels of business activity. Investment spend during the year has included revenue costs of £23 million associated with the implementation of the Mortgage Market Review and the Current Account Switching Service. Transformation costs have significantly increased from £16 million in 2013 to £75 million for the year ended April 4, 2014. These include £39 million relating to our ongoing program to integrate distribution and account administration relating to our Dunfermline, Derbyshire and Cheshire brands.
Another significant investment is the execution of our strategic program to source IT application and support activities through strategic delivery partners and to transform the way these activities are performed. Costs charged in the year for this program were £30 million and relate to the commercial processes, transition activity, provision of technical infrastructure and headcount reductions. The program is expected to deliver annualized cost savings in the region of £50 million.
Income grew 16% in the year ended April 4, 2014 as compared to the year ended April 4, 2013, exceeding cost growth and reducing our statutory cost income ratio to 56.6% in the year ended April 4, 2014 (April 4, 2013: 61.2%) and our underlying cost ratio to 52.5% in the year ended April 4, 2014 (April 4, 2013: 55.9%). Cost growth is expected to moderate in 2014/15.
For the year ended April 4, 2014, depreciation and amortization expenses increased by £66 million to £282 million compared to £216 million for the year ended April 4, 2013. This is primarily driven by the continued investment in key restructuring projects and includes the first full year's charge of £50 million (April 4, 2013: £11 million) relating to our new banking platform which became operational in October 2012.
We assess at each balance sheet date whether, as a result of one or more events that occurred after initial recognition, there is objective evidence that a financial asset or group of assets is impaired. Evidence of impairment may include indications that a borrower or group of borrowers is experiencing significant financial difficulty or default or delinquency in interest or principal payments.
Impairment losses on loans and advances to customers for the year ended April 4, 2014 decreased by 35% to £380 million from £589 million for the year ended April 4, 2013, primarily as a result of a significant improvement in the level of impairment suffered on our commercial lending portfolio.
The following table analyzes the impairment losses on loans and advances to customers for the years ended April 4, 2014 and 2013, respectively:
| For the year ended April 4, |
|||
|---|---|---|---|
| 2014 | 2013 | ||
| (£ millions) | |||
| Residential mortgages | - | 16 | |
| Commercial lending | 309 | 493 | |
| Consumer banking | 60 | 79 | |
| Other lending | 11 | 1 | |
| Total | 380 | 589 |
Residential mortgage impairments have benefited from house price growth of 9.5% over the course of the financial year and continuing low levels of arrears reflecting relatively benign, and now improving, levels of unemployment and our prudent underwriting approach. In addition the continuation of the low interest rate environment is supporting stability of repayment obligations at unusually low levels by historic standards. These factors have contributed to a nil charge for residential impairments (April 4, 2013: £16 million).
Commercial lending impairments relate exclusively to CRE lending, with no arrears in our social housing and Project Finance portfolios. The decrease in the impairment charge to £309 million reflects a £2.4 billion reduction in CRE exposures and stabilization of CRE market conditions with a consequent improvement in investor sentiment towards the sector, allowing a wider range of exit options at improved valuations on all but the most severely distressed exposures. Recovery prospects are case specific, although the general trend of the London and prime property markets faring significantly better than regional locations and secondary properties is being maintained.
Consumer banking impairments are down 24% at £60 million in the year ended April 4, 2014 (April 4, 2013: £79 million) including a credit of £27 million (April 4, 2013: £nil) relating to an update to model assumptions for late stage recoveries on defaulted balances to reflect recent experience. Excluding this adjustment, the implied underlying increase in consumer banking impairment of around 10% in the year ended April 4, 2014 is attributable to balance growth from the year ended April 4, 2013 with no significant change in portfolio performance.
Other lending relates to loans historically originated by our Treasury Division and includes a portfolio of £176 million in the year ended April 4, 2014 (April 4, 2013: £219 million) which primarily comprises secured lending relating to a European commercial loan portfolio and a revolving loan facility secured by a portfolio of asset backed securities. The charge of £11 million in the year ended April 4, 2014 (April 4, 2013: £1 million) relates to the impairment of individual under-performing exposures.
Impairment losses on investment securities of £3 million were recognized for the year ended April 4, 2014 (year ended April 4, 2013: £2 million).
| For the year ended April 4, |
|||
|---|---|---|---|
| 2014 | 2013 | ||
| (£ millions) | |||
| FSCS | 104 | 68 | |
| Customer redress provision | 69 | 73 | |
| Total | 173 | 141 |
We pay levies to the FSCS based upon our share of protected deposits. The charge of £104 million in the year ended April 4, 2014 in respect of the levy for the 2013/2014 scheme year included the first payment of our share of the expected shortfall. Further information is provided in Note 26 to the audited consolidated financial statements for the year ended April 4, 2014.
We are also potentially exposed to future levies resulting from the failure of the Dunfermline Building Society. We recognized £12 million in respect of the shortfall resulting from the failure of the Dunfermline Building Society. The FSCS has confirmed that this levy will be made during September 2014. Potential further shortfalls in relation to Dunfermline Building Society in future years remain uncertain in terms of both quantification and timing.
The charge for customer redress provisions of £69 million in the year ended April 4, 2014 (April 4, 2013: £73 million) relates to estimated 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 statutory reported tax charge for the year of £128 million in the year ended April 4, 2014 (April 4, 2013: £10 million credit) represents an effective tax rate of 18.9%, which is lower than the statutory rate in the UK of 23%. The lower rate is due principally to adjustments with respect to prior periods and the effect of the change in the UK corporation tax rate.
During the year ended April 4, 2014 our income statement bore taxes of £345 million (April 4, 2013: £258 million) including irrecoverable VAT, bank levy, employment and property taxes, all of which are charged to profit before tax as part of administrative expenses and depreciation. With the exception of the bank levy, all of these amounts are recognized in arriving at underlying profit.
This resulted in an overall statutory tax charge for the year ended April 4, 2014 of £128 million (year ended April 4, 2013: £10 million) as set out in the table below:
| For the year ended April 4, |
||
|---|---|---|
| 2014 | 2013 | |
| (£ millions) | ||
| Charge on profits for the year | 161 | 41 |
| Adjustment in respect of prior years | (18) | (44) |
| Effect of corporation tax rate change | (15) | (7) |
| Statutory tax charge | 128 | (10) |
Weighted average total assets were 1.1% lower in the year ended April 4, 2014, as compared to the year ended April 4, 2013 as planned reductions of non-core treasury and commercial assets have more than offset growth in retail lending balances.
Lending remains predominantly concentrated on high quality secured products, with residential mortgages accounting for 87.3% of our total loans and advances to customers as at April 4, 2014. The composition of lending has remained broadly consistent with that reported as at April 4, 2013:
| As at April 4, | |||||||
|---|---|---|---|---|---|---|---|
| 2014 | 2013 | ||||||
| (£ billions, except percentages) | |||||||
| Prime residential mortgages | 119.3 | 71.5% | 110.6 | 69.4% | |||
| Specialist residential mortgages | 26.3 | 15.8% | 25.0 | 15.6% | |||
| Total residential mortgages | 145.7 | 87.3% | 135.6 | 85.0% | |||
| Commercial lending | 17.3 | 10.3% | 19.9 | 12.5% | |||
| Other lending | 0.2 | 0.1% | 0.4 | 0.3% | |||
| Consumer banking | 3.9 | 2.3% | 3.5 | 2.2% | |||
| Gross balances | 167.0 | 100.0% | 159.4 | 100.0% | |||
| Impairment provisions | (1.3) | (1.2) | |||||
| Fair value adjustments for micro hedged risk | 0.9 | 1.4 | |||||
| Total | 166.6 | 159.6 |
Prime residential mortgages are primarily Nationwide-branded advances made through our branch network and intermediary channels.
Over the year ended April 4, 2014, we played a major role in supporting the UK housing market, increasing our lending by 31% to £28.1 billion as at April 4, 2014 (April 4, 2013: £21.5 billion), and accounting for 14.9% of all mortgage lending (year ended April 4, 2013: 15.1%) (source: BoE). Mortgage balances grew by £10.1 billion in the year ended April 4, 2014 of which £8.7 billion (86%) was prime lending and £1.4 billion (14%) related to specialist mortgages. This mix of lending is consistent with prior years and maintains our stock of residential lending at 82% prime and 18% specialist in the year ended April 4, 2014 (April 4, 2013: 82% prime, 18% specialist).
In addition to our support for first time buyers, we have continued with our policy of rewarding our members by providing a loyalty discount to our mortgage rates to existing mortgage customers wishing to move homes, switch products or take a further advance. We have also maintained our BMR at 2% above the BoE base rate. We estimate that this has delivered member benefit in the region of £800 million per annum when compared with the standard variable rate charged by other major lenders, equivalent to a saving of around £1,100 for our average BMR borrower.
As patterns of housing tenure continue to evolve, with greater numbers of people choosing to rent rather than buy, our subsidiary, The Mortgage Works (UK) plc ("TMW"), has continued to be a leading provider of high quality loans to the specialist mortgages sector. Over the year ended April 4, 2014, TMW gross advances accounted for £3.7 billion in the year ended April 4, 2014 (April 4, 2013: £3.3 billion) of our total mortgage lending, representing a market share of 16%, (source: CML) with net lending of £1.7 billion. Our total specialist mortgage book now stands at £26.3 billion as at April 4, 2014 (April 4, 2013: £24.9 billion), representing 18.1% of our total residential lending portfolio as at April 4, 2014 (April 4, 2013: 18.4%).
As at April 4, 2014, buy-to-let mortgages made up 83% of total specialist lending, 11% related to selfcertification mortgages, 4% related to near prime and 2%, amounting to £0.4 billion, related to subprime.
The average LTV of residential mortgages completed has increased to 69% as at April 4, 2014 (April 4, 2013: 67%). This strategy is supported by a robust affordability assessment and credit scoring process that ensures asset quality remains within our risk appetite. TMW has strategically adjusted its product range in order to attract larger loans. This has resulted in the average specialist loan size increasing by approximately £15,000 during the year ended April 4, 2014 and an increased proportion of lending in the South East where property prices are higher. We believe our industry leading controls to reduce the potential misuse of buy-to-let mortgages for residential lending have also proven to be effective. The average indexed LTV of residential mortgages as at April 4, 2014 was 48%, a 3% decrease as compared to April 4, 2013.
| As at April 4, | ||
|---|---|---|
| 2014 | 2013 | |
| (percentages) | ||
| LTV portfolio of residential mortgages: | ||
| 0% - 60% | 19 | 21 |
| 60% - 75% | 38 | 38 |
| 75% - 80% | 10 | 12 |
| 80% - 85% | 15 | 18 |
| 85% - 90% | 16 | 9 |
| 90% - 95% | 2 | 2 |
| >95% | - | - |
| Total | 100 | 100 |
| Average loan to value of stock (indexed) | 48 | 51 |
| Average loan to value of new business | 69 | 67 |
| New business profile: | ||
| First-time buyers | 31 | 27 |
| Home movers | 32 | 29 |
| Remortgagers | 22 | 23 |
| Buy-to-let | 14 | 21 |
| Other | 1 | - |
| Total | 100 | 100 |
The analysis of the new business profile and the average LTV for new business excludes further advances.
Total residential balance sheet provisions as at April 4, 2014 are £102 million, compared with £165 million as at April 4, 2013.
| As at April 4, | ||
|---|---|---|
| 2014 | 2013 | |
| Cases three months or more in arrears as % of total book of residential mortgages |
(percentages) | |
| Group residential mortgages: | ||
| Prime | 0.46 | 0.53 |
| Specialist | 1.53 | 1.75 |
| Total Group residential mortgages | 0.63 | 0.72 |
| CML industry average | 1.59 | 1.89 |
Reflecting our low risk profile, performance of the mortgage books has remained strong with the number of residential mortgages more than three months in arrears reducing in both the specialist and prime mortgage books. Our overall arrears percentage of 0.63% compares favorably with the CML industry average of 1.59% (April 4, 2013: 1.89% as restated by CML).
The table below shows possessions as a percentage of our total residential mortgages as at April 4, 2014 and April 4, 2013:
| As at April 4, | |||
|---|---|---|---|
| 2014 | 2013 | ||
| Possessions as % of total residential mortgages (number of properties) | (percentages) | ||
| Group residential mortgages: | |||
| Prime | 0.01 | 0.02 | |
| Specialist | 0.14 | 0.19 | |
| Total Group residential mortgages | 0.03 | 0.04 |
Our approach to dealing with customers in financial difficulties, combined with our historically cautious approach to lending, means that we only take possession of properties as a last resort. This is illustrated by the number of properties taken into possession compared with the total for the industry. During the year ended April 4, 2014, the properties taken into possession have decreased to 522, representing only 0.03% of properties taken in by the industry as a whole (Source: CML).
The table below provides further information on the residential mortgage portfolio by payment due status as at April 4, 2014 and April 4, 2013:
| As at April 4, 2014 | As at April 4, 2013 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Prime lending |
Specialist lending |
Consumer banking |
Total | Prime lending |
Specialist lending |
Consumer banking |
Total | |||
| (£ billions, except percentages) | ||||||||||
| Not impaired: | ||||||||||
| Neither past due nor impaired |
117.0 | 24.7 | 3.7 | 145.4 | 97% | 108.2 | 23.1 | 3.3 | 134.6 | 97% |
| Past due up to 3 months but not |
||||||||||
| impaired | 1.8 | 1.0 | 0.1 | 2.9 | 2% | 1.8 | 1.2 | 0.1 | 3.1 | 2% |
| Impaired | 0.5 | 0.6 | 0.1 | 1.2 | 1% | 0.6 | 0.7 | 0.1 | 1.4 | 1% |
| Total | 119.3 | 26.3 | 3.9 | 149.5 | 100% | 110.6 | 24.9 | 3.5 | 139.1 | 100% |
The status "past due up to 3 months but not impaired" includes any asset where a payment due is received late or missed. The amount included is the entire financial asset balance rather than just the payment overdue. Loans on interest only or payment holiday concessions are initially categorized according to their payment status as at the date of concession, with subsequent revisions to this category assessed against the terms of the concession.
Loans which are not in possession have collective impairment provisions set aside to cover credit losses.
Loans in the analysis above which are less than three months past due have collective impairment allowances set aside to cover credit losses on loans which are in the early stages of arrears. Loans acquired from the Derbyshire, Cheshire and Dunfermline building societies were fair valued on a basis which made credit loss adjustments for anticipated losses over the remaining life of the loans. Impaired retail loans are broken down further in the following table:
| As at April 4, 2014 | As at April 4, 2013 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Prime lending |
Specialist lending |
Consumer banking |
Total | Prime lending |
Specialist lending |
Consumer banking |
Total | |||
| (£ millions, except percentages) | ||||||||||
| Impaired status: | ||||||||||
| Past due 3 to 6 months |
225 | 269 | 42 | 536 | 44% | 260 | 297 | 41 | 598 | 44% |
| Past due 6 to 12 months |
164 | 183 | 30 | 377 | 31% | 190 | 208 | 24 | 422 | 31% |
| Past due over 12 months |
100 | 138 | - | 238 | 19% | 96 | 134 | - | 230 | 17% |
| Possessions | 15 | 61 | - | 76 | 6% | 18 | 87 | - | 105 | 8% |
| Total | 504 | 651 | 72 | 1,227 | 100% | 564 | 726 | 65 | 1,355 | 100% |
Possession balances represent loans against which we have taken ownership of properties pending their sale. Our approach to dealing with customers in financial difficulty, combined with our historically cautious approach to lending, means that we only take possession of properties as a last resort. This is illustrated by the number of properties that are taken into possession compared to industry benchmarks. The number of properties in possession has fallen to 522 during the year ended April 4, 2014 (April 4, 2013: 600) due to strong property sales and reduced new possessions. This represents 0.03% of our total number of properties as at April 4, 2014 compared to the industry average of 0.08% (source: CML).
We offer a number of support options to both secured and unsecured customers. The credit policies and provisioning treatment relating to these activities have been proactively reviewed over the year ended April 4, 2014 to ensure alignment to good practice as defined by the regulator. The options offered may be classified into three categories:
Changes in terms relate to a concession or permanent change, which results in amended monthly cash flows, these are not offered as a means of forbearance. The options available include:
Performing customers with loans on standard terms and conditions effective before March 2010, who are not experiencing financial difficulty and meet required criteria (including credit score), are permitted to apply for a payment holiday and make reduced or nil payments for an agreed period of time of up to 12 months (depending on reason). As at April 4, 2014, £4,360 million (2013: £4,834 million) of loans have been subject to payment holidays at any point since January 2008 and are still on the books as at April 4, 2014. Only £98 million of loans remain on a payment holiday as at April 4, 2014 (April 4, 2013: £163 million).
We allow performing customers to apply to extend the term of their mortgage. As at April 4, 2014, £1,142 million of loans had an extension at term expiry at any point since January 2008 (April 4, 2013: £1,028 million); of these £318 million of loans (April 4, 2013: £164 million) had an extension at term expiry during the year ended April 4, 2014. The performance of term extensions is in line with that of the wider portfolio and therefore no adjustment was made to our provisioning methodology for these loans.
Customers in arrears may be offered a temporary payment concession allowing them to make reduced or nil payments for an agreed period of time. During this period the arrears amounts are accrued and therefore no additional provision is required. As at April 4, 2014, £890 million (April 4, 2013: £862 million) of loans have been subject to payment concessions at any point since January 2008 and are still on the books as at April 4, 2014. As at April 4, 2014, only £21 million of loans (April 4, 2013: £29 million) remain subject to payment concessions.
Interest-only conversions allow performing customers meeting required criteria to apply for an interestonly conversion, normally reducing their monthly commitment. Following tightening of our policy in relation to interest-only conversions in the year ended April 4, 2012, the facility was completely withdrawn in March 2012. The performance of interest-only conversions is in line with that of the wider portfolio and therefore no adjustment is made to our provisioning methodology for these loans.
The only forbearance option which we offer customers in financial distress is an interest-only concession. Interest-only concessions are offered to customers on a temporary basis with formal periodic review subject to an affordability assessment. The concession allows the customer to reduce monthly payments to cover interest only, typically for six months, and if made, the arrears status of the account will not increase and will remain as at the beginning of the concession.
As at April 4, 2014, £171 million of balances (April 4, 2013: £265 million) representing 0.1% (April 4, 2013: 0.2%) of total mortgage balances were on this concession. Our provisioning methodology reflects the latest performance on these accounts.
The Group offers two forms of repair, capitalization and term extension (at term expiry), as set out below.
When a customer emerges from financial difficulty, we offer the ability to capitalize arrears, resulting in the account being repaired. Customers are only permitted to capitalize arrears where they have demonstrated their ability to meet a repayment schedule at normal commercial terms for a continuous six month period, or if they are able to overpay such that six months' payments are made in a four month period. As at April 4, 2014, £420 million (April 4, 2013: £442 million) of loans had an arrears capitalization at any point since January 2008 and are still on the books at April 4, 2014. £7 million of loans (April 4, 2013: £22 million) were capitalized during the year ended April 4, 2014. Once capitalized the loans are categorized as not impaired as long as contractual repayments are maintained.
Customers who are unable to repay their capital at term expiry may be offered a term extension. These extensions are typically on a capital and interest basis over a relatively short term, normally less than five years, and aim to recover the outstanding balance as quickly as possible, while ensuring the monthly payments remain manageable to the customer. As at April 4, 2014, £1,142 million (April 4, 2013: £1,028 million) of loans had an extension at term expiry at any point since January 2008 and are still on the books as at April 4, 2014; of these £318 million of loans (April 4, 2013: £164 million) had an extension at term expiry during the year ended April 4, 2014. No provisioning methodology adjustment is made for these accounts as a result of the low balance and LTV profile.
The options outlined above apply predominantly to the prime originated portfolio. The table below shows the stock of loans still on the books as at April 4, 2014 that have been subject to forbearance at some point:
| As at April 4, 2014 (Unaudited) |
As at April 4, 2013(2) (Unaudited) |
||||
|---|---|---|---|---|---|
| % of total prime loans and |
% of total prime loans and |
||||
| £ million | advances | £ million | advances | ||
| Change in terms(1) | 13,188 | 9 | 13,147 | 10 | |
| Forbearance(1) | 1,667 | 1 | 1,672 | 1 | |
| Repair(1) _______ |
1,555 | 1 | 1,461 | 1 |
Notes:
(1) The three categories above are not mutually exclusive. The information above has been extracted from our management information systems.
(2) Restated to reflect 2014 PRA guidance.
The following table presents negative equity on residential mortgages:
| As at April 4, 2014 | As at April 4, 2013 | |||||||
|---|---|---|---|---|---|---|---|---|
| Prime lending |
Specialist lending |
Prime lending |
Specialist lending |
|||||
| (£ million) | ||||||||
| Past due but not impaired | 4 | 6 | 5 | 13 | ||||
| Impaired | 3 | 16 | 5 | 21 | ||||
| Possessions | - | 7 | 1 | 15 | ||||
| Total | 7 | 29 | 11 | 49 |
Our commercial lending portfolio of £17.3 billion as at April 4, 2014 (April 4, 2013: £19.9 billion) comprises £7.8 billion secured on commercial property ("Property Finance") (April 4, 2013: £10.2 billion), £8.1 billion advanced to Registered Social Landlords (April 4, 2013: £8.2 billion) and £1.5 billion advanced under Project Finance, principally via the Private Finance Initiative ("PFI") (April 4, 2013: £1.5 billion). Our Property Finance portfolio is diverse both in terms of sectors and geographic spread.
Since April 4, 2014, we have sold over 90% of our non-UK CRE portfolio representing gross loans of £694 million with net sales proceeds in line with their carrying value.
The portfolio is actively monitored for evidence of impairment by reference to a range of factors, which include significant financial difficulty of the borrower, payment default, granting of a concession in accordance with our forbearance policies or other circumstances indicating the likelihood of a material change in cash flow expectations. Impaired Property Finance loans amounted to £3,065 million as at April 4, 2014 (April 4, 2013: £2,715 million) and provisions held against the portfolio amounted to £1,001 million (April 4, 2013: £958 million) representing a coverage ratio of 33% (April 4, 2013: 35%).
The proportion of our Property Finance balances classified as impaired and the provision coverage against these balances are shown below:
| As at April 4, | ||
|---|---|---|
| 2014 7,764 3,065 39% 921 80 1,001 30% 33% |
2013 | |
| (£ million, except percentages) | ||
| Gross balances | 10,192 | |
| Impaired balances | 2,715 | |
| Impaired balances as a % of gross balances | 27% | |
| Commercial provisions: | ||
| Individual | 810 | |
| Collective | 148 | |
| Total provisions | 958 | |
| Provision coverage ratios: | ||
| Individual provisions as a % of impaired balances | 30% | |
| Total provisions as a % of impaired balances | 35% | |
| Total provisions as a % of total gross balances | 13% | 9% |
Estimated (indexed) collateral values in relation to the impaired balances disclosed above amounted to £2,216 million (72% of impaired balances) as at April 4, 2014 and £1,743 million (64% of impaired balances) as at April 4, 2013. There are no cases classified as impaired or with payment arrears in our Registered Social Landlord or PFI portfolios.
Economic uncertainty, ongoing funding pressures across the banking sector and a trend towards higher regulatory capital requirements for CRE lending have significantly reduced the availability of credit for refinance within the sector. Furthermore, current depressed property values mean that foreclosure on loans which are operating outside the original terms of their advance is unlikely to provide the best economic outcome, except in those cases where ongoing serviceability is unachievable and/or the prospects of any recovery in cash flow performance or capital value is unlikely. Our strategy remains one of prudent loss mitigation over the medium term in a market which is both cyclical and currently experiencing extremely low investor demand. We make refinancing available for existing exposures where we are satisfied that we continue to have a constructive relationship with the borrower which recognizes our interests, and can achieve a level of expected return which reflects current funding costs or where there is a realistic likelihood that recovery over the medium term in the hands of the borrower represents a better prospect than short-term disposal. To the extent this strategy leads to forbearance on loans which are renewed at "off-market" interest rates or where the most likely outcome remains an ultimate financial loss, impairment provisions are then recognized in accordance with relevant accounting requirements.
Other lending operations as at April 4, 2014 includes £176 million (April 4, 2013: £219 million) of secured lending relating to a European commercial loan portfolio and a loan secured by a senior asset backed security ("ABS") reference portfolio.
Our unsecured lending in relation to a student loan portfolio (April 4, 2013: £217 million) was sold on April 24, 2013.
The table below provides further information on commercial and other lending operations by payments due status:
| As at April 4, 2014 | As at April 4, 2013 | |||||||
|---|---|---|---|---|---|---|---|---|
| Commercial | Other operations |
Commercial | Other operations |
|||||
| (£ billion, except percentages) | ||||||||
| Neither past due nor impaired | 4.6 | 60% | 0.1 | 50% | 7.1 | 69% | 0.4 | 100% |
| Past due up to 3 months but not | 0.1 | 1% | - | - | ||||
| impaired | 0.4 | 4% | - | - | ||||
| Impaired | 3.1 | 39% | 0.1 | 50% | 2.7 | 27% | - | - |
| Total | 7.8 | 100% | 0.2 | 100% | 10.2 | 100% | 0.4 | 100% |
The status "past due up to three months but not impaired" includes any asset where a payment due under strict contractual terms is received late or missed. The amount included is the entire financial asset rather than just the payment overdue.
Loans in the analysis above which are less than three months past due have collective impairment allowances set aside to cover credit losses.
Impaired balances in other operations total £107 million as at April 4, 2014 (April 4, 2013: £33 million). This consists of £25 million (April 4, 2013: £27 million) relating to the European commercial loan portfolio and £82 million (April 4, 2013: £nil) relating to a first loss exposure on the portfolio of asset backed securities securing the revolving loan facility.
Impaired commercial and other lending operations assets are further analyzed as follows:
| As at April 4, 2014 | As at April 4, 2013 | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Commercial | Other operations |
Commercial | Other operations |
||||||
| (£ million, except percentages) | |||||||||
| Impaired status: | |||||||||
| Past due 0 to 3 months | 2,125 | 69% | 82 | 77% | 1,581 | 58% | - | - | |
| Past due 3 to 6 months | 152 | 5% | - | - | 218 | 8% | 1 | 3% | |
| Past due 6 to 12 months | 334 | 11% | 8 | 7% | 295 | 11% | 2 | 6% | |
| Past due over 12 months | 442 | 15% | 17 | 16% | 620 | 23% | 30 | 91% | |
| Possessions | 12 | - | - | - | 1 | - | - | - | |
| Total | 3,065 | 100% | 107 | 100% | 2,715 | 100% | 33 | 100% |
Commercial assets totalling £2,988 million as at April 4, 2014 (April 4, 2013: £2,629 million) have individual provisions against some or all of the balance.
Possession balances represent loans against which we have taken ownership of properties pending their sale. Assets over which possession has been taken are realized in an orderly manner via open market or auction sales to derive the maximum benefit for all interested parties, and any surplus proceeds are distributed in accordance with the relevant insolvency regulations. We do not normally occupy repossessed properties for our business use or use assets obtained in our operations.
Although collateral can be an important mitigant of credit risk, it is our practice to lend on the basis of the customer's ability to meet their obligations out of cash flow resources rather than rely on the value of the security offered. In the event of default, we may use the collateral as a source of repayment.
Primary collateral is a fixed charge over freeholder or long leasehold properties, but may be supported by other liens, floating charges over company assets and, occasionally, unsupported guarantees. The collateral will have a significant effect in mitigating our exposure to credit risk.
The table below quantifies the estimated value of indexed collateral held against non-performing or impaired assets:
| As at April 4, | ||||
|---|---|---|---|---|
| 2014 | 2013 | |||
| (£ million, except percentages) | ||||
| Past due but not impaired | 65 | 100% | 407 | 100% |
| Impaired | 2,216 | 72% | 1,743 | 64% |
| Total | 2,281 | 73% | 2,150 | 69% |
The percentage, in the table above, is the cover over the asset. The indexed collateral value is based on the most recent valuation indexed using the Investment Property Databank ("IPD") monthly index for the relevant property sector. The indexed value of the collateral is based on the most recent formal valuation. We reserve the right to request a revaluation of any property currently charged in support of facilities advanced or upon an act of default. Although a revaluation is not automatically obtained, the merits of obtaining a revaluation are considered at each facility review and whenever a report is submitted to the Group Risk Division.
During the year a revised valuation policy has been implemented which stipulates the maximum period between formal valuations, relative to the risk profile of the lending. Particular attention is paid to the status of the facilities, for instance whether it is, or is likely to require an impairment review where our assessment of potential loss would benefit from updated valuations, or there are factors affecting the property that might alter the case assessment and the most appropriate action to take.
Collateral held in relation to secured loans that are either past due or impaired is capped at the amount outstanding on an individual loan basis.
Particular attention is paid to the status of the facilities, for instance whether it is or is likely to require an impairment review, where our assessment of potential loss would benefit from updated valuations, or there are factors affecting the property that might alter the case assessment and the most appropriate action to take.
| As at April 4, | ||||
|---|---|---|---|---|
| 2014 | 2013 | |||
| (audited) | (£ million, except percentages) | |||
| Performing loans | ||||
| Fully collateralized | ||||
| LTV ratio: | ||||
| less than 25% | 257 | 359 | ||
| 25% to 50% | 1,122 | 1,201 | ||
| 51% to 75% | 2,014 | 2,441 | ||
| 76 to 90% | 657 | 729 | ||
| 91% to 100% | 141 | 723 | ||
| Total | 4,191 | 54% | 5,453 | 54.5% |
| Partially collateralized | ||||
| More than 100% (A) | 443 | 6% | 1,617 | 16.9% |
| Collateral value of (A) | 373 | 1,282 | ||
| Total performing loans | 4,634 | 60% | 7,070 | 70% |
| As at April 4, | |||||
|---|---|---|---|---|---|
| 42 | 14 | ||||
| 25 | 27 | ||||
| 210 | 147 | ||||
| 144 | 127 | ||||
| 169 | 234 | ||||
| 590 | 8% | 549 | 5% | ||
| 2,540 | 32% | 2,573 | 25% | ||
| 1,690 | 1,580 | ||||
| 3,130 | 40% | 3,122 | 30% | ||
| 7,764 | 100% | 10,192 | 100% | ||
| 2014 | 2013 (£ million, except percentages) |
Notes:
(1) Since April 4, 2014, we have sold commercial real estate loans which represented £694 million and included over 90% of our remaining exposure to the German real estate market.
As a result of performing loans being reclassified as impaired, the overall proportion of partially collateralized non-performing loans has increased to 32% in the year ended April 4, 2014 (April 4, 2013: 25%). However, the shortfall on collateral for non-performing CRE loans has reduced by £143 million during the year ended April 4, 2014 to £850 million (April 4, 2013: £993 million).
The level of negative equity based upon the indexation of property values for the non-performing and impaired assets is detailed below:
| As at April 4, | ||
|---|---|---|
| 2014 | 2013 | |
| (£ million) | ||
| Past due but not impaired | 1 | 21 |
| Impaired | 840 | 972 |
| Possessions | 9 | 1 |
| Total | 850 | 994 |
In consumer banking, the balance of accounts more than 30 days in arrears has shown improvement in personal loans, but increased marginally on FlexAccounts and credit cards. All books have increased in size year-on-year, and where published data is available our performance compared with the industry remains favorable.
| As at April 4, 2014 | |||
|---|---|---|---|
| Delinquent balances |
Balances before provisions |
||
| (£ million) | |||
| FlexAccount (overdraft balances) | 23 | 300 | |
| Personal loans | 61 | 1,907 | |
| Credit cards | 44 | 1,655 | |
| Total | 128 | 3,862 |
The following table presents the percentage of FlexAccounts, personal loans and credit card accounts more than 30 days in arrears:
| As at April 4, | ||
|---|---|---|
| 2014 (percentages) 7.67 3.20 |
2013 | |
| FlexAccount (overdraft balances) | 9.81 | |
| Personal loans | 2.94 | |
| Credit cards | 2.66 | 3.24 |
The basis for the calculation of personal loans more than 30 days in arrears for the year ended April 4, 2013 has been amended to present the information on a consistent basis with the year ended April 4, 2014.
Unsecured customers have limited forbearance options. Credit card customers experiencing financial distress may agree a payment plan, which is typically less than the minimum payment. Additionally, credit card and personal loan customers who have maintained the required payment performance over a sustained period may be re-aged. The volume of payment plans and re-aging is low and therefore no specific treatment is made within our provisioning methodology.
The following section summarizes our direct exposure to institutions, corporates, and other issued securities domiciled in the peripheral eurozone countries. The exposures are shown at their balance sheet carrying values.
| As at April 4, 2014 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Greece | Ireland Italy Portugal |
Spain | Total | |||||||
| (£ million) | ||||||||||
| Mortgage backed securities | - | 14 | 75 | 49 | 299 | 437 | ||||
| Covered bonds | - | 39 | - | 22 | 281 | 342 | ||||
| Other corporate | - | - | 3 | - | - | 3 | ||||
| Total | - | 53 | 78 | 71 | 580 | 782 |
| As at April 4, 2013 | ||||||
|---|---|---|---|---|---|---|
| Greece | Ireland | Italy | Portugal | Spain | Total | |
| (£ million) | ||||||
| Mortgage backed securities | - | 144 | 90 | 50 | 335 | 619 |
| Covered bonds | - | 71 | - | 22 | 326 | 419 |
| Senior debt | - | - | 25 | - | 17 | 42 |
| Other assets | - | - | 3 | - | 2 | 5 |
| Other corporate | - | 11 | 3 | - | - | 14 |
| Total | - | 226 | 121 | 72 | 680 | 1,099 |
Movements in our exposure to peripheral eurozone countries between the years ended April 4, 2013 and 2014 relate to disposals, maturities and fair value movements and there has been no new investment in the current financial year.
During the year ended April 4, 2014, we disposed of £130 million of Irish assets and £25 million of Spanish assets as part of an ongoing exercise to deleverage the balance sheet. There has been no new investment in the year.
As at April 4, 2014 we had further indirect exposure to peripheral eurozone countries as a result of a €100 million loan to a Luxembourg SPV (April 4, 2013: €100 million) included in loans and advances to customers – other lending, which has first loss exposure to a €1.5 billion portfolio as at April 4, 2014 (April 4, 2013: €2 billion) of senior ranking European ABS assets. The sterling equivalent of the loan is £82 million as at April 4, 2014 (April 4, 2013: £85 million). The geographical breakdown of this portfolio as at April 4, 2014 is as follows: UK 56%, Spain 14%, Germany 10%, Italy 7%, Netherlands 7%, Greece 4% and Portugal 2% (April 4, 2013: UK 53%, Spain 13%, Germany 16%, Italy 7%, Netherlands 6%, Greece 3% and Portugal 2%). During the year we incurred a £3 million impairment charge on the loan in relation to the UK element of the portfolio.
None of our exposures to the peripheral eurozone countries are in default, and we did not incur any impairment on these assets in the year ended April 4, 2014. We continue to monitor closely the exposures to these countries.
In addition, our exposure in respect of other eurozone countries and the rest of the world is shown below at their balance sheet carrying value as at April 4, 2014:
| As at April 4, 2014 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Finland | France | Germany | Netherlands | Other eurozone (£ million) |
Total eurozone |
USA | Rest of the world |
Total | |
| Government bonds . | 170 | - | 438 | 778 | - | 1,386 | 388 | - | 1,774 |
| Mortgage backed | |||||||||
| securities | - | 12 | 41 | 334 | - | 387 | 109 | 57 | 553 |
| Covered bonds | - | - | - | - | - | - | 27 | - | 27 |
| Senior debt | - | - | - | - | - | - | - | 39 | 39 |
| Loans to banks | - | 103 | 151 | - | - | 254 | 364 | 385 | 1,003 |
| Other assets | - | 99 | 42 | - | - | 141 | 793 | 666 | 1,600 |
| Other corporate | 10 | 24 | 567 | 36 | - | 637 | - | 3 | 640 |
| Total | 180 | 238 | 1,239 | 1,148 | - | 2,805 | 1,681 | 1,150 | 5,636 |
| As at April 4, 2013 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Finland France |
Germany Netherlands |
Other eurozone |
Total eurozone |
USA | Rest of the world |
Total | |||||||
| (£ million) | |||||||||||||
| Government bonds | 133 | - | 505 | 1,039 | - | 1,677 | 672 | - | 2,349 | ||||
| Mortgage backed | |||||||||||||
| securities | - | 28 | 116 | 273 | - | 417 | 147 | 86 | 650 | ||||
| Covered bonds | 21 | - | 89 | 18 | - | 128 | 29 | 21 | 178 | ||||
| Senior debt | 21 | 33 | - | 50 | 9 | 113 | 57 | 42 | 212 | ||||
| Loans to banks | - | 164 | 130 | - | - | 294 | 460 | 620 | 1,374 | ||||
| Other assets | - | 109 | - | - | - | 109 | 1,085 | 1,001 | 2,195 | ||||
| Other corporate | 10 | 44 | 840 | 16 | - | 910 | - | - | 910 | ||||
| Total | 185 | 378 | 1,680 | 1,396 | 9 | 3,648 | 2,450 | 1,770 | 7,868 |
The movement in the balances in respect of Finland and the Netherlands reflects that these are still active markets for us, along with Germany and the USA. In addition, the above balances will be affected by movements such as pay downs of the assets and fair value and exchange rate adjustments.
The Group aims to align its sources and uses of funding. As such, retail customer loans and advances are largely funded by customer deposits. Non-retail assets, including commercial customer loans, primary liquidity and other treasury assets are largely funded by wholesale debt and equity.
| As at September 30, | As at April 4, | |||
|---|---|---|---|---|
| 2015 | 2015 | 2014 | 2013 | |
| (£ billions) | ||||
| Liabilities: | ||||
| Retail funding | 141 | 139 | 136 | 132 |
| Wholesale funding | 44 | 39 | 38 | 43 |
| Capital and reserves | 12 | 12 | 11 | 10 |
| Other | 6 | 6 | 5 | 6 |
| Total | 203 | 196 | 190 | 191 |
| Assets: | ||||
| Retail mortgages | 157 | 153 | 146 | 137 |
| Treasury (including liquidity portfolio) | 23 | 19 | 18 | 23 |
| Other lending | 3 | 4 | 4 | 4 |
| Commercial/other lending | 14 | 14 | 17 | 20 |
| Other assets | 6 | 6 | 5 | 7 |
| Total | 203 | 196 | 190 | 191 |
Our management of liquidity and funding risk aims to ensure that at all times there are sufficient liquid resources, both as to amount and quality, to cover cash flow mismatches and fluctuations in funding, to retain public confidence and to enable us to meet financial obligations as they fall due, even during episodes of stress. This is achieved through the management and stress testing of business cash flows and the setting of risk limits to maintain our target funding mix, maturity profile and level of high quality liquid assets.
To manage liquidity and funding risk we monitor the following:
We continue to maintain a high quality primary liquidity portfolio through continued investment in highly liquid securities in line with the Liquid Asset Buffer ("LAB") as defined by the PRA in BIPRU 12.7, comprising:
• reserves held at central banks; and
• highly rated debt securities issued by a restricted range of governments, central banks and multilateral development banks.
We also hold a secondary portfolio of other central bank eligible assets that are eligible for use in the funding operations of those central banks that it has access to. In terms of their relative liquidity characteristics, these assets may be viewed as the second tier of liquidity after the primary liquidity portfolio.
Other securities, such as RMBS, are held that are not eligible for central bank operations but can be monetised through repurchase agreements with third parties or through sale.
For contingent funding purposes, self-issued securities, issued under our RMBS and covered bond programs, represented eligible collateral for use in repurchase agreements with third parties or in central bank liquidity operations. These self-issued securities were replaced during the year with unencumbered mortgage assets that are pre-positioned at the BoE.
The section of Funding for Lending which provides funding linked to net residential mortgage lending has now been withdrawn and we do not expect to make any further drawings under Funding for Lending; our total drawings to date are £8.5 billion.
During the year ended April 4, 2015 we raised approximately £1.5 billion through issuance of CET1 CCDS and AT1 capital securities. The returns we pay to investors on these securities will be treated as an appropriation of profit after tax, reflecting their categorization as capital instruments, and hence are not reflected in our interest margin. Distributions for CCDS and AT1 capital securities in respect of the year ended April 4, 2015 totalled £100 million.
Liquidity represents a key area of risk management for financial institutions. In recent years there has been an increased focus on liquidity from the regulatory authorities. We continue to enhance and strengthen our liquidity management systems and approach. See "Risk Factors–Risks Related to Our Business—Our business and prospects are largely driven by the UK mortgage and savings markets, which in turn are driven by the UK economy. Consequently, we are subject to inherent risks arising from general economic conditions in the UK" for additional information on funding and liquidity risk.
In December 2010, the Basel Committee announced proposals to introduce two new liquidity metrics as part of the implementation of Basel III. These are a short-term liquidity stress metric, the Liquidity Coverage Ratio ("LCR") and a longer-term funding metric, the Net Stable Funding Ratio ("NSFR") which is due to be implemented in 2018. In January 2013, the Basel Committee announced revised guidelines in respect of the LCR and confirmed that work continues on the NSFR.
The Group continues to monitor its position relative to the regulatory short-term liquidity stress metric, the LCR, which was implemented on October1, 2015, and the longer-term funding metric, the NSFR.
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.
In October 2014, the Basel Committee on Banking Supervision published its final NSFR standard with a minimum requirement of 100% to be introduced from January 1, 2018. The final European NSFR standard is not expected until 2016.
Based on current interpretations of regulatory requirements and guidance, the Group had a LCR at 30 September 2015 of 130.0% (April 4, 2015: 119.3%) and a NSFR of 124.8% (April 4, 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 due for implementation in 2018.
We ensure sufficient resources are available for day-to-day cash flow needs while enabling us to meet internal and regulatory liquidity requirements, which are calibrated to be resilient even in the event of unexpected outflows that could be seen across a range of stress scenarios. Liquid assets are managed centrally by the Treasury Division. All liquidity is held centrally to meet cash outflows seen in any entity across our Group with the exception of a portfolio of assets held in our Irish branch, Nationwide (UK) Ireland ("NUKI").
The stock of liquid assets managed by our Treasury Division fall into the following four categories:
The Group maintains our high-quality primary liquidity portfolio through continued investment in highly liquid assets in line with the LAB as defined by the PRA in the Prudential Sourcebook for Banks, Building Societies and Investment Firms ("BIPRU") 12, which comprises:
The table below sets out the sterling equivalent fair value of each of the above liquidity types by issuing currency. The table is not a representation of the accounting balance sheet position as it includes offbalance sheet liquidity (Funding for Lending treasury bills), excludes encumbered assets and includes collateral swaps.
| September 30, 2015 | April 4, 2015 | April 4, 2014 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| GBP | EUR | USD | Total | GBP | EUR | USD | Total | GBP | EUR | USD | Total | |
| (£ billion) | (£ billion) | (£ billion) | ||||||||||
| Primary liquidity(1) | 21.9 | 0.7 | 0.7 | 23.3 | 18.4 | 0.8 | 0.4 | 19.6 | 19.0 | 1.3 | 0.5 | 20.8 |
| Other central bank | ||||||||||||
| eligible assets | 1.4 | 1.4 | 0.1 | 2.9 | 0.7 | 1.5 | 0.1 | 2.3 | 0.2 | 1.2 | - | 1.4 |
| Other securities | 1.3 | 0.6 | 0.4 | 2.3 | 1.5 | 0.6 | 0.5 | 2.6 | 1.3 | 0.8 | 0.9 | 3.0 |
| Self-issued RMBS | ||||||||||||
| and | ||||||||||||
| covered bonds | - | - | - | - | - | - | - | - | 14.0 | - | - | 14.0 |
| Whole mortgage | ||||||||||||
| loan pools | ||||||||||||
| pre-positioned at | ||||||||||||
| the BoE 11.5 | - | - | 11.5 | 13.5 | - | - | 13.5 | 2.1 | - | - | 2.1 | |
| Total 36.1 | 2.7 | 1.2 | 40.0 | 34.1 | 2.9 | 1.0 | 38.0 | 36.6 | 3.3 | 1.4 | 41.3 |
Note:
(1) Primary liquidity includes off-balance sheet items, primarily treasury bills held through Funding for Lending participation. The average month-end balance for primary liquidity during the six months ended September 30, 2015 was £21.7 billion (year ended April 4, 2015 was £22.0 billion; April 4, 2014: £19.9 billion).
An analysis of our wholesale funding (made up of deposits from banks, other deposits and debt securities in issue as disclosed on the balance sheet) is set out in the table below:
| As at September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2015 | 2015 | 2014 | 2013 | |||||
| (£ billion, except percentages) | ||||||||
| Repo and other | ||||||||
| secured agreements | 0.1 | 0.2% | - | - | - | - | - | - |
| Deposits, including PEB balances |
10.8 | 24.4% | 11.0 | 28.1% | 9.2 | 24.4% | 8.7 | 20.0% |
| Certificates of | ||||||||
| deposit | 4.0 | 9.0% | 3.1 | 7.9% | 2.6 | 6.9% | 3.8 | 8.8% |
| Commercial paper | 3.7 | 8.4% | 2.4 | 6.1% | 3.5 | 9.3% | 4.0 | 9.2% |
| Covered bonds | 12.2 | 27.5% | 11.3 | 28.8% | 9.5 | 25.2% | 11.4 | 26.3% |
| Medium-term | ||||||||
| notes | 7.6 | 17.2% | 5.2 | 13.3% | 5.1 | 13.5% | 4.7 | 10.8% |
| Securitizations | 4.8 | 10.8% | 4.8 | 12.2% | 6.9 | 18.3% | 7.6 | 17.5% |
| Other | 1.1 | 2.5% | 1.4 | 3.6% | 0.9 | 2.4% | 2.0 | 4.6% |
| Total | 44.3 | 100.0% | 39.2 | 100.0% | 37.7 | 100.0% | 42.2 | 100.0% |
The table below sets out an analysis of the currency composition of our wholesale funding as at September 30, 2015.
| USD | EUR | GBP | Other | Total | |
|---|---|---|---|---|---|
| (£ billion) | |||||
| Repo and other secured agreements | - | 0.1 | - | - | 0.1 |
| Deposits (including PEB balances) | 0.2 | 0.8 | 9.8 | - | 10.8 |
| Certificate of deposit | 0.1 | - | 3.9 | - | 4.0 |
| Commercial paper | 3.4 | - | 0.3 | - | 3.7 |
| Covered bonds | - | 9.5 | 2.6 | 0.1 | 12.2 |
| Medium term notes | 2.0 | 3.3 | 1.7 | 0.6 | 7.6 |
| Securitizations | 1.8 | 1.3 | 1.7 | - | 4.8 |
| Other | 0.1 | 0.8 | 0.2 | - | 1.1 |
| Total as at September 30, 2015 | 7.6 | 15.8 | 20.2 | 0.7 | 44.3 |
The table below sets out an analysis of the currency composition of our wholesale funding as at April 4, 2015:
| USD | EUR | GBP | Other | Total | |
|---|---|---|---|---|---|
| (£ billion) | |||||
| Deposits (including PEB balances) | 0.3 | 0.6 | 10.1 | - | 11.0 |
| Certificate of deposit | 0.1 | 0.1 | 2.9 | - | 3.1 |
| Commercial paper | 1.7 | 0.6 | 0.1 | - | 2.4 |
| Covered bonds | - | 9.4 | 1.8 | 0.1 | 11.3 |
| Medium term notes | 1.4 | 2.4 | 1.2 | 0.2 | 5.2 |
| Securitizations | 1.8 | 1.3 | 1.7 | - | 4.8 |
| Other | 0.1 | 1.0 | 0.3 | - | 1.4 |
| Total as at April 4, 2015 | 5.4 | 15.4 | 18.1 | 0.3 | 39.2 |
| Total as at April 4, 2014 | 7.6 | 13.4 | 16.3 | 0.4 | 37.7 |
To mitigate against cross-currency refinancing risk, we ensure we hold liquidity in each currency to cover at least the next ten business days of wholesale funding maturities.
The proportion of on-balance sheet funding with more than one year to maturity, which excludes the off-balance sheet Funding for Lending drawings, as at September 30, 2015 is 54.6% (April 4, 2015 is 53.3%). Funding for Lending drawings held off balance sheet, have a flexible and maximum maturity of four years. After including Funding for Lending drawings, the residual maturity profile of our wholesale funding has reduced to 38 months as at September 30, 2015 (April 4, 2015: 40 months) and the proportion of funding that is categorized as long term has increased to 61.9% (April 4, 2015: 61.6%). As at September 30, 2015, the primary liquidity pool including Funding for Lending represented 116% (April 4, 2015: 107%) of wholesale funding maturing in less than one year, assuming no rollovers.
The table below sets out the residual maturity of the wholesale funding book as at April 4, 2015:
| As at April 4, | ||
|---|---|---|
| 2015 | ||
| (£ billion, except percentages) | ||
| Less than one year | 18.3 | 46.7% |
| One to two years | 3.6 | 9.2% |
| Two to five years | 17.3 | 44.1% |
| Total | 39.2 | 100% |
The table below sets out a more detailed breakdown of the residual maturity on the wholesale funding book:
| As at April 4, 2015 | ||||||||
|---|---|---|---|---|---|---|---|---|
| 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 |
Sub total less than one year |
Over one year but not more than two years |
Over two years |
Total | |
| (£ billion) | ||||||||
| 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 |
| Securitizations | - | - | - | 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 |
Our short- and long-term credit ratings from the major rating agencies as at the date of this Base Prospectus are as follows:
| Long-Term | Short-Term | Subordinated | Date of last rating action(1) |
|
|---|---|---|---|---|
| S&P(1) | A | A-1 | BBB | June 2015 |
| Moody's(2) | A1 | P-1 | Baa1 | June 2015 |
| Fitch(3) | A | F1 | A- | June 2015 |
Note:
(1) The outlook for S&P is stable. (2) The outlook for Moody's is stable. (3) The outlook for Fitch is stable.
_____________
Our treasury assets held on the balance sheet were £18.8 billion as at April 4, 2015 (April 4, 2014: £18.0 billion) and included £11.1 billion held as available for sale ("AFS") (April 4, 2014: £10.6 billion) and are held in three separate portfolios: primary liquidity, other central bank eligible assets and other securities to better reflect the management of the portfolios and bring the analysis in line with PRA definitions in BIPRU.
During the year ended April 4, 2015, we undertook significant deleveraging of legacy treasury assets that were outside of our current credit policy. The total balance of out of policy assets reduced from £1.8 billion as at April 4, 2014 to £0.7 billion as at April 4, 2015 through targeted sales, maturities and amortization.
We consider "out of policy" assets to be legacy assets (bought prior to the financial crisis) that are no longer approved in our Treasury Credit Policy. These assets are still actively managed, with natural maturities reducing the balance of the assets over time. In addition, we assess opportunities for exit positions, whether via a sale or a tender offer, while also considering the financial implications for us of those potential exits.
Primary liquidity comprises cash and highly rated debt securities issued by governments, central banks or multi-lateral development banks. The remaining two portfolios comprise available for sale assets held for investment purposes and loans and advances to banks.
Analysis of each of these portfolios by credit rating and geographical location of the issuers is set out in the tables below. The tables show those assets held on the balance sheet only.
| As at April 4, 2015 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Credit Rating | Geography | ||||||||
| (Audited) | AAA | AA | A | Other | UK | USA | Europe | Other | |
| (£ billion) | (percentages) | ||||||||
| Primary liquidity portfolio: | |||||||||
| Cash | 4.3 | 100 | - | - | - | 100 | - | - | - |
| Gilts | 5.0 | 100 | - | - | - | 100 | - | - | - |
| Non-domestic government bonds | 1.2 | 21 | 79 | - | - | - | 25 | 75 | - |
| Supranational bonds | 0.5 | 90 | 10 | - | - | - | - | - | 100 |
| Primary liquidity portfolio total . | 11.0 | 91 | 9 | - | - | 85 | 3 | 8 | 4 |
| Other Central Bank eligible portfolio: |
|||||||||
| RMBS | 1.1 | 82 | 12 | 6 | - | 38 | - | 62 | - |
| Covered bonds | 1.0 | 96 | - | - | 4 | 44 | - | 48 | 8 |
| Other | 0.3 | 90 | - | - | 10 | 35 | - | 65 | - |
| Other Central Bank eligible portfolio total |
2.4 | 88 | 6 | 3 | 3 | 40 | - | 57 | 3 |
| Loans and advances to banks | 3.4 | 10 | 30 | 60 | - | 49 | 16 | 15 | 20 |
| RMBS | 0.9 | 35 | 7 | 53 | 5 | 86 | - | 11 | 3 |
| CMBS | 0.1 | - | 19 | 70 | 11 | 15 | 78 | 7 | - |
| CLOs | 0.5 | 75 | 21 | 4 | - | 59 | 41 | - | - |
| Covered bonds | 0.1 | 100 | - | - | - | 100 | - | - | - |
| U.S. student loans | 0.2 | - | 64 | 36 | - | - | 100 | - | - |
| Other | 0.2 | 42 | 25 | 13 | 20 | 40 | 13 | 47 | - |
| Non-core portfolio total | 5.4 | 22 | 26 | 50 | 2 | 55 | 19 | 13 | 13 |
| Total | 18.8 | 71 | 13 | 15 | 1 | 70 | 7 | 16 | 7 |
All assets shown above, other than cash and loans and advances to banks, are classified as availablefor-sale investment securities.
Ratings are obtained from S&P in the majority of cases, or from Moody's if there is no S&P rating available, and internal ratings are used if neither is available.
The quality and liquidity of treasury assets has been maintained with 99% of the total portfolio rated A or above and 84% rated AA or above (April 4, 2014: 97% rated A or better, 83% rated AA or above). Primary liquidity exposures make up 59% of the total portfolio (April 4, 2014: 68%).
A monthly review is undertaken of the current and expected future performance of all treasury assets. A governance structure exists to identify and review under-performing assets and highlight the likelihood of future losses. In accordance with accounting standards, assets are impaired where there is objective evidence that current events and/or performance will result in a loss.
In assessing impairment, we evaluate, among other factors, the normal volatility in valuation, evidence of deterioration in the financial health of the investee, industry and sector performance and operational and financing cash flows.
Collateral held as security for treasury assets is determined by the nature of the instrument. Primary liquidity and non-primary portfolios are generally unsecured with the exception of reverse repos, ABS and similar instruments, which are secured by pools of financial assets. Within loans and advances as at April 4, 2015 is a reverse repo of £0.1 billion (April 4, 2014: £0.1 billion), which is secured by gilts.
Our treasury assets held on the balance sheet were £18.8 billion as at April 4, 2015 (April 4, 2014: £18.0 billion) and included £11.1 billion (held as AFS (April 4, 2014: £10.6 billion). Under IFRS these items are marked to market through other comprehensive income and fair value movements are accumulated in reserves. Of the £11.1 billion of AFS assets, £12 million (April 4, 2014: £71 million) are classified as Level 3 (valuation not based on observable market data) for the purposes of IFRS 13. Details of fair value movements can be found in the notes to our audited consolidated financial statements as at and for the year ended April 4, 2015 incorporated by reference herein.
The fair value movement of AFS assets that are not impaired currently has no effect on our profit or regulatory capital.
As at April 4, 2015, the balance on the AFS reserve had improved to £26 million positive, net of tax (April 4, 2014: £51 million negative). The improvement in the AFS reserve reflects general market movements and the disposal of assets in the non-primary liquidity portfolios.
The following table shows the breakdown of AFS reserves as at April 4, 2015 and April 4, 2014:
| As at April 4, | |||||
|---|---|---|---|---|---|
| 2015 | 2014 | ||||
| Fair value on-balance sheet |
Cumulative AFS reserve |
Fair value on-balance sheet |
Cumulative AFS reserve |
||
| (£ billion) | |||||
| Cash | 4.3 | - | 5.3 | - | |
| Gilts | 5.0 | (0.5) | 4.5 | (0.2) | |
| Non-domestic government bonds | 1.2 | (0.1) | 1.8 | (0.1) | |
| Supranational bonds | 0.5 | - | 0.7 | - | |
| Primary liquidity portfolio total | 11.0 | (0.6) | 12.3 | (0.3) | |
| Residential mortgage backed securities (RMBS) |
1.1 | - | 0.8 | - | |
| Covered Bonds | 1.0 | - | 0.5 | - | |
| Other investments | 0.3 | - | 0.1 | - | |
| Other Central Bank eligible liquidity portfolio total |
2.4 | - | 1.4 | - | |
| Loans and advances to banks | 3.4 | - | 2.1 | - | |
| RMBS | 0.9 | - | 1.5 | 0.1 | |
| CMBS | 0.1 | - | 0.2 | - | |
| Covered bonds | 0.1 | - | 0.5 | - | |
| CLOs | 0.5 | - | 0.6 | - | |
| Financial institutions bonds | - | - | 0.1 | - | |
| U.S. student loan | 0.2 | - | 0.4 | - | |
| Other investments | 0.2 | - | 0.3 | - | |
| Other portfolio total | 5.4 | - | 4.3 | 0.1 | |
| Total treasury liquidity portfolio | 18.8 | - | 18.0 | - | |
| (Positive)/negative AFS reserve before hedge accounting and taxation |
- | (0.6) | (0.2) | ||
| Hedge accounting adjustment for interest rate risk |
- | 0.6 | 0.3 | ||
| Taxation | - | - | - | ||
| Total value of AFS assets/negative AFS reserve |
- | - | - | 0.1 |
The following table provides an analysis of financial assets and liabilities held on our balance sheet at fair value, grouped in levels 1 to 3 based on the degree to which the fair value is observable:
| As at April 4, 2015 | ||||
|---|---|---|---|---|
| Level 1 | Level 2 | Level 3 | Total | |
| (£ million) | ||||
| Investment securities—AFS | 6,726 | 4,299 | 12 | 11,037 |
| Investments in equity shares | - | - | 25 | 25 |
| Derivative financial instruments | - | 2,426 | 911 | 3,337 |
| Other financial assets(4) | - | 12 | - | 12 |
| Financial assets | 6,726 | 6,737 | 948 | 14,411 |
| Derivative financial instruments | - | (4,047) | (1) | (4,048) |
| Other deposits—PEB | - | - | (3,332) | (3,332) |
| Financial liabilities | - | (4,047) | (3,333) | (7,380) |
| As at April 4, 2014 | ||||
|---|---|---|---|---|
| Level 1(1) | Level 2(2) | Level 3(3) | Total | |
| 6,994 | 3,498 | 71 | 10,563 | |
| - | - | 28 | 28 | |
| - | 2,350 | 670 | 3,020 | |
| 6,994 | 5,848 | 769 | 13,611 | |
| - | (2,390) | (1) | (2,391) | |
| - | - | (3,222) | (3,222) | |
| - | (2,390) | (3,223) | (5,613) | |
| (£ million) |
Notes:
_____________
(2) Level 2: Fair value derived from inputs other than quoted prices that are observable for the asset or liability, either directly (i.e. a price) or indirectly (i.e. derived from prices), e.g. most investment grade and liquid bonds, ABS, certain collateralized debt obligations ("CDOs"), CLOs and over-the-counter ("OTC") derivatives.
Our 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 derivative assets and liabilities are valued from discounted cash flow models using yield curves based on observable market data. Other financial assets represent fair value movements in mortgage commitments entered into where a loan has not yet been made.
The main constituents of the Level 3 portfolio are as follows:
The Level 3 investments in equity shares of £25 million as at April 4, 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.
Level 3 assets and liabilities in this category are equity linked derivatives with external counterparties which economically match the investment return payable by us 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 PEB's 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 constructed from the valuation of the associated derivative as valued by an external third-party.
For further information and analysis of our capital resources, see "Capitalization and Indebtedness."
(1) Level 1: Fair value derived from unadjusted quoted prices in active markets for identical assets or liabilities, e.g. G10 government securities.
(3) Level 3: Inputs for the asset or liability are not based on observable market data (unobservable inputs), e.g. private equity investments, derivatives including an equity element, deposits including an equity element, some CDOs and certain ABS and bonds.
(4) Other financial assets represent fair value movements in mortgage commitments entered into where a loan has not yet been made. We recommenced the practice of fair valuing a portion of the mortgage commitments on the balance sheet during the year ended April 4, 2013.
From time to time we encumber assets to support funding initiatives or serve as collateral. Assets that have been so utilized, and thus cannot be utilised for other purposes, are classified as encumbered. The principal forms of encumbrance are secured funding and third-party repurchase transactions, with encumbrance also resulting from excess collateral balances and cash collateral posted. Other encumbered assets are those which cannot be utilised for secured funding due to legal or other reasons.
All other assets are defined as unencumbered assets. These comprise assets that are readily available to secure funding or meet collateral requirements and assets that are not subject to any restrictions but are not readily available for use.
Loans and advances to customers are only classified as available as collateral if they are already in such form that they can be used to raise funding without further management actions. All other loans and advances are conservatively classified as unencumbered other, although, with management action, a proportion would be suitable for use in secured funding transactions.
An analysis of our encumbered and unencumbered on-balance sheet assets as at April 4, 2015 is set out below. The table does not include off-balance sheet assets received as part of our participation in Funding for Lending, which we are permitted to re-use. This disclosure is not designed to identify assets that would be available in the event of a resolution or bankruptcy.
| As at April 4, 2015 | ||||||
|---|---|---|---|---|---|---|
| Encumbered | Unencumbered | |||||
| Pledged as collateral |
Other | Available as collateral |
Other | Total | ||
| (£ million) | ||||||
| Cash | - | 2,218 | 1,947 | 160 | 4,325 | |
| Loans and advances to banks | 2,308 | 327 | - | 757 | 3,392 | |
| Investment securities—AFS | 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 | - | - | - | 630 | 630 | |
| Non-financial assets | - | - | - | 2,212 | 2,212 | |
| Total | 48,092 | 2,545 | 91,491 | 53,452 | 195,580 |
Capital is held by us to protect our depositors, cover our inherent risks, provide a cushion for stress events and support our business strategy. In assessing the adequacy of our capital resources, we consider our risk appetite in the context of the material risks to which we are exposed and the appropriate strategies required to manage those risks. We manage our capital structure to ensure it continues to meet minimum regulatory requirements, as well as meeting the expectations of other key stakeholders. As part of the risk appetite framework, we target a Common Equity Tier 1 ("CET1") ratio among the best in market compared to major banking peers. Our strategy is to meet this primarily through retained earnings, supplemented by external capital issuances where appropriate, as well as the strategic management of credit risk.
The Group manages its capital structure to ensure it continues to meet minimum regulatory requirements, as well as meeting the expectations of other key stakeholders. As part of the risk appetite framework, the Group targets a strong CET1 ratio relative to both regulatory requirements and major banking peers. Planned changes to the balance sheet, potential regulatory developments and other factors (such as movements in the Available for sale reserve and pension deficit) are all considered. The Group continues to expect its CET1 and leverage ratios to be in excess of 16% and 4% respectively and to be well positioned to absorb future regulatory change.
The capital strategy is to manage these ratios through retained earnings, supplemented by external capital where appropriate. In recent years, the Group has demonstrated its ability to supplement retained earnings through the issuance of CET1, Additional Tier 1 and Tier 2 capital instruments and has delivered significant deleveraging of its non-core commercial real estate portfolio and out of policy treasury assets.
The capital disclosures included in this report are reported on a CRD IV end point basis unless otherwise stated 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.
| Total regulatory capital | September 30, 2015 April 4, 2015 |
April 4, 2014 | |
|---|---|---|---|
| (£ million) | (£ million) | (£ million) | |
| General reserve (note (1)) | 8,612 | 7,995 | 7,363 |
| Core capital deferred shares (CCDS) | 531 | 531 | 531 |
| Revaluation reserve | 68 | 68 | 71 |
| Available for sale reserve | (8) | 26 | (51) |
| Regulatory adjustments and deductions: | |||
| Foreseeable distributions (note (2)) | (43) | (44) | (45) |
| Prudent valuation adjustment (note (3)) Own credit and debit valuation |
(3) | (1) | (5) |
| adjustments (note (4)) |
(4) | (11) | (17) |
| Intangible assets (note (5)) | (1,042) | (982) | (890) |
| Goodwill (note (5)) | (12) | (12) | (12) |
| Excess of regulatory expected losses over impairment provisions (note (6)) Total regulatory adjustments and |
(297) | (291) | (1,096) |
| deductions | (1,401) | (1,341) | (2,065) |
| Common Equity Tier 1 capital | 7,802 | 7,279 | 5,849 |
| Additional Tier 1 capital securities (AT1) | 992 | 992 | 992 |
| Total Tier 1 capital | 8,794 | 8,271 | 6,841 |
| Dated subordinated debt (note (7)) Excess of impairment provisions over regulatory |
1,581 | 1,653 | 1,886 |
| expected loss (note (6)) | 3 | - | 171 |
| Collectively assessed impairment | |||
| allowances | 22 | 26 | 27 |
| Tier 2 capital | 1,606 | 1,679 | 2,084 |
| Total regulatory capital | 10,400 | 9,950 | 8,925 |
| Solvency ratios (note (8)): | |||
| Common Equity Tier 1 ratio | 21.9% | 19.8% | 14.5% |
| Total Tier 1 capital ratio | 24.7% | 22.5% | 16.9% |
| Total regulatory capital ratio | 29.2% | 27.0% | 22.1% |
Notes:
(1) The general reserve includes unaudited profits for the period to September 30, 2015 to present the capital position on a basis
consistent with the accounts. When reporting the capital position to the PRA, unaudited profits are excluded.
(2) Foreseeable distributions in respect of CCDS and AT1 securities are deducted from CET1 capital under CRD IV.
(3) A prudent valuation adjustment is applied in respect of fair valued instruments as required under regulatory capital rules.
(4) Own credit and debit valuation adjustments are applied to remove balance sheet gains or losses of fair valued liabilities and
derivatives that result from changes in the Group's own credit standing and risk, in accordance with CRD IV rules.
(5) Intangible assets and goodwill do not qualify as capital for regulatory purposes.
CET1 capital has increased from £7,279 million as at April 4, 2015 to £7,802 million as at September 30, 2015 primarily due to a strong trading performance for the six months. The increases in total tier 1 and total regulatory capital include the increase in CET1 resources, partly offset at a total regulatory capital level by a lower Tier 2 value for dated subordinated debt due to fair value and amortisation movements.
The Group's capital and leverage ratios have increased since April 4, 2015 as a result of a strong trading performance and the deleveraging of the commercial portfolio. In addition, increasing house prices have resulted in lower risk weighted assets attributable to retail mortgages, despite growth in the mortgage book. The Group's key capital measures are summarised in the table below:
| As at September 30, | As at April 4, | ||
|---|---|---|---|
| 2015 | 2015 | 2014 | |
| Risk weighted assets ("RWAs") (£ million) |
35,628 | 36,804 | 40,455 |
| CRD IV capital ratios (unadjusted) |
|||
| CET1 ratio | 21.9% | 19.8% | 14.5% |
| Leverage ratio(1) | 4.2% | 4.1% | 3.4% |
Notes:
(1) The leverage ratio is calculated using the CRR definition of Tier 1 for the capital amount and the delegated act definition of the exposure measure.
The Group previously disclosed PRA adjusted ratios, which applied across the industry following the PRA's capital shortfall exercise in June 2013. In June 2014, the PRA announced that the adjustments would no longer apply from July 1, 2014, and therefore adjusted ratios have not been disclosed in this report.
RWAs have decreased by £1,176 million since April 4, 2015, to £35,628 million as at September 30, 2015. This has been driven by continued deleveraging of the commercial portfolio. Our retail mortgage RWAs are lower as a result of the impact of an increase in the house price index ("HPI"), which more than offsets portfolio growth.
Total exposure used to calculate the leverage ratio has increased by £7,956 million to £208,621 million, as lower off balance sheet exposures partly offset balance sheet growth. Balance sheet assets have grown by £7,531 million to £203,111 million since April 4, 2015 mainly due to increases in residential mortgage lending exceeding deleveraging of the commercial real estate portfolio. The leverage ratio has increased to 4.2% (April 4, 2015: 4.1%) driven by the increase in CET1 capital resources described above, which outweighs the increase in leverage exposure driven by asset growth.
| Risk weighted assets (£ million) | As at September 30, |
As at April 4, | |
|---|---|---|---|
| 2015 | 2015 | 2014 | |
| (£ million) | |||
| Credit risk | |||
| Retail mortgages | 14,024 | 14,372 | 15,105 |
| Retail unsecured lending | 6,835 | 7,023 | 6,899 |
| Commercial loans | 6,752 | 7,646 | 9,061 |
| Treasury | 1,521 | 1,375 | 3,290 |
| Counterparty credit risk (1) | 962 | 826 | 1,014 |
| Other(2) | 1,306 | 1,334 | 1,295 |
| Total credit risk | 31,400 | 32,576 | 36,664 |
| Operational risk | 4,228 | 4,228 | 3,762 |
| Market risk(3) | - | - | 29 |
| Total risk weighted assets | 35,628 | 36,804 | 40,455 |
Notes:
(1) Counterparty credit risk relates to derivative financial instruments.
(2) Other relates to fixed and other assets held on the balance sheet.
(3) We elected to set this to zero in 2015, as permitted by the CRR, as exposure was below the threshold of 2% of own funds.
Our CRD IV Pillar 1 capital requirements (risk weights) are calculated using (i) the Retail IRB approach for prime, buy to let and self-certified mortgages (other than those originated by the Derbyshire, Cheshire and Dunfermline building societies) and unsecured lending; (ii) foundation IRB and the PRA's "slotting" methodology for treasury and commercial portfolios (other than sovereign exposures); and (iii) the standardized approach for all other credit risk exposures including some treasury and commercial exposures that are exempt from using the IRB approach. The introduction of CRD IV increased RWAs principally through asset value correlation, credit value adjustments and increased weightings for deferred tax assets. In addition, we chose to risk weight securitization exposures rated below BB- rather than deduct them from capital such that they are included in treasury RWAs; this change was made from January 1, 2014. RWAs have decreased by £1,176 million to £35,628 million. This has primarily been driven by continued deleveraging of the commercial portfolio and a decrease in the Group's retail mortgage RWAs as a result of the impact of an increase in the house price index (HPI), which more than offsets the portfolio growth.
| As at September 30, |
As at April 4, | ||
|---|---|---|---|
| 2015 | 2015 | 2014 | |
| (million, except for percentages) | |||
| Solvency ratios(3) | |||
| CET1 ratio | 21.9% | 19.8% | 14.5% |
| Total Tier 1 capital (transitional)(4) | 24.7% | 22.5% | 16.9% |
| Total regulatory capital (transitional) | 29.2% | 27.0% | 22.1% |
| Leverage(5) | |||
| Exposure | 208,621 | £200,665 | £199,188 |
| Capital (excluding PIBS) | 8,794 | £8,271 | £6,841 |
| Leverage ratio | 4.2% | 4.1% | 3.4% |
Notes:
(1) Our solvency ratios are on an endpoint basis. Transitional ratios can be found in our 2015 Pillar 3 disclosures at www.nationwide.co.uk.
(2) Our leverage ratio is calculated using the CRR definition of Tier 1 for the capital amount and the delegated act definition of the exposure measure and reported on an endpoint basis. The comparative has been restated to align to the revised definition (previously reported as 3.3% under the Basel III definition of exposure measure).
For further information and analysis of our capital resources, see "Capitalization and Indebtedness."
Our short-term borrowings fluctuate considerably depending on our current operating needs. The terms of our short-term borrowings are less than one year.
For details of the amounts of certain of our financial and other contractual liabilities and when payments are due, without taking into account customer deposits and deposits by other financial institutions, please see notes 33 and 34 to our audited consolidated financial statements as at and for the year ended April 4, 2015 incorporated by reference herein.
For a description of off-balance sheet commitment items under IFRS, please see note 33 to our audited consolidated financial statements as at and for the year ended April 4, 2015 incorporated by reference herein.
For details on our critical accounting policies under IFRS, please see note 2 to our interim financial statements and note 2 to our audited consolidated financial statements as at and for the year ended April 4, 2015 incorporated by reference herein.
We are a building society, incorporated in England and Wales under the UK Building Societies Act, as amended, and authorized by the PRA and regulated by the FCA in relation to conduct of business matters and by the PRA in relation to prudential requirements. Our FCA Mutuals Public Register Number is 355B. Our principal office is Nationwide House, Pipers Way, Swindon SN38 1NW (phone number +44 (0) 1793 513 513). We are the largest building society in the United Kingdom in terms of total assets, with £203 billion of assets as at September 30, 2015. We are the second largest residential mortgage lender in the United Kingdom and the second largest UK savings provider (as calculated by us based on BoE data).
Our core business is providing personal financial services, including:
In addition, we maintain an investment portfolio of debt securities for our own account.
As a mutual organization, we are managed for the benefit of our "members," our retail savings and residential mortgage customers, rather than for equity shareholders. Our main focus is serving our members' interests, while retaining sufficient profit to increase and further develop our business and meet regulatory requirements. We return value to our members by offering typically higher interest rates on savings and lower interest rates on loans than those offered by our main competitors. This returned value is commonly referred to as our member value. As a result of returning value to our members, we earn lower pre-tax profits than our main competitors, which are typically banks or other non-mutual organizations.
Profits on ordinary activities after tax for the six months ended September 30, 2015 and the year ended April 4, 2015 were £636 million and £839 million, respectively. Our lending activities are predominantly concentrated on secured lending, with residential mortgages accounting for 90% of our total loans and advances to customers as at September 30, 2015.
Building societies have existed in the United Kingdom for over 200 years. From the outset, they were community-based, cooperative organizations created to help people purchase homes. The main characteristic of building societies is their mutual status, meaning that they are owned by their members, who are primarily retail savings customers and residential mortgage customers. Our origins go back to the Northampton Freehold Land Society, which was founded in 1846. Over time, this entity merged with similar organizations to create Nationwide Building Society.
Over the past 30 years, many building societies have merged with other building societies or, in some cases, transferred their businesses to the subsidiary of another mutual organization or demutualized and transferred their businesses to existing or specially formed banks. As a result, the number of building societies in the United Kingdom has fallen dramatically over the same period. One consequence of this decrease is that the majority of our competitors are banks. We believe that our mutual status allows us to compete successfully with banks, and it is our strategy to remain a building society. At our annual general meeting in 1998, our members voted against a proposal to demutualize and no subsequent motion to demutualize has since been proposed at a
general meeting of the Society. However, it is possible that another motion to demutualize could be proposed and voted upon at a future general meeting.
In 1997, when many of our competitors that were building societies demutualized, we experienced a sharp increase in the number of new UK member retail savings accounts. We believe that many of these accounts were opened because customers expected us to demutualize and wanted to receive any associated windfall distributions. To prevent the disruption caused by speculative account opening, we have generally required all new members opening accounts with us since November 1997 to assign to charity any windfall benefits which they might otherwise have received as a result of a future demutualization.
We have been involved in a number of mergers and acquisitions in recent years. We merged with Portman Building Society in August 2007 and with Cheshire Building Society and Derbyshire Building Society in December 2008. In March and June 2009 we also acquired selected assets and liabilities of Dunfermline Building Society. In addition, we opened our first branch in the Republic of Ireland in March 2009. We believe these developments have added value to us improved our distribution footprint and helped to grow the membership and are a testament to our strength and our ability to provide support to other building societies.
Our vision is to be the first choice for financial services, and to achieve this, our strategy is based on five strategic priorities: Modern mutual; A bigger voice; Great employer; A strong Society; and Exemplar organisation.
We are committed to mutuality on a broader scale than simply the provision of mortgages and savings. We are a modern mutual, which means that we provide a full service, multi-channel offering to a growing number of members.
We aim to protect and consolidate our top two position in mortgages and savings, while pursuing our goal to build scale in our business in our third core product, personal current accounts. With increased service making use of tablet and mobile technology, we intend to deliver next generation banking by creating an 'always available' environment, using digitally enabled services and simplified processes to allow members to choose when, where and how they wish to engage with us.
We hope to continue to differentiate ourselves in the market through our service and brand. We intend to refocus our branches to deliver help and advice, enhancing our reputation as a trusted organisation. In addition, we intend to increase our sales and service capacity through wider deployment of Nationwide Now, a video conferencing link with members that facilitates services resembling in-branch visits.
Our belief is that a strong, iconic brand effective both in digital and traditional media, is essential to attract new members across all life stages, supporting our current account market share aspirations. We aim to close the gap on our banking peers for spontaneous brand recognition, via our advertising campaigns to a broader range of consumers across traditional and digital channels.
Our staff embody our culture, are ambassadors for our mutual approach, and we believe their skills offer us a competitive advantage. Our principles are expressed across the Group through "PRIDE", our internal set of values and standards to promote delivering high quality customer service. PRIDE stands for putting members first, rewarding membership, inspiring trust, doing the right thing and excelling at service. We aim to attract and retain an efficient, high performing workforce ready to meet the changing organizational requirements of a modern mutual. To support this we strive to develop our leadership pipeline and build an increasingly diverse workforce where employees are engaged and have interests aligned with those of our members. We plan to continue investing in our talent management programs, including increasing the number of graduates and apprentices across our business, to meet current and future capability requirements.
We aim to instill trust and confidence among members by maintaining a low risk appetite and ensuring our assets remain of the highest quality, underpinned by strong levels of liquidity and capital. We aim to preserve the financial security and safety of our business, invest in new products and services and offer long term good value for our members. This financial discipline will be supported by a strong governance and risk framework.
Our culture is focused on delivering good conduct and fair customer outcomes to members and stakeholders. We aim to maintain strong regulatory relationships and put our members' interests at the forefront of our business.
Our lending activities are primarily concentrated on residential mortgage lending in the United Kingdom. We also engage in a limited amount of commercial secured lending and unsecured consumer lending.
The vast majority of our lending portfolio consists of UK residential mortgage loans to individuals. Residential mortgage loans to individuals are secured on the residential property of the borrower on terms which allow for repossession and sale of the property if the borrower breaks the terms and conditions of the loan. Our policy is for all residential mortgage loans to individuals to be fully secured first priority loans on the mortgaged property, to ensure that our claim to the property, in the event of default, is senior to those of other potential creditors. As a result, our residential mortgage lending to individuals carries lower risk than many other types of lending.
As at September 30, 2015, we were the second largest mortgage lender in the United Kingdom (as measured by total loans outstanding) (as calculated by us based on BoE data). As at September 30, 2015, our total prime and specialist residential mortgage lending amounted to £157.0 billion (£152.9 billion as at April 4, 2015). Our residential mortgages are generally for terms of 20 to 30 years. While many customers remain with us for much or all of this term, some customers redeem their mortgage earlier than this in order to remortgage to another lender or for other reasons. The minimum life of a mortgage is usually between two and five years, depending on the terms of the customer's initial product, although we generally retain approximately 85 to 90% of customers when they reach the end of a product.
We have a national franchise within the United Kingdom, with a regional distribution of UK residential mortgage lending to individuals generally matching the regional gross domestic product distribution in the United Kingdom. Below is a table showing the geographical distribution of our UK residential mortgage loans as at September 30, 2015:
| % of UK residential mortgage lending to individuals as at September 30, 2015 |
|
|---|---|
| Region | |
| Greater London | 33 |
| Central England | 18 |
| Northern England | 16 |
| South East London (excluding London) | 12 |
| South West England | 9 |
| Scotland | 7 |
| Wales and Northern Ireland | 5 |
| Total | 100 |
We offer fixed rate and tracker rate mortgages. These products establish a set rate or set methodology for determining a variable rate for a set term, after which the rate reverts to one of our two general variable rates. Our fixed-rate products currently offer a term of two, three, four, five or ten years, but we have from time to time offered longer fixed terms, including 25 years. Our tracker rate products bear interest during the set term (currently two or three years) at a variable rate that is a fixed percentage above the BoE base rate. After the end of the set fixed rate or tracker period, the interest rate reverts to either our BMR (if the mortgage was originated on or before April 29, 2009) or our SMR (if the mortgage was originated on or after April 30, 2009). Both our BMR and our SMR are variable rates set at our discretion, except that our BMR is guaranteed not to be more than 2% above the BoE base rate.
To reduce the costs associated with early repayment of mortgages and to recover a portion of the costs of mortgage incentives, we impose early repayment charges on some products. The early repayment charges generally apply for repayment made prior to the expiration of the fixed or tracker rate for the particular product. Our asset quality has remained strong, which we believe is evidence of our continued prudent lending standards. We are committed to supporting the housing market, and first time buyers in particular. Our gross and net market shares as at September 30, 2015 were 13.2% and 21.2%, respectively, compared with gross and net market shares of 13.4% and 31.2%, respectively for the year ended April 4, 2015. The average LTV of residential mortgages completed has increased to 69% as at September 30, 2015 (April 4, 2015: 66%). The indexed LTV for the whole residential portfolio has improved by 1% to 55% (April 4, 2015: 56%) on a value basis in line with the growth in house prices.
The proportion of our mortgage accounts three months or more in arrears has reduced to 0.46% as at September 30, 2015 (April 4, 2015: 0.49%), this compares favorably with the CML industry average of 1.17%.
The following table sets forth a breakdown of our loans in arrears as at September 30, 2015:
| As at September 30, 2015 |
|
|---|---|
| Arrears | |
| 3-6 months | 0.23% |
| 6-12 months | 0.15% |
| Over 12 months | 0.08% |
| _____ |
Note: (1) ______________ Nationwide prime and specialist residential lending.
We utilize an automated credit scoring system to assist in minimizing credit risk on residential mortgage lending. Our credit procedures for residential mortgage lending take into account the applicant's credit history, loan-to-value criteria, income multiples and an affordability calculation, or shock test, that tests the applicant's ability to service the loan at higher interest rates. For additional information regarding how we manage credit risk in connection with new lending, see "Financial Risk Management—Credit risk."
We focus our residential mortgage sales efforts on first-time buyers, subsequent purchasers moving home and the remortgage market. In current market conditions, we are particularly keen to support our existing members and have introduced products to support first-time buyers. First-time buyers offer a significant potential for additional sources of income through the distribution of insurance and personal investment products. The proportion of new lending to first time buyers has remained stable at 27% during the period during the six months ended September 30, 2015 with 73% to experienced buyers (compared to 27% of residential mortgage advances to first-time buyers and 73% to experienced buyers for ended September 30, 2014).
In addition to residential mortgage loans, we offer further secured advances on existing mortgaged property to customers consistent with our lending criteria for new residential mortgage loans.
We offer specialist UK residential mortgage lending to individuals, which comprises lending to private landlords (buy-to-let) and other non-conforming lending.
As at September 30, 2015, our outstanding specialist UK residential mortgage lending to individuals was £29.7 billion. The specialist residential mortgage balance is made up of advances made through our specialist lending brands, TMW and UCB, and from the acquisitions of the Cheshire, Derbyshire and Dunfermline building societies portfolios. Our outstanding specialist lending loans were advanced primarily in the buy-to-let and self-certification markets. New specialist lending is restricted to buy-to-let via TMW with us having withdrawn from the self-certified lending market in 2009. A breakdown of our specialist UK residential mortgage lending outstanding balances as at September 30, 2015, is shown in the table below:
| Buy-to-let | 87% |
|---|---|
| Self-certified | 8% |
| Near prime | 3% |
| Sub prime | 2% |
| Total | 100% |
TMW is an important provider of high-quality loans to the buy-to-let sector. Our total specialist mortgage book stood at £29.7 billion as at September 30, 2015 (April 4, 2015: £28.3 billion).
There has been a reduction in specialist arrears as a result of reducing arrears volumes on the selforiginated books, and strong book growth in TMW. TMW continues to maintain a very favorable arrears position relative to the industry on both originated business and total lending including acquired loans. Our specialist mortgages continue to perform well with cases three months or more in arrears representing only 1.0% of the total mortgage book as at September 30, 2015 (April 4, 2015: 1.12%), which compares favorably to the overall industry measure (source: CML), that is inclusive of prime lending, 1.17% as at September 30, 2015 (April 4, 2015: 1.30%).
We engage in commercial secured lending, which as at September 30, 2015 accounted for 7% of our total loan assets. To maintain a prudent balance between our asset classes, we currently have a 10% cap on commercial lending as a percentage of our total lending (book balances). We intend to maintain a low risk exposure to commercial secured lending and to maintain the existing level of credit quality throughout our commercial loan portfolio.
The amount and types of loans in the commercial portfolio as at September 30, 2015 were as follows:
| As at September 30, 2015 | |||
|---|---|---|---|
| £ billion | % of total commercial loans |
||
| Commercial Secured Loans | |||
| Commercial real estate | 3.3 | 27% | |
| Registered Social Landlords | 7.7 | 62% | |
| Project Finance | 1.4 | 11% | |
| Total | 12.4 | 100% |
Loans made to UK Registered Social Landlords are secured on residential property and differ significantly from other loans secured on real property. UK Registered Social Landlords provide affordable housing supported by government grants. This portfolio historically has carried a lower risk than our other commercial lending activities, and there are currently no arrears of three months or more in our Registered Social Landlord portfolio. To date we have not needed to raise any loss provisions against this portfolio. We are the largest lender to UK Registered Social Landlords by amount of assets lent.
Loans advanced in relation to Project Finance are secured on cash flows from government backed contracts such as schools, hospitals and roads under the UK Private Finance Initiative legislation, and include assets acquired from Derbyshire, Cheshire and Dunfermline building societies. Again, the Group has never suffered any losses on lending in these markets and there are currently no arrears of three months or more.
The Group's Property Finance portfolio is well diversified by industry type and by borrower, with no significant exposure to development finance.
We engage in personal banking, which accounted for 2% of our total loan assets as at September 30, 2015 and 2% of our total loan assets as at April 4, 2015.
Unsecured consumer banking consists of loans that we make to individuals that are not secured on real or personal property. We offer three different forms of unsecured consumer lending: personal unsecured loans, credit card lending and current accounts with overdraft facilities.
There is a greater risk of loss on unsecured consumer lending than there is on residential mortgage lending because we have no security if the borrower defaults on the loan. Accordingly, unsecured consumer lending products bear higher interest rates than our residential mortgage products. To manage this risk, we use an automated credit scoring system that is designed to evaluate a borrower's ability to repay the loan. In addition, we impose a maximum limit on the size of unsecured consumer loans and encourage customers to take out payment protection insurance.
For information regarding our credit card and overdraft facilities, see the subsections entitled "—Other Banking Services—Credit Cards" and "—Other Banking Services—Current Accounts."
The great majority of our retail funding is in the form of UK retail member deposits. In addition, we accept offshore deposits and deposits which do not convey member status. As at September 30, 2015 we had UK retail member deposits of £135.0 billion, which is an increase of £2.6 billion from £132.4 billion as at April 4, 2015. UK retail member deposits represented 66.4% of our total liabilities and reserves as at September 30, 2015.
We provide a wide range of retail savings products that may be repayable on demand or notice and which may pay a variable or fixed rate of interest. On most retail savings products, we determine variable interest rates at our discretion according to market conditions. Generally, the more restrictions on withdrawal of retail savings, the higher the rate of interest. Balances on all of our notice deposit accounts are, by their terms, withdrawable on demand but, in some cases, subject to loss of interest.
We believe that the primary determinant for attracting retail savings is the interest rate offered to savers. As a mutual organization, we typically set higher interest rates on our retail funding products than those set by our main competitors. We gather UK retail member deposits from a number of sources, chiefly from our branch network but also by mail and internet-based deposit accounts.
The UK retail savings market is highly competitive among building societies and banks, including those banks owned by insurance companies and retailers. This competition has increased the relative cost of retail funds, especially new retail funds.
Our current account, called FlexAccount, is our checking and day-to-day transactional product. Holders of FlexAccounts may be eligible for ATM cards, check books, overdraft facilities and debit cards depending upon the account holder's credit score and the performance of the account. The overdraft facility connected to the current account charges interest at one rate for authorized overdrafts and at a higher rate for unauthorized overdrafts. In addition, current account members have been able to upgrade their account to FlexPlus, thereby gaining access to a comprehensive range of benefits including interest on credit balances, worldwide travel insurance, breakdown cover and extended appliance warranties. Our market share of main standard and packaged accounts increased to 6.9% and includes the latest addition to our product range, FlexOne, a current account designed specifically for the youth market.
We began issuing Nationwide-branded Visa credit cards to our customers in 1997. We market and process credit card applications ourselves (using our credit scoring system), and an outside contractor is responsible for billing and customer service functions. Our credit card holders receive differing credit limits, depending on their credit score. We do not charge customers an annual fee for using the credit card.
Credit card lending continues to grow reflecting increased growth in consumer borrowing with overall balances at September 30, 2015 of £1.7 billion (April 4, 2015: £1.8 billion).
We offer offshore savings through our Isle of Man branch (previously a subsidiary, Nationwide International Limited), to give us access to another funding source. The branch offers demand and notice accounts in sterling, U.S. dollars and euros mainly to offshore investors. As at September 30, 2015, the Isle of Man branch had deposits of £5.6 billion.
We also provide our customers with foreign currency exchange and equity dealing services. We act as an agent in providing these services and assume no foreign exchange or equity price risk as a result of this activity.
Our Treasury Division centrally manages our liquid asset portfolios as well as most of our financial risk exposures, and raises funds on the money and debt capital markets.
The Treasury Division manages risk exposures, including market risk, by making use of derivative instruments such as swaps, futures and options, which reduce our exposure to changes in interest rates and currency rates. See the sections entitled "Financial Risk Management" and "Management's Discussion and Analysis of Financial Condition and Results of Operations—Overview" for further details of risk management.
The Group's liquidity and investment portfolio on the balance sheet at September 30, 2015 of £23.1 billion (compared to April 4, 2015: £18.8 billion) is held in three separate portfolios: primary liquidity, other central bank eligible assets and other assets.
Primary liquidity comprises cash and highly rated debt securities issued by governments or multilateral development banks. The remaining two portfolios comprise available for sale assets held for investment purposes and loans and advances to banks.
The increase in the primary liquidity portfolio to £14.9 billion (compared to April 4, 2015: £11.0 billion) is a consequence of liquidity management planning, which saw an increase in other central bank eligible liquidity.
We raise funds from the money and debt capital markets, accepting time deposits and issuing certificates of deposit, commercial paper and medium-term notes. Funding from wholesale markets increased to £44.3 billion as at September 30, 2015 from £39.2 billion as at April 4, 2015, representing a wholesale funding ratio of 25.1% (compared to 23.3% as at April 4, 2015).
We aim to achieve a diversified mix of wholesale funding by currency, investor category and maturity to prevent dependence on any particular funding sector. We have a variety of programs in place so that we can meet our short-term and long-term funding needs, including:
Canadian commercial paper program;
French commercial paper program;
We do not operate a trading portfolio.
Income from protection and investments has remained stable at £37 million for the six months ended September 30, 2015, from £37 million for the six months ended September 30, 2014.
In conjunction with our core business of providing residential mortgage loans and retail savings, we develop and market insurance products branded with our name that are underwritten by third-party insurers. We sold our subsidiary Nationwide Life Limited to Legal & General on January 31, 2008, and as a result we no longer underwrite our own life assurance products. As part of our agreement, we distribute the insurance products of Legal & General. We also have a new strategic distribution agreement for the supply of motor and travel insurance with Liverpool Victoria to provide our customers with a broader range of competitively priced products from one of the UK's top financial services companies.
The insurance products that we market are:
We typically use leading insurers as third-party underwriters for these insurance products. We receive a commission and, in some cases, participate in the profits, but not the losses, from third-party underwritten insurance products that we market. This provides us with a significant source of non-interest income, and in the six months ended September 30, 2015 and the year ended April 4, 2015 we earned £37 million and £88 million, respectively, from general insurance fees. We generally market our insurance products to new and existing customers, and it is our policy to offer insurance products at competitive prices and with more comprehensive coverage than those products generally offered by our main competitors.
Our integrated and diversified distribution network allows our customers to choose how and when to undertake their transactions with us and has enabled us to expand our business while controlling costs. The distribution network helps us to achieve volume growth principally in residential mortgage lending and supports our retail funding activities. Developments in the network have focused on cost efficiency and meeting the needs of customers who are increasingly prepared to transact business by the Internet, telephone and mail.
We distribute our products primarily through:
Our branch network continues to be a major source of our mortgage lending and retail funding. As at September 30, 2015 we had approximately 700 branches of Nationwide Building Society in the United Kingdom and the Isle of Man. We believe that our branch network is an integral part of our distribution network and we expect to maintain its current size.
Our goal is to utilize our branch network efficiently. All of our branches market our residential mortgage, retail savings, personal lending, personal investment and insurance products. We have continued to make significant investment in transforming our products and delivery channels through the implementation of new systems and organizational structures and meet consumer expectations of digital banking.
We had approximately 1,400 ATMs at September 30, 2015, including some placed in retail stores, railroad stations, gas stations and other remote locations. In addition, our customers also have access to ATMs in the United Kingdom through the LINK and Cirrus networks and world-wide through the VISA network.
Our telephone call centers are open 24 hours a day to service customers and receive calls from potential customers that are interested in our products. In addition, we use telemarketing to supplement our mortgage, insurance and personal loan marketing.
We offer mail-based savings accounts that provide members with higher interest rates on their deposits in return for limiting them to transactions by mail, online banking and ATMs. We also use direct mail to market some of our products.
We first launched an internet banking service in 1997 and have continued to update our service in line with technological advances and in line with increasing customer expectations. Our website allows customers to transact on their accounts and apply for a broad range of our products online.
Agents are third parties that we appoint to market our products and perform retail transactions. Agents are typically intermediary financial advisers or real estate agents and increase our retail distribution network. We remunerate agents for the transactions and sales they perform.
A substantial amount of our mortgage sales are introduced to us by third-party intermediaries. Intermediaries range from large UK insurance companies to small independent mortgage advisers. We remunerate intermediaries for introducing mortgage business.
For the financial year ended April 4, 2015, we employed, on average, 17,622 full and part-time employees. Set out below are our average number of employees during the financial years ended April 4, 2015, 2014 and 2013, respectively:
| Average number of employees | For the year ended April 4, | |||
|---|---|---|---|---|
| 2015 | 2014 | 2013 | ||
| Full-time | 13,667 | 13,172 | 12,720 | |
| Part-time | 3,955 | 4,118 | 4,299 | |
| Total | 17,622 | 17,290 | 17,019 |
We are party to a collective bargaining agreement with the Nationwide Group Staff Union and believe that our relationship with our employees is good. We have never experienced any work stoppages.
Our interests in our principal subsidiary undertakings, all of which are consolidated, as at September 30, 2015 are set out below:
| 100% held subsidiary undertakings | Nature of business |
|---|---|
| Nationwide Syndications Limited | Syndicated lending |
| The Mortgage Works (UK) plc(1) | Centralized mortgage lender |
| Derbyshire Home Loans Limited(1) | Centralized mortgage lender |
| E-Mex Home Funding Limited(1) | Centralized mortgage lender |
| UCB Home Loans Corporation Limited (1) | Centralized mortgage lender |
_____________ Note:
(1) Regulated entities subject to regulations which require them to maintain capital at agreed levels and therefore govern the availability of funds for distribution as dividends.
All the above subsidiary undertakings are limited liability companies which are registered in England and Wales and operate in the UK.
We have interests in a number of entities which give rise to the risks and rewards that are in substance no different from if they were subsidiary undertakings. As a consequence, these entities are consolidated in our accounts.
Our interests in these principal entities as at September 30, 2015 are set out below:
| Other Group undertakings | Nature of business | Country of registration |
Country of operation |
|---|---|---|---|
| Nationwide Covered Bonds LLP | Mortgage acquisition and guarantor of covered |
||
| bonds | England and Wales | UK | |
| Silverstone Master Issuer plc | Funding vehicle | England and Wales | UK |
| Silverstone Funding No.1 Limited | Funding vehicle | England and Wales | UK |
| Cromarty CLO Limited | Investment in a portfolio of European loans |
England and Wales | Republic of Ireland |
Our property interests consist of our branches and non-specialized buildings which may be owned or leased, as well as our head office/administration centers (which we own) and a small number of residential properties held for rental. For further information see note 20 to our audited consolidated financial statements incorporated by reference herein.
Like other UK financial institutions, the Society pays levies based on its share of protected deposits to the FSCS to enable the FSCS to meet claims against it. In 2008 a number of institutions were declared in default by the FSA (now FCA). The FSCS has met the claims by way of loans received from HM Treasury. These loans totalled approximately £20 billion. The terms of these loans were initially interest only for the first three years, and the FSCS recovers the interest cost, together with ongoing management expenses, by way of annual levies on member firms over this period.
While it was anticipated that the majority of the borrowings will be repaid wholly from recoveries from the institutions concerned, the industry has been levied in respect of the anticipated shortfall in repaying these loans over the past 3 financial years in an amount of £753 million. While it has been anticipated that the final £91 million that was levied as part of the 2015/16 scheme year reflects the final levy in respect of this shortfall, there is the potential for further shortfall to be identified. Any further shortfall is to be levied from all firms holding protected deposits including the Group.
FSCS made the first levy in respect of the Dunfermline Building Society failure during September 2014 amounting to £100 million. With a further levy of £265 million during September 2015 for which the Group had provided £30 million at April 4, 2015 representing its share of the estimated charge at the time. Further potential shortfall in relation to Dunfermline Building Society in future years continues to remain uncertain for both quantification and timing
As at September 30, 2015, we held a provision of £43 million in respect of the interest relating to scheme year 2015/16 (September 30, 2014: £46 million in respect of the interest levy relating to scheme years 2014/15). As at April 4, 2015 we held a provision of £126 million in respect of the interest relating to scheme year 2014/15 and capital relating to scheme year 2015/16 (April 4, 2014: £142 million in respect of the interest levy relating to scheme years 2014/15).
On July 19, 2011, the Finance Act 2011 came into force, including the bank levy requirements enacted by section 73 and Schedule 19 thereof. The levy applies to UK banking groups, building societies and the operations of non-UK banks in the UK, but an allowance is given against the first £20 billion of chargeable equity and liabilities, meaning that smaller institutions will effectively be exempted from the levy charge. Certain liabilities are excluded from the chargeable equity and liabilities, including Tier 1 capital, insured retail deposits and repos secured on sovereign debt. Additionally, certain high quality liquid assets on the balance sheet are eligible to reduce the amount of liabilities in the charge. The UK government has announced its intention to implement a gradual reduction in bank levy rates from January 1, 2016. The gradual reduction in bank levy rates will be combined with the introduction of a corporation tax surcharge (at 8%) on banking companies and building societies within the charge to corporation tax.
The bank levy rates have been announced as follows:
| Period | Rates | |
|---|---|---|
| Short-term liabilities | Long-term liabilities | |
| January 1, 2011 to February 28, 2011 | 0.05% | 0.025% |
| March 1, 2011 to April 30, 2011 | 0.1% | 0.05% |
| May 1, 2011 to December 31, 2011 | 0.075% | 0.0375% |
| January 1, 2012 to December 31, 2012 | 0.088% | 0.044% |
| January 1, 2013 to December 31, 2013 | 0.130% | 0.065% |
| January 1, 2014 to 31 March 2015 | 0.156% | 0.078% |
| 1 April, 2015 to 31 December, 2015 | 0.210% | 0.105% |
| January 1, 2016 to December 31, 2016 | 0.18% | 0.09% |
| January 1, 2017 to December 31, 2017 | 0.17% | 0.085% |
| January 1, 2018 to December 31, 2018 | 0.16% | 0.08% |
| January 1, 2019 to December 31, 2019 | 0.15% | 0.075% |
| January 1, 2020 to December 31, 2020 | 0.14% | 0.07% |
| Any time on or after January 1, 2021 | 0.10% | 0.05% |
The following information has been extracted from our management information systems. This information is unaudited. The information contained in this section should be read in conjunction with our consolidated financial statements as well as the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations."
The tables below present, in accordance with IFRS, the average balances for our interest-earning assets and interest-bearing liabilities together with the related interest income and expense amounts, resulting in the presentation of the average yields and rates for the financial years ended April 4, 2015, 2014 and 2013, respectively:
| For the year ended April 4, 2015 | |||
|---|---|---|---|
| Average balance(1) |
Interest(2) | Average yield/ rate |
|
| (£ millions, except percentages) | |||
| Interest-earning assets: | |||
| Loans to credit institutions | 9,271 | 28 | 0.30% |
| Debt securities & derivative financial instruments(2) | 14,553 | 23 | 0.16% |
| Loans to customers | 168,736 | 5,296 | 3.14% |
| Total average interest-earning assets | 192,560 | 5,347 | 2.78% |
| Non-interest-earning assets: | |||
| Tangible fixed assets | 855 | ||
| Fair value adjustment for hedged risk | 598 | ||
| Other financial assets at fair value | 977 | ||
| Other assets | 350 | ||
| Goodwill and intangible fixed assets | 15 | ||
| Investment properties | 9 | ||
| Deferred tax assets | 26 | ||
| Total average assets | 195,390 | ||
| Interest-bearing liabilities: | |||
| UK retail member deposits | 133,095 | 1,897 | 1.43% |
| Other deposits | 16,676 | 116 | 0.70% |
| Debt securities in issue and derivative financial instruments(2) |
31,864 | 378 | 1.19% |
| Subordinated liabilities | 2,202 | 66 | 3.00% |
| Tier 1 capital instruments | 590 | 23 | 3.90% |
| Unwind of discount of pension liabilities | - | 6 | - |
| Total average interest-bearing liabilities | 184,427 | 2,486 | 1.35% |
| Non-interest-bearing liabilities: | |||
| Other liabilities | 1,399 | ||
| Fair value adjustment for hedged risk | 14 | ||
| Other financial liabilities at fair value | 2 | ||
| Reserves | 9,406 | ||
| Current taxes | 142 | ||
| Total average liabilities | 195,390 |
Notes:
(1) Average balances are based on the balance as of the end of each month during the financial year.
(2) For the purpose of the average balance sheet, the interest income and expense amounts are stated after allocation of interest on financial instruments entered into for hedging purposes.
| For the year ended April 4, 2014 | |||
|---|---|---|---|
| Average balance(1) |
Interest(2) | Average yield/ rate |
|
| (£ millions, except percentages) | |||
| Interest-earning assets: | |||
| Loans to credit institutions | 9,959 | 38 | 0.38% |
| Debt securities(2) | 15,065 | 12 | 0.08% |
| Loans to customers | 163,707 | 5,245 | 3.20% |
| Total average interest-earning assets | 188,731 | 5,295 | 2.81% |
| Non-interest-earning assets: | |||
| Tangible fixed assets | 873 | ||
| Fair value adjustment for hedged risk | 406 | ||
| Other financial assets at fair value | 2 | ||
| Other assets | 496 | ||
| Goodwill and intangible fixed assets | 924 | ||
| Investment properties | 8 | ||
| Deferred tax assets | 176 | ||
| Total average assets | 191,616 | ||
| Interest-bearing liabilities: | |||
| UK retail member deposits | 130,196 | 2,250 | 1.73% |
| Other deposits | 15,871 | 51 | 0.32% |
| Debt securities in issue and derivative financial | |||
| instruments(2) | 33,439 | 467 | 1.40% |
| Subordinated liabilities | 2,433 | 79 | 3.25% |
| Tier 1 capital instruments | 879 | 30 | 3.41% |
| Unwind of discount of pension liabilities | - | 15 | - |
| Total average interest-bearing liabilities | 182,819 | 2,892 | 1.58% |
| Non-interest-bearing liabilities: | |||
| Other liabilities | 1,548 | ||
| Fair value adjustment for hedged risk | 77 | ||
| Other financial liabilities at fair value | 5 | ||
| Reserves | 7,090 | ||
| Current taxes | 77 | ||
| Total average liabilities | 191,616 |
Notes:
_________________
(1) Average balances are based on the balance as of the end of each month during the financial year.
(2) For the purpose of the average balance sheet, the interest income and expense amounts are stated after allocation of interest on financial instruments entered into for hedging purposes.
| For the year ended April 4, 2013 | |||
|---|---|---|---|
| Average balance(1) |
Interest(2) | Average yield/ rate |
|
| (£ millions, except percentages) | |||
| Interest-earning assets: | |||
| Loans to credit institutions | 11,205 | 49 | 0.44% |
| Debt securities(2) | 21,747 | 302 | 1.39% |
| Loans to customers | 157,315 | 5,044 | 3.21% |
| Total average interest-earning assets | 190,267 | 5,395 | 2.84% |
| Non-interest-earning assets: | |||
| Tangible fixed assets | 948 | ||
| Fair value adjustment for hedged risk | 1,107 | ||
| Other financial assets at fair value | 11 | ||
| Other assets | 539 | ||
| Goodwill and intangible fixed assets | 757 | ||
| Investment properties | 9 | ||
| Deferred tax assets | 244 | ||
| Total average assets | 193,881 | ||
| Interest-bearing liabilities: | |||
| UK retail member deposits | 125,264 | 2,741 | 2.19% |
| Other deposits | 17,090 | 6 | 0.04% |
| Debt securities in issue and derivative financial instruments(2) |
40,034 | 563 | 1.41% |
| Subordinated liabilities | 1,691 | 43 | 2.54% |
| Tier 1 capital instruments | 1,536 | 38 | 2.47% |
| Unwind of discount of pension liabilities | - | 23 | - |
| Total average interest-bearing liabilities | 185,615 | 3,414 | 1.84% |
| Non-interest-bearing liabilities: | |||
| Other liabilities | 1,734 | ||
| Fair value adjustment for hedged risk | 218 | ||
| Other financial liabilities at fair value | 1 | ||
| Reserves | 6,277 | ||
| Current taxes | 37 | ||
| Total average liabilities _____ |
193,881 |
Notes:
(1) Average balances are based on the balance as of the end of each month during the financial year.
(2) For the purpose of the average balance sheet, the interest income and expense amounts are stated after allocation of interest on financial instruments entered into for hedging purposes.
The following tables show our average interest-earning assets, average interest-bearing liabilities and net interest income and illustrate the comparative net interest margin and net interest spread for the financial years ended April 4, 2015, 2014 and 2013, respectively:
| (£ millions, except percentages) | |
|---|---|
| Net average interest-earning assets | 192,560 |
| Net average interest-bearing liabilities | 184,427 |
| Net interest income(1) | 2,861 |
| Average yield on average interest-earning assets | 2.78% |
| Average rate on average interest-bearing liabilities | 1.35% |
| Net interest spread(2) | 1.43% |
| Net interest margin(3) _____ |
1.46% |
(1) Defined as total interest income less total interest expense.
(2) Defined as the difference between the average yield on interest-earning assets and the average rate on interest-bearing liabilities.
(3) Defined as net interest income divided by weighted average interest-earning assets.
| As at April 4, 2014 | |
|---|---|
| (£ millions, except percentages) | |
| Net average interest-earning assets | 188,731 |
| Net average interest-bearing liabilities | 182,819 |
| Net interest income(1) | 2,403 |
| Average yield on average interest-earning assets | 2.81% |
| Average rate on average interest-bearing liabilities | 1.58% |
| Net interest spread(2) | 1.23% |
| Net interest margin(3) _____ |
1.25% |
(1) Defined as total interest income less total interest expense.
(2) Defined as the difference between the average yield on interest-earning assets and the average rate on interest-bearing liabilities.
(3) Defined as net interest income divided by weighted average interest-earning assets.
| As at April 4, 2013 | ||
|---|---|---|
| (£ millions, except percentages) | ||
| Net average interest-earning assets | 190,267 | |
| Net average interest-bearing liabilities | 185,617 | |
| Net interest income(1) | 1,981 | |
| Average yield on average interest-earning assets | 2.84% | |
| Average rate on average interest-bearing liabilities | 1.84% | |
| Net interest spread(2) | 1.00% | |
| Net interest margin(3) _____ |
1.04% |
Notes:
(1) Defined as total interest income less total interest expense.
(2) Defined as the difference between the average yield on interest-earning assets and the average rate on interest-bearing liabilities.
(3) Defined as net interest income divided by weighted average interest-earning assets.
The following table allocates the changes in our interest income and expense between changes in average volume and changes in the average rates for the financial year ended April 4, 2015 compared to the financial year ended April 4, 2014. We calculated volume and yield/rate variances based on movements of average balances over the period and changes in average interest yields/rates on interest-earning assets and interest-bearing liabilities. The net change attributable to changes in both volume and rate has been allocated in line with the amounts derived for pure rate and volume variances. Pension interest income and expense has been excluded from the table as the assets and liabilities to which they relate are held net on the balance sheet. More information on the net pension liability can be found in our audited consolidated financial statements incorporated by reference herein:
| Year ended April 4, 2015 compared to year ended April 4, 2014 |
||||
|---|---|---|---|---|
| Increase/(decrease) in net interest due to changes | ||||
| in: | ||||
| Volume | Yield/rate | Total net | ||
| change | ||||
| (£ millions) | ||||
| Interest income:(1) | ||||
| Loans to credit institutions | (3) | (7) | (10) | |
| Debt securities | - | 11 | 11 | |
| Loans to customers | 159 | (107) | 52 | |
| Total interest income | 156 | (103) | 53 | |
| Interest expense:(1) | ||||
| UK retail member deposits | 49 | (402) | (353) | |
| Amounts owed to credit institutions | (2) | 1 | (1) | |
| Amounts owed to other customers | 5 | 61 | 66 | |
| Debt securities in issue | (29) | (60) | (89) | |
| Subordinated liabilities | (7) | (6) | (13) | |
| Subscribed capital | (11) | 4 | (7) | |
| Total interest expense | 5 | (402) | (397) | |
| Net interest income | 151 | 299 | 450 | |
| _____ |
Note:
(1) Interest income and expense amounts are stated after allocation of interest on financial instruments entered into for hedging purposes.
The following table allocates the changes in our interest income and expense between changes in average volume and changes in the average rates for the financial year ended April 4, 2014 compared to the financial year ended April 4, 2013. We calculated volume and yield/rate variances based on movements of average balances over the period and changes in average interest yields/rates on interest-earning assets and interest-bearing liabilities. The net change attributable to changes in both volume and rate has been allocated in line with the amounts derived for pure rate and volume variances. Pension interest income and expense has been excluded from the table as the assets and liabilities to which they relate are held net on the balance sheet. More information on the net pension liability can be found in our audited consolidated financial statements incorporated by reference herein:
| Increase/(decrease) in net interest due to changes in: | |||||
|---|---|---|---|---|---|
| Volume | Yield/rate | Total net change |
|||
| (£ millions) | |||||
| Interest income:(1) | |||||
| Loans to credit institutions | (5) | (6) | (11) | ||
| Debt securities | (78) | (212) | (290) | ||
| Loans to customers | 205 | (3) | 202 | ||
| Total interest income | 122 | (220) | (99) | ||
| Interest expense:(1) | |||||
| UK retail member deposits | 104 | (595) | (491) | ||
| Amounts owed to credit institutions | (5) | (4) | (9) | ||
| Amounts owed to other customers | - | 54 | 54 | ||
| Debt securities in issue | (77) | (19) | (96) | ||
| Subordinated liabilities | 22 | 14 | 36 | ||
| Subscribed capital | (20) | 12 | (8) | ||
| Total interest expense | 25 | (538) | (514) | ||
| Net interest income | 97 | 318 | 415 |
Year ended April 4, 2014 compared to year ended April 4, 2013
_________________
(1) Interest income and expense amounts are stated after allocation of interest on financial instruments entered into for hedging purposes.
As at April 4, 2015, our investment securities portfolios were carried at a book value of £11,037 million, representing 5.6% of our total assets. Investment securities are split into two portfolios with approximately £6.7 billion of the assets in the primary liquidity portfolio and approximately £4.3 billion of the assets in the non-core portfolio. We only purchase investment-grade debt securities and do not operate a trading portfolio. The following table provides information on the breakdown of our investment securities as at April 4, 2015, 2014 and 2013, respectively:
| As at April 4, | ||||
|---|---|---|---|---|
| 2015 | 2014 | 2013 | ||
| (£ millions) | ||||
| Investment securities | ||||
| UK government(1) | 5,009 | 4,508 | 5,553 | |
| Other public sector securities(2) | 1,717 | 2,486 | 3,431 | |
| Other issuers(3) | 4,311 | 3,569 | 4,437 | |
| Total | 11,037 | 10,563 | 13,421 |
Notes:
_________________
(1) As at April 4, 2015, UK government securities that we held were equal to 62% of our general and revaluation reserves compared to 61% as at April 4, 2014 and 81% as at April 4, 2013.
(2) Other public sector securities include securities issued by UK local authorities and sovereign debt backed by foreign (non-UK) governments.
(3) As at April 4, 2015, we held no securities issued by counterparties where the values of which individually exceeded 10% of our general and revaluation reserves.
The following table shows the contractual maturity of investment securities held as at April 4, 2015:
| As at April 4, 2015 | |||||
|---|---|---|---|---|---|
| Maturing within 1 year |
Maturing after 1 but within 5 years |
Maturing after 5 years but within 10 years |
Maturing after 10 years |
Total | |
| (£ millions) | |||||
| UK government | - | 695 | 3,177 | 1,137 | 5,009 |
| Other public sector securities | 160 | 664 | 892 | - | 1,717 |
| Other issuers | - | 690 | 1,406 | 2,215 | 4,311 |
| Total | 160 | 2,049 | 5,476 | 3,352 | 11,037 |
The following table presents a further analysis of other issuers as at April 4, 2015, 2014 and 2013, respectively:
| As at April 4, | |||||
|---|---|---|---|---|---|
| 2015 | 2014 | 2013 | |||
| (£ millions) | |||||
| - | - | 47 | |||
| 29 | 269 | 556 | |||
| 34 | 95 | 148 | |||
| 3,224 | 2,926 | 3,453 | |||
| 1,024 | 278 | 233 | |||
| 4,311 | 3,569 | 4,437 | |||
As at April 4, 2015 total loans to customers excluding fair value adjustments for portfolio hedged risk, including accrued interest, were £169,265 million, representing 86.5% of our total assets. Our loan portfolio has increased by 3.2% during the last financial year from £168,684 million as at April 4, 2014 to £174,039 million as at April 4, 2015.
The following table summarizes our loan portfolio, net of allowances, as at April 4, 2015, 2014 and 2013, respectively:
| As at April 4, | |||
|---|---|---|---|
| 2015 | 2014 | 2013 | |
| (£ millions) | |||
| Loans to customers: | |||
| Residential mortgage loans | 152,775 | 145,558 | 135,393 |
| Consumer banking | 3,575 | 3,689 | 3,401 |
| Commercial Lending | 12,890 | 16,283 | 18,958 |
| Other lending | 25 | 164 | 422 |
| Total loans to customers | 169,265 | 165,694 | 158,174 |
| Fair value adjustment for micro hedged risk(1) | 1,382 | 880 | 1,413 |
| Loans and advances to banks | 3,392 | 2,110 | 2,522 |
| Total | 174,039 | 168,684 | 162,109 |
Note:
_________________
(1) Under IFRS the carrying value of the hedged item is adjusted for the change in value of the hedged risk.
| As at April 4, 2015 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Due on Demand |
Due within 3 Months |
Due in 3 months to 1 year |
Due in 1 year to 5 years |
Due after 5 years |
Allowances | Total(1) | |||
| (£ millions) | |||||||||
| Loans to customers | 2,064 | 2,236 | 5,341 | 26,560 | 133,716 | 730 | 170,647 | ||
| Loans and advances to banks |
2,923 | 2 | 61 | 87 | 319 | - | 3,392 | ||
| Total Loans | 4,987 | 2,238 | 5,402 | 26,647 | 134,035 | 730 | 174,039 |
The following table presents the contractual maturity distribution for repayment for the loans held by us as at April 4, 2015:
Note:
_________________
(1) The maturity analysis is produced on the basis that where a loan is repayable by installments, each installment is treated as a separate repayment.
The following table presents the split of fixed and variable loans to customers and credit institutions as at April 4, 2015:
| As at April 4, 2015 | ||||||
|---|---|---|---|---|---|---|
| Fixed rate | Variable rate |
Outstanding Checks |
Total(1) | |||
| 85,008 | 85,639 | - | 170,647 | |||
| 614 | 3,108 | (330) | 3,392 | |||
| 85,622 | 88,747 | (330) | 174,039 | |||
| (£ millions) |
Note:
(1) Outstanding checks were issued by Nationwide mostly on behalf of retail customers, and had not been presented through the banking system as at April 4, 2015.
Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. As a result, the concept of suspended interest and interest write back is no longer recognized.
The following table provides information on prime and specialist lending and consumer banking balances by payment due status as at April 4, 2015:
| As at April 4, 2015 | |||||||
|---|---|---|---|---|---|---|---|
| Prime lending |
Specialist lending |
Consumer banking |
Total | % | |||
| (£ billions, except percentages) | |||||||
| Not impaired: | |||||||
| Neither past due nor impaired | 122.4 | 26.9 | 3.5 | 152.8 | 97% | ||
| Past due up to 3 months but not impaired |
1.7 | 0.9 | 0.1 | 2.7 | 2% | ||
| Impaired | 0.4 | 0.5 | 0.2 | 1.1 | 1% | ||
| 124.5 | 28.3 | 3.8 | 156.6 | 100% |
The following table provides information on prime and specialist lending and consumer banking balances by payment due status as at April 4, 2014:
| As at April 4, 2014 | |||||||
|---|---|---|---|---|---|---|---|
| Prime lending |
Specialist lending |
Consumer banking |
Total | % | |||
| (£ billions, except percentages) | |||||||
| Not impaired: | |||||||
| Neither past due nor impaired | 117.0 | 24.7 | 3.6 | 145.3 | 97% | ||
| Past due up to 3 months but not impaired |
1.8 | 1.0 | 0.1 | 2.9 | 2% | ||
| Impaired | 0.5 | 0.6 | 0.2 | 1.3 | 1% | ||
| 119.3 | 26.3 | 3.9 | 149.5 | 100% |
The following table provides information on prime and specialist lending and consumer banking balances by payment due status as at April 4, 2013:
| As at April 4, 2013 | |||||||
|---|---|---|---|---|---|---|---|
| Prime lending |
Specialist lending |
Consumer banking |
Total | % | |||
| (£ billions, except percentages) | |||||||
| Not impaired: | |||||||
| Neither past due nor impaired | 108.2 | 23.1 | 3.4 | 134.6 | 97% | ||
| Past due up to 3 months but not impaired |
1.8 | 1.2 | 0.0 | 3.0 | 2% | ||
| Impaired | 0.6 | 0.7 | 0.1 | 1.4 | 1% | ||
| 110.6 | 25.0 | 3.5 | 139.0 | 100% |
We assess at each balance sheet date whether, as a result of one or more events that occurred after initial recognition, there is objective evidence that a financial asset or group of financial assets is impaired. Evidence of impairment may include indications that the borrower or group of borrowers are experiencing significant financial difficulty, default or delinquency in interest or principal payments or the debt being restructured to reduce the burden on the borrower.
We first assess whether objective evidence of impairment exists either individually for assets that are separately significant or individually or collectively for assets that are not separately significant. If there is no objective evidence of impairment for an individually assessed asset it is included in a group of assets with similar credit risk characteristics and collectively assessed for impairment.
If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the asset's original effective interest rate. The resultant provisions have been deducted from the appropriate asset values in the balance sheet.
The methodology and assumptions used for estimating future cash flows are reviewed regularly by us to reduce any differences between loss estimates and actual loss experience.
The following table sets forth the movement in our allowances for loan losses for the financial year ended April 4, 2015:
| Prime residential |
Specialist residential |
Consumer banking |
Commercial lending |
Other lending |
Total | |
|---|---|---|---|---|---|---|
| (£ millions) | ||||||
| As at April 5, 2014 | 18 | 84 | 173 | 1,001 | 12 | 1,288 |
| Charge for the year | 13 | 45 | 89 | 52 | 34 | 233 |
| Amounts written off during the year |
(10) | (41) | (56) | (276) | (6) | (389) |
| Amounts recovered during the year |
1 | 1 | 15 | 15 | - | 32 |
| Disposal | - | - | - | (428) | (36) | (464) |
| Unwind of discount of provision |
- | (1) | (5) | (42) | - | (48) |
| As at April 4, 2015 | 22 | 88 | 216 | 322 | 4 | 652 |
The following table sets forth the movement in our allowances for loan losses for the financial year ended April 4, 2014:
| Prime residential |
Specialist residential |
Consumer banking |
Commercial lending |
Other lending |
Total | |
|---|---|---|---|---|---|---|
| (£ millions) | ||||||
| As at April 5, 2013 | 32 | 133 | 87 | 958 | 14 | 1,224 |
| Charge for the year | - | - | 60 | 309 | 11 | 380 |
| Amounts written off during the year Amounts recovered |
(15) | (52) | (3) | (215) | (9) | (294) |
| during the year | 1 | 4 | 33 | 10 | - | 48 |
| Disposal | - | - | - | - | (4) | (4) |
| Unwind of discount of provision |
- | (1) | (4) | (61) | - | (66) |
| As at April 4, 2014 | 18 | 84 | 173 | 1,001 | 12 | 1,288 |
The following table sets forth the movement in our allowances for loan losses for the financial year ended April 4, 2013:
| Prime residential |
Specialist residential |
Consumer banking |
Commercial lending |
Other lending |
Total | |
|---|---|---|---|---|---|---|
| (£ millions) | ||||||
| As at April 5, 2012 | 40 | 162 | 80 | 547 | 14 | 843 |
| Charge for the year | (6) | 22 | 79 | 493 | 1 | 589 |
| Amounts written off during the year |
(9) | (87) | (100) | (130) | (3) | (329) |
| Amounts recovered during the year |
1 | 4 | 30 | 2 | 2 | 39 |
| Transfer from credit loss fair value adjustment |
7 | 35 | - | 86 | - | 128 |
| Unwind of discount of provision |
(1) | (3) | (2) | (40) | - | (46) |
| As at April 4, 2013 | 32 | 133 | 87 | 958 | 14 | 1,224 |
The following table shows the allowances for loan losses as a percentage of total loans, analyzed by category:
| As at April 4, | ||||
|---|---|---|---|---|
| 2015(1) | 2014(1) | 2013(1) | ||
| (percentages) | ||||
| Total Allowances as a % of total loans(1) | ||||
| Residential | 0.07 | 0.07 | 0.02 | |
| Commercial | 2.50 | 6.15 | 4.72 | |
| Consumer | 6.04 | 4.73 | 2.56 | |
| Other | 16.00 | 7.32 | - | |
| Total loans | 0.39 | 0.78 | 0.64 | |
| % of loans in each category to total loans | ||||
| Residential mortgage loans | 89.3 | 87.9 | 85.6 | |
| Commercial | 8.5 | 9.8 | 12.0 | |
| Consumer | 2.2 | 2.2 | 2.2 | |
| Other | - | 0.1 | 0.2 | |
| Total loans | 100.0 | 100.0 | 100.0 |
(1) The loan balances for the financial years ended April 4, 2015, 2014 and 2013 are summarized earlier in this section of the Base Prospectus.
_________________
The following table sets out the average balances and average interest rates for each deposit type for the financial year ended April 4, 2015:
| For year ended April 4, 2015 | |||
|---|---|---|---|
| Average balance | Average rate paid |
||
| (£ millions, except percentages) | |||
| UK retail member deposits | 133,095 | 1.43% | |
| Other customer deposits and amounts due to banks(1) | 16,676 | 0.70% | |
| _____ |
(1) Amounts owed to other customers include time deposits, call deposits and retail deposits that do not grant "member" status.
The following table sets out the average balances and average interest rates for each deposit type for the financial year ended April 4, 2014:
| For year ended April 4, 2014 | ||
|---|---|---|
| Average balance | Average rate paid |
|
| (£ millions, except percentages) | ||
| UK retail member deposits | 130,196 | 1.73% |
| Other customer deposits and amounts due to banks(1) | 15,871 | 0.32% |
| _____ |
Note:
(1) Amounts owed to other customers include time deposits, call deposits and retail deposits that do not grant "member" status.
The following table sets out the average balances and average interest rates for each deposit type for the financial year ended April 4, 2013:
| For year ended April 4, 2013 | ||
|---|---|---|
| Average balance | Average rate paid |
|
| (£ millions, except percentages) | ||
| UK retail member deposits | 125,264 | 2.19% |
| Other customer deposits and amounts due to banks(1) | 17,089 | 0.04% |
| _____ |
Note:
(1) Amounts owed to other customers include time deposits, call deposits and retail deposits that do not grant "member" status.
As explained in "Description of Business–Strategy—Retail Funding," our member accounts include both instant access accounts, from which funds may be withdrawn on demand, and notice accounts, from which funds withdrawn without appropriate notice may be subject to penalties. The approximate split of UK retail member deposits between instant access accounts and notice accounts as at April 4, 2015, is as follows:
| As at April 4, 2015 |
|
|---|---|
| (£ millions) | |
| Instant access accounts(1) | 66,807 |
| Notice accounts(2) | 65,048 |
| Accrued interest | 518 |
| UK retail member deposits _____ |
132,373 |
Notes:
(1) Includes current, transactional, on demand and instant access accounts.
(2) Includes tax advantaged savings accounts, fixed-notice accounts and fixed-term accounts.
The following table shows the maturity analysis of time deposits over \$100,000 and certificates of deposit as at April 4, 2015:
| As at April 4, 2015 | |||||
|---|---|---|---|---|---|
| Time deposits |
Certificates Of deposit |
Total | % | ||
| (£ millions, except percentages) | |||||
| Less than 3 months | 3,123 | 4,066 | 7,189 | 72 | |
| 3 months to 6 months | 906 | 831 | 1,737 | 18 | |
| 6 months to 1 year | 446 | 545 | 991 | 10 | |
| Over 1 year | 17 | 7 | 24 | - | |
| Total | 4,492 | 5,449 | 9,941 | 100 |
The following table represents net income as a percentage of total average assets:
| For the year ended April 4, 2015 |
For the year ended April 4, 2014 (£ millions, except percentages) |
For the year ended April 4, 2013 |
|
|---|---|---|---|
| Net income(1) | 839 | 549 | 178 |
| Total average assets(2) | 195,390 | 191,616 | 193,881 |
| Return on total average assets | 0.43% | 0.29% | 0.09% |
Notes:
_____________
(1) Net income represents profit for the financial year after tax.
(2) Total average assets is based on the total assets as of the end of each month during the financial year.
As a mutual organization, we are managed for the benefit of our members, our retail savings and residential mortgage customers, rather than for equity shareholders. We return value to our members by offering generally higher interest rates on savings and lower interest rates on loans than those offered by our main competitors. As a result, we typically earn lower profits than our main competitors, which are typically banks or other non-mutual organizations. However, most of our net earnings are put into reserves and constitute Tier 1 capital for our capital adequacy requirements.
We have not presented any information regarding returns on equity because, as a mutual organization, we do not have equity.
Financial instruments incorporate the vast majority of our assets and liabilities, both on a Group level and for the Society. Given the dominant position of the Society within the Group structure, the term 'Group' is used in the remainder of this note to cover the activities of both Group and Society.
We accept deposits from customers at fixed and variable interest rates for various periods and seek to earn an interest margin by investing these funds in high quality assets, predominantly mortgages. The principal risks which arise from this core activity, and which need to be managed by the Group, are interest rate risks (including basis risk), credit risks, foreign exchange, liquidity and funding risks.
All risks are monitored and managed within the Enterprise Risk Management Framework ("ERMF"), which we have continued to upgrade and strengthen. The ERMF comprises a Board-approved risk appetite, detailed risk management frameworks (including policies and supporting documentation), and independent governance and oversight functions.
We also use derivative instruments to manage various aspects of risk. However, in doing so it complies with the UK Building Societies Act in relation to the use of derivatives for the mitigation of consequences arising from changes in interest rates, exchange rates or other factors defined by the Act.
The principal derivatives used in balance sheet risk management are interest rate swaps, forward rate agreements, interest rate options, cross-currency swaps, interest rate futures, foreign exchange contracts and equity index swaps. Derivatives are used to hedge balance sheet and income exposures arising, inter alia, from fixed rate mortgage lending, fixed rate savings products, funding and investment activities in foreign currencies or involving fixed rate instruments or instruments with embedded options. Group risk exposures are recorded on our information systems and monitored accordingly.
The Group is exposed to liquidity risk, interest rate risk, foreign exchange risk, equity risk and credit risk in its derivatives positions. All of the Group's derivative financial instruments are held for risk mitigation purposes, although not all of these derivatives are designated as hedging instruments as defined by IAS 39.
The following table describes the significant activities we have undertaken, the risks associated with such activities and the types of derivatives which are used in managing such risks. Such risks may alternatively be managed using cash instruments as part of an integrated approach to risk management:
| Activity | Risk | Type of derivative instrument used | ||
|---|---|---|---|---|
| Savings products and funding activities involving instruments which are fixed rate with embedded options |
Sensitivity to changes in interest rates |
Interest rate swaps, interest rate futures, swaptions, and forward rate agreements |
||
| Mortgage lending and investment activities involving instruments which are fixed rate or which include explicit or embedded options |
Sensitivity to changes in interest rates, including differential between Base Rate and LIBOR |
Interest rate swaps including basis swaps, interest rate futures, swaptions, caps, collars and forward rate agreements |
||
| Investment and funding in foreign currencies |
Sensitivity to changes in foreign exchange rates |
Cross-currency swaps and foreign exchange contracts |
||
| PEB savings products | Sensitivity to changes in stock indices |
Equity index swaps |
The accounting policy for derivatives and hedge accounting is described in the Statement of Accounting Policies. Where possible, fair value hedge accounting is employed but no use is currently made of cash flow hedge accounting.
The Board and the Assets and Liabilities Committee ("ALCO") are responsible for setting certain parameters respectively over the Group's exposure to interest rates, foreign exchange rates and other indices. The Lending Committee for Retail, Commercial and Treasury sets Group credit policy and regularly monitors and reviews credit exposures arising in all aspects of Group operations, including derivatives. ALCO and the Lending Committee are also responsible for mandating, directing and overseeing the Weekly Trading Committee. All risk committees are overseen by the Executive Risk Committee, while the Board Risk Committee provides oversight of the risk framework for the Group including governance.
All exchange-traded instruments are subject to cash requirements under the standard margin arrangements applied by the individual exchanges. Such instruments are not subject to significant credit risk. Credit exposures arising on derivative contracts with certain counterparties are collateralized (e.g. with cash deposits), to mitigate credit exposures. All Group derivatives activity is contracted with Organization for Economic Co-operation and Development financial institutions.
Each of the principal financial risks to which the Group is exposed (interest rate, credit, foreign exchange, liquidity and funding risk) is considered below.
The primary market risk faced by the Group is interest rate risk which primarily arises from the retail and commercial assets and liabilities, reserves, liquidity holdings and wholesale funding activities. Market movements in interest rates affect the interest rate margin realised from lending and borrowing activities.
The Group does not run a trading book and therefore does not have the higher risk exposure run by many banking institutions. To reduce the impact of such movements hedging activities are undertaken by Treasury. For example, interest rate risks generated by lending to and receiving deposits from members are offset against each other internally. The remaining net exposure is managed using derivatives on a continuous basis, within parameters set by ALCO.
The income contribution from the reserves and non-interest bearing current accounts are subject to the volatility of short-term interest rate movements. They are hedged to reduce the impact on earnings by converting short-term interest margin volatility into a more stable medium-term rate.
Interest rate earnings risk arises mainly from the diversity of product terms and associated procedures adopted by the Group in originating and administering retail and commercial products. Should reported exposure approach internal risk parameters, action is initiated by ALCO to mitigate such exposure, through changes to these product terms and procedures or to the product mix, or through the use of derivatives.
The Group uses several metrics to monitor interest rate risk, and details of these are set out below. The controls around these metrics have been set by the Board or by ALCO and reflect the Group's low risk appetite.
Value at Risk ("VaR") is a technique that estimates the potential losses that could occur on risk positions as a result of future movements in market rates and prices over a specified time horizon and to a given level of statistical confidence. It is based on historic market behaviour and uses a series of recorded market rates and prices to derive plausible future scenarios. This takes into account inter-relationships between different markets and rates, including interest rates and foreign exchange rates.
The VaR model used by the Group incorporates risk factors based on interest rate and foreign exchange volatilities and correlations. Potential movements in market prices are calculated by reference to daily market data from the last two years, equally weighted. The Group uses a 10-day horizon and a 99% confidence level in its day-to-day VaR monitoring. VaR is used to monitor interest rate, swap spread and currency risks and is not used to model income. Exposures against limits are reviewed daily by management. Actual outcomes are
monitored on an ongoing basis to test the validity of the assumptions and factors used in the VaR calculation. To be consistent with the management view values reported below are on the same basis as those used internally.
Although it is a valuable guide to risk, VaR needs to be viewed in the context of the following limitations which may mean that exposure could be higher than modelled:
To seek to mitigate these limitations, the Group undertakes backtesting of the VaR model on a regular basis to ensure that the model is appropriate. This process compares actual performance against the estimated VaR numbers. An exception is created when a loss is greater than the daily VaR on any given day. In 2014/15, the backtesting did not highlight any model deficiencies. The chart below shows the results of this backtesting. The one loss exception, due to a significant movement in market rates on a day in August, compares to an expectation of 2.5 exceptions at the 99% confidence level.
Sensitivity analysis (PV01 sensitivity). Sensitivity analysis is used to assess the change in value of, for example, the Group's net interest exposure against a one basis point (0.01%) parallel shift in interest rates (PV01). As is the case with VaR (see below), this analysis is done on a daily basis separately for each currency (but with the main risk arising from sterling exposures) and in aggregate. Sensitivity analysis is also used for swap spread risk and product option risks.
Stress testing (PV200 sensitivity). To evaluate the potential impact of more extreme, though plausible, events or movements in a set of financial variables the standard VaR metric is augmented with sensitivity or stress analysis.
For example, for interest rate risk exposures standard PV01 sensitivity analysis is supplemented by the production of stressed sensitivity measures. A more severe 200 basis point (2.0%) parallel shift in interest rates is calculated in a similar manner to PV01; this sensitivity analysis is known as PV200. PV200 numbers are generated and monitored daily.
In addition, stressed VaR is used to estimate the potential loss arising from unfavourable market movements in a stressed environment. It is calculated in the same way as standard VaR, calibrated over a two year period and on a 99% 10-day basis but uses volatilities and correlations from a period of significant financial stress. During the last year stressed VaR on interest rates was, on average, 7.7 times the standard VaR. The Group reviews stressed VaR on the GBP portfolio only.
Change in value of the Group's current net worth is also calculated against a range of non-linear stresses to the yield curve. This output is reported and monitored on a regular basis.
The average gross exposures (after deduction of the above mentioned specified fixed rate maturity profile for the Group's reserves) through the reporting period are as follows:
| 2015 | 2014 | |||||
|---|---|---|---|---|---|---|
| Average | High | Low | Average | High | Low | |
| (£ millions) | ||||||
| VaR | 0.4 | 1.0 | 0.1 | 0.6 | 2.2 | 0.1 |
| Sensitivity analysis (PV01) | - | 0.1 | (0.1) | - | 0.1 | (0.1) |
| Stress testing (PV200: all currencies) | 4.9 | 20.9 | (10.8) | (0.2) | 22.9 | (20.4) |
Earnings risk. Earnings at risk is used to measure basis risk exposures and net interest income metrics are used to monitor exposure to interest rate risks. Both measures apply rate shocks to the rates paid on liabilities and to the rates earned on assets and the impact on interest earnings is calculated. Both risks are described below in more detail.
The sensitivity of the Group net interest margin to changes in interest rates is measured monthly using a dynamic forecasting model and interest rate scenarios, and is calculated for a forward period of 12 months.
The Group takes on exposure to credit risk, which is defined as the risk that a counterparty will be unable to pay amounts in full when due. Impairment provisions are provided for credit exposures where the Group does not expect to receive contractual cash flows when due. Significant changes in the economy, or from individual exposures, could result in losses that are different from those provided for at the balance sheet date. There could also be idiosyncratic factors that may cause a particular investment to suddenly perform worse than expected.
The Group's Lending Committee is responsible for approving and monitoring the Group's credit exposures, which it does through a formal annual review of the Group's lending policies. Regular monitoring and review of lending is undertaken through detailed management information including the performance of credit scoring systems for all retail lending. Formal limits are set and reviewed at individual, sector and portfolio levels. Summary minutes of the Lending Committee together with key risk monitoring metrics are reviewed by the Executive Risk Committee.
Prior to advancing funds, an assessment is made of the credit quality of borrowers and other counterparties for all lending to both retail and commercial customers. Retail lending is subject to credit scoring and lending policies. Commercial lending is based on counterparty assessment that includes the use of multiple rating methodologies.
Credit risk within the Treasury Division arises primarily from the instruments held by Treasury for operational, liquidity and investment purposes. This aspect of credit risk is managed by the Treasury Credit Risk function which approves all new credit limits and monitors existing exposures. It also sets policy and limits that are approved by the Group's Lending Committee and are responsible for continuous monitoring of exposure through risk reporting and metrics established to measure, mitigate and manage credit risk.
The Treasury Credit Risk function is subject to regular independent review and challenge by Group Risk Oversight in accordance with the Group's risk governance framework.
The Treasury Credit Risk function monitors exposure concentrations against a variety of criteria including industry sector, asset class, individual counterparty and country of risk. The Group has no exposure to emerging markets, hedge funds or credit default swaps and the majority of exposure has an investment grade rating.
The following table presents the Group's maximum exposure to credit risk of on-balance sheet and offbalance sheet financial instruments, before taking into account any collateral held or other credit enhancements and after allowance for impairment where appropriate. The maximum exposure to loss for off-balance sheet financial instruments is considered to be their contractual nominal amounts:
| 2015 | ||||||
|---|---|---|---|---|---|---|
| Carrying value |
Commitments | Maximum credit risk exposure |
Carrying value |
Commitments | Maximum credit risk exposure |
|
| (£ millions) | ||||||
| Cash | 4,325 | - | 4,325 | 5,342 | - | 5,342 |
| Loans and advances to banks |
3,392 | 408 | 3,800 | 2,110 | 408 | 2,518 |
| Investment securities – AFS |
11,037 | - | 11,037 | 10,563 | - | 10,563 |
| Derivative financial instruments |
3,337 | - | 3,337 | 3,020 | - | 3,020 |
| Future value adjustment for portfolio hedged risk |
||||||
| 592 | - | 592 | 221 | - | 221 | |
| Loans and advances to customers |
170,647 | 7,162 | 177,809 | 166,541 | 7,415 | 173,956 |
| Investment in equity shares |
26 | - | 26 | 29 | - | 29 |
| Total | 193,356 | 7,570 | 200,926 | 187,826 | 7,823 | 195,649 |
In addition to the figures shown above, the Group has, as part of its retail operations, commitments of £8,081 million (year ended April 4, 2014: £7,662 million) in respect of credit card and overdraft facilities. These commitments represent agreements to lend in the future, subject to certain conditions. Such commitments are cancellable by the Group, subject to notice requirements, and given their nature are not expected to be drawn down to the full level of exposure.
Foreign exchange risk is the risk that the sterling value of, or net income from, assets and liabilities that are denominated in foreign currency changes as a consequence of changes to foreign exchange rates.
In addition to commercial loans denominated in euro, a significant proportion of Treasury funding and investment activity is undertaken in foreign currencies. Foreign currency exposure is managed through natural offset on the balance sheet or by the use of derivatives to reduce currency exposures to acceptable levels. ALCO sets and monitors limits on the net currency exposure.
In line with the prudential guidance applying to all building societies and after taking account of foreign currency derivatives, the Group has no substantial net exposure to foreign exchange rate fluctuations or changes in foreign currency interest rates.
The table below sets out the limited extent of the residual exposure to foreign exchange risk:
| 2015 | 2014 | ||||||
|---|---|---|---|---|---|---|---|
| Average | High | Low | Average | High | Low | ||
| (£ millions) | |||||||
| VaR | 0.1 | 0.3 | - | 0.2 | 0.7 | - |
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.
The management of liquidity and funding risk aims to ensure that at all times there are sufficient liquid resources, both as to amount and quality, to cover cash flow imbalances and fluctuations in funding, to retain full public confidence and to enable it to meet all financial obligations as they fall due, even during periods of stress. This is achieved through maintaining a prudent level of high quality liquid assets, through management and stress testing of business cash flows and the setting of appropriate risk limits, to maintain a prudent funding mix, maturity profile and level of high quality liquid assets. Our approach to liquidity and funding risk is managed by ALCO and the Board as part of the annual review of the Individual Adequacy Assessment Process ("ILAAP") document.
The Board is responsible for setting risk appetite with respect to levels of liquidity and funding risks. This is articulated through the Board's risk appetite statements. The Board translates these into limits which define the minimum level of liquid resources, the funding mix of the balance sheet, the maturity profile of funding and levels of encumbrance.
ALCO is responsible for setting more detailed limits within the context of overall Board limits, including the composition of liquid assets and concentration of funding, and for monitoring the composition of the Group balance sheet. Wholesale and retail funding maturities are monitored to ensure that there is not excessive concentration in future maturities. This enhances our ability to refinance maturing liabilities. A consolidated cash flow forecast is maintained on an ongoing basis and reviewed by the Weekly Trading Committee.
To mitigate liquidity and funding risks generated by its business activities, we hold a portfolio of liquid assets. The internal stress tests are run daily against a number of scenarios to assess the minimum liquidity requirement alongside the calculation of those prescribed by the regulator. Together these represent our view of the required levels of liquidity to be held.
Liquid assets are categorized according to their liquidity characteristics. The most liquid category of assets predominantly comprises holdings of unencumbered high-quality sovereign-issued securities and deposits with central banks. Assets may be acquired through direct purchase, through repurchase agreements or through collateral swaps. Encumbered assets are excluded from the calculation of liquid assets.
Fixed rate sovereign debt securities are held for liquidity purposes. When swapped to a floating rate using an interest rate swap, the net market value of the security and swap is subject to changes in the relative spreads on sovereign debt and interest rate swaps. This risk is only realized if the debt is sold ahead of maturity (rather than being converted through repurchase agreements), and is subject to a limit set by ALCO.
A Contingency Funding Plan ("CFP") has been approved by ALCO, and describes metrics which could indicate an emerging market-wide or Nationwide-specific stress. It also details procedures and a range of available actions that we could take in the event of a liquidity or funding stress, thereby allowing adequate liquidity resources to be maintained. The CFP is reviewed every six months and tested at least annually.
We undertake securities financing transactions in the form of repos to demonstrate liquidity of the securities held in the Group's LAB. Cash is borrowed in return for pledging securities as collateral and because settlement is on a 'delivery versus payment' basis, the main credit risk arises from intraday changes in the value of the collateral. This is largely mitigated by our collateral management processes.
From a liquidity perspective the main risk is that during a stress, we have insufficient repo market capacity to rapidly monetize the LAB. To mitigate this risk, repo market capacity is assessed via a quarterly review process. This is supplemented by the frequent execution of bilateral repos to maintain credit lines and anonymous transactions via a central counterparty clearing house, such as the London Clearing House, using an electronic trading platform.
LAB securities funding transactions currently have no impact on either funding or encumbered asset reporting due to the short term nature of the transactions, meaning they do not impact the income statement. Repo transactions convert Government bonds (highly liquid securities) into cash, so there is marginal movement in our liquidity position.
The table below segments the carrying value of financial assets and financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date for
the years ended April 4, 2014 and 2015. In practice, customer behaviours mean that liabilities are often retained for longer than their contractual maturities and assets are repaid faster. This gives rise to mismatches in the repricing of assets and liabilities on the balance sheet. The balance sheet structure is managed by ALCO and Weekly Trading Committee and referenced in designing new product propositions. For forecasting purposes, we use judgement and past behavioural performance of each asset and liability class to anticipate the likely cash flow requirements of the Group.
The carrying values of derivative financial instruments are included in the columns according to their contractual maturity:
| As at April 4, 2015 Residual maturity |
Not more than one |
Up to 3 | 3 – 12 | More than | ||
|---|---|---|---|---|---|---|
| month | months | months | 1 – 5 years | 5 years | Total | |
| (£ millions) | ||||||
| Assets | ||||||
| Cash | 4,325 | - | - | - | - | 4,325 |
| Loans and advances | ||||||
| to banks | 2,923 | 2 | 61 | 87 | 319 | 3,392 |
| Investment | ||||||
| securities – | ||||||
| available for sale | 5 | 14 | 142 | 2,049 | 8,827 | 11,037 |
| Loans and advances | ||||||
| to customers | 2,450 | 1,198 | 5,345 | 26,633 | 135,021 | 170,647 |
| Derivative financial | ||||||
| instruments | 42 | 115 | 585 | 1,025 | 1,570 | 3,337 |
| Other financial | ||||||
| assets | - | 12 | 12 | 350 | 256 | 630 |
| Total financial | 9,745 | 1,341 | 6,145 | 30,144 | 145,993 | 193,368 |
| assets | ||||||
| Liabilities | ||||||
| Shares | 97,712 | 1,464 | 17,570 | 14,679 | 948 | 132,373 |
| Deposits from | ||||||
| banks | 1,479 | 391 | 80 | 24 | - | 1,974 |
| Other deposits | 2,582 | 1,458 | 3,072 | 1,964 | - | 9,076 |
| Due to customers | 3,727 | 441 | 1,796 | 155 | - | 6,119 |
| Secured funding – | ||||||
| ABS and covered | ||||||
| bonds | 4 | 15 | 3,776 | 5,667 | 8,071 | 17,533 |
| Senior unsecured | 1,640 | 2,467 | 1,579 | 3,422 | 1,464 | 10,572 |
| Derivative financial | ||||||
| instruments | 64 | 31 | 65 | 1,136 | 2,752 | 4,048 |
| Other financial | ||||||
| liabilities | 1 | 2 | 2 | 9 | - | 14 |
| Subordinated liabilities |
- | - | 540 | 960 | 621 | 2,121 |
| Subscribed capital | - | 3 | - | 141 | 271 | 415 |
| Total financial liabilities |
107,209 | 6,272 | 28,480 | 28,157 | 14,127 | 184,245 |
| Net liquidity gap | (97,464) | (4,931) | (22,335) | 1,987 | 131,866 | 9,123 |
| As at April 4, 2014 | Not more | |||||
|---|---|---|---|---|---|---|
| Residual maturity | than one month |
Up to 3 months |
3 – 12 months |
1 – 5 years | More than 5 years |
Total |
| (£ millions) | ||||||
| Assets | ||||||
| Cash | 5,342 | - | - | - | - | 5,342 |
| Loans and advances | ||||||
| to banks | 1,647 | - | - | 148 | 315 | 2,110 |
| Investment | ||||||
| securities – | ||||||
| available for sale | 4 | 15 | 292 | 1,321 | 8,931 | 10,563 |
| Loans and advances | ||||||
| to customers | 2,974 | 1,305 | 5,704 | 26,864 | 129,694 | 166,541 |
| Derivative financial | ||||||
| instruments | 7 | 22 | 138 | 1,465 | 1,388 | 3,020 |
| Other financial | ||||||
| assets | - | 1 | 8 | 93 | 148 | 250 |
| Total financial | 9,974 | 1,343 | 6,142 | 29,891 | 140,476 | 187,826 |
| assets | ||||||
| Liabilities | ||||||
| Shares | 90,633 | 3,076 | 19,552 | 13,938 | 3,269 | 130,468 |
| Deposits from banks |
1,579 | 310 | 74 | 21 | - | 1,984 |
| Other deposits | 1,777 | 1,066 | 1,198 | 3,094 | - | 7,135 |
| Due to customers | 3,865 | 504 | 1,803 | 36 | - | 6,208 |
| Secured funding – ABS and covered |
||||||
| bonds | 6 | 106 | 4,034 | 7,538 | 5,705 | 17,389 |
| Senior unsecured | 2,107 | 2,811 | 2,835 | 1,689 | 1,726 | 11,168 |
| Derivative financial | ||||||
| instruments | 34 | 27 | 138 | 663 | 1,529 | 2,391 |
| Other financial | ||||||
| liabilities | - | 2 | 20 | 11 | - | 33 |
| Subordinated | ||||||
| liabilities | - | - | 125 | 1,464 | 680 | 2,269 |
| Subscribed capital | 3 | - | 207 | 139 | 252 | 601 |
| Total financial | ||||||
| liabilities | 100,004 | 7,902 | 29,986 | 28,593 | 13,161 | 179,646 |
| Net liquidity gap | (90,030) | (6,559) | (23,844) | 1,298 | 127,315 | 8,180 |
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 following is an analysis of gross undiscounted contractual cash flows differs from the analysis of residual maturity due to the inclusion of interest accrued at current rates for the average period until maturity, on the amounts outstanding at the balance sheet date.
| For the year ended April 4, 2015 | ||||||||
|---|---|---|---|---|---|---|---|---|
| Gross contractual cash flows |
Not more than one month |
Up to 3 months |
3 – 12 months |
1 – 5 years | More than 5 years |
Total | ||
| (£ millions) | ||||||||
| Shares | 97,712 | 1,568 | 17,797 | 14,972 | 977 | 133,026 | ||
| Deposits from | ||||||||
| banks | 1,479 | 392 | 80 | 25 | - | 1,976 | ||
| Other deposits | 2,582 | 1,477 | 3,103 | 1,996 | - | 9,158 | ||
| Due to customers | 3,727 | 448 | 1,803 | 159 | - | 6,137 | ||
| Secured funding – ABS and covered |
||||||||
| bonds | 36 | 20 | 4,004 | 6,568 | 8,068 | 18,696 | ||
| Senior unsecured | 1,640 | 2,471 | 1,729 | 3,950 | 1,640 | 11,430 | ||
| Derivative financial instruments |
101 | 166 | 611 | 2,023 | 2,056 | 4,957 | ||
| Other financial liabilities |
1 | 2 | 2 | 9 | - | 14 | ||
| Subordinated | ||||||||
| liabilities | - | 4 | 518 | 1,321 | 588 | 2,431 | ||
| Subscribed capital | 1 | 5 | 15 | 215 | 307 | 543 | ||
| Total financial liabilities |
107,279 | 6,553 | 29,662 | 31,328 | 13,636 | 188,368 |
| For the year ended April 4, 2014 | ||||||
|---|---|---|---|---|---|---|
| Gross contractual cash flows |
Not more than one month |
Up to 3 months |
3 – 12 months |
1 – 5 years | More than 5 years |
Total |
| (£ millions) | ||||||
| Shares | 90,633 | 3,213 | 19,847 | 14,311 | 3,386 | 131,390 |
| Deposits from | ||||||
| banks | 1,579 | 311 | 74 | 21 | - | 1,985 |
| Other deposits | 1,777 | 1,086 | 1,241 | 3,176 | - | 7,280 |
| Due to customers | 3,865 | 512 | 1,811 | 36 | - | 6,224 |
| Secured funding – ABS and covered |
||||||
| bonds | 55 | 69 | 4,790 | 8,190 | 6,085 | 19,189 |
| Senior unsecured | 2,108 | 2,813 | 2,937 | 2,146 | 1,786 | 11,790 |
| Derivative financial instruments |
58 | 135 | 606 | 1,289 | 753 | 2,841 |
| Other financial liabilities |
- | 2 | 20 | 11 | - | 33 |
| Subordinated liabilities |
16 | 4 | 113 | 1,924 | 703 | 2,760 |
| Subscribed capital | 1 | 5 | 231 | 223 | 327 | 787 |
| Total financial liabilities |
100,092 | 8,150 | 31,670 | 31,327 | 13,040 | 184,279 |
The following table summarizes the carrying amounts and fair values of those financial assets and liabilities not presented on the Group balance sheets at fair value:
| Carrying value | Fair value | ||
|---|---|---|---|
| For the year ended April 4, 2015 (£ millions) |
|||
| Financial assets | |||
| Loans and advances to banks | 3,392 | 3,392 | |
| Loans and advances to customers: | |||
| Residential mortgages | 152,775 | 149,778 | |
| Consumer banking | 3,575 | 3,456 | |
| Commercial lending | 14,272 | 13,145 | |
| Other lending | 25 | 25 | |
| Investments in equity shares | 1 | 1 | |
| Total | 174,040 | 169,797 | |
| Financial liabilities | |||
| Shares | 132,373 | 132,505 | |
| Deposits from banks | 1,974 | 1,976 | |
| Other deposits | 5,744 | 5,745 | |
| Due to customers | 6,119 | 6,122 | |
| Debt securities in issue | 28,105 | 28,733 | |
| Subordinated liabilities | 2,121 | 2,295 | |
| Subscribed capital | 415 | 387 | |
| Total | 176,851 | 177,763 |
| Carrying value | Fair value | ||
|---|---|---|---|
| For the year ended April 4, 2014 (£ millions) |
|||
| Financial assets | |||
| Loans and advances to banks | 2,110 | 2,110 | |
| Loans and advances to customers: | |||
| Residential mortgages | 145,558 | 141,660 | |
| Consumer banking | 3,656 | 3,518 | |
| Commercial lending | 17,163 | 15,675 | |
| Other lending | 164 | 164 | |
| Investments in equity shares | 1 | 1 | |
| Total | 168,652 | 163,128 | |
| Financial liabilities | |||
| Shares | 130,468 | 130,491 | |
| Deposits from banks | 1,984 | 1,985 | |
| Other deposits | 3,913 | 3,915 | |
| Due to customers | 6,208 | 6,210 | |
| Debt securities in issue | 28,557 | 29,168 | |
| Subordinated liabilities | 2,269 | 2,434 | |
| Subscribed capital | 601 | 583 | |
| Total | 174,000 | 174,786 |
Loans and advances are net of provisions for impairment. The estimated fair value of loans and advances represents the discounted amount of estimated future cash flows expected to be received based on expectations of future interest rates and future loan repayment profiles. For fixed rate loans, discount rates are based on the market offer rates currently available for equivalent fixed rate products. For retail variable rate loans, estimated future cash flows are discounted at the currently available market standard variable interest rate. Similar types of retail loan products are grouped together and the expected capital cash flows are discounted at the differential between the current product rate and the standard variable rate to determine fair value. The fair value estimations do not incorporate adjustments for future credit risk. However, incurred loss provisions are deducted from the fair value amounts.
The estimated fair value of 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 price represents the discounted amount of estimated future cash flows based on expectations of future interest rates, customer withdrawals and interest capitalization. For variable interest rate deposits, estimated future cash flows are discounted using current market interest rates for new debts with similar remaining maturity. For fixed rate shares and deposits, the estimated future cash flows are discounted based on market offer rates currently available for equivalent deposits.
The estimated fair values of longer dated liabilities are calculated based on quoted market prices where available or using similar instruments as a proxy for those liabilities that are not of sufficient size or liquidity to have an active market quote. For those notes 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 following table provides an analysis of financial assets and liabilities held on our balance sheet at fair value, grouped into levels 1 to 3 based on the degree to which the fair value is observable:
| For the year ended April 4, 2015 | Level 1 | Level 2 | Level 3 | Total |
|---|---|---|---|---|
| Group | (£ millions) | |||
| Financial Assets | ||||
| Investment securities—AFS | 6,726 | 4,299 | 12 | 11,037 |
| Investments in equity shares | - | - | 25 | 25 |
| Derivative financial instruments | - | 2,426 | 911 | 3,337 |
| Other financial assets | - | 12 | - | 12 |
| Total | 6,726 | 6,737 | 948 | 14,411 |
| Financial Liabilities | ||||
| Derivative financial instruments | - | (4,047) | (1) | (4,048) |
| Other deposits—PEB | - | - | (3,332) | (3,332) |
| Total | - | (4,047) | (3,333) | (7,380) |
| For the year ended April 4, 2015 | Level 1 | Level 2 | Level 3 | Total |
| Group | (£ millions) | 3,498 | 71 | 10,563 |
| Investments in equity shares | - | - | 28 | 28 |
| Derivative financial instruments | - | 2,350 | 670 | 3,020 |
| Other financial assets | - | - | - | - |
| Total | 6,994 | 5,848 | 769 | 13,611 |
| Financial Liabilities | ||||
| Derivative financial instruments | - | (2,390) | (1) | (2,391) |
| Other deposits—PEB | - | - | (3,222) | (3,222) |
| Total | - | (2,390) | (3,223) | (5,613) |
Notes:
_________________
Level 1: Fair value derived from unadjusted quoted prices in active markets for identical assets or liabilities, e.g. G10 government securities.
Level 2: Fair value derived from inputs other than quoted prices that are observable for the asset or liability, either directly (i.e. a price) or indirectly (i.e. derived from prices), e.g. most investment grade and liquid bonds, ABS, certain CDOs, CLOs and OTC derivatives.
Level 3: Inputs for the asset or liability are not based on observable market data (unobservable inputs), e.g. private equity investments, derivatives including an equity element, deposits including an equity element, some CDOs and certain ABS and bonds.
Other financial assets represent fair value movements in mortgage commitments entered into where a loan has not yet been made. We recommenced the practice of fair valuing a portion of the mortgage commitments on the balance sheet during the year.
Our Level 1 portfolio comprises highly rated government and multi-lateral development securities for which traded prices are readily available and during the year ended April 4, 2015, we have reduced this portfolio in response to the changing regulatory environment created by Funding for Lending. There were no significant transfers between the Level 1 and Level 2 portfolios during the year ended April 4, 2015.
With respect to our Level 2 investment securities, AFS assets are sourced from consensus pricing or other observable market prices. None of these Level 2 AFS assets are valued from models. Level 2 derivative assets and liabilities are valued from discounted cash flow models using yield curves based on observable market data.
The main constituents of our Level 3 portfolio are as follows:
Our £12 million Level 3 AFS investment securities at April 4, 2015 comprised mainly of CDOs.
Our Level 3 investments in equity shares of £25 million at April 4, 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.
Level 3 assets and liabilities in this category are equity linked derivatives with external counterparties which economically match the investment return payable by us to customers invested 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 PEB's 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 constructed from the valuation of the associated derivative as valued by an external third-party.
The table below analyzes movements in the Level 3 portfolio:
| For the year ended April 4, 2015 | Investment securities – AFS |
Investments in equity shares |
Net derivative financial instruments – liabilities |
Other deposits - PEBs |
|---|---|---|---|---|
| Group | (£ millions) | |||
| As at April 4, 2014 | 71 | 28 | 669 | (3,222) |
| (Loss)/gain recognized in the |
||||
| income statement: | ||||
| Net interest (expense)/income | - | - | 1 | (50) |
| Gains/(losses) from derivatives | ||||
| and hedge accounting | - | - | 241 | (245) |
| Impairment losses on investment | ||||
| securities | (5) | - | - | - |
| (Loss)/gain recognized in other |
||||
| comprehensive income: | ||||
| Fair value movement taken to | ||||
| members' interests and equity | 1 | (3) | - | - |
| Settlements | (55) | - | (1) | 185 |
| As at April 4, 2015 | 12 | 25 | 910 | (3,332) |
| For the year ended April 4, 2014 | Investment securities – AFS |
Investments in equity shares |
Net derivative financial instruments – liabilities |
Other deposits - PEBs |
|---|---|---|---|---|
| Group | (£ millions) | |||
| As at April 4, 2013 | 60 | 28 | 374 | (2,985) |
| (Loss)/gain recognized in the income statement: |
||||
| Net interest (expense)/income | - | - | (39) | - |
| Gains/(losses) from derivatives and hedge accounting Impairment losses on investment |
- | - | 295 | (305) |
| securities | 2 | - | - | - |
| Gain recognized in other comprehensive income: |
5 | - | - | - |
| Settlements | (6) | - | 39 | 68 |
| Transfers into Level 3 | 11 | - | - | - |
| Transfers out of Level 3 | (1) | - | - | - |
| As at April 4, 2014 | 71 | 28 | 669 | (3,222) |
The significant movements in Level 3 positions during the year ended April 4, 2014 are explained below:
The table below provides sensitivity analysis of reasonably possible alternative valuation assumptions for the assets in the Level 3 portfolio:
| For the year ended April 4, 2015 | Carrying value |
Increase in fair value |
Decrease in fair value |
|---|---|---|---|
| Group | (£ millions) | ||
| Investment securities – AFS: | |||
| Collateralized debt obligations | 12 | 1 | (1) |
| Investments in equity shares | 25 | 2 | (1) |
| Net derivative financial instruments | 910 | - | - |
| Other deposits – PEBs | (3,332) | - | - |
| Total | (2,385) | 3 | (2) |
| For the year ended April 4, 2014 | Carrying value |
Increase in fair value |
Decrease in fair value |
|---|---|---|---|
| Group | (£ millions) | ||
| Investment securities – AFS: | |||
| Collateralized debt obligations | 71 | 11 | (14) |
| Investments in equity shares | 28 | 1 | (2) |
| Net derivative financial instruments | 669 | - | - |
| Other deposits – PEBs | (3,222) | - | - |
| Total | (2,454) | 12 | (16) |
Reasonable alternative assumptions applied take account of the nature of valuation techniques used, as well as the availability and reliability of observable proxy and historic data. The scenarios applied are considered for each product and varied according to the quality of the data and variability of the underlying market.
Any increases in fair values of the PEB derivative financial instruments would be offset by decreases in the fair values of the associated PEB deposit and vice versa. Any resultant impact is deemed by the Group to be immaterial; therefore these items have been excluded from the table above.
Sensitivities on these assets where there are no alternative pricing sources have been calculated by applying a range of probable scenarios against our current valuation process, resulting in a range of possible prices.
Sensitivities on this asset, which is subject to impairment, have been derived from a modeled approach using estimated expected losses at legal maturity and risk adjusted discount rates.
Sensitivities in these holdings have been based on the prices seen in these holdings in the preceding 12 months. As the highest price in the previous 12 months was equal to the current price, there is no upper sensitivity of fair value.
Our business is under the control of our Board of Directors. Each director is elected annually by the members. The executive directors are the Chief Executive, the Group Finance Director, the Executive Director Group Retail and the Chief Operating Officer. All other directors are non-executive directors. The business address of all of the directors and officers is Nationwide House, Pipers Way, Swindon SN38 1NW, England.
Under our rules, the Board of Directors must consist of not less than eight directors of whom not less than five must be present at a Board meeting to form a quorum.
No potential conflicts of interest exist between any duties to us, as Issuer, of the persons on the board of directors and their private interests or other duties.
Following the announcement in May 2015 of the retirement in 2016 of our Chief Executive Officer, Graham Beale, the Board is currently seeking to identify and appoint a successor. The search is expected to be managed in an orderly manner with minimal disruption to the Group's activities and operations. It is intended that Mr. Beale will continue in his position until around the date of the 2016 annual general meeting.
Both Geoffrey Howe, the previous Chairman of the Board of Directors, and Michael Jary, a non-executive member of the Board of Directors, did not stand for re-election, and resigned from the Board of Directors following the 2015 annual general meeting on 23 July. David Roberts was elected as Chairman on this date.
The following table presents information with respect to current directors:
| Name | Age | Position | Other Directorships | ||||
|---|---|---|---|---|---|---|---|
| David Roberts | 52 | Chairman | Campion Willcocks Ltd | ||||
| Dr. | Challoner's (Governor) |
Grammar | School | ||||
| NHS | England Commissioning Board) |
(NHS | National | ||||
| Roger Perkin | 67 | Senior Director |
Independent | Electra Private Equity plc | |||
| Electra Private Equity Investments plc | |||||||
| Crime Reduction Initiatives | |||||||
| Bower Bequest Trustee Company Limited | |||||||
| Tullett Prebon plc | |||||||
| Friends Life Group Holdings Limited | |||||||
| Friends Life Group Plc | |||||||
| Sova | |||||||
| Graham Beale | 57 | Chief Executive | None | ||||
| Mark Rennison | 55 | Group Finance Director | Arkose Funding Limited |
| Name | Age | Position | Other Directorships |
|---|---|---|---|
| Confederation Mortgage Services Limited | |||
| Exeter Trust Limited | |||
| First Nationwide | |||
| LBS Mortgages Limited | |||
| Nationwide Anglia Property Services Limited Nationwide Investments (No.1) Limited |
|||
| Nationwide Housing Trust Limited | |||
| Nationwide Lease Finance Limited | |||
| Nationwide Mortgage Corporation Limited | |||
| Nationwide Syndications Limited | |||
| Staffordshire Leasing Limited | |||
| NBS Fleet Services Limited | |||
| Chris Rhodes | 52 | Group Retail Director | Derbyshire Home Loans Limited |
| E-Mex Home Funding Limited | |||
| The Mortgage Works (UK) plc | |||
| UCB Home Loans Corporation Limited | |||
| at.home nationwide Limited | |||
| Jubilee Mortgages Limited | |||
| The Nationwide Foundation | |||
| National Numeracy (Trustee) | |||
| Tony Prestedge | 45 | Chief Operating Officer | Nationwide Anglia Property Services Limited |
| Opportunity Now | |||
| Dunfermline BS Nominees Limited | |||
| Monument (Sutton) Limited | |||
| The Derbyshire (Premises) Limited | |||
| Rita Clifton | 57 | Non-executive Director | The British United Provident Association Limited ("BUPA") |
| Populus Limited | |||
| WWF – UK (Fellow) |
| Name | Age | Position | Other Directorships |
|---|---|---|---|
| Henley Festival Ltd | |||
| BrandCap Ltd | |||
| The Conservation Volunteers | |||
| TCV Trading 1 Limited | |||
| TCV Trading 2 Limited | |||
| ASOS Plc | |||
| Rita Clifton Limited | |||
| Michael Lenson | 61 | Non-executive Director | Eclipse Film Partners No.39 LLP (Designated Member) |
| The Invicta Film Partnership No.37 LLP (Designated Member) |
|||
| Elysian Fuels 1 LLP (Designated Member) | |||
| Elysian Fuels 2 LLP (Designated Member) | |||
| The Currency Cloud Group Limited | |||
| Lynne Peacock | 61 | Non-Executive Director | Hawkins Residents Limited |
| Scottish Water | |||
| Scottish Water Business Stream Holdings Limited |
|||
| Scottish Water Horizon Holdings Limited | |||
| Standard Life plc | |||
| Standard Life Charitable Trust | |||
| Mai Fyfield | 46 | Non-Executive Director | |
| Tim Tookey | 53 | Non-Executive Director | Westmoreland Court Management (Beckenham) Limited |
David joined Nationwide on September 1, 2014 and took over as Chairman in July 2015. From 2010 to 2014 he was on the Board of Lloyds Banking Group, where he was Group Deputy Chairman and Chairman of the Board Risk Committee. David has many years of experience at board and executive level in retail and commercial banking in the UK and internationally. He joined Barclays in 1983 and held various senior management positions culminating in Executive Director, member of the Group Executive Committee and Chief Executive, International Retail and Commercial Banking, a position he held until December 2006. He is a former Non-Executive Director of BAA plc and Absa Group SA, and was Chairman and Chief Executive of Bawag PSK AG, Austria's second largest retail bank. David is a Non-Executive Director of NHS England, a
fellow of the Chartered Institute of Financial Services and holds an MBA and Honorary Doctorate in Business Administration from Henley Business School.
Graham joined the Society in 1985 and has developed extensive experience and understanding of both retail financial services and the mutual building society sector over a period of almost 30 years. In his role as Chief Executive Officer, Graham is responsible for managing the Society in accordance with the strategy which remains firmly rooted in the Society's mutual heritage. Prior to joining Nationwide, Graham trained and qualified as a chartered accountant.
Graham is a member of the FCA Practitioner Panel and was Chairman of the Panel for two years to April 2015. He sits on the Council of the Building Societies Association, having been its Chairman during 2009 and 2010 and chaired its Remuneration and Nomination Committee from 2011 to 2014. He is a Director of the British Bankers' Association. Previously, he has been a director of VISA Europe, 2007 - 2011.
Mark Rennison is a chartered accountant who joined the Society and was appointed to the Board in February 2007. He is responsible for Finance, Treasury and Corporate Development. He is a director of various Society subsidiaries. Prior to his appointment, Mark was a partner at PricewaterhouseCoopers LLP where he worked in the financial services practice with a specific focus on retail and corporate banking. He has also worked extensively with group treasury operations, leasing and asset finance businesses.
Chris Rhodes is a chartered accountant who joined the Society in April 2009 from Abbey Santander, where he was Director of Retail Distribution for Alliance & Leicester Public Limited Company. Currently, Chris is the Group Retail Director. His responsibilities include Nationwide's retail product range, distribution and marketing. Chris has spent 20 years working in the financial services sector and his previous positions include Deputy Managing Director of Girobank Plc and Retail Operations Director at Alliance & Leicester Public Limited Company. In 2003, he was appointed Managing Director of Retail Banking for the entire Alliance & Leicester Group and in 2007, became Group Finance Director, a role he held until the merger with Santander in 2008. Chris is a non-executive director of Visa Europe Limited and a board member of National Numeracy.
Rita Clifton joined the Board in July 2012. Rita holds a number of non-executive directorships, including at BUPA Limited, ASOS Plc and Populus Limited and is a former non-executive director of Dixons Retail plc. She is also a fellow of WWF-UK, and sits on the Assurance and Advisory Board for BP's carbon offsetting program. Rita has over 20 years' senior management experience in a range of roles with an expertise in demonstrating how brand is an integral part of long-term business strategy and in analyzing and understanding consumer perceptions and behavior. Her executive career has been in advertising, strategic marketing and market research, and she was previously Chairman and Chief Executive at Interbrand UK Ltd, and prior to that Vice Chairman at Saatchi & Saatchi Limited. During her career Rita has advised, at the most senior level, some of the UK's best known organizations, including British Airways, Barclays, BT, Citigroup, Visa and the British Army.
Tony Prestedge was appointed to the Board in August 2007 and was previously Executive Director Group Development. He has held a number of senior management and executive roles at Barclays plc, including Managing Director Home Finance and Retail Support and Operations Director. He was a member of both Woolwich plc and Barclays Retail Banking Executive Committee. Tony is accountable for the Group's Operational Strategy, Performance and Transformation and his divisional reports include Customer Services and Product Operations, Digital Development, Technology, Transformation Delivery, Telephone Channels, Payments, group Secretary and Property Services. Tony is a board member of Opportunity Now.
Roger is a former partner at Ernst & Young LLP and spent 40 years in the accounting profession. During his time at Ernst & Young he worked with many blue chip clients and advised boards across the spectrum of financial services, including banking, insurance, fund management and private equity. He is also a non-executive director at Electra Private Equity plc and Tullett Prebon plc, chairing the Audit Committee of both companies, and Friends Life Group Limited. Additionally, he is a trustee of two charities, Chiddingstone Castle and Crime Reduction Initiatives.
Mitchel has spent over 30 years in the financial services industry and is a former Group Chief Information Officer at Deutsche Bank AG with responsibility for IT and Operations for all operating divisions of the bank, including its retail banking operations. Mitchel was a member of the executive committees previously for both the Corporate and Investment Bank and the Private Client and Asset Management Division. He has also served as MD, Global Head of Operations & Operations IT at UBS Warburg Limited and as Director, Group Operations at Credit Suisse First Boston. More recently, Mitchel was a partner of Olivant & Co. Limited, an investment company providing strategic and operational expertise alongside investment capital to financial services businesses in Europe, the Middle East and Asia-Pacific and was a non-executive director of NYFIX, a NASDAQ listed company and BCC, an AIM listed company. Mitchel is currently a non-executive director of Currency Cloud.
Lynne Peacock joined the Society in July 2011. Lynne, a former Chief Executive UK of National Australia Bank (NAB) and Chief Executive of Woolwich plc, has over 25 years' senior management experience in a range of roles comprising brand development, mergers and acquisitions, change management and business transformation, including almost 20 years at board level. During her time at NAB, Lynne was responsible for its businesses in the UK consisting of Clydesdale and Yorkshire Banks. She became Chief Executive of Woolwich plc in October 2000 following its takeover by the Barclays Bank Group, having previously held a number of senior management and board positions at the Woolwich Building Society, both before and after its conversion to a public listed company in 1997. Lynne is a non executive director of Scottish Water and Standard Life plc.
Mai is currently Sky's Chief Strategy Officer, having been appointed to the position in 2015 following the acquisition of Sky Italia and Sky Deutschland. She was previously Director of Strategy and Business Development for Sky's UK operations. In her current role, Mai is responsible for overseeing the strategy function across the Sky group. In respect of the UK and Ireland she is also responsible for business development, negotiating agreements with third-party channels including as part of Sky's retail offering and for the distribution of Sky's channels to other platforms. She joined Sky in 1999, prior to which Mai spent eight
years working as an economic advisor to major corporations in a number of different industries, both in the UK and the United States.
Tim is a Chartered Accountant with strong experience of major retail financial services organisations. He has significant Board experience and has become Chairman of the Society's Board Risk Committee in July 2015. Tim is a former Chief Financial Officer at Friends Life Group Ltd, a position he held from 2012 until April 2015, following the sale of the business to Aviva. Prior to joining Friends Life, he was Group Finance Director of Lloyds Banking Group between 2008 and 2012 and was appointed as Deputy Group Finance Director upon joining the bank in 2006. From 2002 to 2006, he was Finance Director of Prudential PLC's UK business and from 1996 to 2002 he held the role of Group Finance Director at Heath Lambert Group.
Our Board of Directors operates through its meetings and through its four main committees, the Audit Committee, the Nomination Committee, the Remuneration Committee and the Board Risk Committee. To the extent that matters are not reserved to our Board of Directors, responsibility is delegated to the Chief Executive, who is assisted by the Executive Committee and the Executive Risk Committee.
The Audit Committee, in accordance with its commitment to good corporate governance, seeks to ensure that we maintain sound controls in relation to the responsibilities of the directors, meets regularly with senior management and the internal audit department and regularly reviews its relationship with the external auditors.
The Nomination Committee regularly reviews the balance of skills and experience on the Board and the requirements of the business. It also considers the appointment of new directors and makes recommendations to the Board.
The Remuneration Committee is responsible for our director and executive officer remuneration policy. We have designed our policy to ensure that director and executive officer remuneration reflects performance and allows us to attract, retain and motivate a sufficient number of talented executives. The Remuneration Committee reviews, evaluates and makes recommendations to the Board regarding our executive compensation standards and practices, including basic salaries, bonus distributions, pension fund contributions and the medium-term incentive scheme. The Remuneration Committee consists of all non-executive directors.
The Board Risk Committee, which meets six times a year, has responsibility for overseeing the risk framework, policies and risk appetite, and making recommendations to the Board.
The Executive Committee is our key operational committee which oversees the day-to-day operations of our business. This committee meets once each week, reviews all matters that are to be presented to the Board of Directors, and is composed of our Chief Executive and the three other executive directors and the four Group Directors.
The Executive Risk Committee, which meets monthly, is responsible for ensuring a coordinated approach across all risks and oversight of the risk committees. The Committee's membership comprises the Executive and Group Directors. The risk committees comprise the ALCO, Lending Committee, Group Oversight Committee, Operational Risk Committee and the Conduct & Compliance Committee.
The Operational Risk Committee, which meets monthly, is responsible for determining and amending the Group's attitude to operational risk and set thresholds for endorsement by the Executive Risk Committee and the Board Risk Committee; exercising primary responsibility for controlling operational risk across the Group, ensuring that controls over operational risk are adequately designed and operating effectively and managing and reviewing the operational risk exposures of the Group in accordance with the Enterprise Risk Framework, Board Risk Appetite, Group Strategy and the Corporate Plan. The Committee's membership comprises the Group Operating Officer, Chief Risk Officer, Chief Compliance Officer, and the Divisional Directors Financial Reporting & Tax, Group Services, Business Transformation, Financial Performance, HR, Central Distribution and Customer Experience.
ALCO determines and amends the Group's approach to financial risk and sets thresholds for endorsement by the Executive Risk Committee and the Board. It manages the financial risk profile of the Group in accordance with the Enterprise Risk Management Framework, Board Risk Appetite, Group Strategy and the Corporate Plan. ALCO comprises the Chief Executive, Group Finance Director, Executive Director Group Retail, Chief Risk Officer, the Divisional Director Treasury and Divisional Director Financial Performance. For more information about ALCO, see the section entitled "Financial Risk Management."
The Lending Committee is responsible for determining the Group's attitude to lending risk, monitoring and overseeing the performance of the profile of lending risk across all the various lending portfolios. The Committee's core membership comprises the Executive Director Group Retail, Chief Risk Officer, Group Finance Director who form the quorum for the committee. Specialist members attend the sections of the committee meeting relevant to their lending portfolio, and comprise the Divisional Director Mortgages and Savings, Divisional Director Commercial, Divisional Director Treasury, and the Heads of Secured, Unsecured, Commercial and Treasury Credit Risk. For more information about the Lending Committee, see the section entitled "Financial Risk Management—Credit Risk."
The Group Oversight Committee is responsible for providing second-line oversight of risk management and compliance on a Group-wide basis. The Committee is comprised of the Group Risk Director, and Heads of Enterprise Risk Management, Group Lending Risk Oversight, Group Financial & Strategic Risk Oversight, Operational Risk Oversight, Group Modelling, Measurement & Methodology Oversight and Head of Compliance Oversight Director.
The Conduct & Compliance Committee was established in September 2015 and replaces the Customer Committee and the Compliance Committee. It manages and monitors adherence to all relevant legislation and regulation, on a Group-wide basis on belahf of the Executive Risk Committee. It maintains the conduct and compliance risk appetite statements and measures and monitors adherence to the Corporate Plan and Objectives to ensure that the Society operates within its agreed conduct and compliance risk appetite. The quorum for business is four members, which must include the Chief Compliance Officer or Group Director, Distribution.
For the financial year ended April 4, 2015 the aggregate amount of compensation that we paid to all directors and executive officers as a group totalled £9.2 million. From April 2014 we have operated a performance pay plan for Directors which features deferral periods of up to 5 years on some elements and only pays out if performance targets are met under a broad range of individual, strategic and financial corporate metrics. The Remuneration Committee sets the performance targets each year. The maximum award under this scheme each year for the Chief Executive is 160% of base salary and for other executive directors is 120% of salary. In addition, compensation may be paid under the terms of awards made to Directors under performance based arrangements in place prior to April 2014 and which are still outstanding.
In addition, executive directors receive other benefits including a car allowance, access to shared drivers when required, fuel allowance, healthcare, mortgage allowance and insurance benefits.
As at September 30, 2015, we had loans to directors or persons connected to directors totalling £1.0 million. All of these loans were granted in the normal course of business and were largely made up of residential mortgage loans and balances on credit cards. Whilst the Group previously offered directors and other employees discounts on residential mortgage loans, these offers have been ceased. Some such loans originated before the offer cessation date may still be extant.
We maintain a register containing the details of all loans, transactions and other arrangements made between our directors (and persons connected with our directors) and Nationwide or its subsidiaries. This register is available for inspection at our annual general meetings and during normal business hours at our principal office during the 15 days prior to our annual general meeting.
G.J. Beale has opted out of the Fund, and he receives a monthly allowance in lieu of pension scheme accrual.
T.P. Prestedge has opted out of the Group Personal Pension Arrangement and receives a monthly allowance in lieu of an employer contribution into the Group Personal Pension Arrangement.
M.M. Rennison has opted out of the Fund, and he receives a cash allowance in lieu of pension scheme accrual.
For information on transactions with related parties, see note 40 to our audited consolidated financial statements incorporated by reference herein.
Our main competitors are the five largest UK banking groups. In addition we also compete with other building societies, with smaller banks and with insurance companies. In recent years, new providers have emerged as competitors in all areas of the UK personal financial services market. A description of the traditional types of organizations with which we continue to compete as well as a description of certain new competitors is set forth below.
The UK financial services market is dominated by the five largest banking groups, namely Lloyds Banking Group, Royal Bank of Scotland, Barclays, HSBC and Santander UK. Within the UK retail banking sector there have also been a number of significant business combinations and this trend was accelerated by the financial crisis.
Over the past 30 years, many building societies have merged with other building societies or, in a number of cases, transferred their businesses to the subsidiary of another mutual organization or demutualized and transferred their businesses to existing or specially formed banks. As a result, the number of building societies in the United Kingdom has fallen from 137 in 1985 to 44 as at April 4, 2015. Building societies today continue to hold an important share of the UK mortgage and savings market and have been recognized by recent UK Governments and the Independent Commission on Banking as bringing valuable diversity and competition to the UK banking market. For further information about the UK residential mortgage market and UK retail deposit mark see below.
The UK insurance industry has traditionally been made up of a large number of mutual insurance organizations and several composite insurers originating a range of products, distributed through building societies, banks, direct sales forces and independent financial advisers. Recent trends include consolidation within the industry, the demutualization of mutual insurers and the entry of building societies and banks into the market as underwriters as well as distributors.
A number of large retailers sell financial services to their customers, often through co-operation arrangements with existing banks and insurance companies. Retailing groups, namely Tesco and J. Sainsbury, have entered the market as manufacturers of financial service products in their own right. In addition, foreign banks, investment banks, insurance and life assurance companies have at various times been active in UK personal financial services, particularly the mortgage and retail savings markets, and a number of companies have expressed a desire to enter the market. The growth of internet price comparison sites has enabled consumers to have access to information that has increased price competition particularly in certain insurance markets. Companies are using low cost telephone, mail and internet based distribution channels to offer competitively priced retail savings accounts, mortgages and other financial products. The Internet and mobile communications technology provide opportunities for further competition from organizations from outside the traditional banking sector. The use of the intermediary sector also allows new entrants to gain access to the UK mortgage market. Since the financial downturn, several additional entrants have launched, or investigated ways to launch, on a relatively small scale, seeking to take advantage of the problems faced by of some of the larger participants, though scope to do this is reducing as the incumbents tackle their shortcomings. Competition regulation has and may eventually further assist potential entrants if it enforces the breakup of some of the larger participants or the sale of those in public ownership.
The table below sets out information for the last three years concerning year-end balances of UK lending secured on residential property and the proportions held by building societies, banks and us:
| Year ended December 31, | Total Balances(1) |
Building Societies(1) |
Banks(1) | Others | Our share of total UK residential mortgages(1) |
|---|---|---|---|---|---|
| (£ billions, except percentages) | |||||
| 2014 | 1,257.7 | 85.5%(2) | - | 14.5% | 12.0% |
| 2013 | 1,235.4 | 85.0%(2) | 15.0% | 11.7% | |
| 2012 | 1,265.7 | 15.9% | 68.6% | 15.6% | 10.9% |
| _______ |
Notes:
(1) Source: BoE (excluding lending to housing associations), except for information regarding our balances which are taken from our own data. Building society figures include our own balances. Separate data for Banks & Building Societies is not available from December 2013 onwards.
(2) As of 2013, the BoE no longer quotes banks and building societies market shares on an individual basis.
Although the overall size of the new mortgage market has shrunk considerably since 2007, the nature of competition is essentially unchanged, in that it involves defending the existing stock of balances and competing for the flow of new lending.
Competition for new lending remains fierce and is driven by first-time buyers or next-time buyers remortgaging, changing homes or extending their mortgages. In most cases this is for residential purposes, although the popularity of buy-to-let has continued to increase, accounting for 14% of lending in 2014/15. In recent years, based on English Housing Survey data, there has been a decline in the proportion of the UK population owning their own homes, from a peak of around 71% in 2003 to around 63% in 2014. The aftermath of the global financial crisis is still evident in the mortgage market, with more limited credit availability at higher LTV ratios, although this is improving as a result of government schemes such as the Help To Buy mortgage guarantee, which has been extended through 2020. For further information, see "Risk Factors—Risks Related to Our Business—An increasing interest rate environment or tightening of monetary policy, whether by the UK, US or other central banking authorities, could affect the financial condition of our customers, clients and counterparties, which could in turn adversely affect us." Competition is driven by a combination of price, risk profile and access to funding by lenders.
Our market share of gross advances of 13.4% during the financial year ended April 4, 2015 was above our par share of 11.6% as at January 1, 2014. Over the year ended April 4, 2015, the average LTV ratio of new mortgage lending was 66% (excluding further advances) compared with 69% in the same period a year earlier.
The UK retail deposit market is dominated by banks, building societies and National Savings and Investments, a UK government-sponsored savings and investment organization. Below is a table breaking down the total UK retail deposit market by type of financial institution compiled from details published by the BoE:
| Year ended December 31, | Total UK retail deposits(1) |
Building societies' share of total UK retail deposits(1) |
Banks' share of total UK retail deposits(1) |
Others(1) | Our share of total UK retail deposits(1) |
|---|---|---|---|---|---|
| (£ billions, except percentages) | |||||
| 2014 | 1,279.3 | 91.3%(2) | - | 91.3%(2) | 10.5% |
| 2013 | 1,225.0 | 91.4%(2) | 91.4%(2) | 10.7% | |
| 2012 __ |
1,181.8 | 21.1% | 70.2% | 8.7% | 10.5% |
Notes:
(1) Source: BoE, except for information regarding our balances which are taken from our own data. Separate data for Banks & Building Societies is not available from December 2013 onwards.
(2) As of 2013, the BoE no longer publishes data for Building Societies and Banks separately, but rather as a combined Monetary & Financial Institutions (MFI) percentage.
The UK retail deposit market has become an increasingly commoditized market driven primarily by price, particularly for the flow of new money that generally seeks the most attractive rates available. However the bank failures of 2007 and 2008 and the limits of the FSCS appear to have led some customers to spread their savings across a number of different companies. Older deposit balances have traditionally subsidized the cost of new retail deposits, primarily reflecting customer inertia.
In the last few years, competition for UK retail deposits has increased as new participants, such as foreign banks, supermarkets, insurance/life assurance companies and direct online banking providers have entered the market by offering attractive rates of interest. These new entrants have caused the cost of attracting new retail deposits to increase for existing players in the market and have impacted the flow of new retail deposits. The competition intensified as banks have sought to rebalance their liabilities away from short-term wholesale and back towards retail funding but the introduction of Funding for Lending has eased competition for retail deposits.
We believe that increased consumer awareness driven by the press and increased competition has created potentially greater volatility of retail deposit balances both between different organizations and between different accounts within organizations. This, in turn, has resulted in a reduction in the differential between rates paid to existing and new balances as customers transfer to high rate accounts and organizations aim to retain existing balances. In addition, the recent Government budget announcements, namely the "New ISA" and the pensioner bonds, have created some volatility but have also provided some support to the savings market.
In this context our deposit balances grew by £1.9 billion in the financial year ended April 4, 2015.
Whilst some weaknesses remain, the major banks have now largely completed a process of financial repair upon which they embarked following the financial crisis. In recent years, greater public optimism about the UK economy and a parallel recovery of net new volumes in the mortgage and savings markets have been accompanied by a reduction in the cost of retail funding as a result of the Funding for Lending Scheme. These trends have resulted in increased income for financial institutions which have grown volumes and improved net interest margins. However, many banks now expect limited scope for this margin improvement to continue. Consequently, there is a possibility that competition for volumes will intensify as banks seek to maintain growth rates. Competition also looks set to remain intense for current accounts and deposits, as regulatory measures to allow customers to switch provider more easily are accompanied by increased appetite by providers to grow, or at least maintain, a current account base as a driver of active customer relationships. Investment in new digital capabilities continues at high levels, as major participants look to compete digitally against their existing peers and potential new entrants innovating with digital technology.
The framework for supervision and regulation of banking and financial services in the UK has been, and continues to be, heavily influenced by EU legislation. The Basel III reform package (a regulatory capital and liquidity framework approved by the Basel Committee in 2011) has been implemented in the European Economic Area (the "EEA") through the Capital Requirements Regulation (the "CRR") and the associated directive, the Capital Requirements Directive ("CRD") (together, "CRD IV"), which was published in the Official Journal of the European Union on June 27, 2013. The CRR establishes a single set of harmonized prudential rules for financial institutions and certain minimum liquidity standards which apply directly to all credit institutions in the EEA, with the CRD containing less prescriptive provisions which (unlike the CRR, which applies across the EU without the need for any implementing legislation at member-state level) are required to be transposed into national law. Together the CRR and CRD reinforce capital standards and establish a leverage ratio "backstop." Full implementation began from January 1, 2014, with particular elements being phased in over a period of time (the requirements will largely be effective by 2019 and some minor transitional provisions provide for phase-in until 2024). As CRD IV allows certain national discretion, the final rules and the timetable for their implementation in each jurisdiction may be subject to some level of national variation. The Basel Committee has also published certain proposed revision to the securitisation framework, including changes to the approaches to calculating risk weights and a new risk weight floor of 15%.
The principal intention underlying CRD IV is the harmonisation of banking regulation and supervision throughout the EU and the EEA. CRD IV prescribes minimum standards in key areas and requires EEA member states to give "mutual recognition" to each other's standards of regulation. CRD IV also addresses the "passport" concept, which amounts to freedom for a credit institution authorised in its "home" state to establish branches in, and to provide cross-border services into, other EEA member states.
Although credit institutions are primarily regulated in their home state by a local regulator, CRD IV prescribes minimum criteria for regulation of the authorisation of credit institutions and the prudential supervision applicable to them. Our local regulators are the PRA and the FCA. For further information about regulation in the UK see the subsection entitled "—UK Regulation."
CRD IV substantially reflects the Basel III capital and liquidity standards. CRD IV also makes provision for (among other things) new requirements to reduce reliance by credit institutions on external credit ratings, by requiring that all banks' investment decisions are based not only on ratings but also on their own internal credit opinion, and that banks with a material number of exposures in a given portfolio develop internal ratings for that portfolio instead of relying on external ratings for the calculation of their capital requirements. Certain details remain to be clarified in further binding technical standards to be issued by the European Banking Authority.
The CRR gives express recognition for Common Equity Tier 1 capital instruments for mutuals and cooperatives and permits the use of a cap or restriction to safeguard the interests of members and reserves.
On March 31, 2011, the European Commission published a proposal for a directive on credit agreements relating to residential immovable property for consumers (the "Mortgage Directive"). The council of the EU adopted the Mortgage Directive on January 28, 2014. Member states will be required to implement the Mortgage Directive into national law by March 21, 2016.
The Mortgage Directive applies to: (a) credit agreements secured by a mortgage or comparable security commonly used in a EU member state on residential immovable property, or secured by a right relating to residential immovable property; (b) credit agreements the purpose of which is to finance the purchase or retention of rights in land or in an existing or proposed residential building; and extends the Consumer Credit Directive (2008/48/EC) to (c) unsecured credit agreements the purpose of which is to renovate residential immovable property involving a total amount of credit above €75,000. The Mortgage Directive does not apply to certain equity release credit agreements to be repaid from the sale proceeds of an immovable property, or to certain credit granted by an employer to its employees.
The Mortgage Directive requires (among other things): standard information in advertising; standard pre-contractual information,; adequate explanations to the borrower on the proposed credit agreement and any ancillary service; calculation of the annual percentage rate of charge in accordance with a prescribed formula; assessment of creditworthiness of the borrower; and a right of the borrower to make early repayment of the credit agreement. The Mortgage Directive also imposes prudential and supervisory requirements for credit intermediaries and non-bank lenders.
Both HM Treasury and the FCA consulted on the transposition and implementation of the Mortgage Directive between September 2014 and March 2015. The Mortgage Directive will be implemented in the UK by March 21, 2016 through the Mortgage Credit Directive Order 2015 (SI 2015/910) which was made on March 25, 2015. The final FCA rules and guidance implementing the Mortgage Directive are set out in the Mortgage Credit Directive Instrument 2015 (FCA 2015/18) which was made by order of the Board of the FCA, also on March 25, 2015. In the course of implementing the Mortgage Directive the UK Government has sought to put in place what it has described as the minimum requirements to meet its local obligations under the Mortgage Directive. Notable aspects of the UK Governments' implementation include the extension of the existing regulatory regime for mortgages to buy-to-let and second charge mortgages. However, until the Mortgage Directive is fully implemented into UK law, it is too early to tell what effect the implementation of the Mortgage Directive into UK law would have on us and our respective businesses and operations.
The UK Financial Services Act 2012 amended certain existing legislation including the Financial Services and Markets Act 2000, the Building Societies Act 1986 and the Banking Act to make provision about the exercise of certain statutory functions relating to building societies.
Another area of change which impacts on the UK regulatory landscape relates to banking reform. The Financial Services (Banking Reform) Act 2013 (the "Banking Reform Act") introduced amendments to FSMA which provide for, inter alia, the ring-fencing of vital banking services from international and investment banking services, measures on loss absorbency and depositor preference and proposals for enhancing competition in the banking sector. Certain aspects of such measures entered into force on January 1, 2015 although the full ring-fencing regime will not apply until 2019. Further, the Government has carved building societies out of the proposed ring-fencing legislation and, instead, reserves the power to amend the UK Building Societies Act to bring building societies legislation into line with the proposed ring-fencing requirements. The subsection below entitled "The UK Building Societies Act" refers to the discussion document published by HM Treasury in 2012 which sets out the Government's vision for the building societies sector. The PRA published a consultation paper on Operational Continuity (CP 38/15) in October 2015. The rules will apply from January 1, 2019. The proposals support the resolvability and resilience of building societies and banks in seeking to ensure critical shared services are organized to facilitate continuity in the even of failure.
On January 1, 2015, the Banks and Building Societies (Depositor Preference and Priorities) Order 2014 came into force, changing the different creditor ranking that previously would have applied in the event of a liquidation between a bank and a building society. The effect of these changes is that both banks and building societies are now subject to the preference in ranking accorded to retail deposits and a super-preference for deposits covered by the FSCS. When combined with other specific changes affecting building societies, the relative differences in ranking as between banks and building societies no longer apply and the effective creditor hierarchy for banks and building societies is now the same.
The main piece of legislation regulating building societies is the UK Building Societies Act. The UK Building Societies Act governs the creation, authorisation and management of building societies. We are regulated by the FCA in relation to conduct of business matters and by the PRA in relation to prudential requirements. With the introduction of the Financial Services and Markets Act 2000, certain sections of the UK Building Societies Act were repealed. However, a substantial part of the UK Building Societies Act, including the constitutional parts dealing with the principal purpose of building societies, nature limits and general governance, among others, still remains in force. The UK Building Societies Act has been amended and supplemented since its introduction by secondary legislation. For further information on the reforms under the
Financial Services and Markets Act 2000, see the subsection below entitled "–Financial Services and Markets Act 2000."
On July 6, 2012, HM Treasury published a consultation document entitled "The future of building societies" which set out the Government's aim to maintain the distinctiveness of the building society sector while creating a level playing field and removing unnecessary barriers to growth. The Government stated that it intended to amend the UK Building Societies Act to widen the opportunities for building societies and to align them with ring-fenced banks without compromising their mutuality.
As a result, modernizing changes to the UK Building Societies Act were made under the Banking Reform Act to bring it more in line with company law, assist building societies in raising funding and make minor technical changes in order to allow the building society sector to compete on a more level playing field with banks. The changes, in particular:
All of these changes to the UK Building Societies Act are in force.
The following sections set forth some of the concepts for a building society which is authorized under the Financial Services and Markets Act 2000.
Building societies are mutual organisations that are managed for the benefit of their members, who are primarily retail savings customers and residential mortgage customers. Each member is normally entitled to one vote at a building society's general meeting, regardless of the size of the member's deposit account or mortgage loan or the number of accounts the member maintains.
Building societies are required to be engaged primarily in the business of making loans secured on residential property, which are substantially funded by members. In addition, as long as building societies comply with specific limits on lending and funding, they may engage in additional activities such as commercial lending, unsecured personal lending, insurance and personal investment product activities, subject to compliance with regulatory requirements of the FCA, the PRA and the Competition and Markets Authority (the "CMA"). The general restriction which used to apply to building societies from creating floating charges was removed by the Banking Reform Act with effect from March 26, 2015.
Building societies have a statutory duty to keep accounting records as well as establishing and maintaining systems of control. The FCA and PRA are empowered to request ad hoc reports regarding our compliance with these requirements.
The members of a building society fall into two categories. The first category consists of investing or "shareholding" members. Shareholding members are individuals who have made a deposit (also referred to as an "investment") in a share account with a building society or who hold deferred shares in the society, and bodies corporate which hold deferred shares. In this Base Prospectus we refer to deposits in these share accounts as "UK retail member deposits" and to people holding UK retail member deposits as "UK retail member depositors." "Deferred shares" includes our CCDS, Reset Perpetual Contingent Convertible Additional Tier 1 Capital Securities and Permanent Interest Bearing Shares.
There are restrictions on building societies raising funds from individuals other than in the form of deposits in share accounts or by the issue of deferred shares. A subsidiary of a building society may, however, offer deposit accounts which do not confer member status provided it has the required regulatory authorization. Deposits in these accounts are referred to as "non-member deposits."
The second category of members are "borrowing" members, that is, persons who have received a loan from the building society (or in certain cases, if the rules of the society allow, from another person who holds the benefit of the loan for the building society) which is fully or, if the rules of the society allow, substantially secured on land. Building societies may also make loans that do not confer member status, which generally consist of unsecured loans.
The UK Building Societies Act imposes limits on the ability of building societies to raise funds and to make loans. Investing shares in a building society, representing UK retail member deposits made with the society, must account for not less than 50% of its total funding. In calculating this amount: (1) a specified amount of deposits made by individuals with a building society's subsidiaries in other EEA member states, the Channel Islands, the Isle of Man or Gibraltar is disregarded; and (2) a specified amount in respect of deposits made by small businesses is disregarded. The specified amount in each case is up to 10% of what would have been the society's funding but for the exclusion.
Loans made by a building society and its subsidiaries which are fully secured on residential property must account for not less than 75% of its total trading assets (that is, the total assets of a society and its subsidiaries, plus provisions for bad or doubtful debts, less liquid assets, fixed assets and certain long-term insurance funds).
On April 7, 2010, the Building Societies (Financial Assistance) Order 2010 (the "Financial Assistance Order") came into force in exercise of certain powers under the Banking Act for the purpose of modifying the application of the UK Building Societies Act in specified circumstances to facilitate the provision of relevant financial assistance (including the giving of guarantees or indemnities or any other kind of financial assistance (actual or contingent)) by certain 'qualifying institutions'. Qualifying institutions for this purpose include HM Treasury, the BoE, another central bank of a Member State of the EEA, the European Central Bank, or any person acting for or on behalf of any of such institution or providing financial assistance to a building society on the basis of financial assistance received from such an institution. Most significantly, the Financial Assistance Order permits any qualifying institution to provide such assistance without it counting for the purpose of the 50 % limit on the building society's non-member funding and the Financial Assistance Order also modifies the application of the purpose test and the lending limit.
UK retail member deposits are classified as shares in a building society's balance sheets. There is a fundamental distinction between a share in a building society and a share in a limited liability company. Holders of ordinary shares in a company normally do not have the right to withdraw their share capital from the company. The share capital of a company is therefore fixed. A UK retail member depositor has a right to withdraw his investment from a building society. The share capital of a building society therefore fluctuates each time UK retail member depositors deposit or withdraw funds from their account. As a result shares in a building society do not form a permanent capital resource. The permanent capital of a building society consists primarily of its reserves (which have been built up over the years mainly from its retained earnings) and any deferred shares that it has issued. In addition, a building society can issue deferred shares, which count towards its permanent capital. These have, in the past, mainly been in the form of permanent interest bearing shares, which have counted towards a society's Tier 1 capital. Profit participating deferred shares (a type of deferred share) were recognized by the FSA (and have also now been recognized by the PRA) as Core Tier 1 capital, although these shares have, to date, only been issued by way of exchange for an existing instrument in circumstances of financial stress, by way of a private placement, or as a part of a society's contingent convertible capital (in which case it would only be issued upon a serious decline in the society's capital ratio). Changes to the CRR which were implemented in the UK at the end of 2010 toughened the requirements for eligibility as Tier 1 capital. Permanent interest bearing shares, which were already in existence, retain their capital status, but the extent to which such shares count towards regulatory capital will be phased out over a long transitional period. CCDS, a new form of deferred share, meet the new regulatory criteria for Common Equity Tier 1 capital under CRR, while being consistent with the values of mutuality and supporting members' interests. CCDS are also designed to be a suitable instrument for raising new capital from external investors.
We have also issued Reset Perpetual Contingent Convertible Additional Tier 1 Capital Securities which qualify as Additional Tier 1 Capital under the CRR.
The UK Building Societies Act prohibits building societies and their subsidiaries from entering into any transaction involving derivative investments unless the transaction falls within one of the specified exceptions, including where it is entered for the purpose of limiting the extent to which it will be affected by fluctuations in interest rates, exchange rates, any index of retail prices, any index of residential property prices, any index of the prices of securities or the ability or willingness of a borrower to repay a loan owing to the building society.
The UK Building Societies Act permits a building society to demutualise by transferring the whole of its business to an existing company (referred to as a "takeover") or to a specially formed company (referred to as a "conversion") so long as the process meets statutory requirements. Any such demutualisation must be approved by members and confirmed by the PRA. The successor company will be a bank, which must be duly authorised to carry on its deposit-taking business by the PRA or equivalent EEA regulatory authority.
The member approval threshold required varies depending on the type of demutualisation. In order to convert into a new bank by transferring the society's business to a specially formed company, a minimum of 50% of shareholding members qualified to vote would have to vote on a requisite shareholders' resolution, and a minimum of 75% of those voting would have to support the resolution to convert. In addition, more than 50% of borrowing members who vote would have to vote in favor of a borrowing members' resolution to convert. On a demutualization as a result of a takeover by an existing bank or other company, the requirements would be similar except that 50% of shareholding members qualified to vote (or shareholding members representing 90% by value of the society's shares) must actually vote in favor of the requisite shareholding members' resolution.
The UK Building Societies Act (as modified by the Mutual Societies (Transfers) Order 2009) permits a building society to transfer the whole of its business to the subsidiary of another mutual society (as defined in section 3 of the Building Societies (Funding) and Mutual Societies (Transfers) Act 2007). The successor subsidiary must be duly authorised to carry on its deposit-taking business by the PRA or equivalent EEA regulatory authority. The terms of the transfer to the relevant subsidiary must include provision for making membership of the holding mutual (or membership of the parent undertaking of such holding mutual) available to every qualifying member of the building society and to every person who, after the transfer, becomes a customer of the company, and the membership of the holding mutual (or such parent undertaking) must be on terms no less favorable than those enjoyed by existing members of the holding mutual (or such parent undertaking, as the case may be).
A transfer of business to a subsidiary of another mutual society requires approval by members and confirmation by the PRA. The member approval thresholds require a shareholding members' resolution to be passed by a minimum of 75% of shareholding members qualified to vote and voting on the resolution and a borrowing members' resolution to be passed by more than 50% of borrowing members qualified to vote and voting on the resolution.
The UK Building Societies Act confers power on the PRA, if it considers it expedient to do so in order to protect the investments of shareholders or depositors, to direct a building society to transfer all of its engagements to one or more other building societies or to transfer its business to an existing company. The UK Financial Services Act 2012 also amended the UK Building Societies Act to extend this power of direction to a transfer of a building society's business to an existing or specially formed company that is a subsidiary of another mutual society (as defined in section 3 of the Building Societies (Funding) and Mutual Societies (Transfers) Act 2007). Where any such direction is made, the PRA may also, if it considers it expedient to do so in order to protect the investments of shareholders or depositors, direct that such transfer may proceed on the basis of a resolution of the board of directors of the building society, without the need for member approval.
The PRA is currently the prudential regulator for building societies, banks, insurance companies and other deposit takers. The general objective of the PRA is promoting the safety and soundness of PRA-authorized persons.
The PRA supervises and regulates financial institutions, including building societies, on an ongoing basis by continually assessing their risk profile and capacity to manage and control risks. If the PRA finds that a financial institution has failed to comply with the requirements under the Financial Services and Markets Act 2000, the PRA has a variety of enforcement powers including:
The FCA is currently the conduct regulator for firms that are prudentially regulated by the PRA (dualregulated firms). The FCA regulates both prudential and conduct matters for all other firms. The FCA's strategic objective is ensuring the relevant markets function well. The FCA's operational objectives are:
The FCA also has a variety of enforcement powers under the Financial Services and Markets Act 2000, and from April 1, 2014, is responsible for supervision of consumer credit regulation and superintendence and enforcement of the Consumer Credit Act 1974, as amended.
As set out below, the CMA also enjoys certain enforcement powers under the UK financial services regime.
The Financial Services and Markets Act 2000 (the "FSMA") prohibits any person from carrying on a "regulated activity" by way of business in the UK unless that person is authorised or exempt under this Act. Regulated activities include: deposit-taking, mortgage activities (such as entering into, administering, or advising or arranging in respect of, regulated mortgage contracts), consumer credit activities (such as broking, lending, administration and collection), effecting and carrying out contracts of insurance as well as insurance mediation, and investment activities (such as dealing in investments as principal or as agent, arranging deals in investments, and managing investments). We are authorised for, among other things, deposit-taking and mortgage activities, and are authorized for certain investment activities. We are also deemed to be authorised for various consumer credit activities by virtue of an FCA interim permission which we intend to make permanent by varying our existing authorisation to include such consumer credit activities by March 31, 2016. The FSMA also prohibits Financial Promotions in the UK unless the promotion is issued or approved by an authorised person or exempt from such requirements.
The FSMA, together with the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the "RAO") made under it, regulates certain "credit agreements". It regulates mortgage credit within the definition of "regulated mortgage contract" and also regulates certain other types of home finance. A credit agreement is a regulated mortgage contract if it is entered into on or after October 31, 2004 and, at the time it is entered into: (a) the credit agreement is one under which the lender provides credit to an individual or to trustees; (b) the contract provides for the repayment obligation of the borrower to be secured by a first legal mortgage on land (other than timeshare accommodation) in the UK; and (c) at least 40% of that land is used, or is intended to be used, as or in connection with a dwelling by the borrower or (in the case of credit provided to trustees) by an individual who is a beneficiary of the trust, or by a related person.
The Consumer Credit Act 1974 (the "CCA") has traditionally regulated most unsecured and second charge credit within the definition of "regulated agreement." From April 1, 2014, the concept of regulated agreement has been derived from the definition of regulated credit agreement set out in the RAO. A credit agreement is essentially a regulated credit agreement if: (a) the borrower is or includes a natural person or "relevant recipient of credit" as defined in the RAO; and (b) the credit agreement is not an exempt agreement under the RAO. Regulated mortgage contracts are specifically exempt under the RAO and are not regulated credit agreements. Certain financial limits in respect of the credit provided applied to credit agreements entered into before April 6, 2008, or before October 31, 2008 in the case of buy-to-let mortgages satisfying prescribed conditions. Buy-to-let mortgages entered into on or after October 31, 2008 and satisfying prescribed conditions are exempt agreements under the Consumer Credit Act 1974. That said, some buy-to-let mortgages will become regulated when the Mortgage Directive is implemented in the UK.
Any credit agreement intended to be a regulated mortgage contract or otherwise unregulated might instead be wholly or partly regulated as a regulated credit agreement under the FSMA (and, as a result, also by the Consumer Credit Act 1974) or treated as such, and any credit agreement intended to be regulated as a regulated credit agreement or treated as such or unregulated might instead be a regulated mortgage contract. This is because of technical rules on determining whether the credit agreement or any part of it falls within the definition of a regulated mortgage contract or within the definition of a regulated agreement (described below) and technical rules on changes to credit agreements.
If prohibitions under the FSMA as to authorization or Financial Promotions are contravened (by credit brokers as well as lenders like us), then the affected regulated mortgage contract or regulated credit agreement could be unenforceable against the borrower without a court order (or, in respect of regulated credit agreements only, a validation order from the FCA). The Mortgages and Home Finance: Conduct of Business Sourcebook (the "MCOB"), which is part of the FCA Handbook, sets out rules in respect of regulated mortgage contracts and certain other types of home finance. Under MCOB rules, an authorized firm (such as us) is restricted from repossessing a property unless all other reasonable attempts to resolve the position have failed, which can include the extension of the term of the mortgage, product type changes and deferral of interest payments.
In addition, if requirements under the CCA as to entering into, documenting and servicing a regulated credit agreement are not met, then the affected regulated credit agreement could be unenforceable against the borrower without a court order or (for agreements entered into before April 6, 2007) could be totally unenforceable, depending on the circumstances. Under Sections 75 and 75A of the CCA, in certain circumstances a lender is liable to a customer in relation to misrepresentation and breach of contract by a supplier in a transaction financed by a credit agreement regulated by this Act or treated as such, and the lender has a statutory indemnity from the supplier against liability under Section 75 subject to any agreement between the lender and the supplier. The Consumer Credit Sourcebook ("CONC") which, like MCOB, is also part of the FCA Handbook also sets out conduct of business rules which, in addition to the rules under the CCA, apply to consumer credit activities carried out in respect of regulated credit agreements.
We are also authorised for carrying out insurance mediation. The Insurance: Conduct of Business sourcebook, which is part of the FCA Handbook, sets out rules in respect of non-investment insurance.
The Financial Services and Markets Act 2000 established the FSCS, which pays compensation to eligible customers of authorised financial services firms which are unable, or are likely to be unable, to pay claims against them. The levels of compensation are, for example, for claims against firms declared in default on or after January 1, 2010 (December 31, 2010 for deposits): (i) for retail deposits, 100% of the first £85,000, which is reduced to £75,000 from 1 January 2016; (ii) for mortgage advice and arranging, 100% of the first £50,000; and (iii) for insurance, 100% where claims arise (a) in respect of a liability subject to compulsory insurance; (b) in respect of a liability subject to professional indemnity insurance; and (c) from the death or in capacity of the policy holder due to injury, sickness or infirmity; 90% of the claim where claims arise under other types of policy with no upper limit (for claims against firms declared in default on or after July 3, 2015). The FSCS only pays compensation for financial loss. Compensation limits are per person, per firm and per type of claim. These limits reflect Directive 2009/14/EC, amending Directive 94/19/EC on deposit guarantee schemes (the "DGSD") , which requires member states to set the minimum level of compensation for deposits, for firms declared in default on or after January 1, 2011, at €100,000. A review of the DGSD has been completed and the recast DGSD 2014/49/EC, strengthening the protection of citizens' deposits in case of bank failures, has been published in the Official Journal on June 12, 2014. Implementation by EU member states was required by July 2015. See "Risk Factors—Risks Related To Our Business—We are required to pay levies under the FSCS and are exposed to future increases of such levies, which might impact our profits."
The Financial Services and Markets Act 2000 established the FOS, which determines complaints by eligible complainants in relation to authorised financial services firms, consumer credit licensees and certain other businesses, in respect of activities and transactions under its jurisdiction. The FOS determines complaints on the basis of what, in its opinion, is fair and reasonable in all the circumstances of the case. The maximum level of money award by the FOS is £150,000 plus interest and costs. The FOS may also make directions awards, which direct the business to take such steps as the FOS considers just and appropriate.
In the UK, the Unfair Terms in Consumer Contracts Regulations 1999 as amended (the "1999 Regulations"), together with (in so far as applicable) the Unfair Terms in Consumer Contracts Regulations 1994 (together with the 1999 Regulations, the "UTCCR"), apply to agreements made on or after July 1, 1995. The UTCCR provides that a consumer may challenge a standard term in an agreement on the basis that it is "unfair" within the UTCCR and therefore not binding on the consumer (although the rest of the agreement will remain enforceable if it is capable of continuing in existence without the unfair term), and the lead enforcement body, and any "qualifying body" within the UTCCR (such as the FCA), may seek to enjoin a business from relying on unfair terms.
The UTCCR will not generally affect terms which define the main subject matter of the contract, such as the borrower's obligation to repay the principal, or price terms, provided that these terms are written in plain and intelligible language and are drawn adequately to the consumer's attention. The UTCCR may affect terms that are not considered to be terms which define the main subject matter of the contract or price terms, such as the lender's power to vary the interest rate and certain terms imposing early repayment charges and mortgage exit administration fees. For example, if a term permitting the lender to vary the interest rate (as the originator is permitted to do) is found to be unfair, the borrower will not be liable to pay interest at the increased rate or, to the extent that the borrower has paid it, will be able, as against the lender, or any assignee such as the Issuer, to claim repayment of the extra interest amounts paid or to set off the amount of the claim against the amount owing by the borrower under the loan or any other loan agreement that the borrower has taken with the lender (or exercise analogous rights in Scotland).
The lead enforcement body for the UTCCR was the Office of Fair Trading before April 1, 2014, and is the CMA from April 1, 2014. The qualifying body in relation to regulated mortgage contracts and mortgage loans originated by lenders authorised under the Financial Services and Markets Act was the Financial Services Authority before April 1, 2013. The lead enforcement body was and is responsible for enforcing the UTCCR in relation to other mortgage loans.
While the CMA and FCA have powers to enforce the UTCCR, it would be for a court to determine their proper interpretation. The extremely broad and general wording of the UTCCR makes any assessment of the fairness of terms largely subjective and makes it difficult to predict whether or not a term would be held by a court to be unfair. It is therefore possible that any loans covered by the UTCCR may contain unfair terms which may result in the possible unenforceability of the terms of the underlying loans.
The Consumer Rights Act, which came into force from an unfair contract terms perspective on October 1, 2015 (the "CRA Commencement Date"), provides that, among other things, a term which specifies the main subject matter of the contract, or a price term, is exempt from being reviewed as to its fairness if the term is transparent and prominent and that, in proceedings brought by individual consumers, the court is required to consider the fairness of a term, even if the consumer has not raised the issue of unfairness, where the court has available to it the legal and factual elements necessary for that task.
The CRA reforms and consolidates consumer law in the UK. The CRA involves the creation of a single regime for unfair contract terms out of the Unfair Contract Terms Act 1977 (the "UCTA") (which essentially deals with attempts to limit liability for breach of contract) and the UTCCR. On the CRA Commencement Date, certain sections of the CRA revoked the UTCCR, and introduced a new regime for dealing with unfair contractual terms with respect to contracts entered into on or after the CRA Commencement Date. The UTCCR will continue to apply to contracts entered into prior to the CRA Commencement Date as described above.
Under Part 2 of the CRA an unfair term of a consumer contract (a contract between a trader and a consumer) is not binding on a consumer (a term which has been revised to mean an individual acting for purposes that are wholly or mainly outside that individual's trade, business, craft or profession). In an additional change from the old regime, from the CRA Commencement Date, an unfair consumer notice will also not be binding on a consumer, although a consumer may rely on the term or notice if the consumer chooses to do so. A term will be unfair where, contrary to the requirement of good faith, it causes significant imbalance in the parties' rights and obligations under the contract to the detriment of the consumer. In determining whether a term is fair it is necessary to: (i) take into account the nature of the subject matter of the contract; (ii) refer to all the circumstances existing when the term was agreed; and (iii) refer to all of the other terms of the contract or any other contract on which it depends. The CRA also applies substantially the same test of fairness to consumer notices and generally refers to term and notices interchangeably.
Schedule 2 contains an indicative and non-exhaustive "grey list" of terms of consumer contracts that may be regarded as unfair. Three of these "grey list" terms are new, having not been covered by the UTCCR. Notably, paragraph 11 lists "a term which has the object or effect of enabling the trader to alter the terms of the contract unilaterally without a valid reason which is specified in the contract". Although paragraph 22 provides that this does not include a term by which a supplier of financial services reserves the right to alter the rate of interest payable by or due to the consumer, or the amount of other charges for financial services without notice where there is a valid reason if the supplier is required to inform the consumer of the alteration at the earliest opportunity and the consumer is free to dissolve the contract immediately.
A consumer contract may not be assessed for fairness to the extent that (i) it specifies the main subject matter of the contract; and/or (ii) the assessment is of the appropriateness of the price payable under the contract by comparison with the goods, digital content or services supplied under it; unless it appears on the "grey list" referenced above. A trader must ensure that a written term of a consumer contract, or a consumer notice in writing, is transparent i.e. that it is expressed in plain and intelligible language and is legible. Under the CRA, a trader must also ensure that the term is sufficiently prominent. The CMA considers this to be fully consistent with an interpretation of 'the core exemption' as intended to ensure that only those 'principal obligations' or price terms which are subject to the correcting forces of competition and genuine decision-making are fully assessable for fairness.
Where a term of a consumer contract is "unfair", it will not bind the consumer. However, the remainder of the contract will, so far as practicable, continue to have effect in every other respect. Where a term in a consumer contract is susceptible of multiple different meanings, the meaning most favourable to the consumer will prevail. In a shift from the old regime, under the CRA it is the duty of the court to consider the fairness of any given term. This can be done even where neither of the parties to proceedings has explicitly raised the issue of fairness.
The provisions in the CRA governing unfair contractual terms apply in respect of contracts entered into on or after the CRA Commencement Date. As stated above, UCTA and UTCCR will continue to apply to contracts entered into prior to the CRA Commencement Date. This new regime does not seem to be significantly different from the regime under the UTCCR and UCTA. However, this area of law is rapidly developing and new regulatory guidance and case law as a result of this new legislation can be expected. No assurance can be given that any changes in legislation, guidance or case law on unfair terms will not have a material adverse effect on the Loans and accordingly on the Issuer's ability to make payments in full when due on the notes.
In the UK, the Financial Services (Distance Marketing) Regulations 2004 apply to, inter alia, credit agreements entered into on or after October 31, 2004 by means of distance communication (i.e. without any substantive simultaneous physical presence of the originator and the borrower). A regulated mortgage contract under the FSMA, if originated by a UK lender from an establishment in the UK, will not be cancellable under these regulations but will be subject to related pre-contract disclosure requirements in MCOB. Certain other credit agreements will be cancellable under these regulations if the borrower does not receive the prescribed information at the prescribed time, or in any event for certain unsecured lending. Where the credit agreement is cancellable under these regulations, the borrower may send notice of cancellation at any time before the end of the 14th day after the day on which the cancellable agreement is made, where all the prescribed information has been received or, if later, the borrower receives the last of the prescribed information.
If the borrower cancels the credit agreement under these regulations, then:
If a significant portion of our loans are characterised as being cancellable under these regulations, then there could be an adverse effect on its receipts in respect of those loans.
On May 11, 2005, the European Parliament and the Council of the EU adopted a Directive (2005/29/EC) regarding unfair business-to-consumer commercial practices (the Unfair Practices Directive). Generally, this directive applies full harmonisation, which means that EU member states may not impose more stringent provisions in the fields to which full harmonisation applies. By way of exception, the Unfair Practices Directive permits member states to impose more stringent provisions in the fields of financial services and immovable property, such as mortgage loans. The Unfair Practices Directive provides that enforcement bodies may take administrative action or legal proceedings against a commercial practice on the basis that it is "unfair" within the Unfair Practices Directive. The Unfair Practices Directive is intended to protect only collective interests of consumers, and so is not intended to give any claim, defense or right of set-off to an individual consumer.
The Unfair Practices Directive is implemented into UK law by the Consumer Protection from Unfair Trading Regulations 2008 (the "CPUTR"), which came into force on May 26, 2008. The CPUTR prohibit certain practices which are deemed "unfair" within the terms of the CPUTR. Breach of the CPUTR does not (of itself) render an agreement void or unenforceable, but is a criminal offence punishable by a fine and/or imprisonment. The possible liabilities for misrepresentation or breach of contract in relation to the underlying credit agreements may result in irrecoverable losses on amounts to which such agreements apply. The CPUTR did not initially provide consumers with a private act of redress. Instead, consumers had to rely on existing private law remedies based on the law of misrepresentation and duress. However, amendments to the CPUTR which entered into force on October 1, 2014 have given consumers a right to redress for certain prohibited practices, including a right to unwind agreements.
In addition, the Unfair Practices Directive is taken into account in reviewing rules under the Financial Services and Markets Act 2000. For example, MCOB rules for regulated mortgage contracts from June 25, 2010 prevent the lender from (a) repossessing the mortgaged property unless all other reasonable attempts to resolve the position have failed, which include considering whether it is appropriate to offer an extension of term, or conversion to interest-only for a period, or an alternative product, and (b) automatically capitalising a payment shortfall.
The Unfair Practices Directive provided for a transitional period until June 12, 2013 for the application of full harmonisation in the fields to which it applies. In March 2013, the European Commission published a report on the application of the Unfair Practices Directive, which indicated (among other things) that there is no case for further harmonisation in the fields of financial services and immovable property.
The EU anti-money laundering regime was amended by the implementation of the EU Third Money Laundering Directive (Directive 2005/60/EC) (the "EU Third Money Laundering Directive"), which has imposed requirements in relation to such matters. As a result of the implementation of the EU Third Money Laundering Directive in the UK, the UK Money Laundering Regulations 2007 place a requirement on us to identify and verify the identity and address of customers opening accounts with us, and to keep records to help prevent money laundering and fraud. Guidance in respect of the Money Laundering Regulations 2007 is contained in the Guidance Notes of the Joint Money Laundering Steering Group, including in respect of the identification of new clients, record keeping and otherwise. The EU Third Money Laundering Directive, which underpins the Money Laundering Regulations 2007, is currently being reviewed and the European Commission published a report on the application of the EU Third Money Laundering Directive on April 11, 2012, which found that there were no fundamental shortcomings in the regime but that some modifications are necessary to adapt to the evolving threats posed. On July 31, 2012 the European Commission published a paper summarising the responses to the report published on April 11, 2012. The overall result of the consultation in relation to the report represented a general confirmation of the issues highlighted in the report. Broad support was expressed for the proposed alignment to the revised Financial Action Task Force standards and for greater clarification of certain issues, in particular in the area of data protection and cross-border situations.
The European Commission published on February 5, 2013 two legislative proposals in relation to the EU anti-money laundering regime: (i) a directive on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing (i.e. the Fourth Money Laundering Directive); and (ii) a regulation on information accompanying transfers of funds to secure "due traceability" of these transfers. The Fourth Money Laundering Directive entered into force on June 25, 2015 and is to be implemented by June 26, 2015.
The UK Data Protection Act 1998 regulates the processing of data relating to individual customers. We participate in the unclaimed assets scheme established under the Dormant Bank and Building Society Accounts Act 2008. The purpose of this scheme is to enable money in dormant bank and building society accounts (i.e. balances in accounts that have been inactive or dormant for 15 years or more) to be distributed for the benefit of the community, while protecting the rights of customers to reclaim their money.
On November 1, 2009, the former Financial Services Authority introduced its Banking Conduct Regime for retail banking. The main constituents of this regime are: (i) extending the principles for businesses as they apply to deposit-taking, from prudential matters only, to conduct of business matters in addition; (ii) conduct of business requirements in the Payment Services Regulations 2009 (the "PSR"), which apply to certain payment services made in euro or sterling; and (iii) the Banking: Conduct of Business sourcebook, which applies to deposit-taking in respects not covered by the PSR.
On November 1, 2009, the British Bankers' Association, the Building Societies Association and The UK Cards Association launched The Lending Code, a voluntary code on unsecured lending to personal and small business customers, which is monitored and enforced by the Lending Standards Board. The voluntary Banking Code and the Business Banking Code then ceased to have effect. The Lending Code has been revised a number of times since its introduction, most recently in September 2015.
On April 1, 2010, the Building Societies specialist sourcebook (the "BSOCS") came into effect, subject to certain transitional provisions. BSOCS contains PRA guidance on the systems and controls in relation to treasury management operations and lending. BSOCS focuses on the key financial and lending risks to which building societies are exposed and sets out the framework within which the PRA will supervise building societies' treasury activities. The contents of BSOCS have been placed in two PRA supervisory statements. These have been the subject of a consultation which may lead to changes.
No assurance can be given that additional regulatory changes by the CMA, the FCA, the PRA, the FOS or any other regulatory authority will not arise with regard to the mortgage market in the UK generally, our particular sector in that market or specifically in relation to us. Any such action or developments or compliance costs may have a material adverse effect on us and our respective businesses and operations.
Subject to the withholding tax requirements set out under the subsection entitled "Taxation–UK Taxation," there are currently no UK laws, decrees or regulations that would reduce the payment by the issuer of interest or other payments to holders of notes who are neither residents of, nor trading in, the United Kingdom. For further discussion, see the subsection entitled "Taxation–UK Taxation." There are also no restrictions under our memorandum and rules or under current UK laws that limit the right of non-resident or foreign owners to hold the notes or to vote, when entitled to do so.
This section describes the material terms and provisions of the notes to which any Final Terms may relate. We will describe in each Final Terms the particular terms of the notes that we offer by that Final Terms and the extent, if any, to which the general provisions described below may apply to those notes. Capitalized terms used but not defined in this section have the meanings given to them in the senior notes, subordinated notes, or indenture, as the case may be.
We will offer the notes under an indenture, dated as at February 8, 2002 and as supplemented and amended from time to time, between us (the "Issuer") and The Bank of New York Mellon (as successor to J.P. Morgan Trust Company, National Association (as successor to Bank One Trust Company, N.A.)), as trustee. The notes are limited to an aggregate principal amount of up to \$20,000,000,000 outstanding at any time, including, in the case of notes denominated in one or more other currencies or composite currencies, the equivalent thereof at the Market Exchange Rate in the one or more other currencies on the date on which such note will be issued (the "Original Issue Date"), subject to reduction by or pursuant to action of our Board of Directors, provided that a reduction will not affect any note already issued or as to which we have already accepted an offer to purchase. We may, however, increase these limits without the consent of the holders of the notes if in the future we determine that we wish to sell additional notes.
The notes will mature twelve months or more from the date of issue and may be subject to redemption or early repayment at our option or the holder's option as further described in the subsection entitled "— Redemption and Repurchase." Each note will be denominated in U.S. dollars or in another currency as we specify in the applicable Final Terms. For a further discussion, see "—Payment of Principal, Premium, if any, and Interest, if any." Each note will be either:
The Senior Notes are direct, unconditional and (subject to the provisions of "—Negative Pledge") unsecured obligations of the Issuer and rank (subject to the provisions of "—Negative Pledge") equally among themselves, junior to obligations required to be preferred by law (which from 1 January 2015 includes certain member share accounts which are given preferential status by law) and equally with all other unsecured obligations (other than subordinated obligations, if any) of the Issuer.
The subordinated notes are our direct and unsecured obligations, subordinated and conditional as described below, and rank pari passu and without any preference among themselves. The claims in respect of principal, interests and any other amount (including, without limitation, any damages awarded for breach of the Issuer's obligations) in respect of the subordinated notes will, in the event of the winding up or dissolution of the Issuer (other than an Excluded Dissolution);
Accordingly, if we are at any time in winding up, then no principal, interest or other amounts in respect of the subordinated notes (whether or not already due or accrued prior to the commencement of such winding up) shall be payable by, nor shall any claim in respect thereof be provable against, the Issuer in such winding up unless and until and except to the extent that the Issuer could make such payment in whole or in part and still be solvent immediately thereafter. For the purpose of this subsection, the Issuer shall be deemed to be solvent if it is able to pay its Senior Claims in full, or the liquidator of the Issuer determines that it will be able to do so within a period not exceeding twelve months, and in determining whether the Issuer is deemed to be solvent for the purposes of this subsection there shall be disregarded obligations which are not provable in the winding up.
Subject to applicable law, no holder of subordinated notes may exercise, claim or plead any right of set-off, compensation or retention in respect of any amount owed to it by the Issuer arising under or in connection with the subordinated notes and each holder shall, by virtue of being the holder of any such Subordinated Note be deemed to have waived all such rights of set-off, compensation or retention. Notwithstanding the provision of the foregoing sentence, if any of the said rights and claims of any holder of subordinated notes against the Issuer is discharged by set-off, such holder of subordinated notes will immediately pay an amount equal to the amount of such discharge to the Issuer or, in the event of winding up of the Issuer the liquidator of the Issuer and accordingly such discharge will be deemed not to have taken place.
The subordinated notes do not have the benefit of the negative pledge covenant described below under the subsection entitled "—Negative Pledge" and are subordinated to most of our liabilities. For a further discussion of risks relating to subordination see the section entitled "Risk Factors—Risks Related to the Notes— The subordinated notes are subordinated to most of our liabilities."
To the extent that holders of the notes are entitled to any recovery with respect to the notes in any winding up or liquidation, it is unclear whether such holders would be entitled in such proceedings to recovery in U.S. dollars and they may be entitled only to a recovery in pounds sterling and, as a general matter, the right to claim for any amounts payable on notes may be limited by applicable insolvency law.
"Business Day" means any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which commercial banks are authorized or required by law, regulation or executive order to close in New York City and each Additional Business Center specified in the applicable Final Terms; provided, however, that, with respect to notes denominated in a Specified Currency other than U.S. dollars, it is also not a day on which commercial banks are authorized or required by law, regulation or executive order to close in the Principal Financial Center, as defined below, of the country issuing the Specified Currency (or, if the Specified Currency is euro or EURIBOR is an applicable Interest Rate Basis, such day is also a day on which the euro payments settlement system known as TARGET2 (or any successor thereto) is open for settlement of payments in euro, a "TARGET Settlement Date"); provided, further, that, with respect to notes as to which LIBOR is an applicable Interest Rate Basis, it is also a London Business Day. "London Business Day" means a day on which commercial banks are open for business (including dealings in the Designated LIBOR Currency, as defined below) in London.
"Day Count Fraction" means, in respect of the calculation of an amount for any period of time in accordance with the applicable Final Terms for any Fixed Rate Note, Reset Note, or Floating Rate Note, as applicable:
If no Day Count Fraction for Fixed Rate Notes is specified in the applicable Final Terms then the Day Count Fraction for such Notes shall be Actual/Actual (ICMA) for Notes other than those denominated or payable in U.S. Dollars and 30/360 for Notes denominated or payable in U.S. Dollars.
"deferred share investments" has the meaning ascribed thereto in the rules of the Issuer (and includes the Issuer's permanent interest bearing shares and core capital deferred shares);
"Determination Period" means the period from (and including) a Determination Date in any year to (but excluding) the next Determination Date;
(E) if Actual/365 (Sterling) is specified in the applicable Final Terms, the actual number of days in the Interest Period divided by 365 or, in the case of an Interest Payment Date falling in a leap year, 366;
(F) if Actual/360 is specified in the applicable Final Terms, the actual number of days in the Interest Period divided by 360; and
Day Count Fraction =
$$
\frac{[360 \times (Y_2 - Y_1)] + [30 \times (M_2 - M_1)] + (D_2 - D_1)}{360}
$$
where:
"Y1" is the year, expressed as a number, in which the first day of the Interest Period falls;
"Y2" is the year, expressed as a number, in which the day immediately following the last day of the Interest Period falls;
"M1" is the calendar month, expressed as a number, in which the first day of the Interest Period falls;
"M2" is the calendar month, expressed as a number, in which the day immediately following the last day of the Interest Period falls;
"D1" is the first calendar day, expressed as a number, of the Interest Period, unless such number is 31, in which case D1 will be 30; and
"D2" is the calendar day, expressed as a number, immediately following the last day included in the Interest Period, unless such number would be 31 and D1 is greater than 29, in which case D2 will be 30;
(H) if 30E/360 or Eurobond Basis is specified in the applicable Final Terms, the number of days in the Interest Period divided by 360, calculated on a formula basis as follows:
Day Count Fraction =
$$
\frac{[360 \times (Y_2 - Y_1)] + [30 \times (M_2 - M_1)] + (D_2 - D_1)}{360}
$$
where:
"Y1" is the year, expressed as a number, in which the first day of the Interest Period falls;
"Y2" is the year, expressed as a number, in which the day immediately following the last day of the Interest Period falls;
"M1" is the calendar month, expressed as a number, in which the first day of the Interest Period falls;
"M2" is the calendar month, expressed as a number, in which the day immediately following the last day of the Interest Period falls;
"D1" is the first calendar day, expressed as a number, of the Interest Period, unless such number would be 31, in which case D1 will be 30; and
"D2" is the calendar day, expressed as a number, immediately following the last day included in the Interest Period, unless such number would be 31, in which case D2 will be 30.
(I) if 30E/360 (ISDA) is specified in the applicable Final Terms, the number of days in the Interest Period divided by 360, calculated on a formula basis as follows:
Day Count Fraction =
$$
\frac{[360 \times (Y_2 - Y_1)] + [30 \times (M_2 - M_1)] + (D_2 - D_1)}{360}
$$
where:
"Y1" is the year, expressed as a number, in which the first day of the Interest Period falls;
"Y2" is the year, expressed as a number, in which the day immediately following the last day of the Interest Period falls;
"M1" is the calendar month, expressed as a number, in which the first day of the Interest Period falls;
"M2" is the calendar month, expressed as a number, in which the day immediately following the last day of the Interest Period falls;
"D1" is the first calendar day, expressed as a number, of the Interest Period, unless (i) that day is the last day of February or (ii) such number would be 31, in which case D1 will be 30; and
"D2" is the calendar day, expressed as a number, immediately following the last day included in the Interest Period, unless (i) that day is the last day of February but not the Maturity Date or (ii) such number would be 31, in which case D2 will be 30.
"Excluded Dissolution" means a dissolution of the Issuer by virtue of the amalgamation and transfer provisions set out in sections 93, 94 and 97 of the Building Societies Act 1986, as amended (the "Act"), or by virtue of a transfer pursuant to an order made under section 3 of the Building Societies (Funding) and Mutual Societies (Transfers) Act 2007, as amended (or any successor provisions thereto).
"investing members" has the meaning ascribed thereto in the rules of the Issuer.
"New York City Banking Day" means any day on which commercial banks are open for general business (including dealings in foreign exchange and foreign currency deposits) in the city of New York.
"Principal Financial Center" means the capital city of the country issuing the Specified Currency except, that with respect to U.S. dollars, Canadian dollars, and Swiss francs, the "Principal Financial Center" shall be New York City, Toronto, and Zurich, respectively.
"Regulatory Capital Requirements" means, at any time, any requirement contained in the law, regulations, requirements, guidelines and policies then in effect relating to capital adequacy and prudential supervision and applicable to the Issuer, including (without limitation to the generality of the foregoing), those laws, regulations, requirements, guidelines and policies relating to capital adequacy and prudential supervision then in effect of the United Kingdom or the Supervisory Authority and/or any regulation, directive or other binding rules, standards or decisions adopted by the institutions of the EU.
A "Regulatory Event" is deemed to have occurred if there is a change (which has occurred or which the Supervisory Authority considers to be sufficiently certain) in the regulatory classification of the subordinated notes which becomes effective after the date of issue of the Notes and that results, or would be likely to result, in:
(i) if "Regulatory Event (subordinated notes only): Full Exclusion" is specified in the applicable Final Terms, the entire principal amount of the subordinated notes being excluded from the Tier 2 Capital of the Issuer (whether on an individual or consolidated basis); or
(ii) if "Regulatory Event (subordinated notes only): Full or Partial Exclusion" is specified in the applicable Final Terms, the entire principal amount of the subordinated notes or any part thereof being excluded from the Tier 2 Capital of the Issuer (whether on an individual or consolidated basis).
"Senior Claims" means the aggregate amount of all claims admitted in the winding up of the Issuer which are (i) claims of depositors of the Issuer, (ii) claims of investing members of the Issuer as regards the principal and interest due on share investments other than deferred share investments, (iii) claims of creditors in respect of unsubordinated obligations of the Issuer, and (iv) claims of creditors in respect of subordinated obligations of the Issuer other than claims (x) in respect of obligations which constitute, or would but for any applicable limitation on the amount of such capital, constitute, Tier 1 Capital or Tier 2 Capital or (y) which otherwise rank, or are expressed to rank, pari passu with, or junior to, the claims in respect of the subordinated notes.
"Specified Currency" means a currency issued and actively maintained as a country's or countries' recognized unit of domestic exchange by the government of any country and such term shall also include the euro.
"Supervisory Authority" means, from time to time, the Prudential Regulation Authority or such other authority having primary supervisory authority with respect to prudential matters concerning the Issuer.
"TARGET2" means the Trans-European Automated Real-time Gross Settlement Express Transfer payment system which utilizes a single shared platform and which was launched on November 19, 2007 or any successor thereto.
"Tier 1 Capital", "Common Equity Tier 1 Capital", "Additional Tier 1 Capital" and "Tier 2 Capital" have the respective meanings given thereto (or to a successor or equivalent term) in the Regulatory Capital Requirements. "U.S. Government Securities Business Day" means any day except for a Saturday, Sunday or a day on which The Security Industry & Financial Markets Association recommends that the fixed income departments of its members be closed for the entire day for purposes of trading in U.S. government securities.
Notes of a series will initially be represented by a global note or global notes in fully registered form ("Global Notes"). Notes offered in the United States to qualified institutional buyers in reliance on Rule 144A will be represented by one or more U.S. global notes ("U.S. Global Notes"). Notes offered outside the United States to non-U.S. persons in reliance on Regulation S will be represented by one or more international global notes ("International Global Notes").
Notes will bear a legend setting forth transfer restrictions and may not be transferred except in compliance with these transfer restrictions and subject to certification requirements. In no event will notes in bearer form be issued.
The Global Note or Global Notes representing a series of notes will be issued to and deposited with, or on behalf of, DTC in New York City and registered in the name of Cede & Co. ("Cede"), as DTC's nominee. Interests in a Global Note or Global Notes representing notes of a series will be shown in, and transfers thereof will be effected only through, records maintained by DTC and its participants until such time, if any, as physical registered certificates ("Certificated Notes") in respect of such notes are issued, as set forth in the section entitled "Description of the Global Notes—Book-Entry System."
The Global Note or Global Notes representing a series of notes may be transferred only to a successor of DTC or another nominee of DTC. For additional information, see the section entitled "Description of the Global Notes—Book-Entry System."
Under the following circumstances, Global Notes of a series may be exchanged for certificated registered notes of such series:
Certificated Notes representing a series of notes, if any, will be exchangeable for other Certificated Notes representing notes of such series of any authorized denominations and of a like aggregate principal amount and tenor. Certificated Notes will be serially numbered.
Certificated Notes may be presented to the trustee for registration of transfer of exchange at its Corporate Trust Office which at the date hereof is located at 101 Barclay Street, 8W, New York, New York 10286. Certificated Notes may be presented for exchange and transfer in the manner, at the places and subject to the restrictions set forth in the indenture and the notes. We have not registered the notes under the Securities Act or with any securities regulatory authority of any jurisdiction, and accordingly, transfers of the notes will be subject to the restrictions set forth in the sections entitled "Notice to Investors" and "Transfer Restrictions."
Certificated Notes and interests in the U.S. Global Notes may be transferred to a person who takes delivery in the form of interests in an International Global Note only upon receipt by the trustee of written certifications, in the form provided in the indenture, to the effect that the transfer is being made in accordance with Regulation S or Rule 144 under the Securities Act and that, if this transfer occurs prior to 40 days after the commencement of the offering of such notes, the interest transferred will be held immediately thereafter through Euroclear Bank S.A./N.V. ("Euroclear") or Clearstream Banking, société anonyme ("Clearstream"), each of which is a participant in DTC.
Until 40 days after the closing date for the offering of a series of notes, interests in an International Global Note may be held only through Euroclear or Clearstream, which are participants in DTC. Certificated Notes and interests in International Global Notes may be transferred to a person who takes delivery in the form of interests in a U.S. Global Note only upon receipt by the trustee of written certifications, in the form provided in the indenture, to the effect that such transfer is being made in accordance with Rule 144A to a person whom the transferor reasonably believes is purchasing for its own account or for an account as to which it exercises sole investment discretion and that such person and such account or accounts are "qualified institutional buyers" within the meaning of Rule 144A and agree to comply with the restrictions on transfer set forth in the sections entitled "Notice to Investors" and "Transfer Restrictions."
In the event of any redemption of notes, we will not be required to (i) register the transfer of or exchange the notes during a period of 15 calendar days immediately preceding the date of redemption; (ii) register the transfer of or exchange the notes, or any portion thereof called for redemption, except the unredeemed portion of any of the notes being redeemed in part; or (iii) with respect to notes represented by a Global Note or Global Notes, exchange any such note or notes called for redemption, except to exchange such note or notes for another Global Note or Global Notes of that series and like tenor representing the aggregate principal amount of notes of that series that have not been redeemed.
The Bank of New York Mellon (as successor to JPMorgan Chase Bank, N.A.) is the principal paying agent (the "Paying Agent") pursuant to the indenture. We may at any time designate additional paying agents or rescind the designation of any paying agent provided that if and for so long as the notes are listed on any stock exchange which requires the appointment of a paying agent in any particular place, we shall maintain a paying agent with an office in the place required by such stock exchange or relevant authority.
We will issue senior notes in minimum denominations of \$200,000 and subordinated notes in minimum denominations of \$250,000, and in each case in integral multiples of \$1,000 in excess thereof, in the case of Notes denominated in U.S. dollars. We will issue notes denominated in a Specified Currency other than U.S. dollars in minimum denominations that are the equivalent of these amounts in any other Specified Currency, and in any other denominations in excess of the minimum denominations as specified in the applicable Final Terms. The notes will be issued in integral multiples of 1,000 units of any such Specified Currency in excess of their minimum denominations. If the principal, premium, if any, and interest, if any, on any of the notes not denominated in U.S. dollars, euro or sterling are to be payable at our or the holder's option in U.S. dollars, such payment will be made on the basis of the Market Exchange Rate, computed by the Currency Determination Agent, on the second Business Day prior to such payment or, if such Market Exchange Rate is not then available, on the basis of the most recently available Market Exchange Rate.
Payments of principal, premium, if any, and interest, if any, to owners of beneficial interests in the Global Notes are expected to be made in accordance with those procedures of DTC and its participants in effect from time to time as described in the subsection entitled "Description of the Global Notes—Book-Entry System" and, in the case of any note denominated in a Specified Currency other than U.S. dollars, as provided below.
Payments will be subject in all cases to any withholding or deduction required pursuant to an agreement described in Section 1471(b) of the U.S. Internal Revenue Code of 1986, as amended (the "Code") or otherwise imposed pursuant to Sections 1471 through 1474 of the Code, any regulations or agreements thereunder, any official interpretations thereof, or (without prejudice to the provisions of "—Payments of Additional Amounts" below) any law implementing an intergovernmental approach thereto.
Except as described below, with respect to any Certificated Note, payments of interest, if any, will be made by mailing a check to the holder at the address of such holder appearing on the register for the notes on the regular record date (the "Regular Record Date"). Notwithstanding the foregoing, at our option, all payments of interest on the notes may be made by wire transfer of immediately available funds to an account at a bank located within the United States as designated by each holder not less than 15 calendar days prior to the relevant Interest Payment Date. A holder of \$10,000,000 (or, if the Specified Currency is other than U.S. dollars, the equivalent thereof in that Specified Currency) or more in aggregate principal amount of notes of like tenor and terms with the same Interest Payment Date may demand payment by wire transfer but only if appropriate payment instructions have been received in writing by any paying agent with respect to such note appointed by us, not less than 15 calendar days prior to the Interest Payment Date. In the event that payment is so made in accordance with instructions of the holder, such wire transfer shall be deemed to constitute full and complete payment of such principal, premium and/or interest on the notes. Payment of the principal, premium, if any, and interest, if any, due with respect to any Certificated Note at Maturity will be made in immediately available funds upon surrender of such note at the principal office of any paying agent appointed by us with respect to that note and accompanied by wire transfer instructions, provided that the Certificated Note is presented to such paying agent in time for such paying agent to make such payments in such funds in accordance with its normal procedures.
Payments of principal, premium, if any, and interest, if any, with respect to any note to be made in a Specified Currency other than U.S. dollars will be made by check mailed to the address of the person entitled thereto as its address appears in the register for the notes or by wire transfer to such account with a bank located in a jurisdiction acceptable to us and the trustee as shall have been designated at least 15 calendar days prior to the Interest Payment Date or Maturity, as the case may be, by the holder of such note on the relevant Regular Record Date or at Maturity, provided that, in the case of payment of principal of, and premium, if any, and interest, if any, due at Maturity, the note is presented to any paying agent appointed by us with respect to such note in time for such paying agent to make such payments in such funds in accordance with its normal procedures. Such designation shall be made by filing the appropriate information with the trustee at its Corporate Trust Office, and, unless revoked, any such designation made with respect to any note by a holder will remain in effect with respect to any further payments with respect to such note payable to such holder. If a payment with respect to any such note cannot be made by wire transfer because the required designation has not been received by the trustee on or before the requisite date or for any other reason, a notice will be mailed to the holder at its registered address requesting a designation pursuant to which such wire transfer can be made and, upon such trustee's receipt of such a designation, such payment will be made within 15 calendar days of such receipt. We will pay any administrative costs imposed by banks in connection with making payments by wire transfer, but any tax, assessment or governmental charge imposed upon payments will be borne by the holders of such notes in respect of which such payments are made.
Except as provided below, payments of principal, premium, if any, and interest, if any, with respect to any note represented by Global Notes that is denominated in a Specified Currency other than U.S. dollars will be made in U.S. dollars, as set forth below. If the holder of such note on the relevant Regular Record Date or at Maturity, as the case may be, requests payments in a currency other than U.S. dollars, the holder shall transmit a written request for such payment to any paying agent appointed by us with respect to such note at its principal office on or prior to such Regular Record Date or the date 15 calendar days prior to Maturity, as the case may be. Such request may be delivered by mail, by hand, by cable or by telex or any other form of facsimile transmission. Any such request made with respect to any note by a holder will remain in effect with respect to any further payments of principal, and premium, if any, and interest, if any, with respect to such note payable to such holder, unless such request is revoked by written notice received by such paying agent on or prior to the relevant Regular Record Date or the date 15 calendar days prior to Maturity, as the case may be (but no such revocation may be made with respect to payments made on any such note if an Event of Default has occurred
with respect thereto or upon the giving of a notice of redemption). Holders of notes denominated in a currency other than U.S. dollars whose notes are registered in the name of a broker or nominee should contact such broker or nominee to determine whether and how an election to receive payments in a currency other than U.S. dollars may be made.
The U.S. dollar amount to be received by a holder of a note denominated in other than U.S. dollars who elects to receive payments in U.S. dollars will be based on the highest indicated bid quotation for the purchase of U.S. dollars in exchange for the Specified Currency obtained by the Currency Determination Agent, as defined below, at approximately 11:00 a.m., New York City time, on the second Business Day immediately preceding the applicable payment date (the "Conversion Date") from the bank composite or multicontributor pages of the Quoting Source for three (or two if three are not available) major banks in New York City. The first three (or two) such banks selected by the Currency Determination Agent which are offering quotes on the Quoting Source will be used. If fewer than two such bid quotations are available at 11:00 a.m., New York City time, on the second Business Day immediately preceding the applicable payment date, such payment will be based on the Market Exchange Rate as of the second Business Day immediately preceding the applicable payment date. If the Market Exchange Rate for such date is not then available, such payment will be made in the Specified Currency. As used herein, the "Quoting Source" means Reuters Monitor Foreign Exchange Service, or if the Currency Determination Agent determines that such service is not available, such comparable display or other comparable manner of obtaining quotations as shall be agreed between us and the Currency Determination Agent. All currency exchange costs associated with any payment in U.S. dollars on any such notes will be borne by the holder thereof by deductions from such payment. The currency determination agent (the "Currency Determination Agent") with respect to any such note will be specified in the applicable Final Terms.
If the Specified Currency for a note denominated in a currency other than U.S. dollars is not available for the required payment of principal, premium, if any, and/or interest, if any, in respect thereof due to the imposition of exchange controls or other circumstances beyond our control, we will be entitled to satisfy our obligations to the holder of such note by making such payment in U.S. dollars on the basis of the Market Exchange Rate, computed by the Currency Determination Agent, on the second Business Day prior to such payment or, if such Market Exchange Rate is not then available, on the basis of the most recently available Market Exchange Rate. Any payment made in U.S. dollars under such circumstances where the required payment was to be in a Specified Currency other than U.S. dollars will not constitute an Event of Default under the indenture with respect to the notes.
All determinations referred to above made by the Currency Determination Agent shall be at its sole discretion in accordance with its normal operating procedures and shall, in the absence of manifest error, be conclusive for all purposes and binding on all holders and beneficial owners of notes.
Each Fixed Rate Note bears interest from (and including) the Interest Commencement Date at the rate(s) per annum equal to the Fixed Rate(s) of Interest payable in arrear on the Interest Payment Date(s) in each year specified in the applicable Final Terms and on the Maturity Date specified in the applicable Final Terms if that does not fall on an Interest Payment Date. The first payment of interest will be made on the Interest Payment Date next following the Interest Commencement Date.
Interest shall be calculated in respect of any period by applying the Rate of Interest to the aggregate outstanding nominal amount of the Fixed Rate Notes and multiplying such sum by the applicable Day Count Fraction, and rounding the resultant figure to the nearest subunit of the relevant Specified Currency, half of any such subunit being rounded upwards or otherwise in accordance with applicable market convention.
If any Interest Payment Date or the date of Maturity of a Fixed Rate Note falls on the day that is not a Business Day, the required payments of principal, premium, if any, and interest, if any, with respect to such note will be made on the next succeeding Business Day as if made on the date such payment was due, and no interest will accrue on such payment for the period from and after such Interest Payment Date or the date of Maturity, as the case may be, to the date of such payment on the next succeeding Business Day.
Rates of Interest and Interest Payment Dates
Each Reset Note bears interest:
(in each case rounded if necessary to the fifth decimal place, with 0.000005 being rounded upwards) payable, in each case, in arrear on the Interest Payment Date(s) in each year and on the Maturity Date so specified if that does not fall on an Interest Payment Date.
The Rate of Interest and the amount of interest (the "Interest Amount") payable shall be determined by the Calculation Agent, (A) in the case of the Rate of Interest, at or as soon as practicable after each time at which the Rate of Interest is to be determined, and (B) in the case of the Interest Amount in accordance with the provisions for calculating amounts of interest in "Interest—Interest on Fixed Rate Notes") and, for such purposes, references in the fourth paragraph of "Interest—Interest on Fixed Rate Notes" to "Fixed Rate Notes" shall be deemed to be to "Reset Notes" and "Interest—Interest on Fixed Rate Notes" shall be construed accordingly.
In this section "—Interest on Reset Notes":
"Calculation Agent" means the calculation agent specified in the applicable Final Terms;
"First Margin" means the margin specified as such in the applicable Final Terms;
"First Reset Date" means the date specified in the applicable Final Terms;
"First Reset Period" means the period from (and including) the First Reset Date until (but excluding) the Second Reset Date or, if no such Second Reset Date is specified in the applicable Final Terms, the Maturity Date;
"First Reset Rate of Interest" means, in respect of the First Reset Period and subject to "Interest— Interest on Reset Notes—Fallbacks", the rate of interest determined by the Calculation Agent on the relevant Reset Determination Date as the sum, converted from a basis equivalent to the Fixed Leg Swap Duration or the Reference Bond Yield, as the case may be, to a basis equivalent to the frequency with which scheduled interest payments are payable on the Notes during the relevant Reset Period (such calculation to be determined by the Issuer in conjunction with a leading financial institution selected by it), of (A) the relevant Reset Reference Rate and (B) the First Margin;
"Fixed Leg Swap Duration" has the meaning specified in the applicable Final Terms;
"Initial Rate of Interest" has the meaning specified in the applicable Final Terms;
"Mid-Market Swap Rate" means for any Reset Period the mean of the bid and offered rates for the fixed leg payable with a frequency equivalent to the Fixed Leg Swap Duration (calculated on the basis of the Day Count Fraction as specified in the applicable Final Terms as determined by the Calculation Agent) of a fixed-for-floating interest rate swap transaction in the Specified Currency which transaction (i) has a term equal to the relevant Reset Period and commencing on the relevant Reset Date, (ii) is in an amount that is representative for a single transaction in the relevant market at the relevant time with an acknowledged dealer of good credit in the swap market and (iii) has a floating leg based on the Mid-Swap Floating Leg Benchmark Rate for the Mid-Swap Maturity (calculated on the basis of the Day Count Fraction as specified in the applicable Final Terms as determined by the Calculation Agent);
"Mid-Market Swap Rate Quotation" means a quotation (expressed as a percentage rate per annum) for the relevant Mid-Market Swap Rate;
"Mid-Swap Floating Leg Benchmark Rate" means EURIBOR if the Specified Currency is euro or LIBOR for the Specified Currency if the Specified Currency is not euro;
"Mid-Swap Maturity" has the meaning specified in the applicable Final Terms;
"Mid-Swap Rate" means, in relation to a Reset Determination Date and subject to "Interest— Interest on Reset Notes—Fallbacks", either:
which appears on the Relevant Screen Page or such replacement page on that service which displays the information; or
which appear on the Relevant Screen Page or such replacement page on that service which displays the information,
in either case, as at approximately 11.00 a.m. in the principal financial centre of the Specified Currency on such Reset Determination Date, all as determined by the Calculation Agent provided, however, that if there is no such rate appearing on the Relevant Screen Page for a term equal to the relevant Reset Period, then the Mid-Swap Rate shall be determined through the use of straight-line interpolation by reference to two rates, one of which shall be determined in accordance with the above provisions, but as if the relevant Reset Period were the period of time for which rates are available next shorter than the length of the actual Reset Period and the other of which shall be determined in accordance with the above provisions, but as if the relevant Reset Period were the period of time for which rates are available next longer than the length of the actual Reset Period;
"Rate of Interest" means the Initial Rate of Interest, the First Reset Rate of Interest or the Subsequent Reset Rate of Interest, as applicable;
"Reference Bond" means for any Reset Period the UK government bond selected by the Issuer on the advice of an investment bank of international repute as having an actual or interpolated maturity comparable with the relevant Reset Period that would be utilised, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities denominated in Sterling and of a comparable maturity to the relevant Reset Period.
"Reference Bond Price" means, with respect to any Reset Determination Date, (A) the arithmetic average of the Reference Government Bond Dealer Quotations for such Reset Determination Date, after excluding the highest and lowest such Reference Government Bond Dealer Quotations, or (B) if the Calculation Agent obtains fewer than four such Reference Government Bond Dealer Quotations, the arithmetic average of all such quotations;
"Reference Bond Reset Rate Time" means the time specified in the applicable Final Terms;
"Reference Bond Yield" means the yield to maturity or interpolated yield to maturity (on the relevant day count basis) of the relevant Reference Bond;
"Reference Government Bond Dealer" means each of five banks (selected by the Issuer on the advice of an investment bank of international repute), or their affiliates, which are (A) primary government securities dealers, and their respective successors, or (B) market makers in pricing corporate bond issues;
"Reference Government Bond Dealer Quotations" means, with respect to each Reference Government Bond Dealer and the relevant Reset Determination Date, the arithmetic average, as determined by the Calculation Agent, of the bid and offered prices for the relevant Reference Bond (expressed in each case as a percentage of its nominal amount) at or around the Reference Bond Reset Rate Time on the relevant Reset Determination Date quoted in writing to the Calculation Agent by such Reference Government Bond Dealer;
"Reset Business Day" means a day on which commercial banks and foreign exchange markets settle payments and are open for general business (including dealing in foreign exchange and foreign currency deposits) in any Business Centre specified in the applicable Final Terms;
"Reset Date" means the First Reset Date, the Second Reset Date and each Subsequent Reset Date (as applicable);
"Reset Determination Date" means, in respect of the First Reset Period, the second Reset Business Day prior to the First Reset Date, in respect of the first Subsequent Reset Period, the second Reset Business Day prior to the Second Reset Date and, in respect of each Subsequent Reset Period thereafter, the second Business Day prior to the first day of each such Subsequent Reset Period;
"Reset Period" means the First Reset Period or a Subsequent Reset Period, as the case may be;
"Reset Reference Rate" means either (i) if Mid-Swaps is specified in the applicable Final Terms the Mid-Swap Rate, or (ii) if Reference Bond is specified in the applicable Final Terms, the Reference Bond Yield, assuming a price for such Reference Bond (expressed as a percentage of its nominal amount) equal to the relevant Reference Bond Price;
"Second Reset Date" means the date specified in the applicable Final Terms;
"Subsequent Margin" means the margin specified as such in the applicable Final Terms;
"Subsequent Reset Date" means the date or dates specified in the applicable Final Terms; and
"Subsequent Reset Rate of Interest" means, in respect of any Subsequent Reset Period and subject to "Interest— Interest on Reset Notes—Fallbacks", the rate of interest determined by the Calculation Agent on the relevant Reset Determination Date as the sum, converted from a basis equivalent to the Fixed Leg Swap Duration specified in the applicable Final Terms or the Reference Bond Yield, as the case may be, to a basis equivalent to the frequency with which scheduled interest payments are payable on the Notes during the relevant Reset Period (such calculation to be determined by the Issuer in conjunction with a leading financial institution selected by it), of (A) the relevant Reset Reference Rate and (B) the relevant Subsequent Margin.
If on any Reset Determination Date the Relevant Screen Page is not available or the Mid-Swap Rate does not appear on the Relevant Screen Page, the Calculation Agent shall request each of the Reference Banks (as defined below) to provide the Calculation Agent with its Mid-Market Swap Rate Quotation as at approximately 11.00 a.m. in the principal financial centre of the Specified Currency on the Reset Determination Date in question.
If two or more of the Reference Banks provide the Calculation Agent with Mid-Market Swap Rate Quotations, the First Reset Rate of Interest or the Subsequent Reset Rate of Interest (as applicable) for the relevant Reset Period shall be the sum (converted as set out in the definition of such term above) of the arithmetic mean (rounded, if necessary, to the nearest 0.001 per cent. (0.0005 per cent. being rounded upwards)) of the relevant Mid-Market Swap Rate Quotations and the First Margin or Subsequent Margin (as applicable), all as determined by the Calculation Agent.
If on any Reset Determination Date only one of the Reference Banks provides the Calculation Agent with a Mid-Market Swap Rate Quotation as provided in the foregoing provisions of this paragraph, the First Reset Rate of Interest or the Subsequent Reset Rate of Interest (as applicable) shall be the sum (converted as set out in the definition of such term above) of (rounded, if necessary, to the nearest 0.001 per cent. (0.0005 per cent. being rounded upwards)) of the relevant Mid-Market Swap Rate Quotation and the First Margin or Subsequent Margin (as applicable), all as determined by the Calculation Agent.
If on any Reset Determination Date none of the Reference Banks provides the Calculation Agent with a Mid-Market Swap Rate Quotation as provided in the foregoing provisions of "Interest— Interest on Reset Notes—Fallbacks", the First Reset Rate of Interest or the Subsequent Reset Rate of Interest (as applicable) shall be determined to be the rate of interest as at the last preceding Reset Date or, in the case of the first Reset Determination Date, the First Reset Rate of Interest shall be the Initial Rate of Interest.
For the purposes of section "Interest— Interest on Reset Notes—Fallbacks", "Reference Banks" means the principal office in the principal financial centre of the Specified Currency of four major banks in the swap, money, securities or other market most closely connected with the relevant Mid-Swap Rate as selected by the Issuer on the advice of an investment bank of international repute.
The Calculation Agent will cause the First Reset Rate of Interest, any Subsequent Reset Rate of Interest and, in respect of a Reset Period, the Interest Amount payable on each Interest Payment Date falling in such Reset Period to be notified to the Issuer, the Principal Paying Agent, the Trustee and any competent authority or stock exchange by or on which the relevant Reset Notes are for the time being listed and notice thereof to be published in accordance with "—Notices") as soon as possible after their determination but in no event later than the fourth London Business Day (as defined in "Interest—Interest on Floating Rate Notes—Determination of Rate of Interest and Calculation of Interest Amounts") thereafter.
If for any reason the Calculation Agent defaults in its obligation to determine the Rate of Interest or calculate any Interest Amount in accordance with "Interest—Interest on Reset Notes—Rates of Interest and Interest Payment Dates"), the Trustee may (at the expense of the Issuer) appoint an agent to do so and such determination shall be deemed to have been made by the Calculation Agent. In doing so, such agent shall apply the foregoing provisions of this section "Interest—Interest on Reset Notes") with any necessary consequential amendments, to the extent that, in its opinion, it can do so, and in all other respects it shall do so in such manner as it shall deem fair and reasonable in all the circumstances.
All certificates, communications, opinions, determinations, calculations, quotations and decisions given, expressed, made or obtained for the purposes of the provisions of this section "Interest—Interest on Reset Notes") by the Calculation Agent or any agent appointed by the Trustee shall (in the absence of wilful default, bad faith or manifest error) be binding on the Issuer, the Trustee, the Calculation Agent, the other Paying Agents and all noteholders and Couponholders and (in the absence as aforesaid) no liability to the Issuer, the noteholders or the Couponholders shall attach to the Calculation Agent or the Trustee or any agent appointed by the Trustee in connection with the exercise or non-exercise by it of its powers, duties and discretions pursuant to such provisions.
Each Floating Rate Note bears interest from (and including) the Interest Commencement Date at the rate equal to the Rate of Interest payable in arrear on either:
If any Interest Payment Date which is specified in the applicable Final Terms to be subject to adjustment in accordance with a business day convention would otherwise fall on a day which is not a Business Day, then, if the business day convention specified is:
The Rate of Interest payable from time to time in respect of Floating Rate Notes will be determined in the manner specified in the applicable Final Terms.
Interest on Floating Rate Notes will be determined by reference to the applicable Interest Rate Basis or Bases, which may, as described below, include:
The applicable Final Terms will specify whether any Margin, expressed as a percentage amount, is to be added or subtracted from the related Interest Rate Basis or Bases applicable to such Floating Rate Note.
The applicable Final Terms will specify whether the rate of interest on the related Floating Rate Note will be reset daily, weekly, monthly, quarterly, semi-annually or annually or at such other specified intervals as specified in the applicable Final Terms (each, an "Interest Reset Period") and the dates on which such rate of interest will be reset (each, an "Interest Reset Date"). If any Interest Reset Date for any Floating Rate Note would otherwise be a day that is not a Business Day, such Interest Reset Date will be postponed to the next succeeding Business Day except that in the case of a Floating Rate Note as to which EURIBOR or LIBOR is an applicable Interest Rate Basis and such Business Day falls in the next succeeding calendar month, such Interest Reset Date will be the immediately preceding Business Day.
The interest rate applicable to each Interest Period will be the rate determined by the Calculation Agent (as specified in the applicable Final Terms) as of the applicable Interest Determination Date ("Interest Determination Date").
The interest rate applicable to each Interest Reset Period commencing on the related Interest Reset Date will be the rate determined by the Calculation Agent (as specified in the applicable Final Terms) as of the applicable Interest Determination Date and calculated on or prior to the Calculation Date (as defined below), except with respect to the Eleventh District Cost of Funds Rate, EURIBOR and LIBOR, which will be calculated on such Interest Determination Date, except with respect to the Commercial Paper Rate and the Prime Rate, which will be calculated on or prior to the day that is one New York City Banking Day following the Interest Reset Date pertaining to such Interest Determination Date, and except with respect to the CMT, which will be calculated on the dates specified below under "—CMT Rate." The "Interest Determination Date" with respect to:
The "Interest Determination Date" pertaining to a Floating Rate Note the interest rate of which is determined by reference to two or more Interest Rate Bases will be the most recent Business Day which is at least two Business Days prior to the applicable Interest Reset Date for such Floating Rate Note on which each Interest Rate Basis is determinable. Each Interest Rate Basis will be determined as of such date, and the applicable interest rate will take effect on the applicable Interest Reset Date.
The "Calculation Date," if applicable, pertaining to any Interest Determination Date will be the earlier of (i) the tenth calendar day after such Interest Determination Date or, if such day is not a Business Day, the next succeeding Business Day or (ii) the Business Day immediately preceding the applicable Interest Payment Date or the Maturity Date, as the case may be.
The Calculation Agent shall determine each Interest Rate Basis in accordance with the following provisions:
"CD Rate" means, with respect to any Interest Determination Date relating to a Floating Rate Note for which the interest rate is determined with reference to the CD Rate, the rate on such date for negotiable U.S. dollar certificates of deposit having the Index Maturity specified in the applicable Final Terms as published in H.15(519), (as defined below), under the heading "CDs (secondary market)" or, if not so published by 3:00 p.m., New York City time on the related Calculation Date, the rate on such Interest Determination Date for negotiable U.S. dollar certificates of deposit of the Index Maturity specified in the applicable Final Terms as published in H.15 Daily Update (as defined below), or such other recognized electronic source used for the purpose of displaying such rate, under the caption "CDs (secondary market)." If such rate is not yet published in H.15(519), H.15 Daily Update or another recognized electronic source by 3:00 p.m. New York City time on the related Calculation Date, then the CD Rate on such Interest Determination Date will be calculated by the Calculation Agent and will be the arithmetic mean of the secondary market offered rates as of 10:00 a.m. New York City time on such Interest Determination Date, of three leading non-bank dealers in negotiable U.S. dollar certificates of deposit in New York City (which may include the Placement Agents or their affiliates) selected by the Calculation Agent (after consultation with us) for negotiable U.S. dollar certificates of deposit of major U.S. money center banks with a remaining maturity closest to the Index Maturity specified in the applicable Final Terms in an amount that is representative for a single transaction in that market at that time; provided, however, that if the dealers so selected by the Calculation Agent are not quoting as mentioned in this sentence, the CD Rate determined as of such Interest Determination Date will be the CD Rate in effect on such Interest Determination Date, or, if no CD Rate was in effect on such Interest Determination Date, the rate on such Floating Rate Note for the following Interest Reset Period shall be the Initial Interest Rate specified in the applicable Final Terms.
"H.15(519)" means the weekly statistical release designated as such, or any successor publication, published by the Board of Governors of the Federal Reserve System (the "Board of Governors"), or its successor, available through the website of the Board of Governors at http://www.federalreserve.gov/releases/h15/update/h15upd.htm.
"H.15 Daily Update" means the daily update of H.15(519) available at the Board of Governors of the Federal Reserve System's Internet web site located at http://www.federalreserve.gov/releases/h15/update/h15upd.htm, or any successor site or publication.
"CMT Rate" means, with respect to any Interest Determination Date relating to a Floating Rate Note for which the interest rate is determined with reference to the CMT Rate:
(a) the percentage equal to the yield for United States Treasury securities at "constant maturity" having the Designated CMT Maturity Index specified in the applicable Final Terms as published in H.15(519) under the caption "Treasury Constant Maturities," as the yield is displayed on Reuters (or any successor service) on page FRBCMT (or any other page as may replace the specified page on that service) ("T7051 Page"), on such Interest Determination Date, or
(b) if the rate referred to in clause (a) does not so appear on the T7051 Page, the percentage equal to the yield for United States Treasury securities at "constant maturity" having the particular Designated CMT Maturity Index and for such Interest Determination Date as published in H.15(519) under the caption "Treasury Constant Maturities," or
(h) if fewer than three prices referred to in clause (f) are provided as requested, the CMT Rate in effect on such Interest Determination Date, provided that if no CMT Rate was in effect on such Interest Determination Date, the rate on such Floating Rate Note for the following Interest Reset Period shall be the Initial Interest Rate specified in the applicable Final Terms.
(2) if the Reuters Page T7052 is specified in the applicable Final Terms as the Designated CMT Reuters Page:
(f) if fewer than three prices referred to in clause (d) are provided as requested, the rate on such Interest Determination Date calculated by the Calculation Agent as a yield to maturity based on the arithmetic mean of the secondary market bid prices as of approximately 3:30 P.M., New York City time, on that Interest Determination Date of three Reference Dealers selected by the Calculation Agent (after consultation with us) from five Reference Dealers so selected by the Calculation Agent and eliminating the highest quotation or, in the event of equality, one of the highest and the lowest quotation or, in the event of equality, one of the lowest, for United States Treasury securities with an original maturity greater than the particular Designated CMT Maturity Index, a remaining term to maturity closest to that Designated CMT Maturity Index and in a principal amount that is representative for a single transaction in the securities in that market at the time, or
(g) if fewer than five but more than two prices referred to in clause (f) are provided as requested, the rate on such Interest Determination Date calculated by the Calculation Agent based on the arithmetic mean of the bid prices obtained and neither the highest or the lowest of the quotations will be eliminated, or
If two United States Treasury securities with an original maturity greater than the Designated CMT Maturity Index specified in the applicable Final Terms have remaining terms to maturity equally close to the particular Designated CMT Maturity Index, the quotes for the United States Treasury security with the shorter original remaining term to maturity will be used.
"Designated CMT Maturity Index" means the original period to maturity of the U.S. Treasury securities (either 1, 2, 3, 5, 7, 10, 20 or 30 years) specified in the applicable Final Terms with respect to which the CMT Rate will be calculated.
"Commercial Paper Rate" means, with respect to any Interest Determination Date relating to a Floating Rate Note for which the interest rate is determined with reference to the Commercial Paper Rate, the Money Market Yield (as defined below) on such date of the rate for commercial paper having the Index Maturity specified in the applicable Final Terms as published in H.15(519) under the caption "Commercial Paper— Nonfinancial" or, if not so published by 5:00 p.m., New York City time, on the day that is one New York City Banking Day following the Interest Reset Date pertaining to such Interest Determination Date, the Money Market Yield on such Interest Determination Date for commercial paper having the Index Maturity specified in the applicable Final Terms as published in H.15 Daily Update, or such other recognized electronic source used for the purpose of displaying such rate, under the caption "Commercial Paper—Nonfinancial." If such rate is not yet published in H.15(519), the H.15 Daily Update or another recognized electronic source by 5:00 p.m. New York City time on the day that is one New York City Banking Day following the Interest Reset Date pertaining to such Interest Determination Date, then the Commercial Paper Rate on such Interest Determination Date will be calculated by the Calculation Agent and will be the Money Market Yield of the arithmetic mean of the offered rates at approximately 11:00 a.m., New York City time on such Interest Determination Date of three leading dealers of U.S. dollar commercial paper in New York City (which may include the Placement Agents or their affiliates) selected by the Calculation Agent (after consultation with us) for U.S. dollar commercial paper having the Index Maturity specified in the applicable Final Terms placed for industrial issuers whose bond rating is "Aa," or the equivalent, from a nationally recognized statistical rating organization; provided, however, that if the dealers so selected by the Calculation Agent are not quoting as mentioned in this sentence, the Commercial Paper Rate determined as of such Interest Determination Date will be the Commercial Paper Rate in effect on such Interest Determination Date, or, if no Commercial Paper Rate was in effect on such Interest Determination Date, the rate on such Floating Rate Note for the following Interest Reset Period shall be the Initial Interest Rate specified in the applicable Final Terms.
"Money Market Yield" means a yield (expressed as a percentage) calculated in accordance with the following formula:
$$
MoneyMarketYield = \frac{D \times 360}{360 - (D \times M)} \times 100
$$
where "D" refers to the applicable per annum rate for commercial paper quoted on a bank discount basis and expressed as a decimal, and "M" refers to the actual number of days in the applicable Interest Reset Period.
"Eleventh District Cost of Funds Rate" means, with respect to any Interest Determination Date relating to a Floating Rate Note for which the interest rate is determined with reference to the Eleventh District Cost of Funds Rate, the rate equal to the monthly weighted average cost of funds for the calendar month immediately preceding the month in which such Interest Determination Date falls as set forth opposite the caption "11th Dist COFI" on the display on Reuters (or any successor service) on page COFI/ARMS (or any other page as may replace such page on such service) ("COFI/ARMS Page") as of 11:00 a.m., San Francisco time, on such Interest Determination Date. If such rate does not appear on the COFI/ARMS Page on such Interest Determination Date then the Eleventh District Cost of Funds Rate on such Interest Determination Date shall be the monthly weighted average cost of funds paid by member institutions of the Eleventh Federal Home Loan Bank District that was most recently announced (the "Index") by the FHLB of San Francisco as such cost of funds for the calendar month immediately preceding such Interest Determination Date. If the FHLB of San Francisco fails to announce the Index on or prior to such Interest Determination Date for the calendar month immediately preceding such Interest Determination Date, the Eleventh District Cost of Funds Rate for such Interest Determination Date will be the Eleventh District Cost of Funds Rate in effect on such Interest Determination Date; provided, that if no Eleventh District Cost of Funds Rate was in effect on such Interest Determination Date, the rate on such Floating Rate Note for the following Interest Reset Period shall be the Initial Interest Rate specified in the applicable Final Terms.
"EURIBOR" means the rate determined in accordance with the following provisions:
"Designated EURIBOR Page" means the display on the page specified in the applicable Final Terms for the purpose of displaying the eurozone interbank rates of major banks for the euro; provided, however, if no such page is specified in the applicable Final Terms, the display on Reuters (or any successor service) on the EURIBOR 01 page (or any other page as may replace such page on such service) shall be used.
"eurozone" means the region comprised of member states of the European Union that have adopted the single currency in accordance with the Treaty on European Union signed at Maastricht on February 7, 1992.
"Federal Funds Rate" means, with respect to any Interest Determination Date relating to a Floating Rate Note for which the interest rate is determined with reference to the Federal Funds Rate, the rate on such date for U.S. dollar federal funds as published in H.15(519) opposite the heading "Federal Funds (Effective)," as such rate is displayed on Reuters (or any successor service) on page FEDFUNDS 1 (or any other page as may replace such page) ("Reuters Page FEDFUNDS 1"), or, if such rate does not appear on Reuters Page FEDFUNDS 1 or is not so published by 5:00 p.m., New York City time, on the related Calculation Date, the rate on such Interest Determination Date for U.S. dollar federal funds as published in H.15 Daily Update, or such other recognized electronic source used for the purpose of displaying such rate, under the caption "Federal Funds (Effective)." If such rate does not appear on Reuters Page FEDFUNDS 1 or is not yet published in H.15(519), H.15 Daily Update or another recognized electronic source by 5:00 p.m. New York City time on the related Calculation Date, then the Federal Funds Rate on such Interest Determination Date will be calculated by the Calculation Agent and will be the arithmetic mean of the rates for the last transaction in overnight U.S. dollar federal funds arranged by three leading brokers of U.S. dollar federal funds transactions in New York City (which may include the Placement Agents or their affiliates) selected by the Calculation Agent (after consultation with us) prior to 9:00 a.m., New York City time, on such Interest Determination Date; provided, however, that if the brokers so selected by the Calculation Agent are not quoting as mentioned in this sentence, the Federal Funds Rate determined as of such Interest Determination Date will be the Federal Funds Rate in effect on such Interest Determination Date, or, if no Federal Funds Rate was in effect on such Interest Determination Date, the rate on such Floating Rate Note for the following Interest Reset Period shall be the Initial Interest Rate specified in the applicable Final Terms.
"LIBOR" means the rate determined in accordance with the following:
by three major banks (which may include affiliates of the Placement Agents) in such Principal Financial Center selected by the Calculation Agent (after consultation with us) for loans in the Designated LIBOR Currency to leading European banks, having the Index Maturity specified in the applicable Final Terms, commencing on that Interest Reset Date and in a principal amount that is representative for a single transaction in the Designated LIBOR Currency in such market at such time; provided, however, that if the banks so selected by the Calculation Agent are not quoting as mentioned in this sentence, LIBOR determined as of such Interest Determination Date will be LIBOR in effect on such Interest Determination Date or, if no LIBOR rate was in effect on such Interest Determination Date, the rate on such Floating Rate Note for the following Interest Reset Period shall be the Initial Interest Rate specified in the applicable Final Terms.
"Designated LIBOR Currency" means the currency specified in the applicable Final Terms as to which LIBOR shall be calculated or, if no such currency is specified in the applicable Final Terms, U.S. dollars.
"Designated LIBOR Page" means the display on the page specified in the applicable Final Terms for the purpose of displaying the London interbank rates of major banks for the Designated LIBOR Currency, provided, however, if no such page is specified in the applicable Final Terms, the display on Reuters (or any such service) on the LIBOR 01 page (or any other page as may replace such page on such service) shall be used for the purpose of displaying the London interbank rates of major banks for the Designated LIBOR Currency.
"Prime Rate" means, with respect to any Interest Determination Date relating to a Floating Rate Note for which the interest rate is determined with reference to the Prime Rate, the rate on such date as such rate is published in H.15(519) opposite the caption "Bank Prime Loan" or, if not published by 5:00 p.m., New York City time, on the day that is one New York City Banking Day following the Interest Reset Date pertaining to such Interest Determination Date, the rate on such Interest Determination Date as published in H.15 Daily Update, or such other recognized electronic source used for the purpose of displaying such rate, opposite the caption "Bank Prime Loan." If such rate is not yet published in H.15(519), H.15 Daily Update or another recognized electronic source by 5:00 p.m. New York City time on the day that is one New York City Banking Day following the Interest Reset Date pertaining to such Interest Determination Date, then the Prime Rate shall be the arithmetic mean, as determined by the Calculation Agent, of the rates of interest publicly announced by three major banks (which may include affiliates of the Placement Agents) in New York City selected by the Calculation Agent (after consultation with us) as the U.S. dollar prime rate or base lending rate in effect for such Interest Determination Date. (Each change in the prime rate or base lending rate of any bank so announced by such bank will be effective as of the effective date of the announcement or, if no effective date is specified, as of the date of the announcement.) If fewer than three major banks (which may include affiliates of the Placement Agents) so selected in New York City have publicly announced a U.S. dollar prime rate or base lending rate for such Interest Determination Date, the Prime Rate with respect to such Interest Determination Date shall be the rate in effect on such Interest Determination Date, or, if no Prime Rate was in effect on such Interest Determination Date, the rate on such Floating Rate Note for the following Interest Reset Period shall be the Initial Interest Rate specified in the applicable Final Terms.
"Treasury Rate" means, with respect to any Interest Determination Date relating to a Floating Rate Note for which the interest rate is determined by reference to the Treasury Rate, the rate from the auction held on such Interest Determination Date (the "Auction") of direct obligations of the United States ("Treasury Bills") having the Index Maturity specified in the applicable Final Terms under the caption "INVEST RATE" on the display on Reuters (or any successor service) on page USAUCTION 10 (or any other page as may replace such page) ("USAUCTION 10") or page USAUCTION 11 (or any other page as may replace such page) ("USAUCTION 11") or, if not so published by 3:00 p.m., New York City time, on the related Calculation Date, the Bond Equivalent Yield (as defined below) of the rate for such Treasury Bills as published in H.15 Daily Update, or such other recognized electronic source used for the purpose of displaying such rate, under the caption "U.S. Government Securities/Treasury Bills/ Auction High" or, if not so published by 3:00 p.m., New York City time, on the related Calculation Date, the Bond Equivalent Yield of the auction rate of such Treasury Bills as announced by the U.S. Department of the Treasury. In the event that the auction rate of Treasury Bills having the Index Maturity specified in the applicable Final Terms is not so announced by the U.S. Department of the Treasury, or if no such Auction is held, then the Treasury Rate will be the Bond Equivalent Yield of the rate on such Interest Determination Date of Treasury Bills having the Index Maturity specified in the applicable Final Terms as published in H.15(519) under the caption "U.S. Government Securities/Treasury Bills/Secondary Market" or, if not yet published by 3:00 p.m., New York City time, on the related Calculation Date, the rate on such Interest Determination Date of such Treasury Bills as published in H.15 Daily Update, or such other recognized electronic source used for the purpose of displaying such rate, under the caption "U.S. Government Securities/Treasury Bills/Secondary Market." If such rate is not yet published in H.15(519), H.15 Daily Update or another recognized electronic source, then the Treasury Rate will be calculated by the Calculation Agent and will be the Bond Equivalent Yield of the arithmetic mean of the secondary market bid rates, as of approximately 3:30 p.m., New York City time, on such Interest Determination Date, of three primary U.S. government securities dealers (which may include the Placement Agents or their affiliates) selected by the Calculation Agent (after consultation with us), for the issue of Treasury Bills with a remaining maturity closest to the Index Maturity specified in the applicable Final Terms; provided, however, that if the dealers so selected by the Calculation Agent are not quoting as mentioned in this sentence, the Treasury Rate determined as of such Interest Determination Date will be the Treasury Rate in effect on such Interest Determination Date, or, if no Treasury Rate was in effect on such Interest Determination Date, the rate on such Floating Rate Note for the following Interest Reset Period shall be the Initial Interest Rate specified in the applicable Final Terms.
"Bond Equivalent Yield" means a yield (expressed as a percentage) calculated in accordance with the following formula:
where "D" refers to the applicable per annum rate for Treasury Bills quoted on a bank discount basis, "N" refers to 365 or 366, as the case may be, and "M" refers to the actual number of days in the applicable Interest Reset Period.
If the applicable Final Terms specifies a Minimum Rate of Interest for any Interest Period, then the Rate of Interest for such Interest Period shall in no event be less than such Minimum Rate of Interest and/or if it specifies a Maximum Rate of Interest for any Interest Period, then the Rate of Interest for such Interest Period shall in no event be greater than such Maximum Rate of Interest.
The interest rate on Floating Rate Notes will in no event be higher than the maximum rate permitted by New York law, as the same may be modified, or other applicable law.
The Calculation Agent will, at or as soon as practicable after each time at which the Rate of Interest is to be determined, determine the Rate of Interest for the relevant Interest Period.
The Calculation Agent will calculate the amount of interest (each an "Interest Amount") for the relevant Interest Period. Each Interest Amount shall be calculated by applying the Rate of Interest to the aggregate outstanding nominal amount of the notes and multiplying such sum by the Day Count Fraction specified in the applicable Final Terms. The resultant figure will be rounded as follows (or otherwise in accordance with applicable market convention):
(iii) all amounts denominated in any other currency used in or resulting from such calculations will be rounded to the nearest two decimal places in such currency, with 0.005 being rounded upwards.
All percentages resulting from any calculation on Floating Rate Notes will be rounded, if necessary, to the nearest one hundred thousandth of a percentage point, with five or more one millionths of a percentage point rounded upwards (e.g., 9.876545% (or 0.09876545) would be rounded to 9.87655% (or 0.0987655)).
The Calculation Agent will cause the Rate of Interest and each Interest Amount for each Interest Period and the relative Interest Payment Date to be notified to the Issuer, to the Trustee and to any listing authority, stock exchange and/or quotation system to which the Floating Rate Notes have then been admitted to listing, trading and/or quotation and to be published as soon as possible after their determination but in no event later than the fourth Business Day thereafter. Each Interest Amount and Interest Payment Date so notified may subsequently be amended (or appropriate alternative arrangements made by way of adjustment) without prior notice in the event of an extension or shortening of the Interest Period. Any such amendment or alternative arrangements will promptly be notified to each listing authority, stock exchange and/or quotation system to which the Floating Rate Notes have then been admitted to listing, trading and/or quotation and to the holders in accordance with the indenture.
If for any reason at any time after the Original Issue Date, the Calculation Agent defaults in its obligation to determine the Rate of Interest in accordance with this subsection or the Calculation Agent defaults in its obligation to calculate any Interest Amount in accordance with this subsection, the Trustee (or an agent acting on its behalf) shall determine the Rate of Interest at such rate as, in its absolute discretion (having such regard as it shall think fit to the foregoing provisions of this subsection, but subject always to any Minimum or Maximum Rate of Interest specified in the applicable Final Terms), it shall deem fair and reasonable in all the circumstances or, as the case may be, the Trustee (or an agent acting on its behalf) shall calculate the Interest Amount(s) in such manner as it shall deem fair and reasonable in all the circumstances and each such determination or calculation shall be deemed to have been made by the Calculation Agent.
All certificates, communications, opinions, determinations, calculations, quotations and decisions given, expressed, made or obtained for the purposes of the provisions of this subsection, whether by the Paying Agent or the Calculation Agent or the Trustee, shall (in the absence of willful default, bad faith or manifest error) be binding on the Issuer, the Paying Agent, the Calculation Agent, the Trustee, any other paying agents and all holders and (in the absence as aforesaid) no liability to the Issuer or the holders shall attach to the Paying Agent, the Calculation Agent or the Trustee in connection with the exercise or non-exercise by them of their powers, duties and discretions pursuant to such provisions.
We may issue additional notes of a series having identical terms to that of a prior series of notes of the same series but for the Original Issue Date and the public offering price ("Additional Notes"). The Final Terms relating to any Additional Notes will set forth matters related to such issuance, including identifying the prior series of notes, their Original Issue Date and the aggregate principal amount of notes then comprising such series.
We will pay to the holder of any note such additional amounts as may be necessary in order that every net payment of the principal of (including premium or final redemption amount, initial redemption amount or early redemption amount, if any, and in the case of Zero Coupon Notes, the Amortized Face Amount (as defined below) or other amount payable in respect thereof) and interest, if any, on such note, after deduction or other withholding for or on account of any present or future tax, assessment, duty or other governmental charge of any nature whatsoever imposed, levied or collected by or on behalf of the United Kingdom, or any political
subdivision thereof or authority therein having power to tax, will not be less than the amount provided for in such note as then due and payable. No such additional amount shall, however, be payable on any note on account of any tax, assessment, duty or other governmental charge which is payable:
"Relevant Date" means the date on which the payment of principal (including premium or final redemption amount, initial redemption amount or early redemption amount, if any, and in the case of Zero Coupon Notes, the Amortized Face Amount or other amount payable in respect thereof) or interest, if any, on a note first becomes due and payable but, if the full amount of the monies payable on such date has not been received by the relevant Paying Agent or as it shall have directed on or prior to such date, the "Relevant Date" means the date on which such monies shall have been so received. No additional amounts will be paid as provided above with respect to any payment of principal (including premium or final redemption amount, initial redemption amount or early redemption amount, if any, and in the case of Zero Coupon Notes, the Amortized Face Amount or other amount payable in respect thereof) or interest, if any, on such note to any holder who is a fiduciary or partnership or other than the sole beneficial owner of any such payment, to the extent that a beneficiary or settlor with respect to such fiduciary, a member of such partnership or the beneficial owner of such payment would not have been entitled to the additional amounts had such beneficiary, settlor, member or beneficial owner been the holder of any such note.
Unless previously redeemed or purchased and cancelled as provided below, each Note will be redeemed at 100% of its nominal amount in the relevant Specified Currency on the Maturity Date specified in the applicable Final Terms.
If the Issuer at any time satisfies the trustee immediately prior to the giving of the notice referred to below that:
(1) (in the case of senior notes) on the occasion of the next payment due in respect of the notes, the Issuer will or would be required to pay additional amounts as described under "—Payment of Additional Amounts" or to account to any taxing authority in the United Kingdom for any amount (other than any tax withheld or deducted from interest payable in respect of the notes) calculated by reference to any amount payable in respect of the notes; or
(2) (in the case of subordinated notes) a Tax Event has occurred;
and, in any such case, the Issuer cannot avoid the same by taking reasonable measures available to it, then the Issuer may in its sole discretion (and in the case of subordinated notes, in accordance with "—Preconditions to redemption and purchase of subordinated notes"), having given notice of not more than 60 days nor less than 30 days prior to the date of redemption to the trustee and, in accordance with "—Notices", the noteholders (which notice shall be irrevocable), redeem at any time (if this note is not a Floating Rate Note) or on any Interest Payment Date (if this note is a Floating Rate Note) all (but not some only) of the notes at their early redemption amount as provided under "—Early Redemption Amounts" together, if applicable, with interest accrued to (but excluding) the date fixed for redemption. Upon the expiry of such notice the Issuer shall be bound to redeem the notes accordingly.
Prior to the publication of any notice of early redemption pursuant to the provisions set forth above, the Issuer shall deliver to the trustee a certificate signed by any two authorised signatories of the Issuer confirming that the relevant circumstances in (1) above (in the case of senior notes) or (2) above (in the case of subordinated notes) have occurred and are continuing. The trustee shall be entitled, without liability to any person, to accept such certificate without any further inquiry as sufficient evidence of the satisfaction of the relevant conditions precedent, in which event it shall be conclusive and binding on the trustee and the noteholders. Upon the expiry of such notice the Issuer shall be bound to redeem the notes accordingly.
A "Tax Event" will be deemed to have occurred if, as a result of a Tax Law Change:
(i) in making any payments on the subordinated notes, the Issuer has paid or will or would on the next payment date be required to pay additional amounts as described under "—Payment of Additional Amounts";
(ii) the Issuer is no longer, or will no longer be, entitled to claim a deduction in respect of any payments in respect of the subordinated notes in computing its taxation liabilities or the amount of such deduction is or will be materially reduced;
(iii) the subordinated notes are, or will be, prevented from being treated as loan relationships for United Kingdom tax purposes; or
(iv) the Issuer is not, or will not be, able to have losses or deductions set against any profits or gains, or profits or gains offset by any losses or deductions, of companies with which it is or would otherwise be so grouped for applicable United Kingdom tax purposes (whether under the group relief system current as at the date of issue of the subordinated notes or any similar system or systems having like effect as may from time to time exist).
As used herein, "Tax Law Change" means any change in, or amendment to, the laws or regulations of the United Kingdom (including any treaty to which it is a party) or any political subdivision or any authority thereof or therein having power to tax, or any change in the official interpretation thereof by the relevant tax authority or in the application of such laws or regulations by a decision of any court or tribunal that provides for a position with respect to such laws or regulations that differs from the previously generally accepted position in relation to similar transactions or any pronouncement of a tax authority in the United Kingdom, which change or amendment becomes effective or, in the case of a change in law, if such change is enacted by a UK Act of Parliament or by Statutory Instrument, on or after the Issue Date.
Subject (in the case of subordinated notes only) to compliance with the "—Preconditions to redemption and purchase of subordinated notes", if so specified in the applicable Final Terms, the notes of a series will be redeemable at our option prior to the Stated Maturity. If so specified, and subject to the terms set forth in the applicable Final Terms, the notes will be subject to redemption at our option on any date on and after the applicable Initial Redemption Date specified in the applicable Final Terms in whole or from time to time in part in minimum increments of \$200,000 for senior notes and \$250,000 for subordinated notes, or the minimum denomination specified in such Final Terms (provided that any remaining principal amount thereof shall be at least \$200,000 for senior notes and \$250,000 for subordinated notes, or such minimum denomination), at the Redemption Price specified in the applicable Final Terms on notice given not more than 60 days, if the notes are being redeemed in whole, or 45 days, if the notes are being redeemed in part, nor less than 30 days prior to the date of redemption and in accordance with the provisions of the indenture.
The notes will not be subject to any sinking fund.
Subject to compliance with "—Preconditions to redemption and purchase of subordinated notes", the Issuer may, in its sole discretion, if a Regulatory Event has occurred, having given notice of not more than 60 days nor less than 30 days prior to the date of redemption to the trustee and, in accordance with "—Notices", the noteholders (which notice shall be irrevocable and shall specify the date fixed for redemption), redeem all (but not some only) of the subordinated notes at their early redemption amount as provided under "—Early Redemption Amounts" together, if applicable, with interest accrued to (but excluding) the date fixed for redemption.
Prior to the publication of any notice of early redemption pursuant to the paragraph above, the Issuer shall deliver to the trustee a certificate signed by any two authorised signatories of the Issuer confirming that a Regulatory Event has occurred. The trustee shall be entitled, without liability to any person, to accept such certificate without any further inquiry as sufficient evidence of the satisfaction of the relevant conditions precedent, in which event it shall be conclusive and binding on the trustee and the noteholders. Upon the expiry of such notice the Issuer shall be bound to redeem the subordinated notes accordingly.
If so specified in the applicable Final Terms (unless the relevant Note is a Subordinated Note), the notes will be repayable by us in whole or in part at the option of the holders thereof on their respective optional repayment dates ("Optional Repayment Dates") specified in such Final Terms, upon not more than 30 days', nor less than 15 days', notice prior to such Optional Repayment Dates. If no Optional Repayment Date is specified with respect to a note, such note will not be repayable at the option of the holder thereof prior to the Stated Maturity. Any repayment in part will be in increments of \$200,000 for senior notes and \$250,000 for subordinated notes, or the minimum denomination specified in the applicable Final Terms (provided that any remaining principal amount thereof shall be at least \$200,000 for senior notes and \$250,000 for subordinated notes, or such minimum denomination). Unless otherwise specified in the applicable Final Terms, the repayment price for any note to be repaid means an amount equal to the sum of the unpaid principal amount thereof or the portion thereof plus accrued interest to the date of repayment. Exercise of the repayment option is irrevocable.
If the amount payable in respect of any Zero Coupon Note upon redemption of such Zero Coupon Note pursuant to this subsection or upon its becoming due and repayable as provided upon the occurrence of any Event of Default under the indenture is improperly withheld or refused, the amount due and repayable in respect of such Zero Coupon Note shall be the amount calculated as provided under "—Early Redemption Amounts" below as though the references therein to the date fixed for redemption or the date upon which such Zero Coupon Note becomes due and repayable were replaced by references to the date which is the earlier of:
For the purposes of redemption for tax reasons or a regulatory event and redemption upon the occurrence of any Event of Default under the indenture, each Note will be redeemed at an amount calculated as follows, together with interest, if any, to the date fixed for redemption:
Where such calculation is to be made for a period which is not a whole number of years, it shall be made (i) in the case of a Zero Coupon Note other than a Zero Coupon Note payable in euro, on the basis of a 360 day year consisting of 12 months of 30 days each or (ii) in the case of a Zero Coupon Note payable in euro, on the basis of the actual number of days elapsed divided by 365 (or, if any of the days elapsed falls in a leap year, the sum of (A) the number of those days falling in a leap year divided by 366 and (B) the number of those days falling in a non-leap year divided by 365).
In the case of any partial redemption of notes, and subject to the terms specified in the applicable Final Terms, the notes to be redeemed shall be selected by the trustee individually by lot not more than 60 days prior to the Redemption Date from the outstanding notes not previously called for redemption, provided that partial redemption of Global Notes shall be effected in accordance with DTC's procedures.
Subject (in the case of subordinated notes only) to compliance with "—Preconditions to redemption and purchase of subordinated notes" and prevailing Regulatory Capital Requirements, we may at any time purchase notes at any price or prices in the open market or otherwise. Notes so purchased may be held or resold or, at our discretion, notes may be surrendered to the trustee for cancellation.
Any redemption or purchase of subordinated notes in accordance with any applicable subsection of this section "—Redemption and Repurchase" is subject to:
(a) the Issuer having obtained Relevant Supervisory Consent therefor;
(b) either: (A) the Issuer having replaced the subordinated notes with own funds instruments of equal or higher quality at terms that are sustainable for the income capacity of the Issuer; or (B) the Issuer having demonstrated to the satisfaction of the Supervisory Authority that the own funds of the Issuer would, following such redemption or purchase, exceed its minimum capital requirements (including any capital buffer requirements) by a margin that the Supervisory Authority considers necessary at such time; and
(c) in the case of any redemption prior to the fifth anniversary of the Issue Date, (A) in the case of redemption upon a Tax Event, the Issuer having demonstrated to the satisfaction of the Supervisory Authority that the change in tax treatment is material and was not reasonably foreseeable as at the Issue Date, or (B) in the case of redemption upon the occurrence of a Regulatory Event, the Issuer having demonstrated to the satisfaction of the Supervisory Authority that the relevant change in the regulatory classification of the Notes was not reasonably foreseeable as at the Issue Date.
Notwithstanding the foregoing, if, at the time of any redemption or purchase, the prevailing Regulatory Capital Requirements permit a repayment or purchase only after compliance with one or more additional or alternative preconditions to those set out above in this subsection, the Issuer shall comply (in addition or in the alternative, as the case may be) with such additional and/or alternative precondition(s).
As used herein, "Relevant Supervisory Consent" means, in relation to any action, such permission or waiver of the Supervisory Authority as is then required for such action under prevailing Regulatory Capital Requirements.
By its acquisition of the notes, each noteholder (including each beneficial owner) acknowledges, agrees to be bound by and consents to the exercise of any UK bail-in power (as defined below) by the relevant UK resolution authority (as defined below) that may result in (i) the cancellation, write-down or reduction of all, or a portion, of the principal amount of, or interest on, the notes (including by variation of the notes) and/or (ii) any other modification of the notes and/or (iii) the conversion of all, or a portion, of the principal amount of, or interest on, the notes into our or another person's shares or other securities or other obligations (including by variation of the notes) to give effect to the exercise by the relevant UK resolution authority of such UK bail-in power, and the rights of the holders of the notes will be subject to the provisions of any UK bail-in power which are expressed to implement such a reduction, write-down, cancellation, modification or conversion. Each noteholder further acknowledges and agrees that the rights of the noteholders are subject to, and will be varied, if necessary, so as to give effect to, the exercise by the relevant UK resolution authority of such UK bail-in power.
For purposes of the notes, a "UK bail-in power" is any statutory power to effect a cancellation, writedown, reduction, modification and/or conversion of a liability existing from time to time under any laws, regulations, rules or requirements relating to the resolution of credit institutions, investment firms and certain banking group companies (including relevant parent undertakings, subsidiaries and/or affiliates) incorporated in the United Kingdom in effect and applicable to the issuer or any member of the Group (as defined herein), including but not limited to the Banking Act, as the same may be amended from time to time (whether pursuant to the UK Financial Services (Banking Reform) Act 2013 or otherwise), and any laws, regulations, rules or requirements in the United Kingdom which are adopted or enacted in order to implement Directive 2014/59/EU of the European Parliament and of the Council of May 15, 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council (the "BRRD"), pursuant to which liabilities of a credit institution, investment firm, certain of its parent undertakings and/or certain of its affiliates can be cancelled, written down, reduced, modified and/or converted into shares or other securities or obligations of the issuer or any other person (and a reference to the "relevant UK resolution authority" is to any authority with the ability to exercise a UK bail-in power). "Group" means the Issuer together with its subsidiaries consolidated in accordance with International Financial Reporting Standards.
No repayment of the principal amount of the notes or payment of interest on the notes shall become due and payable after the exercise of any UK bail-in power by the relevant UK resolution authority unless, at the time that such repayment or payment, respectively, is scheduled to become due, such repayment or payment would be permitted to be made by us after the exercise of such UK bail-in power.
By its acquisition of the notes, each holder of the notes waives any and all claims against the trustee for, agrees not to initiate a suit against the trustee in respect of, and agrees that the trustee will not be liable for, any action that the trustee takes, or abstains from taking, in either case in accordance with the exercise of the UK bail-in power by the relevant UK resolution authority with respect to the notes.
Upon the exercise of the UK bail-in power by the relevant UK resolution authority with respect to the notes, we will provide a written notice to DTC as soon as practicable regarding such exercise of the UK bail-in power for purposes of notifying holders of the notes of such occurrence. We will also deliver a copy of such notice to the trustee for information purposes.
The exercise of the UK bail-in power by the relevant UK resolution authority with respect to the notes will not be an Event of Default (as defined in the indenture) with respect to such notes.
Our obligations to indemnify the trustee shall survive the exercise of the UK bail-in power by the relevant UK resolution authority with respect to any notes.
By its acquisition of the notes, each noteholder acknowledges and agrees that, upon the exercise of any UK bail-in power by the relevant UK resolution authority with respect to such notes, (a) the trustee shall not be required to take any further directions from noteholders of the affected notes and (b) the indenture shall impose no duties upon the trustee whatsoever with respect to the exercise of any UK bail-in power by the relevant UK resolution authority. Notwithstanding the foregoing, if, following the completion of the exercise of the UK bailin power by the relevant UK resolution authority, any notes remain outstanding (for example, if the exercise of the UK bail-in power results in only a partial write-down of the principal of the notes), then the trustee's duties under the indenture shall remain applicable with respect to any notes following such completion to the extent that the issuer and the trustee shall agree pursuant to another supplemental indenture or an amendment to the indenture; provided, however, that notwithstanding the exercise of the UK bail-in power by the relevant UK authority, there shall at all times be a trustee for the notes in accordance with the indenture, and the resignation and/or removal of the trustee and the appointment of a successor trustee will continue to be governed by the indenture, including to the extent no additional supplemental indenture or amendment is agreed upon in the event the notes remain outstanding following the completion of the exercise of the UK bail-in power.
By its acquisition of the notes, each noteholder (a) acknowledges and agrees to be bound by and consents to the exercise of any UK bail-in power as it may be imposed without any prior notice by the relevant UK resolution authority of its decision to exercise such power with respect to such notes and (b) shall be deemed to have authorized, directed and requested DTC and any direct participant in DTC or other intermediary through which it holds such notes to take any and all necessary action, if required, to implement the exercise of any UK bail-in power with respect to such notes as it may be imposed, without any further action or direction on the part of such holder or the trustee.
For a discussion of certain risk factors relating to the UK bail-in power, see "Risk Factors—Risks Related to the Notes."
The negative pledge applies to the senior notes only. So long as any of the senior notes remain outstanding, we will not, and will not suffer or permit any of our subsidiaries to, create or have outstanding any mortgage, lien (other than a lien arising by operation of law), pledge or other charge or security interest upon the whole or any part of our or its business or assets, present or future (for the purposes of this subsection, a "Security Interest"), to secure any of our Loan Stock or the Loan Stock of any of our subsidiaries or any of our or our subsidiaries' obligations under any guarantee of or indemnity in respect of the Loan Stock of any other person, without at the same time or prior thereto securing the senior notes equally and ratably therewith to the satisfaction of the trustee or providing such other security for the senior notes which the trustee in its absolute discretion shall deem to be not materially less beneficial to the holders of senior notes or which shall be approved by a majority of the holders of senior notes then outstanding provided that we or any of our subsidiaries may create or have outstanding Security Interests with respect to Loan Stock (without the obligation to secure the senior notes as aforesaid) if at the date of the creation thereof we or any of our subsidiaries have and thereafter maintain free and clear of Security Interests assets the fair market value of which (calculated on a consolidated basis) is at least twice the aggregate principal amount of all Loan Stock which is not secured by any such Security Interest. As used in this subsection, "Loan Stock" means indebtedness for the time being outstanding which is in the form of or represented or evidenced by bonds, notes, debentures, loan stock or other similar securities.
The following shall constitute "Events of Default" with respect to the senior notes:
or which, if capable of remedy, is not, in the opinion of the trustee, remedied within 30 days (or such longer period as the trustee may permit) after notice requiring remedy of such default shall have been given to us by the trustee; or
"Material Subsidiary" means a Subsidiary of ours whose total assets (attributable to us) represent 10% or more of our and our subsidiaries' consolidated total assets (all as more particularly described in the indenture).
The following shall apply with respect to the subordinated notes:
such proceedings unless (a) it shall have been so requested in writing by noteholders holding at least one-quarter in nominal amount of the Notes then outstanding and (b) it shall have been indemnified and/or secured and/or prefunded to its satisfaction.
If any Event of Default has occurred and is continuing with regard to senior notes of any series, the trustee may, at its discretion and without further notice, take such proceedings against us as it may think fit to enforce payment on such senior notes. However, the trustee will not be bound to take any action with respect to such series of senior notes unless:
If any Event of Default has occurred and is continuing with regard to subordinated notes of any series, the trustee may at its discretion institute proceedings for our winding up in England (but not elsewhere) to enforce our obligations in respect of the subordinated notes and the indenture insofar as it relates to the subordinated notes. However, we may not make any payment of principal in respect of the subordinated notes, nor will the trustee accept any such payment of principal from us, other than during or after our winding up or dissolution, unless a Relevant Supervisory Consent has been granted. For the purposes of the foregoing, a payment shall be deemed to be due even if we are not solvent.
Under current New York law, a state court in the State of New York rendering a judgment in respect of a note denominated in other than U.S. dollars would be required to render such judgment in the Specified Currency, and such judgment would be converted into U.S. dollars at the Market Exchange Rate prevailing on the date of entry of such judgment. Accordingly, the holder of such Note denominated in other than U.S. dollars would be subject to exchange rate fluctuations between the date of entry of a judgment in a currency other than U.S. dollars and the time the amount of such judgment is paid to such holder in U.S. dollars and converted by such holder into the Specified Currency. It is not certain, however, whether a non-New York state court would follow the same rules and procedures with respect to conversions of judgments in currency other than U.S. dollars.
We will indemnify the holder of any note against any loss incurred by such holder as a result of any judgment or order being given or made for any amount due under such note and such judgment or order requiring payment in a currency (the "Judgment Currency") other than the Specified Currency, and as a result of any variation between (i) the rate of exchange at which the Specified Currency amount is converted into the Judgment Currency for the purpose of such judgment or order, and (ii) the rate of exchange at which the holder of such note, on the date of payment of such judgment or order, is able to purchase the Specified Currency with the amount of the Judgment Currency actually received by such holder, as the case may be.
So long as any note of a series remains outstanding, we will not consolidate or amalgamate with or merge into any other Person or convey, transfer or lease our properties and assets substantially as an entirety to any Person unless:
(1) the Person formed by such consolidation or amalgamation or into which we are merged or the Person which acquired by conveyance or transfer, or which leases, our properties and assets substantially as an entirety shall be a Person organized and validly existing under the laws of the United Kingdom which shall expressly assume, by an amendment to the indenture that is executed and delivered to the trustee and is in form reasonably satisfactory to the trustee, the due and punctual payment of the principal of (and premium, if any, on) and interest, if any, on all of the notes of such a series and the performance of every covenant of the indenture (other than a covenant included in the indenture solely for the benefit of notes of another series) and of such notes to be performed, and such assumption shall provide that such corporation or
Person shall pay to the holder of any such notes such additional amounts as may be necessary in order that every net payment of the principal of (and premium, if any, on) and interest, if any, on such notes will not be less than the amounts provided for in such notes to be then due and payable and such obligations shall extend to any deduction or withholding for or on account of any present or future tax, assessment or governmental charge imposed upon such payment (it being understood that, except as aforesaid, no such corporation or Person shall be obligated to make any indemnification or payment in respect of any tax consequences to any holder as a result of such assumption of rights and obligations if such corporation or Person would not be obligated to pay an additional amount pursuant to the indenture if such corporation or Person were us);
Upon any such consolidation, amalgamation or merger, or any such conveyance, transfer or lease, the successor corporation or Person will succeed to, and be substituted for, and may exercise every right and power of ours, under the indenture with the same effect as if such successor corporation or Person has been named as the issuer thereunder, and thereafter, except in the case of a lease, the predecessor corporation shall be relieved of all obligations and covenants under the indenture and such notes.
The satisfaction and discharge provisions described below do not apply to subordinated notes.
The indenture provides that we will be discharged from our obligations under the notes of a series (with certain exceptions) at any time prior to the Stated Maturity, or redemption of such notes when (i) we have irrevocably deposited with or to the order of the trustee, in trust, (a) sufficient funds in the currency, currencies, currency unit or units in which such notes are payable (without consideration of any reinvestment thereof) to pay the principal of (and premium, if any, on) and interest, if any, on such notes to the Stated Maturity (or Redemption Date), or (b) such amount of U.S. Government Obligations (as defined below) as will, together with the predetermined and certain income to accrue thereon (without consideration of any reinvestment thereof), be sufficient to pay when due the principal of (and premium, if any, on) and interest, if any, to the Stated Maturity (or Redemption Date), on such notes, or, (c) such amount equal to the amount referred to in clause (a) or (b) in any combination of currency or currency unit of U.S. Government Obligations; (ii) we have paid all other sums payable with respect to such notes; (iii) we have delivered to the trustee an opinion of counsel to the effect that (a) we have received from, or there has been published by, the U.S. Internal Revenue Service a ruling, or (b) since the date of the indenture there has been a change in applicable U.S. federal income tax law, in either case to the effect that, and based upon which such opinion of counsel shall confirm that, the holders of such notes will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such discharge and will be subject to U.S. federal income tax on the same amount and in the same manner and at the same time as would have been the case if such discharge had not occurred; and (iv) certain other conditions are met. Upon such discharge, the holders of the notes of such a series shall no longer be entitled to the benefits of the terms and conditions of the indenture and notes, except for certain provisions including registration of transfer and exchange of such notes and replacement of mutilated, destroyed, lost or stolen notes of such series, and shall look for payment only to such deposited funds or obligations. In addition, any such discharge with respect to the subordinated notes of any series would require a Relevant Supervisory Consent.
"U.S. Government Obligations" means non-callable (i) direct obligations (or certificates representing an ownership interest in such obligations) of the United States for which its full faith and credit are pledged or (ii) obligations of a Person controlled or supervised by, and acting as an agency or instrumentality of, the United States, the timely payment of which is unconditionally guaranteed as a full faith and credit obligation of the United States.
The indenture contains provisions permitting us and the trustee (i) without the consent of the holders of any notes issued under the indenture, to execute supplemental indentures for certain enumerated purposes, such as to cure any ambiguity or inconsistency or to make any change that does not have a materially adverse effect on the rights of any holder of such notes, and (ii) with the consent of the holders of not less than a majority in aggregate principal amount of the Outstanding Notes of each series of notes issued under the indenture and affected thereby, to execute supplemental indentures for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the indenture or of modifying in any manner the rights of holders of any such note under the indenture; provided, that no such supplemental indenture may, without the consent of the holder of each such Outstanding Note affected thereby (a) change the Stated Maturity or the principal of or interest on any such note, or reduce the principal amount of any such note or the rate of interest thereon, if any, or any premium or principal payable upon redemption thereof, or change any obligation of ours to pay additional amounts thereon, or change any Place of Payment where, or change the currency in which, any such note or the interest, if any, thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity, if any, thereof or the date any such payment is otherwise due and payable (or, in the case of redemption, on or after the redemption date); or (b) reduce the percentage in aggregate principal amount of such Outstanding Notes of any particular series, the consent of whose holders is required for any such supplemental indenture, or the consent of whose holders is required for any waiver (of compliance with certain provisions of the indenture or certain defaults thereunder and their consequences) provided for in the indenture; or (c) change any obligation we have to maintain an office or agency in the places and for the purposes specified in the indenture; or (d) modify certain of the provisions of the indenture pertaining to the waiver by holders of such notes of past defaults, supplemental indentures with the consent of holders of such notes and the waiver by holders of such notes of certain covenants, except to increase any specified percentage in aggregate principal amount required for any actions by holders of notes or to provide that certain other provisions of the indenture cannot be modified or waived without the consent of the holder of each such note affected thereby; or (e) in the case of the subordinated notes, change in any manner adverse to the interests of the holders of such Outstanding subordinated notes the subordination provisions of such subordinated notes.
In addition, material variations in the terms and conditions of the subordinated notes of any series, which may include modifications relating to the status, subordination, redemption, repurchase or Events of Default with respect to such subordinated notes, may require a Relevant Supervisory Consent.
The holders of not less than a majority in aggregate principal amount of the Outstanding Notes of a series of notes affected thereby, may on behalf of the holders of all notes of such series waive compliance by us with certain restrictive provisions of the indenture as pertain to the corporate existence of us, the maintenance of certain agencies by us or, solely with respect to senior notes, as pertain to the negative pledge covenant as described under the subsection entitled "—Negative Pledge."
The holders of a majority in aggregate principal amount of the Outstanding Notes of a series of notes may waive on behalf of the holders of all notes of such series, any past default and its consequences under the indenture, except a default in the payment of the principal of (or premium, if any, on) or interest, if any, on any such note of that series or a default in respect of a covenant or a provision which under the indenture cannot be modified or amended without the consent of the holder of each Outstanding Note of such series.
In addition to our and the trustee's rights to modify and amend the indenture as described above, modifications of and amendments to the terms of the indenture or the notes may be made by us and the trustee, without the further consent of the noteholders, to the extent necessary to give effect to the exercise by the relevant UK resolution authority of the UK bail-in power.
Notices to holders of notes will be given by mail to addresses of such holders as they appear in the notes' register.
The indenture and the notes shall be governed by and construed in accordance with the laws of the State of New York; except that the subordination provisions contained in clause 1201 in the indenture and the subordinated notes will be governed by and construed in accordance with the laws of England and Wales, with the intention that such provisions be given full effect in any insolvency proceeding relating to us in England and Wales.
We have designated and appointed CT Corporation System at 111 Eighth Avenue, in the Borough of Manhattan, New York City, New York 10011 as our authorized agent upon which process may be served in any suit or proceeding arising out of or relating to the notes or the indenture which may be instituted in any State or Federal court located in the Borough of Manhattan, City of New York, State of New York, and have submitted (for the purposes of any such suit or proceeding) to the jurisdiction of any such court in which any such suit or proceeding is so instituted. We have agreed, to the fullest extent that we lawfully may do so, that final judgment in any such suit, action or proceeding brought in such a court shall be conclusive and binding upon us and may be enforced in the courts of England and Wales (or any other courts to the jurisdiction of which it is subject).
Notwithstanding the foregoing, any actions arising out of or relating to the notes or the indenture may be instituted by us, the trustee or the holder of any note in any competent court in England and Wales or such other competent jurisdiction, as the case may be.
The indenture provides that, except during the continuance of an Event of Default for a series of notes, the trustee will have no obligations other than the performance of such duties as are specifically set forth in the indenture. If an event of default has occurred and is continuing, the trustee will use the same degree of care and skill in its exercise of the rights and powers vested in it by the indenture as a prudent person would exercise under the circumstances in the conduct of such person's own affairs.
So long as DTC or its nominee is the holder of the Global Notes, any owner of a beneficial interest in the notes of a series must rely upon the procedures of DTC and institutions having accounts with DTC to exercise or be entitled to any rights of a holder of such Global Notes. See the subsection entitled "—Book-Entry System" for a further description of DTC's procedures.
DTC will act as securities depositary for the Global Notes. The Global Notes will be issued as fullyregistered securities registered in the name of Cede (DTC's partnership nominee), unless otherwise specified. No Global Note may be transferred except by DTC to a nominee of DTC or by a nominee of DTC to DTC or another nominee of DTC or any successor thereof.
We have been advised by DTC that upon the deposit of a Global Note with DTC, DTC will immediately credit, on its book-entry registration and transfer system, the respective principal amounts of such beneficial interests in that Global Note to the accounts of the DTC Participants. The accounts to be credited shall be designated by the soliciting Placement Agent or, to the extent that the notes are offered and sold directly, by us.
We understand that DTC is a limited-purpose trust company organized under the laws of the State of New York, a "Banking Organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds securities that its participants ("Participants") deposit with DTC. DTC also facilitates the clearance and settlement among Participants of transactions in such securities through electronic book-entry changes in Participants' accounts, thereby eliminating the need for physical movement of securities certificates. Direct participants ("Direct Participants") include securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is owned by a number of its Direct Participants and by the New York Stock Exchange, Inc., the American Stock Exchange, Inc., and the National Association of Securities Dealers, Inc. Access to DTC's system is also available to others such as securities brokers and dealers, banks and trust companies that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). The rules applicable to DTC and its Participants are on file with the Securities and Exchange Commission.
Ownership of beneficial interests in a Global Note in respect of a series of notes will be limited to DTC Participants, including Clearstream and Euroclear, or persons who hold interests through DTC Participants. In addition, ownership of beneficial interests will be evidenced only by, and the transfer of that ownership interest will be effected only through, records maintained by DTC or its nominee and DTC Participants until such time, if any, as Certificated Notes are issued, as set forth above under the subsection entitled "Terms and Conditions of the Notes—Form, Transfer, Exchange and Denomination." The laws of some states require that certain purchasers of notes take physical delivery of such notes in certificated form. Such laws may impair the ability to transfer beneficial interests in a Global Note.
Interests held through Clearstream and Euroclear will be recorded on DTC's books as being held by the U.S. depositary for each of Clearstream and Euroclear, which U.S. depositaries will in turn hold interests on behalf of their participants' customers' securities accounts.
To facilitate subsequent transfers, all Global Notes deposited with DTC are registered in the name of DTC's partnership nominee, Cede. DTC has no knowledge of the actual owners of beneficial interests in the Global Notes; DTC's records reflect only the identity of the Direct Participants to whose accounts such beneficial interests in Global Notes are credited, which may or may not be the beneficial owners. The Participants will remain responsible for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to beneficial owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.
Redemption notices shall be sent to Cede and any subsequent nominee of DTC. If less than all of the notes within a series are being redeemed, DTC's current practice is to determine pro rata or by lot the amount of the beneficial interest of each Direct Participant in such issue to be redeemed.
Principal and interest payments on the Global Notes will be made to DTC as the registered holder of the Global Notes. DTC's practice is to credit Direct Participants' accounts on the payable date in accordance with their respective holdings shown on DTC's records unless DTC has reason to believe that it will not receive payment on the payable date. Payments by Participants to beneficial owners will be governed by standing instructions and customary practices, as in the case of securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC, or us, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to DTC is our responsibility, disbursement of such payments to Direct Participants shall be the responsibility of DTC, and disbursement of such payments to the beneficial owners shall be the responsibility of Direct Participants and Indirect Participants.
A beneficial owner shall give notice to elect to have its beneficial interests in the Global Notes purchased or tendered, through its Participant, to the trustee for a series of notes, and shall effect delivery of such beneficial interests in the Global Notes by causing the Direct Participant to transfer the Participant's beneficial interest in the Global Notes, on DTC's records, to the trustee.
DTC may discontinue providing its services as securities depositary with respect to the Global Notes at any time by giving reasonable notice to us and the Placement Agents. Under such circumstances, in the event that a successor securities depositary is not obtained, certificated notes in registered form will be printed and delivered in exchange for beneficial interests in the Global Notes as described under the subsection entitled "Terms and Conditions of the Notes—Form, Transfer, Exchange and Denomination."
We may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depositary). In that event, certificated notes in registered form will be printed and delivered in exchange for beneficial interests in the Global Notes as described under the subsection entitled "Terms and Conditions of the Notes—Form, Transfer, Exchange and Denomination."
The information in this section concerning DTC and DTC's book-entry system has been obtained from sources that we believe to be reliable, but we take no responsibility for the accuracy thereof.
In no event will definitive notes in bearer form representing any series of notes be issued.
None of us, any trustee, any paying agent, any registrar for the notes or any Placement Agent will have any responsibility or liability for any aspect of DTC's records or any DTC Participant's records relating to or payments made on account of beneficial ownership interests in a Global Note or for maintaining, supervising or reviewing any of DTC's records or any DTC Participant's records relating to such beneficial ownership interests.
The indenture and the notes require that payments in respect of the notes be made in immediately available funds. Interests in the notes are expected to trade in DTC's Same-Day Funds Settlement System, and any permitted secondary market trading activity in the notes will be required to be settled in immediately available funds. We do not know the effect, if any, of such settlement arrangements on trading activity in the notes or interests in the notes.
If (i) DTC notifies us and the trustee that it is unwilling or unable to continue as holder of the Global Notes or if at any time it ceases to be a clearing agency registered under the Exchange Act and, in either case, a successor holder is not appointed by us within 90 days of such notification or of our becoming aware of such ineligibility, (ii) an Event of Default occurs with respect to one or more series of notes, or (iii) we determine in our sole discretion (subject to DTC's procedures) that certificated notes of such series will be issued in registered form, then in any such case, upon the written request of the holder of the Global Note, the trustee will issue certificated registered notes in the names and in the amounts as specified by the holder of the Global Note. The request for certificated notes may be made by the holder in the circumstances and subject to the conditions described under the subsection entitled "Terms and Conditions of the Notes—Form, Transfer, Exchange and Denomination."
The exchange of interests in the Global Note for certificated notes of a particular series shall be made free of any fees of the trustee to the holder, provided, however, that such person receiving notes in certificated form will be obligated to pay or otherwise bear the cost of any tax or other governmental charge as required by the indenture and any cost of insurance, postage, transportation and the like.
If a note becomes repayable at the option of the holder on a date or dates specified prior to its maturity date, if any, and the trustee is so notified, the trustee will promptly notify the holder of the Global Note that such note has become repayable. In order for the repayment option on any note to be exercised, the owners of beneficial interests in the Global Note must instruct the broker or other DTC Participant through which it holds an interest in the Global Note to notify the trustee of its desire to exercise that right to repayment. Different firms have different cut-off times for accepting instructions from their customers and, accordingly, each beneficial owner should consult the broker or other DTC Participant through which it holds its beneficial interest in a Global Note in order to ascertain the cut-off time by which such an instruction must be given in order for timely notice to be delivered to the depositary.
Unless we otherwise instruct the trustee in writing, the record date for the determination of the holder of Global Notes entitled to receive payment in respect of a Global Note will be the date which is 15 calendar days prior to the applicable payment date on such Global Note in respect of such Global Note, provided that interest payable at Maturity will be payable to the person to whom principal shall be payable. If such 15th day is not a Business Day, the record date for determination will be the next succeeding Business Day. Whenever we or the trustee deem it appropriate to fix a record date for the determination of the holder of Global Notes who should be entitled to receive payment or take any action in respect of Global Notes, the trustee, with our consent, will set such record date at least 15 days prior to the date on which such payment is to be made or such action is to be taken.
The trustee will send promptly to the applicable holders of the Global Notes any notices, reports and other communications from us that are received by the custodian as holder of the Global Notes and that we make generally available to holders of the notes.
Set out below is the form of Final Terms which will be completed for each tranche of Notes issued under the Program.
[Date]
Terms used herein shall be deemed to be defined as such for the purposes of the Terms and Conditions set forth in the Base Prospectus dated [date] [and the supplemental Prospectus dated [date]] which [together] constitute[s] a base prospectus for the purposes of the Prospectus Directive (the Base Prospectus). This document constitutes the Final Terms of the Notes described herein for the purposes of Article 5.4 of the Prospectus Directive and must be read in conjunction with the Base Prospectus. Full information on the Issuer and the offer of the Notes is only available on the basis of the combination of these Final Terms and the Base Prospectus. The Base Prospectus has been published on the website of the London Stock Exchange through a regulatory information service (http://www.londonstockexchange.com/exchange/news/market-news/marketnews-home.html).
[Terms used herein shall be deemed to be defined as such for the purposes of the Terms and Conditions set forth in the Base Prospectus dated [original date] and incorporated by reference into the Base Prospectus dated [date]. This document constitutes the Final Terms of the Notes described herein for the purposes of Article 5.4 of the Prospectus Directive and must be read in conjunction with the Base Prospectus, dated [date] [and the supplemental Prospectus dated [date]] which [together] constitute[s] a base prospectus for the purposes of the Prospectus Directive (the Base Prospectus), including the Terms and Conditions incorporated by reference in the Base Prospectus. Full information on the Issuer and the offer of the Notes is only available on the basis of the combination of these Final Terms and the Base Prospectus. The Base Prospectus has been published on the website of the London Stock Exchange through a regulatory information service (http://www.londonstockexchange.com/exchange/news/market-news/market-news-home.html).]
| 1. | Senior/Subordinated: | [ ] | ||||
|---|---|---|---|---|---|---|
| 2. | Interest Basis: | [Fixed Rate/Reset/Floating Rate/Zero Coupon/Combination] |
||||
| DESCRIPTION OF THE NOTES | ||||||
| 3. | (a) | Series Number: | [ ] | |||
| (b) | Tranche Number: | [ ] | ||||
| 4. | (a) | Nominal Amount of Notes to be issued: |
[ ] | |||
| (b) | Aggregate nominal amount of Series (if more than one issue for the Series): |
[ ] | ||||
| (c) | Specified Currency: | [ ] | ||||
| (d) | Currency Determination Agent: | [ ] [Not Applicable] | ||||
| (e) | Specified Denomination(s): | [ ] [and integral multiples of [ ] in excess thereof] | ||||
| 5. | Issue Price: | [ ] |
| 6. | Issue Date: | [ ] | |
|---|---|---|---|
| 7. | Original Issue Date: | [ ] | |
| 8. | Interest Commencement Date: | [ ] [Issue Date] [Not Applicable] | |
| 9. | Automatic/optional conversion from one Interest Basis to another: |
[ ] [Not Applicable] | |
| 10. | Additional Business Center(s): | [ ] [Not Applicable] | |
| ANY) PAYABLE | PROVISIONS RELATING TO INTEREST (IF | ||
| Fixed Rate Note Provisions | [Applicable/Not Applicable] | ||
| 11. | (a) | Fixed Rate(s) of Interest: | [ ]% per annum payable in arrear on each Fixed Interest Date |
| (b) | Interest Payment Date(s): | [ ] in each year up to and including the Maturity Date | |
| (c) | Day Count Fraction: | Actual/Actual (ICMA)] [30/360] | |
| (d) | Determination Date(s): | [ ] [Not Applicable] | |
| Zero Coupon Note Provisions | [Applicable/Not Applicable] | ||
| 12. | (a) | Accrual Yield: | [ ] |
| (b) | Reference Price: | [ ] | |
| (c) | Calculation Agent (if any): | [ ] | |
| Floating Rate Note Provisions | [Applicable/Not Applicable] | ||
| 13. | (a) | Calculation Agent responsible for calculating the Interest Rate and Interest Amount (if not the Agent): |
[ ] |
| (b) | Interest Period(s) or specified Interest Payment Date(s): |
[ ] | |
| (c) | Business Day Convention: | [Floating Rate/Following Business Day/Modified Following Business Day/Preceding Business Day] |
|
| (d) | First Interest Payment Date: | [ ] | |
| (e) | Calculation Date: | [ ] | |
| (f) | Interest Rate Basis/Bases: | [CD Rate/CMT Rate/Commercial Paper Rate/Eleventh District Cost of Funds Rate/EURIBOR/Federal Funds Rate/LIBOR/Prime Rate/Treasury Rate] |
|
| (g) | Designated CMT Reuters Page: | [Not Applicable] [Reuters 7051 Page/Reuters Page T7052] |
|
| (h) | Designated EURIBOR Page: | [Not Applicable] [EURIBOR 01/[ ]] | |
| (i) | Designated LIBOR Currency: | [Not Applicable] [USD/[ ]] | |
| (j) | Designated LIBOR Page: | [Not Applicable] [LIBOR 01/[ ]] | |
| (k) | Initial Interest Rate: | [ ] | |
| (l) | Initial Interest Reset Date: | [ ] | |
| (m) | Interest Reset Period: | [ ] | |
| (n) | Interest Reset Dates: | [ ] |
| (o) | Index Maturity: | [Not Applicable] [ ] | |
|---|---|---|---|
| (p) | Designated CMT Maturity Index: | [Not Applicable] [ ] | |
| (q) | Margin(s): | [plus/minus] [ ]% per annum | |
| (r) | Minimum Interest Rate (if any): | [ ]% per annum | |
| (s) | Maximum Interest Rate (if any): | [ ]% per annum | |
| (t) | Day Count Fraction: | [[Actual/Actual (ISDA)] [Actual/Actual] [Actual/365 (Fixed)] [Actual/365 (Sterling)] [Actual/360] [30/360] [360/360] [Bond Basis] [30E/360] [Eurobond Basis] [30E/360 (ISDA)]] |
|
| Reset Note Provisions | [Applicable/Not Applicable] | ||
| (a) | Initial Rate of Interest: | [ ] per cent. per annum payable in arrear on each Interest Payment Date] |
|
| (b) | First Margin: | [+/-][ ] per cent. per annum |
|
| (c) | Subsequent Margin: | [[+/-][ ] per cent. per annum] [Not Applicable] |
|
| (d) | Interest Payment Date(s): | [[ ] [and [ ]] in each year up to and including the Maturity Date |
|
| (e) | Fixed Coupon Amount to (but excluding) the First Reset Date: |
[ ] per Calculation Amount |
|
| (f) | Broken Amount(s): | [[ ] per Calculation Amount, payable on the Interest Payment Date falling [in/on] [ ]][Not Applicable] |
|
| (g) | Reset Reference Rate: | [Mid-Swaps/Reference Bond] | |
| (h) | First Reset Date: | [ ] |
|
| (i) | Second Reset Date: | [ ]/[Not Applicable] |
|
| (j) | Subsequent Reset Date(s): | [ ] [and [ ]] [Not Applicable] |
|
| (k) | Relevant Screen Page: | [ ] |
|
| (l) | Mid-Swap Rate: | [Single Mid-Swap Rate/Mean Mid-Swap Rate] | |
| (m) | Mid-Swap Maturity: | [ ] |
|
| (n) | Reference Bond Reset Rate Time: | [ ] |
|
| (o) | Fixed Leg Swap Duration: | [ ] |
|
| (p) | Day Count Fraction: | [30/360] [Actual/Actual (ICMA)] | |
| (q) | Reset Determination Date(s): | [[ ] in each year][Not Applicable] | |
| (r) | Business Centre(s): | [ ] |
| (s) | Calculation Agent: | [ ] |
|
|---|---|---|---|
| PROVISIONS REGARDING REDEMPTION/MATURITY |
|||
| 14. | Maturity Date: | [ ] | |
| 15. | Redemption at Issuer's option: | [Applicable/Not Applicable] | |
| (a) | Initial Redemption Date(s): | [ ] | |
| (b) | Redemption Price of each Note: | [[ ] per Note of [ ] Specified Denomination] | |
| 16. | Repayment at holder's option: | [Applicable/Not Applicable] | |
| (a) | Optional Repayment Date(s): | [ ] | |
| (b) | Repayment price of each note: | [ ] per Note of [ ] Specified Denomination] | |
| 17. | Minimum Denomination for early redemption/repayment: |
[ ] | |
| 18. | Regulatory Event (subordinated notes only): | [Full Exclusion / Full or Partial Exclusion / Not Applicable] |
[[ ] has been extracted from [ ]. The Issuer confirms that such information has been accurately reproduced and that, so far as it is aware and is able to ascertain from information published by [ ], no facts have been omitted which would render the reproduced information inaccurate or misleading.]
Signed on behalf of NATIONWIDE BUILDING SOCIETY
| By: | By: |
|---|---|
| Duly Authorized | Duly Authorized |
Ratings: The [Program/Notes to be issued] [has/have] been rated:
| [Moody's Investors Service Limited: | ||
|---|---|---|
| [Standard & Poor's Credit Market Services Europe Limited: |
[ ]] | |
| [Fitch Ratings Ltd.: | [ ]] | |
| [DBRS: | [ ]] |
[Save for any fees payable to the Placement Agent(s), so far as the Issuer is aware, no person involved in the issue of the notes has an interest material to the offer. The [Manager(s)/Dealer(s)] and their affiliates have engaged, and may in the future engage, in investment banking and/or commercial banking transactions with, and may perform other services for, the Issuer and its affiliates in the ordinary course of business.]
4. YIELD (Fixed Rate Notes only)
Indication of yield: [ ] 5. OPERATIONAL INFORMATION (a) CUSIP: [ ] (b) ISIN Code: [ ] (c) Common Code: [ ] (d) Any clearing system(s) other than The Depository Trust Company and the relevant identification number(s): [ ][Not Applicable]] (e) Names and addresses of additional Paying Agent(s) (if any): [ ]
The following summary describes certain U.S. federal income tax consequences of the purchase, ownership and disposition of notes. Except where noted, this discussion deals only with holders that acquire the notes at their original issuance and that will hold the notes as capital assets and does not deal with investors subject to special tax rules, such as dealers in securities or currencies, financial institutions, regulated investment companies, real estate investment trusts, tax-exempt entities, insurance companies, persons holding notes as a part of a hedging, integrated, conversion or constructive sale transaction or a straddle, partnerships or passthrough entities for U.S. federal income tax purposes, traders in securities that elect to use mark-to-market method of accounting for their securities holdings, persons that have ceased to be U.S. citizens or lawful permanent residents of the United States, or U.S. Holders (as defined below) of notes whose "functional currency" is not the U.S. dollar. The discussion below is based upon the provisions of the U.S. Internal Revenue Code of 1986, as amended (the "Code"), its legislative history, final, temporary and proposed Treasury regulations promulgated thereunder, published rulings and judicial decisions as of the date hereof, all of which are subject to change possibly with retroactive effect or possible differing interpretations so as to result in U.S. federal income tax consequences different from those discussed below. This summary assumes that there will be no substitution of another entity in the place of the Issuer as principal debtor in respect of the notes.
The discussion set forth below only covers notes issued pursuant to the medium-term note program that will constitute debt for U.S. federal income tax purposes. If any note did not constitute debt for U.S. federal income tax purposes, the tax consequences of the ownership of such note could differ materially from the tax consequences described herein. This summary does not address the U.S. federal income tax consequences of every type of note which may be issued under the program, such as notes with an original maturity of more than 30 years or with certain contingent payment features, and additional or modified disclosure concerning certain U.S. federal income tax consequences relevant to such types of notes will be provided as appropriate. Moreover, this summary does not address U.S. federal estate, gift, or alternative minimum tax considerations, the Medicare tax on net investment income or non-U.S., state or local tax considerations.
As used herein, a "U.S. Holder" of a note means a beneficial owner that is, for U.S. federal income tax purposes, (i) a citizen or individual resident alien of the United States, (ii) a corporation created or organized in or under the laws of the United States or any political subdivision thereof (including the District of Columbia), (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source, or (iv) a trust (X) that is subject to the supervision of a court within the United States and one or more United States persons (as defined in the Code) have the authority to control all substantial decisions of the trust or (Y) that has a valid election in effect under applicable U.S. Treasury regulations to be treated as a United States person. A "Non-U.S. Holder" is a beneficial owner of notes that is not a U.S. Holder.
If an entity treated as a partnership for U.S. federal income tax purposes holds notes, the tax treatment of a partner in such entity will generally depend upon the status of the partner and the activities of the partnership. An entity treated as a partnership for U.S. federal income tax purposes considering holding notes should consult its tax advisors concerning the U.S. federal income tax consequences to it and its partners of the acquisition, ownership and disposition of the notes by the partnership.
THE SUMMARY OF U.S. FEDERAL INCOME TAX CONSEQUENCES SET OUT BELOW IS FOR GENERAL INFORMATION ONLY AND DOES NOT ADDRESS EVERY TYPE OF NOTE THAT CAN BE ISSUED UNDER THE PROGRAM. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF OWNING THE NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF U.S. FEDERAL, STATE, LOCAL, NON-U.S. AND OTHER TAX LAWS AND POSSIBLE CHANGES IN TAX LAW.
Except as set forth below, interest (including the payment of any additional amounts) on a note, other than interest on an "Original Issue Discount Note" that is not "qualified stated interest" (each as defined below), generally will be taxable to a U.S. Holder as ordinary income at the time it is paid or accrued in accordance with the U.S. Holder's method of tax accounting, reduced by the allocable amount of amortisable bond premium, if any. Interest income (including original issue discount ("OID"), if any, as discussed below) on the notes will generally be treated as foreign source income. Prospective purchasers should consult their tax advisers concerning the applicability of the foreign tax credit to the notes.
U.S. Holders of notes issued with OID will be subject to special tax accounting rules, as described in greater detail below. U.S. Holders of such notes should be aware that they generally must include OID in gross income as ordinary income in advance of the receipt of cash attributable to that income. However, U.S. Holders of such notes generally will not be required to include separately in income cash payments received on the notes, even if denominated as interest, to the extent such payments do not constitute "qualified stated interest" (as defined below). Notes issued with OID will be referred to as "Original Issue Discount Notes."
Additional rules applicable to Original Issue Discount Notes that are denominated in or determined by reference to a currency other than the U.S. dollar are described under "—Foreign Currency Notes" below.
For U.S. federal income tax purposes, a note, other than a note with a term of one year or less (a "Short-Term Note") with an "issue price" (as defined below) that is less than its stated redemption price at maturity (the sum of all payments to be made on the note other than payments of qualified stated interest) will be issued with OID unless such difference is de minimis (i.e., less than 0.25 percent of the stated redemption price at maturity multiplied by the number of complete years to maturity or, in the case of an note that provides for the payment of amounts other than qualified stated interest before maturity, the weighted average maturity). A note's weighted average maturity is the sum of the following amounts determined for each payment on a note (other than a payment of "qualified stated interest"): (i) the number of complete years from the issue date until the payment is made multiplied by (ii) a fraction, the numerator of which is the amount of the payment and the denominator of which is the note's stated redemption price at maturity. The "issue price" of each note in a particular offering will be the first price at which a substantial amount of that particular offering is sold to persons other than bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents, or wholesalers. The term "qualified stated interest" means stated interest that is unconditionally payable over the entire term of the note in cash or in property (other than debt instruments of the Issuer) at least annually at a single fixed rate or, subject to certain conditions, based on one or more interest indices. Interest is payable at a single fixed rate only if the rate appropriately takes into account the length of the interval between payments.
In the case of a note issued with de minimis OID, the U.S. Holder generally must include such de minimis OID in income at the time principal payments on the note are made in proportion to the amount paid for the note. Any amount of de minimis OID that has been included in income will be treated as capital gain.
Certain notes may be redeemed prior to their maturity at the option of the Issuer and/or at the option of the holder. Original Issue Discount Notes containing such features may be subject to rules that differ from the general rules discussed herein. In the case of notes that provide for alternative payment schedules, OID is calculated by assuming that (i) the holder will exercise or not exercise options in a manner that maximizes the holder's yield and (ii) the Issuer will exercise or not exercise options in a manner that minimizes the holder's yield.
U.S. Holders of Original Issue Discount Notes with a maturity upon issuance of more than one year must, in general, include OID in income in advance of the receipt of some or all of the related cash payments. The amount of OID includible in income by the initial U.S. Holder of an Original Issue Discount Note is the sum of the "daily portions" of OID with respect to the Original Issue Discount Note for each day during the taxable year or portion of the taxable year in which such U.S. Holder held such Original Issue Discount Note ("accrued OID"). The daily portion is determined by allocating to each day in any "accrual period" a pro rata portion of the OID allocable to that accrual period. The "accrual period" for an Original Issue Discount Note may be of any length and may vary in length over the term of the Original Issue Discount Note, provided that each accrual period is no longer than one year and each scheduled payment of principal or interest occurs on either the first day or the final day of an accrual period. The amount of OID allocable to any accrual period is an amount equal to the excess, if any, of (a) the product of the Original Issue Discount Note's "adjusted issue price" at the beginning of such accrual period and its yield to maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period) over (b) the sum of any qualified stated interest allocable to the accrual period. OID allocable to a final accrual period is the difference between the amount payable at maturity (other than a payment of qualified stated interest) and the adjusted issue price at the beginning of the final accrual period. Special rules will apply for calculating OID for an initial short accrual period. The "adjusted issue price" of an Original Issue Discount Note at the beginning of any accrual period is equal to its issue price increased by the amount of accrued OID for each prior accrual period (determined without regard to the amortization of any acquisition or bond premium, as described below) and reduced by any payments made on such note (other than qualified stated interest) on or before the first day of the accrual period. Under these rules, a U.S. Holder will generally have to include in income increasingly greater amounts of OID in successive accrual periods.
In the case of an Original Issue Discount Note that is treated as a "variable rate debt instrument" under U.S. Treasury regulations (a "Floating Rate Note"), both the "yield to maturity" and "qualified stated interest" generally will be determined solely for purposes of calculating the accrual of OID as though the Floating Rate Note will bear interest in all periods at a fixed rate generally equal to the value of the rate that would be applicable to interest payments on the note on its date of issue or, in the case of certain Floating Rate Notes, the rate that reflects the yield to maturity that is reasonably expected for the note. Additional rules may apply if interest on a Floating Rate Note is based on more than one interest index or if the principal amount of the Floating Rate Note is indexed in any manner. Different rules may apply if a Floating Rate Note is treated as a "contingent payment debt instrument" under U.S. Treasury regulations.
Certain notes may be treated as contingent payment debt instruments for U.S. federal income tax purposes. Under applicable U.S. Treasury regulations, interest on contingent payment debt instruments is treated as OID and must be accrued on a constant-yield basis based on a yield to maturity that reflects the rate at which the Issuer would issue a comparable fixed-rate instrument with no contingent payments but with terms and conditions otherwise similar to the contingent payment debt instruments (the "comparable yield"), based on a projected payment schedule determined by the Issuer (the "projected payment schedule"). This projected payment schedule must include each non-contingent payment on the note and an estimated amount for each contingent payment, and must produce the comparable yield.
The Issuer will be required to provide to holders, solely for U.S. federal income tax purposes, a schedule of the projected amounts of payments on such notes that are treated as contingent payment debt instruments for U.S. federal income tax purposes. The applicable Final Terms will either contain the comparable yield and projected payment schedule, or will provide an address to which a U.S. Holder of a contingent payment debt instrument can submit a written request for this information. A U.S. Holder generally will be bound by the comparable yield and the projected payment schedule determined by the Issuer unless the U.S. Holder determines its own comparable yield and projected payment schedule and explicitly and timely justifies and discloses such schedule to the U.S. Internal Revenue Service ("IRS"). The Issuer's determination, however, is not binding on the IRS, and it is possible that the IRS could conclude that some other comparable yield or projected payment schedule should be used instead.
THE COMPARABLE YIELD AND PROJECTED PAYMENT SCHEDULE WILL NOT BE DETERMINED FOR ANY PURPOSE OTHER THAN FOR THE DETERMINATION OF INTEREST ACCRUALS AND ADJUSTMENTS THEREOF IN RESPECT OF CONTINGENT NOTES FOR UNITED STATES FEDERAL INCOME TAX PURPOSES AND WILL NOT CONSTITUTE A PROJECTION OR REPRESENTATION REGARDING THE ACTUAL AMOUNTS PAYABLE TO THE HOLDERS OF THE NOTES.
Gain from the sale or other disposition of a contingent payment debt instrument will be treated as interest income taxable at ordinary income (rather than capital gains) rates. Any loss will be ordinary loss to the extent that the U.S. Holder's total interest inclusions to the date of sale or retirement exceed the total net negative adjustments that the U.S. Holder took into account as ordinary loss, and any further loss will be capital loss. Gain or loss realized by a U.S. Holder on the sale, exchange or retirement of a note that is treated as a contingent payment debt instrument generally will be treated as foreign source gain or loss. Prospective purchasers should consult their tax advisers as to the U.S. federal income tax consequences of purchasing contingent payment debt instruments.
U.S. Holders may elect to treat all interest on any note as OID and calculate the amount includible in gross income under the constant yield method described above with certain modifications. For the purposes of this election, interest includes stated interest, OID, de minimis OID, market discount, de minimis market discount and unstated interest, as adjusted by any amortizable bond premium or acquisition premium. The election is to be made for the taxable year in which the U.S. Holder acquired the note, and may not be revoked without the consent of the IRS.
Certain of the notes: (i) may be redeemable at the option of the Issuer prior to their maturity, (ii) may be repayable at the option of the holder prior to their stated maturity, or (iii) may be otherwise subject to mandatory redemption. Notes containing such features may be subject to rules that are different from the general rules discussed above, which will depend, in part, on the particular terms and features of such notes.
In general, an individual or other cash basis U.S. Holder of a Short-Term Note is not required to accrue OID (calculated as set forth below for the purposes of this paragraph) for U.S. federal income tax purposes unless it elects to do so (but may be required to include any stated interest in income as the interest is received). Accrual basis U.S. Holders and certain other U.S. Holders are required to accrue OID on Short-Term Notes on a straight-line basis or, if the U.S. Holder so elects, under the constant-yield method (based on daily compounding). In the case of a U.S. Holder not required and not electing to include OID in income currently, any gain realized on the sale, exchange or retirement of the Short-Term Note will be ordinary income to the extent of the OID accrued on a straight-line basis (unless an election is made to accrue the OID under the constant-yield method) through the date of sale or other disposition. U.S. Holders who are not required and do not elect to accrue OID on Short-Term Notes will be required to defer deductions for interest on borrowings allocable to Short-Term Notes in an amount not exceeding the deferred income until the deferred income is realized.
For purposes of determining the amount of OID subject to these rules, all interest payments on a Short-Term Note are included in the Short-Term Note's stated redemption price at maturity. A U.S. Holder may elect to determine OID on a Short-Term Note as if the Short-Term Note had been originally issued to the U.S. Holder at the U.S. Holder's purchase price for the Short-Term Note. This election shall apply to all obligations with a maturity of one year or less acquired by the U.S. Holder on or after the first day of the first taxable year to which the election applies, and may not be revoked without the consent of the IRS.
If a U.S. Holder purchases a note (other than a Short-Term Note) for an amount that is less than its stated redemption price at maturity or, in the case of an Original Issue Discount Note, its revised issue price, the amount of the difference will be treated as "market discount" for U.S. federal income tax purposes, unless such difference is less than a specified de minimis amount. Under the market discount rules, a U.S. Holder will be required to treat any principal payment on, or any gain on the sale, exchange, or retirement of, a note as ordinary income to the extent of the market discount which has not previously been included in income and is treated as having accrued on such note at the time of such payment or disposition. In addition, the U.S. Holder generally will be required to defer, until the maturity of the note or its earlier disposition in a taxable transaction, the deduction of all or a portion of the interest expense on any indebtedness incurred or continued to purchase or carry such note. Such interest is deductible when paid or incurred to the extent of income from the Note for the year. If the interest expense exceeds such income, such excess is currently deductible only to the extent that such excess exceeds the portion of the market discount allocable to the days during the taxable year on which such Note was held by the U.S. Holder.
Any market discount will be considered to accrue ratably during the period from the date of acquisition to the maturity date of the note on a straight-line basis, unless the U.S. Holder elects to accrue on a constant yield method. This election to accrue market discount on a constant yield method is to be made for the taxable year in which the U.S. Holder acquired the note, applies only to that note, and may not be revoked without the consent of the IRS. A U.S. Holder may elect to include market discount in income currently as it accrues (on either a ratable or constant-yield method), in which case the rule described above regarding deferral of interest deductions will not apply. This election to include market discount in income currently, once made, applies to all market discount obligations acquired on or after the first day of the first taxable year to which the election applies and may not be revoked without the consent of the IRS.
A U.S. Holder that purchases an Original Issue Discount Note for an amount that is greater than its adjusted issue price but equal to or less than the sum of all amounts payable on the note after the purchase date other than payments of qualified stated interest will be considered to have purchased such note at an "acquisition premium." Under the acquisition premium rules, if the U.S. Holder does not make the election to treat all interest as OID (as described above) then the amount of OID which such U.S. Holder must include in its gross income with respect to such note for any taxable year will be reduced by the portion of such acquisition premium properly allocable to such year.
A U.S. Holder that purchases a note (including an Original Issue Discount Note), for an amount in excess of the sum of all amounts payable on the note after the purchase date other than qualified stated interest will be considered to have purchased the note at a "bond premium." A U.S. Holder generally may elect to amortize bond premium over the remaining term of the note on a constant yield method as an offset to interest when includible in income under the U.S. Holder's regular accounting method. In the case of instruments that provide for alternative payment schedules, bond premium is calculated by assuming that (i) the holder will exercise or not exercise options in a manner that maximizes the holder's yield and (ii) the Issuer will exercise or not exercise options in a manner that minimizes the holder's yield. Bond premium on a note held by a U.S. Holder that does not make such an election will decrease the gain or increase the loss otherwise recognized on disposition of the note. The election to amortize premium on a constant yield method once made applies to all debt obligations held or subsequently acquired by the electing U.S. Holder on or after the first day of the first taxable year to which the election applies and may not be revoked without the consent of the IRS.
Upon the sale, exchange, retirement or other disposition of a note, a U.S. Holder generally will recognize gain or loss equal to the difference between the amount realized upon the sale, exchange, retirement or other disposition (less an amount equal to any accrued but unpaid qualified stated interest, which will be treated as a payment of interest for U.S. federal income tax purposes) and the adjusted tax basis of the note. A U.S. Holder's adjusted tax basis in a note will, in general, be the U.S. Holder's cost therefor, increased by the amount of any OID, market discount or any income attributable to de minimis OID or de minimis market discount previously included in income by the U.S. Holder and reduced by any amortizable bond premium applied to reduce interest on the note and any payments on the note other than qualified stated interest. Except as with respect to certain Short-Term Notes or market discount as described above, with respect to gain or loss attributable to changes in exchange rates, with respect to certain Foreign Currency Notes as described below, and with respect to contingent payment debt instruments as described above, such gain or loss will be capital gain or loss. Except with respect to notes that are treated as contingent payment debt-instruments as described above, gain or loss realized by a U.S. Holder on the sale, exchange or retirement of a note generally will be treated as U.S. source gain or loss. Capital gains of individuals derived from capital assets held for more than one year may be eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations.
The following is a summary of the principal U.S. federal income tax consequences to a U.S. Holder of the ownership of a note denominated in a currency other than the U.S. dollar (a "Foreign Currency Note").
Cash basis U.S. Holders are required to include in income the U.S. dollar value of the amount of interest received, based on the "spot rate" for such foreign currency in effect on the date of receipt, regardless of whether the payment is in fact converted into U.S. dollars. No exchange gain or loss is recognized with respect to the receipt of such payment.
Accrual basis U.S. Holders may determine the amount of income recognized with respect to such interest payment in accordance with either of two methods. Under the first method, the U.S. Holder will be required to include in income for each taxable year the U.S. dollar value of the interest that has accrued during such year, determined by translating such interest at the average rate of exchange for the period or periods during which such interest accrued (or, in the case of an accrual period that spans two taxable years of a U.S. Holder, the part within each taxable year). Under the second method, an accrual basis holder may elect to translate interest income at the spot rate on the last day of the accrual period (or last day of the taxable year in the case of a portion of an accrual period that straddles the holder's taxable year) or on the date the interest payment is received if such date is within five days of the end of the accrual period. Any such election will apply to all debt instruments held by the U.S. Holder at the beginning of the first taxable year to which the election applies or thereafter acquired by such holder and will be irrevocable without the consent of the IRS. Upon receipt of an interest payment on such Foreign Currency Note (including, upon the sale of such Foreign Currency Note, the receipt of proceeds that include amounts attributable to accrued interest previously included in income), the accrual basis U.S. Holder will recognize U.S. source ordinary income or loss in an amount equal to the difference between the U.S. dollar value of such payment (determined by translating any foreign currency received at the spot rate for such foreign currency on the date received) and the U.S. dollar value of the interest income that such U.S. Holder has previously included in income with respect to such payment.
OID on a Foreign Currency Note will be determined for any accrual period in the applicable foreign currency and then translated into U.S. dollars in the same manner as interest income accrued by a holder on the accrual basis, as described above. Additionally, a U.S. Holder will recognize exchange gain or loss (which will be treated as ordinary income or loss) when the OID is paid (including, upon the sale of such Foreign Currency Note, the receipt of proceeds that include amounts attributable to OID previously included in income) to the extent of the difference between the U.S. dollar value of such payment (determined by translating any foreign currency received at the spot rate for such foreign currency on the date of payment) and the U.S. dollar value of the accrued OID (determined in the same manner as for accrued interest). For these purposes, all receipts on a Foreign Currency Note will be viewed: first, as the receipt of any stated interest payments called for under the terms of the Foreign Currency Note; second, as receipts of previously accrued OID (to the extent thereof), with payments considered made for the earliest accrual periods first; and third, as the receipt of principal.
The amount of market discount on Foreign Currency Notes includible in income will generally be determined by translating the market discount determined in the foreign currency into U.S. dollars at the spot rate on the date the Foreign Currency Note is retired or otherwise disposed of. If the U.S. Holder has elected to accrue market discount currently, then the amount which accrues is determined in the foreign currency and then translated into U.S. dollars on the basis of the average exchange rate in effect during such accrual period (or portion thereof within the U.S. Holder's taxable year), and the U.S. Holder will recognize exchange gain or loss with respect to market discount determined using the approach applicable to the accrual of interest income described above.
Bond premium on a Foreign Currency Note will be computed in the applicable foreign currency. With respect to a U.S. Holder that elects to amortize the premium, the amortizable bond premium will reduce interest income in the applicable foreign currency. At the time bond premium is amortized, exchange gain or loss (which is generally taxable as ordinary income or loss) will be realized based on the difference between spot rates at such time and at the time of acquisition of the Foreign Currency Note. A U.S. Holder that does not elect to amortize bond premium will translate the bond premium, computed in the applicable foreign currency, into U.S. dollars at the spot rate on the maturity date and such bond premium will constitute a capital loss which may be offset or eliminated by exchange gain.
Upon the sale, exchange or retirement of a Foreign Currency Note, a U.S. Holder generally will recognize gain or loss equal to the difference between the amount realized upon the sale, exchange, retirement or other disposition (less an amount equal to any accrued and unpaid interest, which will be treated as a payment of interest for U.S. federal income tax purposes) and the U.S. Holder's adjusted tax basis in the Foreign Currency Note.
If a U.S. Holder receives foreign currency on the sale, exchange or retirement of a Foreign Currency Note, then the amount realized generally will be based on the spot rate of the foreign currency on the date of sale, exchange or retirement. For purchases and sales of Foreign Currency Notes traded on an established securities market as defined in applicable Treasury regulations by a cash method taxpayer, however, foreign currency paid or received is translated into U.S. dollars at the spot rate on the settlement date of the purchase or sale. An accrual method taxpayer may elect the same treatment with respect to the purchase and sale of Foreign Currency Notes traded on an established securities market, provided that the election is applied consistently from year to year. This election cannot be changed without the consent of the IRS.
A U.S. Holder's adjusted tax basis in a Foreign Currency Note generally will be the U.S. Holder's cost therefore, which, in the case of a U.S. Holder that purchases a Foreign Currency Note with foreign currency, will be the U.S. dollar value of the foreign currency amount paid for such Foreign Currency Note determined at the time of such purchase. If the Foreign Currency Notes are traded on an established securities market, as defined in applicable Treasury regulations, cash method taxpayers (and electing accrual method taxpayers) will determine the U.S. dollar cost of the Foreign Currency Note on the settlement date. A U.S. Holder that purchases a Foreign Currency Note with previously owned foreign currency will recognize U.S. source exchange gain or loss at the time of purchase attributable to the difference at the time of purchase, if any, between the U.S. Holder's tax basis in such foreign currency and the fair market value of the Foreign Currency Note in U.S. dollars on the date of purchase. Such gain or loss will be treated as ordinary income or loss.
Gain or loss recognized by a U.S. Holder on the sale, exchange, retirement or other disposition of a Foreign Currency Note will generally be treated as U.S. source gain or loss. Subject to the foreign currency rules discussed below, such gain or loss will be capital gain or loss and will be long-term capital gain or loss if at the time of sale, exchange, retirement or other disposition, the Foreign Currency Note has been held for more than one year. Capital gains of individuals derived with respect to capital assets held for more than one year are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations.
A U.S. Holder will recognize exchange gain or loss attributable to the movement in exchange rates between the time of purchase and the time of disposition (including the sale, exchange, retirement or other disposition) of a Foreign Currency Note. Such gain or loss will be treated as ordinary income or loss (and will not be taxable as interest income or expense, except to the extent provided in U.S. Treasury regulations or administrative pronouncements of the IRS) and generally will be U.S. source gain or loss. The realization of such gain or loss will be limited to the amount of overall gain or loss realized on the disposition of a Foreign Currency Note.
A U.S. Holder's tax basis in foreign currency received as interest on (or OID with respect to), or received on the sale, exchange, retirement or other disposition of, a Foreign Currency Note will be the U.S. dollar value thereof at the spot rate at the time the holder received such foreign currency. As discussed above, if the Foreign Currency Notes are traded on an established securities market, a cash basis U.S. Holder (or, upon election, an accrual basis U.S. Holder) will determine the U.S. dollar value of the foreign currency by translating the foreign currency received at the spot rate of exchange on the settlement date of the sale, exchange or retirement. Accordingly, no foreign currency gain or loss will result from currency fluctuations between the trade date and settlement date of a sale, exchange or retirement. Any gain or loss recognized by a U.S. Holder on a sale, exchange, retirement or other disposition of foreign currency will be ordinary gain or loss and generally will be U.S. source gain or loss.
Non-U.S. Holders generally should not be subject to U.S. federal income or withholding tax on any payments on the notes and gain from the sale, redemption or other disposition of the notes unless: (i) that payment and/or gain is effectively connected with the conduct by that Non-U.S. Holder of a trade or business in the U.S.; (ii) in the case of any gain realized on the sale or exchange of a note by an individual Non-U.S. Holder, that holder is present in the U.S. for 183 days or more in the taxable year of the sale, exchange or retirement and certain other conditions are met; or (iii) the Non-U.S, Holder is subject to tax pursuant to provisions of the Code applicable to certain persons that have ceased to be U.S. citizens or lawful permanent residents of the United States.
Non-U.S. Holders should consult their own tax advisors regarding the U.S. federal income and other tax consequences of owning notes.
In general, payments of principal, interest and accrued OID on, and the proceeds of a sale, redemption or other disposition of, the notes, payable to a U.S. Holder by a U.S. paying agent or other U.S. intermediary will be reported to the IRS and to the U.S. Holder as may be required under applicable regulations. Backup withholding will apply to these payments, including payments of OID, if the U.S. Holder fails to provide an accurate taxpayer identification number or certification of exempt status or otherwise fails to comply with the applicable backup withholding requirements. Certain U.S. Holders are not subject to backup withholding. Non-U.S. Holders may be required to comply with applicable certification procedures to establish that they are not U.S. Holders in order to avoid the application of such information reporting requirements and backup withholding tax.
Treasury regulations requiring the reporting of certain tax shelter transactions ("Reportable Transactions") could be interpreted to cover and require reporting of transactions that are generally not regarded as tax shelters, including certain foreign currency transactions. Under these regulations, certain transactions may be characterized as Reportable Transactions based upon any of several indicia, including, in certain circumstances, a sale, exchange, retirement or other taxable disposition of a Foreign Currency Note or foreign currency received in respect of a Foreign Currency Note to the extent that such sale, exchange, retirement or other taxable disposition results in a tax loss in excess of a threshold amount. Persons considering the purchase of Foreign Currency Notes should consult with their tax advisers to determine the tax return obligations, if any, with respect to an investment in such notes, including any requirement to file IRS Form 8886 (Reportable Transaction Disclosure Statement).
Certain U.S. Holders that own "specified foreign financial assets" that meet certain U.S. dollar value thresholds generally are required to file an information report with respect to such assets with their tax returns. The notes generally will constitute specified foreign financial assets subject to these reporting requirements unless the notes are held in an account at certain financial institutions. U.S. Holders are urged to consult their tax advisors regarding the application of these disclosure requirements to their ownership of the notes.
Sections 1471 through 1474 of the Code ("FATCA") impose a new reporting regime and potentially a 30% withholding tax with respect to certain payments to (i) any non-U.S. financial institution (a "foreign financial institution," or "FFI" (as defined by FATCA)) that does not become a "Participating FFI" by entering into an agreement with the IRS to provide the IRS with certain information in respect of its account holders and investors or is not otherwise exempt from or in deemed compliance with FATCA and (ii) any investor (unless otherwise exempt from FATCA) that does not provide information sufficient to determine whether the investor is a U.S. person or should otherwise be treated as holding a "United States account" of the Issuer (a "Recalcitrant Holder"). The Issuer is classified as an FFI.
The new withholding regime is now in effect for payments from sources within the United States and will apply payments of gross proceeds (including principal repayments) from the disposition of property that can produce U.S. source interest or dividends beginning January 1, 2019 and to "foreign passthru payments" (a term not yet defined) no earlier than January 1, 2019. This withholding would potentially apply to payments in respect of (i) any notes characterized as debt (or which are not otherwise characterized as equity and have a fixed term) for U.S. federal tax purposes that are issued or materially modified after the "grandfathering date," which is the date that is six months after the date on which final U.S. Treasury regulations defining the term foreign passthru payment are filed with the Federal Register and (ii) any notes characterized as equity or which do not have a fixed term for U.S. federal tax purposes, whenever issued. If notes are issued on or before the grandfathering date, and additional Notes of the same series are issued after that date, the additional notes may not be treated as grandfathered, which may have negative consequences for the existing notes if the additional notes are not otherwise distinguishable from the original notes, including a negative impact on market price.
The United States and a number of other jurisdictions have entered into, or have agreed in substance to, intergovernmental agreements to facilitate the implementation of FATCA (each, an "IGA"). Pursuant to FATCA and the "Model 1" and "Model 2" IGAs released by the United States, an FFI in an IGA signatory country should be treated as a "Reporting FI" not subject to withholding under FATCA on any payments it receives if it reports certain information in respect of its account holders and investors to its home government or the IRS, as applicable. Further, it is expected that an FFI in an IGA jurisdiction generally would not be required to withhold under FATCA or an IGA (or any law implementing an IGA) (any such withholding being "FATCA Withholding") from payments it makes. The United States and the United Kingdom have entered into an agreement (the "U.S.-UK IGA") based largely on the Model 1 IGA.
If the Issuer is treated as a Reporting FI pursuant to the U.S.-UK IGA it does not anticipate that it will be obliged to deduct any FATCA Withholding from payments it makes. There can be no assurance, however, that the Issuer will be treated as a Reporting FI, or that in the future it would not be required to deduct FATCA Withholding from payments it makes. Accordingly, the issuer and any financial institutions through which payments on the notes are made may be required to deduct FATCA Withholding if (i) any FFI through or to which payment on such notes is made is not a Participating FFI, a Reporting FI, or otherwise exempt from or in deemed compliance with FATCA or (ii) an investor is a Recalcitrant Holder.
While the notes are in global form and held within DTC, it is expected that FATCA will not affect the amount of any payments made under, or in respect of, the notes by the Issuer, any paying agent and DTC, given that each of the entities in the payment chain between the Issuer and the participants in DTC is a major financial institution whose business is dependent on compliance with FATCA and that any alternative approach introduced under an IGA will be unlikely to affect the notes. The documentation expressly contemplates the possibility that the notes may go into definitive form and therefore that they may be taken out of DTC. If this were to happen, a non-FATCA-compliant holder could be subject to FATCA Withholding. However, definitive notes will only be printed in remote circumstances.
FATCA is particularly complex and its application is uncertain at this time. The above description is based in part on regulations, official guidance and model IGAs, all of which are subject to change or may be implemented in a materially different form.
The following is a summary of Nationwide's understanding of current United Kingdom ("UK") law and HM Revenue and Customs ("HMRC") published practice relating to the UK withholding taxation treatment as at the date of this Base Prospectus in relation to payments of principal and interest in respect of the notes issued by Nationwide and does not deal with other UK tax aspects of acquiring, holding or disposing of the notes. This summary relates only to the position of persons who are absolute beneficial owners of the notes. Prospective holders should be aware that the particular terms of issue of any series of the notes as specified in the relevant Final Terms may affect the tax treatment of that and other series of notes. This summary is a general guide and does not purport to be a complete analysis of all tax considerations relating to the notes, and you should treat it with appropriate caution.
You should seek independent professional advice should you have any doubt as to your tax position. If you may be liable to taxation in jurisdictions other than the UK in respect of your acquisition, ownership, holding and disposition of notes, you are particularly advised to consult your professional advisers as to whether you are so liable (and if so under the laws of which jurisdictions), since the following comments relate only to certain UK taxation aspects of payments in respect of the notes. In particular, you should be aware that you may be liable to taxation under the laws of other jurisdictions in relation to payments in respect of the notes, even if such payments may be made without withholding or deduction for or on account of taxation under the laws of the UK.
The references to "interest" in this UK Taxation summary mean "interest" as understood in UK tax law. The statements in this summary do not take any account of any different definitions of "interest" or "principal" which may prevail under any other law or which may be created by the terms and conditions of the notes or any related documentation. This description of the UK withholding tax position assumes that there will be no substitution of the Issuer of the notes pursuant to the terms and conditions of the notes and does not consider the tax consequences of any such substitution.
Payments of interest on Subordinated Notes may be made without withholding or deduction on account of United Kingdom income tax provided that (i) the notes are capable of being listed on a recognised stock exchange within the meaning of section 1005 of the Income Tax Act 2007, and (ii) pursuant to the Taxation of Regulatory Capital Securities Regulations 2013 (the "RCS Regulations") such notes qualify, or have qualified, as Tier 2 instruments under Article 63 of the CRR and such notes form, or formed, a component of Tier 2 capital for the purposes of the CRR and provided further that there are not arrangements the main purpose, or one of the main purposes, of which is to obtain a tax advantage for any person as a result of the application of the RCS Regulations in respect of such notes ("Regulatory Capital Securities").
Notes which are not Regulatory Capital Securities and are issued by Nationwide which carry a right to interest will constitute "quoted Eurobonds" provided they are and continue to be listed on a recognised stock exchange within the meaning of section 1005 of the Income Tax Act 2007. The London Stock Exchange is a recognised stock exchange for those purposes. Securities will be treated as listed on the London Stock Exchange if they are included in the Official List (within the meaning of and in accordance with the provisions of Part 6 of the Financial Services and Markets Act 2000) and admitted to trading on the London Stock Exchange. Provided that the notes are and continue to be quoted Eurobonds, payments of interest on the notes may be made without withholding or deduction for or on account of UK income tax.
If the notes do not qualify as Regulatory Capital Securities, as described in "—Subordinated Notes which are Regulatory Capital Securities" or quoted Eurobonds, as described in "—Notes which are listed on a Recognised Stock Exchange", interest on the notes that has a UK source will generally (subject to certain other exemptions which may be available in certain circumstances) be paid under deduction of UK income tax at the rate of (currently) 20%, subject to such relief as may be available under the provisions of any applicable double taxation treaty.
Where notes are to be, or may fall to be, redeemed at a premium, as opposed to being issued at a discount for tax purposes, then any such element of premium may constitute a payment of interest. Payments of interest are subject to UK withholding tax as outlined above.
In addition to the above, in relation to UK withholding tax, where interest has been paid under deduction of UK income tax, holders of notes who are not resident in the United Kingdom may be able to recover all or part of the tax deducted if there is an appropriate provision in any applicable double taxation treaty.
On February 14, 2013, the European Commission published a proposal (the "Commission's Proposal") for a Directive for a common financial transactions tax ("FTT") in Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia (the "Participating Member States").
The Commission's Proposal has very broad scope and could, if introduced, apply to certain dealings in notes (including secondary market transactions) in certain circumstances. The issuance and subscription of notes should, however, be exempt.
Under the Commission's Proposal, the FTT could apply in certain circumstances to persons both within and outside of the Participating Member States. Generally, it would apply to certain dealings in notes where at least one party is a financial institution, and at least one party is established in a Participating Member State. A financial institution may be, or be deemed to be, "established" in a Participating Member State in a broad range of circumstances, including (a) by transacting with a person established in a Participating Member State or (b) where the financial instrument which is subject to the dealings is issued in a Participating Member State.
However, the FTT proposal remains subject to negotiation between the Participating Member States. It may therefore be altered prior to any implementation, the timing of which remains unclear. Additional EU member states may decide to participate and participating Member States may decide to withdraw their participation. Prospective holders of notes are advised to seek their own professional advice in relation to the FTT.
We have not registered the notes under the Securities Act or any other applicable securities laws, and they may not be offered or sold except pursuant to an effective registration statement or in accordance with an applicable exemption from the registration requirements of the Securities Act. Accordingly, the notes are being offered and sold only:
Each purchaser of notes (other than a Placement Agent in connection with the initial issuance and sale of notes) and each owner of any beneficial interest therein, will be deemed, by its acceptance or purchase thereof, to have represented and agreed as follows:
(8) It acknowledges that prior to any proposed transfer of notes (other than pursuant to an effective registration statement) the holder of such notes may be required to provide certifications relating to the manner of such transfer as provided in the indenture;
(9) It acknowledges that the trustee for the notes will not be required to accept for registration transfer of any notes acquired by it, except upon presentation of evidence satisfactory to Nationwide and such trustee that the restrictions set forth herein have been complied with; and
A legend to the following effect will appear on the face of notes, other than International Global Notes, and which will be used to notify transferees of the foregoing restrictions on transfer. Additional copies of this notice may be obtained from the trustee.
"THE SECURITIES EVIDENCED HEREBY (THE "NOTES") HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "U.S. SECURITIES ACT"), OR ANY OTHER SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. THE HOLDER HEREOF, BY PURCHASING THE NOTES, (1) REPRESENTS THAT IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE U.S. SECURITIES ACT ("RULE 144A")), (2) AGREES ON ITS OWN BEHALF AND ON BEHALF OF ANY INVESTOR ACCOUNT FOR WHICH IT HAS PURCHASED NOTES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH IS ONE YEAR (OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144 UNDER THE U.S. SECURITIES ACT ("RULE 144") OR ANY SUCCESSOR PROVISION THEREUNDER) AFTER THE LATER OF THE ORIGINAL ISSUE DATE OF THE NOTES (OR OF ANY PREDECESSOR THEREOF) OR THE LAST DAY ON WHICH THE NATIONWIDE BUILDING SOCIETY (THE "ISSUER") OR ANY AFFILIATE OF THE ISSUER WERE THE OWNERS OF THE NOTES (OR ANY PREDECESSOR THEREOF) AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAW (THE "RESALE RESTRICTION TERMINATION DATE"), OFFER, SELL, PLEDGE OR OTHERWISE TRANSFER THE NOTES EXCEPT (I) TO THE ISSUER OR ONE OR MORE PLACEMENT AGENTS FOR THE NOTES (EACH, A "PLACEMENT AGENT" AND COLLECTIVELY, THE "PLACEMENT AGENTS") OR BY, THROUGH OR IN A TRANSACTION APPROVED BY A PLACEMENT AGENT, (II) SO LONG AS THE NOTES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A) IN ACCORDANCE WITH RULE 144A, (III) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR 904 OF REGULATION S UNDER THE U.S. SECURITIES ACT, (IV) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE U.S. SECURITIES ACT PROVIDED BY RULE 144 (IF AVAILABLE), (V) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE U.S. SECURITIES ACT OR (VI) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE U.S. SECURITIES ACT, AND IN EACH OF SUCH CASES IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION. THE HOLDER OF THE NOTES, BY PURCHASING THE NOTES, REPRESENTS AND AGREES FOR THE BENEFIT OF THE ISSUER THAT IT WILL NOTIFY ANY PURCHASER OF THE NOTES FROM IT OF THE RESALE RESTRICTIONS REFERRED TO ABOVE. THE ISSUER SHALL HAVE THE RIGHT PRIOR TO ANY OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (VI) ABOVE, TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION SATISFACTORY TO THE ISSUER. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE U.S. SECURITIES ACT."
"THE FOREGOING LEGEND MAY BE REMOVED FROM THIS NOTE ON SATISFACTION OF THE CONDITIONS SPECIFIED IN THE INDENTURE REFERRED TO HEREIN."
A legend to the following effect will appear on the face of the International Global Notes.
"THE SECURITIES EVIDENCED HEREBY (THE "NOTES") HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE U.S. STATE SECURITIES LAWS AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT."
For further discussion of the requirements (including the presentation of transfer certificates) under the indenture to effect exchanges or transfers of interest in global notes and certificated notes, see the subsection entitled "Terms and Conditions of the Notes—Form, Transfer, Exchange and Denomination."
The notes are being offered on a continuous basis for sale by us to or through Barclays Capital Inc., Deutsche Bank Securities Inc., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, HSBC Securities (USA) Inc., J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. LLC and UBS Securities LLC together with such other Placement Agent as may be appointed by us with respect to a particular tranche of notes. We refer collectively to these entities as the "Placement Agents." One or more Placement Agents may purchase notes, as principal, from us from time to time for resale to investors and other purchasers at varying prices relating to prevailing market prices at the time of resale as determined by any Placement Agent, or, if so specified in the applicable Final Terms, for resale at a fixed offering price. If we and a Placement Agent agree, a Placement Agent may also utilize its reasonable efforts on an agency basis to solicit offers to purchase the notes. Any Placement Agents of the notes that are not U.S. registered broker-dealers will agree that they will offer and sell the notes within the United States only through U.S. registered broker-dealers. Unless otherwise described in the applicable Final Terms, we will pay a commission to a Placement Agent depending upon its stated maturity for notes sold through such Placement Agent as agent. Commissions with respect to notes with stated maturities in excess of 30 years that are sold through a Placement Agent as an agent of ours will be negotiated between us and that Placement Agent at the time of such sale.
Unless otherwise specified in the applicable Final Terms, any note sold to one or more Placement Agents as principal will be purchased by such Placement Agents at a price equal to 100% of the principal amount thereof less a percentage of the principal amount equal to the commission applicable to an agency sale of a note of identical maturity. A Placement Agent may sell notes it has purchased from us as principal to certain dealers less a concession equal to all or any portion of the discount received in connection with such purchase. The Placement Agent may allow, and such dealers may reallow, a discount to certain other dealers. After the initial offering of notes, the offering price (in the case of notes to be resold at a fixed offering price), the concession and the reallowance may be changed.
We may withdraw, cancel or modify the offering contemplated hereby without notice and may reject offers to purchase notes in whole or in part. Each Placement Agent shall have the right to reject in whole or in part any offer to purchase notes received by it on an agency basis.
In connection with an offering of notes purchased by one or more Placement Agents as principal on a fixed offering price basis, such Placement Agent(s) will be permitted to engage in transactions that stabilize the price of notes. These transactions may consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of notes. If the Placement Agent creates or the Placement Agents create, as the case may be, a short position in notes, that is, if it sells or they sell notes in an aggregate principal amount exceeding that set forth in the applicable Final Terms, such Placement Agent(s) may reduce that short position by purchasing notes in the open market. In general, purchase of notes for the purpose of stabilization or to reduce a short position could cause the price of notes to be higher than it might be in the absence of such purchases.
Neither we nor any of the Placement Agents makes any representation or prediction as to the direction or magnitude of any effect that the transactions described in the immediately preceding paragraph may have on the price of notes. In addition, neither we nor the Placement Agents makes any representation that the Placement Agents will engage in any such transactions or that such transactions, once commenced, will not be discontinued without notice.
We have agreed to indemnify the Placement Agents against some liabilities (including liabilities under the Securities Act) or to contribute to payments the Placement Agents may be required to make in respect thereof. We have also agreed to reimburse the Placement Agents for some other expenses.
The Placement Agents may from time to time purchase and sell notes in the secondary market, but they are not obligated to do so and may discontinue any such activities at any time and there can be no assurance that there will be a secondary market for the notes or liquidity in the secondary market if one develops. From time to time, the Placement Agents may make a market in the notes.
The Placement Agents and certain of their affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financial and brokerage activities. Certain of the Placement Agents and/or their affiliates have, directly or indirectly, performed investment and commercial banking or financial advisory services for us, for which they have received customary fees and commissions, and they expect to provide these services to us and our affiliates in the future, for which they also expect to receive customary fees and commissions.
In the ordinary course of their various business activities, the Placement Agents and certain of their affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investment and securities activities may involve securities and/or instruments of the issuer or its affiliates. If the Placement Agents or their affiliates have a lending relationship with us, certain of the Placement Agents or their affiliates may hedge their credit exposure to us consistent with their customary risk management policies. Typically, the placement agents and their affiliates would hedge such exposure by entering into transactions which consist of either the purchase of credit default swaps or the creation of short position in our securities or the securities of our affiliates, including potentially the notes offered hereby. Any such credit default swaps or short positions could adversely affect future trading prices of the notes offered hereby. The Placement Agents and certain of their affiliates may also communicate independent investment recommendations, market colour or trading ideas and/or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long and/or short positions ins such securities and instruments.
Each Placement Agent subscribing for or purchasing notes will be required to represent and agree (i) that it will not offer or sell notes (a) as part of its distribution at any time or (b) otherwise until 40 days after the completion of the distribution, as determined and certified by the relevant Placement Agent or, in the case of an issue of Notes on a syndicated basis, the relevant lead manager, of all notes of the tranche of which such notes are a part (such period, the "Distribution Compliance Period"), within the United States or to, or for the account or benefit of, U.S. persons other than in accordance with Rule 144A and (ii) that it will send to each dealer to which it sells any notes during the Distribution Compliance Period a confirmation or other notice setting forth the restrictions on offers and sales of the notes within the United States or to, or for the account or benefit of, U.S. persons. Terms used in this paragraph have the meanings given to them by Regulation S.
Each Placement Agent subscribing for or purchasing notes agrees and each further placement agent appointed under the medium-term note program described in this Base Prospectus that subscribes for or purchases notes will be required to represent and agree that:
Unless otherwise agreed between the relevant Dealers and Nationwide, you must pay the purchase price of the notes in immediately available funds in the applicable specified currency in New York City three business days after the trade date.
The financial statements as at April 4, 2015, 2014 and 2013, and for the years then ended, incorporated by reference in this Base Prospectus, have been audited by PricewaterhouseCoopers LLP, independent auditors, as stated in their reports incorporated by reference herein.
Certain legal matters will be passed upon for us by Allen & Overy LLP, our United States and English counsel, with respect to matters of New York law, U.S. federal law and English law and for the Placement Agents by Linklaters LLP, London, England with respect to matters of New York law, U.S. federal law and English law.
(g) any Final Terms relating to notes issued under the medium-term note program described in this Base Prospectus.
8. There are no material contracts having been entered into outside the ordinary course of our business, and which could result in any group member being under an obligation or entitlement that is material to our ability to meet our obligation to noteholders in respect of the notes being issued.
Certain financial terminology used by building societies in the United Kingdom differs from that used by financial institutions in the United States. The following is a summary of such differences as they relate to our consolidated financial statements. We have used some of the following U.S. terms and descriptions throughout this Base Prospectus.
| UK Term used in financial statements | U.S. equivalent or brief description | |
|---|---|---|
| Accounts | Financial statements | |
| Allotted | Issued | |
| Amounts written off | Amounts charged off, or written-off | |
| Cash in hand | Cash | |
| Debt securities in issue | Debt | |
| Fees and commissions payable | Fees and commissions expense | |
| Fees and commissions receivable | Fees and commissions income | |
| Freehold | Ownership with absolute rights in perpetuity | |
| General reserve | Retained earnings | |
| Income and Expenditure Account | Income Statement | |
| Interest payable | Interest expense | |
| Interest receivable | Interest income | |
| Life assurance | Life insurance | |
| Loans and advances | Loans or Lendings | |
| Loans fully secured on residential property | Residential mortgage loans | |
| Loans in arrears | Past due loans | |
| Loans in repossession | Acquired property, foreclosed assets or Other Real | |
| Estate Owned ("OREO") | ||
| Loans with interest suspended | Loans in non-accrual status | |
| Permanent interest bearing shares and subscribed capital |
No direct U.S. equivalent | |
| Profit | Income | |
| Provisions for bad and doubtful debts (in the balance | Allowance for loan losses | |
| sheet) | ||
| Provisions for bad and doubtful debts (in the income statement) |
Provisions for loan losses | |
| Revaluation reserve | No direct U.S. equivalent | |
| Shares (UK retail member deposits) | No direct U.S. equivalent | |
| Tangible fixed assets | Property, Plant & Equipment or Fixed Assets |
Nationwide House Pipers Way Swindon SN38 1NW England
Barclays Capital Inc. 745 Seventh Avenue
New York, New York 10019 U.S.A.
U.S.A. U.S.A.
New York, New York 10179 New York, New York 10036
U.S.A. U.S.A.
U.S.A. U.S.A.
J. P. Morgan Securities LLC Merrill Lynch, Pierce, Fenner & Smith Incorporated
383 Madison Avenue One Bryant Park U.S.A. U.S.A.
1585 Broadway, 29th Floor 1285 Avenue of the Americas New York, New York 10036 New York, New York 10019
The Bank of New York Mellon Corporate Finance 101 Barclay Street, 8W New York, New York 10286 U.S.A.
The Bank of New York Mellon 101 Barclay Street New York, New York 10286 U.S.A.
PAYING AGENT PAYING AGENT
254
The Bank of New York Mellon Credit Agricole Indosuez Luxembourg, S.A. One Canada Square 39, Allee Scheffer London E14 5AL L-2520 Luxembourg England Grand Duchy of Luxembourg
One Bishops Square One Silk Street England England
To Nationwide To the Placement Agents as to New York, U.S. federal and English law: as to New York, U.S. federal law and English law:
London E1 6AD London EC2Y 8HQ
PricewaterhouseCoopers LLP
1 Embankment Place London WC2N 6RH England
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