Your Society.
Strong today,
investing for
tomorrow.
Annual Report
& Accounts 2019
Jade, member since 2013
Sienna, member since 2016
Jeanette, member since 2013
1
Annual Report and Accounts 2019
Welcome
to our Annual Report and Accounts 2019
We were founded 135 years ago with the belief that people are stronger together and that we
should be run for the benefit of our members. Today we have over 15 million members.
The strength that comes from that membership means we can meet our members’ needs today,
as well as investing in the future.
Together, we’re building society, nationwide.
Strategic Report
Governance
Business and Risk Report
Financial Statements
Other Information
An overview of how we’ve done
this year, our strategy and how
we measure our performance.
3
What have we done to
build society this year
4 Who we are and what we do
5
7
Chairman’s letter
Chief Executive’s
review including
performance updates
26 Risk overview
27 Financial review
33 Non-financial information
How we are governed, what items
are discussed in our Board and
Committee meetings and how
we pay our directors.
36 Board of directors
41 Executive Committee
43
biographies
Report of the directors
on corporate governance
Report of the directors
on remuneration
94 Directors’ report
81
Key risks that could affect our
business performance and what
we do to manage them.
Introduction
98
98
Top and emerging risks
99 Principal risks and uncertainties
103 Managing risk
106 Credit risk
139 Liquidity and funding risk
150 Solvency risk
154 Market risk
159 Pension risk
160 Business risk
161 Model risk
161 Operational risk
163 Conduct and compliance risk
Our audited financial statements,
related notes and our independent
auditors’ report.
166
175
176
Independent
auditors’ report
Income statements
Statements of
comprehensive income
177 Balance sheets
178
Statements of movements
in members’ interests
and equity
180 Cash flow statements
181 Notes to the financial
statements
Including our annual
business statement.
249 Annual business
statement
252 Underlying profit
252 Forward looking
statements
252 Glossary
253
Index
2
Annual Report and Accounts 2019
Patty, member since 2016
and Ian, member since 2003
Strategic
Report
3
4
5
7
What have we done
to build society this year
Who we are and what we do
Chairman’s letter
Chief Executive’s review
including performance updates
26
27
33
Risk overview
Financial review
Non-financial information
The Strategic Report has been approved by the
Board of directors and signed on its behalf by:
Joe Garner
20 May 2019
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Annual Report and Accounts 2019
What have we done to build society this year?
No.1
for customer satisfaction
amongst our peer group1
1st
UK’s most trusted
financial brand2
15.9 million
members
2018: 15.5 million
£788
million
underlying profit4
2018: £977 million
£833
million
statutory profit
2018: £977 million
77,000
first-time buyers helped
into their own homes
2018: 76,000
£705 million
member financial benefit5
2018: £560 million
Our branch
promise:
every town and city which has a branch today
will still have one until at least May 2021
Nationwide
for Business:
our commitment to launch an everyday
current account for small businesses
Banking Brand
of the Year 2018
More than1 in 5
current account switchers
came to us 3
4.9%
UK leverage ratio
2018: 4.9%
We’re investing an extra
£1.3 billion
over five years in technology bringing
our total strategic investment to £4.1 billion
1 Lead at March 2019: 4.8%, March 2018: 4.6%. © Ipsos MORI 2019, Financial Research Survey (FRS), 12 months ending 31 March 2019 and 12 months ending 31 March 2018, c 60,000 adults surveyed per annum, proportion of extremely/very satisfied customers minus proportion of extremely/very/fairly dissatisfied customers
summed across main current account, mortgage and savings. Peer group defined as providers with main current account market share >4% (Barclays, Halifax, HSBC, Lloyds Bank, NatWest, Santander and TSB).
2 Lead at March 2019: 2.3%, March 2018: 1.4%. Source: Nationwide Brand and Advertising tracker – compiled by Independent Research Agency, based on all consumer responses, 12 months ending March 2019 and 12 months ending March 2018. Financial brands included Nationwide, Barclays, Co-operative Bank, First Direct, Halifax, HSBC,
Lloyds Bank, NatWest, TSB and Santander.
3 Pay.UK monthly CASS data. 12 months to March 2019: 21.5%, 12 months to March 2018: 18.9%.
4 2018 comparative has been restated to reflect a change in the components of underlying profit. See page 27 for more information.
5 See page 28 for more information about member financial benefit.
4
Annual Report and Accounts 2019
Who we are and what we do
Our building society was founded 135 years ago
to help people save and buy homes of their own.
We were driven by our social purpose, and our
focus on building society is as important to us
today as it was then.
We’re here to help our members achieve their financial goals, whether that’s:
• owning a home – this year, we helped one in five first-time buyers
into a home of their own
• saving for the future – we look after £1 in every £10 saved in the UK,
or
• looking after their day-to-day finances – almost 10% of all current accounts
in the UK, and 8% of main current accounts are with us1.
We do many of the things that banks do, but we’re owned by, and run for, our
members: people who have their mortgages, savings or current accounts with us.
And we measure our success through the things that matter to them: service,
value and financial strength.
We need to be profitable to make sure that our Society and our members’ money
are safe and secure, but – as a building society – we don’t need to pursue profits to
pay ever higher dividends or put shareholders’ needs above those of our members.
We consider whether every business decision is the right thing to do from the
perspective of our current and future members, which means we make different
decisions from our competitors:
• we choose to forgo some of our profit to give members better
long-term rates and service
• we have a prudent approach to lending
• we’re investing in our branches, as well as in improving members’
digital experiences, and
• we’ve committed to give 1% of each year’s pre-tax profits to charitable activities.
We’re helping to build society, nationwide.
1 Source: CACI (February 2019) and internal calculations. ‘Main current accounts’ includes main standard and packaged accounts.
Member-owned
We’re owned by our members
and run for their benefit.
Our members’ interests shape
everything we do, and we want them
to feel part of something special.
A safe home for our
members’ money
We provide our members with a
secure home for their money as well
as everyday banking services.
Around two-thirds of our funding
comes from our members trusting
us with their money.
Building society
Our decisions are guided by what is
important to our members.
We invest to make sure our service is
amongst the best in the UK; we support
local communities; and we try to
make a difference on issues that
our members care about.
Helping our members
into a home
We lend money to members so they
can buy their own homes.
As a building society, at least 75%
of our lending is secured on
residential property.
We think about
profits differently
We manage the difference between
the interest rates we charge and the
rates we pay to balance the need to be
profitable with giving our members good
long-term value.
Last year, we generated £705m in financial
benefit for our members through better pricing
than the market average.
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5
Annual Report and Accounts 2019
A
letter
from David Roberts
Your Society’s Chairman
Dear fellow member,
As a member of our building society you are also
an owner, so this report is for you – to find out how
we’ve done in the last year, and how the Board and
management are leading the Society on your behalf.
From my perspective as your Chairman, I see
a Society that is thriving. We’re attracting
record numbers of members and doing more
for them. Our service continues to be better
than that of our peer group1.
And the strength of our finances means we can invest for the future,
whilst maintaining strong capital reserves – the amount we set aside
to protect ourselves and our members against unexpected events.
This makes our Society a point of stability in an uncertain world, where
people appear to be more divided along political, social and economic
lines than in generations. These divisions have been brought into sharp
focus by Brexit.
While we cannot remove political uncertainties, we’ve worked hard to
make sure our Society will be able to support members whatever the
future brings. Our strong capital position and cautious approach to risk
mean we can continue to deliver for our members – as we have through
many turbulent times in our 135-year history – supporting more members
to buy homes, save for the future and manage their finances.
Today we are also facing transformational changes in technology and
financial services. The way we communicate, organise ourselves, work
and play has changed hugely in the last decade. New competitors are
emerging, and consumers have more choice than ever before over when,
where and how they manage their money, and who they trust with it.
While our Society is highly successful today, if we are to remain relevant,
valued and competitive, we need to reassess how we serve our members.
This is why last year we undertook a review of the Society’s plans and
capabilities in light of these trends.
Our strong capital position
and cautious approach to risk
mean we can continue to
deliver for our members
As a result, we have chosen to increase significantly the amount we are
investing in technology, taking our planned five-year strategic investment
1 © Ipsos MORI 2019, Financial Research Survey (FRS), 12 months ending 31 March 2019, c.60,000 adults surveyed per annum, proportion of extremely/very satisfied customers minus proportion of extremely/very/fairly dissatisfied customers summed across main current account, mortgage and savings.
Peer group defined as providers with main current account market share >4% (Barclays, Halifax, HSBC, Lloyds Bank, NatWest, Santander and TSB).
6
Annual Report and Accounts 2019
Chairman’s letter (continued)
to over £4 billion. The additional investment will allow us to develop new
digital and branch technologies to serve the changing needs of our
members, however they choose to interact with us, and to remain safe
and secure.
This investment has reduced our profits in the short term, but they remain
sufficiently strong. This was a deliberate decision we were able to make
as a building society, where profitability is only one measure of success –
alongside excellent service, long-term value, and financial strength.
The Society must be fit for the future and so must the Board. We evaluate
the Board’s capabilities and performance annually, and in 2018 this took
the form of an externally facilitated review. This found the Board to be
operating effectively, with a strong focus on the interests of our members.
The review identified some areas for us to prioritise, including preserving
our culture and mutual values in a time of great change, and spending
more time on strategic issues, as well as overseeing operational
performance.
Our Society is financially
strong and growing,
and we look to the future
with confidence
My fellow board members contribute a huge amount of expertise to the
Society. We review regularly the balance of the Board’s skills, capabilities
and independence. During the year we welcomed Albert Hitchcock, who
brings a wealth of experience in technology transformation, to the Board.
He has joined the Board’s IT & Resilience and Risk committees and will
strengthen the Board’s oversight of the Society’s technology strategy.
After eight years Mitchel Lenson will retire from the Board at our AGM
in July 2019 and I would like to thank Mitchel on behalf of the Board for
his valuable contribution over that time. On the management side, Tony
Prestedge became Deputy Chief Executive Officer and we welcomed
Patrick Eltridge to the Executive Committee as Chief Operating Officer.
Our Chief Financial Officer, Mark Rennison, has discussed with the
Board his intention to retire and the Board is actively considering
succession planning.
There is more information about these changes in the Corporate
governance report on page 43.
Another important part of the Board’s work is to ensure we pay our
colleagues fairly. We don’t reward anyone for maximising profits.
We pay the vast majority of our people at or above the market average
and consciously pay our most senior executives less than most of our
competitors, balancing this decision with the need to attract the right
people to lead the Society now, and in the future. I’d encourage you to
read more about this in our Remuneration report on page 81.
Our Board benefits hugely from hearing the views of members and
colleagues. We have a valuable dialogue with members through live
TalkBack events and through our online forum, Member Connect.
Colleagues are given lots of opportunities to hear from and, as importantly,
have open conversations with the CEO and his leadership team. For
example, our ‘People’s Choice’ leaders, who are chosen by their colleagues,
represent the employee voice and share insights at Board meetings twice
a year. We have also given non-executive director Mai Fyfield responsibility
for ensuring the views of our employees are heard by the Board. Member
and colleague views have a real impact on what we do: one example
among many is that member feedback prompted us to develop a business
banking proposition for small businesses.
I’ve talked a lot about change, so I’d like to close by assuring you that some
things will remain the same. Our values and aspirations are constant,
allowing us all to thrive together, through thick and thin. In these uncertain
times, what our Society stands for has become more important, not less:
bringing people together; delivering for members; doing the right thing;
supporting our communities.
Our Society is financially strong and growing, and we look to the future
with confidence. There is no other member-owned financial business in
the UK that can match our scale and reach, and we feel a real sense of
responsibility to provide a service-and values-driven alternative to the
big banks.
We have the strength, experience and values, as well as the steadfast
support of our members and colleagues, to continue to succeed.
Thank you all for your support for our Society.
David Roberts
Chairman
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Annual Report and Accounts 2019
A
review
from Joe Garner
Your Society’s Chief Executive
Dear fellow member,
Nationwide is a building society, which means
we are owned by you, our members. We have
a deep and true member focus: we are here
to serve your needs today and tomorrow.
We are committed to delivering great service, long-term
value and a financially secure Society, run in the best interests
of our members.
We have led our peer group on service for seven
years running1. We are now also comparing our
service against the best in the UK, not just in
financial services, tracking our place in the
all-sector UK Customer Satisfaction Index. We have
achieved our long-term goal of breaking into the
top five, being ranked joint fifth in 2019, up from
joint seventh in 20182. A key part of our service
proposition is our branch network which is why we
are investing in our branches and have pledged to
keep a branch in every town or city we are in today
until at least 2021.
Building legendary service – see page 18
Being member-owned means we can balance
giving value to members, investing in our Society
and maintaining our financial strength.
This year members benefited from £705 million
(2018: £560 million) through better rates, fees
and incentives compared with the market average.
We kept our commitment to offer competitive
mortgages and rewarded our loyal savers with
special rates. Our leading service1 and long-term
value products have, I believe, helped us to
another year of record membership as more
people chose Nationwide for their mortgages,
savings and current accounts.
Building thriving membership – see page 14
Financially, we are strong. Our key measure of
financial strength, our UK leverage ratio, is above
our target at 4.9% (2018: 4.9%). We continue
to manage our risks very carefully in an uncertain
environment.
Our Society is in good health today. However, we
must also look to the future and ensure we are
best able to serve the needs of our members in a
world where technology is changing how people
manage their money. That’s why we announced in
September an investment of an extra £1.3 billion in
technology, taking our total strategic investment,
including investment in our branches, to £4.1 billion
over five years. Our investment will make us more
efficient, innovative and responsive, and help us
address our members’ needs today and in the
future. In addition, we have committed to launch
a business current account for small firms.
As a building society, we were able to increase our
investment in technology to meet the long-term
needs of our members, even though this reduces
profit in the short term. Our underlying profit is in
line with expectations, reducing to £788 million
(2018: £977 million) after recognising a charge
from technology asset write-offs and additional
technology investment made during the year.
Built to last – see page 16
Our success is thanks to the hard work and
commitment of our people, and I would like to
thank them for their care and support for our
members. I would also like to thank you, our loyal
and growing membership, for your continued
support for Nationwide.
Despite the economic uncertainties in the UK
today, people still want to buy homes, save and
manage their money, and we remain determined
to support and serve our membership better
every day.
Joe Garner
Chief Executive Officer
1 © Ipsos MORI 2019, Financial Research Survey (FRS), lead held over seven-year period covering 12 months ending 31 March 2013 to 12 months ending 31 March 2019, c.60,000 adults surveyed per annum, proportion of extremely/very satisfied customers minus proportion of extremely/very/fairly
dissatisfied customers summed across main current account, mortgage and savings. Peer group defined as providers with main current account market share >4% (Barclays, Halifax, HSBC, Lloyds Bank, NatWest, Santander and TSB). Prior to April 2017, peer group defined as providers with main
current account market share >6% (Barclays, Halifax, HSBC, Lloyds Bank (Lloyds TSB prior to 2015), NatWest and Santander).
2 Institute for Customer Service’s UK Customer Satisfaction Index, January 2019 and January 2018.
8
Annual Report and Accounts 2019
Chief Executive’s review (continued)
Your questions answered
We regularly hear from members at our live TalkBack
events and through our online forum, Member Connect.
Here are some of the questions our members ask us.
Q
A
Q
A
Why are you launching a business
current account? Christopher, Andover, Hampshire
We estimate that up to a million members own a small business and our proposition will meet
the straightforward needs of businesses, offering a fair value current account with market
leading service. We have long believed we could bring a mutual alternative of scale to small
firms, offering everyday great service and value. However, in the past, the costs of setting up
were high and, at the time, we didn’t believe this was the optimal use of members’ money.
Now technology is making it more economical to enter the market, and we have also secured
£50 million from the Capability and Innovation Fund to boost competition in business
banking, which will allow us to develop our business banking proposition faster.
How far can you guarantee that you won’t close
any branches? Jill, Waltham Cross, Hertfordshire
While we can’t guarantee to keep every branch open, we’ve pledged to keep a branch in
every town or city that has one today until at least May 2021. We are also adapting them
to meet members’ changing needs.
Members make it very clear that branches are an important part of what we offer – they
value the ability to have conversations about important financial decisions with people they
know, and that comes through very clearly at Member TalkBacks and through our online
member forum, Member Connect. We will continue to listen to members and adapt to their
changing needs.
Q
A
Q
A
Q
A
Why aren’t your savings rates higher?
Brian, Chelmsford, Essex
We’ve kept our average deposit rate more than 50% higher than the market average, meaning
we’ve provided members with £515 million in extra interest. We can do this because we are
member-owned and focused on their interests. However, in an environment where
mortgage rates are low there are limits on how much we can pay to our savings members.
But we always try our hardest to give great value to our membership as a whole.
What are you spending over £4 billion of the
Society’s funds on? Sharon, Market Harborough, Leicestershire
Technology is having a profound effect on every aspect of our lives, including how we
manage our money. A significant part of our £4.1 billion five-year strategic investment will
allow us to develop IT systems and infrastructure to enable us to address members’ changing
needs. We are also investing in our branches. We strongly believe these are investments that
will benefit our members over the long-term, both in terms of being able to access new
services and exciting digital technologies, and in maintaining a resilient and secure Society.
How are you protecting your members’ money
from fraud? Mark, Kings Lynn, Norfolk
Members need to be able to rely on us to keep their money safe. We constantly strengthen our
fraud defences and invest in new technology. We recognise the impact fraud has on customers
and are committed to raising awareness of scams, as well as working closely with regulators,
law enforcement agencies and other providers to combat customer fraud. Our colleagues in
our branches play an important role in educating members on the risks of fraud and providing
help when needed. We also place prominent warnings on our mobile app and internet bank to
encourage members to ‘Stop and Think’ before making a new payment.
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9
Annual Report and Accounts 2019
Chief Executive’s review (continued)
How we’re building society, nationwide
Our purpose, building society,
nationwide, describes our aspiration to
make a positive contribution to society
by delivering the benefits of mutuality
to more members, both present
and future. It is underpinned by five
strategic cornerstones that describe
what we’ll do and how we’ll do it.
Building a
National
Treasure
Building
PRIDE
Building
Legendary
Service
Building
Thriving
Membership
Built to
Last
Building thriving
membership
Built
to last
is about helping more members
make more of their money
is about keeping our Society
and our members’ money safe
because...
the more members we help, whether it’s to
buy a home of their own, save for the future
or manage their everyday finances, the bigger
difference we can make.
To achieve this, we will...
develop our core and ‘just for members’
products and enter new markets where we can
make a mutual difference for more people.
Which will mean...
more than 4 million members will be using
at least two of our products by 2022.
Our priorities next year are to...
develop our range of later life mortgage
products and an everyday current account
for small businesses.
because...
our members need to know that their money,
and personal data, are safe and secure and
that they can access their money wherever
and whenever they need it.
To achieve this, we will...
use our members’ money wisely, and
strike a balance between retaining profits,
rewarding members and investing in the
future of our Society.
Which will mean...
our capital levels give confidence that we can
withstand future challenges and we are profitable,
resilient and sustainable for the long term.
Our priorities next year are to...
maintain strong capital levels and progress our
technology investment, which will help us to
grow, support and protect future generations
of members (see page 12).
10
Annual Report and Accounts 2019
Chief Executive’s review (continued)
Building
legendary service
Building
PRIDE
Building a
national treasure
is about striving to serve our
members better every day
is about creating the right culture
to do the best for our members
is about supporting communities
and making a difference
because...
our members want the best service, with
both the convenience of digital and the
human touch of face-to-face service.
To achieve this, we will...
transform our service so that things work
seamlessly for our members whether they
are online, in a branch or speaking to us
on the phone.
Which will mean...
we are recognised as one of the best for
customer service, both amongst our peers
and in the UK as a whole.
Our priorities next year are to...
continue our £350 million branch
transformation and extend and improve our
digital and mobile experiences.
because...
a positive and energising work environment,
where our colleagues are trusted to make
the right decisions at the right time, will in
turn benefit our members.
To achieve this, we will...
create a distinctive experience for our
colleagues that supports their performance
and growth, and recognises their contribution.
Which will mean...
we are recognised as one of the best places
to work in the UK.
Our priorities next year are to...
attract and develop the digital and data
talent we need for the future, grow our
leadership capability, and inspire and enable
our colleagues to keep learning.
because...
we have a social purpose, to build society,
nationwide, and believe that everyone deserves
a place fit to call home.
To achieve this, we will...
make sure our actions are consistent with our
values, take a bolder stand on issues affecting
society, and invest in local communities.
Which will mean...
consumers think of and trust us to meet
their financial needs, and we make a difference
on the things our members care about.
Our priorities next year are to...
continue our five-year social investment
via our Community Boards, our Oakfield
housing project and our Open Banking
for Good challenge (see page 23).
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11
Annual Report and Accounts 2019
Chief Executive’s review (continued)
How we are doing on service, value and strength
Nationwide is not like most organisations and our key performance indicators (KPIs) are not like those used by most organisations.
We track our performance by focusing on the things that matter most to our members: great service, long-term value and financial strength. Our KPIs and targets for 2019/20 are the same as those for 2018/19. We don’t seek to maximise
profits, so profit is not a KPI. Instead, we’ve developed a Financial Performance Framework that helps us strike the right balance between retaining profits to maintain our financial strength, rewarding members now and investing so that we
can continue to meet members’ needs in the future. You can find out more about this on page 32.
Service
Value
Giving our members the best service possible.
Helping more members achieve their financial goals, giving them
better value products and contributing to local communities.
We aim to be the best
for customer satisfaction
in our peer group as
measured by the FRS
survey, with a lead of
at least 4% against our
closest competitor.
Our lead of 4.8%
exceeded our 2019
target1.
Core products satisfaction
lead, %
6.6
6.7
4.6
4.8
4.0
We also want to be among
the top five organisations
across all sectors for
customer service, as
measured by the Institute
of Customer Service’s
UK Satisfaction Index.
We were joint fifth in
January 2019, in line
with our 2019 target2.
UK CSI
rank
5th=
5th
6th
7th=
9th
We’re aiming to have
10 million engaged members
by 2022, with 4 million
committed members who use
at least two of our products3.
We are on track to achieve
our 2022 targets.
We aim to deliver at least
£400 million of value
each year to our members
through better pricing
than the market average4.
We shared £705 million of
benefit with our members
during 2018/19.
We’ve committed to
give at least 1% of
pre-tax profits to
charitable activities5.
We committed £10.6
million to charitable
activities during 2018/19
meaning that we
continued to meet
our 1% commitment.
Engaged and committed members
million
Member financial benefit
£ million
8.3
8.6
8.9
9.2
10
3.0
3.1
3.2
3.4
4
705
560
505
375
At least
400
Charitable activities
£ million
✓
✓
11.2
10.3
✓
10.6
Commitment
met
✓
7.2
Strength
Keeping our members’
money safe and secure.
We aim to have a UK leverage
ratio (a measure of our
financial strength) of at
least 4.5%.
Our UK leverage ratio of 4.9%
exceeded our 2019 target.
UK leverage ratio
%
4.4
4.4
4.9
4.9
4.5
2017
2016
Old peer group
2018
2019
2019
target
2016
2017
2018
2019
2019
target
2016
2017
Engaged
2018 2019 2022
targets
Committed
2016
2017
2018
2019
2019
target
2016
2017
Other activities
2018
2019
Nationwide
Foundation
2016 2017 2018 2019
2019
target
1 © Ipsos MORI 2019, Financial Research Survey (FRS), 12 months ending 31 March 2016 to 12 months ending 31 March 2019, c.60,000 adults interviewed per annum. Proportion of extremely/very satisfied customers minus proportion of extremely/very/fairly dissatisfied customers
summed across main current account, mortgage and savings. Peer group defined as providers with main current account market share >4% (Barclays, Halifax, HSBC, Lloyds Bank, NatWest, Santander and TSB). Prior to April 2017, peer group defined as providers with main current
account market share >6% (Barclays, Halifax, HSBC, Lloyds Bank, NatWest and Santander).
2 Institute of Customer Service’s UK Customer Satisfaction Index as at January in each year.
3 Engaged members have their main personal current account with us, a mortgage with a balance greater than £5,000, or a savings account with a balance greater than £1,000. Committed members have two or more of our products, of which at least one is an engaged membership
product. Prior to 2018/19, the savings threshold was £5,000; prior year comparatives have been restated using the new £1,000 threshold. Figures are as at 31 March each year.
4 For more information on member financial benefit see page 28.
5 The 1% is calculated based on average pre-tax profits over the past three years. ‘Other activities’ includes, amongst other things, internal costs associated with managing our social investment, but excludes employee volunteering.
How we are doing on service, value and strength
Our technology investment
12
Annual Report and Accounts 2019
Chief Executive’s review (continued)
We’re investing an extra £1.3 billion in technology, bringing our total strategic investment over five years to £4.1 billion.
This will help make sure we can keep meeting our members’ needs in the future.
This new investment means we can…
Deliver new features and services to our
members more quickly, especially on our
digital platforms, by using new tools and
techniques, and changing how we work.
Keep Nationwide, our members’ money
and their data safe and secure by using
state of the art security solutions to make sure
we’re protected against potential threats.
Be there when our members need us by
using technologies like cloud computing, and
improving the way our systems are designed
so that our services are always available.
Why is this important?
Our Society is growing, and digital technologies
are changing how our members manage their
money. For example, last year they made almost
50% more contactless payments and over 40%
more logins to our mobile app. Members also
expect our services to be there whenever and
wherever they need them.
The world around us is changing too. New digital
challenger banks are emerging, and we, the
wider industry and regulators are increasingly
focused on making sure that firms’ customer data
is secure and used appropriately.
What will it achieve?
Our technology investment will make us more
resilient and secure, increase our agility to deliver
better digital capabilities and improve our use
of data. It will streamline our technology and
reduce costs, meaning we can use our members’
money more efficiently.
Our technology investment underpins our
strategy, delivering better member outcomes
and helping us to build society, nationwide.
Keep improving our
products and services
incorporating smarter data
analysis into our services
and back office processes.
Give our members
faster service by using
automation to support
our colleagues with
everyday tasks.
Use our members’ money
more efficiently by
streamlining our technology,
which will reduce how
much it costs to deliver our
services to our members.
Make sure our people have
the right technology skills by
developing the skills of our existing
employees and hiring over 1,000
specialists to our new technology
hubs in Swindon and London.
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Annual Report and Accounts 2019
Helping more
members
their money
make more of
Jay’s had her current account and savings with Nationwide for over 20 years.
So, when she came to buy her first home, she turned to us again.
“I’ve been with Nationwide since I was little,
and I’ve worked here for 15 years, so I didn’t
think twice about choosing them for my
mortgage. I took a look at some other providers,
but Nationwide was the one for me.”
As a first-time buyer that was super helpful
as I was a bit clueless at the start of it all!
I also used the calculators to check how much
I could borrow and which rates were best
for me.
Jay also used our MyNationwide app to help
her along the way.
“The app was great – I could ask questions
any time and get the answers I needed.
I’ve always trusted them to look after my money,
so it made perfect sense to trust Nationwide with
my home. And with the money I saved, I bought
my beautiful boxer puppy, Olive.”
“It made perfect sense
to trust Nationwide
with my home.”
14
Annual Report and Accounts 2019
Chief Executive’s review (continued)
Building thriving membership
We are owned by the 15.9 million
members who we’re helping into
a home, to save for the future, or to
manage their everyday finances.
Our membership grew to its highest level in 2018/19 and we
are doing more with our members. Our committed membership
– members who have two or more of our products – grew from
3.2 million to 3.4 million1.
Members trusted Nationwide with more of their savings and this
helped us grow deposits strongly by £6.0 billion (2018: £3.5 billion).
We kept average deposit rates more than 50% above the market
average, and launched attractive new rates on loyalty accounts.
However, in an environment where mortgage rates are low, there
are limits to how much we can pay to our savings members.
Despite economic uncertainties, mortgage volumes remained
strong and our competitive mortgage pricing meant we lent more
to homebuyers and landlords on both a gross and net basis.
We relaunched our home insurance proposition which was well
received by members who took out 97,000 policies, almost 30%
more than in 2018, and helped us become the top-placed insurance
provider in the Institute of Customer Service’s UK Customer
Satisfaction Index2.
More people are choosing Nationwide to manage their everyday
finances; 794,000 new current accounts were opened this year (2018:
816,000) and our market share of main current accounts has reached
8% for the first time3. We hope to replicate this success in the small
business market, with the launch of a business current account.
Membership matters
Managing everyday finances
The number of people choosing Nationwide to look after their daily finances
continues to grow. More people opened a new current account with
Nationwide than any other brand4, with 794,000 (2018: 816,000) accounts
opened this year. This takes our market share of all current accounts to just
below 10%, and our share of main accounts to 8%5.
More than one in five of all switchers via the current account switching
service chose Nationwide6 and we’re making it easier for people to open
accounts with us. For example, you can now open our youth FlexOne
account in 10 minutes and we will extend this swift account opening process
to all our adult accounts from the summer of 2019.
Open for business
We are hoping to replicate our success in personal current accounts in the
small business current account market. We will launch a straightforward
business account, combining a market-leading digital platform with the
personal service our colleagues give every day. We were successful in our
bid for funding from the Banking Competition Remedy Limited’s Capability
and Innovation Fund and will receive £50 million funding, which will
accelerate the launch of new products and services for small businesses.
Customers become members when they choose Nationwide to help them
buy a home, save, or manage their everyday banking, which means that
mortgages, savings and current accounts are the foundation of our
relationships with members. We grew our membership to a new high and
members are doing more with us: the number of ‘committed’ members –
those with two or more products – grew by 5% to 3.4 million.
Helping more members into homes
Overall, we lent more to help people into a home this year. Gross mortgage
lending reached an all-time high of £36.4 billion (2018: £33.0 billion) and
net lending was £8.6 billion (2018: £5.8 billion).
We’re working hard to expand home loan choices for members whether
they are just starting their home journey, are established home owners,
or are empty nesters.
We’ve supported new home buyers since our founding days, and this
remains at the heart of our purpose. Last year, we helped a record 77,000
first time buyers, one in five of all first time buyers, into their own home.
For older members looking to access the value in their properties, our Later
Life Lending range now offers three ways to borrow against their property
in retirement, and we have a team of dedicated advisers to advise members
on the option that suits them best.
We also improved our buy to let range and grew our lending to landlords
through The Mortgage Works.
Saving for the future
Savers continue to be hard pressed by persistently low interest rates, and
we continue to give them the best rates we can sustainably afford.
Overall, our members benefited from an extra £515 million in deposit interest
compared with the market average (2018: £435 million). We launched a
number of new products to reward loyalty and meet new needs. Our members
responded enthusiastically, opening more than 470,000 new Single Access
and Loyalty ISAs. Over 75,000 Future Saver accounts, a straightforward savings
account for children, were also opened in the year.
1 Committed members have at least two of our products, at least one of which is their main personal current account, a mortgage with a balance greater than £5,000, or a savings account with a balance greater than £1,000.
2 Source: Institute of Customer Service’s UK Customer Satisfaction Index, January 2019.
3 Source: CACI (February 2019) and internal calculations. ‘Main accounts’ refers to main standard and packaged accounts.
4 Sources: eBenchmarkers (April 2018 - March 2019), CACI (April 2018 - February 2019) and internal calculations.
5 Source: CACI (February 2019) and internal calculations. ‘Main accounts’ refers to main standard and packaged accounts.
6 Source: Pay.UK monthly CASS data, 12 months to March 2019.
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Annual Report and Accounts 2019
Keeping our Society
and our
members’
money safe
Mr L visited our Woodley branch and asked to transfer £95,000
from his bonds to his current account.
When the branch team routinely asked why he
wanted to move the money, he told them it was
for personal reasons.
Our Branch Manager, Andreas (pictured), thought
something didn’t quite seem right. He took Mr L
into a private room and asked him if everything
was ok.
“Mr L’s one of our regulars and we know him well
here in the branch, so I could tell that he wasn’t his
normal self. I asked if anyone had told him to take
out the money. After a bit of hesitation, he told me
someone claiming to be the police and trading
standards had told him he needed to pay them
£95,000 to repair the foundations of his house.”
The rogue traders had told Mr L if he didn’t pay,
they’d name and shame him in the newspaper.
They’d also warned him not to tell anyone what
he was doing.
“I’m so glad Andreas intervened and was persistent
in trying to help me, as the alternative would have
been too scary. I would have had nothing.
Nationwide is, and always has been, looking after
us. I’m so grateful to Andreas and the team for
being so vigilant.”
“Nationwide is,
and always has
been, looking
after us.”
16
Annual Report and Accounts 2019
Chief Executive’s review (continued)
Built to last
We are committed to running a financially
secure Society, providing a safe home
for our members’ money. As a building
society, we are able to make decisions in
the long-term interests of our members.
Our Financial Performance Framework helps the Society achieve the right balance
between giving value to members, investing in our business and maintaining our
financial strength.
Our capital – the funds that are a cushion against unexpected economic events
– is above our own targets and regulatory requirements. At 4.9% our UK
leverage ratio, a key measure of our financial strength, is also above our target.
Following the announcement in April 2019 of our intention to redeem our
Additional Tier 1 capital instrument in full, our UK leverage ratio will reduce but
will remain above regulatory requirements.
We are managing our risks conservatively, although slowing house price
growth resulted in a slightly higher loan to value ratio on total lending of 58%
(2018: 56%).
We chose to provide extra value to members by competing in a crowded savings
and mortgage market. Our competitive rates, fees and incentives meant
members benefited from £705 million in member financial benefit, well above
our aim of at least £400 million.
We also decided to invest an extra £1.3 billion in technology over five years so
that we can meet members’ changing needs.
Underlying profit was down to £788 million, largely due to the impact of asset
write-offs and our additional investment in technology, in line with expectations.
Statutory profit was £833 million (2018: £977 million). As a building society, we
were able to make these choices knowing it would impact profitability in the short
term. We remain committed to our Financial Performance Framework, and our
current performance is consistent with this framework which enables us to make
conscious decisions to increase our investment at a time when members’ needs are
changing rapidly and technology advancement is offering new opportunities.
We have continued to manage costs and have delivered over £100 million in
sustainable cost savings in each of the last two years.
Financial and operational resilience
We continue to manage our capital ratios in the best interests of our
members, based on economic and market conditions. Our common
equity tier 1 capital ratio reached 32.4% (2018: 30.5%) and our UK
leverage ratio was above our target at 4.9% (2018: 4.9%). Both are
well above regulatory requirements. Our UK leverage ratio will reduce
following redemption of our Additional Tier 1 capital in June 2019, but
will remain above regulatory requirements.
One of our core values is that we spend our members’ money
carefully. We have been working hard to become more efficient and
to achieve sustainable cost savings. Although our business has
grown, we’ve kept costs broadly flat – excluding the impact of
technology asset write-offs and expenditure directly related to our
additional technology investment. We’ve also delivered over £100
million in sustainable savings in each of the past two years and are
on track to achieve our increased target of £500 million in
sustainable cost savings by 2023.
Operational resilience is also a priority for management and the
Board. We are particularly focused on cyber and fraud defences,
which we’ve enhanced to protect our members’ money. For
example, we’ve delivered new measures to detect and prevent
attacks, including improved authentication on more risky online
shopping transactions.
Managing our profits in our members’ interests
As a building society, our decisions are driven by what is in the
long-term interests of our members rather than the need to make
ever-higher profits. We’ve made two such decisions in the last year,
consciously choosing to prioritise our members’ interests over
higher profits.
Firstly, we chose to keep average deposit rates at a level that was
50% higher than the market average. At the same time, we’ve
offered competitive rates for new and existing mortgage members.
As expected, this has continued to put pressure on our margin – the
difference between the rates we pay on deposits and those we
charge on mortgages – and had an impact on profits. We expect
further pressure on margin in 2019/20 and will continue to manage
our rates in the long-term interest of our members and the Society.
The second decision was to invest in the future of our Society. We
have announced plans to invest an additional £1.3 billion in technology
over five years, taking our total strategic investment to £4.1 billion.
Our investment will mean we can develop a new digital platform,
improve our service experience across all channels and deliver greater
cost efficiencies. There’s more about our investment on page 12.
The effects of these decisions can be seen in this year’s underlying
profits, which were lower at £788 million (2018: £977 million).
Statutory profits were £833 million (2018: £977 million). The major
factor in the reduction in profits was a charge related to technology
asset write-offs and our additional technology investment. Further
information on our Financial Performance Framework is included
on page 32.
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Annual Report and Accounts 2019
Striving to serve our
members better
every day
Emma’s sons told her they wanted to look after their own money.
That’s why she took Carl and Jacob into their local branch to open
their very own FlexOne current accounts.
“I chose Nationwide because I wanted an
organisation that I can trust to look after my
sons’ interests. The team were so welcoming
and I knew instantly that I’d made the right
choice. To me, a building society feels safer
and more caring than the big banks, and
that’s what I want for my boys.”
Carl and Jacob had a fab time when they went
into branch and met Luke, one of our Personal
Banking Managers.
“We loved opening our accounts. Luke was
really nice and he told us all about saving our
money. He even told us we own Nationwide and
that we’re his boss!”
Emma’s really pleased that she and her family
have a branch nearby.
“It means we feel like we have a real relationship
with Nationwide. It makes us trust them and
know that we’re part of something. And thank
you so much to Luke for being so amazing.
You made my boys feel like they matter.
That they’re not just a number.”
“You made my boys
feel like they matter.
That they’re not
just a number.”
18
Annual Report and Accounts 2019
Chief Executive’s review (continued)
Building legendary service
We all know what good service
feels like. When we’re in a hurry,
it’s quick and efficient. When we’re
facing a dilemma, it’s unhurried and
personal. Good service is not ‘one-
size-fits-all’ but combines the best
of human and digital interaction to
serve our members well however
they choose to interact with us.
We start from a strong base. For seven years running, we’ve been
no.1 for service among our peer group1. We’ve moved up to joint fifth
in the all-industry UK Customer Satisfaction Index, achieving our
target of being in the top five2. Our current account satisfaction is also
ahead of our peer group, with a lead of over 10%3, and we were
named Which? Banking Brand of the Year for the second year running.
Service expectations continue to grow, and we continue to work hard
to improve our member experience. We are investing £350 million
in transforming our branch network, while pledging that every town
and city with a Nationwide branch will continue to have one until
at least May 2021. Simultaneously, with mobile users up by 33% last
year, we are investing in our digital services, bringing new levels
of speed, convenience and security to our members.
Branches: here today, here tomorrow
Branches are a vital part of our local communities and valued by our
members. We believe that members still want to talk to someone face to
face about big financial decisions, which is why we continue to invest in
our branches. We’ve recently pledged to keep a branch in every town or
city where we have one today for at least two years.
However, it’s also true that how our members use our branches is changing.
That’s why we are evolving the role of branches and transforming our
network with a £350 million investment over five years. We’re introducing
new branch styles. Last year, we converted over 100 branches to an open
plan format combining the latest technology, such as high-definition video
and iPads, with comfortable seating for coffee and conversation, and
private spaces for personal consultations. We also merged a handful of
branches which were near each other and refurbished the remaining branches
to offer better services and technology.
Delivering digitally
Alongside our branches, members want to make the most of the speed
and convenience of digital devices. We now have over 2.7 million members
who are active mobile users – almost a third more than last year – and they
are logging in, on average, nearly every day.
Net satisfaction with our app is over 90%4 but we are not complacent and
we continue to invest in our digital services to give members more control
over their money. New mobile functionality means members can now set
up new payees, report lost or stolen cards, set up standing orders, and change
their passcode on the move.
We’ve redesigned some of our processes to make it faster and easier to take
out a mortgage or open a current account online, and we will be extending
these improvements to more of our services over the next few months.
We’re also exploring how we can use Open Banking rules that apply across
our industry to put members in control of their money. Since last year,
members have been able to share their financial data with Open Banking
approved third-parties. We have also trialled an aggregation service in our
mobile banking app that lets members see their accounts with multiple
providers in one place. We will roll this out to members this year.
We will be able to go further and faster in developing our digital services
over the next few years, thanks to our technology investment, and this will
help the Society meet the changing lifestyles of our members, providing
them with excellent service however they choose to deal with us.
1 © Ipsos MORI 2019, Financial Research Survey (FRS), lead held over seven-year period covering 12 months ending 31 March 2013 to 12 months ending 31 March 2019, c.60,000 adults surveyed per annum, proportion of extremely/very satisfied customers minus proportion of
extremely/very/fairly dissatisfied customers summed across main current account, mortgage and savings. Peer group defined as providers with main current account market share >4% (Barclays, Halifax, HSBC, Lloyds Bank, NatWest, Santander and TSB). Prior to April 2017, peer group
defined as providers with main current account market share >6% (Barclays, Halifax, HSBC, Lloyds Bank (Lloyds TSB prior to 2015), NatWest and Santander).
2 Institute for Customer Service’s UK Customer Satisfaction Index, January 2019.
3 © Ipsos MORI 2019, Financial Research Survey (FRS), 12 months ending 31 March 2019, c.60,000 adults surveyed per annum, proportion of extremely/very satisfied main current account customers minus proportion of extremely/very/fairly dissatisfied main current account customers.
Peer group defined as providers with main current account market share >4% (Barclays, Halifax, HSBC, Lloyds Bank, NatWest, Santander and TSB).
4 Source: Member surveys commissioned by Nationwide, and collated by KPMG Nunwood. 12 months to March 2019. KPMG Nunwood has not independently verified the information provided and accepts no liability for any inaccuracies or omissions.
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Annual Report and Accounts 2019
Creating the
right culture
to do the best for
our members
We have so many people working here at Nationwide.
We’re all from different backgrounds with different perspectives.
And we know that those differences make us
stronger and help us understand our members,
who are also hugely diverse. Some of our people
have been with us for over 40 years, some are
brand new. Some have come from university,
others have joined us from other organisations.
And recently, we’ve had more and more
apprentices coming to work with us.
Elrich is 21. He went to school in Swindon and
as the time came to leave, he decided to look into
an apprenticeship. That’s when he thought of us.
He joined the Society’s apprenticeship scheme
back in 2016.
“Since then, I’ve been promoted to IT Disaster
Recovery Analyst and have been given extra
time to study for my degree in Business
Management. I feel like Nationwide has really
supported me, both in my work and my studies.”
Kate, our Emerging Talent Manager here at
Nationwide, looks after our apprentices.
“We believe that encouraging our employees
to build their careers in the way that’s best for
them means they’re happier at work. And that
means they’ll be doing their best for our
members, too.”
“I feel like Nationwide
has really supported
me, both in my work
and my studies.”
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Annual Report and Accounts 2019
Chief Executive’s review (continued)
Building PRIDE
PRIDE is a statement of the culture,
values and principles we strive to
live by. It’s about how we treat our
members and each other.
We’ve worked hard to create a working environment where people
are valued, teamwork is celebrated, and everyone can grow and
develop their careers.
We have a strong culture and committed colleagues. This is evident
from this year’s employee engagement score, which at 79% (March
2018: 78%)1, continues to be above the high-performing
benchmark1 of 77%.
However, our rapidly changing world demands new skills and
behaviours from our people: we need to be more innovative and able
to work at pace. To help us achieve this, we developed a new people
strategy last year. Our goal is to develop leaders at every level of our
business to inspire and empower our people, and to help them
learn new skills and capabilities. In the coming year, we will also
be actively recruiting up to 1,000 technology specialists to support
our technology investment. We have an approach to reward and
recognition that recognises every colleague’s contribution based
on the Society’s overall performance.
Culture and values underpin our success
Building society, nationwide is our purpose, and achieving that requires all our
people to understand our strategy and live and breathe our values every day.
We know from independent surveys that our ethic of care for members and
each other is strong. The Banking Standards Board culture survey2 showed
that 92% of our people believe we put our customers at the centre of
business decisions, a clear indication that our mutual values are shared
throughout the Society.
However, we face new challenges in a world being redefined by technology,
and we need to evolve our culture to meet these. We want to move from
prescriptive approaches to clear principles and values that genuinely
empower our people and we are focusing on this in our annual employee
awards, by encouraging people to compete in new categories such as ‘have
a go’, ‘growth’, ‘fresh perspectives’ and ‘mutual good’.
Empowering our People
We’ve launched a number of initiatives to support a move towards individuals
feeling more accountable and empowered, notably the Arthur Webb challenge
cup. In its second year we have seen over 700 colleagues join cross-community
teams to work towards producing simple, innovative solutions to improve
our employee and member experience. We are now focusing on challenging
structural barriers to change, such as policies, governance and procedures,
and encouraging colleagues to be more experimental.
Developing leaders at every level
Over 1,000 leaders have now taken part in our flagship Leading for Mutual
Good programmes that we launched last year to develop senior leaders.
In addition, we’ve introduced Developing My Leadership learning modules
that put our managers in control of their skills development. So far, the
modules have a 98.6% recommendation rate from the 1,600 colleagues
who’ve taken part.
We are also identifying ways in which we can provide roles and experiences
that will stretch and broaden our leaders, so we can meet future demands.
Creating a learning organisation
We are expanding our online learning resources so that every colleague can
develop their skills and knowledge. We’ve launched a new development
framework that translates our PRIDE values into demonstrable everyday skills
and behaviours. Over 2,200 colleagues have used this to take part in learning
relevant to them since April 2018. We’ll continue to develop the platform to
support lifelong learning and development of our people.
Investing in the skills to deliver a fully
digital organisation
Our technology investment to upgrade and develop our digital capabilities
means we need to attract technology specialists to Nationwide. We’ve
created a Technology Talent Squad to address this people challenge,
responsible for both helping existing colleagues develop new skills and
recruiting up to 1,000 new specialists – from software engineers to agile
delivery experts – to work in Swindon and London.
Rewarding and recognising people
Fair pay and reward remain an important part of our ethos. This was the
second year of Sharing in Success, our reward scheme that recognises
every colleague’s contribution based on the Society’s overall performance.
Instead of individual bonuses, all our people receive a variable pay award
which in 2019 was 8.7% (2018: 9.5%). The award reflects our success in
achieving things that are important to members – giving you better service
than our peer group, serving more of our members’ needs, and achieving
our cost-saving targets.
We also made a significant change in how we celebrate loyalty and long
service. Following feedback from our people, who told us they valued time
off to spend with friends and family, we have introduced a paid six-week
sabbatical for everyone who works for Nationwide for 25 years.
Putting our members and their money first
Rising to the challenge
Inspiring trust
Doing the right thing in the right way
Excelling at relationships
pride
1
The comparative for Nationwide’s employee engagement score in 2018 has been restated based on updated information. The high-performing benchmark is based on data from more than 35 companies around the world across a range of industries. It covers more than 450,000 employees.
2 This is an annual survey undertaken by the Banking Standards Board covering 26 firms, including 9 systemically important institutions in the UK (of which Nationwide is one) plus a range of other mid-sized and small banks and building societies. It aims to raise standards across the sector.
Over 3,000 colleagues at NBS participated in the last assessment.
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Annual Report and Accounts 2019
Chief Executive’s review (continued)
Building PRIDE (continued)
Promoting diversity and inclusion
Our diversity and inclusion agenda is about creating a working environment
where all our people feel valued, and able to combine their unique talents with
those of other colleagues to make our Society stronger and more successful.
In 2015 we set ourselves challenging diversity targets to be achieved by the
end of 2020. We’re pleased to have met our gender target, for women to fill
between 33-35% of our most senior roles, ahead of schedule; 34.9% of senior
roles are filled by women. We’re also close to achieving our target of 2.6% of
roles at all levels being filled by disabled people (currently 2.5%). However,
despite considerable efforts, achieving our Black, Asian and Minority Ethnic
(BAME) targets has proved much more challenging than we anticipated.
We were aiming for 8-15% of senior roles to be filled by BAME employees
(currently 4.7%). We are creating progressive and sustainable plans to
address this and stretch our ambition in all areas of diversity and inclusion.
Each part of the Society is working to address its own priorities, with tailored
diversity and inclusion action plans. For example, the Finance & Efficiency
community has begun cultural awareness workshops to prevent potential
unconscious bias. Each area of the Society has also appointed a senior
manager to report progress monthly to our new Strategic Diversity and
Inclusion Action Group.
As we are planning on recruiting up to 1,000 people to support our
technology investment, we have also created a distinct people proposition
and assessment process to help attract quality candidates who share our
values. This includes making sure we are attractive to candidates who are
neuro-diverse, such as people on the autism spectrum, widening our
potential talent pool.
Gender pay gap
We published our second gender pay gap report in November 2018, which
showed our mean average gender pay gap as at 5 April 2018 was 28%
(compared with 29% in 2017). This is very much a function of the nature of
our business and our resulting employee profile. Our overall gender pay gap
is therefore driven by having far fewer men in our junior roles which reflects
our long-term success in offering a variety of work patterns which appeal to
individuals at different stages of their career. We are committed to achieving
a more balanced gender distribution and are putting new programmes
in place to help improve opportunities for women at senior levels.
Employee gender split
Employee BAME split
Board
members
(inc NEDs)
Female 36%
Male 64%
Board
members
(inc NEDs)
BAME
7%
Non-BAME 93%
Senior
managers
Female 35%
Male 65%
Senior
managers
BAME
5%
Non-BAME 90%
Undeclared 5%
All
employees
Female 63%
Male 37%
All
employees
BAME
10%
Non-BAME 84%
Undeclared 6%
22
Annual Report and Accounts 2019
Supporting
communities and
making a
difference
The Rock Trust aims to prevent youth homelessness and support young
people to build better futures. Last year, they received a £50,000
Community Grant from Nationwide’s Community Board in Scotland.
Ally is Head of Services at the Rock Trust.
“When young people leave foster care, they face
temporary accommodation and uncertain futures.
Our Housing First project helps them break out of
that cycle by offering them a permanent place to
live, and support to stand on their own two feet.
With Nationwide’s help, we’ve doubled the
number of young people we can support.”
Hannah is 17 and used to be Scotland’s most
reported missing person.
“The Rock Trust stepped in when I most needed it.
I used to run away all the time and I didn’t feel like
I could trust anyone. Now I’ve got a place to call
my own, I’m at college and I don’t drink or do
drugs anymore. I feel like this is my home.
And I know I have help no matter what.”
Adam (pictured) is one of Hannah’s Rock Trust
project workers who supports her day-to-day.
“The biggest change I’ve seen in Hannah is her
confidence. She lives on her own, supports herself
and has made such a positive change to her life.
And Nationwide’s grant is helping us do that for
so many others now, too.”
Nationwide Community Grants have been rolled
out across the whole of the UK.
“With Nationwide’s
help, we’ve doubled
the number of
young people we
can support.”
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Annual Report and Accounts 2019
Chief Executive’s review (continued)
Building a national treasure
Building a national treasure is perhaps
our most ambitious cornerstone. It’s
not about how we see ourselves, but
about how others see us: how well
we are trusted, recognised as a brand,
and seen as a force for good in society.
We’re pleased to be no.1 for trust in our peer group, and joint top
for brand consideration1 – a measure of how many consumers
would consider Nationwide for their financial needs.
As a building society, we are guided by a social rather than a
commercial purpose and aim to make our communities better
places to live and work. Last year, we aligned our social investment
with our goal of helping people into better homes and now direct
most of our community investment into housing initiatives. In the
second year of our social investment strategy, built on the idea that
everyone should have a place fit to call home, we’ve awarded
Community Grants totalling £3.9 million to more than 100
housing-related projects. We’re also working with Swindon Borough
Council to develop a multi-generational community of 239 homes.
Financial capability is also important to us. We are funding a £3 million
Open Banking for Good challenge, to motivate technology firms to
use Open Banking standards to develop apps and services that put
people in control of their money.
No.1 for trust
We’re no.1 for trust in our peer group, with a lead over our nearest
competitor of 2.3% (March 2018: 1.4%), and we’re joint top for brand
consideration. Our trust and brand consideration scores were our highest
year-end scores ever2.
Everyone should have a place fit to call home
Looking out for tenants
Around one fifth of people in the UK live in privately rented homes and we’re
using our expertise and influence to improve the quality of these homes.
In 2017, we established a cross-industry Partnership Board made up of
organisations and charities representing tenants, landlords and agents. This
is now developing a coherent strategy for the sector. It also backed a Private
Member’s Bill to let tenants bring claims against landlords for poor quality
homes and succeeded in widening access to the rogue landlord database.
Unlocking financial capability
There are around 13 million people in the country who are coping financially,
but only just keeping their heads above water. We believe Open Banking
could help transform the lives of these people and launched a £3 million
Open Banking for Good challenge to the financial technology community to
develop apps and other services for them. We received over 50 applications
and have shortlisted seven firms who we are working with closely to
develop solutions in three areas: helping people understand their income
and expenditure; smoothing irregular incomes, for example, in the flexible
‘gig’ economy; and manage their money and debt. Our funding will help
bring the most successful solutions to market.
We continue to take concrete steps to make our communities better places
to live and work3.
In 2007 our members voted to commit at least 1% of pre-tax profit to
charitable activities each year. In 2018/19, we invested £10.6 million in
community projects through the Nationwide Foundation (an independent
charity which we fund), our own social investment strategy and a range
of local initiatives.
Our social investment is aligned with our founding purpose of helping
people into better homes. Since launching our strategy, we’ve established
11 Community Boards covering the whole of the UK, each made up of
Nationwide members, colleagues and local housing experts. Each Community
Board has the power to award housing-related Community Grants, and
local members have the final say over which projects we support.
In the last year, we have made grants totalling £3.9 million to over 100
housing-related charities or projects. Our funding has helped older people
live independently for longer in Scotland, supported homeless young
people in Gloucestershire to rebuild their lives, and has supported young
vulnerable people in Wales through funding for a new helpline.
We have applied for planning permission for our Oakfield development,
which will transform a brownfield site creating the start of a community
of 239 new homes, including affordable housing. Through the support of
a community organiser, local residents have helped shape the plans to foster
neighbourliness through shared gardens, extensive places to meet and
play, and a community hub. We intend to share what we learn to encourage
other responsible businesses to do more as part of our commitment to find
local solutions to the national housing shortage.
We are also working with two housing and homelessness charities. We have
supported Shelter since 2001, part-funding its national helpline, donating
£5 for every new mortgage taken out and supporting its Christmas campaign.
We’re also working with St Mungo’s, to provide our branch colleagues with
the tools and knowledge they need to provide a compassionate response
to rough sleepers locally.
1
Source: Nationwide Brand and Advertising tracker compiled by Independent Research Agency, based on all consumer responses, 12 months ended 31 March 2019. Financial brands included Nationwide, Barclays, Co-operative Bank, First Direct, Halifax, HSBC, Lloyds Bank, NatWest, Santander and TSB.
Joint top for brand consideration with Halifax.
2 Source: Nationwide Brand and Advertising tracker compiled by Independent Research Agency, based on all consumer responses, 12 months ended 31 March in each year since the surveys began in 2012. Financial brands included Nationwide, Barclays, Co-operative Bank, First Direct, Halifax, HSBC,
Lloyds Bank, NatWest, Santander and TSB. Joint top for brand consideration with Halifax.
3 Social investment statements on this page have been assured to ISAE 3000 standard by Corporate Citizenship, an external Corporate Responsibility Consultancy. The assurance statement is available on nationwide.co.uk.
24
Annual Report and Accounts 2019
Chief Executive’s review (continued)
The Nationwide Foundation
The Nationwide Foundation is an independent charity set up by the Society in 1997. Each year, we give 0.25% of Nationwide’s
pre-tax profits to the Foundation – £2.4 million in 2018/19 – as part of the 1% of pre-tax profits we give to good causes.
The Nationwide Foundation’s vision is that everyone in the UK should have access to a decent, affordable home, and it funds
three programmes to help achieve this ambition:
1
2
3
Nurturing ideas to change the housing system
– to protect and create decent affordable homes
The Nationwide Foundation is supporting an organisation in Knowle West, Bristol, to find ways to use
microsites – such as land in large back gardens, between buildings or grassed verges – to build up to
350 new homes for local residents. The Foundation is also funding the Affordable Housing Commission,
to ensure more genuinely affordable homes will be created in England.
Backing community-led housing
– helping local people take control of their housing
The Nationwide Foundation is helping community-led housing schemes get off the ground by
funding work that seeks to make public land widely available and accessible to community-led
housing organisations. It is also supporting work exploring the health and wellbeing benefits
of living in community-led housing in Wales.
Transforming the private rented sector
– to provide affordable, decent homes for tenants
The Nationwide Foundation funded a landmark review of the private rented sector in England, which
provided robust insights and evidence. Housing experts, politicians and charities welcomed its launch
in 2018. Academics at the University of York conducted the review, independently analysing private
rented housing, including how policies have changed the sector over the last ten years.
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Annual Report and Accounts 2019
Chief Executive’s review (continued)
Outlook
While the UK economy has slowed over the last few years, it has proved more resilient
than many expected, with continued healthy gains in employment and a gradual rise
in earnings contributing to solid rates of household spending.
We expect economic activity to continue to rise at a modest pace in the
near term, which may mean a small rise in the unemployment rate from
recent 43-year lows, with interest rates remaining close to current levels
over the next few years. We anticipate that economic activity will then pick
up once Brexit uncertainties fade and the UK’s trading relationship with
the EU becomes clearer.
We expect demand in the housing market to remain fairly subdued, close
to recent levels, before strengthening once the wider economy gains
momentum. Deposit growth is likely to rise by around 4% per year, a little
stronger than that recorded over the past two years.
In our own business, we will continue to make balanced decisions in the
long-term interests of members and the Society as a whole. We expect
our core mortgage and savings markets to remain competitive, with
a continued narrowing of our net interest margin, and will continue our
focus on delivering good long-term value for borrowers and savers.
Our financial strength has enabled us to commit to ongoing investment
in technology with the confidence that we can continue to support our
members now and in the future as we have done for the last 135 years.
26
Annual Report and Accounts 2019
Risk Overview
Nationwide takes a prudent approach to risk management. We keep our members’ money safe and secure by aligning our risk appetite
with our strategy. To ensure risks are managed consistently, we operate an Enterprise Risk Management Framework, which sets out the
minimum standards and processes for risk management. Further detail is included on page 103 of the Business and Risk Report.
Top and Emerging Risks
Whilst the risks that Nationwide runs are broadly stable, the threat posed by the external environment has heightened over the past year. Nationwide has responded to these threats through our strategy as described below. Additional
information on these and other top and emerging risks, as well as a description of the principal risks and uncertainties we are exposed to through our business model, can be found in the Business and Risk Report on pages 98 to 102.
Political and Economic
Environment
Competition
Nationwide’s core markets are naturally exposed
to any downturn in the UK’s economic conditions.
Economic risks remain heightened due to
uncertainty surrounding Brexit and the wider
geopolitical environment.
Our strategic response:
• Maintaining strong capital and liquidity
surpluses over regulatory minimums with
a CET1 ratio of 32.4%, UK leverage ratio
of 4.9% and Liquidity Coverage Ratio
of 150.2%.
• Undertaking robust internal and regulatory
stress tests, including the 2018 Bank of
England stress test in which we maintained
capital ratios in excess of regulatory
expectations.
UK withdrawal from the European Union
Competition has intensified as newly ring-fenced
banks have increased their focus on our core
markets. Meanwhile new market entrants,
competing primarily via digital channels,
are seeking to exploit new technologies to
revolutionise how customers use and access
existing products and services.
Our strategic response:
• Diversifying our products to better meet
customer needs through initiatives such as
Later Life Lending and Nationwide for Business.
• Committing to maintain our branch presence
and investing £350 million over five years to
improve the experience in branch.
• Partnering with fin-techs to develop
next-generation technologies.
• Investing an additional £1.3 billion in
technology over five years to ensure we
continue to meet our members’ needs.
Technology
(incorporates Managing Change and
Cyber Security)
Our members are increasingly demanding
always-on and intuitive digital services.
This increases demand on our systems and
the volume of data that must be managed
securely and reliably.
Our strategic response:
• Investing an extra £1.3 billion over five years
into our technology to improve services and
minimise the risk of disruption to members.
• Investing in cyber security, evolving our
controls across both new and existing
technologies to protect our systems and
customer data from more complex attacks.
Regulation
The regulatory environment continues to
evolve with a focus on providing confidence
in UK financial services and ensuring specific
markets are operating in the interests of and
delivering value for customers.
Our strategic response:
• As a mutual, our business model focuses on
building long-term relationships rather than
generating profits or shareholder dividends.
• Working with regulators and the industry
to deliver fair outcomes to our members,
and meet all regulatory obligations.
In April 2019, the UK Government and the European Union agreed to delay the UK’s departure from the European Union until 31 October 2019 unless a withdrawal agreement is agreed. As Nationwide’s business model is primarily focused in the UK,
the Society has limited direct exposure to the EU. However, Nationwide is exposed to secondary impacts, particularly volatility in the UK economy and financial markets given the uncertain nature of both the implementation period and the future
relationship between the UK and the EU. We have responded by considering a range of potential outcomes, including leaving without a deal, through our stress testing programme and preparing for alternative economic outcomes. We continue to
monitor closely and analyse political, economic and regulatory developments to ensure we remain well positioned to respond to any potential shocks and minimise any disruption for our members and staff.
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Annual Report and Accounts 2019
Financial
review
Mark Rennison
In summary
An advantage of being a building society is that we can choose how we utilise our resources
in order to deliver more long-term value and better services to our members. During the year we
have continued to be guided by our Financial Performance Framework on how we distribute value
to members, invest in the Society and retain profits. As signalled by our technology investment
announcement in September 2018, a programme of investment has been initiated which
will target the simplification of our IT estate, together with enhancement of our digital service
and data capabilities, over the next five years. During the year we have recognised a charge of
£227 million from asset write-offs and additional technology investment.
As a mutual we continue to aim to optimise, not maximise, profit and offer good long-term value
to our members. For the year ended 4 April 2019, we delivered a member financial benefit of
£705 million (2018: £560 million), demonstrating the competitive products and services that we
offer our members. In line with expectations, underlying profit reduced by 19% to £788 million
(2018: £977 million) and statutory profit before tax reduced by 15% to £833 million (2018:
£977 million), largely due to the impact of asset write-offs and our investment in technology.
This level of profitability maintained our capital strength, with our UK leverage ratio remaining
at 4.9% (2018: 4.9%), well in excess of current and anticipated regulatory requirements.
Notwithstanding the continued uncertainty in the external environment and competitive market
conditions, trading performance for the year has been robust with our strongest ever gross
lending at £36.4 billion (2018: £33.0 billion), and a growth in member deposits of £6.0 billion
(2018: £3.5 billion), reflecting the success of our Single Access ISA, Loyalty ISA and an increase
in current account credit balances.
Achieving sustainable cost savings and embedding efficiencies remains a priority for the Society.
We continue to make good progress with our efficiency programme, with a further £103 million
of in-year sustainable saves being delivered during the year. On a cumulative basis, including the
full year benefit of sustainable saves delivered over the last two years, we have now delivered
approximately half of our target of £500 million of sustainable saves by 2023.
On 5 April 2018 we implemented IFRS 9 ‘Financial Instruments’. The total impact on members’
interests and equity, net of deferred tax, was a reduction of £162 million. There has been no
restatement of comparatives following adoption of IFRS 9. Where useful for the interpretation
of balances or movements, we have highlighted the impact on the Group’s balance sheet and
members’ interests and equity at 5 April 2018.
“ Nationwide concluded 2018/19 in a
position of financial strength with
demonstrable momentum in trading
performance. This reflects our
continued commitment and focus on
offering good value products, and
better service for our members,
whilst maintaining capital strength.”
Underlying profit:
£788m
(2018: £977m)
UK leverage ratio:
4.9%
(2018: 4.9%)
Underlying Cost
Income Ratio:
71.1%
(2018: 64.6%)
Statutory profit:
£833m
(2018: £977m)
Net Interest Margin:
1.22%
(2018: 1.31% note ii)
Statutory Cost
Income Ratio:
70.3%
(2018: 64.6%)
Income statement
Underlying profit represents management’s view of underlying performance. The components of underlying profit have been changed
during the year to reflect more appropriately ongoing business performance. As a result, underlying profit now includes the bank levy
and FSCS management expenses, which were previously excluded. For the year ended 4 April 2019 this decreased underlying profit
by £45 million (2018: £46 million). Comparatives have been restated. Underlying profit continues to exclude FSCS costs arising from
institutional failures, and gains or losses from derivatives and hedge accounting.
Underlying and statutory results (note i)
Net interest income (note ii)
Net other income (note ii)
Total underlying income
Underlying administrative expenses
Impairment losses
Underlying provisions for liabilities
Underlying profit before tax
Financial Services Compensation Scheme (FSCS) (note iii)
Gains/(losses) from derivatives and hedge accounting (notes iii, iv)
Statutory profit before tax
Taxation
Profit after tax
Year to 4 April 2019
£m
2,915
255
3,170
(2,254)
(113)
(15)
788
9
36
833
(215)
618
Year to 4 April 2018
£m
3,004
128
3,132
(2,024)
(105)
(26)
977
1
(1)
977
(232)
745
Notes:
i.
ii.
Under IFRS 9, the recognition and measurement of expected credit losses differs from under IAS 39. As prior period amounts have not been restated,
impairment losses on loans and advances in the comparative period remain in accordance with IAS 39 and are therefore not directly comparable with
impairment losses recorded for the current period.
The opportunity has been taken to reclassify certain items previously included within net interest income to reflect better the nature of the
transactions. As a result, gains and losses recognised on the disposal of investment securities classified as FVOCI (2018: available for sale) are now
presented within net other income.
iii. Within statutory profit:
• FSCS costs arising from institutional failures, are included within provisions for liabilities and charges.
• Gains from derivatives and hedge accounting, are presented separately within total income.
iv. Although we only use derivatives to hedge market risks, income statement volatility can still arise due to hedge accounting ineffectiveness or because
hedge accounting is either not applied or is not achievable. This volatility is largely attributable to accounting rules which do not fully reflect the economic
reality of the hedging strategy.
28
Annual Report and Accounts 2019
Total income and margin
As anticipated, net interest income has decreased, reducing by 3% to
£2,915 million (2018: £3,004 million) due to lower mortgage income,
reflecting sustained market competition and ongoing attrition of base
mortgage rate (BMR) balances. Net interest margin (NIM) has therefore
reduced to 1.22% (2018: 1.31%). We have continued to make conscious
choices to deliver value to our borrowing members through attractive
rates, with the average rate paid by our prime mortgage members
reducing during the year to 2.34% (2018: 2.45%). The availability of low
rates on new mortgages has encouraged product switching and refinancing,
with £26.5 billion of prime mortgage customer balances having switched to
a new Nationwide product in the year (2018: £24 billion). Our legacy BMR
balances have continued to run off during the period and as at 4 April 2019
were £18.1 billion (4 April 2018: £22.7 billion).
The negative impact to NIM from declining mortgage margins has been
partially offset by low savings rates. We have continued to manage savings
pricing in line with our commitment to provide good long-term value for
members. During the year depositors have continued to earn average rates
more than 50% higher than the market average1. We expect market
conditions to remain competitive, and product switching and BMR balance
attrition to continue in line with recent experience. We anticipate therefore
that our reported NIM will continue to trend lower in the year ahead.
Net other income has increased to £255 million during the year (2018:
£128 million), predominantly due to the prior year including a £116 million
charge in relation to a debt buy back exercise.
Member financial benefit
As a building society, we seek to maintain our financial strength whilst providing value to our members through pricing, propositions and service. Through our member financial benefit, we measure the additional financial value for
members from the highly competitive mortgage, savings and banking products that we offer compared to the market. Member financial benefit is calculated by comparing, in aggregate, Nationwide’s average interest rates and incentives
across mortgages, savings, current accounts, personal loans and credit cards to the market, predominantly using market data provided by the Bank of England and CACI. The value for individual members will depend on their
circumstances and product choices. We quantify member financial benefit as:
Our interest rate differential + incentives and lower fees
Interest rate differential
We measure how our average interest rates across our member
balances in total compare against the market over the period.
For our two largest member segments, mortgages and retail
deposits, we compare the average member interest rate for these
portfolios against Bank of England and CACI industry data. A market
benchmark based upon the data from CACI is used for mortgages and
a Bank of England benchmark is used for retail deposits, both adjusted
to exclude Nationwide balances. The differentials derived in this way
are then applied to member balances for mortgages and deposits.
For unsecured lending, a similar comparison is made. We calculate an
interest rate differential based on available market data from the Bank of
England and apply this to the total interest bearing balances of credit
cards and personal loans.
Member incentives and lower fees
Our member financial benefit measure also includes amounts in
relation to higher incentives and lower fees that Nationwide offers to
members. Our calculation includes annual amounts for the following:
• Mortgages: the differential on incentives for members compared
to the market
• ‘Recommend a friend’: the amount paid to existing members, when
they recommend a new current account member to the Society
• FlexPlus account: this current account is considered market leading
against major banking competitors, with a high level of benefits for
a relatively smaller fee. The difference between the monthly account
fee of £13 and the market average of £17 is included in the member
financial benefit measure.
For the year ended 4 April 2019, this measure shows we have
provided our members with a financial benefit of £705 million
(2018: £560 million). This demonstrates that we continue to offer
good long-term value products to our members in both the
mortgage and deposit markets, despite strong levels of competition.
Member financial benefit is derived with reference to available market or industry level data. No adjustment is made to take account of factors such as customer mix, risk appetite and product strategy, due to both
limitations in the availability of data and to avoid bias from segments in which Nationwide may be under or over-represented. On an ongoing basis we will continue to review our methodology to ensure it captures
all the key elements of the financial benefits we provide to our members, where data is available.
1 Market average interest rates are based on Bank of England whole of market average interest rates, adjusted to exclude Nationwide’s balances.
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Annual Report and Accounts 2019
Financial review (continued)
Administrative expenses
Administrative expenses include the impact of technology asset write-offs
and incremental expenditure associated with our technology investment
announced in September 2018. The investment programme incorporates
£1.3 billion of incremental expenditure to be incurred over five years,
targeting the enhancement of our digital services and data capabilities,
together with a simplification of our technology estate. During the year we
have recognised a charge of £227 million, comprising asset write-offs and
impairments of £115 million, combined with expenditure which relates
directly to our technology investment of £112 million.
Excluding this charge, our cost base is broadly flat. Our continued focus
on efficiency has allowed us to absorb inflation, volume growth and the
impact of prior year investment. Beyond our additional technology
investment programme, we continue to make ongoing investments in
supporting the long-term interests of our members, including improving
member service and propositions, both in branch and through digital
channels, and meeting regulatory requirements.
Achieving sustainable cost savings and embedding efficiencies remain a
priority for the Society. We have delivered a further £103 million of new
in-year sustainable saves during the year. On a cumulative basis, including
the full year benefit of sustainable saves delivered over the last two years,
we have now delivered approximately half of our target of £500 million
of sustainable saves by 2023. This has been achieved through a range
of initiatives that are focused on the development of digital capabilities,
organisational design, third party savings, process improvements,
simplification and elimination.
Our underlying cost income ratio has increased to 71.1% (2018: 64.6%)
largely due to the impact of the asset write-offs and expenditure directly
related to our technology investment programme.
Impairment losses/(reversals) on loans and advances to customers
Impairment losses have increased by £8 million to £113 million (2018:
£105 million). Despite this increase in impairments the underlying
portfolio performance remains strong.
Retail lending impairment losses remain at historically low levels with the
£17 million reversal (2018: £11 million charge) for the residential lending
book resulting from improvements to the modelling of refinance risk on
interest only loans and updated economic assumptions. The increase in the
consumer banking impairment charge to £114 million (2018: £97 million)
includes additional provisions against the credit card portfolio relating to
borrowers considered to be in persistent debt (explained in the Credit risk
- Consumer banking section of the Business and Risk Report).
Notwithstanding this increase, delinquency levels on the consumer
banking portfolio have remained low during the year.
During the year commercial loan impairments were £16 million (2018:
£1 million reversal) due to increased credit risk associated with two
individual loans, with the overall portfolio performance remaining robust.
Impairment losses/(reversals)
Residential lending
Consumer banking
Retail lending
Commercial and other lending
Impairment losses on loans and advances
Impairment losses on investment securities
Total
Year to 4 April 2019
£m
Year to 4 April 2018
£m
(17)
114
97
16
113
-
113
11
97
108
(1)
107
(2)
105
Note:
Under IFRS 9, the recognition and measurement of expected credit losses differs from under IAS 39. As prior period amounts have not been restated, impairment losses in the
comparative period are not comparable to impairment losses recorded for the current period.
Provisions for liabilities and charges
Taxation
We hold provisions for customer redress to cover the costs of remediation
and redress in relation to past sales of financial products and ongoing
administration, including non-compliance with consumer credit legislation
and other regulatory requirements. The net charge of £15 million (2018:
£26 million) reflects our latest estimate of our customer redress liabilities.
More information is included in note 27 to the financial statements.
The tax charge for the year of £215 million (2018: £232 million) represents
an effective tax rate of 25.8% (2018: 23.7%) which is higher than the
statutory UK corporation tax rate of 19% (2018: 19%). The effective tax rate
is higher due to the 8% banking surcharge of £37 million (2018: £43 million)
and the tax effect of disallowable bank levy and customer redress costs.
More information is included in note 11 to the financial statements.
30
Annual Report and Accounts 2019
Financial review (continued)
Balance sheet
Total assets have increased 4% year on year to reach £238.3 billion
(5 April 2018: £228.9 billion) with a robust trading performance driving
£8.6 billion of net mortgage lending (2018: £5.8 billion). This has been
supported by strong growth in retail funding flows, with member deposits
growing by £6.0 billion to £154.0 billion (5 April 2018: £148.0 billion) and
our market share of UK deposits increasing slightly to 10.1%
(31 March 2018: 10.0%). Of the growth in member deposits,
£4.6 billion is attributable to an increase in savings balances
largely reflecting the success during the year of accounts such
as our Single Access ISA and Loyalty ISA.
Assets
Residential mortgages (note ii)
Commercial and other lending (note iii)
Consumer banking
Impairment provisions
Loans and advances to customers
Other financial assets
Other non-financial assets
Total assets
Asset quality
Residential mortgages (note ii):
Proportion of residential mortgage accounts more than 3 months in arrears
Average indexed loan to value (by value)
Consumer banking:
Proportion of customer balances with amounts past due more than
3 months (excluding charged off balances) (note iv)
4 April 2019
5 April 2018 (note i)
4 April 2018
£m
186,012
9,118
4,586
199,716
(665)
199,051
36,709
2,541
238,301
%
0.43
58
1.35
%
93
5
2
£m
177,303
10,640
4,107
%
92
6
2
£m
177,299
10,645
4,107
100
192,050
100
192,051
%
92
6
2
100
(629)
191,421
34,877
2,639
228,937
(458)
191,593
34,912
2,593
229,098
%
0.43
56
1.56
Balances as at 5 April 2018 reflect the impact of applying IFRS 9 ‘Financial Instruments’.
Notes:
i.
ii. Residential mortgages include prime and specialist loans, with the specialist portfolio primarily comprising buy to let lending.
iii. Commercial and other lending now exclude balances held with counterparties which are institutions similar to banks. These balances are now reported in Loans and advances
to banks and similar institutions (Other financial assets line), and comparatives have been restated to disclose information on the same basis. Further details are included
in note 1 to the financial statements.
iv. Charged off balances relate to accounts which are closed to future transactions and are held on the balance sheet for an extended period (up to 36 months, depending on the
product) whilst recovery procedures take place.
Liquidity Coverage Ratio:
150.2%
(2018: 130.3%)
Return on Assets:
0.26%
(2018: 0.33%)
Residential mortgages
Despite competitive market conditions, total gross mortgage lending for
the year was £36.4 billion (2018: £33.0 billion) representing our strongest
ever year of gross mortgage lending and reflecting the competitively priced
products and good long-term value that we continue to offer. Our market
share of prime mortgage gross lending as at March 2019 has grown to
13.4% (2018: 12.8%). As a result, total net mortgage lending for the year
increased by £2.8 billion to £8.6 billion (2018: £5.8 billion).
Arrears performance has remained stable during the year, with cases more
than three months in arrears at 0.43% of the total portfolio (4 April 2018:
0.43%). The average LTV of the portfolio has increased during the year to
58% (4 April 2018: 56%), reflecting new lending, offset to a lesser degree
this year by house price growth across the whole portfolio. Impairment
provisions have decreased to £206 million (5 April 2018: £235 million)
largely due to continued run-off of legacy, higher risk portfolios combined
with refinements to our provisioning methodology.
Commercial and other lending
During the year commercial balances have decreased by £1.5 billion to
£9.1 billion (5 April 2018: £10.6 billion). As previously reported, our
commercial real estate (CRE) portfolio is closed to new business and is
currently in run-off. As a result, CRE balances have reduced during the year
by £0.4 billion to £1.4 billion (5 April 2018: £1.8 billion). Impairment
provisions have increased to £41 million (5 April 2018: £29 million) due
to increased credit risks associated with two individual loan exposures.
Notwithstanding this increase in provisions, the overall book performance
remains strong and our exit from the commercial real estate market
continues to be carefully managed.
Given deleveraging activity in previous financial years, the overall portfolio
is increasingly weighted towards registered social landlords with balances
of £6.0 billion (5 April 2018: £6.8 billion) and project finance with balances
of £0.8 billion (5 April 2018: £0.9 billion). The reduction in our registered
social landlord book largely reflects early redemptions of loans by housing
associations.
Consumer banking
Consumer banking balances have grown by £0.5 billion to £4.6 billion
(5 April 2018: £4.1 billion). This balance growth was driven by a record
£1.8 billion of personal loan lending during the year (2018: £1.3 billion)
following the reduction in headline rates in March 2018 and changes to
extend our lowest pricing to more members from January 2019.
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Annual Report and Accounts 2019
Financial review (continued)
Other financial assets
Members’ interests, equity and liabilities
Other financial assets total £36.7 billion (5 April 2018: £34.8 billion), primarily
comprising liquidity and investment assets held by our Treasury function of
£32.7 billion (5 April 2018: £30.8 billion) and derivatives with positive fair
values of £3.6 billion (5 April 2018: £4.0 billion). Derivatives relate primarily
to interest rate and foreign exchange contracts which economically hedge
financial risks inherent in core lending and funding activities.
Our Liquidity Coverage Ratio has increased during the year to 150.2%
(4 April 2018: 130.3%) largely due to the pre-funding of future wholesale
funding maturities combined with a reduction in stressed collateral
requirements. We continue to manage our liquidity in accordance with
our risk appetite, which is more prudent than regulatory requirements.
Further details are included in the Liquidity and funding risk section of
the Business and Risk Report.
Member deposits
Debt securities in issue
Other financial liabilities
Other liabilities
Total liabilities
Members’ interests and equity
Total members’ interests, equity and liabilities
Note:
i. Balances as at 5 April 2018 reflect the impact of applying IFRS 9.
4 April 2019
5 April 2018 (note i)
4 April 2018
£m
153,969
35,942
33,755
1,466
225,132
13,169
238,301
£m
148,003
34,118
33,173
1,402
216,696
12,241
228,937
£m
148,003
34,118
33,173
1,401
216,695
12,403
229,098
Wholesale funding ratio:
28.6%
(2018: 28.2%)
Member deposits
Debt securities in issue and other financial liabilities
Members’ interests and equity
Member deposits have increased by £6.0 billion to £154.0 billion
(4 April 2018: £148.0 billion) largely reflecting the success of our Single
Access and Loyalty ISAs, combined with higher current account credit
balances. In a competitive market, we have slightly increased our market
share of deposits as at March 2019 to 10.1% (2018: 10.0%). Our market
share of main standard and packaged current accounts grew to 8.0%
(2018: 7.9%), with our market share of new current account openings
increasing during the year to 16.2% (2018: 15.8%).
Debt securities in issue have increased during the year by £1.8 billion to
£35.9 billion (5 April 2018: £34.1 billion) largely due to wholesale funding
issued in order to finance our core activities. Other financial liabilities have
increased by £0.6 billion to £33.8 billion (5 April 2018: £33.2 billion) primarily
due to issuances of debt during the year in order to meet the minimum
requirement for own funds and eligible liabilities. Further details are included
in the Liquidity and funding risk section of the Business and Risk Report.
Members’ interests and equity has increased by £1.0 billion to £13.2 billion
(5 April 2018: £12.2 billion) largely reflecting additional retained profits and
an increase in the cash flow hedge reserve.
Statement of comprehensive income
Further information on gross movements in the pension obligation and
movements in the cash flow hedge reserve are included in notes 30 and
7 to the financial statements respectively.
Statement of comprehensive income
(note i)
Profit after tax
Net remeasurement of pension obligations
Net movement in cash flow hedge reserve
Net movement in fair value through other comprehensive income reserve
Net movement in available for sale reserve
Other items
Total comprehensive income
Note:
i. Movements are shown net of related taxation.
Year to 4 April 2019
Year to 4 April 2018
£m
618
153
328
(12)
-
(1)
1,086
£m
745
22
(191)
-
31
1
608
32
Annual Report and Accounts 2019
Financial review (continued)
Financial Performance Framework
As a mutual, we aim to optimise, rather than maximise, profit and retain
sufficient earnings to support future growth, sustain a strong capital
position and allow us to invest in the business to provide the products
and services that our members demand. We have used the most recent
guidance from regulators regarding the maximum expected capital
requirement for Nationwide to develop our Financial Performance
Framework. This framework provides parameters which will allow us to
calibrate future performance and help ensure that we achieve the right
balance between distributing value to members, investing in our business
and maintaining our financial strength.
Capital structure
Our capital position has strengthened during the period with our CET1
ratio increasing to 32.4% (5 April 2018: 30.4%) whilst our UK leverage
ratio remained stable at 4.9% (5 April 2018: 4.9%). Both remain in excess
of the regulatory capital requirements of 13.2% and 4.0% respectively, which
include CRD IV buffers applicable from August 2019.
Capital structure (note i)
Capital resources
Common Equity Tier 1 (CET1) capital
Total Tier 1 capital
Total regulatory capital
Risk weighted assets (RWAs)
UK leverage exposure
CRR leverage exposure
CRD IV capital ratios:
CET1 ratio
UK leverage ratio (note iii)
CRR leverage ratio (note iv)
One of the most important of these parameters is profit, management of which
is a key component in maintaining Nationwide’s capital strength. We believe
that a level of underlying profit of approximately £0.9 billion to £1.3 billion per
annum over the medium term would meet the Board’s objective for sustainable
capital strength. This range will vary from time to time, and whether our
profitability falls within or outside this range in any given financial year or period
will depend on a number of external and internal factors, including conscious
decisions to provide value to members or to make investments in the business.
It should not be construed as a forecast of the likely level of Nationwide’s
underlying profit for any financial year or period within a financial year.
The CET1 ratio increased to 32.4% (5 April 2018: 30.4%) as a result of an
increase in CET1 capital resources, with RWAs remaining relatively stable.
CET1 capital resources have increased by £0.6 billion, primarily due to the
profit after tax for the year of £0.6 billion. RWAs remained stable with
increased retail lending and treasury related RWAs offset by run-off in the
commercial book and the implementation of a new credit card IRB model.
4 April 2019
5 April 2018 (note ii)
4 April 2018
£m
10,517
11,509
14,485
32,506
235,147
247,586
%
32.4
4.9
4.6
£m
9,915
10,907
13,930
32,579
221,982
236,458
%
30.4
4.9
4.6
£m
9,925
10,917
13,936
32,509
221,992
236,468
%
30.5
4.9
4.6
Notes:
i. Data in the table is reported under CRD IV on an end point basis with IFRS 9 transitional arrangements applied.
ii.
Figures have been adjusted to reflect the impact of applying IFRS 9 from 5 April 2018. Further information is provided in note 37 and in our ‘Report on Transition to IFRS 9:
Financial Instruments’, which can be found at nationwide.co.uk
iii. The UK leverage ratio (as defined in the PRA rulebook) is calculated using the Capital Requirements Regulation (CRR) definition of Tier 1 for the capital amount and the Delegated Act
definition of the exposure measure, excluding eligible central bank reserves.
iv. The Capital Requirements Regulation (CRR) leverage ratio is calculated using the CRR definition of Tier 1 for the capital amount and the Delegated Act definition of the exposure
measure and is reported on an end point basis.
We remain committed to our Financial Performance Framework. Our profit
for the year ended 4 April 2019 reflects conscious decisions to increase
investment at a time when members needs are changing rapidly and
technology advancement is offering new opportunities. We are satisfied
that this performance is in line with the framework.
The UK leverage ratio remained stable at 4.9% (5 April 2018: 4.9%), with
an increase in Tier 1 capital driven by profit after tax of £0.6 billion offset
by an increase in UK leverage exposure of £13 billion resulting from an
increase in net retail lending of £9 billion, an increase in treasury exposures
(including counterparty credit risk) of £5 billion, and an increase in other
assets of £1 billion, offset by run-off in the commercial book of £2 billion.
The CRR leverage ratio is based on the Delegated Act definition and
therefore exposures include central bank reserves. This also remained
stable at 4.6% (5 April 2018: 4.6%). On 24 April 2019, Nationwide notified
investors of its intention to redeem its outstanding Additional Tier 1 capital
instrument in full, on 20 June 2019. This will reduce Tier 1 capital resources
by £992 million, resulting in a 0.4 percentage points reduction in the UK
leverage ratio, to 4.5%, and a 0.4 percentage points reduction in CRR
leverage ratio to 4.2%, based on the year end balance sheet.
Nationwide expects to implement new residential mortgage IRB models
in 2020, incorporating the changes required by the June 2017 update to
supervisory statement 11/13. This is anticipated to increase RWAs, leading
to an estimated reduction in the CET1 ratio of approximately one third,
based on our reported ratio at 4 April 2019. We expect the CET1 ratio
to be impacted further by the Basel III reforms which come into effect
progressively between 2022 and 2027. The impact of this legislation will
supersede the effect of the new IRB models, with an expected reduction
in the reported CET1 ratio of approximately 45% to 50%, relative to the
4 April 2019 position; however organic earnings through the transition will
mitigate this impact and we expect leverage requirements to remain our
binding constraint based on latest projections.
Further details of the capital position and regulatory developments are
included in the Solvency risk section of the Business and Risk Report.
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Annual Report and Accounts 2019
Non-financial information
Non-financial information
Measurement and reporting of non-financial matters is important for us to get a full picture of our performance.
As a responsible business, we include below our statement on non-financial reporting.
The non-financial reporting requirements contained in sections 414CA and 414CB of the Companies Act 2006 are addressed below. Although Nationwide, as a building society, is not required to follow the Companies Act 2006,
we seek to apply its requirements where appropriate.
Non-financial information
Business model
Key performance indicators
Key risks
Our policies
Disclosure
Our business model and information on how we do business differently
Our KPIs set out how we are doing on service, value and strength
Our key risks and their management
Our key policies and statements of intent are in place to ensure consistent governance on environmental matters,
our employees, social matters, human rights and anti-bribery and corruption
Section
Strategic Report – Who we are and what we do
Strategic Report – Our KPIs
Strategic Report – Risk overview
Pages
4
11
26
See below
Our policies
Environmental matters
We’re the world’s largest building society, so it’s only natural we play a part in shaping the communities and places we belong to. We know we must do more than meet legal and regulatory requirements; we must reduce the ways we
affect the environment and always aim to do better. And we’re encouraging everyone – our members, suppliers, contractors and other stakeholders – to do the same.
Our environmental targets for 2020, which were set in 2011, have already been met or exceeded. Already we’re a zero landfill business with all our waste either recycled or used for energy recovery, and 100% of our electricity is from
renewable sources - we’re proud to receive over 50% from a Solar Farm Power Purchase Agreement, and we’ve offset our total carbon emissions by funding wind power projects at two sites in India, Andipatti and Thenai. Our ambition
is to look for better, cleaner ways to run our operations and we’re now turning our attention to the Conference of Parties (COP 21) two-degree target set in Paris.
The impact of climate risks
Whilst we continue to work hard to minimise our direct impact on the environment, we must also assess the impact that global climate change could have on our business in the future.
Two types of risk may shape our business: physical risks (which arise from weather-related events) and transitional risks (which come from adapting to a low-carbon economy). As a building society we’re not significantly exposed to
industries adapting to a low-carbon economy. Our core business is to help members buy houses and physical risks mainly arise in our mortgage portfolios. We welcome the recommendations of the Financial Stability Taskforce on
Climate-related Financial Disclosures (TCFD) and are assessing how we can best implement the recommendations.
Governance
The Executive Risk Committee and Board Risk Committee are responsible for our climate related risks. We are creating an executive committee for Responsible Business which will be chaired by our Deputy CEO,
Tony Prestedge. This committee will be charged by the Board with establishing the Society’s responsible business agenda, tracking the Society’s impact right across our business, setting targets for improvement
and reporting back to the Board.
Strategy
We will continue to assess climate change risks on our business and integrate how we manage these risks into our strategy.
Risk Management Over the longer term, risks could arise from more extreme weather events and we are building capability to improve our understanding of these risks. We have worked with third party organisations with
geospatial modelling, and geological and hydrological expertise, to model the impacts of climate change on our property portfolios. Today we use this capability to protect members from purchasing uninsurable
properties and over time this work will allow us to conduct “what if” analysis for different climate change scenarios and enable us to support our members better. To help us manage broader climate change risks,
we assess the potential effects of climate-related financial risks and consider how we can include them in our stress testing and scenario analysis.
Metrics
We are developing our approach to reporting metrics and targets. A summary of our greenhouse gas emissions (GHG) is included in the Directors’ Report on page 95.
We note the recent publications from the PRA and the FCA relating to the financial risks arising from climate change and will work with the regulators as they further develop their approaches to managing and monitoring these risks.
34
Annual Report and Accounts 2019
Non-financial information (continued)
Our policies (continued)
Our key policies / statements of intent
Description
Our employees
Board Composition and Succession Policy
Additional information is included in our Report of the
directors on corporate governance on page 53.
The Board Composition and Succession Policy ensures the Board comprises persons who are fit and proper to direct the Society’s business, and sets out the approach to diversity in the
senior leadership population (Board, executive leaders and their direct reports). The Society has committed to increasing female representation to 33-35% by 2020 across the senior
leadership population. The strategy also includes a target of between 8% to 15% for BAME representation across the senior leadership population. These targets are supported by the
Equality, Diversity and Inclusion Strategy and action plans, which are refreshed annually and against which progress is reported to the Nomination and Governance Committee annually.
Code of Conduct Policy
The Code of Conduct Policy outlines the standards of conduct and behaviour that Nationwide expects from its employees. We want to ensure that Nationwide is a great place to work
for all our employees and we are committed to promoting a culture of honesty and integrity across Nationwide which enables our people to do the right thing for our customers.
Equality, Diversity and Inclusion Policy
Additional information is included in our Building PRIDE
update on page 21.
Our mutuality and fundamental commitment to valuing everyone defines and differentiates us. We are committed to being a fair employer, treating everyone equally and promoting
a supportive culture of equality, diversity and inclusion for our employees, customers and third party business partners.
Social matters
Our social purpose and commitment
to our communities
Additional information is included in our Building
a national treasure update on pages 23 and 24.
Human rights
Slavery and Human Trafficking
Additional information is included in our Slavery
and Human Trafficking Statement available on
nationwide.co.uk
Anti-Bribery and Anti-Corruption
Anti-Bribery and Corruption
Additional information is included in our
Anti-Bribery and Corruption policy statement
available on nationwide.co.uk
It is 135 years since our business was founded - with a social purpose at its heart. This social purpose, helping people into homes of their own, motivates us still today. By helping
people save, buy homes, and manage their money efficiently, we help people build secure and happy lives and communities. We’ve awarded Community Grants totalling £3.9 million
to more than 100 housing-related projects and we’re working with Swindon Borough Council to develop a multi-generational community of 239 homes.
Section 54 of the Modern Slavery Act 2015 (the Act) requires certain commercial organisations, including Nationwide, to state on their website how they are tackling the risk of slavery
and human trafficking in their business or supply chains. Each year, Nationwide produces its statement in accordance with the Act which outlines the steps we have taken and the
policies we have in place to tackle the risk of modern slavery. One of these policies is the Third Party Code of Practice, which we ask all of our 1,200 suppliers to commit to. In addition,
Nationwide’s Code of Conduct details our employees’, temporary workers’ and contractors’ obligations in relation to tackling modern slavery. Nationwide’s Whistleblowing policy offers
colleagues a confidential channel to flag concerns.
Bribery and corruption is a risk for organisations across the world, and a collaborative approach across governments, law enforcement agencies and businesses is taken to tackle the issue.
Nationwide is bound by the laws of the UK, including the Bribery Act 2010 which concerns conduct both at home and abroad. The Board is committed to operating with honesty and
integrity in all of our business activities and to promoting an anti-bribery and corruption culture across the Group. Nationwide takes a zero tolerance approach to bribery and is committed
to implementing and enforcing effective systems, and risk-based controls and procedures to counter bribery and corruption. These controls and procedures include a communication
programme, staff training and awareness, a confidential whistleblowing procedure, and monitoring and review of the Anti-Bribery and Corruption policy and other related policies.
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Annual Report and Accounts 2019
Governance
36 Board of directors
41 Executive Committee biographies
43 Report of the directors on corporate governance
• Corporate governance report
• Audit Committee report
• Board Risk Committee report
• Board IT and Resilience Committee report
• Nomination and Governance Committee report
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Report of the directors on remuneration
94 Directors’ report
Roshni, member since 2003
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Annual Report and Accounts 2019
Board of directors
Meet your Board of directors
who were in office at 4 April 2019,
including Albert Hitchcock, who
is seeking election as non
executive director.
Key
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Audit Committee
Executive Committee
Board IT and Resilience Committee
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Nomination and
Governance Committee
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Remuneration Committee
Board Risk Committee
Indicates chair of a Committee
Baroness Usha Prashar CBE PC
Non executive director since January 2017 (independent)
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Tony Prestedge
Executive director since August 2007
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Skills and experience
Usha is a highly experienced policy advisor, with a singular mix of insight
across the public, not-for-profit and broadcasting sectors. Her wealth of
public and voluntary sector expertise helps inform Nationwide’s regulatory
perspectives and social purpose. Usha shares the Society’s commitment
to contributing to local communities and voluntary work.
Current external positions
Member of House of Lords
Honorary President, UK Community Foundations
Member, the Home Building Review Panel
Chair, Cumberland Lodge
Previous positions include
Deputy Chair, the British Council
Member, European Select Committee
Non executive director, ITV
Non executive director, the Cabinet Office
Non executive director, Channel 4
Non executive director, Ealing, Hounslow and Hammersmith Health Authority
Inaugural Chairman, the Judicial Appointments Commission
Skills and experience
Tony combines deep strategic, transformation, IT and operational
experience from over two decades in financial services, with a passionate
focus on delivering exceptional service across every member touch point
within the Society. Tony is Deputy Chief Executive; his accountabilities
include developing Nationwide’s strategy and driving digital transformation
as well as leading the Society’s Relationships and Distribution community.
This encompasses branches, contact centres, mobile and digital channels,
mortgage and financial planning distribution, collections and recoveries,
member services and intermediary sales. Prior to his current role Tony
was Nationwide’s Chief Operating Officer.
Previous positions include
Managing Director, Home Finance and Retail Support and
Operations Director, Barclays plc
Director, Woolwich Mortgage Services Limited
Director, Global Home Loans Limited
Director, Opportunity Now
Roshni, member since 2003
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Annual Report and Accounts 2019
Board of directors (continued)
Joe Garner
Chief Executive Officer since April 2016
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Skills and experience
Joe has spent his working life in consumer-focused businesses, starting his
career with consumer product companies Procter & Gamble and Dixons
Carphone. He later took on leadership roles first as Head of HSBC’s UK retail
and commercial businesses and then as CEO at Openreach. Throughout
his career, Joe has championed the interests of colleagues and customers,
believing that looking after both is not only the right thing to do, but the key
to commercial success. Since joining Nationwide, Joe’s mission has been
to inspire colleagues to remain true to the Society’s social purpose; using
the power of the collective to improve people’s lives. Joe is passionate about
Nationwide’s core purpose of ‘building society, nationwide’.
Current external positions
Director, UK Finance
Member, Financial Conduct Authority Practitioner Panel
Chairman and trustee, British Triathlon Trust
Member, Economic Crime Strategy Board
Previous positions include
CEO, Openreach
Deputy CEO, HSBC Bank plc
Head, HSBC’s UK Retail and Commercial Business
Non executive director, Financial Ombudsman Service
Lynne Peacock
Non executive director since July 2011 and senior independent
director since July 2016
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Skills and experience
Lynne has an exceptional background in financial services, including an
extensive understanding of the mutual sector. In addition to leading two retail
banks and holding a directorship within a building society, she has operated
at Board level for over 20 years, overseeing brand development, mergers
and acquisitions, change management and business transformation. Lynne
is a strong advocate of mutuality and is Chair of the trustees of a charity for
people with learning disabilities.
Current external positions
Non executive director, Serco Group plc
Chair of trustees, Westminster Society for People with Learning Disabilities
Previous positions include
CEO of National Australia Bank’s UK business
CEO of Woolwich plc
Non executive director, Jardine Lloyd Thompson Group plc
Non executive director, Scottish Water
Non executive director, Standard Life Aberdeen plc
Kevin Parry OBE
Non executive director since May 2016 (independent)
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Skills and experience
Kevin is a chartered accountant with a distinguished career in financial
services and professional practice, bringing to the Board expertise in
audit, regulation, risk management, and finance. As a former Chairman
of the Homes and Communities Agency, his perspective on housing is a
valuable asset to the Society. He is Chairman of Royal London, the largest
mutual insurer in the UK. He is a trustee and former Chairman of the
Royal National Children’s SpringBoard Foundation, a charity providing life
transforming opportunities through education to disadvantaged children.
Current external positions
Chairman, Royal London Group
Chairman, Intermediate Capital Group plc
Non executive director and Chairman of the Audit and Risk Committee, Daily
Mail and General Trust plc
Trustee, Royal National Children’s SpringBoard Foundation
Previous positions include
Chief Financial Officer, Schroders plc
Chief Executive Officer, Management Consulting Group plc
Managing Partner, Information Communications and Entertainment,
KPMG LLP
Senior Independent Director, Standard Life Aberdeen plc
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Annual Report and Accounts 2019
Board of directors (continued)
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Rita Clifton CBE
Non executive director since July 2012 (independent)
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Chris Rhodes
Executive director since April 2009
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Skills and experience
As a former CEO and Chair of brand consultancy Interbrand, Rita is an
acclaimed brand expert. This, and her background in consumer insight, help
ensure that member interests are central to Board business. Rita has helped
a wide range of iconic British organisations understand how to use research,
marketing strategy and communications to build sustainable brand value.
She is also a committed advocate for environmental and sustainability issues.
Skills and experience
Chris is a chartered accountant with over 30 years’ experience in retail
and commercial banking, holding senior leadership roles across finance,
treasury, operations, retail distribution and risk management. This broad
background in financial services means he is ideally placed to oversee the
development of the Society’s product and services to ensure they meet
the needs of the Society’s 15 million members.
Current external positions
Non executive director, ASOS plc
Non executive director, Ascential plc (previously known as EMAP plc)
Chairman, BrandCap
Member, Assurance and Advisory Panel, BP’s carbon off-setting programme
‘Target Neutral’
Trustee, Green Alliance
Previous positions include
London CEO and Chairman, Interbrand
Vice Chairman, Saatchi & Saatchi
Non executive director, Dixons Retail plc
Fellow and Trustee, WWF (Worldwide
Fund for Nature)
Non executive director, Bupa
Non executive director, Populus Limited
Member, the UK Government’s
Sustainable Development Commission
Current external positions
Trustee, National Numeracy
Director, Lending Standards Board
Previous positions include
Group Finance Director, Alliance and Leicester Group
Deputy Managing Director, Girobank
Board Director, Visa Europe
Tim Tookey
Non executive director since June 2015 (independent)
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Skills and experience
Tim is a chartered accountant with over 30 years’ experience in finance,
across retail and commercial banking, life assurance and pensions, and
insurance. As a former Chief Financial Officer, Tim has the background and
expertise to analyse and test the Society’s financial and risk strategies.
Current external positions
Director, Westmoreland Court Management (Beckenham) Ltd
Previous positions include
Chief Financial Officer, Quilter plc (previously known as Old Mutual Wealth
Management Limited)
Chairman, Alliance Trust Savings Limited
Chief Financial Officer, Friends Life Group Limited
Group Finance Director, Lloyds Banking Group
Finance Director, Prudential plc’s UK business
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Annual Report and Accounts 2019
Board of directors (continued)
Mitchel Lenson
Non executive director since July 2011 (independent)
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(Chair until
March 2019)
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Mai Fyfield
Non executive director since June 2015 (independent)
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Skills and experience
After serving the Society for eight years, Mitchel will step down from the
Board at the 2019 AGM. During his term of office, Mitchel has brought to the
Board an exceptional leadership track record in technology, operations and
programme management. In a 30-year career in financial services he has held
senior management positions across retail, corporate, investment banking and
private wealth and asset management. In addition, Mitchel has advised on
financial services in the private equity sector and has ongoing involvement in
the fintech space.
Skills and experience
Mai combines her experience as an economist and strategist with considerable
commercial experience to guide the Board’s strategic thinking and assessment
of new opportunities and initiatives. She was until last year Chief Strategy and
Commercial Officer at Sky where she led strategy and commercial partnerships
across the Sky Group, an organisation she joined in 1999. With a strong
focus on customer experience and service delivery, Mai previously served as
economic adviser to major blue-chip companies. She is a champion of diversity
and helping women succeed in senior management and Board positions.
Current external positions
Non executive director, The Currency Cloud Group Limited
Advisor to Lombard Odier.
Previous positions include
Group Chief Information Officer, Deutsche Bank AG
Managing Director, Global Head of Operations & Operation IT, UBS Warburg
Director, Group Operations, Credit Suisse First Boston
Partner, Olivant & Co
Non executive director, NYFIX.
Current external positions
Director, Roku Inc.
Previous positions include
Director, Jupiter Entertainment
Chief Strategy and Commercial Officer, Sky Group plc.
David Roberts
Non executive director and Chairman elect from September 2014.
Chairman since July 2015 (independent upon appointment as Chairman)
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Skills and experience
David combines a distinctive blend of leadership experience across major
listed corporations, the mutual movement, and public service, including
35 years in financial services. He is a passionate champion of Nationwide’s
social purpose and of the Society’s commitment to help improve the
financial lives of its members. David also strongly believes in the economic
value of commerce and the importance of rebuilding trust in big business.
Current external positions
Chairman, Beazley plc
Vice Chair, NHS England
Associate non executive director, NHS Improvement
Non executive director, Campion Wilcocks Limited
Advisor Board member, The Mentoring Foundation Advisory Council
Member, Strategy Board, Henley Business School, University of Reading.
Previous positions include
Group Deputy Chairman, Lloyds
Banking Group plc
Executive director, Barclays Bank
plc and CEO, International and
Commercial Banking
Chairman and CEO, Bawag PSK AG
Non executive director, BAA plc
Non executive director, Absa Group SA
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Annual Report and Accounts 2019
Board of directors (continued)
Mark Rennison
Executive director since February 2007
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Gunn Waersted
Non executive director since June 2017 (independent)
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(Chair from
March 2019)
Albert Hitchcock
Non executive director since December 2018 (independent)
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Skills and experience
Mark is a chartered accountant with over 30 years’ experience in financial
services. His track record in the sector, including expertise in treasury
operations, risk management and capital planning, equip him to lead the
sustained and safe operation of a large financial business like Nationwide.
As Chief Financial Officer, he is responsible for Finance and Efficiency,
effectively ensuring Nationwide’s financial strength so that it can continue
to invest in sustainable services for current and future members.
Current external positions
Chair, Financial Risk and Policy Committee, UK Finance
Director, Arkose Funding Limited.
Previous positions include
Partner, PricewaterhouseCoopers LLP
Member, Bank of England’s PRA Practitioner Panel.
Skills and experience
Gunn has a distinguished international career, including senior leadership
positions in financial services, telecommunications and petrochemicals.
She brings to the Board vast experience of driving large-scale operational,
cultural change and digital transformation programmes to improve customer
experience. She is a strong advocate of the need for strong people cultures
and creating genuinely diverse organisations.
Current external positions
Chair, Telenor ASA
Chair, Petoro AS
Member, Fidelity International.
Previous positions include
CEO, Wealth Management Division, CEO of Nordea Bank Norway and
Executive Vice President at Nordea Bank Group
CEO, Vital Forsikring and Executive Vice President of DnB
Chair, Ferd and BI
Non executive director, Statkraft, Statoil.
Skills and experience
Albert is a leader in information technology with a 33-year career in the
technology industry. His experience is of huge value to the Society as we
embark upon our ambitious £4.1 billion transformation programme to meet
the expectations of our members today and in the future.
Current external positions
Chief Technology and Operations Officer, Pearson plc.
Previous positions include
Technology Adviser to the Board, Royal Bank of Scotland plc
Group Chief Information Officer, Vodafone plc
Global Chief Information Officer, Nortel Networks.
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Annual Report and Accounts 2019
Executive Committee biographies
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As well as sitting on the
Board of directors, the
following people are also part
of the Executive Committee:
3
4
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Tony Prestedge
Mark Rennison
Chris Rhodes
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Joe Garner
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Annual Report and Accounts 2019
Executive Committee biographies (continued)
1 Martin Boyle
Chief Transformation Officer
2 Patrick Eltridge
Chief Operating Officer
Martin leads the multi-million-pound
strategic investment and change portfolio
and is responsible for delivering the
Society’s transformational programmes,
balancing modern, digital convenience with
Nationwide’s human touch. He joined the
Portman Building Society in 2004 which
subsequently merged with Nationwide
Building Society. Before that Martin had over
20 years’ change experience in consulting
and retail financial services.
Patrick joined the Society as Chief Operating
Officer in February 2019. He was previously
Chief Information Officer at Royal Bank of
Scotland, where he was responsible for the
successful delivery of IT and operational
resilience improvement programmes.
As COO, Patrick’s focus is on the Society’s
infrastructure, ensuring that through the
development of new, innovative technology
Nationwide continues to deliver real value
and service for members.
5 Janet Chapman
Chief Internal Auditor
(Executive Committee attendee)
7 Mark Chapman
Chief Legal Officer
and Society Secretary
Janet joined Nationwide in 2017, following an
extensive career in financial services in the
UK and the USA. She leads the Internal Audit
community and was most recently with
Citigroup where she was Chief Auditor for the
institutional businesses. Before that, Janet
was Chief Auditor for the Americas at The
Bank of Tokyo Mitsubishi. Her early career
was spent with Accenture as an IT consultant.
Mark joined the Society in 2018 as the
leader of Legal and Secretariat which
focuses on providing expert advice and
guidance on legal and regulatory issues, as
well as a comprehensive secretariat service.
Immediately before joining Nationwide,
Mark spent a year volunteering as a teacher
at a school in a township in the Western
Cape of South Africa. He previously served
as General Counsel of Barclays UK for six
years, and General Counsel at Nomura
International for over a decade having
started his career as a litigator at Freshfields.
8 Julia Dunn
Chief Risk Officer
9 Sara Bennison
Chief Marketing Officer
11 Alison Robb
Chief People Officer
Julia joined Nationwide in 2013 as Chief
Compliance Officer. She now leads the Risk
Community, helping to keep the Society, and
its members, safe and secure. A qualified
chartered accountant, Julia previously spent
13 years in supervision and enforcement with
the Financial Services Authority, and latterly
the Financial Conduct Authority as Director
of Retail Banking Supervision.
Sara started her career in advertising
agencies, working across a variety of major
brands in the UK and Asia. She joined
Nationwide in 2016 having spent the
previous decade at BT and then Barclays.
She is responsible for all Nationwide’s
research, marketing, communications and
social investment.
Alison leads Nationwide’s people matters,
including recruitment, training, diversity and
the development of teams to meet our
members’ needs. A qualified chartered
accountant, Alison worked for KPMG and
WH Smith before joining Nationwide in 1996.
She has worked across the Society, including
in the finance and strategy functions.
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43
Annual Report and Accounts 2019
Report of the
directors on
Corporate
Governance
For the year ended 4 April 2019
David Roberts
Dear fellow member,
I am pleased to present the Corporate Governance Report
for the financial year ended 4 April 2019.
With record numbers of members seeing
the benefits of mutuality – from service to
value – Nationwide must be responsive to their
changing needs to ensure we remain relevant
and competitive. Our governance framework
continues to serve us well as we invest in
new markets and enhanced services, ensuring
that the long-term decisions we take continue
to deliver value for members, today and tomorrow.
The board of directors is responsible for the
governance of the Society and is committed
to maintaining the highest standards in the way
Nationwide is directed, governed and managed.
We believe that good quality governance
underpins Nationwide’s ability to provide
legendary service and reward the loyalty of our
members. The Board seeks to balance members’
needs with protecting the long-term success
of the Society: an example being our response
to the increased competition in digital banking
services with our investment spend in new
technologies, whilst still investing in branches.
Our Members
As a mutual, Nationwide is owned by and run for the benefit of you, our
members. Members are at the heart of Nationwide and are central to
everything we do. We believe that as owners of Nationwide, members
should have the opportunity to share their views and have their say on
the direction of the business. I am pleased that our regular member
TalkBack sessions held at various locations throughout the United
Kingdom continue to be successful, with 11 sessions held this financial
year. To build on this success, we will be holding more TalkBack sessions
in the 2019/20 financial year. More information on these sessions can be
found on our website nationwide.co.uk
We encourage your participation at our Annual General Meeting (AGM),
a key event which provides the Board with the opportunity to meet with
members. All the directors, including the Chairs of Board Committees,
attend the AGM and will be available at the meeting to answer your
questions and hear your views. Members can also vote on important
issues such as re-electing directors to the Board. At this year’s AGM,
following the audit tender process referenced in last year’s report, members
will also be asked to vote on the appointment of Ernst and Young LLP as
the Society’s external auditor. We look forward to meeting as many of
you as possible at this year’s AGM in Manchester on 18 July 2019.
Our People and Culture
Our culture defines the way we do business and is an integral part of our
mutuality and our strategy. The Board recognises the importance of its
role in setting and embedding the “tone from the top” throughout the
Society. To this end, we pay close attention to culture and seek to shape
the way we operate to ensure it is in the interests of both the Society and
its members. The Board’s commitment to the development of the
Society’s culture was demonstrated at our strategy conference in October
2018. Culture was a key topic with discussions on how the Society’s
culture could further evolve to support the organisation’s purpose in a
rapidly changing environment. Further information on this can be found
on page 47.
Our Governance
At Nationwide we strive for excellence and transparency in corporate
governance and have adopted the UK Corporate Governance Code (the
Code) which sets the governance standards for public listed companies.
We do so in line with the Building Societies Association Guidance on the
Code to ensure alignment with good practice and our mutual status.
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Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
Further information about our governance structure and application of the
Code can be found in the Corporate Governance Report on pages 43 to 58.
We have considered the revision to the Code published in July 2018 which
is relevant to Nationwide from 5 April 2019. Over the past few months,
we have reviewed our activities and assessed how to further embed
the revised and updated principles into our governance framework. For
example, to bring the voice of colleagues directly into the Boardroom,
one of our non executive directors, Mai Fyfield has assumed specific
responsibility for ensuring the voice of our employees is heard in the
Boardroom. We will report on our compliance with the revised Code in our
2020 Annual Report.
Our Board
The Board collectively is responsible for the long-term success of your
Society and as Chairman, it is my responsibility to lead the Board and
promote its effectiveness within a strong and sound governance
framework. Each year, a formal evaluation of the effectiveness of the
Board and its committees is conducted. In 2019, the effectiveness review
was conducted internally.
We will report fully on the findings and any action plans in next year’s
annual report. We continue to make good progress on the plans we put
in place in response to the findings of the 2018 externally facilitated
Board effectiveness review. More information on the 2018 evaluation
process and its findings can be found on page 55.
It is vital to the success of Nationwide that the Board has the mix of skills
and diversity needed to set the strategic direction and apply the
appropriate level of oversight and challenge for the business. On a
regular basis, we review the Board’s balance of experience, knowledge
and skills to enable the discharge of its responsibilities. At the end of
2018, we were pleased to announce the appointment of Albert Hitchcock
to the Board as a non executive director. He also became a member of
both the Board IT & Resilience and Board Risk committees. Albert’s
wealth of experience in transformation technology will be hugely
valuable to the Board’s oversight of the Society’s technology strategy.
We also announced that, after eight years of service, Mitchel Lenson will
retire from the Board as a non executive director at our AGM in July 2019.
Gunn Waersted replaced Mitchel as Chair of the Board IT & Resilience
Committee in March 2019. I would like to take the opportunity to thank
Mitchel on behalf of the Board and Nationwide for his contribution to the
Board and wish him well for the future.
As part of its remit, the Nomination and Governance Committee
continues to focus on succession planning and leadership changes at
executive management level. With effect from June 2018, Tony Prestedge
was appointed Deputy Chief Executive Officer, a role which includes
The year ahead
At Nationwide, we have an established and effective governance
framework and we will continue to embrace the best governance
practices to enable us to deliver great value products and outstanding
service to you and our wider stakeholders.
David Roberts
Chairman
accountability for strategic planning. Tony has been an executive director
with Nationwide since 2007. We are pleased to welcome Patrick Eltridge
who joined the Executive Committee in February this year as Chief
Operating Officer. Patrick has deep and relevant experience in technology
development and operations from his previous role as Group Chief
Information Officer at Royal Bank of Scotland. He is also a member of the
Executive Risk Committee. Our Chief Financial Officer, Mark Rennison,
has discussed with the Board his intention to retire and we are actively
considering succession planning.
Diversity
The Board is committed to a diverse workforce and continues to focus
on increasing diversity on our Board and at all levels across the Society.
We recognise the significant benefits that come with having a diverse
Board and I am pleased to report how the diversity on our Board
compares with recent benchmarks set for listed firms. Whilst Nationwide
is a building society and not a listed company, we have already achieved
the Hampton-Alexander review 2020 target for a minimum of 33%
women’s representation on the boards of FTSE 350 companies. We have
also achieved the Parker review 2021 target of each FTSE 100 company
having at least one director from an ethnic background. We believe,
however, that diversity needs to look much wider than gender and
ethnicity to include variations in experience, skills, background and
personal attributes. To further promote the Board’s commitment and
support for diversity initiatives at Nationwide, we have designated
Baroness Usha Prashar, a non executive director, as the Board’s sponsor
of the Society’s diversity and inclusion agenda. More information on our
diversity targets across the Society can be found on page 21.
Governance at Nationwide
The Board has established a set of internal standards and principles by which Nationwide is governed to ensure sound and
prudent control of the Society, to keep members’ money and interests safe. Everyone in Nationwide has a role in governance:
The Board
Sets the strategy and tone, and
promotes ethical leadership,
culture, values, governance,
controls and risk management.
Chief Executive Officer
The Chief Executive Officer derives
their authority from the Board and
cascades standards and principles
agreed by the Board to the business.
Nationwide’s People
Everyone at Nationwide is
responsible for good governance
and adhering to the standards
and tone set by the Board.
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Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
UK Corporate Governance Code
Statement of Compliance
Nationwide is committed to high standards of corporate governance and has continued to adopt the UK Corporate Governance Code 2016 (the Code) which is available at www.frc.org.uk. The Board believes that throughout the year
ended 4 April 2019 Nationwide has complied with the principles of the Code as it applies to building societies (according to the Building Societies Association guidance of June 2016). Details of the principles, including a reference to where
you can read more about how Nationwide complied with them, are set out below:
Leadership
Effectiveness
Every company should be headed by an effective board
which is collectively responsible for the long-term success of
the company.
Role of the Board – Page 47
There should be a clear division of responsibilities at the head of
the company between the running of the Board and the executive
responsibility for the running of the company’s business. No one
individual should have unfettered powers of decision.
Roles and responsibilities – Pages 47 to 50
The Board and its committees should have the appropriate
balance of skills, experience, independence and knowledge
of the company to enable them to discharge their respective
duties and responsibilities effectively.
Board composition – Page 53
Nomination and Governance Committee report – Pages 75 to 80
There should be a formal, rigorous and transparent
procedure for the appointment of new directors to the Board.
The Board should be supplied in a timely manner with
information in a form and of a quality appropriate to enable
it to discharge its duties.
Information and advice – Page 54
The Board should undertake a formal and rigorous annual
evaluation of its own performance and that of its committees
and individual directors.
Nomination and Governance Committee report – Pages 75 to 80
Board effectiveness review – Page 55
The Chairman is responsible for leadership of the Board and
ensuring its effectiveness on all aspects of its role.
Roles and responsibilities – Pages 47 to 50
All directors should be able to allocate sufficient time to the
company to discharge their responsibilities effectively.
All directors should be submitted for re-election at regular
intervals, subject to continued satisfactory performance.
How the Board operates – Page 50
Time commitment – Page 53
Tenure and independence – Page 53
As part of their role as members of a unitary board, non
executive directors should constructively challenge and help
develop proposals on strategy.
Roles and responsibilities – Pages 47 to 50
All directors should receive induction on joining the Board
and should regularly update and refresh their skills and
knowledge.
Induction – Page 54
Nomination and Governance Committee report – Pages 75 to 80
1 The UK Corporate Governance Code uses the terminologies of ‘company’ and ‘shareholder’ but for the purpose of Nationwide and this Corporate Governance report, these terms should be read as ‘Society’ and ‘member’ respectively.
46
Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
UK Corporate Governance Code Statement of Compliance (continued)
Accountability
Remuneration
Relations with members
The Board should present a fair, balanced and
understandable assessment of the company’s position
and prospects.
Audit Committee report – Pages 59 to 66
Directors’ report – Pages 94 to 96
Executive directors’ remuneration should be designed
to promote the long-term success of the company.
Performance-related elements should be transparent,
stretching and rigorously applied.
There should be a dialogue with shareholders based on the
mutual understanding of objectives. The Board has
responsibility for ensuring that a satisfactory dialogue with
shareholders takes place.
Report of the directors on remuneration – Pages 81 to 93
Members help build society, nationwide – Page 58
The Board is responsible for determining the nature and
extent of the principal risks it is willing to take in achieving
its strategic objectives. The board should maintain sound
risk management and internal control systems.
Strategic Report – Pages 2 to 34
Business and Risk Report – Pages 97 to 164
Board Risk Committee Report – Pages 67 to 70
There should be a formal and transparent procedure for
developing policy on executive remuneration and for
fixing the remuneration packages of individual directors.
No director should be involved in deciding his or her own
remuneration.
Report of the directors on remuneration – Pages 81 to 93
The Board should use general meetings to communicate with
investors and to encourage their participation.
Members help build society, nationwide – Page 58
The Board should establish formal and transparent
arrangements for considering how they should apply the
corporate reporting and risk management and internal
control principles and for maintaining an appropriate
relationship with the company’s auditors.
Audit Committee report – Pages 59 to 66
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Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
Leadership
The role of the Board
The Board is responsible for ensuring that the Society can deliver long-term success for members and is built to last. It determines
the Society’s strategic objectives within a framework of risk appetite and controls. The Board monitors the Society’s overall financial
performance and ensures effective governance, controls and risk management.
When setting the Society’s strategy, the Board considers the impact that
its decisions might have on various stakeholders such as members,
employees, suppliers and the community. It is accountable for ensuring
that as a collective body, it has the appropriate skills, knowledge and
experience to perform its role effectively. The Board is also responsible
for providing leadership to the Society on culture, values and ethics.
The powers of the Board are set out in the Society’s Memorandum and Rules
which are available on the Society’s website nationwide.co.uk
The Board operates under formal terms of reference which include a
schedule of matters reserved to the Board for decision, with the day to day
running of the business delegated to the Chief Executive Officer. The Chief
Executive Officer derives his authority from the Board and cascades the
agreed standards to the business. The Board’s terms of reference can be
found on the Society’s website nationwide.co.uk
Culture
Leading the development of the Society’s culture remains a key focus of the
Board to support the organisation’s purpose, and the delivery of its strategic
ambitions. This is set against the backdrop of a rapidly changing competitive
and technological environment. The Society’s cultural assessment tool, the
Culture Mosaic, has been in use for the last year providing analysis and
insights to both the Executive Committee and the Board on the evolution of
the culture. Using both quantitative and qualitative information including the
organisation’s employee engagement survey and the Banking Standards
Board2 report, it helps the Society to develop aspects of the culture to meet
the changing needs of employees and members in the future.
Culture was a key theme of the Board Strategy Conference in October 2018.
Led by a variety of inputs and insights provided by the Mosaic and external
research, the cultural shifts needed to ensure the Society can respond to future
challenges and opportunities were agreed. It was recognised that Nationwide’s
culture has many strengths, particularly its member focus, ethic of care and
commitment to doing the right thing. Whilst maintaining this essence of what
makes Nationwide special for members and colleagues, the Board identified
more agility, pace and innovation as necessary to deliver Nationwide’s
business strategy and core purpose in a world being redefined by technology.
As a result, several priorities were identified that now form part of the
Society’s agenda on culture over the next few years. These include
re-shaping the cultural narrative, empowering colleagues, developing
leadership potential, creating a learning organisation and evolving the
Society’s approach to reward and recognition. An essential part of this is
to create a distinctive Nationwide experience for employees, focusing on
all aspects of working life that support performance and growth, helping
people to be at their best for members. This includes stretching ambition
on matters such as diversity, inclusion and wellbeing. Sponsoring and
monitoring progress in all these areas will be a priority for the Board.
Leadership structure
An overview of the Board structure and its committees as at 4 April 2019 is set out below.
Board
Board committees
Remuneration
Committee
Nomination and
Governance Committee
Audit
Committee
Board IT and
Resilience Committee
Board Risk
Committee
Chief Executive
Officer
Executive
Committee
Further information on the role of the Board and its committees can be found on pages 48 to 50 of this report and in the individual committee reports.
2 This is an annual survey undertaken by the Banking Standards Board covering 26 firms, including 9 systemically important institutions in the UK (of which Nationwide is one) plus a range
of other mid-sized and small banks and building societies. It aims is to raise standards across the sector. Over 3,300 colleagues at NBS participated in the last assessment.
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Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
Leadership (continued)
Whistleblowing
Nationwide has arrangements in place for employees, contractors and
temporary workers to raise concerns, in confidence, about possible
misconduct, wrongdoing and behaviour towards others, including those
relating to non-financial matters.
Nationwide’s Chairman, David Roberts, is the Society’s Whistleblowers’
Champion. David has the responsibility for ensuring and overseeing the integrity,
independence and effectiveness of Nationwide’s policies and procedures
on whistleblowing, including those intended to protect whistleblowers
from being victimised because they have disclosed reportable concerns.
Having effective and trusted confidential whistleblowing arrangements is a
key priority for the Board in supporting the Society’s open and honest culture.
The Board receives an annual whistleblowing report so that it is aware of
themes and categories of concerns raised during the year and has reviewed
the adequacy and effectiveness of the arrangements.
Nationwide provides employees, contractors and temporary workers with
annual training which includes information on how they can raise a
whistleblowing concern directly with the Financial Conduct Authority
or the Prudential Regulation Authority, without first reporting internally.
The Board
All directors are subject to conduct rules laid down by the regulators and
must satisfy requirements relating to their fitness and propriety. In addition,
the Chairman, the Senior independent director and Chairs of the key Board
Committees are subject to all aspects of the Senior Managers Regime3.
The Board governs and makes decisions as a collective body. Each role
on the Board has specific responsibilities. A summary of the responsibilities
of each role can be found below:
Role
Responsibilities
Role
Responsibilities
Chairman
David Roberts
Senior
independent
director
Lynne Peacock
Non executive
directors
Rita Clifton
Mai Fyfield
Albert Hitchcock
Mitchel Lenson
Kevin Parry
Usha Prashar
Tim Tookey
Gunn Waersted
Leads the Board, ensuring it is effective;
Key in setting the tone from the top both in terms of the Society’s culture –
fostering open and honest debates, and in setting the strategic direction;
Together with the other members of the Board, promotes the long-term success
and ensures the accountability of the Society to its members;
Supervises and supports the Chief Executive Officer.
Chief Executive
Officer
Joe Garner
Responsible for the day to day running of the business and accountable to the
Board for the Society’s financial and operational performance;
Implements and monitors systems for the apportionment and oversight of
responsibilities, controls and best practices, policies and processes within the
Society which maintain its operational efficiency and high standards of
business conduct.
Provides a sounding board for the Chairman;
Leads the annual review of the Chairman’s performance by the Board;
Available to directors and members when contact through the usual channels
(Chairman or Chief Executive Officer) may not be appropriate.
Acts as trusted intermediary for other directors when necessary.
Collectively set the tone from the top, in relation to culture and governance –
holding management to account for embedding and maintaining the Society’s
culture and values;
Contribute to the development of the strategy and risk appetite, exercising
effective oversight over risk management and controls;
Monitor performance and constructively challenge as appropriate using their
skills and expertise to engage in honest debate;
Promote the long-term success of the Society for the benefit of members and
ensure that the Society meets its obligations as a regulated firm.
Executive
directors
Tony Prestedge
Mark Rennison
Chris Rhodes
As members of the Board, collectively with non executive directors, set the
strategy, risk appetite and culture and values;
Ensure that the Board is kept informed of all significant matters, escalating issues
on a timely basis;
Accountable to the Board for the execution of the strategy and the performance
of the business;
Hold specific management responsibilities in the day to day running
of the business.
Society
Secretary
Mark Chapman
Advises the Board through the Chairman on all governance related matters.
Supports the Board and is responsible for ensuring good information flows
between the Board and the rest of the business to ensure that high quality and
timely information is provided to the Board.
3 The Senior Managers Regime allocates specific responsibilities to Senior Managers to enhance individual accountability across the business. It applies to UK banks, building societies, credit
unions, branches of foreign banks operating in the UK and the largest investment firms regulated by the PRA and the FCA.
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Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
Leadership (continued)
Board Committees
To assist the Board in carrying out its functions and to ensure that there is independent oversight of internal control and risk management, certain governance
responsibilities have been delegated by the Board to board committees. These board committees comprise independent non executive directors and,
in some cases, the Chairman. The terms of reference of the Board and its committees can be found on the Society’s website: nationwide.co.uk
Committee
Responsibilities
Executive Committees
There is a clear division of responsibilities between the Chairman, as
leader of the Board, and the Chief Executive Officer who is responsible for
the day to day running of the business. To the extent that matters are not
reserved to the board of directors, responsibility is delegated to the Chief
Executive Officer, who is assisted by the Executive Committee and the
Executive Risk Committee.
The Audit Committee provides oversight and advice to the Board in respect of financial reporting, financial crime, internal
and external audit, and the adequacy and effectiveness of internal controls and risk management systems.
Committee
Responsibilities
Audit
Committee
Board IT and
Resilience
Committee
Board Risk
Committee
The Committee provides oversight and advice to the Board on the Society’s IT strategy, IT architecture, IT operating
model effectiveness, delivery performance and resilience controls, including cyber risk, as well as overseeing the Society’s
data management strategy.
Executive
Committee
The role of the Committee is to provide oversight and advice to the Board in relation to current and potential future risk
exposures and future risk strategy including determination of risk appetite. In addition, the Committee is responsible for
monitoring compliance oversight, and the effectiveness of the Enterprise Risk Management Framework (ERMF). It also
advises the Remuneration Committee on any risk adjustments to be made to remuneration.
Nomination
and Governance
Committee
The Nomination and Governance Committee assists the Chairman in keeping the composition of the Board under review,
making recommendations to the Board on succession planning, executive level appointments and leading the
appointments process for nominations to the Board. The Committee oversees the implementation of the Society’s
Equality, Diversity and Inclusion strategy and objectives. It also reviews the Board’s governance arrangements and makes
recommendations to the Board to ensure that the arrangements are consistent with best practice.
Executive Risk
Committee
Remuneration
Committee
The Remuneration Committee is responsible for determining and agreeing with the Board the framework or broad
policy for remuneration of the Chairman, the directors and other senior executives of the Society including employees
who are identified as material risk takers under the PRA Remuneration Code. It determines, within the terms of the
agreed policy, the specific remuneration packages for these roles. The Committee also reviews the ongoing
appropriateness and relevance of the remuneration policy across the rest of Nationwide.
The Executive Committee is Nationwide’s
key operational committee which oversees
the day to day operations of the Society’s
business. This Committee meets once a
month, reviews matters that are to be
presented to the board of directors, and is
composed of the Chief Executive Officer,
the three other executive directors and the
seven individuals who form the Society’s
senior leadership team. More information
on Nationwide’s senior leadership team
can be found on page 41.
The Executive Risk Committee, which
meets monthly, is responsible for ensuring
a coordinated approach across all risks
and oversight of the risk committees such
as the Operational Risk Committee, Assets
and Liabilities Committee, Credit
Committee, Conduct and Compliance
Committee and the Model Risk Oversight
Committee. The Committee’s membership
comprises the four executive directors and
a number of other members of the
Executive Committee. It is chaired by the
Society’s Chief Risk Officer.
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Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
Leadership (continued)
How the Board operates
The Board meets regularly and holds a strategy meeting annually to review
strategic options open to the Society in the context of the economic,
regulatory and competitive environment. The Board also meets when
necessary to discuss important emerging issues that require consideration
between scheduled Board meetings. There were ten scheduled Board
meetings this year including the annual strategy day. The Board meetings
are structured to ensure that the Board covers a range of items (as detailed
below) relating to the Society’s business, strategy, culture and performance
through open debate. The Chairman regularly meets with the non executive
directors, without executive directors present.
The attendance record for board members during the period is set out below.
The table shows the actual number of meetings attended with the number
of meetings for which directors were eligible to attend shown separately.
Each director attended all the meetings they were eligible to attend in the year.
In addition to the meetings shown below, two joint Board and Audit
Committee meetings were held during the year to consider the Q1 and Q3
Interim Management Statements.
Board attendance
Meetings attended / (eligible to attend)
Rita Clifton
10 / (10)
Mai Fyfield
10 / (10)
Joe Garner
10 / (10)
Albert Hitchcock*
2 / (2)
Mitchel Lenson
10 / (10)
Kevin Parry
10 / (10)
Lynne Peacock
10 / (10)
Meetings attended / (eligible to attend)
Usha Prashar
10 / (10)
Tony Prestedge
10 / (10)
Mark Rennison
10 / (10)
Chris Rhodes
10 / (10)
David Roberts
10 / (10)
Tim Tookey
10 / (10)
Gunn Waersted
10 / (10)
* Joined the Board on 2 December 2018
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Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
What the Board did this year
Throughout the year, the Board reviewed
all areas of cultural and strategic
importance, as well as reviewing
and approving financial information,
governance and regulatory matters.
The Board regularly received updates on business progress and the issues
and challenges faced by management. Board activities were structured to
support the Society’s strategy, focusing on the cornerstones as outlined on
pages 9 and 10, and an in depth review of the progress of the strategy was
considered by the Board at its annual strategy day. During the year, focus
was given to implementation plans for the Society’s technology initiatives,
including the people recruitment needs and organisational changes
required for successful delivery of the Society’s technology programme.
The Society continues to develop and invest in new products and services
which are developed within the Board’s risk appetite.
In addition to the main items for consideration, the Board received updates
at each meeting on the work of its principal committees to keep abreast
of significant issues.
Building a
National
Treasure
Building
PRIDE
Building
Legendary
Service
Building
Thriving
Membership
Built to
Last
The following is a non-exhaustive list of the matters that the Board has considered during the year:
Building thriving membership
Built to last
Building a
National
Treasure
Building
PRIDE
Building
Legendary
Service
Building
Thriving
Membership
Built to
Last
Items discussed
• Considered how best to meet the needs of small and
micro businesses, and approved the proposal to launch
Nationwide for Business and to submit a bid for
£50 million from the RBS Alternative Remedies Package.
• Approved the development of a range of initiatives
designed to broaden the products and services offered
to Nationwide’s members.
• Reviewed and discussed proposed enhancements to
propositions for younger customers and initiatives which
will continue to deepen relationships with existing
members. This included consideration of progress made
in growing the number of committed members.
• Approved enhancements to Nationwide’s Later Life
lending range.
Building a
National
Treasure
Building
PRIDE
Building
Legendary
Service
Building
Thriving
Membership
Built to
Last
Items discussed
• Approved the Society’s investment in technology, part of which would
enable the Society to deliver increased resilience, making it more secure
and delivering better member outcomes through improved digital
capabilities and better use of data, whilst also driving down costs.
• Reviewed and approved the Society’s 2019-24 five year plan.
• Regularly assessed financial performance of the Society and its main
businesses via reports from the Chief Executive Officer and the Chief Financial
Officer. Approved the Society’s Annual Report and Accounts prior to
publication with consideration given to the viability of the business over a three-
year horizon and the preparation of the accounts on a going concern basis.
• Discussed the output of a Board and Executive Committee Business
Continuity Exercise under the Society’s Recovery Plan to ensure that
adequate provisions and processes are in place to protect the Society’s
business and its members. Approved the overall set of actions within the
annual recovery planning scenario.
• Received quarterly updates from the Chief Risk Officer on Nationwide’s risk
profile highlighting the top risks and key areas for consideration. Approved
revisions to the Board risk appetite to take into account the additional
financial risk and a reduction in the longer-term operational risk profile
of the Society arising from the Society’s investment in technology.
52
Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
What the Board did this year (continued)
Building legendary service
Building PRIDE
Building a national treasure
Building a
National
Treasure
Building
PRIDE
Building
Legendary
Service
Building
Thriving
Membership
Built to
Last
Items discussed
• Discussed the Society’s ability to collaborate and work with
partners across the FinTech community in developing new
technologies to ensure that the Society is taking a leadership
position in a world of Open Banking. The Board received an
overview of the current UK Digital Banking market with a
focus on the progress made in the banking sector in this area.
• Received an update on the delivery on the technology investment
and discussed the initiatives to support the delivery and the
roadmap for execution of the Society’s technology plans.
There was a focus on initiatives to develop a platform that will
support future growth and new services whilst honouring
current delivery commitments with a view to improving
member experience across the sales and service journeys.
• Reviewed progress in the Society’s branch transformation,
recognising that branches continue to remain an important
and valued channel for members and the need to ensure
Nationwide is in the right place with the best services to
meet members’ needs.
Building a
National
Treasure
Building
PRIDE
Building
Legendary
Service
Building
Thriving
Membership
Built to
Last
Building a
National
Treasure
Building
PRIDE
Building
Legendary
Service
Building
Thriving
Membership
Built to
Last
Items discussed
• Reviewed the progress made on the development of
Nationwide’s culture with a review of a Culture Mosaic which
draws together a number of cultural themes within the
organisation. This includes inputs from the 2018 ‘Viewpoint’
employee engagement survey and the 2018 Banking
Standards Board survey on culture. The Board reviewed key
themes and areas for prioritisation.
• Reviewed the plans for recruitment, training and
development and retention of employees to support the
successful execution of our technology strategy.
• Reviewed the Annual Whistleblowing Report and the
Society’s whistleblowing arrangements, noting it as a key
priority for the Board in support of the Society’s open and
honest culture.
Items discussed
• In considering what makes a national treasure the Board,
as part of the Society’s social investment strategy, explored
opportunities to lead active campaigns and align to the key
strategies pursued by the Nationwide Foundation.
• Received regular updates on the delivery of the Society’s
social investment strategy which focuses on providing decent
affordable homes for people in need. As part of this, the Board
approved the establishment of the Oakfield Foundation,
a charitable foundation to support local initiatives that will
complement the philosophy and aims of the Society’s
Oakfield community development project.
• Received regular updates on reputation and the positioning
of the Society’s brand, giving the Board the opportunity to
reflect upon the progress made in re-defining the Society’s
brand and review the propositions offered to members.
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Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
Effectiveness
Board composition
Member nominations
The Nomination and Governance Committee is responsible for reviewing
Board composition, considering succession plans for both the Board and
senior executives, selecting and appointing new directors and considering
the results of the Board effectiveness review. More information on the work
of this Committee during the year can be found on pages 75 to 80.
Members of Nationwide have the right to nominate candidates for election
to the Board, subject to the Society’s Rules and compliance with PRA and
FCA requirements. No such nominations had been received by 4 April
2019, this being the deadline for election to the Board at the 2019 Annual
General Meeting (AGM).
The individual biographies of the directors, which include their relevant
skills and experience, can be found on pages 36 to 42.
Time commitment
To discharge their responsibilities effectively, non executive directors must
commit sufficient time to their role. The time the Society’s non executive
directors are expected to commit to their role at Nationwide is agreed
individually, as part of the appointment process, and depends upon their
responsibilities. For example, additional time commitment will often be
required of the Senior independent director and Chairs of the Board
Committees to fulfil their responsibilities. Time commitments are reviewed
annually, or more regularly if needed, as Nationwide recognises the need
to take account of changes in best practice – for example any revisions to
the Code recommending different or expanded roles of Board Committees.
For this year, the Chairman has individually confirmed with each non
executive director that they have been able to allocate sufficient time to
fulfilling their duties. The Chairman spends a minimum of an average
of 2.5 days per week on Nationwide business. Externally, there has been
no increase in the other significant commitments of the Chairman during
the year which would impact the time he has to fulfil the role.
Executive directors’ service contracts and the letters of appointment for
the Chairman and non executive directors are available for inspection at
the Society’s principal office and will be available at the AGM.
Tenure and independence
The Society’s Memorandum and Rules (Rules) require that board directors
must be re-elected by the Society’s membership every three years.
However, in compliance with the UK Corporate Governance Code (the
Code), all directors of Nationwide are subject to election or re-election by the
members annually. Before re-election, a non executive director will be subject
to a review of that director’s continued effectiveness and independence.
The independence of each non executive director is considered by the
Nomination and Governance Committee annually. The Committee considers
factors such as length of tenure and relationships or circumstances which
are likely to affect or appear to affect the director’s judgement in
determining whether they remain independent. On the recommendation
of the Committee, all non executive directors have been assessed by the
Board to be independent as to character and judgement and to be free of
relationships and other circumstances which could materially affect the
exercise of their judgement. Following this assessment, all directors
eligible for re-election (save for Mitchel Lenson who has announced his
retirement from the Board) will be recommended to members for
re-election at the AGM in July 2019. The Code requires the Chairman to
be independent on appointment. Thereafter, the test of independence no
longer applies to this role. David Roberts, Chairman, was deemed to be
independent upon his appointment to the role of non executive director
and Chairman Elect.
Board composition
4
5
10
9
Executive and
non executive directors
• Executive directors
• Non executive directors
Gender
• Male
• Female
Board diversity
5
3
1
5
Age of board members
• 45-50 • 51-55
• 56-60 • 61+
6
5
3
Directors’ tenure
• 0-3 years
• 3-6 years
• 6+ years
54
Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
Effectiveness (continued)
Conflicts of interest
Induction
Directors have a legal duty to avoid conflicts of interests. Prior to appointment
(and on an ongoing basis), potential conflicts of interest are disclosed and
assessed to ensure that there are no matters which would prevent that person
from taking on the appointment.
If any potential conflict arises, the Society’s Rules permit the Board to
authorise the conflict, subject to such conditions or limitations as the
Board may determine. The Board has considered the current external
appointments of all directors which may give rise to a situational conflict
and has authorised potential conflicts where appropriate.
In addition, at the start of every Board or Committee meeting the Chair
asks if there are any conflicts (in addition to those already recorded) to be
declared. In a situation where a potential conflict arises, the director will
recuse themselves from any meeting or discussion, and all material in
relation to that matter will be restricted, including Board papers and minutes.
Details of the Society’s directors’ other directorships can be found in the annual
business statement on pages 250 to 251.
Information and advice
The Board has full and timely access to all relevant information to enable it
to perform its duties effectively. The Society Secretary ensures appropriate
and timely information flows between the Board, its Committees and senior
management, enabling the Board to exercise its judgement and make fully
informed decisions when discharging its duties. The Society Secretary
supports the Chairman in setting the Board agenda. Board papers are
distributed to all directors in advance of Board meetings via a secure electronic
system allowing directors to access information in a timely manner.
All directors have access to the advice and services of the Society Secretary,
who is responsible to the Board for ensuring that Board procedures are
followed and compliance with applicable rules and regulations is observed.
The directors may, if required, take independent professional advice at the
Society’s expense.
Following appointment, each new director receives a full and formal bespoke
induction to familiarise them with their duties and the Society’s business
operations, and risk and governance arrangements. Inductions are tailored
to each director’s individual experience, background and areas of focus.
The induction programme includes meetings with members of the
Executive Committee and senior management in key areas of the business.
Typical areas covered include an overview of the Society’s business
strategy and model, the Society’s brand, products and markets, capital
management and financial controls, and risk and governance responsibilities,
as well as information on the Society’s people and culture. These meetings
are supplemented by induction materials such as recent Board papers and
minutes, industry and regulatory reports and relevant policies.
Training and development
To ensure that the directors have the necessary knowledge and understanding
of the Society’s business, they are regularly provided with the opportunity for
ongoing training and professional development. Directors are encouraged to
continually update their professional skills and knowledge of the business.
The Chairman has conversations with each non executive director on a
regular basis during the year and at the end of the year to review performance
and development needs. The senior independent director is responsible for
the evaluation of performance and development needs for the Chairman.
Executive board directors continue to undertake performance and
development review and planning activity as part of the annual performance
management cycle. Training opportunities are provided through one-to-one
meetings, presentations and briefings by senior management as well as
external advisers. During the year, the directors attended briefing sessions
on subjects including derivatives and hedge accounting, overview of models
and cloud computing from a Nationwide perspective.
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Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
Board effectiveness review
2018 Board evaluation
To be effective as a Board, directors must function cohesively as a group.
Each year, an evaluation of the effectiveness of the Board is conducted,
providing an opportunity to identify and optimise the Board’s strengths as
well as highlighting areas for further focus and development.
The evaluation includes an assessment of the effectiveness of Board
Committees and an evaluation of the performance of individual directors. The
approach which has been developed at Nationwide is designed to ensure
that all directors, both executive and non executive, contribute effectively
to the good governance of Nationwide. The contribution of individuals is
one of the factors considered when deciding whether individual directors
will offer themselves for election or re-election at the Society’s AGM.
The 2018 evaluation process was an external review led by Niall FitzGerald
KBE. Mr FitzGerald has chaired a wide range of companies and public
sector bodies, including Unilever, Reuters and the International Business
Council. The Board was of the view that his broad experience would
significantly assist the development of the Board. Mr FitzGerald has no
other connection with the Society.
Form of the review
The review took place between January and March 2018 with the main
theme being how the Board could be a high performing Board whilst in
the pursuit of creating a long-term sustainable business. Mr FitzGerald
attended Board and Board Committee meetings as an observer, reviewed
a number of Board papers and materials and held a series of one to one
meetings with Board members. An initial Board discussion and feedback
session took place in April 2018 with a final report produced for further
discussion with the Board in May.
Findings
The review endorsed the belief that the Board and its Committees are
performing and operating effectively. Meetings were found to be professionally
led with challenge and constructive debate by all encouraged. Mr FitzGerald
found discussions at meetings to be engaging and insightful. The spirit of
mutuality was evident in the Board’s discussion with a strong focus on the
interests of members. Changes to the Board and executive leadership had
been handled well, resulting in an experienced and professional team.
As the Society’s strategy evolves and the complexity of the business grows,
key priorities for the Board are to ensure that the Society’s culture and mutual
values are preserved and that the immediate and short-term decisions
necessary to implement the strategy do not compromise long-term success.
The Board adopted the recommendations from the findings and developed
a plan to implement the actions with oversight by the Nomination and
Governance Committee.
Following the review, a number of changes to board processes have been
made to ensure that the Board’s focus remains on strategic, not operational,
matters. The progress made on the key recommendations is described below.
Key Recommendations
Action Taken
Increased focus on key strategic issues
and greater board debates on risks and
risk appetite from a strategic perspective.
The frequency of Board meetings and programme have been revised to ensure that the
Board devotes its time to the most important issues. This has allowed for enhanced
discussions and debate of key strategic matters, including macro risks, at Board meetings,
with the balance of the Board’s attention moving more towards strategy and its execution.
Production of high quality reporting and
information flows to the Board.
The production of high quality Board papers and management information, including
KPIs, has continued to enhance the quality of debate at Board meetings and assist the
Board in making timely and informed decisions.
Continuing to monitor the talent pipeline
for key Board and senior management
positions.
To ensure that the Board has visibility of talent in the Society, an annual Board ‘deep dive’ on
the talent pool led by the CEO has been incorporated into the Board’s forward programme.
2019 Board evaluation
Following the comprehensive external review in 2018, the 2019 Board
evaluation process was an internal review led by the Society Secretary.
The review took place in March and April of 2019.
The process took the form of a questionnaire covering general areas of
effectiveness as well as actions implemented for the Board and Committees in
response to 2018 review. It was followed by one to one meetings between
the Chairman and individual directors to provide feedback and expand on
particular aspects, for example culture and performance of the Board.
The results of the questionnaire and feedback were presented to the Board for
discussion in May 2019 and will form the basis of an action plan for completion
during 2019. A similar process will be followed for Board Committees.
Further information on the outcomes and actions identified will be presented
in the Annual Report and Accounts 2020.
The evaluation of the performance and contribution of each director was
conducted by the Chairman. The reviews concluded that each Director
continues to perform effectively and demonstrate commitment to their role.
Led by Lynne Peacock, the senior independent director, a review of the
Chairman’s performance was carried out by the Board. Feedback on the
Chairman’s performance was obtained from all the directors as well as
selected members of the management team. The results were collated
and were discussed at a meeting without the Chairman present. The
review concluded that the Chairman continues to perform effectively and
demonstrate commitment to his role.
56
Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
Engaging with stakeholders
The Board recognises the impact the Society has on its diverse range of stakeholders and therefore understands the importance
of engaging with them at all levels. The Board takes into consideration the interests of these stakeholders as part of its discussion and
decision-making processes. The detail below provides an insight into the Society’s engagement with its principal stakeholders.
Members
Employees
We listen to our members
As a mutual organisation, members are at the heart of the
Society’s activities and need to be able to share their views
on the overall direction of the business.
The Member TalkBack Programme is a series of events to facilitate dialogue between
members, the Society’s Board and senior management. Members can sign up to ‘Nationwide
Connect’, our online research community which helps provide feedback on a variety of topics
including products and services, as well as perceptions of how the directors are running
the Society and directors’ remuneration. Members are also encouraged to attend the Society’s
AGM to hear first-hand from directors and have their say on the way the Society is run.
More information on how the Society engages with its members can be found on page 58.
We value our colleagues
Employees are critical to the services provided by
the Society and employee engagement is regularly
discussed, including presentations to the Board
on the results of “Viewpoint”, the employee
engagement survey.
During the year, the General Secretary of the Nationwide Group Staff
Union attended a Board meeting and a Remuneration Committee
meeting to discuss the relationship of the Union with Nationwide and
the alignment of interests between the Union and the Society.
Nationwide employees can vote their colleagues onto leadership forums
under the People’s Choice programme, with a view to bringing a different
perspective to our leadership forums. At least twice a year, a small number
of the People’s Choice representatives attend one of the Society’s Board or
Board Committee meetings to share their insight on a topic of their choosing.
The CEO also engages directly with employees via the Society’s intranet
on topics of interest and receives comments and views directly back
from employees across the entire Society. To further promote the link
and engagement between the Board and colleagues, Mai Fyfield has
been appointed the non executive director with specific responsibilities
for employee engagement.
More information on employee engagement metric can be found
on page 20.
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Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
Communities
Investors
We support our local
communities
As a building society, Nationwide believes in supporting
people and their communities.
That includes housing, and Nationwide’s belief is that regenerating local areas,
working with local people and reinvesting profits will create real communities.
In line with the member vote in 2007, the Society has continued to invest at
least 1% of its pre-tax profits to support good causes, focusing on the belief
that ‘Everyone deserves a place fit to call home’. The Board regularly receives
updates on progress made.
More information on the Society’s community activities can be found on page 23.
Suppliers
We engage actively with our investors
Nationwide is active in wholesale funding markets, engaging
in the issuance of instruments.
Wholesale investors contribute towards the Society’s loss absorbing capital, helping to ensure
that Nationwide is built to last. The Society maintains an active dialogue with the investors in
its instruments through a thorough investor relations (IR) programme. During a typical year
the IR team will host around 500 meetings, providing current and potential investors with the
opportunity to meet senior managers and directors of the Society.
Regulators
We work closely with
our suppliers
Nationwide has approximately 1,200
suppliers who are seen as an extension
of the organisation and therefore key to
the Society’s ability to develop and deliver
services to its members.
It is important to Nationwide that all suppliers represent the
Society in a manner that enhances its reputation and
relationships with its stakeholders. As a result, the Society
endeavours to partner with organisations that demonstrate
a commitment to its mutual values, ethics, policies and
standards. This is also embedded in the Code of Practice
that we ask suppliers to commit to. The Nationwide Supplier
Portal (https://www.nationwide.co.uk/suppliers/suppliers-
home)] is designed to provide any new, potential or existing
suppliers with all the information they need to know about
supplying goods and services to Nationwide.
We seek an open
relationship with
regulators
Nationwide is committed to complying
with all legislation and regulatory rules
applicable to its business.
It aims to foster and maintain an open and transparent
working relationship with its key regulators, the Prudential
Regulation Authority and the Financial Conduct Authority.
In addition to receiving regular updates and reports on the
views of the Society’s key regulators, directors also meet
regularly with representatives of these bodies as part of the
regulators’ supervisory activities.
58
Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
Members help build society, nationwide
As a mutual organisation, members are also the owners of Nationwide, and we want our members to be able
to share their views on the overall direction of the business. To help them do this, we aim:
to make it as easy as possible for
members to talk to us in whichever
way they prefer
to listen and respond to member
suggestions and comments, building
products and services based around
their needs
to include members in other activities
they’d like to join us in, for example
deciding how our community grants are
allocated via our Community Boards
programme (see page 23 for details)
AGM
The AGM is the key event at which members can have their say on the
way the Society is run and hear first-hand from directors. It is the main
opportunity to hold the Board to account, as members can vote for or
against those standing for election and on other key issues.
Last year more members than ever used the online facilities to cast their
vote, with 41% of the voters choosing to vote online, although overall
turnout at meetings continues to decline, both at Nationwide’s AGM and
across the building society sector. As has been the practice for a number
of years, the meeting is held at a different venue across the UK each year,
making us more accessible to members across the country. This year, the
AGM will be held at Manchester Central on Thursday 18 July.
As well as the AGM, we also work throughout the year to speak to our
members and to encourage feedback on the way we operate. The main
ways we did this during 2018/19 were:
Face to face
Our popular Member TalkBack programme continued through 2018/19
with the delivery of 11 events across the UK. Over 750 members came
along to these events over the course of the year. TalkBacks give our
members the chance to meet and speak to the Society’s Board and senior
management about anything on their mind. 99% of members attending
felt ‘valued’ or ‘more valued’ as a result of taking part. In 2019/20 we’re
looking to increase the number of TalkBacks held, visiting more towns
and cities, and meeting even more members.
submit it here, and they can also see suggestions made by other members.
In 2018/19 just under 800 suggestions were made.
Our branch teams have also been involved in their communities. They
attended or held 168 events in 2018/19, ranging from supporting local
fetes, carnivals and Pride parades, through to offering advice on protecting
yourself from fraud, educating children on money and helping people to
understand the world of mortgages. We held over 2,500 conversations at
these events with existing and prospective members.
Members were also able to engage with Nationwide colleagues at 10
agricultural shows and festivals across the UK, including the Royal Norfolk,
Great Yorkshire and the Royal Welsh shows.
Online
As well as the research Nationwide commissions to find out how members rate
our service, we have around 9,000 members signed up to our online customer
research community ‘Nationwide Connect’, which helps provide feedback
on a variety of topics including executive remuneration. Any member can
sign up to the Connect panel via our website. This year the panel gave their
views on topics such as savings bonds, credit card offerings, standard rate
mortgages and much more, via regular online discussions and polls.
Nationwide Connect also includes Member Suggestions. Any member who
wants to suggest a change or improvement to our products or services can
We also held two live online webcasts in 2018/19. One was a lifestyle show
exclusively available for members, and the other gave a group of members
the opportunity to ask questions directly to Chief Executive Joe Garner on
everything related to savings rates.
From the live and on-demand views, over 2,100 members have been able to
interact with this online content. We’ll continue to consider webcasts as a
channel to reach our members for future engagement as opportunities arise.
Social media
The number of followers on the Society’s main social media channels has
increased by 11% over the last 12 months with content on these channels
being seen by over 11 million members and non-members. Content relating
to local branch stories, social investment and fraud education has generated
the most engagement and advocacy.
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59
Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
Audit
Committee
report
Kevin Parry
“ The Audit Committee has continued to
provide challenge to management and
oversee the integrity of financial reporting
and the strength of financial controls.”
Dear fellow member,
I am pleased to be able to report on the Audit
Committee’s key role in safeguarding the interests
of Nationwide for the benefit of its members.
The Committee continues to challenge the
financial reports prepared by management, to
scrutinise the effectiveness of the Society’s
internal controls, to review the Society’s
procedures for fighting financial crime, and to
oversee the assurance work of our internal and
external auditors. We monitor external risks to
ensure that reporting and controls respond to
developments. This has included both
uncertainty over future UK economic conditions
and external security threats.
Our oversight of financial reporting matters has
focused on assumptions driving loan loss
provisions following a significant change in
accounting requirements this year. We have also
prioritised monitoring development of the control
environment, including the increasing maturity
of control ownership across the Society, and
controls in important business activities such
as payments and digital services.
To comply with mandatory requirements for
rotation of the external auditor, we completed
a rigorous tender process which resulted in the
selection of Ernst & Young LLP who will be
auditor for the 2020 year end, subject to
approval at the Annual General Meeting. This
year the Committee has overseen preparation
for the auditor transition and I look forward to
working with EY.
I should like to thank PwC for the audit service
they have provided to the Society over the last
28 years.
If any member has feedback on this report,
I should be pleased to receive their comments.
I will attend the 2019 AGM and be available to
answer members’ questions.
Kevin Parry
Chair – Audit Committee
Who sits on the Committee
The Board believes members of the Audit Committee have the financial, risk, control and commercial expertise
required to provide effective challenge to management. Kevin Parry and Tim Tookey are considered by the Board
to meet the requirement of the UK Corporate Governance Code to have recent and relevant financial experience.
Committee members
Meetings attended (eligible to attend)
Kevin Parry (Chair)
7 / (7)
Rita Clifton
6 / (7)
Lynne Peacock
7 / (7)
Tim Tookey
7 / (7)
Regular attendees of the Committee include: Chairman of the Board, Chief Executive Officer, Deputy Chief Executive
Officer, Chief Internal Auditor, Chief Financial Officer, Chief Product and Propositions Officer, Chief Risk Officer,
Director of Financial Reporting and representatives of PricewaterhouseCoopers and Ernst & Young
60
Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
How the Committee works
Report on the year
Preparation of the financial statements and external financial reporting
The Committee spent significant time in reviewing the half year and full
year financial statements, and also the interim management statements
published in August 2018 and February 2019. In particular, the Committee
discussed and challenged management’s analyses, the external auditor’s
work and conclusions on the main areas of judgement.
Internal controls and risk management systems are in place to provide
assurance over the preparation of the Annual Report and Accounts.
Financial information submitted for inclusion in the financial statements
is attested by individuals with appropriate knowledge and experience.
The Annual Report and Accounts are scrutinised throughout the process
by relevant senior stakeholders before being submitted to the Audit
Committee, who provide debate and challenge, before recommending to
the Board for approval. Key controls in the process are subject to regular
testing, the results of which are reported to the Audit Committee.
The Audit Committee comprises independent non executive directors who
bring a diverse range of experience in business, finance, auditing, risk and
controls, with particular depth of experience in the financial services
sector. The Committee is therefore able to challenge and scrutinise the
work of management. The Committee also draws on the expertise of key
advisors and control functions, including the internal and external auditors.
The Committee provides oversight and advice to the Board on the matters
listed in its terms of reference (available at nationwide.co.uk) and reports
to the Board on those matters after each meeting. The Committee is
authorised by the Board to obtain any information it needs from any
director or employee of the Society. It is also authorised to seek, at the
expense of the Society, appropriate professional advice as needed. The
Committee did not need to take any independent advice during the year.
The Committee works closely with the Board Risk Committee, as some
matters are relevant to both committees. A joint meeting was held
in March 2019 to review the 2019/20 assurance plans for Risk and
Compliance Oversight and Internal Audit.
During the year, the Committee met privately with the Chief Internal
Auditor, the Society’s external auditors and the Chief Risk Officer, without
management present.
The Committee reviews its terms of reference and its activities over the previous
year as part of an annual cycle to confirm that its activities were in line with
its remit. More detail on the Committee’s duties and responsibilities can be
found within its terms of reference on the Society’s website: nationwide.co.uk
The Committee’s effectiveness is reviewed annually. In 2018, a number of
recommendations were made to improve the performance of the Committee.
In response to the outcome of the review, there are regular presentations
to the Board by the Chief Internal Auditor, giving an overview of the control
environment and suggestions for continuous improvement. The 2019
effectiveness review process is described on page 55.
How the Committee spent its time in the year
32%
32%
16%
7%
5%
8%
• Financial reporting • Internal controls and risk management (including internal audit) • External audit
• Financial crime • Statutory duties • Other (including meeting administration)
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61
Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
Key areas/matters considered by the Committee during the year
The significant judgements, issues and actions taken by the Committee in relation to the Annual Report and Accounts 2019 are outlined below. Each of these matters was discussed with the external auditor during the year and,
where appropriate, have been addressed as areas of audit focus in the Auditors’ Report.
Area of focus
Committee’s response
Accounting policies, including
the implementation of IFRS 9
(accounting for financial instruments)
and forthcoming implementation
of IFRS 16 (leases)
The Committee reviewed the Society’s accounting policies and confirmed they were appropriate to be used in the financial statements. It also considered changes to policies
required by new and forthcoming accounting standards, and the effectiveness of new models and processes introduced as a result.
IFRS 9 was implemented for the 2018/19 financial year and represents a significant change in accounting. The Committee had monitored the Society’s preparations for the
introduction of IFRS 9 throughout the implementation programme, and in 2018/19 received regular reporting from management on the outputs from models and nature and
value of any post model adjustments in relation to expected credit loss provisions. The Committee also discussed management’s regular cycle of model monitoring and
development, which included incorporating into the models a number of items previously recognised as post model adjustments. At the Committee’s request, management
included changes to models in regular reporting to the Committee.
The Committee received updates from management on preparations for the adoption of IFRS 16, which will also become effective from 2019/20. The Committee discussed
work carried out to identify leases which will be recognised on the balance sheet and the quantification of adjustments on implementation, including the disclosure of the
expected impact in the financial statements.
The Committee considered management’s proposal to adopt the hedge accounting provisions of IFRS 9 for individual hedges from 2019/20 and agreed that it was appropriate.
Alternative Performance Measures
and disclosure of member financial
benefit
Details on member financial benefit are
shown on page 28
The Committee continues to consider that certain non-GAAP measures, such as underlying profit, aid an understanding of the Society’s results. However, it is important that
items are excluded from underlying profit only where they do not relate to ongoing business performance. Following discussion with management, the definition of underlying
profit was reviewed and updated during the year, resulting in a change to include both the Bank Levy and FSCS management charges in underlying profit.
The other performance disclosure considered carefully by the Committee was the value for member financial benefit included in Nationwide’s financial reporting. This metric
shows the benefit provided to members in the form of differentiated pricing and incentives, representing Nationwide’s interest rate differential, lower fees and higher member
incentives compared with market averages and is considered a key performance indicator.
The Committee was pleased that, following improvements made in the prior year, the documentation of, and controls over, the calculation of member financial benefit measure
have matured. The Committee was satisfied with the calculation.
Going concern and business viability
statement
See the Directors’ Report (page 95)
for the business viability and the going
concern statements
The Committee reviewed the going concern basis of preparation of the financial statements and the statement of business viability for recommendation to the Board for
approval. As a deposit taking institution, liquidity management and viability are core requirements for the Society and there is substantial oversight by the Board through the
Risk Committee and the Audit Committee. Information scrutinised by the Committee in drawing conclusions included assessment of levels of capital and availability of funding
and liquidity, together with output of stress tests and reverse stress tests. It also covered profitability from business activities and any matters likely to affect future development,
performance and financial position, together with the assessment of principal risks.
The Committee considered whether a longer period than three years should be covered in the viability statement, concluding that, as in the prior year, a period of three years
was appropriate, particularly when taking into account changes in the economic, technological and regulatory environment.
The Committee concluded that it remained appropriate to prepare the accounts on a going concern basis and recommended the viability statement to the Board for approval.
62
Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
Key areas/matters considered by the Committee during the year (continued)
Area of focus
Committee’s response
Fair, balanced and understandable
report and accounts
The Society’s Annual Report and Accounts, taken as a whole, must be fair, balanced and understandable.
The Committee considered the overall presentation of the financial statements and was satisfied that the reporting, including the disclosures in the notes to the accounts,
fairly represented the results and business performance for the year ended 4 April 2019.
The Committee considered the Annual Report and Accounts against a number of hallmarks of ‘fair, balanced and understandable’, including whether the overall portrayal of
Nationwide was open and honest, setting out both successes and challenges, and whether language was used that a person with reasonable knowledge of financial sector
financial reporting could understand. The Committee also considered whether the reporting was relevant in the context of the Society’s strategy.
The Committee considered a report by management setting out the review processes used to assess the overall presentation of the Annual Report and Accounts. This included
an independent management review by members of executive management covering a wide range of business responsibilities, which concluded that the reporting was clear,
consistent, balanced, open and appropriately focused on material items.
The Committee reviewed the draft Corporate governance report and was satisfied that it presented an accurate view of the work of the Board and its Committees.
After consideration of management’s report and the Committee’s own review, the Committee concluded that it could inform the Board that, in its opinion, the Annual Report
and Accounts were fair, balanced and understandable.
In compiling a set of financial statements, it is necessary to make estimates and judgements about outcomes that are typically dependent on future events. Significant matters are set out below. In addition, the Committee reviewed and was
satisfied with management’s application of the effective interest rate method, assumptions relating to the calculation of the defined benefit pension deficit, and hedge accounting.
Area of focus
Committee’s response
Impairment provisions for loan
portfolios and related disclosures
Information on credit risk and assumptions
relating to expected credit losses are included
in Note 10 to the financial statements
Given the materiality of Nationwide’s loan portfolios and the significance of changes to provisioning methodology introduced with IFRS 9 from 5 April 2018, understanding
the Society’s exposure to credit risk and ensuring that impairment provisions are appropriate are key priorities for the Audit Committee.
The introduction of provisions based on expected credit losses in accordance with IFRS 9 required implementation of a new suite of models, using key assumptions about the
impact on loan portfolio performance of a range of potential economic scenarios. The Committee challenged management over the scenarios modelled to ensure that they
adequately reflected uncertainty in the economic outlook and the potential for an economic downturn from the benign environment experienced in recent years. Following
detailed review and discussion, assumptions and probabilities for central, upside and downside scenarios, as well as a severe economic downturn, were agreed.
Nationwide published its report on the transition to IFRS 9 in June 2018 and the Committee held an additional meeting to review the report. The Committee scrutinised in
detail the approach taken to identifying loans which had experienced a significant increase in credit risk, including the assessment of the risk of borrowers failing to repay
interest only loans at maturity, principally in the buy-to-let portfolio. The Committee also focused on the clarity and transparency of disclosures in the report, and asked
management to confirm that best practice disclosures were included as far as possible.
At the year end, the Committee challenged management to ensure that all relevant risks had been taken into account in the expected credit risk models, and that post model
adjustments were recognised for risks which could not be modelled. The Committee discussed economic uncertainty in the UK, particularly in the period before Brexit,
satisfying itself that these risks had been considered sufficiently in impairment provisions. The Committee requested assurance from management that latest data available
regarding indications of affordability pressure, and also performance of interest only loans at maturity, had been considered. It also discussed any heightened risk in the
commercial property lending portfolio arising from exposure to the retail sector. The Committee was satisfied with the overall level of provisioning. Looking forward, the
Committee encouraged management to continue to develop disclosure, prioritising transparency and clarity of disclosures, as well as supporting the aims of the Prudential
Regulatory Authority and industry peers to improve consistency.
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63
Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
Key areas/matters considered by the Committee during the year (continued)
Area of focus
Committee’s response
Provisions for customer redress
The Committee received updates on a number of conduct-related matters during the year and considered whether provisions for customer redress were appropriate.
Information on provisions is included
in note 27 to the financial statements
Assumptions used in calculating provisions for customer redress are often highly judgemental, including in relation to the volume of cases and amounts of redress required.
Judgement may also be needed in assessing the likelihood of potential conduct issues crystallising, and evaluating whether a provision, or alternatively disclosure of a
contingent liability, is required.
The Committee reviewed judgements and estimates for a number of conduct-related issues, discussing with management matters including administration of customer
accounts, non-compliance with consumer credit legislation and other issues subject to ongoing remediation, including the sale of Payment Protection Insurance (PPI) and the
related Plevin legal case in respect of high levels of undisclosed commission. Discussions included the criteria for recognition of new provisions or provision releases, as well
as the estimation of liabilities.
The Committee reviewed latest data on PPI and Plevin complaint volumes at each reporting period, challenging management to ensure appropriate recognition of the risk
of an escalation of complaints in the period to the FCA’s August 2019 deadline for complaint submission. Information reviewed included historic complaint rates and uphold
rates as well as market experience and expectations for further media and claims management company activities.
Provisions for other conduct matters were reviewed and the basis for assumptions challenged, including the likely potential outcomes for those matters where less historic
experience is available.
The Committee concluded that the current provisions held by the Society were appropriate.
Capitalisation and impairment
of software
Following the announcement in September 2018 of a significant additional investment in technology, the Committee reviewed the work carried out by management to identify
any existing assets whose useful life or value was affected by the new investment. The Committee scrutinised carefully the scope and depth of work carried out, and was
satisfied that the amount written off was appropriate.
The Committee has responsibility for monitoring the adequacy of the control environment, including the prevention of financial crime. Following reporting of control improvements required in areas of IT in the prior year, and also
an increase in the number of open issues raised by Internal Audit, the Committee increased the time spent this year reviewing internal control matters and ensuring that there was sufficient management focus on improvements.
The Committee’s review of the operation of internal controls encompassed the following:
Area of focus
Controls
Committee’s response
Control environment
The Committee continued to monitor the overall effectiveness of the Society’s control environment, including work to strengthen and enhance controls. The Committee was
updated regularly on the status of important work to streamline the approach to control ownership, including management accountability for key controls and declarations of
control effectiveness.
Financial controls
The Committee reviewed reporting by management on the effectiveness of the financial controls framework. The Committee also considered analysis by management of the
principal differences between the current approach and a Sarbanes-Oxley approach to internal financial controls, concluding that the steps proposed by management would
deliver an appropriately robust and proportionate approach. The Committee also scrutinised reporting on the effectiveness of controls relating to balance sheet substantiation,
considering the results of management’s control testing as well as the low level of errors and reported control weaknesses in concluding that the control environment is
adequate and there is appropriate focus on continued improvement.
64
Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
Key areas/matters considered by the Committee during the year (continued)
Area of focus
Controls
Committee’s response
Security, IT controls and operational resilience
The Committee monitored closely work focused on strengthening further aspects of security management. Internal Audit also completed several related audits during the year,
and the Committee discussed with PwC their view on controls over privileged access to IT systems. These reports, together with reporting by management, demonstrated the
progress made in the year and informed priorities going forward. The Committee will continue to monitor this important aspect of control in the forthcoming year.
Financial crime
Financial crime is a broad term that includes anti-bribery and corruption, anti-money laundering, fraud, theft from customers’ accounts and card related thefts. The Committee
received a number of reports on each of these areas.
The Committee noted that a comprehensive review of the Society’s Anti-Bribery and Corruption policies and framework had been carried out, and good progress had been
made. The Committee emphasised the importance of understanding and monitoring this risk in third parties. The Committee also received a report from the Group Anti-Money
Laundering Officer and noted the improvement in the capabilities of the Society.
The Committee reviewed a detailed report on anti-fraud controls, which noted the relatively low level of losses but emphasised the continued external threat. The Committee
also considered the implications of the approach of the Payment Services Regulator and consumer organisations to liability for fraud losses, stressing the importance of industry
co-ordination. In the context of the Board’s risk appetite, the Committee was satisfied with the steps being taken to reduce losses from financial crime.
First line controls
During the year the Committee introduced a series of deep dives into key aspects of first line controls, which included anti-fraud controls, payments controls and controls in
digital services. This enabled the Committee to engage directly with relevant executive management to ensure that risks are fully understood and the effectiveness of controls
is monitored and improved as necessary. The Committee was satisfied that controls are being developed, enhanced and then embedded in important business areas where
development is fast paced and it is critically important to ensure that controls keep pace.
The Committee has responsibilities beyond financial reporting disclosures, judgments and estimates and the control environment. Other matters considered during the year were:
Area of focus
Committee’s response
Capital and distributions
The Committee is responsible for advising the Board on the affordability of making distributions to holders of Core Capital Deferred Shares (CCDS) and AT1 securities and
recommended to the Board that the payments proposed by management be made.
Tax
The Committee reviewed the management of Nationwide’s tax affairs and discussed with the Head of Tax Management the management of tax risk in business activities.
The Committee also reviewed the updated tax strategy prior to approval by the Board and external publication.
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65
Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
Internal Audit
Senior statutory auditor
Audit and non-audit fees
The Committee works closely with the Chief Internal Auditor who reports
directly to the Chairman of the Audit Committee. Throughout the year, the
Committee continued to monitor the progress of the internal audit function.
The Audit Committee approved the annual audit plan and all changes to
the plan during the year, which were reviewed quarterly. The scope of work
takes account of the function’s own assessment of risks, and the input of
first and second line management and the Audit Committee itself. The
Committee also approved the risk-based frequency of audit coverage to be
used in planning internal audit activities. The annual audit plan and annual
risk and compliance plans were approved at a joint meeting of the Audit
and Risk Committees where the Committees reviewed materials setting
out the co-ordination and combined coverage of these plans.
The Committee received quarterly updates from the Chief Internal Auditor
on the work of the internal audit function, drawing its attention to the most
significant audit work which included operational resilience, foundational IT
and security controls. The Committee continued to focus on the prompt and
effective resolution of control issues raised by internal audit, where progress
was made during the year, although this remains an area of focus, particularly
in respect of complex issues which require extended time to resolve.
The quality of internal audit’s work is monitored by a quality control function
whose head reports findings directly to the Audit Committee Chairman.
No major issues were reported although there was continued focus on
improving the quality of documentation. The effectiveness of the internal
audit function was also assessed by means of a survey of recipients of
internal audit work. The findings showed that internal audit continues to
be effective, independent and objective. Priorities for continued
improvement included clarification of the relationship between Internal
Audit and other lines of defence, consistent focus on the more material
issues and continuing to develop technical expertise in specialist areas.
The Committee reviewed the resourcing of the audit function each quarter
and was satisfied that the resources were appropriate. The Audit Committee
Chairman and the Chief Internal Auditor review progress on a monthly basis.
The Committee also considered the new organisational structure of the
internal audit function, which recognises the changing focus of its activities
as business priorities and risks develop, concluding that it was appropriate.
External Audit
PwC acted as the Society’s external audit firm throughout the 2018/19
financial year. The Audit Committee is responsible for overseeing the
relationship with the external auditor, and for the effectiveness of the
audit process.
Hemione Hudson of PwC has been Nationwide’s senior statutory auditor
for the 2015 year through to 2019 year end. Under regulation Ms Hudson
would be due for rotation following the 2019 year end audit which
coincides with the audit rotation date. PwC’s report can be found on pages
166 to 174.
Audit quality and materiality
The Committee has a responsibility for reviewing the quality and effectiveness
of the external audit. The Committee approved the scope of the audit plan
and materiality level in advance of the annual audit. Materiality is the level
at which the auditor considers that a misstatement would compromise the
truth or fairness of the financial statements. For 2018/19, overall Group
audit materiality was set at £42.3 million (2018: £54.5 million).
Auditor independence
The Board has an established policy setting out the non-audit services that can
be provided by the external auditor. The aim of the policy, which is reviewed
annually, is to safeguard the independence and objectivity of the external
auditors and comply with the ethical standards of the Financial Reporting
Council (FRC). The policy specifies non-audit services provided by the external
auditor that are either permitted or prohibited. PwC has confirmed that it has
complied with relevant regulatory and professional requirements and its
objectivity is not impaired. The Committee is satisfied that PwC remained
independent throughout the year.
Audit outputs
The Committee reviewed and approved the external auditor’s engagement
letter and proposed audit fee.
Under the Society’s non-audit fees policy, all non-audit work is approved by
the Audit Committee where the fee is over £50,000, or by the Audit
Committee Chairman and the Chief Financial Officer with ratification at the
next Audit Committee meeting where the fee is below £50,000. During
the year, the Committee considered a number of proposals from
management to use the external auditors for non-audit services, ensuring
that management had considered alternative suppliers and scrutinising
analysis of any potential threats to auditor independence. The value of
non-audit fees incurred in the year was reported to the Committee at each
regular meeting.
A regulatory cap on the annual value of non-audit fees of 70% of the
average of three years’ audit fee will be mandatory for Nationwide in
2022/23, being the fourth financial year following the forthcoming change
of auditor. The Committee monitors the cumulative value of non-audit
work with the aim of operating within this framework in advance of the
regulatory requirement.
The fees paid to PwC for the year ended 4 April 2019 totalled £6.8 million
(2018: £5.5 million), of which £2.8 million (2018: £1.8 million) were
for non-audit services. Non-audit services represented 67% (2018: 51%)
of the statutory audit fee. Fees for individual non-audit services where the
expenditure was more than £100,000 were:
• Supporting the selection and preparation for implementation
of a governance, risk and control system; fees of £247,100
• Half year review; fees of £208,000
During the year the Committee reviewed the following reports:
• Assurance on work to enhance privileged access management;
• PwC’s year end report for the 2017/18 financial year and its statutory
opinion in respect of the year. The report set out key areas of focus in the
audit work, namely year end impairment provisions and the judgements
made in determining opening IFRS 9 provisions for 2018/19, judgements
in relation to conduct provisions and controls over privileged access. The
Audit Committee Chairman met with the PwC audit partners in advance
of Committee meetings during the year and discussed in detail the basis
of their opinion on the key judgements in the financial statements.
• PwC’s report on the findings from their review of the Interim Financial
Statements.
• PwC’s private reports to the Prudential Regulation Authority (PRA),
which focused on key areas as requested by the PRA, including aspects
of expected credit loss methodology.
fees of £157,000
• Assurance over the Society’s technology strategy implementation;
fees of £1.6 million.
The remaining non-audit services relate to treasury funding issuances and
programme updates, and cyber security assessment.
The total fees are set out in note 8 to the financial statements on page 198.
Having reviewed both the quantum of the non-audit fees and the nature
of the work carried out, the Committee is satisfied that the non-audit work
do not detract from PwC’s audit independence.
66
Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
Audit effectiveness
Auditor rotation
The year ahead
The Committee reviews the effectiveness of the external audit process on an
annual basis. The Committee received a report on audit effectiveness based on
a questionnaire to Audit Committee members and those members of
management who interact with the auditors. It showed that the external
auditor was performing its duties in an independent and effective manner,
with some improvement in feedback results compared with the prior year.
The Committee concluded that the rating given to PwC remained acceptable,
with strengths including planning, engagement with senior management and
communication. Some areas for improvement were noted, including providing
greater insight into industry practice and ensuring challenges to management
are communicated as early as possible. PwC has responded effectively to
the findings. Following the review, it was recommended to the Board and
subsequently to the Annual General Meeting that PwC be reappointed as
auditor for the 2018/19 financial year.
Following the completion of a competitive tender in 2017, Ernst & Young
LLP (EY) will be recommended to the members as Nationwide’s auditor for
2019/20 at the AGM in 2019. During the year, EY commenced planning for
the audit, including engaging widely with management, shadowing the
PwC audit, including understanding key areas of audit focus and management
judgement, and observing Audit Committee meetings. As part of the
transition, the following reports were presented to the Audit Committee:
• EY’s transition plan, which set out the audit transition activities
completed and planned, and confirmed the firm’s independence
• an Initial Observations report, which set out EY’s views on various aspects
of governance and control based on their audit planning activities.
Further information on the competitive tender process is presented in the
Audit Committee report of the 2018 Annual Report and Accounts.
In 2019/20 the Audit Committee will continue to focus on its oversight of the
financial reporting and internal controls of Nationwide, including monitoring
the ongoing maturity of expected credit loss provisions under IFRS 9.
A key area of focus for the Committee will be the effective transition to the
incoming audit firm to ensure that audit independence and quality is
safeguarded. The Committee will also continue to work with the Board Risk
Committee to ensure that the Internal Audit, Prudential Risk Oversight and
Compliance Oversight functions have appropriate and co-ordinated plans
in place and will monitor their progress and implementation.
In the challenging and competitive environment in which Nationwide
operates, the Audit Committee remains committed to its vital role in
overseeing the integrity of financial reporting and effectiveness of controls.
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67
Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
Board Risk
Committee
report
Tim Tookey
“ The Board Risk Committee has
continued to provide support and
challenge to management to ensure
that our members, their money
and the Society’s safety and security
are being appropriately protected.”
Dear fellow member,
I am pleased to present the Board Risk Committee’s
report for the financial year ended 4 April 2019.
During the year, we have continued to focus on
maintaining operational resilience to provide the
service that our members expect. Despite customer
expectations continuing to increase and other
challenges remaining in the external environment,
the Society’s risk profile has stayed broadly stable
through monitoring and proactively managing risk
exposures before they have crystallised.
External challenges have included uncertainty in
the macroeconomic environment relating to Brexit,
further competition for our core products, as well as
continued customer affordability pressures.
Technological change has continued at pace and
the nature of threats in the IT and cyber
environments have continued to evolve. Internally,
the number of operational incidents has reduced
despite increasing transaction volumes and delivery
of complex change initiatives. The Committee has
been focused on challenging management to ensure
that our systems are built to last, that conduct
matters are proactively identified and resolved and
that our members receive the level of service they
expect from Nationwide. Whilst the Committee
retains overall responsibility for providing oversight
and advice to the Board on all risk matters,
assessment and measurement of IT related risk is
delegated to the Board IT and Resilience Committee
(BITRC); regular reporting is provided to the
Committee from BITRC and further detail can be
found in that Committee’s report on page 71.
Whilst ensuring robust management of key risks,
this year has seen the Committee continue to provide
advice to management, with active support for the
Society’s strategy. The Committee has continued to
provide oversight of the important role played by
the Risk community independent of the Society’s
operations, has overseen the conscious further
investment in risk capability through developing its
people, systems and innovation agenda, and has
ensured that sufficient priority is given to maintaining
strong relationships with our regulators.
Tim Tookey
Chair – Board Risk Committee
Who sits
on the
Committee
Committee members
Tim Tookey (Chair)
Albert Hitchcock
(Joined the Committee
in January 2019)
Mitchel Lenson
Kevin Parry
Lynne Peacock
Meetings attended (eligible to attend)
7 / (7)
1 / (1)
7 / (7)
7 / (7)
7 / (7)
Regular attendees of the Committee include: Chairman of the Board, Chief Executive Officer, Deputy Chief Executive Officer,
Chief Products and Proposition Officer, Chief Financial Officer, Chief Operating Officer, Chief Risk Officer, Chief Credit Officer,
Chief Internal Auditor and representatives of the auditors, PricewaterhouseCoopers.
68
Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
How the Committee works
The Board Risk Committee comprises independent non executive directors
whose attendance record is set out on page 67. Albert Hitchcock became
a member of the Committee in January 2019. Details of the skills and
experience of the Committee members can be found in their biographies
on pages 36 to 42. The Committee is scheduled to meet seven times a year
and additionally as and when required. During the year there was one joint
Audit and Board Risk Committee meeting to consider matters of common
interest: the overall assurance plan, the annual oversight plan and the
annual internal audit plan.
In addition to the regular attendees from management, the Committee
invites the CEO for his perspectives on the current and emerging risk
profile of the Society and receives a report from the Chief Risk Officer on
the same matters at each meeting. Subject matter experts are also invited
to Committee meetings to present on a variety of topics. Following each
meeting, updates are provided to the Board, summarising activities
undertaken, areas where the Committee had challenged management and
key decisions taken. Updates from the Committee to the Board are
accompanied by reports from the Chief Risk Officer.
The Committee delegates responsibility for oversight and challenge of the
day-to-day IT and resilience risk, control and oversight arrangements to the
Board IT and Resilience Committee. This includes reviewing the effectiveness
of the relevant aspects of the control environment. The Board IT and
Resilience Committee formally reports on these matters to the Board Risk
Committee. The Board Risk Committee also oversees the Executive Risk
Committee, which is the management committee responsible for ensuring
a co-ordinated risk management approach across all the Society’s risks.
The Committee reviews its terms of reference and its activities over the
previous year as part of an annual cycle to confirm that its activities were
in line with its remit. More detail on the Committee’s duties and
responsibilities can be found within its terms of reference on the Society’s
website: nationwide.co.uk
The Committee’s effectiveness is reviewed annually. In 2018, the review was
carried out as part of the overall review of the effectiveness of the Board
and its committees. In response to the outcome of the review, the Committee
will continue to focus on developing a dynamic framework within which the
Board continually assesses its appetite for risk. In addition, there will be an
increased focus on macro risks, cultural, competitive, and environmental
risks, and reviews of the appropriate balancing of risks and rewards across
various components of our strategy. The 2019 effectiveness review process
is described on page 55.
Report on the year
The principal purpose of the Committee is to provide oversight on behalf of,
and advice to, the Board in relation to risk-related matters. The Committee
fulfils this role by providing advice, oversight and challenge to enable
management to promote, embed and maintain a strong risk awareness
culture throughout the Society. The Society’s approach to the management
of risk is set out in more detail on pages 103 to 105.
In addition to considering the Society’s current and emerging risk exposures,
the Committee also considered longer-term risks to delivering the Society’s
strategy and emerging issues that could present risks in the future.
The Board considers the appropriateness of the Society’s strategic plan in the
context of its risk appetite. During the year, the Committee recommended
the Society’s Board risk appetite to the Board and monitored performance
against it by undertaking appropriate reviews on material risk issues against
the set risk appetite.
On behalf of the Board, the Committee reviewed and approved the Society’s
Internal Capital Adequacy Assessment Process (ICAAP) and Internal Liquidity
Adequacy Assessment Process (ILAAP) documents. In addition, under a
delegated mandate from the Board, the Committee approved:
• The Enterprise Risk Management Framework (ERMF) which defines
what risk management is and how it works at Nationwide
• The Society’s risk strategy
• Pillar 3 disclosures and the updated Pillar 3 Disclosure Policy
• The Society’s recovery plan.
How the Committee spent its time in the year
39%
23%
19%
9%
10%
• Prudential risk • Operational risk1 • Conduct and compliance risk • Enterprise risk
• Other matters (including meeting administration)
1 It should be noted that the Board IT and Resilience Committee also covers significant areas of operational risk oversight on behalf of the Board Risk Committee.
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69
Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
Key areas/matters considered by the Committee during the year
The Committee balanced its agenda to continue to focus on standing areas of risk management whilst ensuring key risks were escalated for consideration during the course of the year. As part of this, the Committee reviewed the
Society’s risk profile, facilitated by reporting and analysis from the Chief Risk Officer. An outline of other key matters considered by the Committee in the year is broken down by risk category and set out below:
Area of focus
Prudential Risk
Committee’s response
The Society lends in a responsible, affordable and sustainable way to ensure we safeguard members and the financial strength of the Society through the credit cycle.
It maintains sufficient capital and liquidity resources to support current business activity, including planned growth, to remain resilient to significant stress.
(includes credit, model, liquidity and funding,
market, solvency and pension risks)
In this context, the Committee discussed macroeconomic risk matters against a challenging global geopolitical backdrop and the uncertainty around Brexit. These events were
continually monitored and assessed to manage the impact on the Society’s business.
The Committee discussed and challenged management on the risks associated with potential weaknesses in the design or execution of models used by the Society. During the
year there was a training session for the Committee members for a better understanding of the key features of the Society’s most important models. Models are used to support
key decisions including in relation to the amount of capital and liquidity resources required, lending and pricing, resourcing and earnings.
During the year, the Committee reviewed a number of aspects of prudential risk as required by the PRA, including the Society’s capital and liquidity adequacy (as reported
in the ICAAP and the ILAAP respectively), the Pillar 3 risk disclosures, the recovery plan and associated regulatory reporting. It also reviewed and approved the results of the
2018 Concurrent Stress Test focusing on new requirements for estimating loan loss provisions on an expected loss basis.
The Committee held deep dive sessions to discuss controls in place to mitigate mortgage credit risk in different scenarios. This included its approach to managing risk within
the unsecured lending and buy to let portfolios to ensure they remain within the Board’s approved risk appetite. The Committee also held a deep dive session on the
performance of the Society’s savings, current account and prime mortgage portfolios.
The Committee undertook an evaluation of the ability of the Society’s business model to endure stress through a review of the 2018 reverse stress test. The principal scenario
explored was based on the work carried out on the 2017 reverse stress test and the Bank of England’s Biennial Exploratory Scenario. The Society was challenged to consider
how it would react to a range of scenarios, including an environment of sustained low interest rates and margin compression. The Committee considered how the Society
would remain resilient and stable in such instances.
Operational Risk
The Society minimises customer disruption, financial loss and reputational damage through providing sustainable customer services and resilient systems.
In addition to receiving regular reports on IT related risk, resilience issues, IT-related risk decisions taken and other important matters from the Chairman of the Board IT &
Resilience Committee, the Committee reviewed key areas of operational risk exposure during the year including:
• the risk management and assurance approach for delivery of the technology investment.
• the management of outsourcing and third party related risks with a focus on three key areas – procurement and contracts, operational vendor management and the testing
and assurance of suppliers.
• how the Society is ensuring compliance with the requirements of the General Data Protection Regulation (GDPR) and to enhance members’ data protection and privacy.
• how the Society supports colleagues in managing specific risks including insider threat and IT privileged access.
• the contingency plans to mitigate the impact of various potential Brexit scenarios on the business of the Society.
The Committee discussed the findings and learnings identified from the result of a Business Continuity Incident Management exercise which was carried out at the Executive
Committee level.
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Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
Key areas/matters considered by the Committee during the year (continued)
Area of focus
Committee’s response
Conduct and compliance risk
Enterprise risk
(includes Business risk)
The year ahead
The Society treats customers fairly, before, during and after the sales process through offering products and services which meet customer needs and expectations, perform as
represented and provide value for money.
The Committee has continued to champion the Society’s approach to the ongoing embedding of conduct risk, meaning that the Society’s products and processes are focused on
delivering good customer outcomes and minimising regulatory non-compliance.
The Committee discussed residual risks to compliance with the General Data Protection Regulation (GDPR) and noted the continued focus by the Society on ensuring compliance
with the requirements of the regulation.
The Committee also discussed and approved the Society’s approach to managing the emerging risks relating to data ethics and the ways in which the Society uses members’ data.
Management was challenged to ensure a continuous embedding of conduct risk awareness and the need for consideration of conduct risk at the early stages of developing new propositions.
It should be noted that whilst the conduct risk profile of the Society was considered satisfactory, there will always be focus maintained on further embedding conduct risk awareness.
On behalf of the Board, the Committee approved the Society’s Complaint Handling Framework and the Society’s Treasury Communications Policy which have been put in place to
satisfy the requirements of the Markets in Financial Instruments Directive II (MiFID II) regulation with respect to complaints handling and call recording respectively.
The Committee reviewed the progress on the implementation of the BCBS 239 Reporting Principles (principles for effective data aggregation and risk reporting) and approved the
Society’s Risk Data Aggregation and Risk Reporting Framework.
The Society operates a mutual business model which is sustainable and remains within the constraints of the Building Societies Act in a stress. In this context, the Committee has:
• On behalf of the Board, endorsed the Board’s risk appetite which clearly sets out the amount and type of risk that the Board is comfortable with the Society taking.
This is to ensure that it remains sustainable in the long term for all members’ benefit. Within the parameters set by the Board’s risk appetite, the Committee performed
a regular review of the Society’s risk performance to ensure that appropriate action was being taken and to inform consideration of any potential risk adjustments to
executive remuneration.
• Approved the results of the review of the Society’s Enterprise Risk Management Framework (ERMF), an annual review of the adequacy of Nationwide’s system of risk
management and internal controls. The review concluded that the Society’s system of risk management and internal control was adequate when assessed against the
Board’s risk appetite.
• Approved the Society’s risk strategy which had been updated based on changes to the external environment, the Society’s technology strategy and updated Board risk
appetite. Nationwide’s risk strategy sets out the Society’s approach to managing the emerging risk landscape over the medium to longer term.
During the year, the Committee received regular updates from the Society’s second line oversight functions. It satisfied itself that the Society’s segregation of duties between
the first and second lines of defence is sufficiently robust to ensure that the Society’s operational decisions receive appropriate, timely and sufficient challenge. The Committee
also approved changes to the Terms of Reference of the Executive Risk Committee.
As part of its remit to provide advice to the Remuneration Committee on potential risk adjustments to be applied to performance objectives incorporated in the incentive
structure for executives, the Committee reviewed a report from the Remuneration Committee on variable pay arrangements across the Society during the year.
The Society has ambitions to broaden and deepen its member relationships
through its lending, current accounts and savings portfolios in an increasingly
competitive market, ensure its costs are controlled effectively, and continue
to invest in IT and operational resilience whilst managing changing regulatory
requirements. Delivering against these objectives will be challenging but
these are the right areas to focus on for the benefit of the Society’s members
– making sure that they are at the heart of everything the Society does.
To support this ambition, over the next 12 months the Committee will continue
to focus on the top and emerging risks, to monitor the uncertain
macroeconomic outlook, and to ensure the Society delivers what is required
by regulators and other authorities - ensuring the Society is built to last.
The Committee will continue to support and challenge management in
addressing these requirements and in overseeing the strengthening of the
Society’s business operations, particularly with regard to operational resilience
– ensuring that members’ interests are safeguarded.
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71
Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
Board IT
andResilience
Committee
report
Mitchel Lenson
“ It has been my privilege to chair this
Board Committee over the past 7 years,
as it oversees the future technology
roadmap to deliver legendary service
for current and future members.”
Dear fellow member,
The past year has been a momentous one for
your Society.
We are living through times of unprecedented
change, with technology transforming the way
we all live our lives. An increasing number of our
members are accessing our services digitally, and
Nationwide saw 220 million more mobile log-ins
than last year and our mobile app now has
2.7 million active users. Technology is enabling
new services, propositions and business models;
this brings new opportunities but also creates
a new set of challenges we must rise to.
That is why in September 2018 we announced
plans for additional technology investment of
£1.3 billion over five years to enhance our existing
technology programme. Our technology investment
will deliver increased resilience, make us more
secure and deliver better member outcomes
through improved digital capabilities and better
use of data, whilst also driving down costs.
This is an exciting, ambitious plan to improve the
service we offer existing members and to develop
new capabilities to serve the needs of members
in the future. I want to reassure members that
this is not a single ‘big bang’ change. Rather,
members will see a series of improvements over
the course of time with each step carefully managed.
In totality the changes will further improve the
quality of the service we can offer, all underpinned
by the security and reliability our members expect,
and the Society’s ethos of mutuality.
Gunn Waersted assumed the Chair of this
Committee in March 2019. I wish her and the
Committee every success. I am confident that the
Society is well placed to execute its ambitious
technology programme.
Mitchel Lenson
Chair – Board IT and Resilience Committee
(until March 2019)
Who sits
on the
Committee
Committee members
Mitchel Lenson
(Chair until
March 2019)
Gunn Waersted
(Chair from
March 2019)
Mai Fyfield
Albert Hitchcock
(Joined the Committee
in January 2019)
Tim Tookey
(Joined the Committee
in July 2018)
Meetings attended (eligible to attend)
6 / (6)
6 / (6)
6 / (6)
1 / (1)
4 / (5)
Regular attendees of the Committee include: Chairman of the Board, Chief Executive Officer, Deputy Chief Executive Officer,
Chief Operating Officer, Chief Financial Officer, Chief Product & Propositions Officer, Chief Risk Officer, Chief Technology Officer,
Chief Data Officer, Chief Transformation Officer, Chief Internal Auditor; and the Society’s external advisers Conrad Prince and
Oliver Bussmann. The Society’s other external advisers partner business areas and attend the Committee where their specific
expertise is relevant and valuable to the Committee.
72
Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
How the Committee works
Report on the year
In March 2018, the IT Strategy & Resilience Committee was successfully
repurposed as the Board IT and Resilience Committee. This year has seen
the Committee’s remit extended to include oversight of the recently
approved technology investment, in addition to providing oversight for
the Society’s IT and cyber-related risks, IT service availability and delivery,
and monitoring execution of the Society’s respective IT-related plans.
Additionally, the Committee provides challenge to, and oversight of, the
Society’s management activities to ensure that the Society’s technology
continues to deliver the best possible member experience. Concurrently,
the Committee is focused on ensuring that the Society’s online and mobile
products are available when members need them and continue to keep
their data safe. More detail on the Committee’s duties and responsibilities
can be found within its terms of reference on the Society’s website:
nationwide.co.uk
The Board IT and Resilience Committee supports the Board and the Board
Risk Committee.
The Committee comprises independent non executive directors whose
attendance record is set out on page 71. Albert Hitchcock became a
member of the Committee in January 2019, and Gunn Waersted replaced
Mitchel Lenson as Chair of the Committee in March 2019. The Committee
is supported by six external experts who help the Society keep up to date
with digital innovation, the mobile channel, payments, data, security
and resilience.
Following each Committee meeting, the Chair of the Committee provides
verbal updates to the Board and the Board Risk Committee.
The Committee reviews its terms of reference and its activities over the
previous year as part of an annual cycle to confirm that its activities were
in line with its remit. More detail on the Committee’s duties and
responsibilities can be found within its terms of reference on the Society’s
website: nationwide.co.uk
The Committee’s effectiveness is reviewed annually. In 2018, the review
was carried out as part of the overall review of the effectiveness of the
Board and Board Committees. Following the review, the Committee will
continue to focus on macro issues and develop a dynamic framework
for decisions linked to the strategic priorities of the business. The 2019
effectiveness review process is described on page 55.
How the Committee spent its time in the year
18%
35%
9%
3%
5%
12%
18%
• Service delivery and operational resilience • Technology programme and architecture
• Cyber risk and security • Data and analytics • Transformation delivery and operating model
• IT risk and controls oversight • Other (including meeting administration)
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73
Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
Key areas/matters considered by the Committee during the year
Area of focus
Committee’s response
Service delivery and
operational resilience
Technology programme
and architecture
The Committee reviewed IT service provision throughout the year considering incidents, root causes, solutions and strategic intent.
The Committee challenged management to maintain focus on operational impact, evidenced with the development of metrics to capture operational risk to enable the Society
to better monitor performance and member impact following IT incidents. A service availability measure has been enhanced to capture the number of minutes of outage,
rather than percentage, to better assess member impact. Furthermore, the Committee has overseen activity to manage the risk of IT service outages that might impact
member services and has focused on ensuring that any action taken to mitigate risk considered conduct risk, ensuring that members are fairly treated.
The Society’s Operational Resilience Strategy was approved and delivered in conjunction with the Resilience Programme. Highlights included the development of a framework
for the target state of operational resilience, demonstrating a good understanding of people, processes and technology.
Technology programme
The investment in technology has been part of the 2018 Society-wide and was approved by the Board in September 2018. This investment underpins the plans to grow the
Society and provide better products and services to members. The investment will enable the Society to simplify its technology estate and build new technology platforms to
enable growth and diversification, and drive forward digital, data and analytics plans. The Committee challenged management to ensure that significant deliverables are
business-driven and technology led.
The technology investment will create a technology model to meet future challenges and ensure success. Looking to the future, the Committee challenged management to
prioritise its activity across strategic workstreams to make sure the Society manages its resources to meet members’ needs efficiently. Mobilisation efforts are now underway
and include execution of delivery projects, architectural decision making and the creation of an operating model to build future capability. PwC was appointed to provide
external independent assurance over the delivery of the technology investment to the Committee and Board. PwC’s work, together with that of the Society’s oversight and
internal audit functions, will form part of a combined assurance approach.
Nationwide for Business
Nationwide for Business will mark the Society’s entry into the small business banking market. The Committee discussed and challenged management on the core platform
selection, delivery plans, costs and particularly the risks of the business banking proposition.
Cyber risk and security
Over the last year, the financial services industry has been subject to a concerted campaign of ever increasing and sophisticated attacks against systems worldwide, including
successful hacks, ransomware and phishing attacks.
The Committee approved the Nationwide Security Strategy 2018-21 and has received regular updates throughout the course of the year. The Committee has supported
management during the cyber security strategy refresh.
The Society, supported by the Committee, continues to sustain focus and provide investment to support and improve its security capability, mitigating against cyber risks and
taking a proactive approach to help keep members’ money and data safe. The Society works with the wider industry and with the Government’s National Cyber Security Centre
to share good practice and understanding about new and evolving threats.
74
Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
Key areas/matters considered by the Committee during the year (continued)
Area of focus
Data and analytics
Committee’s response
Since endorsement in July 2017, the Committee has supported management in developing the Society’s data plans. In May 2018, the Society successfully demonstrated
compliance with the General Data Protection Regulation (GDPR), further improving the Society’s awareness of control and governance of member data.
The Committee has also helped management to develop its thinking as the Society prepares for the new Basel Committee Banking Supervision (BCBS) 239 Regulation and
align activities to the reporting principles of timeliness, completeness and accuracy, expecting compliance by June 2019.
Transformation delivery and
operating model
Transformation
The Committee has continued to review management’s progress against key transformation delivery objectives, some of which are enabled by change activity. The Committee
regularly received insight on programmes within the Society’s Transformation Portfolio, including:
IT risk and controls oversight
• The successful transformation of the Society’s high street presence which brings a new branch design to members
• The Society’s commitment to comply with industry standards on Open Banking, GDPR and most recently BCBS 239
• Assessing whether critical delivery milestones are met in line with planned timetables.
Improved ways of working
The Committee has continued to champion the Society’s use of ‘Agile’ working and recognised a shift in the cultural mindset towards agile management and the use of agile
methodology and skills, with the aim of bringing individuals together from across the Society to create a more efficient and innovative working environment. By streamlining
decision-making, the Society has made progress towards improving processes and products for members.
Second line, third line and external reviews
The Committee is routinely provided with independent reviews from the Society’s Oversight and Internal Audit functions. This activity complements the Society’s first line risk
management by business areas and processes have been improved by initiatives to encourage first line risk teams to become more proactive in identifying and managing risk
across the Society.
During the year the Committee has also received reports from external reviews of the Society’s cyber security and technology plans from PwC, which has enabled the
Committee to hold management to account against industry standard best practice and to shape future development plans.
The year ahead
The year ahead presents an exciting opportunity to continue to deliver the
technology investment which will be transformative for the Society,
instrumental in safeguarding future resilience and a key enabler to continue
to meet Nationwide’s core purpose in years to come. The Committee will
need to strike a balance between the enablement of operational continuity
(operations, resilience and security), meeting new regulatory requirements
and providing oversight of strategic initiatives, whilst challenging management
to ensure that the Society makes the best use of members’ money.
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75
Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
and
Nomination
Governance
Committee
report
David Roberts
“ The Committee retains its focus on
the identification and development of
talent to meet leadership needs at
Board and management levels in an
inclusive way that reflects the society
in which Nationwide operates.”
Dear fellow member,
This year the Nomination and Governance
Committee has overseen all matters within its
terms of reference, with increased focus on
leadership, resourcing, succession and diversity.
The Committee has observed that the Society
continues to build the strong leadership needed to
deliver our strategy, supported by our continued
investment in leadership development. With
oversight from the Committee, the Society is
building on this through a ‘leadership pathways’
activity to ensure we have the leadership talent
we need for the future. The Committee has also
seen the Society strengthen its position on
emerging talent and on the technical training
needed to support our technology investment.
The Committee is committed to diversity and
inclusion and has endorsed a programme of
activity to educate and engage leadership teams
across the Society in driving positive action,
supported by research and deep insight. This
includes a focus on enabling difference of all
kinds to flourish in the interests of our members.
Baroness Usha Prashar attends Committee
meetings as the Board’s sponsor of the Society’s
diversity and inclusion agenda.
We have continued to strengthen the composition of
the Board with the recent appointment of Albert
Hitchcock enhancing the skills and experience to
oversee how we optimise our strategic investment
plans. We’ve also taken the opportunity to hear
employee perspectives in the Boardroom this
year with Mai Fyfield as the designated director
for employee engagement.
The Committee’s attention to corporate governance
includes a review of best practice and participation
in national policy consultations. Our approach to
managing regulatory regime requirements on
matters such as senior manager accountabilities
and fitness and propriety is now well established.
The Committee has a busy year ahead with an
agenda informed by the Board Strategy Conference
in October, where several people priorities were
identified that will require the Committee’s
oversight. Board effectiveness and sound corporate
governance will continue to be important aspects
of the Committee’s responsibilities to ensure that
we are fit to face an exciting future.
David Roberts
Chair – Nomination and Governance Committee
Who sits
on the
Committee
Committee members
Meetings attended (eligible to attend)
David Roberts (Chair)
8 / (8)
Kevin Parry
8 / (8)
Lynne Peacock
8 / (8)
Tim Tookey
8 / (8)
Regular attendees of the Committee include: Chief Executive Officer, Chief People Officer, Baroness Usha Prashar (non
executive director), Chief Legal Officer and Society Secretary, Director of Secretariat; and Director, Engagement & Leadership
76
Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
How the Committee works
The Committee is chaired by the Chairman of the Board and the members
are independent non executive directors; their attendance record is set out
on page 75. Details of the skills and experience of the Committee members
can be found in their biographies on pages 36 to 42. The Committee
meets as and when required and the number of meetings held in the year
can be found on page 75. Following each meeting, the Chair of the
Committee provides verbal updates to the Board, summarising activities
undertaken, and key decisions taken.
The Committee reviewed its terms of reference and its activities over the
previous year as part of an annual cycle to confirm that its activities were in
line with its remit. More detail on the Committee’s duties and
responsibilities can be found within its terms of reference on the Society’s
website: nationwide.co.uk
The Committee’s effectiveness is reviewed annually. In 2018, the review
was carried out as part of the overall review of the effectiveness of the
Board and Board committees. Following the review, the Committee will
continue to focus on ways in which the Society can accommodate and
encourage diversity of style without compromise to its values. The 2019
effectiveness review process is described on page 55.
Report on the year
The Committee continued to focus on strengthening the Society’s
leadership capability during the year, with the emphasis on building those
skills and behaviours required to evolve the organisation’s culture and
renewed strategic ambitions. This was a core theme of the Board Strategy
Conference in October 2018, and oversight responsibility for this resides
with the Nomination and Governance Committee.
Board members have been actively involved in the continuation of the
Society’s flagship leadership programme, Leading for Mutual Good, with
over 1,000 leaders having participated to date. More information on the work
of the Committee in this area can be found on page 77. The Committee
also endorsed the launch of the Developing My Leadership (DML) learning
curriculum with over 1,600 junior and middle managers participating.
As an output of the Board Strategy Conference in October, management has
placed further focus on leadership talent through a ‘leadership pathways’
approach, having concluded that leadership is a key lever for future
organisational culture, performance and growth. Initiated in January 2019,
this involves a review of the Society’s operating model, redefinition of its
future capability requirements and creating the right career pathways for
leaders to develop. The Committee has reviewed the approach and will
monitor progress at every meeting as part of its forward agenda. Meanwhile,
the Committee has continued to review the robustness of succession plans
and scrutinise resourcing activity for senior leadership roles.
An essential part of this work is optimising opportunities to strengthen the
diversity of the Society’s leadership population. The Committee has
continued to put priority on the Diversity and Inclusion agenda with the
sponsorship of non executive director, Baroness Usha Prashar.
Recognising the increasing significance of digital and technology resilience
expertise, the Committee commenced the search for a new non executive
director. Ridgeway Partners, an executive search firm which has no other
connection with the Society, was engaged to assist with the search for a
suitable candidate. A candidate specification was prepared considering the
desired skills, knowledge, experience and personal characteristics required
for the role. From the specification, a list of potential candidates was
identified, who were approached for initial discussions with the Chairman.
Following this, a short list of candidates was produced and after a series of
interviews with executive directors and Committee members, the
Committee recommended the Board to approve the appointment of Albert
Hitchcock as a non executive director in December 2018. Bringing senior
transformational technology leadership experience, his appointment
supports succession planning and Board composition in the context of the
Society’s ambitions for technology.
How the Committee spent its time in the year
21%
11%
8%
26%
5%
20%
9%
• Leadership, talent and succession • Executive resourcing and retention • Diversity and inclusion
• Board composition and effectiveness • Individual accountability regimes
• Governance and Regulatory Requirements • Other (including meeting administration)
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Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
Key areas/matters considered by the Committee during the year
Area of focus
Committee’s response
Leadership, talent
and succession
The Committee reviewed several matters on this subject, with a strong focus on developing leadership capability for the future. The Committee supported the extension of the
Leading for Mutual Good leadership programme to reach 1000 leaders this year and the set-up of an active alumni to help bring learning to life. In addition, the Committee
noted the success of the core management curriculum in its first full year of delivery.
Underpinning the Society’s investment in technology, management has supported an increase in new talent to join the Technology Development Programme and the
onboarding of a managed service provider to respond to the increasing technical and knowledge-based training required to support the development of services and products
provided to members. The Committee welcomed the increased focus on technical and knowledge-based learning to support the Society’s technology investment, together with
increases in the intake of emerging talent in the form of graduates, industrial placements and apprentices.
Early in the year, the Committee paid attention to retaining individual talent, upon whom the Society had a dependency in terms of particular skills that are scarce in the
marketplace. Retention plans were put in place with good results.
Latterly, the Committee provided oversight for the design and implementation of the Society’s ‘leadership pathways’ work through which we are identifying experiential
opportunities that provide stretch and breadth to develop top talent. This involves a comprehensive review of the skills and motivations of the Society’s leaders to shape the
right career pathways. The Committee will continue to oversee this substantial activity in the coming year.
Executive resourcing
and retention
The Committee received updates on leavers, vacancies and appointments in the senior executive population at every meeting and observed that retention levels were relatively
high and, accordingly, recruitment volumes low. The Committee also started to review headcount changes to ensure the Society is maintaining resourcing levels while
managing costs. It was noted that the Society continues to be rigorous in selection, using appropriate assessment tools and observing all regulatory requirements.
Ensuring diverse candidate pools continues to be a priority for the Committee, in addition to which, analysis of assessment insights and outcomes has led to a greater
understanding of how the Society can enable difference to flourish through the way it selects and onboards new talent.
Diversity and inclusion
With the sponsorship of non executive director, Usha Prashar, the Committee endorsed recommendations resulting from research into the experiences of BAME colleagues and
maternity returners and supported Nationwide’s response to Gender Pay Gap and Women in Finance reporting, with the latest reporting on these published in November 2018.
This showed a similar position to last year and provided a clear and complete picture of how the Society is actively promoting gender equality. Business area diversity targets and
action plans are being established to support the Society’s commitments.
This year, the Society signed up to the BiTC Race at Work charter and played an active membership role in the 30% Club and Mentoring Foundation, demonstrating the Board’s
ongoing commitment to improve diversity and inclusion at Nationwide and beyond. Nationwide is one of the first business signatories to the Race at Work charter and is also
involved in the government consultation on the ethnicity pay gap.
More information on the Society’s diversity targets can be found on page 21.
One of the key areas of activity in 2018-19 overseen by the Committee was about strengthening ‘tone from the top’ by engaging and educating senior leadership teams in inclusion
matters and driving local action planning. In addition, the Society is promoting inclusion through key people processes such as talent management, performance management and
resourcing as well as developing a programme of sponsorship and mentoring for its diverse talent.
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Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
Key areas/matters considered by the Committee during the year continued
“ By far the best thing
I’ve ever done in my
career. I’m so grateful
for the opportunity.”
Krissy
took part in
our Leading for
Mutual Good
programme
What did you know about leadership before
Leading for Mutual Good?
I think I was a pretty good leader, but I had nowhere
near as much confidence as I do now.
What did you think of it?
The programme was amazing. I learned so much about
leadership, and I’m still learning now. I met all kinds
of interesting people, and realised there’s a whole world
out there that I didn’t even know about.
What have you done since?
All sorts of new experiences have come along.
I’ve made a video on mental health awareness,
and I’ve run ‘Best Self’ sessions inspired by the
programme for several areas of the business.
I’ve organised nutritional therapy sessions, sleep
clinics and mindfulness sessions (all with my
new-found confidence). Helping people be at
their best for our members is so important.
Also, I’ve been to Parliament and saw Joe talk about
Nationwide and putting trust back into financial
services, attended part of a Board meeting to represent
the voice of our people and interviewed our senior
leaders about results on behalf of the Society. Finally,
I’ve got myself a mentor. She’s in Bournemouth. We’d
never have met if not for LMG.
How has it changed your life?
LMG gave me a voice and increased my confidence to
speak up and make positive changes in my own business
area, knowing I had the support and guidance of my
LMG peer group. It gave me a fresh perspective to look
at improving the way we do things that I would have
overlooked in the past. I have been able to learn from
others across the organisation and at all levels and share
my learning to benefit others. It’s definitely changed
my life for the better – by far the best thing I’ve ever
done in my career. I’m so grateful for the opportunity.
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79
Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
Key areas/matters considered by the Committee during the year (continued)
Area of focus
Committee’s response
Board composition
and Effectiveness
The remit of the Nomination and Governance Committee includes ensuring the Society has the right mix of knowledge, skills and behaviours on the Board for it to be effective
in delivering its responsibilities to provide oversight and governance of the Society and to safeguard the interests of its members.
Composition and succession have been reinforced by the appointment of Albert Hitchcock, who brings a wealth of technology transformation experience to support the
strategic investment the Society is making into the innovation of products and services for members.
The Committee has also strengthened the employee voice in the Boardroom by assigning additional responsibilities in this respect to non executive director, Mai Fyfield. She
has participated in a programme of engagement activity with employees throughout the year and supported several colleagues attending Board meetings to represent the
views of employees. The General Secretary of the union and various colleagues have attended Board and Committee meetings during the year to provide feedback on their
experiences of what’s going well and what’s hindering progress across the Society in relation to the strategy and culture of the organisation. This is bringing new perspectives
to the Board to inform areas of challenge and support decision-making.
The Committee regularly examined the progress of the action plan arising out of the outcome of the 2018 Board effectiveness review and endorsed the approach to be taken
for the 2019 Board effectiveness review. More information on the effectiveness review can be found on page 55.
Corporate governance
Throughout the year the Committee has exercised oversight of the Society’s governance arrangements on behalf of the Board. Among other things, it reviewed the corporate
governance disclosures for the annual report. The Committee received updates on significant corporate governance developments and in particular those emanating from the
revised UK Corporate Governance Code published in July 2018 with a view to understanding how the revised Code might impact the Society.
Individual accountability regimes
The Committee continued to focus on regulatory requirements to ascertain fitness and propriety of relevant individuals and ensure senior manager responsibilities were allocated
appropriately through our now well-established mapping process.
As part of its oversight role, the Committee noted the rigour with which Nationwide continued to respond to the regimes and agreed that the interventions and processes
put in place for the Senior Manager Regime were working well. The annual certification process, capturing 1,200 employees, was completed. All individuals were deemed as ‘fit’
to continue in their certified roles. The Committee was also satisfied that Conduct Rules were embedded and that employee relations policies and processes were sufficiently
robust to handle any breaches.
The year ahead
Through the Board Strategy Conference this year, a set of priorities were
identified that includes areas for the Committee’s ongoing scrutiny and
oversight. These priorities were defined in relation to Nationwide’s strategy
and culture ambitions.
The first of these is the work on ‘leadership pathways’ and the gestation of
stretching roles and experiences for leaders to grow their capability for the
future and strengthen succession. The Committee will also be keen to see
opportunities generated to recruit and onboard new and diverse leadership
talent that can stimulate progress and innovation in line with the Society’s
strategic ambitions. Refreshed diversity targets will be set for 2025.
Further priorities were identified in relation to the Society’s people
proposition which will require the Committee’s attention.
This involves the need to focus on aspects that support performance and
growth such as inclusion, wellbeing and learning.
As well as the areas brought into focus through the Strategy Conference,
the Committee will continue to ensure that Board effectiveness, corporate
governance and processes to support the regulatory regimes remain fit for
purpose, reinforce positive member outcomes and support the strategic
direction of the Society.
80
Annual Report and Accounts 2019
Report of the directors on corporate governance (continued)
Key areas/matters considered by the Committee during the year continued
Albert joined the Board
in December 2018 and shares his
experiences so far
What are your first impressions
of Nationwide?
My experience so far leads me to believe that
Nationwide is a purpose driven organisation,
with great integrity and a sincere and deep
commitment to the members. People are really
open, honest and engaging. I also see an
organisation that may find change challenging
and I know leaders are aware of the need for
greater pace, innovation and agility.
How is your induction going?
It’s going really well. I’ve had meetings with a
range of people from across the Society and they
have been very generous with their time.
I’m learning a lot and the challenges and
opportunities I hear about are certainly similar
to those I experience elsewhere. I spent some
time on the Leading for Mutual Good Programme
last week and really enjoyed being in the
company of such enthusiastic people and
hearing the quality of their thinking and ideas
about shaping the future of the Society.
What do you see as the main opportunities
and challenges for Nationwide?
There’s a real opportunity for Nationwide to
envision the future and consider the art of the
possible. We need to be pre-emptive and prepare
for a digital future. At the same time,
we need to preserve the things that make
Nationwide special and distinctive such as its
ethos and values.
What do you think you can bring to the
Society and its members?
I believe I can bring differing perspectives and
experiences to the Board, which can form the
basis for constructive challenge and support.
My background means I can help the Society
use technology to enable business success
and enhance member experience.
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“ There’s a real opportunity
for Nationwide to envision
the future and consider the
art of the possible.”
81
Annual Report and Accounts 2019
Report of the
directors on
remuneration
For the year ended 4 April 2019
Lynne Peacock
“ We believe it is vital that all of our
employees share in the collective success
of the Society, which is why our culture
is supported by a common set of goals
directly linked to members’ interests”
Dear fellow member,
I am pleased to present the Remuneration Committee’s report, including details of our directors’ pay for the year to
4 April 2019. This report includes a summary of our remuneration policy, together with the key decisions made in the year.
How we decide how much to pay our people
Our approach to pay takes into account our mutual status and our
commitment to create a remuneration policy that is aligned with
our members’ interests. We want to be fair to our members who
rightly expect us to use their money wisely and fair to our people
who work hard to deliver for our members.
Across the Society in addition to salary, what people earn takes
into account how well we perform for our members each year.
We do not reward people for maximising profit, instead we focus
on sharing in success in our reward scheme whereby all employees,
including executive directors, are rewarded on delivering what we
know matters most to members, delivering the highest quality
service, attracting more business from members and sustainable
cost savings. Moreover, the Board will only pay any variable award
if it is sure that the Society is financially secure.
The targets we set ourselves are challenging. For example, we
have to be at least first for customer service against our peer
group for any part of the ‘building legendary service’ element
of the variable award to pay out.
For our directors, a significant proportion of pay is performance-
related and is based on the same assessment of the Society’s
performance, together with team and personal goals. The way we
manage performance pay for our most senior people has to be
different because there are regulations in place that mean that
a significant part of their pay has to be held back for up to seven
years, and may not be paid in part or at all if misconduct
is found. A substantial proportion therefore remains ‘money at
risk’ which may be reduced or cancelled at the Committee’s
discretion, taking into account the Society’s and the individual’s
performance over the seven-year period.
Who sits on the Committee
The members of the Remuneration Committee are all independent non executive directors of the Society and include a member
of the Board Risk Committee and two members of the Audit Committee.
Committee members
Lynne Peacock (Chair)
David Roberts
Rita Clifton
Mai Fyfield
Usha Prashar
Meetings attended (eligible to attend)
9 / (9)
9 / (9)
9 / (9)
6 / (6)
9 / (9)
Regular attendees of the Committee include: the Chief Executive, the Leader of People and Culture and the Director of Reward and
Pensions. In no case is any person present when their own remuneration is discussed. In addition, Deloitte LLP, our independent
external consultants, who were appointed by the Committee following a tender process, also attend. Deloitte also provided tax, financial
advisory, risk, internal audit and consulting services to the Society during the year. The Committee is satisfied that the advice received
is objective and independent, and reviews annually all other services provided by Deloitte to ensure this continues to be the case.
Their fees for advice provided to the Committee during 2018/19 were £217,450, typically charged based on a time-and-material basis.
The Remuneration Committee is supported by the Board Risk Committee on risk related matters including performance pay plan
design, the assessment of specific performance measures, and wider issues relating to risk and controls. The Remuneration Committee
is also supported by and receives input from the Audit Committee.
82
Annual Report and Accounts 2019
Report of the directors on remuneration (continued)
Our people join the Society for a number of reasons beyond the financial, and
in overall terms we pay less than the market for our executive team, relative
to their peers in large financial services businesses and other organisations of
similar scale and complexity. We are also not out of step with the building
society sector when you consider the size and scale of the organisation.
However, we must accept that we operate in a competitive market. It is in the
interest of the Society and members to recruit the most competent people
which means that we have to be able to compete for talent. We do that by
looking at a pay package which reflects these market realities.
We voluntarily disclose details of our executive pay arrangements to the
extent it is appropriate for us to do so as a mutual.
Activities during the year
During the year, the revised UK Corporate Governance Code was published
which sets out a number of changes in the way in which remuneration
committees are expected to operate and approach the structure of executive
remuneration. Nationwide has, to date, applied the principles of the UK
Corporate Governance Code and will continue to do so, whenever practicable.
The revised Code applies to accounting periods beginning on or after
1 January 2019 and I am pleased to say that we are already well placed
in a number of areas from a remuneration perspective. For example,
the Committee is already responsible for determining the pay of senior
management roles below the Board and has oversight of the pay policies
and practices for the broader workforce. The Committee also has wide
discretionary powers to adjust variable remuneration outcomes to take
account of broader performance considerations.
As with our entire workforce, our directors receive pension contributions.
Over the next two to three years, we will reduce these contributions from
33% to 16% of salary in line with the contributions we make for employees
in the Nationwide Group Personal Pension. As a first step, the pension
allowance for executive directors will reduce from 33% to 24% of salary
with effect from 1 April 2019. The Committee undertook a review of our
remuneration policies and approaches across the Society during the year.
The Committee concluded that no other material changes be made to the
structure of pay for our directors in 2019/20.
Broader context
The Committee pays close attention to the relationship between pay policies
and practices for executive directors and all other employees. The Board and
Committee directly engages with the Nationwide Group Staff Union and one
member of the Committee has accountability for the ‘Voice of the Employee’ to
ensure that the Board considers this broader perspective in its decision making.
This year, the Society has decided to publish the ratio of the Chief Executive’s
pay to the wider employee population, ahead of the formal disclosure
requirement coming into force next year. This ratio reflects the nature of our
business with a high proportion of our employees working in branches and
contact centres.
How the directors have performed
Our results for the year to 4 April 2019 demonstrate that the Society has
continued to deliver strong performance against our purpose of building society,
nationwide, and the strategic cornerstones that underpin it. We have retained
our position of first amongst our peer group on customer satisfaction1 and have
increased our committed members to 3.4 million. We have also achieved
sustainable cost savings of £103 million and passed all performance gateway
measures based on statutory profit, leverage ratio and conduct matters.
The impact on directors’ performance pay
In considering directors’ pay for the year, the Committee took into account
the Society’s results together with an assessment of the underlying
performance of the Society with input from the Board Risk and Audit
committees. Based on this assessment, payments have been awarded under
the Directors’ Performance Award (DPA) in respect of the year. Details of
these payments, including the measures set and factors considered, are set
out in this report. The Committee believes that our directors have continued
to deliver real benefits for the Society and all our members.
Report on the year
How the Committee spent its time in the year
28%
28%
18%
13%
13%
• Performance award outcomes • Pay strategy and approach for the year
• Oversight of remuneration across the Society • Regulatory reporting • Procedural issues
The year ahead
Our remuneration policy was approved by our members in 2017 and sets the
framework for our directors’ remuneration. A summary of the remuneration
policy is set out in this report and this will continue to apply in 2019/20.
We will be presenting a new policy for approval at the 2020 AGM and
accordingly during the forthcoming year the Committee will continue to
review the Society’s approach to executive remuneration taking into account
the Society’s strategy, together with developments in the external
environment and feedback from members.
On behalf of the Remuneration Committee, I recommend that you support
our Annual Report on Remuneration.
Lynne Peacock
Chair – Remuneration Committee
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1 © Ipsos MORI 2019, Financial Research Survey (FRS), 12 months ending 31 March 2019 and 12 months ending 31 March 2018, c60,000 adults surveyed per annum, proportion of extremely/very satisfied customers minus proportion of extremely/very/fairly dissatisfied customers
summed across main current account, mortgage and savings. Peer group defined as providers with main current account market share >4% (Barclays, Halifax, HSBC, Lloyds Bank, NatWest, Santander and TSB).
83
Annual Report and Accounts 2019
Report of the directors on remuneration (continued)
How the Committee works
Key areas/matters considered by the Committee during the year
The Remuneration Committee is responsible for determining and agreeing
with the Board the remuneration strategy, policy and the specific remuneration
packages for the Chairman, the executive directors and other members of
the Executive Committee of the Society as well as any other employees who
are deemed to fall within scope of the PRA/FCA Remuneration Codes. This
includes reviewing the year-end pay outcomes for the Society’s Material Risk
Taker population as well as the outcome for the Society-wide element of our
variable pay. The Committee approves the design of, and determines the
performance targets for, the discretionary performance pay plan operated by
the Society for the benefit of employees within the Committee’s remit and
approving the total annual payments under such plan.
The Committee also oversees the remuneration policy throughout the
Society, with a specific focus on the risks posed by remuneration policies and
practices. As part of its oversight role, the Committee receives an update on
the pay policies for the wider workforce at least annually. In addition, this
year the Committee has received direct feedback from both the Nationwide
Group Staff Union and also from members.
The Committee reviews its terms of reference and its activities over the
previous year as part of an annual update to confirm that they were in line
with its remit. More detail on the Committee’s duties and responsibilities
can be found within its terms of reference at nationwide.co.uk
Area of focus
Committee’s response
Remuneration Review
Performance Targets
Outcome of DPA
Base Pay Review
Evolving Regulation
The Committee undertook a strategic review of remuneration during the year and agreed that
no material changes were required to the structure of pay for directors prior to the full policy
review in 2020
The Committee agreed the performance targets for awards to be made under the Directors’
Performance Award (DPA) taking into account the Society’s plan
Taking into account input from the Board Risk and Audit committees, the Committee reviewed
and approved the outcome of the DPA to be paid in respect of the year
Agreed base salary increases for executive directors as outlined in the year ahead section
Ongoing work in relation to the PRA/FCA Remuneration Codes and other corporate governance
matters, including the updated UK Corporate Governance Code, and how they apply to
Nationwide as a mutual
Directors’ Remuneration Report
Approved the Directors’ Remuneration Report including the implementation of the remuneration
policy for 2019/20
Material Risk Taker (MRT) Identification
Reviewed and approved the identification approach and list of employees who fall within the scope
of the PRA/FCA Remuneration Codes
Broader Context
The Committee reviewed information on the pay policies and practices across the Society and
met with the Nationwide Staff Group Union
Annual Report on Remuneration – Directors’ Performance Award (DPA)
A significant proportion of the overall remuneration for executive directors
is dependent on the performance achieved in the year against a number
of key measures. The DPA was the only performance award in which
executive directors participated in 2018/19. The DPA is aligned to the
key objectives for the Society and the measures reflect three of the five
strategic cornerstones, which help us to deliver value to members.
The maximum potential award level for 2018/19 was 152% of salary for the
Chief Executive and 112% of salary for other executive directors, which is
unchanged from 2017/18.
The all-employee element of the performance pay plan rewards the attainment
of challenging strategic and financial metrics drawn from the Society’s
plan. The senior element also incorporates an amount based on individual
performance and behaviours. The Society measures fall within the following
broad areas and ensure focus on delivering benefits for our members.
Society measures – Three strategic cornerstones
Individual performance
Building thriving membership – Number of committed members
Building legendary service – Customer service satisfaction rating
Built to last – Sustainable cost savings
Objectives reflecting each individual’s contribution
towards the delivery of the Society’s plan as well as
individual conduct and behaviours
For the Chief Executive, 28% of the maximum award is based on individual performance. For the other executive directors, this is 27% of the maximum award.
Payments under the plan are made at the discretion of the Remuneration Committee and delivered in instalments over the next seven years. Payments due over
the next seven years remain ‘at risk’ and may be reduced or cancelled if the Committee believes that the plan outcomes are not representative of the overall
performance of the Society, the individual or by reference to wider circumstances as appropriate. The Society also has the ability to claw back performance pay
awards for up to ten years after they were awarded in certain circumstances.
84
Annual Report and Accounts 2019
Report of the directors on remuneration (continued)
The table shows that for awards in respect of 2018/19, 20% of the award
is payable in June 2019 with 20% retained until June 2020. The remaining
60% is deferred, payable between years three and seven following the
date of award. 50% of the upfront portion and 60% of the deferred portion
is linked to the performance of the Society’s core capital deferred shares
(CCDS). These CCDS linked elements are payable in cash subject to a 12 month
retention period.
Illustration of the years when performance pay is paid to our executive directors
Performance year
Award determined
based on value
delivered for
members in the year
2019
2020
2021
2022
2023
2024
2025
2026
20% of award 20% of award
60% of award
At least 50% of awards are linked to the value of the Society’s core capital deferred shares (CCDS) and subject
to a 12 month retention period
Payments remain ‘at risk’ and may be reduced or cancelled during the seven year deferral period
(clawback provisions may apply for up to ten years in certain circumstances)
Outcomes for DPA 2018/19
Audited information
Cornerstone/Measure
Performance
target range:
threshold – maximum
Performance
relative
to targets
Outcome
Three ‘gateways’ must be passed before any payment is made under the
plan, based on measures of statutory profit, leverage ratio and conduct
risk. These gateways were achieved in 2018/19. The Board must also be
satisfied that there are no significant conduct, risk, reputational, financial,
operational or other reasons why awards should not be made, taking into
account input from the Board Risk and Audit committees. In reviewing
performance under the DPA during 2018/19, the Committee then assessed
the Society’s performance against three equally weighted measures.
Building thriving membership –
Number of committed members
Building legendary service –
Customer service satisfaction
rating (note i)
Built to last – Sustainable
cost savings (note ii)
3.23 million – 3.57 million
Above target
1st – 1st + 6%
Above target
3.4 million committed
members
1st in our peer group
with a 4.8% lead
£80 million – £140 million
Above target
£103 million
Total performance pay achieved based on Society performance
Individual performance element (see further detail below)
Total performance pay achieved based on Society and individual performance
Out of a maximum opportunity (as a % of salary) of:
Performance pay achieved
(% of salary)
Chief
Executive
Executive
directors
24.6
28.9
24.6
78.1
36
114.1
152
19.6
22.3
19.6
61.5
19 – 27
80.5 – 88.5
112
Notes:
i. © Ipsos MORI 2019, Financial Research Survey (FRS), 12 months ending 31 March 2019, c60,000 adults surveyed per annum, proportion of extremely/very satisfied customers minus
proportion of extremely/very/fairly dissatisfied customers summed across main current account, mortgage and savings. Peer group defined as providers with main current account
market share >4% (Barclays, Halifax, HSBC, Lloyds Bank, NatWest, Santander and TSB).
ii. Subject to remaining within an adjusted cost position of £2,198 million after excluding costs of incremental investment relating to our efficiency programme.
For the element based on individual performance, performance has been assessed against both the delivery of the Society performance scorecard as well as
individual goals, conduct and behaviours.
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85
Annual Report and Accounts 2019
Report of the directors on remuneration (continued)
The table below provides an overview of the individual performance 2018/19 achieved by each executive director based on their objectives.
Executive
director
J D Garner
Performance pay achieved
(% of salary) / maximum available
Comments
36/42
The Society delivered strong performance under Joe’s leadership, together with good progress across a range of objectives, including:
• Maintenance of customer service with continued leading position amongst our peer group 1.
• Extremely strong and improved brand metrics and strengthened external relationships.
• Successful progress in key strategic opportunities including technology investment and Nationwide for Business.
• Strong trading performance, capital ratios and delivery of cost plan.
• Sustained strong employee engagement in period of change and mobilised changes to people strategy.
• Good risk and compliance management in context of Board risk appetite. Improved operational resilience with further planned enhancements.
• Strong cultural leadership.
T P Prestedge
27/30
•
•
A very strong year where Tony resumed accountability for technology and operations plus leading strategy, and undertook additional responsibilities
in his role of Deputy Chief Executive.
Significant elements of above target performance contributed to significant improvement in operational resilience evidenced by reduced unplanned outages,
with further enhancements being planned.
• Strong contribution to delivery of agreed technology strategy plus building capabilities in cyber security.
• Contributed to development of strategy including venturing and partnering opportunities.
• Strong focus on people strategy including building talent pipeline.
M M Rennison
19/30
•
Notwithstanding the continued uncertainty in the external environment, and competitive market conditions, a good year with predominantly on target
outcomes and good focus on risk and conduct management.
• Strong focus on efficiency agenda with second year of £100 million sustainable savings delivered.
• Good contribution to development of technology strategy, specifically in relation to financial outcomes.
• Successful completion of stress testing, including IFRS 9 outcomes for the first time, with further improvements now being planned.
• Led Society activity in Operational Continuity in Resolution (OCR) work, with further evolution planned.
• Has overseen good contribution from Society’s Treasury function including successful MREL issuance.
• Has overseen procurement team with significant focus on third party management and work in relation to outsourcing.
C S Rhodes
23/30
• Notwithstanding the continued uncertainty in the external environment, and competitive market conditions, a good year with predominantly on target outcomes.
•
Good progress made on growing broader and deeper member relationships evidenced by number of committed members without any evidence
of increased conduct risk.
Led the Society’s development of new propositions including launch of Later Life proposition with learning through initial pilot activity with further
planned enhancements.
•
• Achieved objectives in terms of member journeys, simplification of savings range.
• Strong contribution to leadership team through approach to balancing complexities of member benefits, profitability and conduct priorities.
1 © Ipsos MORI 2019, Financial Research Survey (FRS), 12 months ending 31 March 2019 and 12 months ending 31 March 2018, c60,000 adults surveyed per annum, proportion of extremely/very satisfied customers minus proportion of extremely/very/fairly dissatisfied
customers summed across main current account, mortgage and savings. Peer group defined as providers with main current account market share >4% (Barclays, Halifax, HSBC, Lloyds Bank, NatWest, Santander and TSB).
86
Annual Report and Accounts 2019
Report of the directors on remuneration (continued)
Executive directors’ remuneration
Single total figure of remuneration for each executive director (£’000) (Audited)
Where indicated, the tables in the following sections have been audited by
PricewaterhouseCoopers LLP.
These disclosures are included in compliance with the Building Societies
Act 1986 and other mandatory reporting regulations, as well as the Large
and Medium-Sized Companies and Groups (Accounts and Reports)
(Amendment) Regulations 2013, which the Society has voluntarily adopted.
The table shows the total remuneration for each executive director for the
years ended 4 April 2019 and 4 April 2018.
Our directors receive a number of benefits and, where appropriate, we pay
tax associated with those benefits. In the single figure table, ‘taxable benefits’
includes certain essential travel costs met by the Society, including any tax
due under HMRC regulations, provided to enable the executive directors to
work whilst travelling and undertake their responsibilities most effectively.
Other benefits include medical insurance, car allowance and security.
Fixed remuneration
Variable remuneration
Taxable benefits
Total pay package
Executive directors
2019
Salary
(note i)
Pension
allowance
Directors’ Performance
Award (note ii)
Travel and other taxable
benefits (note iii)
J D Garner
T P Prestedge
M M Rennison
C S Rhodes
Total
Executive directors
2018
J D Garner
T P Prestedge
M M Rennison
C S Rhodes
Total
885
590
635
590
2,700
292
195
210
195
892
1,010
522
511
499
2,542
185
141
141
67
534
2,372
1,448
1,497
1,351
6,668
Fixed remuneration
Variable remuneration
Taxable benefits
Total pay package
Salary
855
580
625
580
2,640
Pension
allowance
Directors’ Performance
Award (note ii)
Travel and other taxable
benefits (note iii)
342
191
206
191
930
903
493
511
480
2,387
217
146
189
68
620
2,317
1,410
1,531
1,319
6,577
Notes:
i.
As disclosed in last year’s report, salaries were increased with effect from 1 April 2018. J D Garner received an increase of 3.5%, T P Prestedge 1.7%, M M Rennison
1.6% and C S Rhodes 1.7%.
ii. Variable remuneration consists of the awards under the DPA. A substantial proportion of this award is subject to deferral with payments spread over the following seven
years. Details of this plan and associated performance measures are set out earlier in this report.
iii. This value is included as fixed remuneration for the calculation of the bonus cap in meeting our regulatory requirements. A full description of the taxable benefits
is set out above.
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87
Annual Report and Accounts 2019
Report of the directors on remuneration (continued)
Executive directors’ pensions
M M Rennison is a deferred member of the Society’s defined benefit scheme.
He did not accrue any additional pension entitlement during the year. The
change in accrued pension shown in the table is as a result of inflationary
increases that are required by legislation. For his benefit accrued prior to
1 April 2011, the Normal Retirement Age is 60 and for his benefit accrued
between 1 April 2011 and 30 June 2011, his Normal Retirement Age is 65.
Table of the value of pension benefits for executive directors (£’000) (Audited)
Executive
directors
Accrued
pension at
4 April 2019
(a)
Accrued
pension at
4 April 2018
(b)
Transfer
value at
4 April 2019
(c)
Transfer
value at
4 April 2018
(d)
Change in
transfer
value
(note i)
(c)-(d)
Additional
pensions
earned in
year
(e)
Transfer
value of the
increase
Directors’
contributions
in year
M M Rennison
62
60
1,965
1,764
201
-
-
-
Notes:
i.
The transfer value basis is set by the Nationwide Pension Fund Trustee and is based on financial market conditions at the calculation date. The increases in transfer values
over the year reflect these financial market changes (which have increased the transfer value for all members of the Fund including executive directors) in addition to the fact
that the executive directors are one year older and thus one year closer to normal retirement age.
Explanations:
(a) and (b) show deferred pension entitlement at 4 April 2019 and 2018 respectively.
(c) is the transfer value of the deferred pension in (a) calculated at 4 April 2019.
(d) is the transfer value of the deferred pension in (b) calculated at 4 April 2018.
(e) is the increase in pension built up during the year. A zero figure means that, after allowing for inflation, no additional pension was built up.
Chairman and non executive directors
Fee Policy
The fees for the Chairman and non executive directors were last reviewed in
March 2019. Inflationary increases have been made to both the Chairman’s
fee of 2.5% and the basic fee for non executive directors of 2.2%.
M Fyfield was appointed the director with specific responsibility for the ‘Voice
of the Employee’ during 2018 as an extension of her Board responsibilities.
This role provides a two-way process to enhance existing employee
engagement mechanisms for employees across the Society, to ensure that
a broad range of views are reflected in Board discussions. On creation of the
role, in recognition of the additional time commitment required, an annual
fee of £10,000 was set, payable from 1 September 2018 which is equivalent
to the fees for membership of the IT, Strategy and Resilience Committee.
Additional fees may be paid for other committee responsibilities during
the year.
Chairman
Basic fee (note i)
Senior Independent Director (note ii)
Chairman of the Audit, Board Risk or Remuneration Committee
Member of the Audit, Board Risk or Remuneration Committee
Member of the Nomination and Governance Committee
Chairman of the IT Strategy and Resilience Committee
Member of the IT Strategy and Resilience Committee
Voice of the Employee (note iii)
Annual fees for 2019/20
Annual fees for 2018/19
(£’000)
405
(£’000)
395
69
40
35
15
6
25
10
10
67
40
35
15
6
25
10
10
Notes:
i. The actual basic fee for 2019/20 is £68,500.
ii. The Senior Independent Director fee is inclusive of committee membership fees. Committee Chairmen fees will continue to be paid.
iii. New role from 1 September 2018.
88
Annual Report and Accounts 2019
Report of the directors on remuneration (continued)
Single total figure of remuneration for non executive directors
The total fees paid to each non executive director are shown below.
Single total figure of remuneration for each non executive director (£’000) (Audited)
D L Roberts (Chairman)
R Clifton
M Fyfield
A Hitchcock (note i)
M A Lenson
K A H Parry
L M Peacock (Senior Independent Director)
U K Prashar
T Tookey
G Waersted (note ii)
Total
Pension payments to past non executive directors (note iii)
Society and Group
fees
2019
Travel and other
taxable benefits
(note iv)
Total fees and
taxable benefits
Society and Group
fees
2018
Travel and other
taxable benefits
(note iv)
Total fees and
taxable benefits
395
97
92
28
106
123
142
82
131
78
1,274
2
8
9
5
4
6
4
11
6
10
65
397
105
101
33
110
129
146
93
137
88
1,339
243
389
96
76
-
106
121
141
81
125
63
1,198
2
15
7
-
3
10
6
13
7
8
71
391
111
83
-
109
131
147
94
132
71
1,269
251
Notes:
i. A Hitchcock joined the Board on 2 December 2018.
ii. G Waersted joined the Board on 1 June 2017.
iii. The Society stopped granting pension rights to non executive directors who joined the Board after January 1990.
iv. Taxable benefits for non executive directors relate to expenses incurred in connection with travel and attendance at Board meetings. HMRC deem these expenses to be taxable where the meetings take place at the Society’s main offices and the Society settles the tax
on behalf of the non executive directors.
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89
Annual Report and Accounts 2019
Report of the directors on remuneration (continued)
Additional Disclosures
Chief Executive remuneration for the past ten years
Financial year
The table shows details of the Chief Executive’s remuneration for the
previous ten years.
Total remuneration
(£’000)
Annual performance pay earned
as % of maximum available
Medium term performance pay earned
as % of maximum available
2018/19
2017/18
2016/17
2015/16
2014/15
2013/14
2012/13
2011/12
2010/11
2009/10
2,372
2,317
3,386 (note ii)
3,413 (note iii)
3,397 (note iii)
2,571
2,258
2,251
1,961
1,539
75.1
69.5
71.9
75.8
74.4
83.3
60.6
60.6
75.4
33.8
- (note i)
- (note i)
- (note i)
80.8
84.5
74.9
41.7
40.7
76.9
61.7
Notes:
i. Medium term performance pay ceased at the end of 2015/16.
ii. Joe Garner commenced his role as Chief Executive on 5 April 2016. His total remuneration for 2016/17 included the value of buy-out awards on joining (2017: £1,070,752).
These awards do not form part of ongoing remuneration. If this amount is excluded, the figure for 2016/17 would be £2,315,047.
iii. The Chief Executive in 2015/16 and all previous financial years shown in the table above was Graham Beale. His total remuneration for 2015/16 and 2014/15 includes awards
under the DPA as well as legacy payouts under the directors’ previous medium term pay plan as a result of the transition period between plans.
Change in remuneration of Chief Executive
The change in remuneration (base salary, benefits (including pension) and
annual performance pay only) for the Chief Executive from 2017/18 to 2018/19
compared to the average for all other employees is shown in the table.
Chief Executive
Average employee
Salary
3.51%
2.73%
Benefits
Annual performance pay
-14.65%
7.22%
11.80%
-8.93%
Note:
i.
The difference in annual performance pay for the CEO compared with the average employee is due to a number of contributing factors. Society performance for 2018/19,
whilst still above target, is lower than in 2017/18 for all employees. In addition, 2017/18 performance pay for the CEO was reduced by 7.5% to the total value of his
performance pay achieved. Both of these factors contribute to the year on year changes. Finally, in 2018/19 the CEO has also received a higher individual performance rating
compared with 2017/18.
90
Annual Report and Accounts 2019
Report of the directors on remuneration (continued)
Relative importance of spend on pay
Total remuneration bandings
The chart below illustrates the amount spent on remuneration paid to all
employees of Nationwide Building Society, compared with retained earnings.
Total remuneration includes base salary, performance awards for 2018/19, pension and benefits/allowances. The total number is based on employees
of the Society as at 4 April 2019 and 4 April 2018.
Relative importance of spend on pay (£ million)
■ 2018/19 ■ 2017/18
826
824
613
460
900
800
700
600
500
400
300
200
100
0
All employee remuneration
Retained earnings
Payroll costs represent 36.65% (2018: 40.71%) of total administrative
expenses. Nationwide’s profit after tax for the year was £618 million,
of which £158 million was paid as distributions and the remaining
£460 million is held as retained earnings.
Total remuneration bandings
Total employees 2018/19
Total employees 2017/18
£0 - £50,000
£50,001 - £100,000
£100,001 - £250,000
£250,001 - £500,000
£500,001 - £1,000,000
Over £1,000,000
13,693
3,806
586
65
11
6
13,966
3,592
517
57
12
4
Other directorships
Gender pay gap reporting
Executive directors and members of senior management may be invited
to become non executive directors of other companies, subject to the
agreement of the Society. These appointments provide an opportunity to
gain broader experience outside Nationwide and therefore benefit the
Society, providing that appointments are not likely to lead to a conflict of
interest. Any fees earned may be retained by the executive director
concerned. No executive director earned any fees during the year. With
effect from 1 July 2014, the number of external appointments that
executive and non executive directors can hold is limited as required
under CRD IV.
The Society is fully committed to promoting a diverse and inclusive
workplace. The gender pay gap measures the difference in earnings
between women and men across all roles. We published our second
gender pay gap report in November 2018, which can be found at
nationwide.co.uk, together with an update of progress on our Women in
Finance charter commitments. Our mean average gender pay gap, as at 5
April 2018, was 28%, compared with 29% in 2017.
Gender pay is not the same as equal pay and our regular audits show that
our pay policies operate fairly. Equal pay measures the pay of men and
women who are carrying out the same or equivalent roles.
Payments for loss of office
No payments for loss of office were made during the year.
Payments to past directors
No payments were made to former directors in the year in excess of the
minimum threshold for disclosure of £20,000.
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Annual Report and Accounts 2019
Report of the directors on remuneration (continued)
CEO pay ratio reporting
Voting at AGM
The Society has decided to publish the ratio of the Chief Executive’s pay to the wider employee population, ahead of the formal disclosure requirement
coming into force next year. This ratio will build annually to cover a rolling ten year period. The ratio compares the total remuneration of the Chief Executive
against the total remuneration of the median employee and those who sit at the 25th and 75th percentiles (lower and upper quartiles).
A resolution to approve the 2017/18 ‘Report of the directors on remuneration’
was passed at the 2018 AGM. The Remuneration Policy was last approved
by members at the 2017 AGM. In each case votes were cast as follows:
Year
2018/19
Method
Option A
25th percentile pay ratio
Median pay ratio
75th percentile pay ratio
99:1
77:1
48:1
The total remuneration and salary values for the 25th, median and 75th percentile employees for 2018/19 are:
Total remuneration
Salary
25th percentile
£23,969
£19,059
Median
£30,939
£24,773
75th percentile
£49,466
£35,968
Notes:
i. The calculation is based on Option A as set out in the regulations which is considered to be the most statistically accurate methodology.
ii. Employee data includes full time equivalent total remuneration for all UK employees as at 1 March 2019. For each employee, remuneration was calculated based on all
components of pay including base pay, performance pay for 2018/19, core benefits and pension payments.
iii. Whilst the majority of employees participate in a defined contribution scheme with a fixed maximum employer contribution, there are other pension arrangements in place for
some employees including a defined benefit pension scheme which has been closed to new participants since 2007. Although it would be possible to recognise a higher value
under the defined benefit scheme, in order to ensure accurate year on year comparative data going forward, a fixed value equal to the maximum employer contribution available
to the defined contribution scheme members is included for all defined benefit scheme members.
iv. The Committee has considered the pay data for the three individuals identified for 2018/19 and confirms that the ratios reasonably represent the Society’s approach to pay and
reward for employees taken as a whole.
Report of the
directors on
remuneration
Remuneration
Policy
Votes in favour
Votes against
Votes withheld
534,342 (90.75%)
550,109 (92.04%)
54,448 (9.25%)
47,552 (7.96%)
9,743
10,261
The year ahead
A summary of the remuneration policy approved by our members in 2017
is set out below together with an overview of how it will be applied in
2019/20. In applying this policy, the Committee is guided by the need to
ensure executives are appropriately motivated and rewarded to deliver
demonstrable value for our members. This summary does not replace or
override the full approved policy, which is available at nationwide.co.uk
The Committee will continue to focus on ensuring that our remuneration
structure supports the right culture and behaviours as well as our values as
a mutual. Key priorities for 2019/20 include preparation of a new policy for
approval at the 2020 AGM and accordingly during the forthcoming year
the Committee will continue to review the Society’s approach to executive
remuneration taking into account the Society’s strategy, together with
developments in the external environment.
The Committee agreed base salary increases with effect from 1 April 2019,
in line with the all-employee pay settlement. The exception is T P Prestedge
where the increase reflects his additional responsibilities in his role of
Deputy Chief Executive. In addition, with effect from 1 April 2019, the
pension allowance for all executive directors has been reduced from 33%
to 24% of base salary as part of a wider three-year strategy to align
contributions to those made for employees in the Nationwide Group
Personal Pension.
92
Annual Report and Accounts 2019
Report of the directors on remuneration (continued)
Remuneration policy
Operation
Implementation in 2019/20 for executive directors
Base salary
Benefits
Pension
Our performance pay plan, the Directors’
Performance Award (DPA), comprises two
elements:
(i) an all-employee element; and
(ii) an element in which the most senior team
participate subject to deferral provisions
• Reviewed annually, taking into account market levels of pay, individual
skills, performance and experience, and the approach to salaries
throughout Nationwide.
An overall aggregate increase of 4.1% applies across the executive directors which is in line
with the pay review for the wider employee population except for T P Prestedge where the
increase also reflects his additional responsibilities as Deputy Chief Executive:
• J D Garner £916,000 (3.50%)
• T P Prestedge £635,000 (7.63%)
• M M Rennison £654,000 (2.99%)
• C S Rhodes £605,000 (2.54%)
• Include car benefits, healthcare and insurance benefits.
No change for 2019/20.
• Executive directors receive a cash allowance in lieu of pension
• Maximum allowance is 40% of salary.
From 2019/20 executive directors will receive a pension allowance of 24% of salary (reduced
from 33%).
The maximum pension allowance for new appointments is capped at 25% of salary. This limit
will be reviewed as part of the wider policy review during the year. In practice for 2019/20,
in the event of new appointments at this level, it is not anticipated that any pension allowance
would be above that for the current executive directors.
• Rewards annual performance against stretching Society, team and
individual measures and objectives
• Performance measures reflect the priorities of the Society and are drawn
No change in maximum award opportunity for 2019/20:
• 152% of base salary for the Chief Executive
• 112% of base salary for other executive directors
from the Society’s plan
• Deferral periods are such that no more than 40% of total performance
pay is paid after the performance period and 60% is deferred for
between three and seven years
• At least 50% of awards are linked to the value of the Society’s core capital
deferred shares (CCDS) and subject to a 12 month retention period
• Awards are subject to clawback for up to ten years
• The all-employee element operates on the same basis for all employees.
Performance measures:
• Gateway measures based on statutory profit, leverage ratio and conduct matters
• Society performance, subject to minimum performance thresholds, assessed against the
following cornerstones:
– Building thriving membership – Number of committed members
– Building legendary service – Customer service satisfaction rating
– Built to last – Sustainable cost savings.
For the CEO, 28% of the maximum award assessed is based on individual contribution and
behaviours including in relation to conduct matters. For the other executive directors, this is
36% of the maximum award.
As set out in this report, inflationary increases of 2.5% have been made to the Chairman and
2.2% to the non executive director basic fee for 2019/20.
Chairman and non executive director fees
• Chairman fees normally reviewed and approved by the Remuneration
Committee on an annual basis
• Non executive director fees normally reviewed and approved by the
executive directors and the Chairman on an annual basis
• Non executive directors receive a basic fee and an additional supplement
is paid for serving on or chairing a Board Committee
• The Chairman and non executive directors do not participate in any
performance pay plans or pension arrangements. Benefits may be
provided if considered appropriate.
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93
Annual Report and Accounts 2019
Report of the directors on remuneration (continued)
What our executive directors could earn in 2019/20 based on performance
The table below illustrates the amounts that executive directors would be paid under three different scenarios.
Breakdown of total remuneration for 2019/20 (£’000)
Fixed Pay
Salary
Pension as a % of salary
Performance pay
Target as a % of salary
Maximum as a % of salary
Total remuneration
Fixed pay – base salary, pension and benefits (note i)
Target – assuming we deliver target levels of performance against the measures set out in the DPA
Maximum – assuming DPA arrangements pay out in full. This would only occur where performance
has been truly exceptional across all the measures set
Note:
i. Includes benefits based on 2018/19 actuals.
J D Garner
T P Prestedge
M M Rennison
C S Rhodes
916
24%
98%
152%
1,321
2,219
2,713
635
24%
78%
112%
928
1,424
1,640
654
24%
78%
112%
952
1,462
1,684
605
24%
78%
112%
817
1,289
1,495
94
Annual Report and Accounts 2019
Directors’ report For the year ended 4 April 2019
Information for the ‘Content’ items listed in the table below can be found in the section of the accounts as listed against them. These items are required to be shown in the Directors’ report by the Building Societies Act 1986 and are incorporated
into the Directors’ report by this cross referencing.
Content
Business objectives and future plans
Section
Strategic Report
Nationwide results and key performance indicators
Strategic Report – Chief Executive’s review including performance updates
Charitable donations
Strategic Report – How we are doing on service, value and strength
Employee engagement, development, equality, diversity and inclusion
Strategic Report – Building PRIDE
Directors’ remuneration
Mortgage arrears
Risk management
Principal, top and emerging risks
Directors’ share options
CRD IV country-by-country reporting
Distributions on CCDS instruments
Governance – Report of the directors on remuneration
Business and Risk Report
Business and Risk Report
Strategic Report – Risk overview
Annual business statement
Published online – www.nationwide.co.uk/about/corporate-information/results-and-accounts
Financial Statements – Note 31
Pages
2 to 34
7 to 24
11
20 to 21
81 to 93
122
103 to 105
26
251
-
235
Board of directors
Political donations
Participation in the unclaimed assets scheme
The names of the directors of the Society who were in office at the date of
signing the financial statements, along with their biographies, are set out on
pages 36 to 42.
The only change in the year and up to the date of signing the financial
statements was the appointment of Albert Hitchcock (non-executive
director), in December 2018.
Mitchel Lenson will be retiring at the AGM on 18 July 2019.
None of the directors have any beneficial interest in equity shares in, or
debentures of, any connected undertaking of the Society.
The Board has agreed that in accordance with the UK Corporate Governance
Code, all the directors will stand for election or re-election on an annual basis.
Nationwide engages with a range of policymakers across the political
spectrum on issues which matter to our members such as housing.
Nationwide did not give any money for political purposes during the year.
(2017/18: None)
The Society participates in the Government-backed unclaimed assets
scheme, whereby savings accounts that have been inactive for 15 years, and
where the account holder cannot be traced, are eligible to be transferred into
a central reclaim fund. The central reclaim fund has the responsibility for
retaining sufficient monies to meet the costs of future reclaims for any
previously transferred dormant account balances, and to transfer any surplus
to the Big Lottery Fund for the benefit of good causes which have a social or
environmental purpose. On 14 December 2018 Nationwide made a transfer
of £12,143,551 to the Reclaim Fund Limited, the administrators of the
unclaimed assets scheme. This follows the previous transfer the Society
made in April 2017 (£4,996,120). The total contributions from inception to
that date are £69,642,551.
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95
Annual Report and Accounts 2019
Directors’ report (continued)
Creditor Payment Policy
The Society’s policy is to agree the terms of payment with suppliers at the
start of trading, to ensure that suppliers are aware of the terms of payment,
and pay in accordance with contractual and other legal obligations. It is the
Society’s policy to settle the supplier’s invoice for the complete provision of
goods and services (unless there is an express provision for stage payments)
within the agreed payment terms, subject to the full conformity with the
terms and conditions of the purchase. The Society’s creditor days were 9 days
at 4 April 2019 (2018: 11 days).
Environment
The Society reports its greenhouse gas emissions (GHG) on the right,
as set out by the Companies Act 2006. For more information on the Society’s
environmental sustainability performance, see page 33.
A summary of our performance is as follows:
Year to 4 April 2019
Year to 4 April 2018
Baseline year 4 April 2011
Carbon dioxide (CO2e) in tonnes (notes i and ii)
Scope 1 emissions
Energy
Travel
Scope 2 emissions
Electricity
Total Scope 1 and 2 emissions (note iii)
PPA carbon reduction (note iv)
Absolute carbon outturn
Total carbon dioxide in tonnes per FTE
Water use (cubic metres)
Water use (cubic metres) per FTE
Waste generated in tonnes
Percentage of waste recycled
3,721
2,190
23,446
29,357
(22,187)
7,170
0.39
195,854
10.56
2,581
63%
4,374
1,624
29,268
35,266
(19,972)
15,294
0.87
209,207
11.87
2,516
68%
4,890
2,448
50,802
58,140
-
58,140
3.46
259,718
15.45
4,554
43%
Notes:
i. CO2e is an abbreviation of ‘carbon dioxide equivalent’ and is the internationally recognised measure of greenhouse gas emissions.
ii. When calculating our carbon emissions we have used the DEFRA 2015 conversion factors.
iii. Scope 1 covers direct combustion of fuels and company owned vehicles and Scope 2 covers emissions from electricity.
iv. Represents the contribution of a solar power purchase agreement, producing emissions-free energy backed by renewable obligations certificates.
Directors’ responsibilities in respect of the preparation of the Annual Report and Accounts
The following statement, which should be read in conjunction with the
Independent auditor’s report on pages 166 to 174, is made by the directors
to explain their responsibilities in relation to the preparation of the Annual
Report and Accounts, the directors’ emoluments disclosures within the
Report of the directors on remuneration, the Annual business statement
and the Directors’ report.
The Annual Report and Accounts have been prepared in accordance with
International Financial Reporting Standards (IFRSs) as adopted by the EU.
A copy of the Annual Report and Accounts can be found on Nationwide
Building Society’s website at nationwide.co.uk (Results and accounts
section). The directors are responsible for the maintenance and integrity of
statutory and audited information on the website. Information published on the
internet is accessible in many countries with different legal requirements.
Legislation in the United Kingdom governing the preparation and dissemination
of financial statements may differ from legislation in other jurisdictions.
Building Societies Act 1986 (the Act)
As required by regulations made under the Act, the directors have prepared
an Annual Report and Accounts which gives a true and fair view of the income
and expenditure of the Society and the Group for the financial year and of the
state of the affairs of the Society and the Group as at the end of the financial
year, and which provides details of directors’ emoluments in accordance
with Part VIII of the Act and regulations made under it. The Act states that
the requirements under international accounting standards achieve a fair
presentation. In preparing the Annual Report and Accounts, the directors have:
• selected appropriate accounting policies and applied them consistently
• made judgements and estimates that are reasonable
• stated whether applicable accounting standards have been followed, subject
to any material departures disclosed and explained in the financial statements
• prepared the financial statements on the going concern basis.
British Bankers’ Association Code for Financial Reporting Disclosure
(the BBA Code)
The Group has continued to adopt the BBA Code in preparing the Annual
Report and Accounts in compliance with the code.
Going concern
The Group’s business activities, along with its financial position, capital structure,
risk management approach and factors likely to affect its future performance
are described in the Strategic Report and the Business and Risk Report.
The Group’s forecasts and projections, taking account of possible changes in
trading performance and funding retention, and including stress testing and
scenario analysis, show that the Group will be able to operate at adequate
levels of both liquidity and capital for the next 12 months. Furthermore, the
Group’s capital ratios and its total capital resources are comfortably in excess
of PRA requirements.
After making enquiries the directors are satisfied that the Group has adequate
resources to continue in business for the foreseeable future and that,
therefore, it is appropriate to adopt the going concern basis in preparing the
financial statements.
Business viability statement
In addition to the going concern statement above, the directors have an
obligation in accordance with provision C.2.2 of the UK Corporate Governance
Code to confirm that they believe that both the Society and the Group will
be able to continue in operation, and to meet their liabilities as they fall due.
This assessment is made over a time period considered appropriate by
reference to the Society’s financial plan.
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Annual Report and Accounts 2019
Directors’ report (continued)
Assessment of prospects
In making this viability assessment, the directors have used a wide range
of sources including: the principal and emerging risks which could impact
the performance of the Group; the outcome of the Bank of England’s 2018
Concurrent Stress Test; and, the Group’s financial plan. This plan includes
forecasts of detailed financial, capital, funding and customer information
over the next five years, together with an assessment of the relevant risks.
The Group’s financial plan is produced and reviewed at least annually by
the directors. The process for creating the financial plan takes into account
the Group’s strategic objectives, the risks involved in meeting those objectives
and the risk appetite limits in place to ensure that the Group remains safe
and secure for its members. The Group’s annual planning process involves
the following key steps:
1. The Board reviews the Group’s strategic objectives in the context of the
market environment.
2. Economic and market assumptions for the next five years are prepared.
These are then used to develop financial, propositional pricing, funding
and capital projections.
3. In addition to our core projections, a range of alternate economic scenarios
are prepared to ensure that the Group would continue to remain profitable if
the assumptions included in our financial plan were different. The scenarios
are derived using external data and statistical methodologies, together with
management judgement, to determine scenarios which span an
appropriately wide range of plausible economic conditions. This enables
the Group to develop actions to mitigate these scenarios, should they occur.
4. The Board also obtains independent assurance from the Group’s Risk
Oversight function that the financial plan aligns with the Group’s strategic
ambitions and risk appetite. This assessment also identifies the key risks
to delivery of the financial plan, and any relevant adjustments are made
to ensure that we remain within our risk appetite.
5. These projections, including the plausible downside scenarios, are then
reviewed and challenged by the Board to confirm that they fully reflect
Nationwide’s strategic ambitions, whilst ensuring that they are based
on plausible assumptions and remain within the Group’s risk appetite.
Once approved by the Board, they form the basis of the Group’s targets
for the following year.
Assessment of viability
Whilst the financial plan represents the best estimate of Nationwide’s future
prospects, the directors have also considered the financial impact of the
alternative scenarios described above and the results of the Bank of England’s
2018 Concurrent Stress Test, which outlines the impact on the Group’s
business model of a severe economic downturn. Due to the Group’s strong
capital position and robust business model, it would be able to withstand
both plausible and severe economic and competitive downturns.
The Group has also developed policies and processes for monitoring and
managing its top and emerging risks. Further details on this are described
in the ‘Business and Risk Report’ (pages 98 and 99).
• The financial statements, prepared in accordance with IFRSs as adopted
by the EU, give a true and fair view of the assets, liabilities, financial
position and profit of the Group and Society.
Assessment period used for reviewing Nationwide’s viability
Based on the above, the directors have a reasonable expectation that the
Society and Group will be able to continue to operate and meet liabilities as
they fall due, over the next three years to 4 April 2022. The directors have
specifically assessed the prospects of the Society and Group over the first
three years of the financial plan because:
• The uncertain economic environment caused by the UK’s vote to leave the
EU, and the pace of regulatory and technological change, mean that the
assumptions underpinning the fourth and fifth years of the financial plan
may be less reliable. Notwithstanding this, there is no information contained
within the outer years of the financial plan which would cause the directors
to conclude that the Group would not remain viable in the longer term.
• It is within the period covered by the Group’s future projections of profitability,
cashflows, capital requirements and capital resources. It is also within
the period covered by both the Bank of England’s Concurrent Stress Tests
and our own internal alternative downside scenarios.
Fair, balanced and understandable
The directors are satisfied that the Annual Report and Accounts, taken as a
whole, are fair, balanced and understandable, and provide the information
necessary for members and other stakeholders to assess the Group’s position
and performance, business model and strategy.
Details of the governance procedures that have been embedded to support
this can be found in the Audit Committee report.
Enhanced Disclosure Task Force (EDTF)
The EDTF established by the Financial Stability Board, published its report
‘Enhancing the Risk Disclosures of Banks’ in October 2012. All EDTF
recommendations are reflected in the Annual Report and Accounts and Pillar
3 Disclosure.
Directors’ statement pursuant to the disclosure and
transparency rules
As required by the Disclosure and Transparency Rules of the Financial Conduct
Authority, the directors have included a fair review of the business and a
description of the principle risks and uncertainties facing the Group. The
directors confirm that, to the best of each director’s knowledge and belief:
• The Chief Executive’s review and the Financial review contained in the
Strategic Report include a fair review of the development and
performance of the business and the position of the Group and Society.
In addition, the Strategic Report contains a description of the principal
risks and uncertainties.
• In addition to the Annual Report and Accounts, as required by the Act, the
directors have prepared an Annual business statement and a Directors’
report, each containing prescribed information relating to the business of
the Society and its connected undertakings.
Directors’ responsibilities in respect of accounting
records and internal control
The directors are responsible for ensuring that the Society and its connected
undertakings:
• keep accounting records which disclose with reasonable accuracy the
financial position of the Society and the Group and which enable them to
ensure that the Annual Report and Accounts comply with the Building
Societies Act
• take reasonable care to establish, maintain, document and review such
systems and controls as are appropriate to the Society.
The directors have general responsibility for safeguarding the assets of the
Group and for taking reasonable steps for the prevention and detection of
fraud and other irregularities.
The directors who held office at the date of approval of this report confirm
that, so far as they are each aware, there is no relevant audit information of
which the Group’s auditors are unaware, and each director has taken all the
steps that they ought to have taken as a director to make themselves aware
of any relevant audit information and to establish that the Group’s auditors
are aware of that information.
The auditors
Due to audit firm rotation regulations PricewaterhouseCoopers LLP is due to
resign as the Society’s audit firm effective from the date of the Annual
General Meeting. Following a successful tender, as reported in the Audit
Committee report of the Annual Report and Accounts 2018, a resolution will
be proposed at the Annual General Meeting to appoint Ernst & Young LLP
(EY) as external audit firm for the year ending 4 April 2020.
David Roberts
Chairman
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97
Annual Report and Accounts 2019
Business and
Risk Report
Introduction
98
98 Top and emerging risks
99 Principal risks and uncertainties
103 Managing risk
106 Credit risk
• Overview
• Residential mortgages
• Consumer banking
• Commercial and other lending
• Treasury assets
139 Liquidity and funding risk
150 Solvency risk
154 Market risk
159 Pension risk
160 Business risk
161 Model risk
161 Operational risk
163 Conduct and compliance risk
Melissa, member since 2013
98
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report
Introduction
Risk management is at the heart of our business and has an important part to play in delivering our shared purpose of building society, nationwide by making sure
we are safe and secure for the future.
Whilst it is accepted that all business activities involve some degree of risk, Nationwide seeks to protect its members by appropriately managing the risks that arise from its activities. Nationwide’s risk management processes ensure
the Society is built to last by:
•
•
•
• maintaining an appropriate balance between delivering member value and remaining a prudent and responsible lender.
identification of risks through a robust assessment of principal risks and uncertainties facing the Society, including those that would threaten its business model, future performance, solvency or liquidity
contributing to better decision making, ensuring we take the right risks, in a way that is considered and supports the strategy
ensuring the risks we do take are appropriately understood, controlled and managed
Top and emerging risks
Top and emerging risks are identified through the process outlined in the ‘Managing Risk’ section of this report and are closely tracked throughout the governance structure. They are specific instances of one or more of our principal
risks which are particularly relevant in the current environment and which the Society will keep under close observation through risk reporting. The top and emerging risks to Nationwide’s strategy are detailed below.
Political and Economic Environment
Competition
Technology ➔
Nationwide is inherently exposed to a downturn in macro-economic
conditions which can impact customer affordability, credit losses and
the availability and cost of financial resources. Numerous factors are
expected to impact the external political and economic environment
over the coming year, including uncertainty surrounding the UK’s exit
from the European Union, trade wars, and ongoing geopolitical
tensions.
We maintain strong capital and liquidity surpluses over regulatory
minimums, operate strong credit controls, and conduct regular stress
tests to identify and manage our exposure to economic shocks.
The competitive environment continues to evolve as rapid
technological advancement and societal change revolutionise how
members use and access existing products and services. These trends
are also changing the kinds of products and services required by
members.
We continue to identify new and innovative products, technology and
service propositions to better meet customer needs. We are investing
in our technology and branches, as well as diversifying our product
offerings.
Increasingly our members demand an always-on, constantly evolving
and improving digital service. This means systems need to be
managed to avoid disruption to member services whilst also
delivering technological change to match demand and improve our
services. In addition, ever increasing volumes of data must be
managed securely and reliably.
We continue to invest in the resilience of systems, implementing
robust controls to minimise disruption.
Key principal risks impacted
•
•
•
Business Risk
Credit Risk
Solvency Risk
Liquidity and Funding Risk
•
• Market Risk
•
Pension Risk
Key principal risks impacted
•
•
•
Business Risk
Operational Risk
Conduct and Compliance Risk
Key principal risks impacted
•
•
Operational Risk
Conduct and Compliance Risk
Key (level of risk to Nationwide)
Increasing level of risk ➔ Stable level of risk
Decreasing level of risk
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Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Top and emerging risks (continued)
Regulation ➔
Managing Change
Cyber Security ➔
The regulatory environment is evolving as regulators continue to drive
an agenda committed to maintaining trust and confidence in UK
financial services and a number of complex regulatory changes
continue to be embedded.
The Society’s investment in technology has increased the scale of
the Society’s change agenda. Whilst this will lower risk over the long-
term, it increases the immediate risk to service provision and costs
as change is delivered.
The threat of disruption to customer services or a loss of customer
data as a result of cyber crime remains heightened as cyber attacks
become ever more sophisticated and as Nationwide and our
members become more connected and embrace new technology.
We continue to work closely both with regulators and the industry
to deliver fair outcomes to our members, and ensure we meet all
regulatory obligations.
We continue to manage the change agenda to minimise the risk of
service disruption and maximise return on investment for our
members.
Key principal risks impacted
•
•
•
Conduct and Compliance Risk
Business Risk
Operational Risk
Key principal risk impacted
•
•
•
Business Risk
Operational Risk
Conduct and Compliance Risk
Key (level of risk to Nationwide)
Increasing level of risk ➔ Stable level of risk
Decreasing level of risk
Principal risks and uncertainties
We continue to invest in cyber security, evolving our controls across
both new and existing technologies to protect our systems and
customer data from more complex attacks whilst collaborating with
industry bodies and law enforcement agencies to respond to
emerging cyber threats.
Key principal risk impacted
•
Operational Risk
The principal risks described below represent the most significant risks to successful delivery of our strategic objectives. These risks remain largely unchanged from last year and are managed through the Society’s Enterprise Risk
Management Framework as described on page 103.
Credit risk
The risk of loss as a result of a member,
customer or counterparty failing to meet their
financial obligations.
•
Find out more on page 106.
Why this risk is important for Nationwide
How Nationwide manages this risk on behalf of members
Borrowers may be unable to repay loans for a number of reasons, such as
changes to the economic and market environment or in their individual
circumstances. This may lead to:
•
Financial difficulty or other detriment to borrowers who are unable to afford
repayments on existing products and services, either with Nationwide or
other providers.
Credit losses which adversely impact the Society’s profitability, ability to
generate sufficient capital or sustainability.
Nationwide seeks to minimise unaffordable lending and credit losses through:
•
Stringent affordability checks and controls, ensuring lending is responsible
and will not cause financial difficulty for members and customers.
Prudent lending policies, operated across specific market segments, which
ensure lending remains within the Board’s risk appetite.
Continuous monitoring of credit portfolios to identify potential risks, through
stress testing, modelling and ongoing reporting to senior management and
the Board.
•
•
Annual Report and Accounts 2019
Business and Risk Report (continued)
Top and emerging risks (continued)
100
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Principal risks and uncertainties (continued)
Regulation ➔
Managing Change
Cyber Security ➔
The regulatory environment is evolving as regulators continue to drive
The Society’s investment in technology has increased the scale of
an agenda committed to maintaining trust and confidence in UK
financial services and a number of complex regulatory changes
the Society’s change agenda. Whilst this will lower risk over the long-
term, it increases the immediate risk to service provision and costs
continue to be embedded.
as change is delivered.
The threat of disruption to customer services or a loss of customer
data as a result of cyber crime remains heightened as cyber attacks
become ever more sophisticated and as Nationwide and our
members become more connected and embrace new technology.
We continue to work closely both with regulators and the industry
to deliver fair outcomes to our members, and ensure we meet all
regulatory obligations.
members.
We continue to manage the change agenda to minimise the risk of
We continue to invest in cyber security, evolving our controls across
service disruption and maximise return on investment for our
both new and existing technologies to protect our systems and
customer data from more complex attacks whilst collaborating with
industry bodies and law enforcement agencies to respond to
emerging cyber threats.
Key principal risk impacted
•
Operational Risk
Key principal risks impacted
Conduct and Compliance Risk
•
•
•
Business Risk
Operational Risk
Key principal risk impacted
Business Risk
Operational Risk
•
•
•
Conduct and Compliance Risk
Key (level of risk to Nationwide)
Increasing level of risk ➔ Stable level of risk
Decreasing level of risk
Principal risks and uncertainties
Management Framework as described on page 103.
Credit risk
The principal risks described below represent the most significant risks to successful delivery of our strategic objectives. These risks remain largely unchanged from last year and are managed through the Society’s Enterprise Risk
Why this risk is important for Nationwide
How Nationwide manages this risk on behalf of members
The risk of loss as a result of a member,
Borrowers may be unable to repay loans for a number of reasons, such as
Nationwide seeks to minimise unaffordable lending and credit losses through:
customer or counterparty failing to meet their
changes to the economic and market environment or in their individual
financial obligations.
circumstances. This may lead to:
•
•
Financial difficulty or other detriment to borrowers who are unable to afford
repayments on existing products and services, either with Nationwide or
other providers.
Credit losses which adversely impact the Society’s profitability, ability to
generate sufficient capital or sustainability.
the Board.
•
•
•
Stringent affordability checks and controls, ensuring lending is responsible
and will not cause financial difficulty for members and customers.
Prudent lending policies, operated across specific market segments, which
ensure lending remains within the Board’s risk appetite.
Continuous monitoring of credit portfolios to identify potential risks, through
stress testing, modelling and ongoing reporting to senior management and
Find out more on page 106.
Solvency risk
The risk that Nationwide fails to maintain
sufficient capital to absorb losses throughout
a full economic cycle and to maintain the
confidence of current and prospective members,
investors, the Board and regulators.
Find out more on page 150.
Market risk
The risk that the net value of, or net income
arising from, the Society’s assets and liabilities is
impacted as a result of market price or rate
changes. As Nationwide does not have a trading
book, market risk only arises in the banking book.
Find out more on page 154.
Business risk
The risk that volumes decline or margins shrink
relative to the cost base, affecting the
sustainability of the business and the ability to
deliver the strategy due to macro-economic,
geopolitical, industry, regulatory or other external
events.
Find out more on page 160.
Why this risk is important for Nationwide
How Nationwide manages this risk on behalf of members
A sudden stress or series of unexpected losses may result in Nationwide’s capital
reserves being depleted. This may lead to:
•
Threats to the ongoing viability of the Society should capital resources
be exhausted.
An inability to offer new products to members as capital is not available
to support these offerings.
Reputational damage to the Society as members, regulators, investors
and counterparties lose trust in Nationwide’s ability to operate.
•
•
Nationwide ensures it maintains sufficient capital resources through:
•
Defining a minimum level of capital, including leverage, which the Society
is willing to accept through Board risk appetite, which is maintained and
monitored by the Board and other risk committees.
Structuring capital to meet key regulatory minimums, stakeholder
expectations and the requirements of the strategy.
•
Why this risk is important for Nationwide
How Nationwide manages this risk on behalf of members
Nationwide’s income or the value of its assets may be altered by changes in
interest rates, currency rates and equity prices. This may lead to:
•
Lower than expected income, adversely affecting the Society’s profitability
and ability to generate capital.
Assets and investments which are worth less than expected, impacting the
Society’s ability to meet its financial commitments and its ongoing viability.
•
Nationwide seeks to minimise its exposure to fluctuations in market prices and
rates through:
•
Fully hedging market risks where possible and appropriate and taking
market risks only when these are essential to core business activities, or are
designed to provide stability of earnings.
Continuous monitoring through a variety of techniques including sensitivity
analysis, earnings sensitivity, Value at Risk and stress analysis.
•
Why this risk is important for Nationwide
How Nationwide manages this risk on behalf of members
Nationwide may fail to respond appropriately to changes in the external
environment including new technology, consumer behaviour, regulation or
market conditions. This may lead to:
•
Products and services which fail to meet members’ needs, adversely
affecting both the Society’s relationship with members and the ability to
generate income.
A weakening of our relationships with members as they increasingly conduct
their business through third parties.
Degradation of profitability through increased costs or decreased income.
•
•
Whilst changes in Nationwide’s operating environment pose risks, they also
present opportunities to provide new, innovative products and services to
members. Nationwide ensures it is able to adapt to new conditions and continues
to meet members’ needs whilst remaining safe and secure for the future through:
•
Considering the potential for disruption to the market and operating
environment from a range of factors, including technology and consumer
trends, through regular Board and senior management reporting.
Continuing to develop new products and services based on member
engagement, emerging trends, and technological innovation.
Identifying and monitoring potential risks to its business model through
dedicated horizon scanning processes.
•
•
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Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Principal risks and uncertainties (continued)
Liquidity and funding risk
Liquidity risk is the risk that Nationwide is unable
to meet its liabilities as they fall due and maintain
member and other stakeholder confidence.
Funding risk is the risk that Nationwide is unable
to maintain diverse funding sources in wholesale
and retail markets and manage retail funding risk
that can arise from excessive concentrations of
higher risk deposits.
Find out more on page 139.
Pension risk
The risk that the value of the pension schemes’
assets will be insufficient to meet the estimated
liabilities, creating a pension deficit.
Find out more on page 159.
Model risk
The risk of weaknesses or failures in models
used to support key decisions including in relation
to the amount of capital and liquidity resources
required, lending and pricing, resourcing and
earnings.
Find out more on page 161.
Why this risk is important for Nationwide
How Nationwide manages this risk on behalf of members
In the event of a downturn in the macroeconomic environment, sudden
withdrawals of member deposits or other potential shocks, Nationwide could have
insufficient financial resources to meet its commitments. This may lead to:
• Members being unable to access their money or other products and services.
•
•
Disruption to other organisations or the market.
Damage to the Society’s reputation, decreased member and stakeholder
confidence and increased funding costs.
Nationwide ensures it is able to meet its liabilities as they fall due and maintain
appropriate funding through:
•
Operating a comprehensive suite of policies, limits, stress testing, monitoring
and robust governance controls to ensure a stable and diverse funding base
and sufficient holdings of high quality liquid assets.
Continuously monitoring liabilities against internal and regulatory
requirements, and management of liquidity resources to meet these as they
fall due.
•
• Maintaining a contingency funding plan which details the actions available to
the Society in a stress situation.
Why this risk is important for Nationwide
How Nationwide manages this risk on behalf of members
Nationwide has funding obligations to defined benefit pension schemes. The value
of the schemes’ assets could become insufficient to meet estimated liabilities as a
result of volatility in the value of schemes’ assets and liabilities, driven by market
interest rates, inflation and longevity. This may lead to:
•
Insecurity of employee pension arrangements.
•
A requirement to increase cash funding into these schemes.
•
An adverse impact on Nationwide’s capital position.
The assets of Nationwide’s defined benefit schemes are held in legally separate
trusts, each administered by a board of trustees, in accordance with UK
legislation. Nationwide minimises the impact of pension risk on both the Society
and pension scheme members through:
• Maintaining effective engagement with trustees to ensure that the
investment strategy balances risk, return, and employee considerations
appropriately.
Why this risk is important for Nationwide
How Nationwide manages this risk on behalf of members
Model outputs could be inaccurate as a result of inappropriate design or
operation, leading to:
• Members being inappropriately offered or refused access to products and
services.
Financial loss or insufficient financial resources.
Regulatory censure.
•
•
Models play an ever more important part in supporting the strategy as decision
making becomes more sophisticated. This risk is mitigated through:
•
A well governed model development process, operated by expert modelling
teams and independently validated by specialists in the second line.
Regular monitoring of model performance and maintenance, supported by
independent review.
•
Annual Report and Accounts 2019
Business and Risk Report (continued)
Principal risks and uncertainties (continued)
102
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Principal risks and uncertainties (continued)
Liquidity and funding risk
Why this risk is important for Nationwide
How Nationwide manages this risk on behalf of members
Liquidity risk is the risk that Nationwide is unable
In the event of a downturn in the macroeconomic environment, sudden
Nationwide ensures it is able to meet its liabilities as they fall due and maintain
to meet its liabilities as they fall due and maintain
withdrawals of member deposits or other potential shocks, Nationwide could have
appropriate funding through:
member and other stakeholder confidence.
insufficient financial resources to meet its commitments. This may lead to:
Operational risk
The risk of loss resulting from inadequate
or failed internal processes, people and systems,
or from external events.
Find out more on page 161.
Conduct and Compliance risk
The risk that Nationwide exercises inappropriate
judgement or makes errors in the execution of its
business activities, leading to:
• non-compliance with regulation or legislation,
• market integrity being undermined, or
• an unfair outcome being created for customers.
Find out more on page 163.
Funding risk is the risk that Nationwide is unable
to maintain diverse funding sources in wholesale
and retail markets and manage retail funding risk
that can arise from excessive concentrations of
higher risk deposits.
• Members being unable to access their money or other products and services.
Disruption to other organisations or the market.
Damage to the Society’s reputation, decreased member and stakeholder
confidence and increased funding costs.
•
•
Operating a comprehensive suite of policies, limits, stress testing, monitoring
and robust governance controls to ensure a stable and diverse funding base
and sufficient holdings of high quality liquid assets.
Continuously monitoring liabilities against internal and regulatory
requirements, and management of liquidity resources to meet these as they
fall due.
• Maintaining a contingency funding plan which details the actions available to
the Society in a stress situation.
Find out more on page 139.
Pension risk
Find out more on page 159.
Model risk
Find out more on page 161.
The risk that the value of the pension schemes’
assets will be insufficient to meet the estimated
liabilities, creating a pension deficit.
Nationwide has funding obligations to defined benefit pension schemes. The value
The assets of Nationwide’s defined benefit schemes are held in legally separate
of the schemes’ assets could become insufficient to meet estimated liabilities as a
trusts, each administered by a board of trustees, in accordance with UK
result of volatility in the value of schemes’ assets and liabilities, driven by market
legislation. Nationwide minimises the impact of pension risk on both the Society
Why this risk is important for Nationwide
How Nationwide manages this risk on behalf of members
interest rates, inflation and longevity. This may lead to:
Insecurity of employee pension arrangements.
A requirement to increase cash funding into these schemes.
An adverse impact on Nationwide’s capital position.
and pension scheme members through:
• Maintaining effective engagement with trustees to ensure that the
investment strategy balances risk, return, and employee considerations
appropriately.
Why this risk is important for Nationwide
How Nationwide manages this risk on behalf of members
The risk of weaknesses or failures in models
Model outputs could be inaccurate as a result of inappropriate design or
Models play an ever more important part in supporting the strategy as decision
used to support key decisions including in relation
operation, leading to:
to the amount of capital and liquidity resources
required, lending and pricing, resourcing and
services.
earnings.
Financial loss or insufficient financial resources.
Regulatory censure.
making becomes more sophisticated. This risk is mitigated through:
•
•
teams and independently validated by specialists in the second line.
Regular monitoring of model performance and maintenance, supported by
independent review.
• Members being inappropriately offered or refused access to products and
A well governed model development process, operated by expert modelling
•
•
•
•
•
•
•
Why this risk is important for Nationwide
How Nationwide manages this risk on behalf of members
Process, people or system failures or external events could lead to:
•
Disruption either to the services provided to members or to internal
processes, resulting in unfair customer outcomes.
The loss of customer data, assets, or other form of detriment due to external
parties (e.g. cyber-attack, fraud) or poor internal controls.
Financial loss, through a loss of income, increase in costs, or direct loss.
•
•
Nationwide seeks to minimise detriment and loss to members, customers and the
Society through:
•
Regularly identifying and assessing the key operational risks to its strategy,
ensuring appropriate controls are in place to mitigate these risks.
Considering and planning for extreme but plausible events which could affect
the Society.
Continuing to invest in enhanced controls in key areas including cyber,
resilience and data.
•
•
Why this risk is important for Nationwide
How Nationwide manages this risk on behalf of members
In an evolving regulatory and consumer environment, Nationwide could provide
products and services which are misaligned to the needs of customers or market
conditions due to the pace of change in customer behaviour, regulation, or the
external environment. This may lead to:
•
Unfair customer outcomes, with customers being sold products which are
not wanted or needed.
Non-compliance with the letter or spirit of legislation or regulation.
Disruption to the market.
Regulatory censure.
•
•
•
Nationwide seeks to minimise its conduct and compliance exposure through:
•
Rigorous testing of products and services both before and after providing
them to members to ensure they are designed and performing appropriately.
Continually assessing new and existing risks in the conduct and compliance
environment (e.g. technology, cyber-crime, changes in consumer or market
behaviour and regulatory changes) and ensuring that risk exposures are
appropriately managed.
•
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Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Managing risk
How we manage our risks
Like any business, Nationwide is exposed to risks as part of its normal activities. Nationwide aims to protect our members by limiting the risks we take, and, when we do take risks ensuring that we manage them appropriately
and proportionately to ensure that we continue to meet our obligations to our members to remain safe and secure and to operate effectively and efficiently.
This is done through an enterprise-wide risk management framework, which describes the approach to risk management at Nationwide by setting out the minimum standards, and associated processes, for successful risk
management, connecting the Society’s strategy with day-to-day risk management activities.
Enterprise risk management framework (ERMF)
Whilst Nationwide has continued to evolve the ERMF in response to best practice and the risk landscape, our approach to risk management remains fundamentally unchanged from last year as set out below.
Together these activities and structures provide a framework which ensures that risks are managed through robust and consistent processes, supported by appropriate tools and guidance, enabling better business decisions
for delivery of Nationwide’s strategy for the benefit of our members.
The Board monitors the Society’s risk management and internal control systems and carries out an annual review of their effectiveness. During the year, the Society’s risk management and internal control systems have been
reviewed and, on the basis of this review, the Board is satisfied that Nationwide has an adequate system of risk management and internal control.
Annual Report and Accounts 2019
Business and Risk Report (continued)
Managing risk
How we manage our risks
104
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Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Managing risk (continued)
Risk appetite
Like any business, Nationwide is exposed to risks as part of its normal activities. Nationwide aims to protect our members by limiting the risks we take, and, when we do take risks ensuring that we manage them appropriately
and proportionately to ensure that we continue to meet our obligations to our members to remain safe and secure and to operate effectively and efficiently.
Board risk appetite articulates how much risk the Board is willing to accept on behalf of its members in the delivery of the strategy. The following statements articulate Nationwide’s approach to taking risk responsibly in the interests
of our members. The Society’s ambitions are to:
This is done through an enterprise-wide risk management framework, which describes the approach to risk management at Nationwide by setting out the minimum standards, and associated processes, for successful risk
management, connecting the Society’s strategy with day-to-day risk management activities.
Enterprise risk management framework (ERMF)
Whilst Nationwide has continued to evolve the ERMF in response to best practice and the risk landscape, our approach to risk management remains fundamentally unchanged from last year as set out below.
Together these activities and structures provide a framework which ensures that risks are managed through robust and consistent processes, supported by appropriate tools and guidance, enabling better business decisions
for delivery of Nationwide’s strategy for the benefit of our members.
The Board monitors the Society’s risk management and internal control systems and carries out an annual review of their effectiveness. During the year, the Society’s risk management and internal control systems have been
reviewed and, on the basis of this review, the Board is satisfied that Nationwide has an adequate system of risk management and internal control.
Lend in a responsible, affordable and sustainable way to ensure we safeguard members and the financial strength of the Society throughout the credit cycle
•
• Maintain sufficient capital and liquidity resources to support current business activity and planned growth and to remain resilient to significant stress
• Minimise customer disruption, financial loss, reputational damage and regulatory non-compliance, especially those caused by failures of people, processes and systems
•
•
•
•
•
Provide sustainable customer services over resilient systems
Treat customers fairly before, during and after the sales process
Offer products and services which meet customer needs and expectations, perform as represented and provide value for money
Operate a mutual business model which is sustainable and remains within the requirements of the Building Societies Act
Only incur market risks that are required for operational efficiency, stability of earnings or cost minimisation in supporting core business activities.
The Board is satisfied that the Group has stayed within its risk appetite during the year.
Three lines of defence
Nationwide operates a three lines of defence model, ensuring clear separation between risk and control ownership (first line), oversight, support and challenge (second line), and audit assurance (third line). Accountabilities within
the three lines of defence model are outlined below:
First line
Risk and control ownership
Specific accountabilities include:
Setting business objectives
Defining management risk appetite
Identifying, owning and managing risks
Defining, operating and testing controls
Implementing and maintaining regulatory compliance
Adhering to the minimum standards set out in the risk
management framework and associated policies
Identifying future threats and risks
•
•
•
•
•
•
•
Second line
Oversight, support and challenge
Specific accountabilities include:
Third line
Assurance
Specific accountabilities include:
•
•
•
•
•
•
•
Providing expert advice on business initiatives
Advising the Board on setting risk appetite
Reporting aggregate enterprise level risks to the Board
Conducting independent and risk-based oversight and
challenge
Interpreting material regulatory change
Setting the risk management framework and
associated policies
Identifying future threats and risks
•
•
•
Performing independent audits of the effectiveness of
first line risk and control and second line risk
oversight, support and challenge
Taking a risk-based approach to the programme of
audit work
Preparing an annual opinion on the risk management
and controls framework to present to the Audit
Committee
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105
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Managing risk (continued)
Risk Committee structure
The Board Risk Committee and Audit Committee provide oversight and advice to the Board.
The Executive Risk Committee ensures a co-ordinated management approach across all risk categories.
The risk committee structure is represented in the following diagram.
Annual Report and Accounts 2019
Business and Risk Report (continued)
Managing risk (continued)
Risk Committee structure
The Board Risk Committee and Audit Committee provide oversight and advice to the Board.
The Executive Risk Committee ensures a co-ordinated management approach across all risk categories.
The risk committee structure is represented in the following diagram.
106
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Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Overview
Credit risk is the risk of loss as a result of a member, customer or counterparty failing to meet their financial obligations. Credit risk encompasses:
•
•
•
•
borrower/counterparty risk – the risk of loss arising from a borrower or counterparty failing to pay, or becoming increasingly likely not to pay the interest or principal on a loan, financial product, or service on time;
security/collateral risk – the risk of loss arising from deteriorating security/collateral quality;
concentration risk – the risk of loss arising from insufficient diversification;
refinance risk – the risk of loss arising when a repayment of a loan or other financial product occurs later than originally anticipated.
Nationwide manages credit risk for the following portfolios:
Portfolio
Residential mortgages
Consumer banking
Commercial and other lending
Treasury
Definition
Loans secured on residential property
Unsecured lending comprising current account overdrafts, personal loans and credit cards
Loans to registered social landlords, loans made under the Private Finance Initiative, commercial real estate lending
and other balances due from counterparties not covered by other categories
Treasury liquidity, derivatives and discretionary investment portfolios
Management of credit risk
At Nationwide, we lend in a responsible, affordable and sustainable way to ensure we safeguard members and the financial strength of the Society throughout the credit cycle. To this end, the Board Risk Committee sets the level of
risk appetite it is willing to take in pursuit of the Society’s strategy, which is articulated as Board risk appetite statements and underlying principles:
We safeguard our members by lending responsibly
• We will only lend to members, customers or counterparties who demonstrate that they can afford to borrow.
• We will support members and customers buying houses of wide-ranging types and qualities.
• We will work with members, customers and counterparties to recover their financial position should there be a delay, or risk of delay, in meeting their financial obligations.
We safeguard the Society’s financial performance, strength and reputation
• We will manage asset quality so that losses through an economic cycle will not undermine profitability, financial strength and our standing with internal/external stakeholders.
• We will ensure that no material segment of our lending exposes the Society to excessive loss.
• We will proactively manage credit risk and comply with regulation.
We operate with a commitment to responsible lending and a focus on championing good conduct and fair outcomes. In this respect, we formulate appropriate credit criteria and policies which are aimed at mitigating risk against
individual transactions and ensuring that the Society’s credit risk exposure remains within risk appetite. The Board Risk Committee and, under a governed delegated mandate structure, the Credit Committee, the Executive
Sanctioning Committee and Material Risk Takers make credit decisions, based on a thorough credit risk assessment, to ensure that customers are able to meet their obligations.
At a portfolio level, we measure and manage our risk profile and the performance of our credit portfolios on an ongoing basis, through a formal governance structure. Compliance with Board risk appetite is measured against
absolute limits and risk metrics and is reported to the Society’s Credit Committee monthly, with adverse trends being investigated and corrective action taken to mitigate the risk and bring performance back on track.
Nationwide is committed to helping customers who may anticipate or find themselves experiencing a period of financial difficulty, offering a range of forbearance options tailored to their individual circumstances. This is the case for
residential mortgages, consumer banking and commercial lending. Accounts in financial difficulty/arrears are managed by specialist teams within Nationwide to ensure an optimal outcome for our members, customers and the
Society.
Forbearance
Forbearance occurs when concessions are made to the contractual terms of a loan when the customer is facing or about to face difficulties in meeting their financial commitments. A concession is where the customer receives
assistance, which could be a modification to the previous terms and conditions of a facility or a total or partial refinancing of debt, either mid-term or at maturity. Requests for concessions are principally attributable to:
•
•
•
temporary cash flow problems;
breaches of financial covenants; or
an inability to repay at contractual maturity.
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Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Overview (continued)
Consistent with the European Banking Authority reporting definitions, loans that meet the regulatory forbearance exit criteria are not reported as forborne. The concession events used to classify balances subject to forbearance for
residential mortgages, consumer banking and commercial lending are described in the relevant sections of this report.
IFRS 9 Transition
With effect from 5 April 2018 Nationwide adopted IFRS 9 ‘Financial Instruments’, which replaces IAS 39 ‘Financial Instruments: Recognition and Measurement’. Under IFRS 9, impairment provisions on financial assets are calculated
on an expected credit loss (ECL) basis for assets held at amortised cost and at fair value through other comprehensive income (FVOCI). ECL impairment provisions are based on an assessment of the probability of default (PD),
exposure at default and loss given default, discounted to give a net present value. The Credit risk section of this report summarises for the individual portfolios:
•
•
•
•
the maximum exposure to credit risk;
the stage distribution of loans and provisions (explained below);
credit quality;
other risk factors and concentrations, including loan to value ratios, regional exposures, arrears and forbearance.
Further information on the impact of implementing IFRS 9 is provided in note 37 to the financial statements and in our ‘Report on Transition to IFRS 9: Financial Instruments’, which can be found at nationwide.co.uk
In accordance with IFRS 9, in the consolidated financial statements there has been no restatement of comparative information for the year ended 4 April 2018, which is reported on an IAS 39 basis. However, to support the
understanding of the current year IFRS 9 disclosures, certain comparative balances within the Credit risk section of this Business and Risk Report are shown as at 5 April 2018 (the effective date of the adoption of IFRS 9). These 5
April 2018 comparatives include financial asset balance sheet carrying values that have changed as a result of adopting IFRS 9, and the stage distribution of gross lending and ECL provisions.
The table below shows the classification of assets on the Group’s balance sheet following the adoption of IFRS 9:
Classification and measurement
(Audited)
Cash – Amortised cost
Loans and advances to customers – Amortised cost (notes i and ii)
Loans and advances to customers – FVTPL
Investment securities – FVOCI
Investment securities – Amortised cost (note i)
Investment securities – FVTPL
Fair value adjustment for portfolio hedged risk
4 April 2019
(IFRS 9 basis)
£m
12,493
198,922
129
14,500
1,656
78
411
5 April 2018
(IFRS 9 basis)
£m
14,361
191,174
247
11,881
1,120
45
(144)
4 April 2018
(IAS 39 basis)
£m
14,361
191,593
-
11,926
1,120
-
(109)
Notes:
i.
ii.
Balances are stated net of impairment provisions.
Loans and advances to customers exclude balances held with counterparties which are institutions similar to banks. These balances are now reported in loans and advances to banks and similar institutions, and comparatives for the prior period have been
restated to disclose information on the same basis. Further details are included in note 1 to the financial statements.
The stage distribution of gross lending and provisions for loans and advances to customers is presented for assets held at amortised cost. Certain tables below exclude loans and advances to customers classified as fair value through
profit or loss (FVTPL), since these are not subject to the impairment requirements of IFRS 9.
Stage distribution
Impairment provisions are calculated using a three stage approach depending on changes in credit risk since original recognition of the assets:
•
an asset which is not credit impaired on initial recognition and has not subsequently experienced a significant increase in credit risk is categorised as being within stage 1, with a provision equal to a 12 month ECL (losses arising
on default events expected to occur within 12 months);
• where a loan’s credit risk increases significantly, it is moved to stage 2. The provision recognised is equal to the lifetime ECL (losses on default events expected to occur at any point during the life of the asset);
•
if a loan meets the definition of credit impaired, it is moved to stage 3 with a provision equal to its lifetime ECL.
Consistent with the European Banking Authority reporting definitions, loans that meet the regulatory forbearance exit criteria are not reported as forborne. The concession events used to classify balances subject to forbearance for
residential mortgages, consumer banking and commercial lending are described in the relevant sections of this report.
For loans and advances held at amortised cost, the stage distribution and the provision coverage ratios are shown in this report for each individual portfolio. The provision coverage ratio is calculated by dividing the provisions by the
gross balances for each main lending portfolio. Loans remain on the balance sheet, net of associated provisions, until they are deemed no longer recoverable, when such loans are written off. The definition, assumptions and timing
for write-off of loans have not changed with the adoption of IFRS 9.
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Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Overview (continued)
Maximum exposure to credit risk
Nationwide’s maximum exposure to credit risk has risen to £249 billion (5 April 2018: £240 billion), principally reflecting the growth in residential mortgages.
Credit risk largely arises from exposure to loans and advances to customers, which account for 85% (5 April 2018: 85%) of Nationwide’s total credit risk exposure. Within this, the exposure relates primarily to residential mortgages,
which account for 93% (5 April 2018: 93%) of total loans and advances to customers and which comprise high quality assets with low occurrences of arrears and possessions.
In addition to loans and advances to customers, Nationwide is exposed to credit risk on all other financial assets. For all financial assets recognised on the balance sheet, the maximum exposure to credit risk represents the balance
sheet carrying value after allowance for impairment plus off-balance sheet commitments. For off-balance sheet commitments, the maximum exposure is the maximum amount that Nationwide would have to pay if the commitments
were to be called upon. For loan commitments and other credit related commitments that are irrevocable over the life of the respective facilities, the maximum exposure is the full amount of the committed facilities.
Maximum exposure to risk
4 April 2019
(Audited)
Amortised cost loans and advances to customers:
Residential mortgages
Consumer banking
Commercial and other lending (note ii)
Fair value adjustment for micro hedged risk (note iii)
FVTPL loans and advances to customers:
Residential mortgages (note iv)
Commercial and other lending
Other items:
Cash
Loans and advances to banks and similar institutions (note ii)
Investment securities – FVOCI
Investment securities – Amortised cost
Investment securities – FVTPL
Derivative financial instruments
Fair value adjustment for portfolio hedged risk (note iii)
Total
Gross
balances
£m
185,940
4,586
8,178
883
199,587
72
57
129
12,493
4,009
14,500
1,656
78
3,562
411
36,709
236,425
Less:
impairment
provisions
£m
Carrying
value
Commitments
(note i)
£m
£m
Maximum
credit risk
exposure
£m
% of total
credit risk
exposure
%
(206)
(418)
(41)
-
(665)
-
-
-
-
-
-
-
-
-
-
-
(665)
185,734
4,168
8,137
883
198,922
72
57
129
12,493
4,009
14,500
1,656
78
3,562
411
36,709
235,760
12,051
33
872
-
12,956
-
-
-
-
-
-
-
-
-
-
-
12,956
197,785
4,201
9,009
883
211,878
72
57
129
12,493
4,009
14,500
1,656
78
3,562
411
36,709
248,716
79
2
4
-
85
-
-
-
5
2
6
1
-
1
-
15
100
Annual Report and Accounts 2019
Business and Risk Report (continued)
Credit risk – Overview (continued)
IFRS 9 Transition
With effect from 5 April 2018 Nationwide adopted IFRS 9 ‘Financial Instruments’, which replaces IAS 39 ‘Financial Instruments: Recognition and Measurement’. Under IFRS 9, impairment provisions on financial assets are calculated
on an expected credit loss (ECL) basis for assets held at amortised cost and at fair value through other comprehensive income (FVOCI). ECL impairment provisions are based on an assessment of the probability of default (PD),
exposure at default and loss given default, discounted to give a net present value. The Credit risk section of this report summarises for the individual portfolios:
the maximum exposure to credit risk;
the stage distribution of loans and provisions (explained below);
credit quality;
other risk factors and concentrations, including loan to value ratios, regional exposures, arrears and forbearance.
Further information on the impact of implementing IFRS 9 is provided in note 37 to the financial statements and in our ‘Report on Transition to IFRS 9: Financial Instruments’, which can be found at nationwide.co.uk
In accordance with IFRS 9, in the consolidated financial statements there has been no restatement of comparative information for the year ended 4 April 2018, which is reported on an IAS 39 basis. However, to support the
understanding of the current year IFRS 9 disclosures, certain comparative balances within the Credit risk section of this Business and Risk Report are shown as at 5 April 2018 (the effective date of the adoption of IFRS 9). These 5
April 2018 comparatives include financial asset balance sheet carrying values that have changed as a result of adopting IFRS 9, and the stage distribution of gross lending and ECL provisions.
The table below shows the classification of assets on the Group’s balance sheet following the adoption of IFRS 9:
Classification and measurement
(Audited)
Cash – Amortised cost
Loans and advances to customers – Amortised cost (notes i and ii)
Loans and advances to customers – FVTPL
Investment securities – FVOCI
Investment securities – Amortised cost (note i)
Investment securities – FVTPL
Fair value adjustment for portfolio hedged risk
Notes:
i.
ii.
Balances are stated net of impairment provisions.
4 April 2019
(IFRS 9 basis)
5 April 2018
(IFRS 9 basis)
4 April 2018
(IAS 39 basis)
£m
12,493
198,922
129
14,500
1,656
78
411
£m
14,361
191,174
247
11,881
1,120
45
(144)
£m
14,361
191,593
11,926
1,120
-
-
(109)
Loans and advances to customers exclude balances held with counterparties which are institutions similar to banks. These balances are now reported in loans and advances to banks and similar institutions, and comparatives for the prior period have been
restated to disclose information on the same basis. Further details are included in note 1 to the financial statements.
The stage distribution of gross lending and provisions for loans and advances to customers is presented for assets held at amortised cost. Certain tables below exclude loans and advances to customers classified as fair value through
profit or loss (FVTPL), since these are not subject to the impairment requirements of IFRS 9.
Stage distribution
Impairment provisions are calculated using a three stage approach depending on changes in credit risk since original recognition of the assets:
an asset which is not credit impaired on initial recognition and has not subsequently experienced a significant increase in credit risk is categorised as being within stage 1, with a provision equal to a 12 month ECL (losses arising
on default events expected to occur within 12 months);
• where a loan’s credit risk increases significantly, it is moved to stage 2. The provision recognised is equal to the lifetime ECL (losses on default events expected to occur at any point during the life of the asset);
if a loan meets the definition of credit impaired, it is moved to stage 3 with a provision equal to its lifetime ECL.
•
•
•
•
•
•
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i
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a
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c
i
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S
t
a
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Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Overview (continued)
Maximum exposure to credit risk
5 April 2018
(Audited)
Amortised cost loans and advances to customers:
Residential mortgages
Consumer banking
Commercial and other lending (note ii)
Fair value adjustment for micro hedged risk (note iii)
FVTPL loans and advances to customers:
Residential mortgages (note iv)
Commercial and other lending
Other items:
Cash
Loans and advances to banks and similar institutions (note ii)
Investment securities – FVOCI
Investment securities – Amortised cost
Investment securities – FVTPL
Derivative financial instruments
Fair value adjustment for portfolio hedged risk (note iii)
Total
Gross
balances
£m
177,114
4,107
9,540
1,042
191,803
189
58
247
14,361
3,493
11,881
1,120
45
4,121
(144)
34,877
226,927
Less:
impairment
provisions
£m
(235)
(365)
(29)
-
(629)
-
-
-
-
-
-
-
-
-
-
-
(629)
Carrying
value
Commitments
(note i)
£m
176,879
3,742
9,511
1,042
191,174
189
58
247
14,361
3,493
11,881
1,120
45
4,121
(144)
34,877
226,298
£m
12,205
42
943
-
13,190
-
-
-
-
-
-
700
-
-
-
700
13,890
Maximum
credit risk
exposure
£m
189,084
3,784
10,454
1,042
204,364
189
58
247
14,361
3,493
11,881
1,820
45
4,121
(144)
35,577
240,188
% of total
credit risk
exposure
%
79
2
4
-
85
-
-
-
6
1
5
1
-
2
-
15
100
Annual Report and Accounts 2019
Business and Risk Report (continued)
Credit risk – Overview (continued)
Maximum exposure to credit risk
5 April 2018
Amortised cost loans and advances to customers:
(Audited)
Residential mortgages
Consumer banking
Commercial and other lending (note ii)
Fair value adjustment for micro hedged risk (note iii)
FVTPL loans and advances to customers:
Residential mortgages (note iv)
Commercial and other lending
Loans and advances to banks and similar institutions (note ii)
Investment securities – FVOCI
Investment securities – Amortised cost
Investment securities – FVTPL
Derivative financial instruments
Fair value adjustment for portfolio hedged risk (note iii)
Other items:
Cash
Total
Carrying
value
Commitments
(note i)
% of total
credit risk
exposure
Gross
balances
£m
177,114
4,107
9,540
1,042
191,803
189
58
247
14,361
3,493
11,881
1,120
45
4,121
(144)
34,877
226,927
Less:
impairment
provisions
£m
(235)
(365)
(29)
(629)
-
-
-
-
-
-
-
-
-
-
-
-
£m
176,879
3,742
9,511
1,042
191,174
189
58
247
14,361
3,493
11,881
1,120
45
4,121
(144)
£m
12,205
42
943
13,190
-
-
-
-
-
-
-
-
-
-
700
(629)
34,877
226,298
700
13,890
Maximum
credit risk
exposure
£m
189,084
3,784
10,454
1,042
204,364
189
58
247
14,361
3,493
11,881
1,820
45
4,121
(144)
35,577
240,188
%
79
2
4
-
85
-
-
-
6
1
5
1
-
2
-
15
100
110
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Overview (continued)
Maximum exposure to credit risk
4 April 2018
(Audited)
Cash
Loans and advances to banks and similar institutions (note ii)
Investment securities – Available for sale
Investment securities – Held to maturity
Derivative financial instruments
Fair value adjustment for portfolio hedged risk (note iii)
Loans and advances to customers:
Residential mortgages
Consumer banking
Commercial and other lending (notes ii and iii)
Total
Gross
balances
£m
14,361
3,493
11,926
1,120
4,121
(109)
34,912
177,299
4,107
10,645
192,051
226,963
Less:
impairment
provisions
£m
-
-
-
-
-
-
-
(145)
(298)
(15)
(458)
(458)
Carrying
value
Commitments
(note i)
£m
14,361
3,493
11,926
1,120
4,121
(109)
34,912
177,154
3,809
10,630
191,593
£m
-
101
-
700
-
-
801
12,204
42
842
13,088
Maximum
credit risk
exposure
£m
14,361
3,594
11,926
1,820
4,121
(109)
35,713
189,358
3,851
11,472
204,681
226,505
13,889
240,394
% of total
credit risk
exposure
%
6
1
5
1
2
-
15
79
1
5
85
100
Notes:
i.
In addition to the amounts shown above, Nationwide has, as part of its retail operations, revocable commitments of £9,475 million (4 and 5 April 2018: £9,517 million) in respect of credit card and overdraft facilities. These commitments represent agreements
to lend in the future, subject to certain considerations. Such commitments are cancellable by Nationwide, subject to notice requirements, and given their nature are not expected to be drawn down to the full level of exposure.
Commercial and other lending excludes balances held with counterparties which are institutions similar to banks. These balances are now reported in loans and advances to banks and similar institutions, and comparatives for the prior period have been
restated to disclose information on the same basis. Further details are included in note 1 to the financial statements.
The fair value adjustment for portfolio hedged risk and the fair value adjustment for micro hedged risk (which relates to the commercial lending portfolio) represent hedge accounting adjustments. They are indirectly exposed to credit risk through the
relationship with the underlying loans covered by Nationwide’s hedging programmes.
FVTPL residential mortgages include equity release loans, the balance of which has reduced following a disposal during the year.
ii.
iii.
iv.
Commitments
Irrevocable undrawn commitments to lend are within the scope of IFRS 9 provision requirements. The commitments in the table above consist of overpayment reserves and separately identifiable irrevocable commitments for the
pipeline of residential mortgages, personal loans, commercial loans and investment securities. These commitments are not recognised on the balance sheet, and the total associated provision of £0.4 million (5 April 2018: £0.6
million) is included within provisions for liabilities and charges.
Revocable commitments relating to overdrafts and credit cards are included in ECL-based provisions, with the allowance for future drawdowns made as part of the exposure at default element of the ECL calculation.
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Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Residential mortgages
Summary
Nationwide’s residential mortgages comprise both prime and specialist loans. Prime residential mortgages are mainly Nationwide-branded advances made through the branch network and intermediary channels. Specialist lending
consists principally of buy to let (BTL) mortgages originated under The Mortgage Works (UK) plc (TMW) brand, together with smaller legacy portfolios in run-off. Over the year, as we continued to grow our lending in line with
established credit criteria, the credit performance of our residential mortgages has remained stable and credit quality continues to be strong.
Residential mortgage gross balances
(Audited)
Prime
Specialist:
Buy to let
Other (note i)
4 April 2019
£m
151,445
32,012
2,483
34,495
%
82
17
1
18
5 April 2018
£m
143,869
30,439
2,806
33,245
%
81
17
2
19
4 April 2018
£m
144,049
30,438
2,812
33,250
%
81
17
2
19
Amortised cost loans and advances to customers
185,940
100
177,114
100
177,299
100
FVTPL loans and advances to customers (note ii)
Total residential mortgages
72
186,012
189
177,303
177,299
Notes:
i.
ii.
Other includes self-certified, near prime and sub prime lending, all of which were discontinued in 2009.
As a result of their contractual cash flow characteristics, certain residential mortgages (including equity release loans) were reclassified from amortised cost to FVTPL on transition to IFRS 9 on 5 April 2018 and remeasured at fair value as disclosed in the
above table.
Total balances across the residential mortgage portfolios have grown by 5% during the year to £186 billion (4 April 2018: £177 billion) as we continue to help people buy a home of their own and support the BTL sector. The reduction
in FVTPL balances reflects a disposal of equity release loans.
Annual Report and Accounts 2019
Business and Risk Report (continued)
Credit risk – Residential mortgages
Summary
Residential mortgage gross balances
(Audited)
Prime
Specialist:
Buy to let
Other (note i)
Notes:
i.
ii.
above table.
FVTPL loans and advances to customers (note ii)
Total residential mortgages
Nationwide’s residential mortgages comprise both prime and specialist loans. Prime residential mortgages are mainly Nationwide-branded advances made through the branch network and intermediary channels. Specialist lending
consists principally of buy to let (BTL) mortgages originated under The Mortgage Works (UK) plc (TMW) brand, together with smaller legacy portfolios in run-off. Over the year, as we continued to grow our lending in line with
established credit criteria, the credit performance of our residential mortgages has remained stable and credit quality continues to be strong.
4 April 2019
£m
151,445
5 April 2018
£m
143,869
4 April 2018
£m
144,049
%
82
17
1
18
30,439
2,806
33,245
189
177,303
%
81
17
2
19
30,438
2,812
33,250
177,299
32,012
2,483
34,495
72
186,012
%
81
17
2
19
Other includes self-certified, near prime and sub prime lending, all of which were discontinued in 2009.
As a result of their contractual cash flow characteristics, certain residential mortgages (including equity release loans) were reclassified from amortised cost to FVTPL on transition to IFRS 9 on 5 April 2018 and remeasured at fair value as disclosed in the
Total balances across the residential mortgage portfolios have grown by 5% during the year to £186 billion (4 April 2018: £177 billion) as we continue to help people buy a home of their own and support the BTL sector. The reduction
in FVTPL balances reflects a disposal of equity release loans.
112
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Residential mortgages (continued)
Impairment losses for the year
Impairment (reversals)/losses for the year
(Audited)
Prime
Specialist
Total
2019
(IFRS 9 basis)
£m
(1)
(16)
(17)
2018
(IAS 39 basis)
£m
3
8
11
Note:
Impairment losses/(reversals) represent the net amount charged/(credited) through the profit and loss account, rather than amounts written off during the year.
Amortised cost loans and advances to customers
185,940
100
177,114
100
177,299
100
The following table shows residential mortgage lending balances carried at amortised cost, the stage allocation of the loans, impairment provisions and the resulting provision coverage ratios:
Due to the high quality of residential mortgage portfolios and continued low levels of arrears, impairment losses remain low. The provision reversals above are principally attributable to improvements in the modelling of refinance risk
on interest only loans and updated economic assumptions used in calculating ECLs. As impairment provisions are calculated on a different basis under IFRS 9 from IAS 39, the losses shown above are not comparable between 2018
and 2019.
Residential mortgages staging analysis
4 April 2019
(Audited)
Gross balances
Prime
Specialist
Total
Provisions
Prime
Specialist
Total
Provisions as a % of total balance
Prime
Specialist
Total
Stage 1
£m
148,639
27,384
176,023
22
15
37
%
0.01
0.06
0.02
Stage 2
total
£m
2,048
6,431
8,479
12
115
127
%
0.57
1.80
1.50
Stage 2
<30 DPD
(note i)
£m
Stage 2
>30 DPD
(note i)
£m
1,781
6,218
7,999
9
101
110
%
0.48
1.63
1.37
267
213
480
3
14
17
%
1.19
6.78
3.65
Stage 3
POCI
(note ii)
£m
758
513
1,271
10
32
42
%
1.38
6.15
3.31
£m
-
167
167
-
-
-
%
-
-
-
Total
£m
151,445
34,495
185,940
44
162
206
%
0.03
0.47
0.11
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Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Residential mortgages (continued)
Residential mortgages staging analysis
5 April 2018
(Audited)
Gross balances
Prime
Specialist
Total
Provisions
Prime
Specialist
Total
Provisions as a % of total balance
Prime
Specialist
Total
Stage 1
£m
134,864
21,783
156,647
6
11
17
%
0.00
0.05
0.01
Stage 2
total
£m
8,289
10,783
19,072
29
142
171
%
0.35
1.32
0.90
Stage 2
<30 DPD
(note i)
£m
8,035
10,574
18,609
25
131
156
%
0.31
1.24
0.84
Stage 2
>30 DPD
(note i)
£m
254
209
463
4
11
15
%
1.53
5.33
3.25
Stage 3
POCI
(note ii)
£m
716
499
1,215
12
35
47
%
1.67
7.01
3.84
£m
-
180
180
-
-
-
%
-
-
-
Total
£m
143,869
33,245
177,114
47
188
235
%
0.03
0.57
0.13
Notes:
i.
ii.
Days past due, a measure of arrears status.
POCI loans are those which were credit-impaired on purchase or acquisition. The POCI loans shown in the table above were recognised on the balance sheet when the Derbyshire Building Society was acquired in December 2008. These balances, which are
mainly interest-only, were 90 days or more in arrears when they were acquired and so have been classified as credit-impaired on acquisition. The gross balance for POCI is net of the lifetime ECL of £6 million (£7 million at 5 April 2018).
At 4 April 2019, 95% (5 April 2018: 88%) of the residential mortgage portfolio is in stage 1, reflecting the portfolio’s strong credit quality. In addition to new mortgages originated during the year, the stage 1 balances have increased
as a result of transfers from stage 2. Explanations of the transfer of assets between stages are provided on page 114.
Stage 3 loans in the residential mortgage portfolio equate to 1% (5 April 2018: 1%) of the total residential mortgage exposure. Of the total £1,271 million (5 April 2018: £1,215 million) stage 3 loans, £705 million (5 April 2018: £686
million) is in respect of balances which are more than 90 days past due, with the remainder being impaired due to other indicators of unlikeness to pay such as distressed restructures or the bankruptcy of the borrower.
Annual Report and Accounts 2019
Business and Risk Report (continued)
Credit risk – Residential mortgages (continued)
Residential mortgages staging analysis
5 April 2018
(Audited)
Gross balances
Provisions
Prime
Specialist
Total
Prime
Specialist
Total
Prime
Specialist
Total
Notes:
i.
ii.
Provisions as a % of total balance
Stage 2
>30 DPD
(note i)
Stage 3
POCI
(note ii)
Stage 1
£m
134,864
21,783
156,647
6
11
17
%
0.00
0.05
0.01
Stage 2
total
£m
8,289
10,783
19,072
29
142
171
%
0.35
1.32
0.90
Stage 2
<30 DPD
(note i)
£m
8,035
10,574
18,609
25
131
156
%
0.31
1.24
0.84
£m
254
209
463
4
11
15
%
1.53
5.33
3.25
£m
716
499
1,215
12
35
47
%
1.67
7.01
3.84
Total
£m
143,869
33,245
177,114
47
188
235
%
0.03
0.57
0.13
£m
-
180
180
-
-
-
-
-
-
%
Days past due, a measure of arrears status.
POCI loans are those which were credit-impaired on purchase or acquisition. The POCI loans shown in the table above were recognised on the balance sheet when the Derbyshire Building Society was acquired in December 2008. These balances, which are
mainly interest-only, were 90 days or more in arrears when they were acquired and so have been classified as credit-impaired on acquisition. The gross balance for POCI is net of the lifetime ECL of £6 million (£7 million at 5 April 2018).
At 4 April 2019, 95% (5 April 2018: 88%) of the residential mortgage portfolio is in stage 1, reflecting the portfolio’s strong credit quality. In addition to new mortgages originated during the year, the stage 1 balances have increased
as a result of transfers from stage 2. Explanations of the transfer of assets between stages are provided on page 114.
Stage 3 loans in the residential mortgage portfolio equate to 1% (5 April 2018: 1%) of the total residential mortgage exposure. Of the total £1,271 million (5 April 2018: £1,215 million) stage 3 loans, £705 million (5 April 2018: £686
million) is in respect of balances which are more than 90 days past due, with the remainder being impaired due to other indicators of unlikeness to pay such as distressed restructures or the bankruptcy of the borrower.
114
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Residential mortgages (continued)
The table below summarises the movements in the Group’s residential mortgages held at amortised cost, including the impact of ECL impairment provisions. The movements within the table are an aggregation of monthly
movements over the year.
Reconciliation of movements in gross residential mortgage balances and impairment provisions
(Audited)
At 5 April 2018
Stage transfers:
Transfers from Stage 1 to Stage 2
Transfers to Stage 3
Transfers from Stage 2 to Stage 1
Transfers from Stage 3
Net remeasurement of ECL arising from transfer of stage
Net movement arising from transfer of stage
New assets originated or purchased
Repayments and changes in risk parameters
Other items impacting income statement charge/(reversal) (including recoveries)
Redemptions
Income statement charge for the year
Decrease due to write-offs
Other provision movements
4 April 2019
Net carrying amount
Non-credit impaired
Subject to 12 month ECL
Stage 1
Subject to lifetime ECL
Stage 2
Credit impaired (note i)
Subject to lifetime ECL
Stage 3 and POCI
Total
Gross balances
£m
156,647
Provisions Gross balances
£m
19,072
£m
17
Provisions Gross balances
£m
1,395
£m
171
Provisions Gross balances
£m
177,114
£m
47
Provisions
£m
235
(27,661)
(294)
35,956
185
8,186
35,279
(7,459)
1
(16,631)
-
-
176,023
(8)
-
141
1
(131)
3
6
13
-
(2)
-
-
37
175,986
27,661
(837)
(35,956)
547
(8,585)
-
(293)
-
(1,715)
-
-
8,479
8
(30)
(141)
13
120
(30)
-
-
-
(14)
-
-
127
8,352
-
1,131
-
(732)
399
-
(43)
1
(273)
(41)
-
1,438
-
30
-
(14)
(8)
8
-
4
(4)
(1)
(16)
4
42
1,396
-
-
-
-
-
35,279
(7,795)
2
(18,619)
(41)
-
185,940
-
-
-
-
(19)
(19)
6
17
(4)
(17)
(17)
(16)
4
206
185,734
Note:
i.
Gross balances of credit impaired loans include £167 million (5 April 2018: £180 million) of purchased or originated credit impaired (POCI) loans, which are presented net of lifetime ECL impairment provisions of £6 million (5 April 2018: £7 million).
Gross balances increased by £8,826 million over the year as a result of positive net lending. The stage 2 balance reduced by £10,593 million, primarily due to net transfers from stage 2 to stage 1 for both prime and specialist
residential mortgages. As the stage of individual loans is assessed monthly, the gross movements between stages 1 and 2 include transfers caused by relatively small changes in PD leading to their breaching the threshold for
transferring assets to stage 2 and vice versa.
During the year there has been a net decrease of £8,585 million of residential mortgage balances in stage 2, the majority of which moved to stage 1. The reasons for this movement are:
•
•
Prime mortgages - ECL models are subject to ongoing review to ensure they continue to reflect actual experience as it evolves. Consequential model updates during the year reduced PDs, resulting in a shift in loans from
stage 2 to stage 1. This movement was partly offset by a decision to change one of our staging criteria from a multiple of 8 times origination PD to a multiple of 4, thus making the models more sensitive to relative PD
changes over time. There was no significant impact on provisions given the strong quality of the loans affected.
Specialist mortgages - Staging movements during the year were affected by the same updates and criterion change described above for prime mortgages. In addition, we have changed assumptions for income growth on
BTL loans to be correlated to wage growth, rather than CPI, to align more closely with other aspects of our risk assessment on these loans. This change reduced the number of stage 2 loans with a consequent reduction in
provisions of £11 million.
Total impairment provisions decreased by £29 million. The main drivers of this reduction are the movement of assets from stage 2 to stage 1, combined with the run-off of legacy portfolios which represent the majority of write-offs.
Further information on movements in total gross loans and advances to customers and impairment provisions, including the methodology applied in preparing the table, is included in note 14 to the financial statements.
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Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Residential mortgages (continued)
Reason for residential mortgages being included in stage 2
4 April 2019
Quantitative criteria:
Payment status (greater than 30 DPD) (note i)
Increase in PD since origination (less than 30 DPD)
Qualitative criteria:
Forbearance (less than 30 DPD)
Interest only – significant risk of inability to refinance at
maturity (less than 30 DPD)
Other qualitative criteria
Prime
£m
267
1,613
148
-
20
%
13
79
7
-
1
Specialist
£m
213
2,186
7
4,018
7
%
3
34
-
63
-
Total Stage 2 gross balances
2,048
100
6,431
100
Note:
i.
This category includes all loans greater than 30 DPD, including those where the original reason for being classified as stage 2 was not arrears over 30 DPD.
Total
£m
480
3,799
155
4,018
27
8,479
%
6
45
2
47
-
100
Loans which are reported within stage 2 are those which have experienced a significant increase in credit risk since origination. The significant increase is determined through both quantitative and qualitative indicators. Of the
£8,479 million stage 2 balances, only 6% are in arrears by 30 days or more.
The primary quantitative indicators are the outputs of internal credit risk assessments. For retail exposures, PDs are derived using modelled scorecards, which use external information such as that from credit reference agencies, as
well as internal information such as known instances of arrears or other financial difficulty. While different approaches are used within each portfolio, current and historical data relating to the exposure are combined with forward-
looking macroeconomic information to determine the likelihood of default.
The credit risk of each loan is evaluated at each reporting date by calculating the residual lifetime PD of each loan. For retail loans, the main indicators of a significant increase in credit risk are either of the following:
•
•
the residual lifetime probability of default (PD) exceeds a benchmark determined by reference to the maximum credit risk that would have been accepted at origination
the residual lifetime PD has increased by both at least 75bps and a 4x multiple of the original lifetime PD (5 April 2018: 8x multiple).
Qualitative indicators are also used to complement the above. These indicators include the increased risk associated with interest only loans which may not be able to refinance at maturity. Also included are forbearance events where
full repayment of principal and interest is still anticipated, on a discounted basis. In addition, loans will be moved to stage 2 when certain “backstop” events occur, including arrears of greater than 30 days past due.
Annual Report and Accounts 2019
Business and Risk Report (continued)
Credit risk – Residential mortgages (continued)
Reason for residential mortgages being included in stage 2
4 April 2019
Quantitative criteria:
Payment status (greater than 30 DPD) (note i)
Increase in PD since origination (less than 30 DPD)
Qualitative criteria:
Forbearance (less than 30 DPD)
Interest only – significant risk of inability to refinance at
maturity (less than 30 DPD)
Other qualitative criteria
Prime
£m
267
1,613
148
-
20
%
13
79
7
-
1
213
2,186
4,018
7
7
Specialist
£m
Total
£m
%
3
34
-
63
-
480
3,799
155
4,018
27
8,479
%
6
45
2
47
-
100
Total Stage 2 gross balances
2,048
100
6,431
100
Note:
i.
This category includes all loans greater than 30 DPD, including those where the original reason for being classified as stage 2 was not arrears over 30 DPD.
Loans which are reported within stage 2 are those which have experienced a significant increase in credit risk since origination. The significant increase is determined through both quantitative and qualitative indicators. Of the
£8,479 million stage 2 balances, only 6% are in arrears by 30 days or more.
The primary quantitative indicators are the outputs of internal credit risk assessments. For retail exposures, PDs are derived using modelled scorecards, which use external information such as that from credit reference agencies, as
well as internal information such as known instances of arrears or other financial difficulty. While different approaches are used within each portfolio, current and historical data relating to the exposure are combined with forward-
looking macroeconomic information to determine the likelihood of default.
The credit risk of each loan is evaluated at each reporting date by calculating the residual lifetime PD of each loan. For retail loans, the main indicators of a significant increase in credit risk are either of the following:
•
•
the residual lifetime probability of default (PD) exceeds a benchmark determined by reference to the maximum credit risk that would have been accepted at origination
the residual lifetime PD has increased by both at least 75bps and a 4x multiple of the original lifetime PD (5 April 2018: 8x multiple).
Qualitative indicators are also used to complement the above. These indicators include the increased risk associated with interest only loans which may not be able to refinance at maturity. Also included are forbearance events where
full repayment of principal and interest is still anticipated, on a discounted basis. In addition, loans will be moved to stage 2 when certain “backstop” events occur, including arrears of greater than 30 days past due.
116
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Residential mortgages (continued)
Credit quality
The residential mortgages portfolio comprises many relatively small loans which are broadly homogenous, have low volatility of credit risk outcomes and are geographically diversified. The table below shows the loan balances and
provisions for residential mortgages held at amortised cost, by PD range. The PD distributions shown are based on a 12 month PD under IFRS 9 at the reporting date.
Loan balance and provisions by PD (note i)
4 April 2019
(Audited)
Gross balances
Provisions
Stage 1
Stage 2
PD Range
0.00 to < 0.15%
0.15 to < 0.25%
0.25 to < 0.50%
0.50 to < 0.75%
0.75 to < 2.50%
2.50 to < 10.00%
10.00 to < 100%
100% (default)
Total
Loan balance and provisions by PD (note i)
5 April 2018
(Audited)
PD Range
0.00 to < 0.15%
0.15 to < 0.25%
0.25 to < 0.50%
0.50 to < 0.75%
0.75 to < 2.50%
2.50 to < 10.00%
10.00 to < 100%
100% (default)
Total
£m
165,949
4,631
2,471
1,689
1,157
126
-
-
176,023
Stage 1
£m
147,728
4,969
2,317
1,014
619
-
-
-
156,647
Note:
i.
Includes POCI loans of £167 million (5 April 2018: £180 million).
Stage 3
and POCI
£m
88
23
34
16
57
129
189
902
1,438
Total
Stage 1
Stage 2
£m
170,315
5,385
2,995
1,975
2,093
1,312
963
902
185,940
£m
30
3
2
1
1
-
-
-
37
£m
43
9
8
5
18
18
26
-
127
£m
4,278
731
490
270
879
1,057
774
-
8,479
Gross balances
Provisions
Stage 2
£m
10,781
1,733
1,461
1,205
1,719
1,332
841
-
19,072
Stage 3
and POCI
£m
81
22
38
16
57
125
166
890
1,395
Total
Stage 1
Stage 2
£m
158,590
6,724
3,816
2,235
2,395
1,457
1,007
890
177,114
£m
13
2
1
-
1
-
-
-
17
£m
63
14
11
9
21
26
27
-
171
Stage 3
and POCI
£m
-
-
-
-
-
1
3
38
42
Stage 3
and POCI
£m
-
-
-
-
-
1
2
44
47
Provision
coverage
%
0.04
0.23
0.33
0.29
0.93
1.45
3.00
4.18
0.11
Provision
coverage
%
0.05
0.24
0.31
0.43
0.90
1.82
2.87
4.93
0.13
Total
£m
73
12
10
6
19
19
29
38
206
Total
£m
76
16
12
9
22
27
29
44
235
Over the year, the PD distribution has remained broadly stable, reflecting the high quality of the residential mortgage portfolios and benign economic conditions. At year end, 98% of the portfolio had a PD of less than 2.5% (5 April
2018: 98%). The provisions allocated to the lowest PD range primarily reflect the fact that the majority of loans are in this range. Changes in provision coverage for loans in different PD ranges are principally due to the continued run-
off of balances in specialist legacy lending portfolios, together with the impact of updating economic assumptions.
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Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Residential mortgages (continued)
Distribution of new business by borrower type (by value)
Distribution of new business by borrower type (by value)
(note i)
Prime:
First time buyers
Home movers
Remortgagers
Other
Total prime
Specialist:
Buy to let new purchases
Buy to let remortgagers
Total specialist
Total new business
2019
%
2018
%
35
25
25
1
86
3
11
14
38
29
21
1
89
2
9
11
100
100
Note:
i.
All new business measures exclude further advances and product switches.
New business by borrower type remains diversified. During the year there has been a shift in the distribution of new business from prime to specialist lending, reflecting an increase in buy to let low LTV remortgage business and,
following a successful pilot, the embedding of our lending to limited companies, recognising that landlords are increasingly using these as a vehicle for their investment.
In October 2014, the Financial Policy Committee (FPC) introduced a 15% limit on the proportion of new lending for residential mortgages, excluding buy to let, that may be written at income multiples of 4.5 and above. The
proportion of new lending at income multiples of 4.5 or higher was 7.7% in the year (2018: 8.3%). This is closely monitored and controlled to remain within risk appetite and FPC limits.
Annual Report and Accounts 2019
Business and Risk Report (continued)
Credit risk – Residential mortgages (continued)
Distribution of new business by borrower type (by value)
Distribution of new business by borrower type (by value)
(note i)
Prime:
First time buyers
Home movers
Remortgagers
Other
Total prime
Specialist:
Buy to let new purchases
Buy to let remortgagers
Total specialist
Total new business
Note:
2019
%
2018
%
35
25
25
1
86
3
11
14
38
29
21
1
89
2
9
11
100
100
i.
All new business measures exclude further advances and product switches.
New business by borrower type remains diversified. During the year there has been a shift in the distribution of new business from prime to specialist lending, reflecting an increase in buy to let low LTV remortgage business and,
following a successful pilot, the embedding of our lending to limited companies, recognising that landlords are increasingly using these as a vehicle for their investment.
In October 2014, the Financial Policy Committee (FPC) introduced a 15% limit on the proportion of new lending for residential mortgages, excluding buy to let, that may be written at income multiples of 4.5 and above. The
proportion of new lending at income multiples of 4.5 or higher was 7.7% in the year (2018: 8.3%). This is closely monitored and controlled to remain within risk appetite and FPC limits.
118
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Residential mortgages (continued)
LTV and credit risk concentration
Loan to value (LTV) is calculated by weighting the borrower level LTV by the individual loan balance to arrive at an average LTV. This approach is considered to reflect most appropriately the exposure at risk.
LTV distribution of new business
0% to 60%
60% to 75%
75% to 80%
80% to 85%
85% to 90%
90% to 95%
Over 95%
Total
2019
%
25
33
7
10
22
3
-
100
2018
%
26
30
9
14
18
3
-
100
Average LTV of new business
(note i)
Prime
Specialist (buy to let)
Group
Average LTV of loan stock
(note ii)
Prime
Specialist
Group
2019
%
73
60
71
2018
%
72
61
71
4 April 2019
%
57
58
58
4 April 2018
%
55
58
56
Notes:
i.
ii.
The LTV of new business excludes further advances and product switches.
The average LTV of loan stock includes both amortised cost and FVTPL balances. There have been no new FVTPL
advances during the year.
The maximum LTV for new prime residential borrowers remains at 95%. Nationwide continues to support first time buyers. All of this lending meets Nationwide underwriting criteria and our risk appetite for lending. The proportion
of new business with an LTV above 80% remained stable at 35% (4 April 2018: 35%). The average LTV of loan stock has increased to 58% (4 April 2018: 56%), with the increase reflecting our new lending; in the prior year this was
offset to a greater degree by house price growth impacting the whole portfolio. Whilst there are no signs of deterioration in the residential mortgage portfolio, with the immediate outlook for the UK and the HPI being less certain, the
expectation is for a gradual rise in LTV from current low levels.
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Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Residential mortgages (continued)
Residential mortgage balances by LTV and region
Geographical concentration by stage
The following table shows residential mortgages, excluding FVTPL balances, by LTV and region across stages 1 and 2 (non-credit impaired) and stage 3 (credit impaired):
Residential mortgage gross balances by LTV and region
4 April 2019
(Audited)
Stage 1 and 2 loans
Fully collateralised
LTV ratio:
Up to 50%
50% to 60%
60% to 70%
70% to 80%
80% to 90%
90% to 100%
Not fully collateralised
Over 100% LTV
Collateral value
Negative equity
Total stage 1 and 2 loans
Stage 3 and POCI loans
Fully collateralised
LTV ratio:
Up to 50%
50% to 60%
60% to 70%
70% to 80%
80% to 90%
90% to 100%
Not fully collateralised
Over 100% LTV
Collateral value
Negative equity
Total stage 3 and POCI loans
Total residential mortgages
Greater
London
£m
Central
England
£m
Northern
England
£m
South East
England
£m
South West
England
£m
Scotland
Wales
£m
£m
Northern
Ireland
£m
Total
£m
%
24,171
11,296
10,060
8,078
5,876
2,645
62,126
5
4
1
10,927
6,122
6,743
5,498
3,331
705
33,326
3
3
-
7,408
4,382
6,434
5,682
3,679
543
28,128
17
14
3
8,286
4,221
3,928
3,480
2,595
916
23,426
1
1
-
5,833
3,143
3,385
2,757
2,019
517
17,654
2
1
1
3,104
1,714
2,458
2,516
1,488
208
11,488
6
6
-
1,439
814
1,285
1,172
744
167
5,621
2
1
1
970
382
413
428
282
84
2,559
138
118
20
62,138
32,074
34,706
29,611
20,014
5,785
184,328
174
148
26
99.1
0.1
62,131
33,329
28,145
23,427
17,656
11,494
5,623
2,697
184,502
99.2
233
115
54
15
9
3
429
-
-
-
83
50
58
48
14
1
254
1
1
-
61
39
56
57
50
22
285
6
5
1
61
35
31
17
4
1
149
-
-
-
39
25
25
21
3
1
114
-
-
-
429
255
291
149
114
23
15
20
17
13
3
91
1
1
-
92
11
9
9
11
10
3
53
1
1
-
54
11
5
5
4
4
5
34
20
17
3
54
522
293
258
190
107
39
1,409
29
25
4
1,438
62,560
33,584
28,436
23,576
17,770
11,586
5,677
2,751
185,940
0.8
-
0.8
100
Total geographical concentrations
34%
18%
15%
13%
10%
6%
3%
1%
100%
Annual Report and Accounts 2019
Business and Risk Report (continued)
Credit risk – Residential mortgages (continued)
Residential mortgage balances by LTV and region
Geographical concentration by stage
Residential mortgage gross balances by LTV and region
The following table shows residential mortgages, excluding FVTPL balances, by LTV and region across stages 1 and 2 (non-credit impaired) and stage 3 (credit impaired):
Greater
London
£m
Central
England
£m
Northern
England
£m
South East
England
£m
South West
England
£m
Scotland
Wales
£m
£m
Northern
Ireland
£m
4 April 2019
(Audited)
Stage 1 and 2 loans
Fully collateralised
LTV ratio:
Up to 50%
50% to 60%
60% to 70%
70% to 80%
80% to 90%
90% to 100%
Not fully collateralised
Over 100% LTV
Collateral value
Negative equity
Total stage 1 and 2 loans
Stage 3 and POCI loans
Fully collateralised
LTV ratio:
Up to 50%
50% to 60%
60% to 70%
70% to 80%
80% to 90%
90% to 100%
Not fully collateralised
Over 100% LTV
Collateral value
Negative equity
Total stage 3 and POCI loans
Total residential mortgages
62,131
33,329
28,145
23,427
17,656
11,494
5,623
2,697
184,502
99.2
24,171
11,296
10,060
8,078
5,876
2,645
62,126
5
4
1
233
115
54
15
9
3
429
-
-
-
10,927
6,122
6,743
5,498
3,331
705
33,326
3
3
-
83
50
58
48
14
1
254
1
1
-
7,408
4,382
6,434
5,682
3,679
543
28,128
17
14
3
61
39
56
57
50
22
285
6
5
1
8,286
4,221
3,928
3,480
2,595
916
23,426
1
1
-
61
35
31
17
4
1
149
-
-
-
5,833
3,143
3,385
2,757
2,019
517
17,654
2
1
1
39
25
25
21
3
1
114
-
-
-
3,104
1,714
2,458
2,516
1,488
208
11,488
6
6
-
23
15
20
17
13
3
91
1
1
-
92
1,439
814
1,285
1,172
744
167
5,621
2
1
1
11
9
9
11
10
3
53
1
1
-
54
Total
£m
62,138
32,074
34,706
29,611
20,014
5,785
174
148
26
522
293
258
190
107
39
1,409
29
25
4
1,438
970
382
413
428
282
84
138
118
20
11
5
5
4
4
5
34
20
17
3
54
%
99.1
0.1
0.8
-
0.8
100
120
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Residential mortgages (continued)
Residential mortgage gross balances by LTV and region
5 April 2018 (note i)
(Audited)
Stage 1 and 2 loans
Fully collateralised
LTV ratio:
Up to 50%
50% to 60%
60% to 70%
70% to 80%
80% to 90%
90% to 100%
Not fully collateralised
Over 100% LTV
Collateral value
Negative equity
Greater
London
£m
Central
England
£m
Northern
England
£m
South East
England
£m
South West
England
£m
Scotland
£m
27,017
11,577
9,030
6,453
4,989
508
59,574
4
3
1
10,490
5,968
6,848
4,974
2,824
318
31,422
4
3
1
6,962
4,133
6,182
5,604
3,411
458
26,750
24
20
4
8,789
4,527
3,698
2,820
1,977
308
22,119
2
2
-
5,846
3,250
3,326
2,423
1,594
172
16,611
2
2
-
2,911
1,624
2,388
2,511
1,461
286
11,181
12
11
1
Wales
£m
1,396
803
1,279
1,105
679
67
5,329
1
1
-
Northern
Ireland
£m
943
393
397
409
276
87
2,505
179
153
26
Total
£m
64,354
32,275
33,148
26,299
17,211
2,204
175,491
228
195
33
%
99.1
0.1
2,559
184,328
Total stage 1 and 2 loans
59,578
31,426
26,774
22,121
16,613
11,193
5,330
2,684
175,719
99.2
Stage 3 and POCI loans
Fully collateralised
LTV ratio:
Up to 50%
50% to 60%
60% to 70%
70% to 80%
80% to 90%
90% to 100%
Not fully collateralised
Over 100% LTV
Collateral value
Negative equity
Total stage 3 and POCI loans
Total residential mortgages
257
98
39
7
4
1
406
-
-
-
76
47
55
41
20
2
241
1
1
-
59
36
55
53
53
28
284
5
5
-
65
36
33
11
2
-
147
-
-
-
38
25
23
18
2
1
107
-
-
-
406
242
289
147
107
17
15
20
19
10
5
86
1
1
-
87
11
9
11
10
10
4
55
1
1
-
56
12
6
5
4
6
4
37
24
19
5
61
535
272
241
163
107
45
1,363
32
27
5
1,395
59,984
31,668
27,063
22,268
16,720
11,280
5,386
2,745
177,114
0.8
-
0.8
100
429
255
291
149
114
62,560
33,584
28,436
23,576
17,770
11,586
5,677
2,751
185,940
Note:
i.
The distribution of the portfolio by geography and LTV ratios at 4 April 2018 is the same as that disclosed for 5 April 2018.
Over the year, the geographical distribution of residential mortgages across the UK has remained stable, with the highest concentration continuing to be in Greater London, at 34% of the total.
Total geographical concentrations
34%
18%
15%
13%
9%
6%
3%
2%
100%
Total geographical concentrations
34%
18%
15%
13%
10%
6%
3%
1%
100%
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Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Residential mortgages (continued)
In addition to balances held at amortised cost shown in the table above, there are £72 million (5 April 2018: £189 million) of residential mortgages held at FVTPL which have an average LTV of 40% (5 April 2018: 40%). The largest
geographical concentration within the FVTPL balances is in Greater London, at 44% (5 April 2018: 33%).
Arrears and possessions
Residential mortgage lending continues to have a low risk profile as demonstrated by the low level of arrears compared to the industry average:
Number of cases more than 3 months in arrears as % of total book
Number of properties in possession as % of total book
Prime
Specialist
Total
4 April 2019
%
0.35
0.82
0.43
4 April 2018
%
0.34
0.83
0.43
UK Finance (UKF) industry average
0.78
0.81
Note: The methodology for calculating mortgage arrears is based on the UKF definition of arrears, where months in arrears is
determined by dividing the arrears balance outstanding by the latest contractual payment.
Prime
Specialist
Total
UKF industry average
4 April 2019
4 April 2018
Number of
properties
78
153
231
Number of
properties
108
150
258
%
0.01
0.05
0.01
0.02
%
0.01
0.05
0.02
0.03
Whilst there are no signs of deterioration in the portfolio, with the immediate outlook for the UK being less certain and the buy to let market facing increased costs and potentially less investor demand, a gradual rise in arrears from
current low levels is expected over the medium term.
Annual Report and Accounts 2019
Business and Risk Report (continued)
Credit risk – Residential mortgages (continued)
geographical concentration within the FVTPL balances is in Greater London, at 44% (5 April 2018: 33%).
Arrears and possessions
Residential mortgage lending continues to have a low risk profile as demonstrated by the low level of arrears compared to the industry average:
Number of cases more than 3 months in arrears as % of total book
Number of properties in possession as % of total book
Prime
Specialist
Total
UK Finance (UKF) industry average
4 April 2019
4 April 2018
%
0.35
0.82
0.43
0.78
%
0.34
0.83
0.43
0.81
Prime
Specialist
Total
UKF industry average
Note: The methodology for calculating mortgage arrears is based on the UKF definition of arrears, where months in arrears is
determined by dividing the arrears balance outstanding by the latest contractual payment.
Whilst there are no signs of deterioration in the portfolio, with the immediate outlook for the UK being less certain and the buy to let market facing increased costs and potentially less investor demand, a gradual rise in arrears from
current low levels is expected over the medium term.
In addition to balances held at amortised cost shown in the table above, there are £72 million (5 April 2018: £189 million) of residential mortgages held at FVTPL which have an average LTV of 40% (5 April 2018: 40%). The largest
Residential mortgages by payment status
122
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Residential mortgages (continued)
The following table shows the payment status of all residential mortgages.
Residential mortgages gross balances by payment status
4 April 2019
4 April 2018
Number of
properties
78
153
231
Number of
properties
108
150
258
%
0.01
0.05
0.01
0.02
%
0.01
0.05
0.02
0.03
(Audited)
Not past due
Past due up to 3 months
Past due 3 to 6 months
Past due 6 to 12 months
Past due over 12 months
Possessions
Total residential mortgages
4 April 2019
4 April 2018
Prime
£m
149,771
1,356
177
122
84
7
151,517
Specialist
£m
33,468
657
159
121
69
21
34,495
Total
£m
183,239
2,013
336
243
153
28
186,012
%
98.5
1.1
0.2
0.1
0.1
-
100
Prime
£m
142,383
1,294
162
113
89
8
144,049
Specialist
£m
32,197
685
159
110
76
23
33,250
Total
£m
174,580
1,979
321
223
165
31
177,299
%
98.5
1.1
0.2
0.1
0.1
-
100
The proportion of loans in arrears has remained stable at 1.5% (4 April 2018: 1.5%) and arrears levels remain low across prime and specialist lending, reflecting the favourable economic conditions and low interest rate environment,
supported by robust credit assessment and affordability controls at the point of lending. In total, £370 million (4 April 2018: £368 million) of specialist lending balances were more than 3 months past due or in possession. Of these,
£233 million or 63.0% (4 April 2018: £252 million; 68.5%) related to legacy portfolios in run-off.
As at 4 April 2019, the mortgage portfolios included 1,491 mortgage accounts (4 April 2018: 1,634), including those in possession, where payments were more than 12 months in arrears. The total principal outstanding in these cases
was £165 million (4 April 2018: £182 million), and the total value of arrears was £20 million (4 April 2018: £22 million) or 0.01% (4 April 2018: 0.01%) of total mortgage balances.
Interest only mortgages
Interest only balances for prime residential mortgages relate primarily to historical balances which were originally advanced as interest only mortgages or where a subsequent change in terms to an interest only basis was agreed.
Maturities on interest only mortgages are managed closely, engaging regularly with borrowers to ensure the loan is redeemed or to agree a strategy for repayment. The majority of the specialist lending portfolio comprises buy to let
loans, with 89% of the portfolio relating to interest only balances (4 April 2018: 89%).
Interest only mortgages (gross balance) – term to maturity
(note i)
Term expired
(still open)
Due within one year
4 April 2019
Prime
Specialist
Total
4 April 2018
Prime
Specialist
Total
£m
69
133
202
£m
54
126
180
£m
278
166
444
£m
331
173
504
Due after one year
and before two
years
£m
329
272
601
Due after two
years and before
five years
£m
1,532
1,281
2,813
£m
366
213
579
£m
1,577
1,305
2,882
Due after more than
five years
£m
9,288
28,785
38,073
£m
11,271
27,795
39,066
Total
£m
11,496
30,637
42,133
£m
13,599
29,612
43,211
% of
book
%
7.6
88.8
22.7
%
9.4
89.1
24.4
Note:
i.
Balances subject to forbearance with agreed term extensions are presented based on the latest agreed contractual term.
Interest only loans that are term expired (still open) are not considered to be past due where contractual interest payments continue to be met, pending renegotiation of the facility. However, under IFRS 9 these are now treated as
credit impaired and form part of the stage 3 balance from three months after the maturity date. Previously, term expired (still open) loans were not categorised as impaired unless in litigation or more than 3 months in arrears on the
contractual interest payments.
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123
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Residential mortgages (continued)
Forbearance
Capitalisation
Nationwide is committed to supporting borrowers facing financial difficulty by working with them to find
a solution through proactive arrears management and forbearance.
The following concession events are included within the forbearance reporting for residential mortgages:
Past term interest only concessions
Nationwide works with borrowers who are unable to repay the capital at term expiry of their interest only
mortgage. Where a borrower is unable to renegotiate the facility within six months of maturity but no legal
enforcement is pursued, the account is considered forborne. Should another concession event such as a term
extension occur within the six month period, this is also classed as forbearance.
Interest only concessions
Where a temporary interest only concession is granted the loans do not accrue arrears for the period of the
concession and are not categorised as impaired, unless already impaired, provided the revised interest only
repayment amount is maintained.
When a borrower emerges from financial difficulty and provided they have made at least six full monthly
instalments, they are offered the option to capitalise arrears. This results in the account being repaired and
the loans are categorised as not impaired provided contractual repayments are maintained.
Term extensions (within term)
Customers in financial difficulty may be allowed to extend the term of their mortgage. On a capital repayment
mortgage this will reduce their monthly commitment; interest only borrowers will benefit by having a longer
period to repay the capital at maturity.
Permanent interest only conversions
In the past, some borrowers in financial difficulty were granted a permanent interest only conversion, normally
reducing their monthly commitment. This facility was withdrawn in March 2012.
The table below provides details of residential mortgages held at amortised cost subject to forbearance, which
are all assessed as in either stage 2 or stage 3:
Gross balances subject to forbearance
(note i)
Past term interest only (note ii)
Interest only concessions
Capitalisation
Term extensions (within term)
Permanent interest only conversions (note iii)
Total forbearance
Impairment provisions on forborne loans
4 April 2019
5 April 2018
Prime
£m
122
525
42
35
3
727
5
Specialist
£m
134
59
51
13
33
290
11
Total
£m
256
584
93
48
36
1,017
16
Prime
£m
130
511
45
35
5
726
5
Specialist
£m
136
66
59
14
24
299
11
Total
£m
266
577
104
49
29
1,025
16
Notes:
i. Where more than one concession event has occurred, balances are reported under the latest event.
ii.
Includes interest only mortgages where a customer is unable to renegotiate the facility within six months of maturity and no legal enforcement is pursued. Should a concession event such as a term extension occur within the six-month period, this will also be
classed as forbearance.
The increase from 2018 represents loans which were part interest only and part capital repayment, where the capital repayment element has been repaid and the loan categorised as an interest only conversion.
iii.
Over the year, total balances subject to forbearance have remained stable at £1,017 million (5 April 2018: £1,025 million) and, as the portfolio has grown, the forborne balances as a percentage of total residential mortgage lending
have reduced to 0.55% (5 April 2018: 0.58%).
In addition to the amortised cost balances above, there are £72 million FVTPL balances (5 April 2018: £189 million), of which £4 million (5 April 2018: £19 million) are forborne.
The total value of balances subject to forbearance at 4 April 2018 was £1,043 million, with an associated impairment provision of £17 million.
124
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Consumer banking
Summary
The consumer banking portfolio comprises balances on unsecured retail banking products: overdrawn current accounts, personal loans and credit cards. Over the year, total balances across these portfolios have grown by £479
million to £4,586 million (4 April 2018: £4,107 million), equating to 12% growth, and credit quality has remained stable.
Consumer banking gross balances
(Audited)
Overdrawn current accounts
Personal loans
Credit cards
Total consumer banking
4 April 2019
4 and 5 April 2018
£m
324
2,449
1,813
4,586
%
7
53
40
100
£m
277
2,031
1,799
4,107
%
7
49
44
100
Interest only concessions
In the past, some borrowers in financial difficulty were granted a permanent interest only conversion, normally
reducing their monthly commitment. This facility was withdrawn in March 2012.
Following the transition to IFRS 9, all consumer banking loans continue to be classified and measured at amortised cost.
Where a temporary interest only concession is granted the loans do not accrue arrears for the period of the
concession and are not categorised as impaired, unless already impaired, provided the revised interest only
repayment amount is maintained.
are all assessed as in either stage 2 or stage 3:
The table below provides details of residential mortgages held at amortised cost subject to forbearance, which
Impairment losses for the year
(Audited)
Overdrawn current accounts
Personal loans
Credit cards
Total
2019
(IFRS 9 basis)
£m
9
38
67
114
2018
(IAS 39 basis)
£m
15
36
46
97
Note:
Impairment losses represent the net amount charged through the profit and loss account, rather than amounts written off during the year.
Impairment losses for the year reflect updates to the economic assumptions applied to provision calculations, which have led to a £23 million increase in provisions. The losses also include £13 million in recognition of the risk related
to borrowers in persistent debt1 in the credit card portfolio. As impairment provisions are calculated on a different basis under IFRS 9 from IAS 39, the losses shown above are not comparable between 2018 and 2019.
Annual Report and Accounts 2019
Business and Risk Report (continued)
Credit risk – Residential mortgages (continued)
Forbearance
Capitalisation
Nationwide is committed to supporting borrowers facing financial difficulty by working with them to find
a solution through proactive arrears management and forbearance.
The following concession events are included within the forbearance reporting for residential mortgages:
Past term interest only concessions
When a borrower emerges from financial difficulty and provided they have made at least six full monthly
instalments, they are offered the option to capitalise arrears. This results in the account being repaired and
the loans are categorised as not impaired provided contractual repayments are maintained.
Term extensions (within term)
Customers in financial difficulty may be allowed to extend the term of their mortgage. On a capital repayment
mortgage this will reduce their monthly commitment; interest only borrowers will benefit by having a longer
Nationwide works with borrowers who are unable to repay the capital at term expiry of their interest only
mortgage. Where a borrower is unable to renegotiate the facility within six months of maturity but no legal
enforcement is pursued, the account is considered forborne. Should another concession event such as a term
extension occur within the six month period, this is also classed as forbearance.
period to repay the capital at maturity.
Permanent interest only conversions
4 April 2019
Prime
Specialist
5 April 2018
Prime
Specialist
£m
122
525
42
35
3
727
5
£m
134
59
51
13
33
290
11
Total
£m
256
584
93
48
36
1,017
16
£m
130
511
45
35
5
726
5
£m
136
66
59
14
24
299
11
Total
£m
266
577
104
49
29
1,025
16
Gross balances subject to forbearance
(note i)
Past term interest only (note ii)
Interest only concessions
Capitalisation
Term extensions (within term)
Permanent interest only conversions (note iii)
Total forbearance
Impairment provisions on forborne loans
Notes:
classed as forbearance.
have reduced to 0.55% (5 April 2018: 0.58%).
i. Where more than one concession event has occurred, balances are reported under the latest event.
ii.
Includes interest only mortgages where a customer is unable to renegotiate the facility within six months of maturity and no legal enforcement is pursued. Should a concession event such as a term extension occur within the six-month period, this will also be
iii.
The increase from 2018 represents loans which were part interest only and part capital repayment, where the capital repayment element has been repaid and the loan categorised as an interest only conversion.
Over the year, total balances subject to forbearance have remained stable at £1,017 million (5 April 2018: £1,025 million) and, as the portfolio has grown, the forborne balances as a percentage of total residential mortgage lending
In addition to the amortised cost balances above, there are £72 million FVTPL balances (5 April 2018: £189 million), of which £4 million (5 April 2018: £19 million) are forborne.
The total value of balances subject to forbearance at 4 April 2018 was £1,043 million, with an associated impairment provision of £17 million.
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1 Borrowers are classified as being in persistent debt when they have paid more interest, fees and charges than capital over an 18-month period.
125
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Consumer banking (continued)
The following table shows consumer banking balances by stage, with the corresponding impairment provisions and resulting provision coverage ratios:
Consumer banking product and staging analysis
(Audited)
Gross balances
Overdrawn current accounts
Personal loans
Credit cards
Total
Provisions
Overdrawn current accounts
Personal loans
Credit cards
Total
Provisions as a % of total balance
Overdrawn current accounts
Personal loans
Credit cards
Total
Stage 1
£m
187
2,140
1,211
3,538
2
11
14
27
%
1.30
0.53
1.12
0.77
4 April 2019
Stage 2
£m
Stage 3
£m
100
186
475
761
18
22
92
132
%
17.42
12.11
19.33
17.32
37
123
127
287
33
107
119
259
%
89.92
86.58
93.61
90.12
Total
£m
324
2,449
1,813
4,586
53
140
225
418
%
16.37
5.74
12.38
9.11
Stage 1
£m
149
1,803
1,312
3,264
2
10
13
25
%
1.34
0.57
1.03
0.78
5 April 2018
Stage 2
£m
Stage 3
£m
94
116
365
575
23
18
62
103
%
24.19
15.16
17.09
17.86
34
112
122
268
30
96
111
237
%
90.52
86.31
90.64
88.45
Total
£m
277
2,031
1,799
4,107
55
124
186
365
%
19.97
6.11
10.36
8.90
As at 4 April 2019, 77% (5 April 2018: 79%) of the consumer banking portfolio is in stage 1. Over the year, consumer banking balances in stages 2 and 3 have increased, principally as a result of updating personal loan and credit card
risk models for latest performance expectations and the recognition of the risks associated with persistent debt in the credit card portfolio, which resulted in balances moving from stage 1 to stage 2. In addition, changes in
assumptions regarding the economic outlook have led to increased provisions, and therefore provision coverage, in the credit card portfolio. Further information is included in note 10 to the financial statements.
Consumer banking stage 3 gross balances and provisions include charged off balances. These are accounts which are closed to future transactions and are held on the balance sheet for an extended period (up to 36 months) whilst
recovery activities take place. Excluding these charged off balances and related provisions, the provision coverage ratio for the total portfolio is 5.0% (5 April 2018: 4.8%).
Annual Report and Accounts 2019
Business and Risk Report (continued)
Credit risk – Consumer banking (continued)
Consumer banking product and staging analysis
The following table shows consumer banking balances by stage, with the corresponding impairment provisions and resulting provision coverage ratios:
Overdrawn current accounts
Overdrawn current accounts
(Audited)
Gross balances
Personal loans
Credit cards
Total
Provisions
Personal loans
Credit cards
Total
Provisions as a % of total balance
Overdrawn current accounts
Personal loans
Credit cards
Total
4 April 2019
Stage 2
£m
Stage 3
£m
5 April 2018
Stage 2
£m
Stage 3
£m
Stage 1
£m
187
2,140
1,211
3,538
2
11
14
27
%
1.30
0.53
1.12
0.77
100
186
475
761
18
22
92
132
%
17.42
12.11
19.33
17.32
37
123
127
287
33
107
119
259
%
89.92
86.58
93.61
90.12
Total
£m
324
2,449
1,813
4,586
53
140
225
418
%
16.37
5.74
12.38
9.11
Stage 1
£m
149
1,803
1,312
3,264
2
10
13
25
%
1.34
0.57
1.03
0.78
94
116
365
575
23
18
62
103
%
24.19
15.16
17.09
17.86
34
112
122
268
30
96
111
237
%
90.52
86.31
90.64
88.45
Total
£m
277
2,031
1,799
4,107
55
124
186
365
%
19.97
6.11
10.36
8.90
As at 4 April 2019, 77% (5 April 2018: 79%) of the consumer banking portfolio is in stage 1. Over the year, consumer banking balances in stages 2 and 3 have increased, principally as a result of updating personal loan and credit card
risk models for latest performance expectations and the recognition of the risks associated with persistent debt in the credit card portfolio, which resulted in balances moving from stage 1 to stage 2. In addition, changes in
assumptions regarding the economic outlook have led to increased provisions, and therefore provision coverage, in the credit card portfolio. Further information is included in note 10 to the financial statements.
Consumer banking stage 3 gross balances and provisions include charged off balances. These are accounts which are closed to future transactions and are held on the balance sheet for an extended period (up to 36 months) whilst
recovery activities take place. Excluding these charged off balances and related provisions, the provision coverage ratio for the total portfolio is 5.0% (5 April 2018: 4.8%).
126
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Consumer banking (continued)
Reason for consumer banking balances being included in stage 2
4 April 2019
Quantitative criteria:
Payment status (greater than 30 DPD) (note i)
Increase in PD since origination (less than 30 DPD)
Qualitative criteria:
Forbearance (less than 30 DPD) (note ii)
Other qualitative criteria (less than 30 DPD)
Total Stage 2 gross balances
Overdrawn current accounts
Personal loans
Credit cards
£m
3
84
2
11
100
%
3
84
2
11
100
£m
9
172
-
5
186
%
5
92
-
3
100
£m
6
414
-
55
475
%
1
87
-
12
100
Total
£m
18
670
2
71
761
%
2
88
-
10
100
Notes:
i.
ii.
This category includes all loans greater than 30 DPD, including those whose original reason for being classified as stage 2 was not arrears over 30 DPD.
Stage 2 forbearance relates to cases where full repayment of principal and interest is still anticipated, on a discounted basis.
Of the £761 million stage 2 balances, only 2% are in arrears by 30 days or more. Balances reported within stage 2 are those which have experienced a significant increase in credit risk since origination. The significant increase is
determined through both quantitative and qualitative indicators. The majority of credit card balances included in stage 2 due to qualitative factors relate to exposures where there is increased risk as a result of persistent debt,
reflecting emerging regulatory requirements.
The primary quantitative indicators are the outputs of internal credit risk assessments. For retail exposures, PDs are derived using modelled scorecards, which use external information such as that from credit reference agencies as
well as internal information such as known instances of arrears or other financial difficulty. While different approaches are used within each portfolio, current and historic data relating to the exposure are combined with forward-
looking macroeconomic information to determine the likelihood of default.
The credit risk of each loan is evaluated at each reporting date by calculating its residual lifetime PD. For retail loans, the main indicators of a significant increase in credit risk are either of the following:
•
•
the residual lifetime probability of default (PD) exceeds a benchmark determined by reference to the maximum credit risk that would have been accepted at origination
the residual lifetime PD has increased by both at least 75bps and a 4x multiple of the original lifetime PD
Qualitative criteria include both forbearance events and, within the credit card portfolio, recognition of the risk related to borrowers in persistent debt. In addition, loans are moved to stage 2 when certain “backstop” events occur,
including arrears of greater than 30 days past due.
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Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Consumer banking (continued)
Credit quality
Nationwide adopts robust credit management policies and processes designed to recognise and manage the risks arising from the portfolio.
The following table shows gross balances and provisions for consumer banking balances held at amortised cost, by PD range. The PD distributions shown are based on a 12 month probability of default under IFRS 9 at the reporting
date:
Consumer banking gross balances and provisions by PD
4 April 2019
(Audited)
Gross balances
PD range
0.00 to <0.15%
0.15 to < 0.25%
0.25 to < 0.50%
0.50 to < 0.75%
0.75 to < 2.50%
2.50 to < 10.00%
10.00 to < 100%
100% (default)
Total
Consumer banking gross balances and provisions by PD
5 April 2018
(Audited)
PD range
0.00 to <0.15%
0.15 to < 0.25%
0.25 to < 0.50%
0.50 to < 0.75%
0.75 to < 2.50%
2.50 to < 10.00%
10.00 to < 100%
100% (default)
Total
Stage 1
£m
1,016
364
542
332
911
366
7
-
3,538
Stage 1
£m
998
314
465
292
838
347
10
-
3,264
Stage 2
£m
5
9
24
26
190
349
158
-
761
Gross balances
Stage 2
£m
3
5
17
17
116
282
135
-
575
Stage 3
£m
-
-
-
-
-
1
4
282
287
Stage 3
£m
-
-
-
-
-
1
5
262
268
Total
£m
1,021
373
566
358
1,101
716
169
282
4,586
Total
£m
1,001
319
482
309
954
630
150
262
4,107
Stage 1
£m
3
1
2
2
9
9
1
-
27
Stage 1
£m
1
1
2
2
9
9
1
-
25
Provisions
Stage 2
£m
Stage 3
£m
-
1
2
2
21
53
53
-
132
Provisions
Stage 2
£m
-
-
1
1
9
41
51
-
103
-
-
-
-
-
-
2
257
259
Stage 3
£m
-
-
-
-
-
-
3
234
237
Provision
coverage
%
0.29
0.48
0.74
1.19
2.71
8.74
33.19
90.98
9.11
Provision
coverage
%
0.15
0.32
0.58
0.90
1.93
7.86
36.92
89.26
8.90
Total
£m
3
2
4
4
30
62
56
257
418
Total
£m
1
1
3
3
18
50
55
234
365
The credit quality of the consumer banking portfolio has remained broadly stable, benefiting from the continued low interest rate environment, with 90% of the portfolio (5 April 2018: 90%) considered good quality with a PD of less
than 10%. Changes in provision coverage for loans in different PD ranges are principally due to changes in the mix of products.
Nationwide adopts robust credit management policies and processes designed to recognise and manage the risks arising from the portfolio.
Credit risk in the consumer banking portfolios is primarily monitored and reported based on arrears status which is set out below:
128
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Consumer banking (continued)
Consumer banking balances by payment due status
The following table shows gross balances and provisions for consumer banking balances held at amortised cost, by PD range. The PD distributions shown are based on a 12 month probability of default under IFRS 9 at the reporting
Consumer banking gross balances by payment due status
(Audited)
Not past due
Past due up to 3 months
Past due 3 to 6 months
Past due 6 to 12 months
Past due over 12 months
Charged off (note i)
Total
Overdrawn
current
accounts
£m
279
12
3
3
3
24
324
Personal
loans
4 April 2019
Credit
cards
£m
2,282
48
8
15
14
82
2,449
£m
1,667
30
11
2
-
103
1,813
Total
£m
4,228
90
22
20
17
209
4,586
Overdrawn
current
accounts
£m
235
12
4
3
3
20
277
%
92.2
1.9
0.5
0.4
0.4
4.6
100
Personal
loans
4 April 2018
Credit
cards
£m
1,882
43
13
12
13
68
2,031
£m
1,656
33
11
2
-
97
1,799
Total
£m
3,773
88
28
17
16
185
4,107
%
91.9
2.1
0.7
0.4
0.4
4.5
100
Note:
i.
Charged off balances relate to accounts which are closed to future transactions and are held on the balance sheet for an extended period (up to 36 months, depending on the product) whilst recovery procedures take place.
Total balances subject to arrears, excluding charged off balances, have remained stable at £149 million (4 April 2018: £149 million). Excluding charged off balances, balances on accounts in arrears have reduced to 3.2% (4 April
2018: 3.6%) of the total portfolio as a result of overall portfolio growth.
Annual Report and Accounts 2019
Business and Risk Report (continued)
Credit risk – Consumer banking (continued)
Credit quality
date:
4 April 2019
(Audited)
PD range
0.00 to <0.15%
0.15 to < 0.25%
0.25 to < 0.50%
0.50 to < 0.75%
0.75 to < 2.50%
2.50 to < 10.00%
10.00 to < 100%
100% (default)
Total
5 April 2018
(Audited)
PD range
0.00 to <0.15%
0.15 to < 0.25%
0.25 to < 0.50%
0.50 to < 0.75%
0.75 to < 2.50%
2.50 to < 10.00%
10.00 to < 100%
100% (default)
Total
Consumer banking gross balances and provisions by PD
Gross balances
Stage 2
Stage 3
£m
Provisions
Stage 2
Stage 1
£m
Consumer banking gross balances and provisions by PD
Gross balances
Stage 2
£m
Stage 3
£m
Provisions
Stage 1
£m
Stage 2
£m
Stage 3
£m
Stage 1
£m
1,016
364
542
332
911
366
7
-
3,538
Stage 1
£m
998
314
465
292
838
347
10
-
3,264
£m
5
9
24
26
190
349
158
-
761
3
5
17
17
116
282
135
-
575
Total
£m
1,021
373
566
358
1,101
716
169
282
4,586
Total
£m
1,001
319
482
309
954
630
150
262
4,107
-
-
-
-
-
1
4
282
287
-
-
-
-
-
1
5
262
268
£m
-
1
2
2
21
53
53
-
132
-
-
1
1
9
41
51
-
103
Stage 3
£m
-
-
-
-
-
-
2
257
259
-
-
-
-
-
-
3
234
237
3
1
2
2
9
9
1
-
27
1
1
2
2
9
9
1
-
25
Provision
coverage
%
0.29
0.48
0.74
1.19
2.71
8.74
33.19
90.98
9.11
Provision
coverage
%
0.15
0.32
0.58
0.90
1.93
7.86
36.92
89.26
8.90
Total
£m
3
2
4
4
30
62
56
257
418
Total
£m
1
1
3
3
18
50
55
234
365
The credit quality of the consumer banking portfolio has remained broadly stable, benefiting from the continued low interest rate environment, with 90% of the portfolio (5 April 2018: 90%) considered good quality with a PD of less
than 10%. Changes in provision coverage for loans in different PD ranges are principally due to changes in the mix of products.
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Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Consumer banking (continued)
Forbearance
Nationwide is committed to supporting customers facing financial difficulty by working with them to find a solution through proactive arrears management and forbearance.
The following concession events are included within the forbearance reporting for consumer banking:
Payment concession
This concession consists of reduced monthly payments over an agreed period and may be offered to customers with an overdraft or credit card. For credit cards subject to such a concession, arrears do not increase provided the
payments are made.
Interest suppressed payment arrangement
This temporary interest payment concession results in reduced monthly payments and may be offered to customers with an overdraft, credit card or personal loan. Interest payments and fees are suppressed during the period of the
concession and arrears do not increase. Cases subject to this concession are classified as impaired.
Balances re-aged/re-written
As customers repay their debt in line with the terms of their arrangement and begin to emerge from financial difficulty we will repair their accounts, bringing them into an up-to-date and performing position. For personal loans we
will re-write their account over a longer term, to maintain a reduced monthly payment. For credit cards we re-age the account and set the payment status to ‘up-to-date’, at which point the customer is treated in the same way as any
other performing account.
The table below provides details of consumer banking balances subject to forbearance. These are all assessed as either stage 2, or stage 3 (credit-impaired) where full repayment of principal and interest is no longer anticipated.
Gross balances subject to forbearance
(note i)
Payment concession
Interest suppressed payment concession
Balance re-aged/re-written
Total forbearance
Impairment provisions on forborne loans
Overdrawn
current
accounts
£m
16
6
-
22
12
4 April 2019
Personal
loans
Credit
cards
£m
-
34
1
35
29
£m
2
15
3
20
14
Total
£m
18
55
4
77
55
Overdrawn
current
accounts
£m
18
6
-
24
13
5 April 2018
Personal
loans
Credit
cards
£m
-
32
-
32
27
£m
2
16
4
22
16
Total
£m
20
54
4
78
56
Note:
i. Where more than one concession event has occurred, balances are reported under the latest event.
Over the year, the volume of balances subject to forbearance has remained stable at £77 million (5 April 2018: £78 million), with forborne balances as a percentage of the total consumer banking lending improving to 1.7% (5 April
2018: 1.9%), largely as a result of book growth.
The total value of balances subject to forbearance at 4 April 2018 was £78 million with an associated impairment provision of £43 million.
Annual Report and Accounts 2019
Business and Risk Report (continued)
Credit risk – Consumer banking (continued)
Forbearance
Payment concession
payments are made.
Interest suppressed payment arrangement
Balances re-aged/re-written
other performing account.
Gross balances subject to forbearance
(note i)
Payment concession
Interest suppressed payment concession
Balance re-aged/re-written
Total forbearance
Impairment provisions on forborne loans
Nationwide is committed to supporting customers facing financial difficulty by working with them to find a solution through proactive arrears management and forbearance.
The following concession events are included within the forbearance reporting for consumer banking:
This concession consists of reduced monthly payments over an agreed period and may be offered to customers with an overdraft or credit card. For credit cards subject to such a concession, arrears do not increase provided the
This temporary interest payment concession results in reduced monthly payments and may be offered to customers with an overdraft, credit card or personal loan. Interest payments and fees are suppressed during the period of the
concession and arrears do not increase. Cases subject to this concession are classified as impaired.
As customers repay their debt in line with the terms of their arrangement and begin to emerge from financial difficulty we will repair their accounts, bringing them into an up-to-date and performing position. For personal loans we
will re-write their account over a longer term, to maintain a reduced monthly payment. For credit cards we re-age the account and set the payment status to ‘up-to-date’, at which point the customer is treated in the same way as any
The table below provides details of consumer banking balances subject to forbearance. These are all assessed as either stage 2, or stage 3 (credit-impaired) where full repayment of principal and interest is no longer anticipated.
Overdrawn
current
accounts
£m
16
6
-
22
12
4 April 2019
Personal
loans
Credit
cards
£m
-
34
1
35
29
£m
2
15
3
20
14
Total
£m
18
55
4
77
55
Overdrawn
current
accounts
£m
18
6
-
24
13
5 April 2018
Personal
loans
Credit
cards
£m
32
-
-
32
27
£m
2
16
4
22
16
Total
£m
20
54
4
78
56
Note:
i. Where more than one concession event has occurred, balances are reported under the latest event.
Over the year, the volume of balances subject to forbearance has remained stable at £77 million (5 April 2018: £78 million), with forborne balances as a percentage of the total consumer banking lending improving to 1.7% (5 April
2018: 1.9%), largely as a result of book growth.
The total value of balances subject to forbearance at 4 April 2018 was £78 million with an associated impairment provision of £43 million.
130
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Commercial and other lending
Summary
The commercial portfolio comprises loans which have been provided to meet the funding requirements of registered social landlords, commercial real estate investors and project finance initiatives. Whilst the project finance and
commercial real estate portfolios are closed to new business, the registered social landlord portfolio was re-opened in September 2018.
Commercial and other lending gross balances
Registered social landlords (note i)
Commercial real estate (CRE)
Project finance (note ii)
Other lending (note iii)
Commercial and other lending balances at amortised cost
Fair value adjustment for micro hedged risk (note iv)
Commercial lending balances – FVTPL (note v)
Total
4 April 2019
£m
5,980
1,383
807
8
8,178
883
57
9,118
5 April 2018
£m
6,816
1,810
906
8
9,540
1,042
58
10,640
4 April 2018
£m
6,820
1,868
906
8
9,602
1,043
-
10,645
Notes:
i.
ii.
iii. Other lending previously included balances held with counterparties which are institutions similar to banks. These are now reported in loans and advances to banks and similar institutions, and comparatives for the prior period have been restated to disclose
Loans to registered social landlords are secured on residential property.
Loans advanced in relation to project finance are secured on cash flows from government or local authority backed contracts under the Private Finance Initiative.
information on the same basis. Further details are included in note 1 to the financial statements.
iv. Micro hedged risk relates to loans hedged on an individual basis.
v.
As a result of their contractual cash flow characteristics, certain commercial loans were reclassified from amortised cost to FVTPL on transition to IFRS 9 on 5 April 2018 and remeasured at fair value.
Over the year, total balances across the commercial portfolios have reduced, reflecting run-off of the closed CRE and project finance books, with borrowers repaying loans at or before loan maturity. In the registered social landlord
portfolio, reductions are due to early repayments and a managed reduction in the concentration risk to loans above £200 million. As the portfolio balances have reduced the quality and performance of the portfolios has remained
stable.
Impairment losses /(reversals) for the year for commercial and other lending
Total
2019
(IFRS 9 basis)
£m
16
2018
(IAS 39 basis)
£m
(1)
Note:
Impairment losses represent the net amount charged through the profit and loss account, rather than amounts written off during the year.
The £16 million impairment loss for the year relates to two loans which are not representative of risks in the wider portfolio. As impairment provisions are calculated on a different basis under IFRS 9 from IAS 39, the losses shown
above are not comparable between 2018 and 2019.
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Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Commercial and other lending (continued)
The following table shows commercial and other lending balances carried at amortised cost on the balance sheet, with the stage allocation of the exposures, impairment provisions and resulting provision coverage ratios:
Commercial and other lending product and staging analysis
Gross balances
Registered social landlords
CRE
Project finance
Other lending
Total
Provisions
Registered social landlords
CRE
Project finance
Other lending
Total
Provisions as a % of total balance
Registered social landlords
CRE
Project finance
Other lending
Total
Stage 1
£m
5,923
1,122
754
8
7,807
1
2
1
-
4
%
0.02
0.19
0.15
-
0.05
4 April 2019
Stage 2
£m
Stage 3
£m
57
213
29
-
299
-
2
-
-
2
%
0.18
0.96
0.97
-
0.81
-
48
24
-
72
-
18
17
-
35
%
-
37.11
71.54
-
48.74
Total
£m
5,980
1,383
807
8
8,178
1
22
18
-
41
%
0.02
1.58
2.20
-
0.50
Stage 1
£m
6,725
1,587
818
8
9,138
1
5
-
-
6
%
0.01
0.32
0.02
1.25
0.07
5 April 2018
Stage 2
£m
Stage 3
£m
91
186
88
-
365
-
3
7
-
10
%
0.15
1.19
8.37
-
2.74
-
37
-
-
37
-
13
-
-
13
%
-
36.99
-
-
35.55
Total
£m
6,816
1,810
906
8
9,540
1
21
7
-
29
%
0.01
1.15
0.83
1.25
0.30
Over the year, the performance of the commercial and other lending portfolios has remained stable, with 95% (5 April 2018: 96%) of balances remaining in stage 1. Of the £299 million stage 2 loans (5 April 2018: £365 million), £1
million (5 April 2018: £2 million) is in arrears by 30 days or more, with the remainder in stage 2 due to non-arrears factors such as a deterioration in risk rating or placement on a watchlist.
The increase in CRE stage 2 and 3 balances is in respect of a small number of loans that are subject to increased loan maturity risk, with stage 3 (credit-impaired) loans, at £48 million (5 April 2018: £37 million), equating to 3% (5
April 2018: 2%) of the total CRE exposure.
Within the registered social landlord portfolio, there are no stage 3 assets, and only 1% (5 April 2018: 1%) of the exposure is in stage 2. Against a backdrop of a long history of zero defaults, the risk profile of this portfolio remains low.
Loans in the project finance portfolio benefit from long-term cash flows, which typically emanate from the provision of assets such as schools, hospitals, police stations, government buildings and roads, procured under the Private
Finance Initiative. 97% of balances are in respect of fully developed assets.
There is no significant exposure to credit risk on the other lending balances.
The following table shows commercial and other lending balances carried at amortised cost on the balance sheet, with the stage allocation of the exposures, impairment provisions and resulting provision coverage ratios:
Credit quality
132
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Commercial and other lending (continued)
Over the year, the performance of the commercial and other lending portfolios has remained stable, with 95% (5 April 2018: 96%) of balances remaining in stage 1. Of the £299 million stage 2 loans (5 April 2018: £365 million), £1
In addition to the above, £57 million (5 April 2018: £58 million) of commercial lending balances are classified as FVTPL, of which £53 million (5 April 2018: £53 million) relates to CRE loans with a risk grade of satisfactory.
Nationwide adopts robust credit management policies and processes designed to recognise and manage the risks arising from the portfolio.
The following table shows the CRE portfolio by risk grade and the provision coverage for each category. The table includes balances held at amortised cost only.
CRE gross balances by risk grade and provision coverage
Strong
Good
Satisfactory
Weak
Impaired
Total
Stage 1
Stage 2
Stage 3
4 April 2019
£m
676
381
65
-
-
1,122
£m
57
76
8
72
-
213
£m
-
-
-
-
48
48
Total
£m
733
457
73
72
48
1,383
Provision
coverage
%
0.3
0.1
0.4
1.4
37.1
1.6
Stage 1
Stage 2
Stage 3
5 April 2018
£m
912
614
61
-
-
1,587
£m
20
79
32
55
-
186
£m
-
-
-
-
37
37
Total
£m
932
693
93
55
37
1,810
Provision
coverage
%
0.5
0.1
1.2
2.0
36.0
1.1
The risk grades in the table above are based upon supervisory slotting criteria, under which exposures are classified into categories depending on the underlying credit risk, with the assessment based upon financial strength, asset
characteristics, the strength of the sponsor and the security. As CRE balances reduce, the credit quality of the portfolio remains strong, with 91% (5 April 2018: 95%) of the portfolio continuing to be rated as satisfactory or better.
Risk grades for the project finance portfolio are also based upon supervisory slotting criteria, with 97% of the exposure rated strong or good.
The registered social landlord portfolio is risk rated using an internal PD rating model with the major drivers being financial strength, independent viability assessment ratings provided by the Regulator of Social Housing, and the type
and size of the registered social landlord. The distribution of exposures is weighted towards the stronger risk ratings and against a backdrop of zero defaults, the credit quality remains high, with an average 12 month PD of 0.05%
across the portfolio.
Annual Report and Accounts 2019
Business and Risk Report (continued)
Credit risk – Commercial and other lending (continued)
Commercial and other lending product and staging analysis
Gross balances
Registered social landlords
Registered social landlords
CRE
Project finance
Other lending
Total
Provisions
CRE
Project finance
Other lending
Total
CRE
Project finance
Other lending
Total
Provisions as a % of total balance
Registered social landlords
4 April 2019
Stage 2
£m
Stage 3
£m
5 April 2018
Stage 2
£m
Stage 3
£m
Stage 1
£m
5,923
1,122
754
8
7,807
1
2
1
-
4
%
0.02
0.19
0.15
-
0.05
57
213
29
-
299
-
2
-
-
2
%
0.18
0.96
0.97
-
0.81
-
48
24
-
72
-
18
17
-
35
%
-
37.11
71.54
-
48.74
Total
£m
5,980
1,383
807
8
8,178
1
22
18
-
41
%
0.02
1.58
2.20
-
0.50
Stage 1
£m
6,725
1,587
818
8
9,138
1
5
-
-
6
%
0.01
0.32
0.02
1.25
0.07
91
186
88
-
365
-
3
7
-
10
%
0.15
1.19
8.37
-
2.74
37
-
-
-
37
-
13
-
-
13
%
-
-
-
36.99
35.55
Total
£m
6,816
1,810
906
8
9,540
1
21
7
-
29
%
0.01
1.15
0.83
1.25
0.30
million (5 April 2018: £2 million) is in arrears by 30 days or more, with the remainder in stage 2 due to non-arrears factors such as a deterioration in risk rating or placement on a watchlist.
The increase in CRE stage 2 and 3 balances is in respect of a small number of loans that are subject to increased loan maturity risk, with stage 3 (credit-impaired) loans, at £48 million (5 April 2018: £37 million), equating to 3% (5
April 2018: 2%) of the total CRE exposure.
Within the registered social landlord portfolio, there are no stage 3 assets, and only 1% (5 April 2018: 1%) of the exposure is in stage 2. Against a backdrop of a long history of zero defaults, the risk profile of this portfolio remains low.
Loans in the project finance portfolio benefit from long-term cash flows, which typically emanate from the provision of assets such as schools, hospitals, police stations, government buildings and roads, procured under the Private
Finance Initiative. 97% of balances are in respect of fully developed assets.
There is no significant exposure to credit risk on the other lending balances.
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133
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Commercial and other lending (continued)
CRE balances by LTV and region
The following table includes both amortised cost and FVTPL CRE balances.
CRE lending gross balances by LTV and region
(note i)
Fully collateralised
LTV ratio (note ii):
Less than 25%
25% to 50%
51% to 75%
76% to 90%
91% to 100%
Not fully collateralised:
Over 100% LTV
Collateral value
Negative equity
Total CRE loans
Geographical concentration
4 April 2019
London
£m
Rest of UK
£m
89
559
181
1
1
831
-
-
-
831
58%
70
298
175
20
6
569
36
19
17
605
42%
Total
£m
159
857
356
21
7
1,400
36
19
17
1,436
100%
London
£m
5 April 2018
Rest of UK
£m
189
569
241
4
1
1,004
-
-
-
1,004
54%
124
374
291
51
4
844
16
7
9
860
46%
Total
£m
313
943
532
55
5
1,848
16
7
9
1,864
100%
Notes:
i.
ii.
A CRE loan may be secured on assets located in different regions. The calculation for regional allocation has been changed in the year to reflect a more refined approach, with comparatives presented on a consistent basis.
The LTV ratio is calculated using the on-balance sheet carrying amount of the loan divided by the indexed value of the most recent independent external collateral valuation. The Investment Property (IPD) monthly index is used.
Changes to the regional distribution of the CRE portfolio reflect the managed reduction of the portfolio, with 58% (5 April 2018: 54%) of the CRE exposure now being secured against assets located in London. Over the year, the LTV
distribution of the CRE portfolio remained stable, with 96% (5 April 2018: 96%) of the portfolio having an LTV of 75% or less, and 71% (5 April 2018: 67%) of the portfolio having an LTV of 50% or less.
The distribution of the CRE balances by geography and LTV ratios at 4 April 2018 is the same as that disclosed above as at 5 April 2018.
Credit risk concentration by industry sector
Credit risk exposure by industry sector is unchanged from the prior year, continuing to be spread across the retail, office, residential investment, industrial and leisure sectors. Where a CRE loan is secured on assets crossing different
sectors, the sector allocation is based upon the value of the underlying assets in each sector. For CRE exposures, including FVTPL balances, the highest concentration is to the residential investment sector at 44% (5 April 2018:
44%). Over the year, our exposure to retail assets has reduced from £367 million to £286 million.
CRE balances by payment due status
Of the £1,436 million (5 April 2018: £1,864 million) CRE exposure, including FVTPL balances, £24 million (5 April 2018: £52 million) relates to balances with arrears, of which £2 million (5 April 2018: £24 million) have arrears greater
than 3 months.
Annual Report and Accounts 2019
Business and Risk Report (continued)
Credit risk – Commercial and other lending (continued)
CRE balances by LTV and region
The following table includes both amortised cost and FVTPL CRE balances.
CRE lending gross balances by LTV and region
(note i)
Fully collateralised
LTV ratio (note ii):
Less than 25%
25% to 50%
51% to 75%
76% to 90%
91% to 100%
Not fully collateralised:
Over 100% LTV
Collateral value
Negative equity
Total CRE loans
Geographical concentration
Notes:
i.
ii.
4 April 2019
London
£m
Rest of UK
£m
London
£m
5 April 2018
Rest of UK
£m
Total
£m
159
857
356
21
7
1,400
36
19
17
1,436
100%
89
559
181
1
1
831
-
-
-
831
58%
70
298
175
20
6
569
36
19
17
605
42%
Total
£m
313
943
532
55
5
1,848
16
7
9
1,864
100%
189
569
241
4
1
1,004
-
-
-
1,004
54%
124
374
291
51
4
844
16
7
9
860
46%
A CRE loan may be secured on assets located in different regions. The calculation for regional allocation has been changed in the year to reflect a more refined approach, with comparatives presented on a consistent basis.
The LTV ratio is calculated using the on-balance sheet carrying amount of the loan divided by the indexed value of the most recent independent external collateral valuation. The Investment Property (IPD) monthly index is used.
Changes to the regional distribution of the CRE portfolio reflect the managed reduction of the portfolio, with 58% (5 April 2018: 54%) of the CRE exposure now being secured against assets located in London. Over the year, the LTV
distribution of the CRE portfolio remained stable, with 96% (5 April 2018: 96%) of the portfolio having an LTV of 75% or less, and 71% (5 April 2018: 67%) of the portfolio having an LTV of 50% or less.
The distribution of the CRE balances by geography and LTV ratios at 4 April 2018 is the same as that disclosed above as at 5 April 2018.
Credit risk concentration by industry sector
44%). Over the year, our exposure to retail assets has reduced from £367 million to £286 million.
CRE balances by payment due status
than 3 months.
Of the £1,436 million (5 April 2018: £1,864 million) CRE exposure, including FVTPL balances, £24 million (5 April 2018: £52 million) relates to balances with arrears, of which £2 million (5 April 2018: £24 million) have arrears greater
134
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Commercial and other lending (continued)
Forbearance
Security amendment
Forbearance is recorded and reported at borrower level and applies to all commercial lending, including
impaired exposures and borrowers subject to enforcement and recovery action.
Where a customer seeks the release of assets charged to Nationwide as security for their commercial loan,
this will be treated as forbearance where Nationwide’s position is weakened in terms of either the loan to
value of the remaining exposure or the level of interest cover available.
For commercial customers in financial difficulty, the following concession events are included within
forbearance reporting:
Extension at maturity
Refinance
Customers who are unable to repay the loan at term expiry may be given short term maturity extensions to
allow them time to negotiate the repayment of facilities in full either via asset sales or external refinance.
Debt restructuring, either mid-term or at maturity, will be considered where asset sales or external refinance
cannot be secured to repay facilities in full and where a restructure is considered to provide the best debt
recovery outcome for both the customer and Nationwide.
Breach of covenant
Interest concession
Where a customer is unable to comply with either financial or non-financial covenants, as specified in their
loan agreement, a temporary waiver or amendment to the covenants will be considered, as appropriate
The temporary postponement of interest or a reduction to the interest rate charged, during which period the
loans do not accrue arrears, may be considered where the customer is experiencing payment difficulties.
The table below provides details of commercial loans that are currently subject to forbearance.
Capital concession
Capital concessions consist of temporary suspensions to capital repayments to allow the customer time to
overcome payment difficulties, the full or partial consolidation of previous payment arrears or the partial write-
off of debt.
Credit risk exposure by industry sector is unchanged from the prior year, continuing to be spread across the retail, office, residential investment, industrial and leisure sectors. Where a CRE loan is secured on assets crossing different
sectors, the sector allocation is based upon the value of the underlying assets in each sector. For CRE exposures, including FVTPL balances, the highest concentration is to the residential investment sector at 44% (5 April 2018:
Total impairment provision on forborne loans
Gross balances subject to forbearance
(note i)
Refinance
Modifications:
Capital concession
Security amendment
Extension at maturity
Breach of covenant
Total
4 April 2019
£m
44
5 April 2018
£m
78
2
6
12
122
186
23
8
9
42
139
276
19
Note:
i.
Loans where more than one concession event has occurred are reported under the latest event.
Amortised cost balances subject to forbearance have reduced, reflecting the managed run-off of the CRE portfolio.
In addition to the amortised cost balances included in the table above, there are £57 million (5 April 2018: £58 million) of FVTPL commercial lending balances, none (5 April 2018: £42 million) of which are forborne.
The total value of balances subject to forbearance at 4 April 2018 was £318 million with an associated impairment provision of £10 million.
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135
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Treasury assets
Summary
The treasury portfolio is held primarily for liquidity management and, in the case of derivatives, for market risk management. As at 4 April 2019 treasury assets represented 15.2% (2018: 15.3%) of total assets.
Investment activity, in line with the Board’s risk appetite, remains restricted to high quality liquid securities. The size of the portfolio has increased, predominantly due to higher US Treasury balances held as a strategic response to
potential market volatility during ongoing negotiations for the UK’s departure from the EU. In addition, the Society invests in highly rated liquid assets that are eligible for accessing central bank funding operations. Derivatives are
used to reduce exposure to market risks but are not used for trading or speculative purposes. There are no exposures to emerging markets, hedge funds or credit default swaps.
The table below shows the classification of treasury asset balances following the adoption of IFRS 9.
Treasury asset balances
(Audited)
Cash
Loans and advances to banks and similar institutions (note i)
Investment securities
Investment securities
Investment securities
Liquidity and investment portfolio
Derivative instruments (note ii)
Treasury assets
IFRS 9
classification
4 April 2019
Amortised cost
Amortised cost
FVOCI
FVTPL
Amortised cost
FVTPL
£m
12,493
4,009
14,500
78
1,656
32,736
3,562
36,298
5 April 2018
(IFRS 9)
£m
14,361
3,493
11,881
45
1,120
30,900
4,121
35,021
4 April 2018
(IAS 39)
£m
14,361
3,493
11,926
-
1,120
30,900
4,121
35,021
Notes:
i.
Loans and advances to banks has been renamed to loans and advances to banks and similar institutions and now includes balances held with counterparties that are institutions similar to banks. These balances were previously reported in loans and advances
to customers. Comparatives have been restated to disclose information on the same basis. Further details are included in note 1 to the financial statements.
Derivatives are classified as assets where their fair value is positive and liabilities where their fair value is negative. At 4 April 2019, derivative liabilities were £1,593 million (4 April 2018: £2,337 million).
ii.
Managing treasury credit risks
Credit risk within the treasury portfolio arises primarily from the instruments held and transacted by the Treasury function for operational, liquidity and investment purposes. In addition, counterparty credit risk arises from the use of
derivatives to reduce exposure to market risks; these are only transacted with highly rated organisations and are collateralised under market standard documentation. The Treasury Credit Risk function manages all aspects
of credit risk in accordance with the Society’s risk governance frameworks, under the supervision of the Credit Committee.
A monthly review is undertaken of the current and expected future performance of treasury assets. An established governance structure identifies and reviews under-performing assets to assess the likelihood of future losses. There
were no impairment losses for the year ended 4 April 2019, or the prior year. For financial assets classified as FVTPL, no provisions are calculated as credit risk is reflected in the carrying value of the asset; no additional provision
information is therefore disclosed in respect of these assets. For financial assets held at amortised cost or at FVOCI, the stage distribution is described below.
Impairment provisions on treasury assets
(Audited)
Loans and advances to banks and similar institutions (note i)
Investment securities – FVOCI
Investment securities – Amortised cost
4 April 2019
5 April 2018
Gross balances
£m
4,009
14,500
1,656
Provisions
£m
-
-
-
Gross balances
£m
3,493
11,881
1,120
Provisions
£m
-
-
-
Note:
i.
Loans and advances to banks has been renamed to loans and advances to banks and similar institutions and now includes balances held with counterparties that are institutions similar to banks. These balances were previously reported in loans and advances
to customers. Comparatives have been restated to disclose information on the same basis. Further details are included in note 1 to the financial statements.
The treasury portfolio is held primarily for liquidity management and, in the case of derivatives, for market risk management. As at 4 April 2019 treasury assets represented 15.2% (2018: 15.3%) of total assets.
Investment activity, in line with the Board’s risk appetite, remains restricted to high quality liquid securities. The size of the portfolio has increased, predominantly due to higher US Treasury balances held as a strategic response to
potential market volatility during ongoing negotiations for the UK’s departure from the EU. In addition, the Society invests in highly rated liquid assets that are eligible for accessing central bank funding operations. Derivatives are
used to reduce exposure to market risks but are not used for trading or speculative purposes. There are no exposures to emerging markets, hedge funds or credit default swaps.
The table below shows the classification of treasury asset balances following the adoption of IFRS 9.
Annual Report and Accounts 2019
Business and Risk Report (continued)
Credit risk – Treasury assets
Summary
Loans and advances to banks and similar institutions (note i)
Treasury asset balances
(Audited)
Cash
Investment securities
Investment securities
Investment securities
Liquidity and investment portfolio
Derivative instruments (note ii)
Treasury assets
Notes:
i.
ii.
Managing treasury credit risks
IFRS 9
classification
Amortised cost
Amortised cost
Amortised cost
FVOCI
FVTPL
FVTPL
4 April 2019
5 April 2018
4 April 2018
(IFRS 9)
(IAS 39)
£m
12,493
4,009
14,500
78
1,656
32,736
3,562
36,298
£m
14,361
3,493
11,881
45
1,120
30,900
4,121
35,021
£m
14,361
3,493
11,926
-
1,120
30,900
4,121
35,021
Loans and advances to banks has been renamed to loans and advances to banks and similar institutions and now includes balances held with counterparties that are institutions similar to banks. These balances were previously reported in loans and advances
to customers. Comparatives have been restated to disclose information on the same basis. Further details are included in note 1 to the financial statements.
Derivatives are classified as assets where their fair value is positive and liabilities where their fair value is negative. At 4 April 2019, derivative liabilities were £1,593 million (4 April 2018: £2,337 million).
Credit risk within the treasury portfolio arises primarily from the instruments held and transacted by the Treasury function for operational, liquidity and investment purposes. In addition, counterparty credit risk arises from the use of
derivatives to reduce exposure to market risks; these are only transacted with highly rated organisations and are collateralised under market standard documentation. The Treasury Credit Risk function manages all aspects
of credit risk in accordance with the Society’s risk governance frameworks, under the supervision of the Credit Committee.
A monthly review is undertaken of the current and expected future performance of treasury assets. An established governance structure identifies and reviews under-performing assets to assess the likelihood of future losses. There
were no impairment losses for the year ended 4 April 2019, or the prior year. For financial assets classified as FVTPL, no provisions are calculated as credit risk is reflected in the carrying value of the asset; no additional provision
information is therefore disclosed in respect of these assets. For financial assets held at amortised cost or at FVOCI, the stage distribution is described below.
Impairment provisions on treasury assets
Loans and advances to banks and similar institutions (note i)
Investment securities – FVOCI
Investment securities – Amortised cost
(Audited)
Note:
4 April 2019
5 April 2018
Gross balances
Provisions
Gross balances
Provisions
£m
4,009
14,500
1,656
£m
-
-
-
£m
3,493
11,881
1,120
£m
-
-
-
i.
Loans and advances to banks has been renamed to loans and advances to banks and similar institutions and now includes balances held with counterparties that are institutions similar to banks. These balances were previously reported in loans and advances
to customers. Comparatives have been restated to disclose information on the same basis. Further details are included in note 1 to the financial statements.
136
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Treasury assets (continued)
The credit quality of treasury financial assets continues to be low risk and stable with all exposures within the table on the previous page classified as stage 1, except for £1.5 million of FVOCI investment securities in stage 2. If there is
objective evidence that an instrument measured at amortised cost or FVOCI is credit-impaired, the financial asset will be transferred into stage 3. There are no assets in stage 3.
£m
AAA
%
Liquidity and investment portfolio
The liquidity and investment portfolio of £32,736 million (4 April 2018: £30,900 million) comprises liquid assets and other securities. An analysis of the on-balance sheet portfolios is set out below.
Liquidity and investment portfolio by credit rating (note i)
4 April 2019
(Audited)
Liquid assets:
Cash and reserves at central banks
Government bonds
Supranational bonds
Covered bonds
Residential mortgage backed securities (RMBS)
Asset backed securities (other)
Liquid assets total
Other securities (note ii):
RMBS FVOCI
RMBS amortised cost
Other investments (note iii)
Other securities total
Loans and advances to banks and similar institutions (note iv)
Total
12,493
11,581
725
1,202
556
258
26,815
142
1,656
114
1,912
4,009
32,736
100
71
-
4
-
-
77
-
-
-
36
-
-
2
-
29
100
60
100
100
21
100
63
-
59
54
49
78
-
-
-
-
-
-
-
-
23
-
-
-
-
10
35
84
-
75
-
22
-
2
19
3
-
-
100
100
19
95
86
80
45
8
52
13
49
8
20
6
29
9
51
70
-
-
52
3
7
9
Other
%
AA
%
UK
%
US
%
A
%
Liquidity and investment portfolio by credit rating (note i)
4 April 2018
(Audited)
Liquid assets:
Cash and reserves at central banks
Government bonds
Supranational bonds
Covered bonds
Residential mortgage backed securities (RMBS)
Asset backed securities (other)
Liquid assets total
Other securities (note ii):
RMBS available for sale
RMBS held to maturity
Other investments (note iii)
Other securities total
Loans and advances to banks and similar institutions (note iv)
Total
Notes:
i.
ii.
iii.
iv.
£m
14,361
8,937
655
1,007
738
302
26,000
188
1,120
99
1,407
3,493
30,900
AAA
%
-
15
96
100
100
100
16
21
85
-
71
-
16
AA
%
100
85
4
-
-
-
84
19
5
36
9
47
77
A
%
-
-
-
-
-
-
-
60
7
42
16
50
6
Other
%
-
-
-
-
-
-
-
-
3
22
4
3
1
UK
%
100
80
-
51
64
56
87
100
100
22
95
84
87
US
%
-
5
-
-
-
-
2
-
-
42
3
6
2
Ratings used are obtained from Standard & Poor’s (S&P), and from Moody’s or Fitch if no S&P rating is available. For loans and advances to banks and similar institutions, internal ratings are used.
Includes RMBS (UK Buy to let and UK Non-conforming) not eligible for the Liquidity Coverage Ratio (LCR).
Includes investment securities held at FVTPL of £78 million (2018 IAS 39 basis: £nil).
Loans and advances to banks has been renamed to loans and advances to banks and similar institutions and now includes balances held with counterparties that are institutions similar to banks. These balances were previously reported in loans and advances
to customers. Comparatives have been restated to disclose information on the same basis. Further details are included in note 1 to the financial statements.
S
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G
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c
e
B
u
s
i
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e
s
s
a
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d
R
i
s
k
R
e
p
o
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t
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
O
t
h
e
r
I
n
f
o
r
m
a
t
i
o
n
Europe
%
Other
%
-
14
-
18
46
51
8
-
-
29
2
6
8
-
-
100
23
-
-
4
-
-
-
-
1
3
Europe
%
Other
%
-
15
-
27
36
44
8
-
-
36
2
8
8
-
-
100
22
-
-
3
-
-
-
-
2
3
137
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Treasury assets (continued)
Country exposures
The following table summarises the exposure (shown at the balance sheet carrying value) to institutions outside the UK. None of the exposures detailed in the table were in stage 2 or 3 at 4 April 2019.
Country exposures
4 April 2019
(Audited)
Belgium
Finland
France
Germany
Netherlands
Spain
Total Eurozone
USA
Rest of world (note i)
Total
Country exposures
4 April 2018
(Audited)
Austria
Belgium
Finland
France
Germany
Ireland
Netherlands
Total Eurozone
USA
Rest of world (note i)
Total
Government
bonds
£m
208
244
185
673
178
-
1,488
2,642
140
4,270
Government
bonds
£m
66
44
267
-
627
-
335
1,339
441
-
1,780
Mortgage
backed
securities
£m
-
-
-
-
255
-
255
-
-
255
Mortgage
backed
securities
£m
-
-
-
-
-
-
263
263
-
-
263
Note:
i.
Rest of world exposure is to Australia, Canada, Denmark, Norway, Sweden and Switzerland.
Covered bonds Supra-national
bonds
Loans and advances
to banks and
similar institutions
£m
-
-
24
190
-
18
232
265
60
557
£m
-
-
-
-
-
-
-
-
725
725
£m
-
24
-
15
-
-
39
-
455
494
Covered bonds
Supra-national
bonds
£m
-
-
24
-
-
-
-
24
-
472
496
£m
-
-
-
-
-
-
-
-
-
656
656
Loans and advances
to banks and
similar institutions
£m
-
-
-
156
119
1
-
276
215
63
554
Other
assets
£m
-
-
33
132
-
-
165
59
-
224
Other
assets
£m
-
-
-
36
132
-
-
168
41
-
209
Total
£m
208
268
242
1,010
433
18
2,179
2,966
1,380
6,525
Total
£m
66
44
291
192
878
1
598
2,070
697
1,191
3,958
Annual Report and Accounts 2019
Business and Risk Report (continued)
Credit risk – Treasury assets (continued)
The following table summarises the exposure (shown at the balance sheet carrying value) to institutions outside the UK. None of the exposures detailed in the table were in stage 2 or 3 at 4 April 2019.
Country exposures
Country exposures
4 April 2019
(Audited)
Belgium
Finland
France
Germany
Netherlands
Spain
Total Eurozone
Rest of world (note i)
USA
Total
Country exposures
4 April 2018
(Audited)
Austria
Belgium
Finland
France
Germany
Ireland
Netherlands
Total Eurozone
Rest of world (note i)
USA
Total
Note:
i.
Rest of world exposure is to Australia, Canada, Denmark, Norway, Sweden and Switzerland.
Government
bonds
Mortgage
backed
securities
£m
Covered bonds Supra-national
Loans and advances
to banks and
similar institutions
bonds
£m
£m
£m
Other
assets
-
-
-
24
190
18
265
232
60
557
-
725
725
£m
208
244
185
673
178
-
1,488
2,642
140
4,270
£m
66
44
267
627
-
-
-
335
1,339
441
1,780
-
-
-
-
255
-
255
-
-
255
-
-
-
-
-
-
-
-
263
263
263
£m
-
24
15
-
-
-
39
-
455
494
£m
24
-
-
-
-
-
-
-
24
472
496
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
656
656
Total
£m
208
268
242
1,010
433
18
2,179
2,966
1,380
6,525
Total
£m
66
44
291
192
878
1
598
2,070
697
1,191
3,958
33
132
-
-
-
-
165
59
224
-
-
-
-
-
-
36
132
168
41
-
209
-
-
-
1
-
156
119
276
215
63
554
Government
bonds
Mortgage
backed
securities
£m
Covered bonds
Supra-national
Loans and advances
bonds
£m
to banks and
similar institutions
£m
£m
Other
assets
138
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Credit risk – Treasury assets (continued)
Derivative financial instruments
Derivatives are used to reduce exposure to market risks, although the application of accounting rules can create volatility in the income statement in a financial year. The fair value of derivative assets at 4 April 2019 was £3.6 billion
(4 April 2018: £4.1 billion) and the fair value of derivative liabilities was £1.6 billion (4 April 2018: £2.3 billion).
To comply with EU regulatory requirements, Nationwide, as a direct member of a central counterparty (CCP), has central clearing capability which it uses to clear standardised derivatives. Where derivatives are not cleared at a CCP
they are transacted under the International Swaps and Derivatives Association (ISDA) Master Agreement. A Credit Support Annex (CSA) is always executed in conjunction with the ISDA Master Agreement. Under the terms of a CSA,
collateral is passed between parties to mitigate the market-contingent counterparty risk inherent in the outstanding positions. CSAs are two-way agreements where both parties post collateral dependent on the exposure of the
derivative. Collateral is paid or received on a regular basis (typically daily) to mitigate the mark to market exposures.
Nationwide’s CSA legal documentation for derivatives grants legal rights of set off for transactions with the same counterparty. Accordingly, the credit risk associated with such positions is reduced to the extent that negative mark to
market values offset positive mark to market values in the calculation of credit risk within each netting agreement.
Under the terms of CSA netting agreements, outstanding transactions with the same counterparty can be offset and settled on a net basis following a default, or another predetermined event. Under these arrangements, netting
benefits of £1.4 billion (4 April 2018: £2.0 billion) were available and £2.1 billion of collateral (4 April 2018: £2.2 billion) was held. Only cash is held as collateral.
The following table shows the exposure to counterparty credit risk for derivative contracts after netting benefits and collateral.
Derivative credit exposure
Counterparty credit quality
(Audited)
Gross positive fair value of contracts as reported on the balance sheet
Netting benefits
Net current credit exposure
Collateral (cash)
Net derivative credit exposure
AA
£m
1,096
(350)
746
(732)
14
A
£m
2,460
(1,007)
1,453
(1,398)
55
BBB
£m
6
(6)
-
-
-
Total
£m
3,562
(1,363)
2,199
(2,130)
69
AA
£m
1,584
(532)
1,052
(1,051)
1
A
£m
2,266
(1,156)
1,110
(1,106)
4
BBB
£m
271
(271)
-
-
-
Total
£m
4,121
(1,959)
2,162
(2,157)
5
4 April 2019
4 April 2018
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139
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Liquidity and funding risk
Summary
Liquidity risk is the risk that Nationwide is unable to meet its liabilities as they fall due and maintain member and other stakeholder confidence. Funding risk is the risk that Nationwide is unable to maintain diverse funding sources
in wholesale and retail markets and manage retail funding risk that can arise from excessive concentrations of higher risk deposits.
Nationwide manages liquidity and funding risks within a comprehensive risk framework which includes policies, strategy, limit setting and monitoring, stress testing and robust governance controls. This framework ensures that
Nationwide maintains stable and diverse funding sources and sufficient holdings of high quality liquid assets so that there is no significant risk that liabilities cannot be met as they fall due.
Liquidity and funding levels continued to be within Board risk appetite and regulatory requirements throughout the year. This includes the Liquidity Coverage Ratio (LCR), which ensures that sufficient high quality liquid assets are
held to survive a short term severe but plausible liquidity stress. Nationwide’s LCR at 4 April 2019 was 150.2% (4 April 2018: 130.3%), above the regulatory minimum of 100%. Nationwide continues to manage its liquidity against its
internal risk appetite, which is more prudent than regulatory requirements.
Nationwide also monitors its position against the longer term funding metric, the Net Stable Funding Ratio (NSFR). Based on current interpretations of expected European regulatory requirements and guidance, the NSFR at 4 April
2019 was 130.5% (4 April 2018: 131.0%) which exceeds the expected 100% minimum future requirement.
Funding risk
Funding strategy
Nationwide’s funding strategy is to remain predominantly retail funded, as set out below.
Funding profile
Assets
(note i)
Retail mortgages
Treasury assets (including liquidity portfolio) (note iii)
Commercial lending (note iii)
Consumer lending
Other assets
4 April 2019
£bn
185.8
32.7
9.1
4.2
6.5
238.3
5 April 2018
(note ii)
£bn
177.1
30.9
10.6
3.7
6.6
228.9
4 April 2018 Liabilities
4 April 2019
£bn
177.2 Retail funding
30.9 Wholesale funding
10.6 Other liabilities
3.8 Capital and reserves
6.6
229.1
£bn
154.0
61.2
3.0
20.1
238.3
5 April 2018
(note ii)
£bn
148.4
58.8
3.7
18.0
228.9
4 April 2018
£bn
148.4
58.8
3.7
18.2
229.1
Notes:
i.
ii.
iii.
The figures in the above table are stated net of impairment provisions where applicable.
Balances as at 5 April 2018 reflect the impact of applying IFRS 9 ’Financial Instruments’.
Treasury assets now include balances held with counterparties that are institutions similar to banks. These balances were previously reported in commercial lending balances. Comparatives have been restated to disclose information on the same basis. Further
details are included in note 1 to the financial statements.
At 4 April 2019, Nationwide’s loan to deposit ratio, which represents loans and advances to customers divided by the total of shares and other deposits, was 125.2% (4 April 2018: 125.5%).
Annual Report and Accounts 2019
Business and Risk Report (continued)
Liquidity and funding risk
Summary
Liquidity risk is the risk that Nationwide is unable to meet its liabilities as they fall due and maintain member and other stakeholder confidence. Funding risk is the risk that Nationwide is unable to maintain diverse funding sources
in wholesale and retail markets and manage retail funding risk that can arise from excessive concentrations of higher risk deposits.
Nationwide manages liquidity and funding risks within a comprehensive risk framework which includes policies, strategy, limit setting and monitoring, stress testing and robust governance controls. This framework ensures that
Nationwide maintains stable and diverse funding sources and sufficient holdings of high quality liquid assets so that there is no significant risk that liabilities cannot be met as they fall due.
Liquidity and funding levels continued to be within Board risk appetite and regulatory requirements throughout the year. This includes the Liquidity Coverage Ratio (LCR), which ensures that sufficient high quality liquid assets are
held to survive a short term severe but plausible liquidity stress. Nationwide’s LCR at 4 April 2019 was 150.2% (4 April 2018: 130.3%), above the regulatory minimum of 100%. Nationwide continues to manage its liquidity against its
internal risk appetite, which is more prudent than regulatory requirements.
Nationwide also monitors its position against the longer term funding metric, the Net Stable Funding Ratio (NSFR). Based on current interpretations of expected European regulatory requirements and guidance, the NSFR at 4 April
2019 was 130.5% (4 April 2018: 131.0%) which exceeds the expected 100% minimum future requirement.
Funding risk
Funding strategy
Funding profile
Assets
(note i)
Retail mortgages
Nationwide’s funding strategy is to remain predominantly retail funded, as set out below.
4 April 2019
4 April 2018 Liabilities
5 April 2018
(note ii)
4 April 2019
5 April 2018
(note ii)
4 April 2018
Treasury assets (including liquidity portfolio) (note iii)
Commercial lending (note iii)
Consumer lending
Other assets
£bn
185.8
32.7
9.1
4.2
6.5
238.3
£bn
177.1
30.9
10.6
3.7
6.6
228.9
177.2 Retail funding
30.9 Wholesale funding
10.6 Other liabilities
3.8 Capital and reserves
£bn
6.6
229.1
£bn
154.0
61.2
3.0
20.1
238.3
£bn
148.4
58.8
3.7
18.0
228.9
£bn
148.4
58.8
3.7
18.2
229.1
Notes:
i.
ii.
iii.
The figures in the above table are stated net of impairment provisions where applicable.
Balances as at 5 April 2018 reflect the impact of applying IFRS 9 ’Financial Instruments’.
details are included in note 1 to the financial statements.
Treasury assets now include balances held with counterparties that are institutions similar to banks. These balances were previously reported in commercial lending balances. Comparatives have been restated to disclose information on the same basis. Further
At 4 April 2019, Nationwide’s loan to deposit ratio, which represents loans and advances to customers divided by the total of shares and other deposits, was 125.2% (4 April 2018: 125.5%).
140
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Liquidity and funding risk (continued)
Wholesale funding
The wholesale funding portfolio is made up of a range of secured and unsecured instruments to ensure Nationwide has a stable and diversified funding base across a range of instruments, currencies, maturities and investor types.
Part of Nationwide’s wholesale funding strategy is to remain active in core markets and currencies. A funding risk limit framework also ensures that a prudent funding mix and maturity concentration profile is maintained, and limits
the level of encumbrance to ensure sufficient contingent funding capacity is retained in the event of a stress.
Wholesale funding has increased by £2.4 billion to £61.2 billion during the year primarily in liabilities with maturities of less than one year. This additional funding is reflected in Nationwide’s wholesale funding ratio (on-balance sheet
wholesale funding as a proportion of total funding liabilities) which was 28.6% at 4 April 2019 (4 April 2018: 28.2%).
The table below sets out Nationwide’s wholesale funding by currency.
Wholesale funding by currency
Repos
Deposits
Certificates of deposit
Commercial paper
Covered bonds
Medium term notes
Securitisations
TFS
Other
Total
GBP
£bn
0.4
6.0
3.2
-
3.8
2.0
0.7
17.0
0.2
33.3
EUR
£bn
0.3
1.2
1.1
0.3
12.9
3.0
1.1
-
0.6
20.5
4 April 2019
USD
£bn
0.1
0.1
0.5
2.9
-
1.9
1.2
-
-
6.7
Other
£bn
-
-
-
-
0.1
0.6
-
-
-
0.7
Total % of total
£bn
0.8
7.3
4.8
3.2
16.8
7.5
3.0
17.0
0.8
61.2
1
12
8
5
28
12
5
28
1
100
GBP
£bn
0.7
5.4
4.0
-
2.5
2.0
1.1
17.0
0.2
32.9
EUR
£bn
0.2
1.4
0.1
-
12.6
4.6
1.3
-
0.6
20.8
4 April 2018
USD
£bn
-
-
0.2
1.0
-
1.8
1.3
-
-
4.3
Other
£bn
-
-
-
-
0.2
0.6
-
-
-
0.8
Total
£bn
0.9
6.8
4.3
1.0
15.3
9.0
3.7
17.0
0.8
58.8
% of total
2
12
7
2
26
15
6
29
1
100
The residual maturity of the wholesale funding book, on a contractual maturity basis, is set out below.
Wholesale funding – residual maturity
4 April 2019
Not more than
one month
Repos
Deposits
Certificates of deposit
Commercial paper
Covered bonds
Medium term notes
Securitisations
TFS
Other
Total
Of which secured
Of which unsecured
% of total
£bn
0.8
4.5
-
-
0.8
-
0.4
-
-
6.5
2.0
4.5
10.6
Over one
month but not
more than
three months
£bn
-
0.6
2.3
2.0
0.9
0.6
-
-
-
6.4
0.9
5.5
10.5
Over three
months but not
more than
six months
£bn
-
2.2
2.3
1.2
-
0.4
0.1
-
-
6.2
0.1
6.1
10.1
Over six
months but not
more than
one year
£bn
-
-
0.2
-
-
0.9
0.3
-
-
1.4
0.3
1.1
2.3
Subtotal less
than one year
Over one year
but not more
than two years
Over two years
Total
£bn
0.8
7.3
4.8
3.2
1.7
1.9
0.8
-
-
20.5
3.3
17.2
33.5
£bn
-
-
-
-
3.3
0.1
1.0
6.0
0.2
10.6
10.5
0.1
17.3
£bn
-
-
-
-
11.8
5.5
1.2
11.0
0.6
30.1
24.6
5.5
49.2
£bn
0.8
7.3
4.8
3.2
16.8
7.5
3.0
17.0
0.8
61.2
38.4
22.8
100.0
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141
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Liquidity and funding risk (continued)
Wholesale funding – residual maturity
4 April 2018
Repos
Deposits
Certificates of deposit
Commercial paper
Covered bonds
Medium term notes
Securitisations
TFS
Other
Total
Of which secured
Of which unsecured
% of total
Not more than
one month
£bn
0.9
4.5
-
0.1
0.8
0.1
0.1
-
-
6.5
1.8
4.7
11.1
Over one
month but not
more than
three months
£bn
-
0.5
3.6
0.9
0.1
0.1
-
-
-
5.2
0.1
5.1
8.8
Over three
months but not
more than
six months
£bn
-
1.4
0.5
-
-
0.1
0.3
-
-
2.3
0.3
2.0
3.9
Over six
months but not
more than
one year
£bn
-
0.4
0.2
-
-
1.4
0.4
-
-
2.4
0.4
2.0
4.1
Subtotal less
than one year
Over one year
but not more
than two years
Over two years
Total
£bn
0.9
6.8
4.3
1.0
0.9
1.7
0.8
-
-
16.4
2.6
13.8
27.9
£bn
-
-
-
-
1.6
1.8
0.9
-
-
4.3
2.5
1.8
7.3
£bn
-
-
-
-
12.8
5.5
2.0
17.0
0.8
38.1
32.6
5.5
64.8
£bn
0.9
6.8
4.3
1.0
15.3
9.0
3.7
17.0
0.8
58.8
37.7
21.1
100.0
At 4 April 2019, cash, government bonds and supranational bonds included in the liquid asset buffer represented 120% of wholesale funding maturing in less than one year, assuming no rollovers (4 April 2018: 142%).
The increase in the proportion of wholesale funding with a residual maturity of less than one year is principally driven by the pre-funding of upcoming maturities as we manage funding in the uncertain economic environment.
Liquidity risk
Liquidity strategy
Nationwide ensures it has sufficient liquid assets, both in terms of amount and quality, to meet daily cash flow needs as well as simulated stressed requirements driven by the Society’s risk appetite and regulatory assessments. This
includes ensuring the currency composition of the liquid asset buffer is consistent with the currency profile of stressed outflows.
Nationwide’s liquid assets are held and managed centrally by its Treasury function. Nationwide maintains a high quality liquidity portfolio, predominantly comprising reserves held at central banks and highly rated debt securities
issued by a restricted range of governments, central banks and supranationals.
The size and mix of the liquid asset buffer is defined by the Society’s risk appetite as set by the Board, which is translated into a set of liquidity risk limits; it is also influenced by other relevant considerations such as stress testing and
regulatory requirements.
Annual Report and Accounts 2019
Business and Risk Report (continued)
Liquidity and funding risk (continued)
Wholesale funding – residual maturity
4 April 2018
Repos
Deposits
Certificates of deposit
Commercial paper
Covered bonds
Medium term notes
Securitisations
TFS
Other
Total
Of which secured
Of which unsecured
% of total
Liquidity risk
Liquidity strategy
Not more than
Over one
Over three
Over six
one month
month but not
months but not
months but not
Subtotal less
than one year
Over two years
Total
Over one year
but not more
than two years
more than
three months
more than
six months
more than
one year
£bn
0.9
4.5
-
0.1
0.8
0.1
0.1
-
-
6.5
1.8
4.7
11.1
£bn
-
0.5
3.6
0.9
0.1
0.1
-
-
-
5.2
0.1
5.1
8.8
£bn
-
1.4
0.5
0.1
0.3
-
-
-
-
2.3
0.3
2.0
3.9
£bn
-
0.4
0.2
1.4
0.4
-
-
-
-
2.4
0.4
2.0
4.1
£bn
0.9
6.8
4.3
1.0
0.9
1.7
0.8
-
-
16.4
2.6
13.8
27.9
£bn
-
-
-
-
-
-
1.6
1.8
0.9
4.3
2.5
1.8
7.3
£bn
-
-
-
-
12.8
5.5
2.0
17.0
0.8
38.1
32.6
5.5
64.8
£bn
0.9
6.8
4.3
1.0
15.3
9.0
3.7
17.0
0.8
58.8
37.7
21.1
100.0
At 4 April 2019, cash, government bonds and supranational bonds included in the liquid asset buffer represented 120% of wholesale funding maturing in less than one year, assuming no rollovers (4 April 2018: 142%).
The increase in the proportion of wholesale funding with a residual maturity of less than one year is principally driven by the pre-funding of upcoming maturities as we manage funding in the uncertain economic environment.
142
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Liquidity and funding risk (continued)
Liquid assets
The table below sets out the sterling equivalent fair value of the liquidity portfolio, by issuing currency. It includes off-balance sheet liquidity, such as bonds received through reverse repurchase (repo) agreements, and excludes bonds
encumbered through repo agreements.
Liquid assets
Cash and reserves at central banks
Government bonds
Supranational bonds
Covered bonds
Residential mortgage backed securities (RMBS) (note i)
Asset-backed securities and other securities
Total
GBP
£bn
12.4
7.8
0.5
0.4
0.6
0.1
21.8
4 April 2019
EUR
£bn
0.1
0.7
-
0.7
0.3
0.1
1.9
USD
£bn
-
2.8
0.2
-
0.1
0.1
3.2
Total
£bn
12.5
11.3
0.7
1.1
1.0
0.3
26.9
GBP
£bn
14.4
6.8
0.4
0.6
1.7
0.2
24.1
4 April 2018
EUR
£bn
-
0.8
-
0.6
0.3
0.1
1.8
USD
£bn
-
0.6
0.3
-
-
-
0.9
Total
£bn
14.4
8.2
0.7
1.2
2.0
0.3
26.8
Note:
i.
Balances include all RMBS held by the Society which can be monetised through sale or repo.
The average combined month end balance during the year of cash and reserves at central banks, and government and supranational bonds, was £27.8 billion (2018: £27.2 billion).
Nationwide also holds a portfolio of high quality, central bank eligible covered bonds, RMBS and asset-backed securities. Other securities are held that are not eligible for central bank operations but can be monetised through
repurchase agreements with third parties or through sale.
Nationwide undertakes securities financing transactions in the form of repurchase agreements. This demonstrates the liquid nature of the assets held in its liquid asset buffer and also satisfies regulatory requirements. Cash is
borrowed in return for pledging assets as collateral and because settlement is on a simultaneous ‘delivery versus payment’ basis, the main credit risk arises from intra-day changes in the value of the collateral. This is largely mitigated
by Nationwide’s collateral management processes.
Nationwide ensures it has sufficient liquid assets, both in terms of amount and quality, to meet daily cash flow needs as well as simulated stressed requirements driven by the Society’s risk appetite and regulatory assessments. This
includes ensuring the currency composition of the liquid asset buffer is consistent with the currency profile of stressed outflows.
Repo market capacity is assessed and tested regularly to ensure there is sufficient capacity to monetise the liquid asset buffer rapidly in a stress.
For contingent purposes, Nationwide pre-positions unencumbered mortgage assets at the Bank of England which can be used in the Bank of England’s liquidity operations if market liquidity is severely disrupted.
Nationwide’s liquid assets are held and managed centrally by its Treasury function. Nationwide maintains a high quality liquidity portfolio, predominantly comprising reserves held at central banks and highly rated debt securities
issued by a restricted range of governments, central banks and supranationals.
The size and mix of the liquid asset buffer is defined by the Society’s risk appetite as set by the Board, which is translated into a set of liquidity risk limits; it is also influenced by other relevant considerations such as stress testing and
regulatory requirements.
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143
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Liquidity and funding risk (continued)
Residual maturity of financial assets and liabilities
The table below segments the carrying value of financial assets and financial liabilities into relevant maturity groupings based on the final contractual maturity date (residual maturity):
Residual maturity
(note i)
4 April 2019
Financial assets
Cash
Loans and advances to banks and similar institutions (note iii)
Investment securities
Derivative financial instruments
Fair value adjustment for portfolio hedged risk
Loans and advances to customers
Total financial assets
Financial liabilities
Shares
Deposits from banks and similar institutions
Of which repo
Of which TFS
Other deposits
Fair value adjustment for portfolio hedged risk
Secured funding – ABS and covered bonds
Senior unsecured funding
Derivative financial instruments
Subordinated liabilities
Subscribed capital (note iv)
Total financial liabilities
Off-balance sheet commitments (note v)
Net liquidity difference
Cumulative liquidity difference
Due less than
one month
(note ii)
£m
Due between
one and
three months
£m
Due between
three and
six months
£m
Due between
six and
nine months
£m
Due between
nine and
twelve months
£m
Due between
one and
two years
£m
Due between
two and
five years
£m
Due after
more than
five years
£m
12,493
3,363
16
18
(2)
3,024
18,912
131,451
3,026
849
-
2,295
-
1,183
43
36
18
1
138,053
12,956
(132,097)
(132,097)
-
-
20
127
4
1,393
1,544
3,039
1
-
1
625
(1)
887
4,890
118
-
1
9,560
-
(8,016)
(140,113)
-
-
114
29
11
1,982
2,136
4,070
122
-
-
2,094
(1)
132
3,979
21
54
1
10,472
-
(8,336)
(148,449)
-
-
284
33
26
2,003
2,346
1,482
-
-
-
25
-
141
512
10
3
-
2,173
-
173
(148,276)
-
-
78
70
26
1,974
2,148
1,475
-
-
-
19
(1)
148
466
12
-
-
2,119
-
29
(148,247)
-
-
971
535
132
8,303
9,941
3,926
6,000
-
6,000
4
(2)
4,367
99
127
662
-
15,183
-
(5,242)
(153,489)
-
-
5,558
1,183
71
23,549
30,361
7,386
11,000
-
11,000
12
(12)
7,754
2,297
69
756
-
29,262
-
1,099
(152,390)
-
646
9,193
1,567
143
156,823
168,372
1,140
-
-
-
-
-
5,777
3,267
1,200
5,213
247
16,844
-
151,528
(862)
Total
£m
12,493
4,009
16,234
3,562
411
199,051
235,760
153,969
20,149
849
17,001
5,074
(17)
20,389
15,553
1,593
6,706
250
223,666
12,956
(862)
-
The table below segments the carrying value of financial assets and financial liabilities into relevant maturity groupings based on the final contractual maturity date (residual maturity):
Annual Report and Accounts 2019
Business and Risk Report (continued)
Liquidity and funding risk (continued)
Residual maturity of financial assets and liabilities
Residual maturity
(note i)
4 April 2019
Financial assets
Cash
Loans and advances to banks and similar institutions (note iii)
Investment securities
Derivative financial instruments
Fair value adjustment for portfolio hedged risk
Loans and advances to customers
Total financial assets
Deposits from banks and similar institutions
Financial liabilities
Shares
Of which repo
Of which TFS
Other deposits
Fair value adjustment for portfolio hedged risk
Secured funding – ABS and covered bonds
Senior unsecured funding
Derivative financial instruments
Subordinated liabilities
Subscribed capital (note iv)
Total financial liabilities
Off-balance sheet commitments (note v)
Net liquidity difference
Cumulative liquidity difference
Due less than
one month
Due between
Due between
Due between
Due between
Due between
Due between
(note ii)
three months
one and
three and
six months
six and
nine and
nine months
twelve months
one and
two years
two and
five years
£m
Due after
more than
five years
£m
£m
12,493
3,363
16
18
(2)
3,024
18,912
131,451
3,026
849
-
-
2,295
1,183
43
36
18
1
138,053
12,956
(132,097)
(132,097)
£m
-
-
20
127
4
1,393
1,544
3,039
625
(1)
887
4,890
118
1
-
1
-
1
-
£m
-
-
114
29
11
1,982
2,136
4,070
122
-
-
2,094
(1)
132
3,979
21
54
1
-
£m
-
-
284
33
26
2,003
2,346
-
-
-
-
25
141
512
10
3
-
2,173
-
173
£m
-
-
78
70
26
1,974
2,148
19
(1)
148
466
12
-
-
-
-
-
-
£m
-
-
971
535
132
8,303
9,941
3,926
6,000
-
6,000
4
(2)
4,367
99
127
662
-
-
1,482
1,475
9,560
10,472
2,119
15,183
29,262
(8,016)
(140,113)
(8,336)
(148,449)
(148,276)
(148,247)
29
(5,242)
(153,489)
1,099
(152,390)
-
-
5,558
1,183
71
23,549
30,361
7,386
11,000
-
11,000
12
(12)
7,754
2,297
69
756
-
-
-
646
9,193
1,567
143
156,823
168,372
1,140
-
-
-
-
-
5,777
3,267
1,200
5,213
247
16,844
-
151,528
(862)
Total
£m
12,493
4,009
16,234
3,562
411
199,051
235,760
153,969
20,149
849
17,001
5,074
(17)
20,389
15,553
1,593
6,706
250
223,666
12,956
(862)
-
144
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Liquidity and funding risk (continued)
Residual maturity
(note i)
4 April 2018
Financial assets
Cash
Loans and advances to banks and similar institutions (note iii)
Investment securities
Derivative financial instruments
Fair value adjustment for portfolio hedged risk
Loans and advances to customers (note iii)
Total financial assets
Financial liabilities
Shares
Deposits from banks and similar institutions (note iii)
Of which repo
Of which TFS
Other deposits (note iii)
Fair value adjustment for portfolio hedged risk
Secured funding – ABS and covered bonds
Senior unsecured funding
Derivative financial instruments
Subordinated liabilities
Subscribed capital (note iv)
Total financial liabilities
Off-balance sheet commitments (note v)
Net liquidity difference
Cumulative liquidity difference
Due less than
one month
(note ii)
£m
Due between
one and
three months
£m
Due between
three and
six months
£m
Due between
six and
nine months
£m
Due between
nine and
twelve months
£m
Due between
one and
two years
£m
Due between
two and
five years
£m
Due after
more than
five years
£m
14,361
3,149
76
12
-
2,970
20,568
120,617
3,375
946
-
2,493
-
872
229
39
17
1
127,643
13,890
(120,965)
(120,965)
-
-
64
17
(16)
1,318
1,383
2,892
9
-
1
481
(6)
65
4,644
25
-
1
8,111
-
(6,728)
(127,693)
-
-
17
6
(30)
1,925
1,918
4,403
47
-
-
1,343
(6)
273
595
11
49
1
6,716
-
(4,798)
(132,491)
-
-
141
231
(19)
1,886
2,239
4,430
5
-
-
315
(4)
211
980
6
-
-
5,943
-
(3,704)
(136,195)
-
-
89
52
(30)
1,908
2,019
3,248
-
-
-
50
(4)
224
553
11
-
-
4,082
-
(2,063)
(138,258)
-
-
387
381
(90)
7,564
8,242
6,593
-
-
-
11
(8)
2,491
1,845
64
-
-
10,996
-
(2,754)
(141,012)
-
-
2,498
1,966
(53)
22,961
27,372
4,499
17,000
-
17,000
-
(25)
9,266
1,589
305
690
-
33,324
-
(5,952)
(146,964)
-
344
9,774
1,456
129
151,061
162,764
1,321
-
-
-
-
-
6,288
3,993
1,876
4,741
260
18,479
-
144,285
(2,679)
Total
£m
14,361
3,493
13,046
4,121
(109)
191,593
226,505
148,003
20,436
946
17,001
4,693
(53)
19,690
14,428
2,337
5,497
263
215,294
13,890
(2,679)
-
Notes:
i.
The analysis excludes certain non-financial assets (including property, plant and equipment, intangible assets, 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).
Due less than one month includes amounts repayable on demand.
Loans and advances to banks and deposits from banks have been renamed to loans and advances to banks and similar institutions and deposits from banks and similar institutions and now include balances held with counterparties that are institutions similar
to banks. These balances were previously reported in loans and advances to customers and other deposits respectively. In addition, balances reported previously as due to customers are now reported in other deposits. Comparatives for the prior period have
been restated to disclose information on the same basis. Further details are included in note 1 to the financial statements.
The principal amount for undated subscribed capital is included within the due after more than five years column.
Off-balance sheet commitments include amounts payable on demand for unrecognised loan commitments, customer overpayments on residential mortgages where the borrower is able to draw down the amount overpaid and commitments to acquire
financial assets.
ii.
iii.
iv.
v.
In practice, customer behaviours mean that liabilities are often retained for longer than their contractual maturities and assets are repaid faster. This gives rise to funding mismatches on Nationwide’s balance sheet. The balance
sheet structure and risks are managed and monitored by Nationwide’s Assets and Liabilities Committee (ALCO). Nationwide uses judgement and past behavioural performance of each asset and liability class to forecast likely cash
flow requirements.
S
t
r
a
t
e
g
i
c
R
e
p
o
r
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G
o
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r
n
a
n
c
e
B
u
s
i
n
e
s
s
a
n
d
R
i
s
k
R
e
p
o
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t
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F
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a
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c
i
a
l
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a
t
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I
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o
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m
a
t
i
o
n
145
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Liquidity and funding risk (continued)
Financial liabilities – gross undiscounted contractual cash flows
The tables below provide an analysis of gross contractual cash flows. The totals differ from the analysis of residual maturity as they include estimated future interest payments, calculated using balances outstanding at the balance
sheet date, contractual maturities and appropriate forward looking interest rates.
Amounts are allocated to the relevant maturity band based on the timing of individual contractual cash flows.
Gross contractual cash flows
4 April 2019
(Audited)
Shares
Deposits from banks and similar institutions (note ii)
Other deposits
Secured funding – ABS and covered bonds
Senior unsecured funding
Subordinated liabilities
Subscribed capital (note iii)
Total non-derivative financial liabilities
Derivative financial liabilities:
Gross settled derivative outflows
Gross settled derivative inflows
Gross settled derivatives – net flows
Net settled derivative liabilities
Total derivative financial liabilities
Total financial liabilities
Off-balance sheet commitments (note iv)
Total financial liabilities including off-balance sheet
commitments
Due less than
one month
(note i)
£m
131,451
3,026
2,295
1,199
43
20
1
138,035
Due between
one and
three months
£m
3,098
32
630
835
4,670
-
1
9,266
Due between
three and
six months
£m
4,121
153
2,096
172
4,270
123
4
10,939
Due between
six and
nine months
£m
1,525
31
25
185
518
28
3
2,315
Due between
nine and
twelve months
£m
1,514
31
19
186
524
75
4
2,353
Due between
one and
two years
£m
4,063
6,102
4
4,313
252
888
13
15,635
Due between
two and
five years
£m
7,605
11,119
12
7,493
2,656
607
68
29,560
Due after
more than
five years
£m
1,141
-
-
5,901
3,486
6,412
217
17,157
(439)
427
(12)
(28)
(40)
137,995
12,956
150,951
(2,565)
2,485
(80)
(125)
(205)
9,061
-
9,061
(1,243)
1,185
(58)
(101)
(159)
10,780
-
10,780
(76)
58
(18)
(130)
(148)
2,167
-
2,167
(71)
45
(26)
(119)
(145)
2,208
-
2,208
(1,951)
1,783
(168)
(368)
(536)
15,099
(2,840)
2,595
(245)
(579)
(824)
28,736
(5,349)
5,086
(263)
(916)
(1,179)
15,978
-
-
-
12,956
15,099
28,736
15,978
234,980
Total
£m
154,518
20,494
5,081
20,284
16,419
8,153
311
225,260
(14,534)
13,664
(870)
(2,366)
(3,236)
222,024
Annual Report and Accounts 2019
Business and Risk Report (continued)
Liquidity and funding risk (continued)
Financial liabilities – gross undiscounted contractual cash flows
The tables below provide an analysis of gross contractual cash flows. The totals differ from the analysis of residual maturity as they include estimated future interest payments, calculated using balances outstanding at the balance
sheet date, contractual maturities and appropriate forward looking interest rates.
Amounts are allocated to the relevant maturity band based on the timing of individual contractual cash flows.
Secured funding – ABS and covered bonds
1,199
835
172
185
186
4,313
7,493
5,901
Gross contractual cash flows
4 April 2019
(Audited)
Shares
Other deposits
Senior unsecured funding
Subordinated liabilities
Subscribed capital (note iii)
Deposits from banks and similar institutions (note ii)
Derivative financial liabilities:
Gross settled derivative outflows
Gross settled derivative inflows
Gross settled derivatives – net flows
Net settled derivative liabilities
Total derivative financial liabilities
Total financial liabilities
Off-balance sheet commitments (note iv)
Total financial liabilities including off-balance sheet
commitments
Due less than
one month
Due between
Due between
Due between
Due between
Due between
Due between
(note i)
three months
one and
three and
six months
six and
nine and
nine months
twelve months
one and
two years
two and
five years
Due after
more than
five years
£m
131,451
3,026
2,295
43
20
1
(439)
427
(12)
(28)
(40)
137,995
12,956
150,951
£m
3,098
32
630
4,670
-
1
(2,565)
2,485
(80)
(125)
(205)
9,061
-
9,061
£m
4,121
153
2,096
4,270
123
4
10,939
(1,243)
1,185
(58)
(101)
(159)
10,780
-
10,780
£m
1,525
31
25
518
28
3
2,315
(76)
58
(18)
(130)
(148)
2,167
-
2,167
£m
1,514
31
19
524
75
4
2,353
(71)
45
(26)
(119)
(145)
2,208
-
2,208
£m
4,063
6,102
4
252
888
13
15,635
(1,951)
1,783
(168)
(368)
(536)
15,099
£m
7,605
11,119
12
2,656
607
68
29,560
(2,840)
2,595
(245)
(579)
(824)
28,736
£m
1,141
-
-
3,486
6,412
217
17,157
(5,349)
5,086
(263)
(916)
(1,179)
15,978
Total
£m
154,518
20,494
5,081
20,284
16,419
8,153
311
225,260
(14,534)
13,664
(870)
(2,366)
(3,236)
222,024
-
-
-
12,956
15,099
28,736
15,978
234,980
Total non-derivative financial liabilities
138,035
9,266
146
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Liquidity and funding risk (continued)
Gross contractual cash flows
4 April 2018
(Audited)
Shares
Deposits from banks and similar institutions (note ii)
Other deposits (note ii)
Secured funding – ABS and covered bonds
Senior unsecured funding
Subordinated liabilities
Subscribed capital (note iii)
Total non-derivative financial liabilities
Derivative financial liabilities:
Gross settled derivative outflows
Gross settled derivative inflows
Gross settled derivatives – net flows
Net settled derivative liabilities
Total derivative financial liabilities
Total financial liabilities
Off-balance sheet commitments (note iv)
Total financial liabilities including off-balance sheet commitments
Due less than
one month
(note i)
£m
120,617
3,402
2,493
880
162
18
1
127,573
Due between
one and
three months
£m
2,959
8
486
76
4,712
-
1
8,242
Due between
three and
six months
£m
4,462
48
1,345
297
638
104
4
6,898
Due between
six and
nine months
£m
4,479
64
315
193
990
18
3
6,062
Due between
nine and
twelve months
£m
3,288
75
50
367
629
56
14
4,479
Due between
one and
two years
£m
6,708
182
11
2,739
1,992
197
13
11,842
Due between
two and
five years
£m
4,690
17,271
-
8,006
1,049
1,004
60
32,080
(13)
14
1
(23)
(22)
127,551
13,890
141,441
(67)
59
(8)
(63)
(71)
8,171
-
8,171
(39)
41
2
(59)
(57)
6,841
-
6,841
(237)
222
(15)
(105)
(120)
5,942
-
5,942
(103)
105
2
(46)
(44)
4,435
-
4,435
(522)
521
(1)
(265)
(266)
11,576
-
11,576
(2,522)
2,479
(43)
(608)
(651)
31,429
-
31,429
Due after
more than
five years
£m
1,524
-
-
8,625
5,274
5,400
244
21,067
(5,692)
5,596
(96)
(1,190)
(1,286)
19,781
-
19,781
Total
£m
148,727
21,050
4,700
21,183
15,446
6,797
340
218,243
(9,195)
9,037
(158)
(2,359)
(2,517)
215,726
13,890
229,616
Notes:
i.
ii.
Due less than one month includes amounts repayable on demand.
Deposits from banks has been renamed to deposits from banks and similar institutions and now includes balances held with counterparties that are institutions similar to banks. These balances were previously reported in other deposits. In addition, balances
reported previously as due to customers are now reported in other deposits. Comparatives have been restated to disclose information on the same basis. Further details are included in note 1 to the financial statements.
The principal amount for undated subscribed capital is included within the due more than five years column.
iii.
iv. Off-balance sheet commitments include amounts payable on demand for unrecognised loan commitments, customer overpayments on residential mortgages where the borrower is able to draw down the amount overpaid and commitments to acquire
financial assets.
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
G
o
v
e
r
n
a
n
c
e
B
u
s
i
n
e
s
s
a
n
d
R
i
s
k
R
e
p
o
r
t
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
O
t
h
e
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m
a
t
i
o
n
147
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Liquidity and funding risk (continued)
Asset encumbrance
Encumbrance arises where assets are pledged as collateral against secured funding and other collateralised obligations and therefore cannot be used for other purposes. The majority of asset encumbrance arises from the use of
prime mortgage pools to collateralise the Covered Bond and Silverstone secured funding programmes (further information is included in note 14) and from participation in the Bank of England’s Term Funding Scheme (TFS).
Certain unencumbered assets are readily available to secure funding or meet collateral requirements. These include prime mortgages and cash and securities held in the liquid asset buffer. Other unencumbered assets, such as non-
prime mortgages, are capable of being encumbered with a degree of further management action. Assets which do not fall into either of these categories are classified as not being capable of being encumbered.
An analysis of Nationwide’s encumbered and unencumbered on-balance sheet assets is set out below. This disclosure is not intended to identify assets that would be available in the event of a resolution or bankruptcy.
Asset encumbrance
4 April 2019
Assets encumbered as a result of transactions with counterparties
other than central banks
Cash
Loans and advances to banks and similar institutions
Investment securities
Derivative financial instruments
Loans and advances to customers
Non-financial assets
Other financial assets
Total
4 April 2018
Cash
Loans and advances to banks and similar institutions (note i)
Investment securities
Derivative financial instruments
Loans and advances to customers (note i)
Non-financial assets
Other financial assets
Total
s
d
n
o
b
d
e
r
e
v
o
c
f
o
t
l
u
s
e
r
a
s
A
£m
590
-
-
-
22,656
-
-
23,246
£m
381
-
-
-
21,000
-
-
21,381
s
n
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t
a
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£m
660
-
-
-
6,936
-
-
7,596
£m
376
-
-
-
8,712
-
-
9,088
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O
£m
-
1,352
1,694
-
-
-
-
3,046
£m
-
1,220
944
-
-
-
-
2,164
Other assets (comprising assets encumbered at the
central bank and unencumbered assets)
Assets not positioned
at the central bank
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1,250
1,352
1,694
-
29,592
-
-
33,888
£m
140
1,276
30
-
39,558
-
-
41,004
£m
10,859
-
13,043
-
82,561
-
-
106,463
£m
-
-
-
-
47,340
-
-
47,340
£m
244
1,381
1,467
3,562
-
2,541
411
9,606
£m
757
1,220
944
-
29,712
-
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32,633
£m
-
1,124
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-
37,732
-
-
38,886
£m
13,389
-
12,027
-
76,791
-
-
102,207
£m
-
-
-
-
47,358
-
-
47,358
£m
215
1,149
45
4,121
-
2,593
(109)
8,014
Total
£m
12,493
4,009
16,234
3,562
199,051
2,541
411
238,301
£m
14,361
3,493
13,046
4,121
191,593
2,593
(109)
229,098
l
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£m
11,243
2,657
14,540
3,562
169,459
2,541
411
204,413
£m
13,604
2,273
12,102
4,121
161,881
2,593
(109)
196,465
Note:
i.
Loans and advances to banks has been renamed to loans and advances to banks and similar institutions now includes balances held with counterparties that are institutions similar to banks. These balances were previously reported in loans and advances to
customers. Comparatives have been restated to disclose information on the same basis. Further details are included in note 1 to the financial statements.
148
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Liquidity and funding risk (continued)
Managing liquidity and funding risk
Encumbrance arises where assets are pledged as collateral against secured funding and other collateralised obligations and therefore cannot be used for other purposes. The majority of asset encumbrance arises from the use of
prime mortgage pools to collateralise the Covered Bond and Silverstone secured funding programmes (further information is included in note 14) and from participation in the Bank of England’s Term Funding Scheme (TFS).
Nationwide’s management of liquidity and funding risks aims to ensure that at all times there are sufficient liquid assets, both as to amount and quality, to:
Certain unencumbered assets are readily available to secure funding or meet collateral requirements. These include prime mortgages and cash and securities held in the liquid asset buffer. Other unencumbered assets, such as non-
prime mortgages, are capable of being encumbered with a degree of further management action. Assets which do not fall into either of these categories are classified as not being capable of being encumbered.
An analysis of Nationwide’s encumbered and unencumbered on-balance sheet assets is set out below. This disclosure is not intended to identify assets that would be available in the event of a resolution or bankruptcy.
cover cash flow mismatches and fluctuations in funding
retain public confidence
•
•
• 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 through the translation of Board risk appetite into appropriate risk limits. This ensures a prudent funding mix and maturity profile, sufficient
levels of high quality liquid assets and appropriate encumbrance levels are maintained.
Assets encumbered as a result of transactions with counterparties
other than central banks
Other assets (comprising assets encumbered at the
central bank and unencumbered assets)
Total
The liquidity and funding risk framework is reviewed by the Board as part of the annual Internal Liquidity Adequacy Assessment Process (ILAAP). ALCO is responsible for managing the balance sheet structure, including the Funding
Plan, and its risks. This includes setting and monitoring more granular limits within Board limits. A consolidated cash flow forecast is maintained and reviewed weekly to support ALCO in monitoring key risk metrics.
A Liquidity Contingency Plan (LCP) is maintained which describes early warning triggers for indicating an emerging liquidity or funding stress as well as escalation procedures and a range of actions that could be taken in response to
ensure sufficient liquidity is maintained. The LCP is tested annually to ensure it remains robust. Nationwide also has a Recovery Plan which describes potential actions that could be utilised in a more extreme stress.
Liquidity stress testing
To mitigate liquidity and funding risks generated by its business activities, Nationwide aims to maintain a liquid asset buffer of at least 100% of the anticipated outflows seen under internal stress test scenarios and the regulatory-
prescribed LCR.
Potential contractual and behavioural stress outflows are assessed across a range of liquidity risk drivers over 30 calendar days, with the key assumptions shown below. A three month assessment is also performed against which LCP
capacity is assessed. Internal stress assumptions are reviewed regularly with changes approved by ALCO, and approved annually by the Board as part of the ILAAP.
Annual Report and Accounts 2019
Business and Risk Report (continued)
Liquidity and funding risk (continued)
Asset encumbrance
Asset encumbrance
4 April 2019
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1,352
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757
1,220
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-
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£m
381
£m
376
£m
140
1,276
30
-
£m
1,124
30
-
-
-
-
-
-
10,859
13,043
-
-
-
-
£m
13,389
12,027
76,791
-
-
-
-
21,000
8,712
29,712
37,732
47,358
22,656
6,936
29,592
39,558
82,561
47,340
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£m
244
1,381
1,467
3,562
2,541
-
411
£m
215
1,149
45
4,121
-
2,593
(109)
8,014
-
-
-
-
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£m
l
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£m
11,243
2,657
14,540
3,562
169,459
2,541
411
£m
13,604
2,273
12,102
4,121
161,881
2,593
(109)
£m
12,493
4,009
16,234
3,562
199,051
2,541
411
238,301
£m
14,361
3,493
13,046
4,121
191,593
2,593
(109)
23,246
7,596
3,046
33,888
41,004
106,463
47,340
9,606
204,413
Cash
Loans and advances to banks and similar institutions
590
660
Investment securities
Derivative financial instruments
Loans and advances to customers
Non-financial assets
Other financial assets
Total
4 April 2018
Cash
Loans and advances to banks and similar institutions (note i)
Investment securities
Derivative financial instruments
Loans and advances to customers (note i)
Non-financial assets
Other financial assets
Total
Note:
i.
Loans and advances to banks has been renamed to loans and advances to banks and similar institutions now includes balances held with counterparties that are institutions similar to banks. These balances were previously reported in loans and advances to
customers. Comparatives have been restated to disclose information on the same basis. Further details are included in note 1 to the financial statements.
At 4 April 2019, under the most severe internal 30 calendar day stress test (a combined market-wide and Nationwide-specific stress scenario), modelled stressed net outflows equated to £21.5 billion (4 April 2018: £20.5 billion). The
liquid asset buffer as a percentage of stressed net outflows equated to 119% (4 April 2018: 120%).
21,381
9,088
2,164
32,633
38,886
102,207
47,358
196,465
229,098
Intra-day
Liquid assets
Liquidity is needed to pre-fund outgoing payments.
Asset values are reduced in recognition of the stressed conditions assumed.
Contractual outflows occur in relation to secured funding programmes due to credit rating downgrades.
Lending commitments continue to be met.
Collateral outflows arise due to adverse movements in market rates.
Inflows from mortgages or retail and commercial loans are assessed on a contractual basis.
zero roll-over of maturing long-term wholesale funding;
zero roll-over of maturing short-term funding received from financial counterparties and partial roll-
over from non-financial counterparties;
no new wholesale funding received.
Liquidity risk driver
Retail funding
Wholesale funding
Off-balance sheet
Modelling assumptions used
Significant unexpected outflows are experienced with no new deposits received.
Following a credit rating downgrade:
•
•
•
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149
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Liquidity and funding risk (continued)
External credit ratings
The Group’s long-term and short-term credit ratings are shown in the table below. The long-term rating for both Standard & Poor’s and Moody’s is the senior preferred rating. The long-term rating for Fitch is the senior
non-preferred rating.
Credit ratings
Standard & Poor’s
Moody’s
Fitch
Senior
preferred
Short-term
Senior
non-preferred
A
Aa3
A+
A-1
P-1
F1
BBB+
Baa1
A
Tier 2
BBB
Baa1
A-
Outlook
Date of last rating
action /
confirmation
November 2018
February 2019
Positive
Negative
March 2019 Ratings Watch Negative
In November 2018 Standard & Poor’s reaffirmed their positive outlook reflecting their expectation that Nationwide’s buffer of bail-in instruments could exceed their threshold for two notches of Additional Loss Absorbing Capacity
(ALAC) uplift over their 18-24 month forecast horizon.
In October 2018, Moody’s affirmed Nationwide’s Aa3/P-1 long and short term ratings, but changed its outlook to negative from stable. The change in outlook reflected uncertainties embedded in Moody’s forward looking view on the
loss given failure of the Society’s senior debt. This was reaffirmed in February 2019.
In March 2019, Fitch placed the Long Term Issuer Default Rating of Nationwide, along with eighteen other UK banking groups, on Ratings Watch Negative. The Ratings Watch Negative reflects the heightened uncertainty over the
ultimate outcome of the Brexit process and the increased risk that a disruptive ‘no-deal’ Brexit could result in negative action on the UK banks, with the likelihood that negative outlooks will be assigned.
Whilst there have been changes to outlook as referred to above, Nationwide’s credit ratings remain unchanged since April 2018.
The table below sets out the amount of additional collateral Nationwide would need to provide in the event of a one and two notch downgrade by external credit rating agencies.
4 April 2019
4 April 2018
Cumulative adjustment for
a one notch downgrade
£bn
3.0
3.1
Cumulative adjustment for
a two notch downgrade
£bn
3.4
3.3
The contractually required cash outflow would not necessarily match the actual cash outflow as a result of management actions that could be taken to reduce the impact of the downgrades.
Annual Report and Accounts 2019
Business and Risk Report (continued)
Liquidity and funding risk (continued)
External credit ratings
non-preferred rating.
Credit ratings
Standard & Poor’s
Moody’s
Fitch
The Group’s long-term and short-term credit ratings are shown in the table below. The long-term rating for both Standard & Poor’s and Moody’s is the senior preferred rating. The long-term rating for Fitch is the senior
Senior
preferred
A
Aa3
A+
Short-term
Senior
Tier 2
Date of last rating
Outlook
non-preferred
A-1
P-1
F1
BBB+
Baa1
A
action /
confirmation
November 2018
February 2019
BBB
Baa1
A-
March 2019 Ratings Watch Negative
Positive
Negative
In November 2018 Standard & Poor’s reaffirmed their positive outlook reflecting their expectation that Nationwide’s buffer of bail-in instruments could exceed their threshold for two notches of Additional Loss Absorbing Capacity
(ALAC) uplift over their 18-24 month forecast horizon.
In October 2018, Moody’s affirmed Nationwide’s Aa3/P-1 long and short term ratings, but changed its outlook to negative from stable. The change in outlook reflected uncertainties embedded in Moody’s forward looking view on the
loss given failure of the Society’s senior debt. This was reaffirmed in February 2019.
In March 2019, Fitch placed the Long Term Issuer Default Rating of Nationwide, along with eighteen other UK banking groups, on Ratings Watch Negative. The Ratings Watch Negative reflects the heightened uncertainty over the
ultimate outcome of the Brexit process and the increased risk that a disruptive ‘no-deal’ Brexit could result in negative action on the UK banks, with the likelihood that negative outlooks will be assigned.
Whilst there have been changes to outlook as referred to above, Nationwide’s credit ratings remain unchanged since April 2018.
The table below sets out the amount of additional collateral Nationwide would need to provide in the event of a one and two notch downgrade by external credit rating agencies.
4 April 2019
4 April 2018
Cumulative adjustment for
a one notch downgrade
Cumulative adjustment for
a two notch downgrade
£bn
3.0
3.1
£bn
3.4
3.3
The contractually required cash outflow would not necessarily match the actual cash outflow as a result of management actions that could be taken to reduce the impact of the downgrades.
150
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Solvency risk
Solvency risk is the risk that Nationwide fails to maintain sufficient capital to absorb losses throughout a full
economic cycle and sufficient to maintain the confidence of current and prospective investors, members, the
Board and regulators. Capital is held to protect members, cover inherent risks, provide a buffer for stress
events and support the business strategy. In assessing the adequacy of capital resources, risk appetite is
considered in the context of the material risks to which Nationwide is exposed and the appropriate strategies
required to manage those risks.
Managing solvency risk
A number of tools are employed to support the management of solvency risk. The Board is responsible for
setting risk appetite with respect to solvency risk, which is articulated through its risk appetite statements,
and it defines minimum levels of capital, including leverage, that it is willing to operate with. These are
translated into specific risk metrics, which are monitored by the Board Risk Committee (BRC), Assets and
Liabilities Committee (ALCO) and other internal management reviews.
The capital structure is managed to ensure that Nationwide continues to meet minimum regulatory
requirements, as well as meeting the expectations of other key stakeholders. As part of the risk appetite
framework, strong capital ratios are targeted relative to both regulatory requirements and major banking
peers. Any planned changes to the balance sheet, potential regulatory developments and other factors (such
as trading outlook, movements in the fair value through other comprehensive income reserve and defined
benefit pension deficit) are all considered.
The capital strategy is to manage capital ratios through retained earnings, supplemented by external capital
where appropriate. With general reserves forming the majority of capital resources, profitability is an
important factor when considering the ability to meet capital requirements. A return on capital framework is
in place, based upon an allocation of overall capital requirements, which forms part of the Society’s Board risk
appetite metrics as well as forming part of the performance monitoring activity for individual product
segments. In recent years, Nationwide’s ability to supplement retained earnings through the issuance of
Common Equity Tier 1 (CET1), Additional Tier 1 and Tier 2 capital instruments has been demonstrated, and its
non-core commercial lending portfolios have been significantly deleveraged.
Capital is held to meet Pillar 1 requirements for credit, operational and market risks. In addition, the PRA
requires firms to hold capital to meet Pillar 2A requirements, which form an Individual Capital Requirement
(ICR). This is a point in time estimate, set by the PRA on an annual basis based on the submission of the
results of our annual Internal Capital Adequacy Assessment Process (ICAAP). This process confirms the
amount of capital required to be held to meet risks partly covered by Pillar 1 such as credit concentration and
operational risk, and risks not covered by Pillar 1 such as pension and interest rate risk. The combination of
Pillar 1 and Pillar 2A requirements form Nationwide’s Total Capital Requirement (TCR). The ICR and TCR
replace the former Individual Capital Guidance (ICG).
Nationwide’s latest Pillar 2A ICR and TCR were received in September 2018. The ICR equates to circa £2.4
billion, of which at least circa £1.4 billion (56%) must be met by CET1 capital. The ICR was equivalent to 7.4%
of risk weighted assets (RWAs) as at 4 April 2019 (4 April 2018: 7.1%), largely reflecting the low average risk
weight, given that approximately 78% (4 April 2018: 78%) of total assets are in the form of secured residential
mortgages.
To protect against the risk of consuming Pillar 1 and Pillar 2A requirements (thereby breaching TCR), firms are
subject to regulatory capital buffers which are set out in CRD IV. The ICAAP process also considers a capital
buffer to ensure that the impact of a severe but plausible stress can be absorbed. The PRA may also set an
additional firm-specific buffer based upon supervisory judgement informed by the impact of stress scenarios
on a firm’s capital requirements and resources, and taking into account other factors including leverage,
systemic importance and any weaknesses in firms’ risk management and governance procedures.
Regular stress tests are undertaken, covering Nationwide and its subsidiaries, to enhance the understanding
of potential vulnerabilities and how management actions might be deployed in the event of stressed
conditions developing. These stress tests project capital resources and requirements over a multi-year period,
during severe but plausible scenarios that cover a range of macro-economic or market-wide stresses, and
idiosyncratic scenarios that test particular risks to Nationwide’s business model. Stress test results are
reported to the Board Risk Committee.
Nationwide aims to be in a position where it would maintain strong capital and leverage ratios in the event of
a severe but plausible economic or idiosyncratic stress. Embedded in the risk appetite framework is an
expectation to maintain the CET1 and leverage ratios in excess of regulatory minima under stressed
conditions.
A set of management actions is maintained that would be available in the event of a breach of one or more of
the risk metrics, to support the capital position. In a more severe stress, Nationwide would consider the
implementation of its Recovery Plan, maintained under UK regulatory rules implementing the European Bank
Recovery and Resolution Directive (BRRD), which documents a broad range of management actions. In
addition, reverse stress testing is carried out using extreme, highly improbable scenarios to further test the
viability of Nationwide’s business model.
During 2018, the major UK banks and building societies, including Nationwide, took part in the PRA’s annual
concurrent stress test (CST), which included two scenarios. The main scenario, the Annual Cyclical Scenario
(ACS), assessed firms’ resilience to a severe economic downturn, characterised by an increase in the Bank of
England base rate to 4%, a 33% fall in UK house prices and a 4.7% fall in UK GDP. The stress featured the
same global and domestic economic downturn used for the 2017 exercise but with the expected credit losses
(ECLs) modelled under the new IFRS 9 accounting standard. The Financial Policy Committee (FPC) will use
these results to understand more fully the impact of IFRS 9 on capital ratios, and to consider changes to the
way in which it monitors firms’ capital position.
Despite the severity of the ACS, the results illustrate the strength and resilience of Nationwide, with low point
CET1 and UK leverage ratios of 14.1% and 5.1% respectively after the application of management actions.
While the UK leverage ratio remained relatively stable, risk weighted assets increased significantly causing a
reduction in the CET1 ratio, largely due to the use of Point in Time (PiT) modelling approaches for secured
portfolios.
S
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a
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i
o
n
151
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Solvency risk (continued)
Nationwide, along with the major UK banks, is currently taking part in the 2019 CST. This year’s ACS features a similar global and domestic economic downturn to that used for the 2018 exercise, reflecting the FPC’s assessment of
underlying vulnerabilities being broadly unchanged year on year.
Capital position
Capital ratios
Solvency
Common Equity Tier 1 (CET1) ratio
Total Tier 1 ratio
Total regulatory capital ratio
Leverage
UK leverage exposure (note ii)
CRR leverage exposure (note iii)
Tier 1 capital
UK leverage ratio
CRR leverage ratio
4 April 2019
%
32.4
35.4
44.6
£m
235,147
247,586
11,509
%
4.9
4.6
5 April 2018 (note i)
%
30.4
33.5
42.8
£m
221,982
236,458
10,907
%
4.9
4.6
4 April 2018
%
30.5
33.6
42.9
£m
221,992
236,468
10,917
%
4.9
4.6
Figures have been adjusted to reflect the impact of applying IFRS 9 Financial Instruments from 5 April 2018. Further information is provided in our Report on Transition to IFRS 9: Financial Instruments, which can be found on nationwide.co.uk.
Notes:
i.
ii. The UK leverage ratio is calculated using the Capital Requirements Regulation (CRR) definition of Tier 1 for the capital amount and the Delegated Act definition of the exposure measure, excluding eligible central bank reserves.
iii. The Capital Requirements Regulation (CRR) leverage ratio is calculated using the CRR definition of Tier 1 for the capital amount and the Delegated Act definition of the exposure measure.
The capital disclosures included in this report are on a Capital Requirements Directive IV (CRD IV) end point
basis. This assumes that all CRD IV requirements are in force during the period, with no transitional provisions
permitted. In addition, the disclosures are on a consolidated Group basis, including all subsidiary entities,
unless otherwise stated.
The CET1 ratio increased to 32.4% (5 April 2018: 30.4%) as a result of an increase in CET1 capital resources,
with risk weighted assets (RWAs) remaining relatively stable. CET1 capital resources have increased by £0.6
billion, primarily due to the profit after tax for the year of £0.6 billion. RWAs remained stable with increased
retail lending and treasury related RWAs offset by run-off in the commercial book and the implementation of a
new credit card internal ratings based (IRB) model.
Risk-based ratios remain in-excess of regulatory requirements with the CET1 ratio of 32.4% (5 April 2018:
30.4%) above Nationwide’s capital requirement of 13.2%. This includes a minimum CET1 capital requirement
of 8.7% (Pillar 1 and Pillar 2A) and CRD IV combined buffer requirements of 4.5% (allowing for the announced
1% systemic risk buffer). The CET1 ratio is expected to be impacted by future regulatory developments, with
Nationwide expecting to implement the PRA's revised expectations for residential mortgage IRB models in
2020. The implementation of the new IRB models is expected to cause an increase in RWAs leading to an
estimated reduction in the CET1 ratio of approximately one third. We also expect the CET1 ratio to be impacted
further through the Basel III reforms, expected to come into effect between 2022 and 2027 (see regulatory
developments section for further details).
CRD IV requires firms to calculate a non-risk based leverage ratio, to supplement risk-based capital
requirements. The UK leverage ratio of 4.9% (5 April 2018: 4.9%) remains in excess of Nationwide’s capital
requirement of 4.0% from August 2019, which comprises of a minimum Tier 1 capital requirement of 3.25%
and buffer requirements of 0.75% (allowing for the 0.35% additional leverage buffer).
The UK leverage ratio remained stable at 4.9% (5 April 2018: 4.9%), with an increase in Tier 1 capital driven
by profits after tax of £0.6 billion offset by an increase in UK leverage exposure of £13 billion resulting from an
increase in net retail lending of £9 billion, an increase in treasury exposures (including counterparty credit
risk) of £5 billion, and an increase in other assets of £1 billion, offset by run-off in the commercial book of £2
billion. The CRR leverage ratio is based on the Delegated Act definition and therefore exposures include
central bank reserves. This also remained stable at 4.6% (5 April 2018: 4.6%). On 24 April 2019, Nationwide
notified investors of its intention to redeem its outstanding Additional Tier 1 capital instrument in full, on 20
June 2019. This will reduce Tier 1 capital resources by £992 million, resulting in a 0.4 percentage points
reduction in the UK leverage ratio, to 4.5%, and a 0.4 percentage points reduction in CRR leverage ratio to
4.2%, based on the year-end balance sheet.
Leverage requirements continue to be Nationwide’s binding capital constraint, as they are in excess of risk-
based requirements, and it is expected that will continue despite the impact of IRB model changes and Basel
III reforms on risk-based capital requirements. The expected impact of the Basel III reforms on Nationwide’s
UK leverage ratio is negligible. The risk of excessive leverage is managed through regular monitoring and
reporting of the UK leverage ratio, which forms part of risk appetite.
Further details on the leverage exposure can be found in the Group’s annual Pillar 3 Disclosure 2019 at
nationwide.co.uk
Nationwide, along with the major UK banks, is currently taking part in the 2019 CST. This year’s ACS features a similar global and domestic economic downturn to that used for the 2018 exercise, reflecting the FPC’s assessment of
The table below reconciles the general reserves to total regulatory capital on an end-point basis and so does not include non-qualifying instruments.
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Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Solvency risk (continued)
Total regulatory capital
(Audited)
General reserve
Core capital deferred shares (CCDS)
Revaluation reserve
FVOCI reserve
Available for sale reserve
Regulatory adjustments and deductions:
Foreseeable distributions (note i)
Prudent valuation adjustment (note ii)
Own credit and debit valuation adjustments (note iii)
Intangible assets (note iv)
Goodwill (note iv)
Excess of regulatory expected losses over impairment provisions (note v)
IFRS 9 transitional arrangements (note vi)
Total regulatory adjustments and deductions
Common Equity Tier 1 capital
Additional Tier 1 capital securities (AT1) (note vii)
Total Tier 1 capital
Dated subordinated debt (notes viii)
Excess of impairment provisions over regulatory expected losses (note v)
IFRS9 transitional arrangements (note vi)
Tier 2 capital
2019
£m
10,418
1,325
64
50
-
(68)
(50)
-
(1,274)
(12)
(2)
66
(1,340)
10,517
992
11,509
2,976
46
(46)
2,976
2018
£m
9,951
1,325
68
-
75
(68)
(32)
(1)
(1,286)
(12)
(95)
-
(1,494)
9,925
992
10,917
3,019
-
-
3,019
Total regulatory capital
14,485
13,936
Annual Report and Accounts 2019
Business and Risk Report (continued)
Solvency risk (continued)
underlying vulnerabilities being broadly unchanged year on year.
Capital position
Capital ratios
Solvency
Common Equity Tier 1 (CET1) ratio
Total Tier 1 ratio
Total regulatory capital ratio
Leverage
UK leverage exposure (note ii)
CRR leverage exposure (note iii)
Tier 1 capital
UK leverage ratio
CRR leverage ratio
Notes:
4 April 2019
5 April 2018 (note i)
4 April 2018
%
32.4
35.4
44.6
£m
235,147
247,586
11,509
%
4.9
4.6
%
30.4
33.5
42.8
£m
221,982
236,458
10,907
%
4.9
4.6
%
30.5
33.6
42.9
£m
221,992
236,468
10,917
%
4.9
4.6
i.
Figures have been adjusted to reflect the impact of applying IFRS 9 Financial Instruments from 5 April 2018. Further information is provided in our Report on Transition to IFRS 9: Financial Instruments, which can be found on nationwide.co.uk.
ii. The UK leverage ratio is calculated using the Capital Requirements Regulation (CRR) definition of Tier 1 for the capital amount and the Delegated Act definition of the exposure measure, excluding eligible central bank reserves.
iii. The Capital Requirements Regulation (CRR) leverage ratio is calculated using the CRR definition of Tier 1 for the capital amount and the Delegated Act definition of the exposure measure.
The capital disclosures included in this report are on a Capital Requirements Directive IV (CRD IV) end point
requirement of 4.0% from August 2019, which comprises of a minimum Tier 1 capital requirement of 3.25%
basis. This assumes that all CRD IV requirements are in force during the period, with no transitional provisions
and buffer requirements of 0.75% (allowing for the 0.35% additional leverage buffer).
retail lending and treasury related RWAs offset by run-off in the commercial book and the implementation of a
central bank reserves. This also remained stable at 4.6% (5 April 2018: 4.6%). On 24 April 2019, Nationwide
permitted. In addition, the disclosures are on a consolidated Group basis, including all subsidiary entities,
unless otherwise stated.
The CET1 ratio increased to 32.4% (5 April 2018: 30.4%) as a result of an increase in CET1 capital resources,
with risk weighted assets (RWAs) remaining relatively stable. CET1 capital resources have increased by £0.6
billion, primarily due to the profit after tax for the year of £0.6 billion. RWAs remained stable with increased
new credit card internal ratings based (IRB) model.
Risk-based ratios remain in-excess of regulatory requirements with the CET1 ratio of 32.4% (5 April 2018:
30.4%) above Nationwide’s capital requirement of 13.2%. This includes a minimum CET1 capital requirement
of 8.7% (Pillar 1 and Pillar 2A) and CRD IV combined buffer requirements of 4.5% (allowing for the announced
1% systemic risk buffer). The CET1 ratio is expected to be impacted by future regulatory developments, with
Nationwide expecting to implement the PRA's revised expectations for residential mortgage IRB models in
2020. The implementation of the new IRB models is expected to cause an increase in RWAs leading to an
The UK leverage ratio remained stable at 4.9% (5 April 2018: 4.9%), with an increase in Tier 1 capital driven
by profits after tax of £0.6 billion offset by an increase in UK leverage exposure of £13 billion resulting from an
increase in net retail lending of £9 billion, an increase in treasury exposures (including counterparty credit
risk) of £5 billion, and an increase in other assets of £1 billion, offset by run-off in the commercial book of £2
billion. The CRR leverage ratio is based on the Delegated Act definition and therefore exposures include
notified investors of its intention to redeem its outstanding Additional Tier 1 capital instrument in full, on 20
June 2019. This will reduce Tier 1 capital resources by £992 million, resulting in a 0.4 percentage points
reduction in the UK leverage ratio, to 4.5%, and a 0.4 percentage points reduction in CRR leverage ratio to
4.2%, based on the year-end balance sheet.
Leverage requirements continue to be Nationwide’s binding capital constraint, as they are in excess of risk-
based requirements, and it is expected that will continue despite the impact of IRB model changes and Basel
III reforms on risk-based capital requirements. The expected impact of the Basel III reforms on Nationwide’s
estimated reduction in the CET1 ratio of approximately one third. We also expect the CET1 ratio to be impacted
UK leverage ratio is negligible. The risk of excessive leverage is managed through regular monitoring and
further through the Basel III reforms, expected to come into effect between 2022 and 2027 (see regulatory
reporting of the UK leverage ratio, which forms part of risk appetite.
developments section for further details).
Further details on the leverage exposure can be found in the Group’s annual Pillar 3 Disclosure 2019 at
CRD IV requires firms to calculate a non-risk based leverage ratio, to supplement risk-based capital
requirements. The UK leverage ratio of 4.9% (5 April 2018: 4.9%) remains in excess of Nationwide’s capital
nationwide.co.uk
Foreseeable distributions in respect of CCDS and AT1 securities are deducted from CET1 capital under CRD IV.
Notes:
i.
ii. A prudent valuation adjustment (PVA) is applied in respect of fair valued instruments as required under regulatory capital rules.
iii. 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 Nationwide’s own credit standing and risk, in accordance with CRD IV rules.
iv.
v. Where capital expected loss exceeds accounting impairment provisions, the excess balance is removed from CET1 capital, gross of tax. In contrast, where impairment provisions exceed capital expected loss, the excess balance is added back to Tier 2 capital,
Intangible assets and goodwill are deducted from capital resources after netting associated deferred tax liabilities.
gross of tax. This calculation is not performed for equity exposures, in line with Article 159 of CRR. The expected loss amounts for equity exposures are deducted from CET1 capital, gross of tax.
vi. The transitional adjustments to capital resources apply scaled relief for the impact of IFRS 9, over a 5-year transition period. Further detail regarding these adjustments is provided in the Interim Pillar 3 disclosures at nationwide.co.uk
vii. On 24 April 2019 Nationwide announced the redemption of the AT1 instrument in full at the first call date of 20 June 2019, therefore making it ineligible as regulatory capital from the date of this announcement.
viii. Subordinated debt includes fair value adjustments related to changes in market interest rates, adjustments for unamortised premiums and discounts that are included in the consolidated balance sheet, and any amortisation of the capital value of Tier 2
instruments required by regulatory rules for instruments with fewer than five years to maturity.
As part of the Bank Recovery and Resolution Directive (BRRD), the Bank of England, in its capacity as the UK resolution authority, has published its policy for setting the minimum requirement for own funds and eligible liabilities
(MREL) and provided firms with indicative MREL. From 1 January 2020, it is anticipated that Nationwide will be subject to a requirement to hold twice the minimum capital requirements (6.5% of UK leverage exposure), plus the
applicable capital requirement buffers, which are currently expected to amount to 0.75% of UK leverage exposure. In order to meet this pending requirement, Nationwide issued a further £1 billion of senior non-preferred notes in the
financial year which are MREL eligible.
At 4 April 2019, total MREL resources were equal to 7.9% of UK leverage ratio exposure (4 April 2018: 7.5%), above the anticipated 2020 requirement of 7.25% described above.
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153
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Solvency risk (continued)
Risk weighted assets
The table below shows the breakdown of risk weighted assets (RWAs) by risk type and business activity. Market risk has been set to zero as permitted by the CRR, as the exposure is below the threshold of 2% of own funds.
Risk weighted assets
Retail mortgages
Retail unsecured lending
Commercial loans
Treasury
Counterparty credit risk (note iii)
Other (note iv)
Total
Credit Risk
(note i)
£m
14,072
5,581
3,604
779
1,532
2,095
27,663
2019
Operational
Risk (note ii)
£m
3,393
778
176
152
-
344
4,843
Total Risk
Weighted Assets
£m
17,465
6,359
3,780
931
1,532
2,439
32,506
Credit Risk
(note i)
£m
13,764
5,805
4,634
540
1,184
1,681
27,608
2018
Operational
Risk (note ii)
£m
3,564
725
210
87
-
315
4,901
Total Risk
Weighted Assets
£m
17,328
6,530
4,844
627
1,184
1,996
32,509
This column includes credit risk exposures, counterparty credit risk exposures and exposures below the thresholds for deduction that are subject to a 250% risk weight.
RWAs have been allocated according to the business lines within the standardised approach to operational risk, as per article 317 of CRR.
Notes:
i.
ii.
iii. Counterparty credit risk relates to derivative financial instruments and repurchase agreements.
iv. Other relates to equity, fixed and other assets.
RWAs remained stable at £32.5 billion (4 April 2018: £32.5 billion) primarily due to an increase in retail lending and treasury related RWAs offset by run-off in commercial loans and the implementation of a new credit card IRB model
impacting retail unsecured lending RWAs.
The increase in counterparty credit risk RWAs is driven by changes in interest rates and foreign exchange rates, impacting the regulatory value of derivative exposures. The increase in Other RWAs is driven by higher equity balances
and a change in the treatment of ‘items in the course of collection’, which is now risk weighted at 100% (2018: 20%).
More detailed analysis of RWAs is included in the Group’s annual Pillar 3 Disclosure 2019 at nationwide.co.uk
IRB model risk
The performance and accuracy of IRB models is critical to the calculation of credit risk capital requirements. The effectiveness of the models is achieved through clear allocation of roles and responsibilities covering model ownership,
approval and governance, ongoing model monitoring, review and independent validation. Further information can be found in the ‘model risk management of IRB risk ratings systems’ section of the Group’s annual Pillar 3 Disclosure
2019 at nationwide.co.uk
Regulatory developments
Highlighted below are a number of areas where regulatory requirements are yet to be finalised. Nationwide will remain engaged in the development of the regulatory approach to ensure it is prepared for any change.
Nationwide is currently required to maintain a minimum UK leverage ratio of 3.25% following the recalibration to adjust for the impact of excluding central bank holdings from the exposure measure. Following the Financial Policy
Committee’s (FPC) announcement on the countercyclical buffer (November 2018: 1%), the equivalent countercyclical leverage ratio buffer (CCLB) was set at 0.4%. There is also an additional leverage ratio buffer (ALRB) due to be
implemented in August 2019, linked to the individual systemic risk buffer (SRB) requirement, which will be set at 0.35%. Therefore, Nationwide’s UK leverage ratio requirement is expected to be 4% from August 2019. Nationwide’s
UK leverage ratio of 4.9% at 4 April 2019 exceeds the requirement and will continue to meet requirements after redemption of the outstanding Additional Tier 1 capital instrument, which will result in a UK leverage ratio of 4.5% on a
proforma year end basis.
Nationwide has submitted its new hybrid IRB mortgage models to the PRA for approval with the expectations that these will be implemented during 2020, in line with the deadline set out in PS13/17. Our current estimate is that the
impact of these models will be to reduce our reported CET1 ratio by approximately one third given the material increase in risk weighted assets; however we expect UK leverage requirements to continue to be the binding capital
constraint.
Annual Report and Accounts 2019
Business and Risk Report (continued)
Solvency risk (continued)
Risk weighted assets
Risk weighted assets
Retail mortgages
Retail unsecured lending
Commercial loans
Treasury
Counterparty credit risk (note iii)
Other (note iv)
Total
Notes:
i.
ii.
IRB model risk
2019 at nationwide.co.uk
Regulatory developments
proforma year end basis.
constraint.
The table below shows the breakdown of risk weighted assets (RWAs) by risk type and business activity. Market risk has been set to zero as permitted by the CRR, as the exposure is below the threshold of 2% of own funds.
2019
2018
Credit Risk
(note i)
Operational
Total Risk
Risk (note ii)
Weighted Assets
Credit Risk
(note i)
Operational
Total Risk
Risk (note ii)
Weighted Assets
£m
14,072
5,581
3,604
779
1,532
2,095
27,663
£m
3,393
778
176
152
344
4,843
-
£m
17,465
6,359
3,780
931
1,532
2,439
32,506
£m
13,764
5,805
4,634
540
1,184
1,681
27,608
£m
3,564
725
210
87
-
315
4,901
£m
17,328
6,530
4,844
627
1,184
1,996
32,509
This column includes credit risk exposures, counterparty credit risk exposures and exposures below the thresholds for deduction that are subject to a 250% risk weight.
RWAs have been allocated according to the business lines within the standardised approach to operational risk, as per article 317 of CRR.
iii. Counterparty credit risk relates to derivative financial instruments and repurchase agreements.
iv. Other relates to equity, fixed and other assets.
RWAs remained stable at £32.5 billion (4 April 2018: £32.5 billion) primarily due to an increase in retail lending and treasury related RWAs offset by run-off in commercial loans and the implementation of a new credit card IRB model
impacting retail unsecured lending RWAs.
The increase in counterparty credit risk RWAs is driven by changes in interest rates and foreign exchange rates, impacting the regulatory value of derivative exposures. The increase in Other RWAs is driven by higher equity balances
and a change in the treatment of ‘items in the course of collection’, which is now risk weighted at 100% (2018: 20%).
More detailed analysis of RWAs is included in the Group’s annual Pillar 3 Disclosure 2019 at nationwide.co.uk
The performance and accuracy of IRB models is critical to the calculation of credit risk capital requirements. The effectiveness of the models is achieved through clear allocation of roles and responsibilities covering model ownership,
approval and governance, ongoing model monitoring, review and independent validation. Further information can be found in the ‘model risk management of IRB risk ratings systems’ section of the Group’s annual Pillar 3 Disclosure
Highlighted below are a number of areas where regulatory requirements are yet to be finalised. Nationwide will remain engaged in the development of the regulatory approach to ensure it is prepared for any change.
Nationwide is currently required to maintain a minimum UK leverage ratio of 3.25% following the recalibration to adjust for the impact of excluding central bank holdings from the exposure measure. Following the Financial Policy
Committee’s (FPC) announcement on the countercyclical buffer (November 2018: 1%), the equivalent countercyclical leverage ratio buffer (CCLB) was set at 0.4%. There is also an additional leverage ratio buffer (ALRB) due to be
implemented in August 2019, linked to the individual systemic risk buffer (SRB) requirement, which will be set at 0.35%. Therefore, Nationwide’s UK leverage ratio requirement is expected to be 4% from August 2019. Nationwide’s
UK leverage ratio of 4.9% at 4 April 2019 exceeds the requirement and will continue to meet requirements after redemption of the outstanding Additional Tier 1 capital instrument, which will result in a UK leverage ratio of 4.5% on a
Nationwide has submitted its new hybrid IRB mortgage models to the PRA for approval with the expectations that these will be implemented during 2020, in line with the deadline set out in PS13/17. Our current estimate is that the
impact of these models will be to reduce our reported CET1 ratio by approximately one third given the material increase in risk weighted assets; however we expect UK leverage requirements to continue to be the binding capital
154
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Solvency risk (continued)
The Basel Committee published their final reforms to the Basel III framework in December 2017. The amendments include changes to the standardised approaches for credit and operational risks and the introduction of a new RWA
output floor. The rules are subject to a lengthy transitional period from 2022 to 2027. These reforms will lead to a significant increase in the Group’s risk weights over time, Nationwide currently expects the consequential impact on
the reported CET1 ratio to ultimately be a reduction of approximately a half relative to the current position. The change relates to the application of standardised floors which override IRB model outputs and should therefore not be
aggregated with the impact of new hybrid IRB models noted above. Organic earnings through the transition will mitigate this impact such that the reported CET1 ratio will in practice remain well in excess of the proforma levels
implied by this change, and leverage requirements will remain the binding constraint based on latest projections. These reforms represent a re-calibration of regulatory requirements with no underlying change in the capital
resources held or the risk profile of assets. Final impacts are subject to uncertainty for future balance sheet size and mix, and because the final detail of some elements of the regulatory changes remain at the PRA’s discretion.
Market risk
Summary
Market risk is the risk that the net value of, or net income arising from, assets and liabilities is impacted as a result of changes in market prices or rates, specifically interest rates, currency rates or equity prices. Nationwide has limited
appetite for market risk and does not have a trading book. Market risk is closely monitored and managed to ensure the level of risk remains within appetite. Market risks are not taken unless they are essential to core business
activities and they provide stability of earnings, minimise costs or enable operational efficiency.
The principal market risks, linked to Nationwide’s balance sheet assets and liabilities, are listed in the table below, irrespective of materiality.
Market risk linkage to the balance sheet
Assets
Cash
Loans and advances to banks and similar institutions
Investment securities
Derivative financial instruments
Loans and advances to customers
Other assets
Total assets
Liabilities
Shares (customer deposits)
Deposits from banks and similar institutions
Other deposits
Debt securities in issue
Derivative financial instruments
Subordinated liabilities
Other liabilities (note i)
Total liabilities
2019
£bn
12.5
4.0
16.2
3.6
199.1
2.9
238.3
154.0
20.1
5.1
35.9
1.6
6.7
1.7
225.1
Interest rate risk
Basis risk
Market risk
Swap spread risk
Currency risk Product option risk
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
Note:
i.
Other liabilities include the difference between the assets and liabilities of the Nationwide Pension Fund (a defined benefit pension scheme). Nationwide’s obligations to the Nationwide Pension Fund result in Pension risk, which includes exposure to market
risk factors such as interest rate risk, inflation risk, and equity risk (share prices). Pension risk is managed separately from the market risk arising from Nationwide’s core business. For further details, see the ‘Pension risk’ section of this report.
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Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Market risk (continued)
Global market conditions
During the year, general market conditions have been dominated by the political uncertainty primarily caused
by Brexit, despite the optimism at the start of the year that caused rates to rise and sterling to strengthen. At
4 April 2019, sterling was 9% below its 2018 peak in April. Swap rates fluctuated within a relatively tight
band, despite some significant one-day falls. The Bank of England (BoE) raised the bank rate by 0.25% in
August following positive economic data in the first half of the year. Globally, economies struggled to maintain
the momentum they achieved in 2017 with growth slowing in many countries, including in the Eurozone.
While stock markets traded at record highs in the first few months of the year, in October concerns about
growth, both globally and in the US, together with fears about the impact of a US/China trade war caused
indices around the world to fall. The US Federal Reserve has increased interest rates three times since April
2018.
Regulation
a prescribed series of standardised interest rate shocks that firms must use to assess sensitivities on their
Economic Value of Equity (EVE) and Net Interest Income (NII). Whilst the final guidelines become effective
from June 2019, Nationwide already monitors its exposures against these prescribed shocks, as well as against
internally generated shock scenarios. Final standardised market disclosures for IRRBB are expected to be
implemented through ongoing revisions to the CRD and CRR.
Market risk appetite
Nationwide’s market risk only arises in the banking book as it does not have a trading book. Most of the
exposure to market risk arises from fixed rate mortgages or savings and changes in the market value of the
liquidity portfolio. There is a limited amount of net currency risk on non-sterling financial assets and liabilities
held.
The UK regulators have reiterated their intention to transition from LIBOR to alternative benchmark rates by
the end of 2021. Nationwide is directly impacted through exposure to LIBOR linked assets, liabilities and
derivative transactions. Nationwide is closely engaged with the Bank of England’s Working Group on Sterling
Risk-Free Reference Rates and other industry bodies, and planning is underway to progress and manage the
impacts of this transition.
The Board is responsible for setting market risk appetite and ALCO is responsible for managing Nationwide’s
market risk profile within this defined risk appetite. Market risk is managed within a comprehensive risk
framework which includes policies, limit setting and monitoring, stress testing and robust governance
controls. Internal risk limits remain low to restrict the potential exposure to market risk arising from the daily
management of residual positions, with relevant market risk metrics reported monthly to ALCO.
The European Banking Authority (EBA) published final guidelines on Interest Rate Risk in the Banking Book
(IRRBB) in July 2018, which largely endorse the consultation paper published in 2017. These guidelines specify
Market risk management
The principal market risks that affect Nationwide are listed below together with the types of risk reporting
measures used:
Market risk exposure
Definition
Interest rate risk
Basis risk
Swap spread risk
Currency risk
Product option risk
The impact of market movements in interest rates, which affects the interest rate margin realised from lending and borrowing activities. Volatility in
short term interest rates can also impact the net income contribution from rate insensitive liabilities.
The impact on earnings of relative changes in short term interest rate benchmarks, for example between Bank Base Rate and LIBOR
Earnings sensitivity
The impact on the market value of treasury investments arising from changes in the spread between bond yields and swap rates
Value at Risk
The impact on earnings due to changes in exchange rates
Value sensitivity / Value at Risk
The impact from changes to hedging which may be required when customer behaviour deviates from expectations, principally resulting from early
repayment of fixed rate loans
Value at Risk
Reporting measure
Value sensitivity / Value at Risk / Earnings sensitivity
Nationwide has a capital requirement for each of the above market risks. In addition, stress analysis is used to
evaluate the impact of more extreme, but plausible events. These analytical techniques are described below
with a review of the exposures during the year.
Value and earning sensitivities
Sensitivity analysis is used to assess the change in value of the net exposure to defined parallel and non-
parallel shifts in interest rates. For example, a one basis point (0.01%) shift is measured using PV01. This
analysis is performed daily by currency. Earning sensitivity metrics are used to measure and quantify exposure
to interest rate risks, including basis risk. These techniques assess the impact on earnings when rate shocks
are applied to the rates paid on liabilities and to the rates earned on assets based on a static balance sheet
position.
Nationwide also measures interest rate risk through NII and EVE measures, under a range of shock scenarios
which include behavioural assumptions for retail products as interest rates change. These measures are
assessed based on the standard shocks prescribed in the EBA final guidelines published in July 2018, as well
as against internally generated shock scenarios.
•
•
NII sensitivities assess the impact to earnings in different interest rate shocks over a one year period.
Sensitivities are calculated based on a static balance sheet, where all assets and liabilities maturing within
the year are reinvested in like for like products. The sensitivity also includes the impact arising from off-
balance sheet exposures.
EVE sensitivities measure the change in value of interest rate sensitive items, both on and off-balance
sheet, under a range of interest rate shocks. Sensitivities are calculated on a run-off balance sheet basis.
Both NII and EVE sensitivities are measured monthly, with risk limits set against the various shocks.
Annual Report and Accounts 2019
Business and Risk Report (continued)
Market risk (continued)
Global market conditions
During the year, general market conditions have been dominated by the political uncertainty primarily caused
by Brexit, despite the optimism at the start of the year that caused rates to rise and sterling to strengthen. At
4 April 2019, sterling was 9% below its 2018 peak in April. Swap rates fluctuated within a relatively tight
band, despite some significant one-day falls. The Bank of England (BoE) raised the bank rate by 0.25% in
a prescribed series of standardised interest rate shocks that firms must use to assess sensitivities on their
Economic Value of Equity (EVE) and Net Interest Income (NII). Whilst the final guidelines become effective
from June 2019, Nationwide already monitors its exposures against these prescribed shocks, as well as against
internally generated shock scenarios. Final standardised market disclosures for IRRBB are expected to be
August following positive economic data in the first half of the year. Globally, economies struggled to maintain
implemented through ongoing revisions to the CRD and CRR.
the momentum they achieved in 2017 with growth slowing in many countries, including in the Eurozone.
While stock markets traded at record highs in the first few months of the year, in October concerns about
growth, both globally and in the US, together with fears about the impact of a US/China trade war caused
indices around the world to fall. The US Federal Reserve has increased interest rates three times since April
Market risk appetite
Nationwide’s market risk only arises in the banking book as it does not have a trading book. Most of the
exposure to market risk arises from fixed rate mortgages or savings and changes in the market value of the
liquidity portfolio. There is a limited amount of net currency risk on non-sterling financial assets and liabilities
held.
2018.
Regulation
The UK regulators have reiterated their intention to transition from LIBOR to alternative benchmark rates by
the end of 2021. Nationwide is directly impacted through exposure to LIBOR linked assets, liabilities and
derivative transactions. Nationwide is closely engaged with the Bank of England’s Working Group on Sterling
Risk-Free Reference Rates and other industry bodies, and planning is underway to progress and manage the
impacts of this transition.
The Board is responsible for setting market risk appetite and ALCO is responsible for managing Nationwide’s
market risk profile within this defined risk appetite. Market risk is managed within a comprehensive risk
framework which includes policies, limit setting and monitoring, stress testing and robust governance
controls. Internal risk limits remain low to restrict the potential exposure to market risk arising from the daily
management of residual positions, with relevant market risk metrics reported monthly to ALCO.
The European Banking Authority (EBA) published final guidelines on Interest Rate Risk in the Banking Book
(IRRBB) in July 2018, which largely endorse the consultation paper published in 2017. These guidelines specify
Market risk management
The principal market risks that affect Nationwide are listed below together with the types of risk reporting
measures used:
Market risk exposure
Definition
Reporting measure
Interest rate risk
The impact of market movements in interest rates, which affects the interest rate margin realised from lending and borrowing activities. Volatility in
Value sensitivity / Value at Risk / Earnings sensitivity
short term interest rates can also impact the net income contribution from rate insensitive liabilities.
Basis risk
Swap spread risk
Currency risk
Product option risk
The impact on earnings of relative changes in short term interest rate benchmarks, for example between Bank Base Rate and LIBOR
Earnings sensitivity
The impact on the market value of treasury investments arising from changes in the spread between bond yields and swap rates
Value at Risk
The impact on earnings due to changes in exchange rates
Value sensitivity / Value at Risk
The impact from changes to hedging which may be required when customer behaviour deviates from expectations, principally resulting from early
Value at Risk
repayment of fixed rate loans
Nationwide has a capital requirement for each of the above market risks. In addition, stress analysis is used to
assessed based on the standard shocks prescribed in the EBA final guidelines published in July 2018, as well
evaluate the impact of more extreme, but plausible events. These analytical techniques are described below
as against internally generated shock scenarios.
with a review of the exposures during the year.
Value and earning sensitivities
Sensitivity analysis is used to assess the change in value of the net exposure to defined parallel and non-
parallel shifts in interest rates. For example, a one basis point (0.01%) shift is measured using PV01. This
analysis is performed daily by currency. Earning sensitivity metrics are used to measure and quantify exposure
to interest rate risks, including basis risk. These techniques assess the impact on earnings when rate shocks
are applied to the rates paid on liabilities and to the rates earned on assets based on a static balance sheet
position.
Nationwide also measures interest rate risk through NII and EVE measures, under a range of shock scenarios
which include behavioural assumptions for retail products as interest rates change. These measures are
•
•
NII sensitivities assess the impact to earnings in different interest rate shocks over a one year period.
Sensitivities are calculated based on a static balance sheet, where all assets and liabilities maturing within
the year are reinvested in like for like products. The sensitivity also includes the impact arising from off-
balance sheet exposures.
EVE sensitivities measure the change in value of interest rate sensitive items, both on and off-balance
sheet, under a range of interest rate shocks. Sensitivities are calculated on a run-off balance sheet basis.
Both NII and EVE sensitivities are measured monthly, with risk limits set against the various shocks.
156
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Market risk (continued)
Value at Risk (VaR)
VaR is a technique that estimates the potential losses that could occur from risk positions because of future
movements in market rates and prices, over a specified time horizon, to a given level of statistical confidence.
VaR is based on historic market behaviour and uses a series of recorded market rates and prices to derive
plausible future scenarios. This considers inter-relationships between different markets and rates.
The VaR model incorporates risk factors based on historic interest rate and currency movements. A 10-day
horizon and a 99% confidence level is typically used in day to day VaR monitoring. VaR is used to monitor
interest rate, swap spread, currency and product option risks and is not used to model income. Exposures
against limits are reviewed daily by management. Actual outcomes are monitored on an ongoing basis by
management to test the validity of the assumptions and factors used in the VaR calculation. The values
reported below are on the same basis as those used internally.
Although VaR is a valuable risk measure, it needs to be viewed in the context of the following limitations which
may mean that exposures could be higher than modelled:
•
•
•
•
The use of a 99% confidence level, by definition, does not take account of changes in value that might
occur beyond this level of confidence;
VaR models often under-predict the likelihood of extreme events and over-predict the benefits of
offsetting positions in those extreme events;
The VaR model uses historical data to predict future events. Extreme market moves outside of those used
to calibrate the model will deliver exceptions. In periods where volatility is increasing, the model is likely
to under-predict market risks and in periods where volatility is decreasing it is likely to over-predict
market risks;
Historical data may not adequately predict circumstances arising from government interventions and
stimulus packages, which increase the difficulty of evaluating risks.
To seek to mitigate these limitations, backtesting of the VaR model is undertaken regularly 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. The chart below shows the
results of this backtesting. The three loss exceptions were due to significant movements in market rates on
each of those days. In 2018/19, the backtesting and broader model governance did not highlight any model
deficiencies.
VaR backtesting 99%/1-day
£m
2.00
Key:
Actual return
99% 1-day VaR
Backtesting loss exception
1.50
1.00
0.50
0.00
-0.50
-1.00
-1.50
-2.00
Apr-18
Jul-18
Oct-18
Jan-19
The model will continue to be subject to an annual review process to ensure it remains appropriate for risk
reporting. The types of risks not captured in VaR include:
•
• Market liquidity risk – this has a limited impact because, whilst Nationwide requires an appropriate level
of market liquidity to manage market risk, it does not have a high ongoing dependency on liquidity for
market risk purposes as it does not operate a trading book;
Level 3 asset valuation uncertainty – only a very small portfolio of these assets is held so the impact is
limited. Any valuation uncertainty is included within the Prudent Valuation Adjustment reflected in capital
resources; and
Interest rate movements that can impact credit/debit valuation adjustments (CVA/DVA). These are not
captured in the VaR or sensitivity analysis but are negligible.
•
Stress analysis
To evaluate the potential impact of more extreme but plausible events or movements in a set of financial
variables, the standard VaR metric is supported with sensitivity and stress analysis. For example, for interest
rate risk exposures, the 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 market data from a period of significant financial
stress.
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Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Market risk (continued)
Interest rate risk
Nationwide’s main market risk is interest rate risk. Market movements in interest rates affect the interest rate margin realised from lending and borrowing activities. To reduce the impact of such movements, hedging activities are
undertaken by Nationwide’s Treasury function. For example, interest rate risks generated by lending to and receiving deposits from customers are offset against each other internally where possible. The remaining net exposure is
managed using derivatives, within parameters set by ALCO. In addition to our primary lending and borrowing activities, income volatility arising from certain rate insensitive products (including reserves and CCDS) are structurally
hedged. Nationwide’s interest rate risk is measured using a combination of value-based assessments and earnings sensitivity assessments.
The table below highlights Nationwide’s limited exposure to interest rate risk, shown against a range of value-based assessments. The risk exposure is calculated each day and summarised over the financial year:
Interest rate risk
VaR (99%/10-day) (audited)
Sensitivity analysis (PV01) (audited)
Stress testing (PV200: all currencies)
Average
£m
1.1
0.0
6.1
2019
High
£m
3.1
0.1
21.4
Low
£m
0.4
(0.1)
(23.4)
Average
£m
0.9
0.0
4.2
2018
High
£m
5.4
0.2
39.1
Low
£m
0.1
(0.2)
(32.6)
The interest rate sensitivities in the table above do not include retail product behavioural changes, which are captured by other measures.
Earnings sensitivity assessments measure the risk that income is adversely affected by changes in interest rates. The sensitivity of earnings to changes in interest rates is measured monthly using a forecasting model and potential
interest rate scenarios.
The table below sets out the sensitivity of pre-tax future earnings over a one year period to instantaneous parallel rises and falls in interest rates.
Potential favourable/(adverse) impact on annual earnings
(Audited)
+200 basis points shift
+100 basis points shift
-25 basis points shift
The following should be noted in respect of the table above:
2019
£m
132
64
(26)
2018
£m
121
56
(10)
•
•
•
•
•
the interest rate sensitivities set out above are illustrative only and are based on a static balance sheet; all assets and liabilities maturing within the year are assumed to reinvest in like for like products;
the reported sensitivities will vary over time due to several factors, such as the timing of maturing assets and liabilities, market conditions, product rate flooring assumptions, customer behaviour assumptions and strategic
changes to the balance sheet mix, and should not therefore be considered a guide to future performance;
the sensitivity analysis includes all financial assets and liabilities held;
the model does not take account of any management actions; and
the impact on equity would be equivalent to the change in net interest income after tax.
The absolute levels of interest rates can influence the flexibility to manage earnings. Illustratively, if rates were to fall then margins may be constrained because it is unlikely that the benefit to borrowers could be fully offset through
current account or savings product rate changes.
Annual Report and Accounts 2019
Business and Risk Report (continued)
Market risk (continued)
Interest rate risk
Nationwide’s main market risk is interest rate risk. Market movements in interest rates affect the interest rate margin realised from lending and borrowing activities. To reduce the impact of such movements, hedging activities are
undertaken by Nationwide’s Treasury function. For example, interest rate risks generated by lending to and receiving deposits from customers are offset against each other internally where possible. The remaining net exposure is
managed using derivatives, within parameters set by ALCO. In addition to our primary lending and borrowing activities, income volatility arising from certain rate insensitive products (including reserves and CCDS) are structurally
hedged. Nationwide’s interest rate risk is measured using a combination of value-based assessments and earnings sensitivity assessments.
The table below highlights Nationwide’s limited exposure to interest rate risk, shown against a range of value-based assessments. The risk exposure is calculated each day and summarised over the financial year:
Earnings sensitivity assessments measure the risk that income is adversely affected by changes in interest rates. The sensitivity of earnings to changes in interest rates is measured monthly using a forecasting model and potential
Interest rate risk
VaR (99%/10-day) (audited)
Sensitivity analysis (PV01) (audited)
Stress testing (PV200: all currencies)
Average
£m
1.1
0.0
6.1
2019
High
£m
3.1
0.1
21.4
Low
£m
0.4
(0.1)
(23.4)
Average
£m
0.9
0.0
4.2
2018
High
£m
5.4
0.2
39.1
Low
£m
0.1
(0.2)
(32.6)
The interest rate sensitivities in the table above do not include retail product behavioural changes, which are captured by other measures.
The table below sets out the sensitivity of pre-tax future earnings over a one year period to instantaneous parallel rises and falls in interest rates.
Potential favourable/(adverse) impact on annual earnings
interest rate scenarios.
(Audited)
+200 basis points shift
+100 basis points shift
-25 basis points shift
•
•
•
•
•
2019
£m
132
64
(26)
2018
£m
121
56
(10)
The following should be noted in respect of the table above:
changes to the balance sheet mix, and should not therefore be considered a guide to future performance;
the sensitivity analysis includes all financial assets and liabilities held;
the model does not take account of any management actions; and
the impact on equity would be equivalent to the change in net interest income after tax.
158
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Market risk (continued)
Basis risk
Basis risk arises where variable rate assets and liabilities re-price with reference to differing short term interest rate benchmarks. The primary interest rates that Nationwide is exposed to are the Bank of England base rate, Sterling
Overnight Index Average (SONIA) and three-month sterling LIBOR. If the difference between these interest rates changes over time, this may impact earnings.
Assets and liabilities are offset when their reference rate, or ‘basis’ type, is matched. Exposure to the net mismatch is mitigated, where required, by transacting basis swaps to ensure Nationwide remains within internally agreed risk
limits.
Swap spread risk
A liquidity portfolio is held to manage Nationwide’s liquidity risk. These assets are predominantly fixed rate sovereign debt securities. Interest rate swaps are used to hedge the interest rate risk associated with these assets. However,
there remains a residual risk associated with the possible movement in the spread between sovereign debt yields and swap rates. This ‘swap spread risk’ reflects the fact that the market value of the liquidity portfolio assets can
change due to movements in bond yields and the swaps due to movements in swap rates. In economic terms, this risk is only realised if a bond is sold and the swap is cancelled ahead of maturity.
Swap spread risk is monitored using a historical VaR metric and the risk is controlled via internal limits linked to capital requirements. Exposures are monitored daily and are reported monthly to ALCO.
Currency risk
Currency exposure is managed through natural offsetting on the balance sheet, with derivatives used to maintain the net exposures within limits. ALCO sets and monitors limits on the net currency exposure. The table below sets out
the limited extent of the residual exposure to currency risk:
Currency risk
(Audited)
VaR (99%/10-day)
Product option risk
Average
£m
0.1
2019
High
£m
2.4
Low
£m
0.0
Average
£m
0.1
2018
High
£m
2.2
Low
£m
0.0
Market risk also arises when customers exercise options contained within fixed rate products which can require changes to hedging. The key product risks are prepayment risk (early redemption or under- or over-payment of fixed
rate mortgages), access risk (early withdrawal of fixed rate savings), and take-up risk (higher or lower completions of fixed rate mortgages than expected). These risk exposures are quantified under a range of stress scenarios using
models that predict customer behaviour in response to changes in interest rates. The potential impacts are then closely monitored. These stressed risk measures are subject to a set of limits and are reported to ALCO, along with
proposed management actions where necessary to bring the exposures within limits. This approach is also used to assess internal capital requirements for product option risks.
the interest rate sensitivities set out above are illustrative only and are based on a static balance sheet; all assets and liabilities maturing within the year are assumed to reinvest in like for like products;
the reported sensitivities will vary over time due to several factors, such as the timing of maturing assets and liabilities, market conditions, product rate flooring assumptions, customer behaviour assumptions and strategic
Model risk
The absolute levels of interest rates can influence the flexibility to manage earnings. Illustratively, if rates were to fall then margins may be constrained because it is unlikely that the benefit to borrowers could be fully offset through
current account or savings product rate changes.
Managing market risk effectively is highly dependent on effective models. The models are designed as representations of business systems and markets to help describe the impact of various scenarios and to optimise decisions taken
as a result.
The risk associated with market risk models is controlled and managed through Nationwide’s Model Risk Policy. This requires all significant models to be validated by an independent oversight team prior to use. The validation
process identifies model strengths and weaknesses, assesses the potential impact of these and suggests appropriate mitigating actions. After implementation, model performance is assessed regularly via back testing and sensitivity
analysis. All models are also subject to a more thorough periodic review, at least annually, to ensure they remain fit for purpose. The results of the model performance assessment are used to inform future model development.
Calculations to determine the Pillar 2 capital requirements for market risks are made using the same models as those used for monitoring them day to day.
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Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Pension risk
Summary
Nationwide has funding obligations to several defined benefit pension schemes. Pension risk is defined as the
risk that the value of the pension schemes’ assets will be insufficient to meet the estimated liabilities, creating
a pension deficit. Pension risk can negatively impact Nationwide’s capital position and may result in increased
cash funding obligations to the pension schemes.
The largest pension scheme is the Nationwide Pension Fund (the Fund), which has approximately 29,500
Fund members, the majority of whom are deferred members (former employee members, not yet retired).
The Fund is closed to new employees, although some employees continue to accrue benefits.
In accordance with UK legislation, the assets of the Fund are held in a legally separate trust from Nationwide’s
assets and are administered by a board of trustees (the Trustee) who have fiduciary responsibilities to Fund
members.
Nationwide has a responsibility to ensure that Fund members are paid the pension they have been promised.
To support this aim, Nationwide has a dedicated pension team which ensures that pension risk is
appropriately monitored and managed, whilst helping to educate and engage Fund members about their
pension benefits.
Risk factors
Volatility in investment returns from and the value of the assets and liabilities both cause volatility in the
Fund’s deficit. The key risk factors which impact the deficit are set out below. These factors can have a positive
or negative effect on the deficit.
Asset performance: The Fund’s liabilities are calculated using a discount rate set with reference to high
quality bond yields. This creates a risk that the Fund’s assets perform worse than those bond yields, resulting
in the Fund’s deficit being volatile or increasing.
The Fund holds a significant proportion of return-seeking assets including equities and credit investments.
Return-seeking assets are expected to outperform liabilities in the long-term, but they are risky and volatile in
the short to medium-term. Investments in return-seeking assets are monitored by both the Trustee and
Nationwide to ensure they remain appropriate given the Fund’s long-term objectives. Further details are set
out in note 30 to the accounts.
Liabilities: There is a risk that the Fund’s liabilities increase to a level which is not supported by asset
performance, whether through discount rate changes, increases in long-term inflation expectations, or
increases in the life expectancy (longevity) of Fund members.
Actuarial assumptions: There is a risk that a change in the methodology used to derive key actuarial
assumptions (for example, the discount rate or longevity assumptions) results in a step change in the
assessment of the liabilities and therefore deficit (impacting Nationwide's capital and/or deficit funding
requirements). The ultimate cost of providing pension benefits over the life of the Fund will depend on actual
future events, rather than assumptions made.
Changes in the year
During the year, £61 million of employer deficit contributions were paid. These deficit contributions are
included in employer contributions in the table below, together with employer contributions in respect of
employee benefit accrual during the period. Following the 31 March 2016 Triennial Valuation, which was
completed in 2017, annual employer deficit contributions of £61 million are payable over the years 2019 to
2021, in line with an agreed Deficit Recovery Plan, and employer contributions in respect of employee benefit
accrual will be paid in line with an agreed Schedule of Contributions. Nationwide can cease paying deficit
contributions in certain circumstances, such as the Fund reaching a funding surplus. The effective date of the
next Triennial Valuation of the Fund is 31 March 2019, from which point the Society and Trustee have 15
months to negotiate, among other things, a new Schedule of Contributions and Deficit Recovery Plan.
The retirement benefit obligation that appears within liabilities on the balance sheet has decreased from £345
million to £105 million, as set out below:
Changes in the present value of net defined benefit liability
At 5 April
Pension charge
Net interest cost
Benefits paid directly by the Group
Actuarial remeasurement
Employer contributions (including deficit contributions)
At 4 April
2019
£m
(345)
(98)
(6)
3
210
131
(105)
2018
£m
(423)
(95)
(8)
-
29
152
(345)
The pension charge (recognised in the income statement) increased to £98 million (2018: £95 million),
mainly due to a decrease in corporate bond yields between April 2017 and April 2018.
Benefits paid directly by the Group relate to a settlement of a retirement benefit obligation for an unfunded
legacy pension obligation.
The actuarial remeasurement quantifies the impact on the deficit from updating financial assumptions (e.g.
discount rate and long-term inflation) and demographic assumptions (e.g. longevity). Further details are
included in note 30 to the financial statements.
Outlook
Regular analysis, insight and monitoring supports pension risk management and helps Nationwide to
anticipate any management actions that may be required. This includes risk appetite articulation and regular
reporting to governance committees. In addition, pension risk is embedded into Nationwide’s Enterprise Risk
Management Framework and stress testing processes. Nationwide monitors all pension regulation and
legislation change which may impact Nationwide’s obligations to the Fund.
Nationwide has a responsibility to ensure that Fund members are paid the pension they have been promised.
To support this aim, Nationwide has a dedicated pension team which ensures that pension risk is
appropriately monitored and managed, whilst helping to educate and engage Fund members about their
Changes in the present value of net defined benefit liability
Annual Report and Accounts 2019
Business and Risk Report (continued)
Pension risk
Summary
Nationwide has funding obligations to several defined benefit pension schemes. Pension risk is defined as the
risk that the value of the pension schemes’ assets will be insufficient to meet the estimated liabilities, creating
a pension deficit. Pension risk can negatively impact Nationwide’s capital position and may result in increased
cash funding obligations to the pension schemes.
The largest pension scheme is the Nationwide Pension Fund (the Fund), which has approximately 29,500
Fund members, the majority of whom are deferred members (former employee members, not yet retired).
The Fund is closed to new employees, although some employees continue to accrue benefits.
In accordance with UK legislation, the assets of the Fund are held in a legally separate trust from Nationwide’s
assets and are administered by a board of trustees (the Trustee) who have fiduciary responsibilities to Fund
members.
pension benefits.
Risk factors
Volatility in investment returns from and the value of the assets and liabilities both cause volatility in the
Fund’s deficit. The key risk factors which impact the deficit are set out below. These factors can have a positive
or negative effect on the deficit.
Asset performance: The Fund’s liabilities are calculated using a discount rate set with reference to high
quality bond yields. This creates a risk that the Fund’s assets perform worse than those bond yields, resulting
in the Fund’s deficit being volatile or increasing.
The Fund holds a significant proportion of return-seeking assets including equities and credit investments.
Return-seeking assets are expected to outperform liabilities in the long-term, but they are risky and volatile in
the short to medium-term. Investments in return-seeking assets are monitored by both the Trustee and
Nationwide to ensure they remain appropriate given the Fund’s long-term objectives. Further details are set
out in note 30 to the accounts.
Liabilities: There is a risk that the Fund’s liabilities increase to a level which is not supported by asset
performance, whether through discount rate changes, increases in long-term inflation expectations, or
increases in the life expectancy (longevity) of Fund members.
Actuarial assumptions: There is a risk that a change in the methodology used to derive key actuarial
assumptions (for example, the discount rate or longevity assumptions) results in a step change in the
assessment of the liabilities and therefore deficit (impacting Nationwide's capital and/or deficit funding
requirements). The ultimate cost of providing pension benefits over the life of the Fund will depend on actual
future events, rather than assumptions made.
Changes in the year
During the year, £61 million of employer deficit contributions were paid. These deficit contributions are
included in employer contributions in the table below, together with employer contributions in respect of
employee benefit accrual during the period. Following the 31 March 2016 Triennial Valuation, which was
completed in 2017, annual employer deficit contributions of £61 million are payable over the years 2019 to
2021, in line with an agreed Deficit Recovery Plan, and employer contributions in respect of employee benefit
accrual will be paid in line with an agreed Schedule of Contributions. Nationwide can cease paying deficit
contributions in certain circumstances, such as the Fund reaching a funding surplus. The effective date of the
next Triennial Valuation of the Fund is 31 March 2019, from which point the Society and Trustee have 15
months to negotiate, among other things, a new Schedule of Contributions and Deficit Recovery Plan.
The retirement benefit obligation that appears within liabilities on the balance sheet has decreased from £345
million to £105 million, as set out below:
At 5 April
Pension charge
Net interest cost
Benefits paid directly by the Group
Actuarial remeasurement
Employer contributions (including deficit contributions)
At 4 April
2019
£m
(345)
(98)
(6)
3
210
131
(105)
2018
£m
(423)
(95)
(8)
-
29
152
(345)
The pension charge (recognised in the income statement) increased to £98 million (2018: £95 million),
mainly due to a decrease in corporate bond yields between April 2017 and April 2018.
Benefits paid directly by the Group relate to a settlement of a retirement benefit obligation for an unfunded
legacy pension obligation.
The actuarial remeasurement quantifies the impact on the deficit from updating financial assumptions (e.g.
discount rate and long-term inflation) and demographic assumptions (e.g. longevity). Further details are
included in note 30 to the financial statements.
Regular analysis, insight and monitoring supports pension risk management and helps Nationwide to
anticipate any management actions that may be required. This includes risk appetite articulation and regular
reporting to governance committees. In addition, pension risk is embedded into Nationwide’s Enterprise Risk
Management Framework and stress testing processes. Nationwide monitors all pension regulation and
legislation change which may impact Nationwide’s obligations to the Fund.
160
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Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Pension risk (continued)
Over the long term, the Trustee intends to further reduce the Fund’s risk, and Nationwide actively engages
with the Trustee to ensure broad alignment on investment objectives and implementation. This is supported
by permanent representation by Nationwide at the Trustee’s Investment & Funding Committee and
investment working groups, and the sharing of management information between Nationwide and the
Trustee in order to consider specific risk management initiatives.
plan. This activity is complemented by ongoing financial forecasting and monitoring as well as a range of
stress testing activity to consider unlikely but plausible events or longer-term risks to the Society. Ongoing
strategy development ensures that the strategy and associated plans continue to evolve to address risks to the
business model by considering changes in the external environment, including new technology, consumer
behaviour, regulation or market conditions.
Potential risk management initiatives include, but are not limited to, adjusting the asset allocation (for
example reducing the allocation to equities and increasing the allocation to bonds), implementing derivative
hedging strategies, adjusting contribution levels and adjusting the level of benefits that employee Fund
members accrue in the future.
On 26 October 2018 a verdict from the High Court relating to the Lloyds Banking Group pension schemes
confirmed that Guaranteed Minimum Pensions (GMPs) must be equalised between male and female
members, and arrears paid. The verdict will be applicable to all defined benefit pension schemes (including
the Nationwide Pension Fund) that contracted out of the state second pension between 1978 and 1997,
substituting members’ state second pensions for GMP. Nationwide has recognised an increase of £9 million in
pension liabilities. Further details are included in note 30 to the financial statements.
The Government’s white paper, ‘Protecting defined benefit pension schemes’, published in March 2018, set
out a package of measures to improve trustees’ focus on long-term strategic thinking, and detailed The
Pension Regulator’s (TPR) intention to review and consult on updating its Defined Benefit funding code of
practice. In March 2019, TPR released their 2019 annual funding statement confirming their intentions, with
particular emphasis on how schemes conduct their Triennial Valuations. TPR confirmed that in summer 2019,
it will be consulting on various options for a revised funding framework and funding code of practice.
Nationwide will monitor closely any developments that may impact its obligations to the Fund.
Business risk
Summary
Nationwide defines business risk as the risk that volumes decline or margins shrink relative to the cost base,
affecting the sustainability of the business and the ability to deliver the strategy, due to external or internal
factors. We actively manage this risk so that we continue to benefit our current or future members, with a
focus on long-term sustainability rather than short-term performance metrics. Nationwide ensures that it can
generate sustainable profits by focusing on recurrent sources of income that provide value which is
commensurate with risk appetite. The Society monitors this risk as part of ongoing business performance
reporting to senior management and the Board.
Outlook
Managing business risk
Business risks are identified as part of the Society’s strategy and financial planning processes. These risks
inform potential areas of strategy development and are assessed using a range of sensitivities to the financial
These risks are assessed against Board risk appetite, and aligned to the Financial Performance Framework,
which ensures the right balance between distributing value to members, investing in the business and
maintaining financial strength.
Business risk is managed and mitigated through a range of measures such as:
•
Financial forecasting
As part of the financial planning process Nationwide forecasts income and costs over a five year period
with an updated forecast reviewed by management regularly, taking into consideration the key risks and
sensitivities.
• Monitoring of financial and business performance
The various components of financial performance are monitored monthly against internal forecasts, limits
and triggers across a variety of committees and forums, which consider potential risks and possible
mitigating actions. In addition, business areas monitor the demand for products and services to ensure
we continue to provide propositions that our members want and need.
•
Stress testing and sensitivity analysis
Business risk is regularly stress tested as part of internal management reporting such as the financial plan
downside and upside scenarios, Internal Capital Adequacy Assessment Process and reverse stress tests.
In addition, the PRA’s Concurrent Stress Test scenarios provide a test of the business model and the risks
it is exposed to.
As an output from these activities the Society identifies potential actions that can be taken if risks crystallise.
To effectively manage more extreme events the Society maintains a Recovery Plan, in line with regulatory
guidance, that contains a range of strategic options that could be taken if necessary to protect the Society
from severe stresses and ensure it remains sustainable over the long term.
Outlook
Business risks are closely related to the top and emerging risks outlined on page 98. The current competitive
environment is expected to continue and further increases in competition would increase the level of business
risk for Nationwide, potentially putting pressure on the Society’s financial performance. In addition,
uncertainty in the economic outlook caused by the political environment and the length of the current
economic and/or credit cycle represents potential risks in the short-term, although stress testing results
demonstrate that Nationwide is resilient to significant short-term economic shocks.
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Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Model risk
Summary
Outlook
Models are widely used throughout Nationwide to support decision making. Whilst they provide significant
benefit, using models also carries risk.
The impact of upcoming changes in regulation continues to be a significant factor driving model development
activity.
Nationwide defines model risk as risk of an adverse outcome that occurs as a direct result of weaknesses or
failures in the development, implementation or use of a model. The adverse consequences include financial
loss, poor business or strategic decision making, or damage to Nationwide’s reputation.
Model risk is established in Nationwide’s Enterprise Risk Management Framework and is managed at a Group
level using limits and triggers set according to Board Risk Appetite, governed and supported by policies,
standards and guidelines.
Current environment
The effectiveness of all models and management of inherent model risk are achieved through clear allocation
of roles and responsibilities covering ownership for each of the core activities relating to the control of model
risk. Each model is required to have a model owner in the first line of defence, who is responsible for the
development, implementation and maintenance of the model. Key models are also subject to regular
monitoring, which is reported to the relevant risk committee or accountable individual, with a detailed review
required at least annually. The model owner is also responsible for ensuring the model has been through the
appropriate model governance. Ultimate responsibility for approving the use of Nationwide’s key models
resides with the first line of defence risk committees (for example Assets & Liabilities Committee, Credit
Committee) who ensure that model risk is managed within appetite.
Nationwide’s risk appetite for models is articulated to ensure they are developed, governed and maintained to
a high quality to meet internal standards. Metrics, with limits and triggers, are designed to indicate when
there is a systemic issue with model development capability or model management so that senior committees
can take appropriate action. The approval process brings together directors, senior managers of business
areas and technical staff to provide challenge and identify issues that would prevent a model being fit for
purpose.
Independent oversight and challenge of the models is conducted by a team which sits within the Risk function.
Nationwide monitors the risk and materiality of its models on an individual basis, these are aggregated to
create a single profile across all models to manage the Society’s overall risk. Internal Audit provides
independent assurance over both the control and oversight of the models.
Internal Ratings Based (IRB) models, used in credit risk capital calculations, are undergoing significant
regulatory reform with a view to bringing more consistency to IRB approaches across financial services firms.
Nationwide is well advanced through the programme of work designed to redevelop all the IRB models to
ensure the models comply with the new regulations when they come into force in 2021.
Another key area of significant reliance on models is in the annual Concurrent Stress Testing (CST) exercise,
an assessment by the regulator of the broader banking system’s resilience to adverse economic scenarios. The
models used to support this exercise will continue to be developed in the coming year to ensure they meet
internal and regulatory requirements. In addition, an area of focus for this year will be to further enhance
model risk reporting to support the Board in providing challenge of key model assumptions that underpin the
stress testing results.
Operational risk
Summary
Operational Risk is the risk of loss resulting from failures of internal processes, people and systems, or from
external events. Nationwide manages operational risk across a number of sub-categories, which include cyber,
IT resilience and security, business continuity, payments and fraud.
Nationwide operates a three lines of defence model to manage its operational risk. Details on this approach
are set out in the Managing risk section on page 103. The operational risk profile is informed by risk
assessments from across the business, and by review and challenge by both management and the Risk
Oversight function which operates as a second line of defence. Risk Oversight supports management in
managing the risks it faces in its normal day-to-day activities and when implementing change programmes.
Nationwide continues to enhance and embed its operational risk framework, expanding the use of techniques
such as scenario analysis to support the understanding of current and future risks and to optimise risk-based
decision making across the Society.
Nationwide also monitors and reports on the operational risk events that have occurred, to understand better
those exposures and drive sustainable mitigation to prevent recurrence. For the purposes of this report,
operational risk events include only those where a financial loss arises from an operational risk incident.
Nationwide records operational risk events against causal categories, as well as reporting them against the
operational risk categories defined by the Basel Committee on Banking Supervision in Basel II. This allows
comparison of operational risk experience with its peer group.
Models are widely used throughout Nationwide to support decision making. Whilst they provide significant
The impact of upcoming changes in regulation continues to be a significant factor driving model development
Annual Report and Accounts 2019
Business and Risk Report (continued)
Model risk
Summary
benefit, using models also carries risk.
Nationwide defines model risk as risk of an adverse outcome that occurs as a direct result of weaknesses or
failures in the development, implementation or use of a model. The adverse consequences include financial
loss, poor business or strategic decision making, or damage to Nationwide’s reputation.
Model risk is established in Nationwide’s Enterprise Risk Management Framework and is managed at a Group
level using limits and triggers set according to Board Risk Appetite, governed and supported by policies,
standards and guidelines.
Current environment
The effectiveness of all models and management of inherent model risk are achieved through clear allocation
of roles and responsibilities covering ownership for each of the core activities relating to the control of model
risk. Each model is required to have a model owner in the first line of defence, who is responsible for the
development, implementation and maintenance of the model. Key models are also subject to regular
monitoring, which is reported to the relevant risk committee or accountable individual, with a detailed review
required at least annually. The model owner is also responsible for ensuring the model has been through the
appropriate model governance. Ultimate responsibility for approving the use of Nationwide’s key models
resides with the first line of defence risk committees (for example Assets & Liabilities Committee, Credit
Committee) who ensure that model risk is managed within appetite.
Nationwide’s risk appetite for models is articulated to ensure they are developed, governed and maintained to
a high quality to meet internal standards. Metrics, with limits and triggers, are designed to indicate when
there is a systemic issue with model development capability or model management so that senior committees
can take appropriate action. The approval process brings together directors, senior managers of business
areas and technical staff to provide challenge and identify issues that would prevent a model being fit for
purpose.
Independent oversight and challenge of the models is conducted by a team which sits within the Risk function.
Nationwide monitors the risk and materiality of its models on an individual basis, these are aggregated to
create a single profile across all models to manage the Society’s overall risk. Internal Audit provides
independent assurance over both the control and oversight of the models.
Internal Ratings Based (IRB) models, used in credit risk capital calculations, are undergoing significant
regulatory reform with a view to bringing more consistency to IRB approaches across financial services firms.
Nationwide is well advanced through the programme of work designed to redevelop all the IRB models to
ensure the models comply with the new regulations when they come into force in 2021.
Another key area of significant reliance on models is in the annual Concurrent Stress Testing (CST) exercise,
an assessment by the regulator of the broader banking system’s resilience to adverse economic scenarios. The
models used to support this exercise will continue to be developed in the coming year to ensure they meet
internal and regulatory requirements. In addition, an area of focus for this year will be to further enhance
model risk reporting to support the Board in providing challenge of key model assumptions that underpin the
Outlook
activity.
stress testing results.
Operational risk
Summary
Operational Risk is the risk of loss resulting from failures of internal processes, people and systems, or from
external events. Nationwide manages operational risk across a number of sub-categories, which include cyber,
IT resilience and security, business continuity, payments and fraud.
Nationwide operates a three lines of defence model to manage its operational risk. Details on this approach
are set out in the Managing risk section on page 103. The operational risk profile is informed by risk
assessments from across the business, and by review and challenge by both management and the Risk
Oversight function which operates as a second line of defence. Risk Oversight supports management in
managing the risks it faces in its normal day-to-day activities and when implementing change programmes.
Nationwide continues to enhance and embed its operational risk framework, expanding the use of techniques
such as scenario analysis to support the understanding of current and future risks and to optimise risk-based
decision making across the Society.
Nationwide also monitors and reports on the operational risk events that have occurred, to understand better
those exposures and drive sustainable mitigation to prevent recurrence. For the purposes of this report,
operational risk events include only those where a financial loss arises from an operational risk incident.
Nationwide records operational risk events against causal categories, as well as reporting them against the
operational risk categories defined by the Basel Committee on Banking Supervision in Basel II. This allows
comparison of operational risk experience with its peer group.
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Business and Risk Report (continued)
Business and Risk Report (continued)
Operational risk (continued)
Operational risk experience
A significant proportion of Nationwide’s operational risk events have been recorded against three of the Basel categories: ‘Clients, Products & Business Practices’, ‘External Fraud’ and ‘Execution, Delivery and Process Management’.
These categories account for 99.2% by value, and 98.4% by number, of Nationwide’s operational risk events (2018: 99.3% by value and 96.8% by number).
Whilst the highest losses are against the Clients, Products and Business Practices (C,P&BP) category, this is where we record the cost of administration and customer redress for payment protection insurance (PPI) claims, however
due to treating these losses as a single event, this does not represent a high volume of reported instances. Nationwide continues to experience a high volume of events with relatively low individual loss amounts in the External Fraud
category. This is in line with other financial institutions and predominantly relates to Card Not Present fraud.
0perational risk events by Basel risk category, % of total events by value (note i)
Clients, products and business practices (note iii)
External fraud
Execution, delivery and process management
Internal fraud
Business disruption and system failure
Damage to physical assets
Employment practices and workplace safety
Total
2019
%
79.1
10.6
9.5
0.1
0.3
0.0
0.4
100.0
2018 (note ii)
%
69.7
5.9
23.7
0.3
-
0.2
0.2
100.0
Operational risk events by Basel risk category, % of total events by number (note i)
2019
%
3.0
86.0
9.4
0.5
0.4
0.0
0.7
100.0
Clients, products and business practices (note iii)
External fraud
Execution, delivery and process management
Internal fraud
Business disruption and system failure
Damage to physical assets
Employment practices and workplace safety
Total
2018 (note ii)
%
4.5
84.4
7.9
0.5
0.6
0.9
1.2
100.0
Notes:
i.
ii.
iii.
Risk events with losses over £5,000; multiple losses relating to the same event are only counted once.
Comparatives have been restated to include additional historic data where more information has been received.
Includes the costs of administration and customer redress in relation to ongoing payment protection insurance claims.
Current environment
Over the course of the year, the overall profile of operational risks has remained relatively stable, with the main
risks continuing to relate to IT resilience and cyber security. Nationwide continues to meet the high standards
expected by our customers with regards to management of key inherent risks such as cyber-security and IT
resilience. Nationwide’s focus is on being safe, secure and dependable in order to ensure that service
availability and customer data are protected.
Cyber security
Nationwide recognises the direct impact a successful cyber attack may have on customers and their ability to
carry out transactions on a day-to-day basis. The constant threat posed by a cyber attack also directly impacts
the risks associated with external fraud, data loss, data integrity and data accessibility, and makes the threat
of a cyber attack the single biggest risk for Nationwide.
There continues to be an increase in the maturity, intensity and sophistication of organised cyber crime;
attacks continue to raise the profile and increase the public awareness of cyber threats such as Ransomware
and Distributed Denial of Service (DDOS).
Over the last year there have been significant improvements in the prevention and detection environment to
keep pace with the threat posed by cyber-crime. Nationwide continues to put significant effort into
discharging its cyber risk management responsibilities effectively, with ongoing investment in appropriate
technology and processes to effectively manage this risk. This includes exercising our responses to a simulated
successful cyber attack, which allows us to safely test, maintain and build our performance in this area.
Nationwide maintains strong links with government bodies and continues to work with the wider industry to
identify vulnerabilities and share best practice to help combat cyber crime. Cyber security remains a high
priority and Nationwide will continue to focus on improving the awareness of its customers and employees, as
well as continuing to build its understanding of the developing threats, its defences and its resilience to cyber
attacks.
IT and operational resilience
Nationwide’s members quite rightly expect IT systems to be stable and available when they want to use them.
In September 2018 Nationwide announced that it would invest an additional £1.3 billion in technology over the
next five years. This technology investment will ensure that Nationwide remains resilient and secure, increase
agility and deliver new features and services to our members more quickly. More information on this
investment can be found on page 12.
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163
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Operational risk (continued)
People risk
Nationwide relies on the talent and dedication of its people to deliver its strategy, provide first class service,
and to operate a strong risk and control framework. Attracting, retaining and developing the right people
remains a key focus for the Society, particularly in specialist areas, such as technology, where the appropriate
skill sets are scarce or in high demand. Nationwide continues to monitor and closely mange the impact on its
people requirements as it delivers the products, services and experience that members want, to ensure that
the required levels of skill, knowledge and engagement are maintained.
Pace of change
Nationwide is committed to responding to the varied and evolving needs of its customers, making it easier for
them to transact through a range of channels. However, the scale and pace of change can create delivery
challenges. Such challenges have the potential to disrupt Nationwide’s operating environment and negatively
impact the service experienced by customers. These operational risks are managed through a strong focus on
service management, transformation governance and programme management disciplines. There is also a
high volume of change driven by regulation; this is explored further in the Conduct and compliance risk
section below.
Data
The continued expansion of data used in digital services increases the complexity and cost of managing data
securely and effectively. Nationwide is committed to protecting customer data from accidental loss, or from
nefarious activities. There is a steady flow of regulation that will have an impact on how data is managed;
Nationwide will monitor these developments, continue to be agile and react to the evolving requirements.
External fraud
Debit and credit card fraud remains the largest driver of fraud losses, driven by increasing transaction volumes
as a result of business growth and customer behaviour. Nationwide continues to develop its fraud detection
and prevention capabilities. Losses incurred through the digital channels remain low; however, in common
with the industry Nationwide continues to see increasingly sophisticated attacks. Nationwide is dedicated to
keeping pace with the increases in digital capability and sophistication of attacks by investing in its fraud
defences.
Nationwide recognises the impact fraud has on its customers and is committed to raising awareness of fraud
scams, as well as working closely with the Payments Service Regulator and UK Finance to combat customer
losses. Nationwide welcome the increased authentication requirements being introduced with the EU
Payments Services Directive (PSD2), which should help protect our customers from Card Not Present fraud.
Use of third parties
Nationwide needs to ensure customer outcomes and service experiences are maintained regardless of
whether services are delivered in house or through third parties. Relationships with third parties are managed
closely to ensure the service they offer is in line with acceptable standards and Nationwide’s customer ethos.
The use of cloud based solutions is a key strategic enabler for the Society and provides the potential to reduce
aspects of the operational risk profile. Significant progress has been made in the year in addressing the
associated risks in this area; this includes the operation of a specific cloud surgery and governance board to
bring a higher level of scrutiny and governance.
Outlook
Nationwide’s operational risk outlook is impacted by the environment in which it operates and its strategy.
The drivers of operational risk are expected to remain broadly consistent, with the main themes being:
•
the scale and pace of change, particularly in a digital environment and with the enablement of Open
Banking
the impact on fraud of PSD2 and delivering help to the victims of Authorised Push Payment scams.
IT resilience and the continued increase in the sophistication of cyber security threats
the continued reliance on strategic third-party partners, including increased adoption of cloud based
solutions.
•
•
•
Nationwide continues to invest in all these areas to maintain and develop appropriate controls to ensure
residual risk exposures are managed within appetite.
Conduct and Compliance risk
Summary
Conduct and compliance risk is the risk that Nationwide exercises inappropriate judgement or makes errors in
the execution of its business activities, leading to non-compliance with regulation or legislation, market
integrity being undermined, or an unfair outcome being created for our customers.
Current environment
Nationwide believes in delivering fair outcomes to its customers, through the embedding of effective conduct
risk management, improving frameworks and guidance, and interpreting and implementing regulatory
obligations.
Our strategy recognises that our members’ needs are changing. Increasingly our members demand an
always-on, constantly evolving and improving digital service. Member impact and the potential for member
harm is considered as a matter of course throughout the Society as we deliver our strategy. This gives us the
confidence that our strategy will be successfully delivered, with the mitigation of risk and especially risks with
the potential to harm members at the core of our activity.
The regulatory environment remains challenging, with a variety of complex regulatory changes having to be
embedded, as regulators continue to drive an agenda committed to rebuilding trust and confidence in the UK
financial services market. In addition to this, regulators have been putting in place the necessary
arrangements to continue to meet their statutory objectives in the event of a no-deal Brexit, and seeking
feedback from the industry. As Nationwide is a UK-domiciled and UK-focused building society, the proposals
put forward by the regulators are not expected to have material implications for our business model, financial
Annual Report and Accounts 2019
Business and Risk Report (continued)
Operational risk (continued)
People risk
Nationwide relies on the talent and dedication of its people to deliver its strategy, provide first class service,
and to operate a strong risk and control framework. Attracting, retaining and developing the right people
remains a key focus for the Society, particularly in specialist areas, such as technology, where the appropriate
skill sets are scarce or in high demand. Nationwide continues to monitor and closely mange the impact on its
people requirements as it delivers the products, services and experience that members want, to ensure that
the required levels of skill, knowledge and engagement are maintained.
Nationwide is committed to responding to the varied and evolving needs of its customers, making it easier for
them to transact through a range of channels. However, the scale and pace of change can create delivery
challenges. Such challenges have the potential to disrupt Nationwide’s operating environment and negatively
impact the service experienced by customers. These operational risks are managed through a strong focus on
service management, transformation governance and programme management disciplines. There is also a
high volume of change driven by regulation; this is explored further in the Conduct and compliance risk
Pace of change
section below.
Data
External fraud
The continued expansion of data used in digital services increases the complexity and cost of managing data
securely and effectively. Nationwide is committed to protecting customer data from accidental loss, or from
nefarious activities. There is a steady flow of regulation that will have an impact on how data is managed;
Nationwide will monitor these developments, continue to be agile and react to the evolving requirements.
Summary
Debit and credit card fraud remains the largest driver of fraud losses, driven by increasing transaction volumes
as a result of business growth and customer behaviour. Nationwide continues to develop its fraud detection
and prevention capabilities. Losses incurred through the digital channels remain low; however, in common
with the industry Nationwide continues to see increasingly sophisticated attacks. Nationwide is dedicated to
keeping pace with the increases in digital capability and sophistication of attacks by investing in its fraud
defences.
Current environment
obligations.
Nationwide recognises the impact fraud has on its customers and is committed to raising awareness of fraud
scams, as well as working closely with the Payments Service Regulator and UK Finance to combat customer
losses. Nationwide welcome the increased authentication requirements being introduced with the EU
Payments Services Directive (PSD2), which should help protect our customers from Card Not Present fraud.
Use of third parties
Nationwide needs to ensure customer outcomes and service experiences are maintained regardless of
whether services are delivered in house or through third parties. Relationships with third parties are managed
closely to ensure the service they offer is in line with acceptable standards and Nationwide’s customer ethos.
The use of cloud based solutions is a key strategic enabler for the Society and provides the potential to reduce
aspects of the operational risk profile. Significant progress has been made in the year in addressing the
associated risks in this area; this includes the operation of a specific cloud surgery and governance board to
bring a higher level of scrutiny and governance.
Outlook
•
•
•
•
Banking
solutions.
Nationwide’s operational risk outlook is impacted by the environment in which it operates and its strategy.
The drivers of operational risk are expected to remain broadly consistent, with the main themes being:
the scale and pace of change, particularly in a digital environment and with the enablement of Open
the impact on fraud of PSD2 and delivering help to the victims of Authorised Push Payment scams.
IT resilience and the continued increase in the sophistication of cyber security threats
the continued reliance on strategic third-party partners, including increased adoption of cloud based
Nationwide continues to invest in all these areas to maintain and develop appropriate controls to ensure
residual risk exposures are managed within appetite.
Conduct and Compliance risk
Conduct and compliance risk is the risk that Nationwide exercises inappropriate judgement or makes errors in
the execution of its business activities, leading to non-compliance with regulation or legislation, market
integrity being undermined, or an unfair outcome being created for our customers.
Nationwide believes in delivering fair outcomes to its customers, through the embedding of effective conduct
risk management, improving frameworks and guidance, and interpreting and implementing regulatory
Our strategy recognises that our members’ needs are changing. Increasingly our members demand an
always-on, constantly evolving and improving digital service. Member impact and the potential for member
harm is considered as a matter of course throughout the Society as we deliver our strategy. This gives us the
confidence that our strategy will be successfully delivered, with the mitigation of risk and especially risks with
the potential to harm members at the core of our activity.
The regulatory environment remains challenging, with a variety of complex regulatory changes having to be
embedded, as regulators continue to drive an agenda committed to rebuilding trust and confidence in the UK
financial services market. In addition to this, regulators have been putting in place the necessary
arrangements to continue to meet their statutory objectives in the event of a no-deal Brexit, and seeking
feedback from the industry. As Nationwide is a UK-domiciled and UK-focused building society, the proposals
put forward by the regulators are not expected to have material implications for our business model, financial
164
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Business and Risk Report (continued)
Business and Risk Report (continued)
Conduct and Compliance risk (continued)
soundness, or ability to continue to provide service to our members. Nevertheless, we continue to monitor
both political and regulatory developments in this space to ensure we continue to provide reliable services to
our members.
Nationwide remains committed to financial crime compliance and continues to develop its capability to limit
financial crime by preventing, deterring and detecting money laundering and terrorist financing, making
ongoing improvements to internal policies and procedures to support this agenda.
In 2017, the Financial Conduct Authority (FCA) announced the final deadline for making new Payment
Protection Insurance (PPI) complaints as 29 August 2019. As the deadline approaches, it is expected that the
number of both customer complaints and Claims Management Company (CMC) managed PPI complaints will
increase. Nationwide continues to monitor the volume of complaints received and to ensure appropriate
resources are in place to handle peak volumes. Nationwide will continue to monitor CMC activities to identify
emerging patterns in newly targeted areas of focus as the PPI industry-wide complaints process comes to an
end and the CMCs fall under the FCA’s remit from April 2019.
As noted, there continues to be a significant volume of complex regulatory change impacting the financial
services industry; some of the key items relevant to Nationwide are listed below:
Data
The Basel Committee and Banking Standards (BCBS) 239 principles are aimed at strengthening banks’ and
building societies’ risk data aggregation capabilities and internal risk reporting practices, in support of risk
management and decision-making processes. Nationwide is in the process of enhancing its reporting
capabilities in line with the BCBS 239 principles and timescales agreed with the regulators.
Open banking
The introduction of Open Banking creates both opportunities and risks for Nationwide. Nationwide views the
change as a positive opportunity to deepen relationships with its members. Open Banking also has the
potential to drive changes in customer behaviour and how customers interact with their financial services
providers. Nationwide continues to develop its Open Banking strategy and capability and from September
2019 will facilitate both Account Information Services and Payment Information Services to Third Party
Providers (TPPs). This will enable Open Banking subscribers to authorise TPPs to obtain and aggregate their
Nationwide current account and credit card account information, manage their accounts and make payments
from those products outside of the Nationwide Online Bank.
Financial crime compliance
Nationwide is continuing to invest in processes and systems to achieve compliance with the European Union’s
Money Laundering Directives, enhancing defences to combat money laundering and terrorist financing and
protect the integrity of the financial markets.
Industry reviews
The Financial Conduct Authority’s (FCA) published the final report on its Mortgage Market Study in March
2019 with an overall assessment that the market works well in many respects, that engagement is high, and
consumers are getting mortgages that are suitable and affordable. Working with UK Finance, we have already
committed to the voluntary code for ‘mortgage prisoners’ and will consider any further findings against our
existing mortgage proposition, with enhancements made where appropriate.
This year, the FCA published its final report on the Strategic Review of Retail Banking Business Models,
designed to better understand the competitive forces shaping the banking sector, and the potential impact on
customers. This has highlighted a regulatory focus on ‘back book’ pricing and customer inertia, which is
considered further in the recent Discussion Paper on ‘Fair Pricing in Financial Services’. We will continue to
engage in and monitor this discussion.
Following the FCA’s High-Cost Credit Review, firms are required to introduce a series of measures with the
aim of encouraging competition by increasing customer awareness of how they use their overdraft and how
an overdraft works. The FCA is proposing reforms to the way firms charge for overdrafts, including
unarranged overdrafts. Nationwide will continue to engage with and support the regulator in reviewing
overdrafts and implementing any additional requirements.
Both the FCA and PRA have recognised the potential impact that climate change and the transition to a low
carbon economy could have on the UK’s economy and financial services, and how this transition relates to
their respective statutory objectives. Both regulators are working to understand how firms are currently
identifying, monitoring and mitigating the risks of climate change, and how they intend to disclose these. The
FCA is also focusing on how firms intend to provide suitable consumer protection, while ensuring regulation
does not stifle positive innovation in green financial services. We expect further developments in this area over
the coming year.
Following the FCA’s Occasional Paper on consumer vulnerability in 2015, firms’ approaches to vulnerable
customers have been a focal point for the regulator. At a high level, the FCA expects firms to proactively
identify vulnerable customers and ensure that policies are in place to protect those at a greater risk of harm.
The Society has made significant progress since 2015 in its approach to vulnerable customers and continues
to develop the Society-wide strategic approach ahead of the FCA guidance to published in early 2019.
Nationwide will actively engage with the regulators to respond to these complex regulatory changes, and will
continue to provide a secure and dependable variety of products and services which are designed to meet the
needs of members and customers.
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Financial
statements
166
175
176
Independent auditors’ report
Income statements
Statements of
comprehensive income
177 Balance sheets
178
Statements of movements in
members’ interests and equity
180 Cash flow statements
Notes to the financial
181
statements
Note 1
Statement of accounting policies
Note 2
Judgements in applying accounting
policies and critical accounting
estimates
Performance/return
Note 3
Interest receivable and similar income
Note 4
Interest expense and similar charges
Note 5
Fee and commission income and
expense
Note 6
Other operating income/expense
Note 7
Gains/losses from derivatives
and hedge accounting
Note 8
Administrative expenses
Note 9
Employees
Note 10
Impairment losses and provisions on
loans and advances to customers
Note 11
Taxation
Financial assets and liabilities
Note 12
Classification and measurement
Note 13
Investment securities
Note 14
Loans and advances to customers
Note 15
Derivative financial instruments
Note 16
Deposits from banks and similar
institutions
Note 17
Other deposits
Note 18
Debt securities in issue
Note 19
Subordinated liabilities
Note 20
Subscribed capital
Note 21
Fair value hierarchy of financial assets
and liabilities held at fair value
Note 22
Fair value of financial assets and
liabilities held at fair value – Level 3
portfolio
Note 23
Fair value of financial assets and
liabilities measured at amortised cost
Note 24
Offsetting financial assets
and financial liabilities
Other assets and investments
Note 25
Intangible assets
Note 26
Property, plant and equipment
Accruals, provisions, contingent
liabilities and other legal
proceedings
Note 27
Provisions for liabilities and charges
Note 28
Capital and leasing commitments
Note 29
Contingent liabilities
Employee benefits
Note 30
Retirement benefit obligations
Capital and equity instruments
Note 31
Core capital deferred shares (CCDS)
Note 32
Other equity instruments
Scope of consolidation
Note 33
Investments in Group undertakings
Note 34
Structured entities
Other disclosure matters
Note 35
Related party transactions
Note 36
Notes to the cash flow statements
Note 37
Adoption of IFRS 9
Note 38
Capital management
Note 39
Registered office
Victoria, member since 2003
166
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Independent auditors’ report
Independent auditors’ report to the members of Nationwide Building Society
Report on the audit of the financial statements
Opinion
In our opinion, Nationwide Building Society’s Group financial statements and Society financial statements (the “financial statements”):
● give a true and fair view of the state of the Group’s and of the Society’s affairs as at 4 April 2019 and of the Group’s and the Society’s profit and cash flows for the year then ended;
● have been properly prepared in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union; and
● have been prepared in accordance with the requirements of the Building Societies Act 1986 and, as regards the Group financial statements, Article 4 of the IAS Regulation.
We have audited the financial statements, included within the Annual Report and Accounts 2019 (the “Annual Report”), which comprise: the Group and Society balance sheets as at 4 April 2019; the Group and Society income
statements and the statements of comprehensive income, the Group and Society cash flow statements, and the Group and Society statements of movements in members’ interests and equity for the year then ended; and the notes to
the financial statements, which include a description of the significant accounting policies.
Our opinion is consistent with our reporting to the Audit Committee.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the
financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We remained independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest
entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the Society.
Other than those disclosed in note 8 to the financial statements, we have provided no non-audit services to the Group or the Society in the period from 5 April 2018 to 4 April 2019.
Our audit approach
Overview
● Overall Group materiality: £42.3 million (2018: £54.5 million), based on 5% of profit before tax.
● Overall Society materiality: £18.0 million (2018: £28.0 million), based on 5% of profit before tax.
The key audit matters for our Group and Society audits were:
● The judgements applied to allowances made in addition to the core models, multiple economic scenarios and staging as they relate to loan loss provisioning;
● The judgements applied to the material provisions for customer redress;
● Valuation of IT intangible assets; and
● Privileged access to IT systems.
The scope of our audit
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we looked at where the directors made subjective judgements, for example in
respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain.
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Annual Report and Accounts 2019
Independent auditors’ report (continued)
Independent auditors’ report (continued)
Report on the audit of the financial statements (continued)
Capability of the audit in detecting irregularities, including fraud
Based on our understanding of the Group and industry, we identified that the principal risks of non-compliance with laws and regulations related to breaches of banking laws and regulations such as, but not limited to, regulations
relating to consumer credit and unethical and prohibited business practices, and we considered the extent to which non-compliance might have a material effect on the financial statements. We also considered those laws and
regulations that have a direct impact on the preparation of the financial statements such as the Building Societies Act 1986 and the Consumer Credit Act 1974. We evaluated management’s incentives and opportunities for fraudulent
manipulation of the financial statements (including the risk of override of controls), and determined that the principal risks were related to the posting of manual journal entries to manipulate financial performance, management bias
through judgements and assumptions in significant accounting estimates and significant one-off or unusual transactions. The Group engagement team shared this risk assessment with the component auditors so that they could
include appropriate audit procedures in response to such risks in their work. Audit procedures performed by the Group engagement team and/or component auditors included:
● Discussions with management and those charged with governance including consideration of known or suspected instances of non-compliance with laws and regulation and fraud;
● Incorporation of unpredictability into the nature, timing and/or extent of our testing;
● Reading key correspondence with the Financial Conduct Authority and Prudential Regulation Authority;
● Challenging assumptions and judgements made by management in their significant accounting estimates, in particular in relation to allowances made in addition to the core models, multiple economic scenarios and staging;
provisions for customer redress; and valuation of IT intangible assets (see related key audit matters below);
● Testing of period end adjustments; and
● Identifying and testing journal entries, in particular any journal entries posted by senior management including the directors or infrequent users, posted on unusual days, posted with descriptions indicating a higher level of risk,
posted to unusual account combinations, or duplicate journal entries and material late adjustments.
There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we
would become aware of it. Also, the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or
intentional misrepresentations, or through collusion.
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the Group and the Society, the accounting
processes and controls, and the industry in which they operate.
We primarily focused our work in these areas by assessing the directors’ judgements against available evidence, forming our own judgements and evaluating the disclosures in the financial statements.
We tested and examined information using sampling and other auditing techniques, to the extent we considered necessary to provide a reasonable basis for us to form our own judgements. We obtained audit evidence by testing the
effectiveness of controls, substantive procedures or a combination of both.
Within the financial statements, the Group has been recognised as one operating segment. However for the purposes of our audit, we scoped the Group at a component level, defined by product or service function, for example
treasury or prime mortgages, to ensure appropriate granularity of our testing approach.
Individually financially significant components, in the context of the Group’s financial statements, are identified as those that have greater than 15% of absolute total income of the Group. We performed a full scope audit of the
financial information of these individually financially significant components. Subsequently, we identified components that are related to significant risks and performed audit procedures over the relevant account balances to address
the significant audit risks. All residual components were considered to be non-significant components; however, we assessed these non-significant components for large or unusual balances. Where large or unusual balances were
identified, we performed audit procedures to obtain sufficient audit evidence over those balances.
At the Society level, we performed scoping to ensure that the untested balances within each balance were below our materiality.
In addition, we attended all Audit Committee meetings and also held meetings with senior management. We also met privately with the non-executive directors and other key stakeholders, including the regulators of the Group and
Society.
Annual Report and Accounts 2019
Independent auditors’ report (continued)
Report on the audit of the financial statements (continued)
Capability of the audit in detecting irregularities, including fraud
168
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Independent auditors’ report (continued)
Independent auditors’ report (continued)
Report on the audit of the financial statements (continued)
Materiality
Based on our understanding of the Group and industry, we identified that the principal risks of non-compliance with laws and regulations related to breaches of banking laws and regulations such as, but not limited to, regulations
relating to consumer credit and unethical and prohibited business practices, and we considered the extent to which non-compliance might have a material effect on the financial statements. We also considered those laws and
regulations that have a direct impact on the preparation of the financial statements such as the Building Societies Act 1986 and the Consumer Credit Act 1974. We evaluated management’s incentives and opportunities for fraudulent
manipulation of the financial statements (including the risk of override of controls), and determined that the principal risks were related to the posting of manual journal entries to manipulate financial performance, management bias
through judgements and assumptions in significant accounting estimates and significant one-off or unusual transactions. The Group engagement team shared this risk assessment with the component auditors so that they could
include appropriate audit procedures in response to such risks in their work. Audit procedures performed by the Group engagement team and/or component auditors included:
● Discussions with management and those charged with governance including consideration of known or suspected instances of non-compliance with laws and regulation and fraud;
● Incorporation of unpredictability into the nature, timing and/or extent of our testing;
● Reading key correspondence with the Financial Conduct Authority and Prudential Regulation Authority;
provisions for customer redress; and valuation of IT intangible assets (see related key audit matters below);
● Testing of period end adjustments; and
● Challenging assumptions and judgements made by management in their significant accounting estimates, in particular in relation to allowances made in addition to the core models, multiple economic scenarios and staging;
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the
nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial statements as a
whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Overall materiality
How we determined it
Rationale for benchmark applied
Group financial statements
Society financial statements
£42.3 million (2018: £54.5 million).
£18.0 million (2018: £28.0 million).
5% of profit before tax.
Profit before tax is one of the principal considerations when assessing the Group’s and Society’s performance,
and is a generally accepted auditing benchmark.
5% of profit before tax.
● Identifying and testing journal entries, in particular any journal entries posted by senior management including the directors or infrequent users, posted on unusual days, posted with descriptions indicating a higher level of risk,
posted to unusual account combinations, or duplicate journal entries and material late adjustments.
For each component in the scope of our Group audit, we allocated a materiality that is less than our overall Group materiality. The range of materiality allocated across components was between £2.0 million and £15.0 million.
There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we
would become aware of it. Also, the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £2.1 million (Group audit) (2018: £2.7 million) and £0.9 million (Society audit) (2018: £1.4 million) as well as
misstatements below those amounts that, in our view, warranted reporting for qualitative reasons.
Key audit matters
Based on our understanding of the business, changes in the economic environment and our discussions with the Audit Committee, we performed a risk assessment to determine the higher risk areas. We presented those identified
higher audit risk areas during the Audit Committee meeting in October 2018. Throughout the year our plan was refreshed and revised to address changes in the external and internal environment and we presented a final, updated
risk assessment in the May 2019 Audit Committee meeting.
Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial statements of the current period and include the most significant assessed risks of material
misstatement (whether or not due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement
team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not
provide a separate opinion on these matters. This is not a complete list of all risks identified by our audit.
intentional misrepresentations, or through collusion.
How we tailored the audit scope
processes and controls, and the industry in which they operate.
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the Group and the Society, the accounting
We primarily focused our work in these areas by assessing the directors’ judgements against available evidence, forming our own judgements and evaluating the disclosures in the financial statements.
We tested and examined information using sampling and other auditing techniques, to the extent we considered necessary to provide a reasonable basis for us to form our own judgements. We obtained audit evidence by testing the
effectiveness of controls, substantive procedures or a combination of both.
Within the financial statements, the Group has been recognised as one operating segment. However for the purposes of our audit, we scoped the Group at a component level, defined by product or service function, for example
treasury or prime mortgages, to ensure appropriate granularity of our testing approach.
Individually financially significant components, in the context of the Group’s financial statements, are identified as those that have greater than 15% of absolute total income of the Group. We performed a full scope audit of the
financial information of these individually financially significant components. Subsequently, we identified components that are related to significant risks and performed audit procedures over the relevant account balances to address
the significant audit risks. All residual components were considered to be non-significant components; however, we assessed these non-significant components for large or unusual balances. Where large or unusual balances were
identified, we performed audit procedures to obtain sufficient audit evidence over those balances.
At the Society level, we performed scoping to ensure that the untested balances within each balance were below our materiality.
In addition, we attended all Audit Committee meetings and also held meetings with senior management. We also met privately with the non-executive directors and other key stakeholders, including the regulators of the Group and
Society.
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Annual Report and Accounts 2019
Annual Report and Accounts 2019
Independent auditors’ report (continued)
Independent auditors’ report (continued)
Report on the audit of the financial statements (continued)
Key audit matter
How our audit addressed the key audit matter
The judgements applied to allowances made in addition to the core models, multiple economic scenarios and
staging as they relate to loan loss provisioning
Group and Society
We understood and critically assessed the methodology applied in the impairment models, using modelling
specialists to confirm that the implemented methodology was compliant with IFRS 9. We tested key assumptions
and judgements used in the calculation of provisions and tested the accuracy of critical data inputs used by the
impairment models on a sample basis to supporting documentation.
Refer to page 59 (Audit Committee Report), page 181 (Accounting Policies) and page 200 (Note 10 and Critical
Accounting Estimates and Judgements).
We tested the key assumptions in material additional allowances made by management and considered the
completeness of adjustments to core models using our audit and wider industry knowledge to take account of
latent risks and known model limitations.
The determination of expected credit losses (‘ECL’) is highly subjective and judgemental. The introduction of IFRS
9 in the current year meant that significant changes have been incorporated into the measurement of loan loss
provisioning, including the development of new impairment models where losses are recognised on an expected,
forward-looking basis, reflecting the Group's view of potential future economic events. As a result, a new
methodology encompassing new estimates and judgements is now required to calculate impairment provisions
and disclose them.
In 2018, we audited the opening balances under IFRS 9. This work provided a foundation for our testing in 2019.
Management built and implemented a number of models to achieve compliance with the requirements of IFRS
9. The determination of ECL is a complex process and a number of judgements are involved in the estimation of
ECL. We focused our audit work on the areas of the methodology that we identified as most judgemental.
The three areas we focused on were:
1.
2.
3.
The assessment of allowances made in addition to the core impairment models, which management
has made to take account of latent risks and known core model limitations. We focused our work on
the key assumptions in material additional allowances made by management. Management has
implemented models to take account of risks associated with maturing interest only mortgages as
well as risks associated with a severe economic downturn. We therefore focused our work on testing
these additional allowances and updates to assumptions.
The application of forward-looking economic assumptions used in the models; and
The appropriateness of the ‘staging’ thresholds selected by management to determine whether a
significant increase in credit risk had arisen, and hence whether a 12 month or lifetime loss provision
is recorded.
We compared the forward-looking economic assumptions to independent consensus forecasts when testing the
impact of the multiple economic scenarios used. We also considered the reasonableness of management’s
downside and severe downside assumptions and their assigned weightings to take account of risks from an
economic downturn. We found that the assumptions adopted and assigned weightings were reasonable.
We re-performed key aspects of management’s validation activities to test the ‘staging' thresholds. This included
independently re-performing a retrospective review of the staging outcomes for a sample of portfolios to confirm
that the criteria selected by management were reasonable.
We tested management’s monitoring controls including the sufficiency of the model validation activities
undertaken in the current year and re-performed a number of monitoring tests independently.
We reviewed the credit risk disclosures made by management to ensure compliance with IFRS requirements and
agreed the disclosures to supporting evidence without any material exceptions.
From the evidence obtained we found the judgements applied to allowances made in addition to the core
models, multiple economic scenarios and staging as they relate to loan loss provisioning to be appropriate and
supportable.
Annual Report and Accounts 2019
Independent auditors’ report (continued)
Report on the audit of the financial statements (continued)
Key audit matter
Group and Society
staging as they relate to loan loss provisioning
specialists to confirm that the implemented methodology was compliant with IFRS 9. We tested key assumptions
and judgements used in the calculation of provisions and tested the accuracy of critical data inputs used by the
impairment models on a sample basis to supporting documentation.
Refer to page 59 (Audit Committee Report), page 181 (Accounting Policies) and page 200 (Note 10 and Critical
We tested the key assumptions in material additional allowances made by management and considered the
Accounting Estimates and Judgements).
completeness of adjustments to core models using our audit and wider industry knowledge to take account of
The determination of expected credit losses (‘ECL’) is highly subjective and judgemental. The introduction of IFRS
9 in the current year meant that significant changes have been incorporated into the measurement of loan loss
We compared the forward-looking economic assumptions to independent consensus forecasts when testing the
provisioning, including the development of new impairment models where losses are recognised on an expected,
impact of the multiple economic scenarios used. We also considered the reasonableness of management’s
forward-looking basis, reflecting the Group's view of potential future economic events. As a result, a new
downside and severe downside assumptions and their assigned weightings to take account of risks from an
methodology encompassing new estimates and judgements is now required to calculate impairment provisions
economic downturn. We found that the assumptions adopted and assigned weightings were reasonable.
latent risks and known model limitations.
and disclose them.
In 2018, we audited the opening balances under IFRS 9. This work provided a foundation for our testing in 2019.
independently re-performing a retrospective review of the staging outcomes for a sample of portfolios to confirm
Management built and implemented a number of models to achieve compliance with the requirements of IFRS
that the criteria selected by management were reasonable.
9. The determination of ECL is a complex process and a number of judgements are involved in the estimation of
ECL. We focused our audit work on the areas of the methodology that we identified as most judgemental.
We tested management’s monitoring controls including the sufficiency of the model validation activities
We re-performed key aspects of management’s validation activities to test the ‘staging' thresholds. This included
The three areas we focused on were:
1.
The assessment of allowances made in addition to the core impairment models, which management
agreed the disclosures to supporting evidence without any material exceptions.
undertaken in the current year and re-performed a number of monitoring tests independently.
We reviewed the credit risk disclosures made by management to ensure compliance with IFRS requirements and
From the evidence obtained we found the judgements applied to allowances made in addition to the core
models, multiple economic scenarios and staging as they relate to loan loss provisioning to be appropriate and
has made to take account of latent risks and known core model limitations. We focused our work on
the key assumptions in material additional allowances made by management. Management has
implemented models to take account of risks associated with maturing interest only mortgages as
well as risks associated with a severe economic downturn. We therefore focused our work on testing
supportable.
these additional allowances and updates to assumptions.
2.
3.
The application of forward-looking economic assumptions used in the models; and
The appropriateness of the ‘staging’ thresholds selected by management to determine whether a
significant increase in credit risk had arisen, and hence whether a 12 month or lifetime loss provision
is recorded.
The judgements applied to allowances made in addition to the core models, multiple economic scenarios and
We understood and critically assessed the methodology applied in the impairment models, using modelling
The judgements applied to the material provisions for customer redress
For significant customer redress provisions, we tested the completeness and accuracy of the data used and re-
performed the calculations. We found no material differences in these tests.
How our audit addressed the key audit matter
Key audit matter
How our audit addressed the key audit matter
170
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Independent auditors’ report (continued)
Independent auditors’ report (continued)
Report on the audit of the financial statements (continued)
Group and Society
Refer to page 59 (Audit Committee Report), page 181 (Accounting Policies) and page 227 (Note 27 and Critical
Accounting Estimates and Judgements).
We assessed the assumptions used in the provisions for reasonableness based on the evidence available and our
broader industry knowledge. We traced the actual claims experience and costs to date to historical data without
exception.
There is inherent uncertainty in assessing and measuring the potential obligations resulting from ongoing
regulatory matters and past sales practices, including mis-selling of Payment Protection Insurance (‘PPI’), issues
related to administration of customer accounts and non-compliance with consumer credit legislation.
We tested a sample of customer complaints by reviewing the related correspondence with the customers to
understand whether there were indicators of inconsistency with the outcome recorded. This testing did not
identify any exceptions.
In relation to PPI, there continues to be uncertainty about the volume of future complaints. As we near the
timebar set by the Financial Conduct Authority (29 August 2019), some of this uncertainty will start to dissipate,
however, it remains difficult to predict future complaints given the unprecedented nature of this event.
Specifically, for PPI provisioning, we challenged the forecasted complaint volumes and consider them to be
acceptable based on our understanding of the Society and the industry.
Valuation of IT intangible assets
Group and Society
Given the inherent uncertainty in the calculation of customer redress provisions and their judgemental nature,
we considered whether the disclosures relating to the provisions adequately reflected the uncertainties
associated with customer redress and determined that they did.
No additional material customer redress issues that would require either provision or disclosure in the financial
statements were identified as a result of the audit work performed.
From the evidence obtained we found the judgements applied to calculate the material provisions for customer
redress to be appropriate and supportable.
We tested the design and operating effectiveness of the controls surrounding the impairment assessment for
intangible assets.
We understood and critically assessed management’s impairment process for intangible assets.
Refer to page 59 (Audit Committee Report), page 181 (Accounting Policies) and page 225 (Note 25 and Critical
Accounting Estimates and Judgements).
In September 2018, the Group announced a technology investment to simplify the existing IT estate and enhance
digital services and data capabilities over the next five years.
The Group’s investment in new technologies has lowered the realisable value of certain existing intangible assets
that are becoming obsolete or redundant. Consequently, the technology strategy has impacted the planned
usage, and therefore, recoverability of certain assets. Management have evaluated the impact of the technology
strategy and assessed assets for impairment indicators. This impairment assessment and determination of future
recoverability is judgemental. It entails considering the specific nature of each asset and the planned future use.
Given the complexity and degree of management judgement, we determined that there was a higher level of
audit risk.
We tested a sample of assets to assess whether there were any indicators of impairment. We obtained
management’s impairment assessment and tested this for reasonableness. We reconciled the data to underlying
accounting records and challenged assumptions made with regard to the specific nature of the asset, the impact
of the technology strategy and planned future use. Where indicators of impairment were identified, we obtained
further corroborating evidence to support the recoverability of the asset.
We recalculated the impairment charge for those assets that were considered to be impaired. We challenged the
rationale for the impairment and ensured the judgements made were appropriate. We reconciled the
impairment charges back to underlying accounting records, noting no exceptions.
Based on the procedures performed, management’s conclusions over impairment were supported by the
evidence obtained.
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171
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Independent auditors’ report (continued)
Independent auditors’ report (continued)
Report on the audit of the financial statements (continued)
Key audit matter
Privileged access to IT systems
Group and Society
Refer to page 59 (Audit Committee report).
In previous years, we identified and reported that privileged access management (PAM) controls to applications,
operating systems and data in the financial reporting process required improvements. These controls are critical
to mitigate the risk that users can change IT system functionality and data intentionally or through error.
Management have made significant progress in addressing the control findings, including onboarding most
systems to a suite of enhanced PAM controls.
However, the privileged access remediation achieved in the year occurred in the latter half and further
improvements are required for remediation to be fully complete. A number of accounts are yet to be on boarded
onto PAM controls. As a result, we tested mitigating controls and performed substantive testing procedures in
line with the prior year approach.
How our audit addressed the key audit matter
We understood and tested the design and operating effectiveness of the privileged access control environment.
We identified the inventory of privileged generic accounts and tested if they were controlled appropriately on
CyberArk (third party privileged access management tool). For any accounts that were not, we tested whether
there were effective compensating controls and inspected login date stamps to verify whether they were logged
into during the year.
In response to the weaknesses identified, we performed additional testing of systems that were not on CyberArk
and did not have appropriate mitigating controls. For operating systems, we identified the automated controls
we used in our audit procedures and inspected timestamps and code comparisons to test that system
functionality had not been amended during the year. No inappropriate changes to system functionality were
identified through our testing.
For databases, additional substantive testing was performed on those areas where we identified a higher risk of
fraud or error in relation to privileged access, including the following:
●
●
●
●
●
A higher extent of testing on key reconciliations;
Increased sample testing of administrative expenses;
A specific test over the validity of payments;
Additional risk based manual journal testing;
Additional payroll testing to mitigate the risk of inappropriate amendments to standing data.
In our procedures performed above, no inappropriate changes to system data were identified through our
testing.
Conclusions relating to going concern
In accordance with ISAs (UK), we are required to report if we have anything material to add or draw attention to in respect of the directors’ statement in the financial statements about whether the directors considered it appropriate
to adopt the going concern basis of accounting in preparing the financial statements and the directors’ identification of any material uncertainties to the Group’s and the Society’s ability to continue as a going concern over a period of
at least twelve months from the date of approval of the financial statements.
We have nothing material to add or to draw attention to.
However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group’s and Society’s ability to continue as a going concern. For example, the terms on which the United Kingdom
may withdraw from the European Union are not clear, and it is difficult to evaluate all of the potential implications on the Group’s and Society’s business, customers, suppliers and the wider economy.
Annual Report and Accounts 2019
Independent auditors’ report (continued)
Report on the audit of the financial statements (continued)
Key audit matter
Privileged access to IT systems
Group and Society
Refer to page 59 (Audit Committee report).
How our audit addressed the key audit matter
We understood and tested the design and operating effectiveness of the privileged access control environment.
We identified the inventory of privileged generic accounts and tested if they were controlled appropriately on
CyberArk (third party privileged access management tool). For any accounts that were not, we tested whether
there were effective compensating controls and inspected login date stamps to verify whether they were logged
into during the year.
In previous years, we identified and reported that privileged access management (PAM) controls to applications,
operating systems and data in the financial reporting process required improvements. These controls are critical
In response to the weaknesses identified, we performed additional testing of systems that were not on CyberArk
to mitigate the risk that users can change IT system functionality and data intentionally or through error.
and did not have appropriate mitigating controls. For operating systems, we identified the automated controls
Management have made significant progress in addressing the control findings, including onboarding most
functionality had not been amended during the year. No inappropriate changes to system functionality were
systems to a suite of enhanced PAM controls.
identified through our testing.
we used in our audit procedures and inspected timestamps and code comparisons to test that system
However, the privileged access remediation achieved in the year occurred in the latter half and further
For databases, additional substantive testing was performed on those areas where we identified a higher risk of
improvements are required for remediation to be fully complete. A number of accounts are yet to be on boarded
fraud or error in relation to privileged access, including the following:
onto PAM controls. As a result, we tested mitigating controls and performed substantive testing procedures in
line with the prior year approach.
A higher extent of testing on key reconciliations;
Increased sample testing of administrative expenses;
A specific test over the validity of payments;
Additional risk based manual journal testing;
Additional payroll testing to mitigate the risk of inappropriate amendments to standing data.
●
●
●
●
●
testing.
172
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Independent auditors’ report (continued)
Independent auditors’ report (continued)
Report on the audit of the financial statements (continued)
Reporting on other information
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report thereon. The directors are responsible for the other information. Our opinion on the financial
statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our
knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a
material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are
required to report that fact. We have nothing to report based on these responsibilities.
With respect to the Annual business statement and Directors’ report we also considered whether the disclosures required by the Building Societies Act 1986 have been included.
Based on the responsibilities described above and our work undertaken in the course of the audit, the Building Societies Act 1986 and ISAs (UK) require us also to report certain opinions and matters as described below (required by
ISAs (UK) unless otherwise stated).
Building Societies Act 1986 – Opinion on Annual business statement and Directors’ report
In our opinion, based on our work undertaken in the course of the audit:
● the Annual business statement and the Directors’ report have been prepared in accordance with the requirements of the Building Societies Act 1986;
● the information given in the Directors’ report for the year ended 4 April 2019 is consistent with the accounting records and the financial statements; and
● the information given in the Annual business statement (other than the information upon which we are not required to report) gives a true representation of the matters in respect of which it is given.
In our procedures performed above, no inappropriate changes to system data were identified through our
In the light of the knowledge and understanding of the Group and Society and their environment, we have not identified any material misstatements in the directors’ report.
In accordance with ISAs (UK), we are required to report if we have anything material to add or draw attention to in respect of the directors’ statement in the financial statements about whether the directors considered it appropriate
to adopt the going concern basis of accounting in preparing the financial statements and the directors’ identification of any material uncertainties to the Group’s and the Society’s ability to continue as a going concern over a period of
Conclusions relating to going concern
at least twelve months from the date of approval of the financial statements.
We have nothing material to add or to draw attention to.
However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group’s and Society’s ability to continue as a going concern. For example, the terms on which the United Kingdom
may withdraw from the European Union are not clear, and it is difficult to evaluate all of the potential implications on the Group’s and Society’s business, customers, suppliers and the wider economy.
The directors’ assessment of the prospects of the Group and of the principal risks that would threaten the solvency or liquidity of the Group
As a result of the directors’ voluntary reporting on how they have applied the UK Corporate Governance Code (the “Code”), we are required to report to you if we have anything material to add or draw attention to regarding:
● the directors’ confirmation on page 96 of the Annual Report that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance,
solvency or liquidity.
● the disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated.
● the directors’ explanation on page 95 of the Annual Report as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement
as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention
to any necessary qualifications or assumptions.
We have nothing to report in respect of this responsibility.
Other Code provisions
As a result of the directors’ voluntary reporting on how they have applied the Code, we are required to report to you if, in our opinion:
● the statement given by the directors, on page 96, that they consider the Annual Report taken as a whole to be fair, balanced and understandable, and provides the information necessary for the members to assess the Group’s
and Society’s position and performance, business model and strategy is materially inconsistent with our knowledge of the Group and Society obtained in the course of performing our audit.
● the section of the Annual Report on page 59 describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee.
We have nothing to report in respect of this responsibility.
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173
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Independent auditors’ report (continued)
Independent auditors’ report (continued)
Report on the audit of the financial statements (continued)
Responsibilities for the financial statements and the audit
Responsibilities of the directors for the financial statements
As explained more fully in the Directors’ responsibilities in respect of the preparation of the Annual Report set out on page 95, the directors are responsible for the preparation of the financial statements in accordance with the
applicable framework and for being satisfied that they give a true and fair view. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free
from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the Group’s and the Society’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going
concern basis of accounting unless the directors either intend to liquidate the Group or the Society or to cease operations, or have no realistic alternative but to do so.
Auditors’ responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error
and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors’ report.
Use of this report
This report, including the opinions, has been prepared for and only for the Society’s members as a body in accordance with Section 78 of the Building Societies Act 1986 and for no other purpose. We do not, in giving these opinions,
accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
Other required reporting
Building Societies Act 1986 exception reporting
Under the Building Societies Act 1986 we are required to report to you if, in our opinion:
● adequate accounting records have not been kept by the Society; or
● the Society financial statements are not in agreement with the accounting records; or
● we have not received all the information and explanations and access to documents we require for our audit.
We have no exceptions to report arising from this responsibility.
Appointment
Following the recommendation of the Audit Committee, we were appointed by the directors on 26 July 1991 to audit the financial statements for the year ended 4 April 1992 and subsequent financial periods. The period of total
uninterrupted engagement is 28 years, covering the years ended 4 April 1992 to 4 April 2019.
Annual Report and Accounts 2019
Independent auditors’ report (continued)
Report on the audit of the financial statements (continued)
Responsibilities for the financial statements and the audit
Responsibilities of the directors for the financial statements
174
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Independent auditors’ report (continued)
Independent auditors’ report (continued)
Other voluntary reporting
Corporate Governance Statement
As explained more fully in the Directors’ responsibilities in respect of the preparation of the Annual Report set out on page 95, the directors are responsible for the preparation of the financial statements in accordance with the
applicable framework and for being satisfied that they give a true and fair view. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free
from material misstatement, whether due to fraud or error.
The Group prepares a Corporate governance report in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the Financial Conduct Authority (“DTR”) and has chosen to voluntarily comply with the UK
Corporate Governance Code (the ‘Code’). The directors have requested that we review the parts of the Corporate governance report relating to the Society’s compliance with the provisions of the DTR and the Code, specified for
auditor reporting by the Companies Act 2006, or for review by the Listing Rules of the Financial Conduct Authority, as if the Society were a premium listed company.
We have nothing to report arising from our responsibility to report if a Corporate Governance Statement has not been prepared by the Society.
In preparing the financial statements, the directors are responsible for assessing the Group’s and the Society’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going
concern basis of accounting unless the directors either intend to liquidate the Group or the Society or to cease operations, or have no realistic alternative but to do so.
In our opinion, based on the work undertaken in the course of the audit, the information given in the Corporate Governance Statement (on pages 43 to 58) about internal controls and risk management systems in relation to financial
reporting processes in compliance with rules 7.2.5 and 7.2.6 of the DTR is consistent with the financial statements and has been prepared in accordance with applicable legal requirements.
Auditors’ responsibilities for the audit of the financial statements
In light of our knowledge and understanding of the Group and the Society and their environment obtained in the course of the audit, we did not identify any material misstatements in this information.
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error
and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors’ report.
This report, including the opinions, has been prepared for and only for the Society’s members as a body in accordance with Section 78 of the Building Societies Act 1986 and for no other purpose. We do not, in giving these opinions,
accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
Use of this report
Other required reporting
Building Societies Act 1986 exception reporting
Under the Building Societies Act 1986 we are required to report to you if, in our opinion:
● adequate accounting records have not been kept by the Society; or
● the Society financial statements are not in agreement with the accounting records; or
● we have not received all the information and explanations and access to documents we require for our audit.
We have no exceptions to report arising from this responsibility.
Appointment
Following the recommendation of the Audit Committee, we were appointed by the directors on 26 July 1991 to audit the financial statements for the year ended 4 April 1992 and subsequent financial periods. The period of total
uninterrupted engagement is 28 years, covering the years ended 4 April 1992 to 4 April 2019.
In our opinion, based on the work undertaken in the course of the audit, the information given in the Corporate Governance Statement (on pages 43 to 58) with respect to the Society’s corporate governance code and practices and
about its administrative, management and supervisory bodies and their committees complies with rules 7.2.2, 7.2.3 and 7.2.7 of the DTR.
Going concern
The directors have requested that we review the statement on page 95 in relation to going concern as if the Society were a premium listed company. We have nothing to report having performed our review.
The directors’ assessment of the prospects of the Group and of the principal risks that would threaten the solvency or liquidity of the Group
The directors have requested that we perform a review of the directors’ statements on pages 95 and 96 that they have carried out a robust assessment of the principal risks facing the Group and in relation to the longer-term viability
of the Group, as if the Society were a premium listed company. Our review was substantially less in scope than an audit and only consisted of making inquiries and considering the directors’ process supporting their statements;
checking that the statements are in alignment with the relevant provisions of the Code; and considering whether the statements are consistent with the knowledge and understanding of the Group and Society and their environment
obtained in the course of the audit. We have nothing to report having performed this review.
Other Code provisions
The directors have prepared a Corporate Governance Statement and requested that we review it as though the Society were a premium listed company. We have nothing to report in respect of the requirement for the auditors of
premium listed companies to report when the directors’ statement relating to the Society’s compliance with the Code does not properly disclose a departure from a relevant provision of the Code specified, under the Listing Rules, for
review by the auditors.
Directors’ Remuneration
The Society voluntarily prepares a Report of the directors on remuneration in accordance with the provisions of the Companies Act 2006. The directors have requested that we audit the part of the Report of the directors on
remuneration specified by the Companies Act 2006 to be audited, as if the Society were a quoted company.
In our opinion, the part of the Report of the directors on remuneration to be audited has been properly prepared in accordance with the Companies Act 2006.
Hemione Hudson (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
20 May 2019
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175
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Income statements
For the year ended 4 April 2019
Interest receivable and similar income/(expense):
Calculated using the effective interest rate method
Other
Total interest receivable and similar income/(expense)
Interest expense and similar charges
Net interest income
Fee and commission income
Fee and commission expense
Other operating income/(expense)
Gains/(losses) from derivatives and hedge accounting
Total income
Administrative expenses
Impairment losses on loans and advances to customers
Impairment recoveries on investment securities
Provisions for liabilities and charges
Profit before tax
Taxation
Profit after tax
*Comparatives have been restated as detailed in note 1.
The notes on pages 181 to 247 form part of these financial statements.
Notes
Group
2019
£m
3
3
3
4
5
5
6
7
8
10
27
11
5,141
(23)
5,118
(2,203)
2,915
449
(248)
54
36
3,206
(2,254)
(113)
-
(6)
833
(215)
618
2018*
£m
4,862
(51)
4,811
(1,807)
3,004
449
(244)
(77)
(1)
3,131
(2,024)
(107)
2
(25)
977
(232)
745
Society
2019
£m
4,827
(31)
4,796
(2,313)
2,483
446
(248)
52
(7)
2,726
(2,223)
(129)
-
(6)
368
(114)
254
2018*
£m
4,501
(72)
4,429
(1,964)
2,465
445
(244)
(78)
(26)
2,562
(1,995)
(97)
2
(20)
452
(115)
337
Annual Report and Accounts 2019
Income statements
For the year ended 4 April 2019
Interest receivable and similar income/(expense):
Calculated using the effective interest rate method
Other
Total interest receivable and similar income/(expense)
Interest expense and similar charges
Net interest income
Fee and commission income
Fee and commission expense
Other operating income/(expense)
Gains/(losses) from derivatives and hedge accounting
Total income
Administrative expenses
Impairment losses on loans and advances to customers
Impairment recoveries on investment securities
Provisions for liabilities and charges
Profit before tax
Taxation
Profit after tax
*Comparatives have been restated as detailed in note 1.
The notes on pages 181 to 247 form part of these financial statements.
Notes
Group
2019
£m
Society
2019
£m
3
3
3
4
5
5
6
7
8
10
27
11
5,141
(23)
5,118
(2,203)
2,915
449
(248)
54
36
3,206
(2,254)
(113)
-
(6)
833
(215)
618
2018*
£m
4,862
(51)
4,811
(1,807)
3,004
449
(244)
(77)
(1)
3,131
(2,024)
(107)
2
(25)
977
(232)
745
4,827
(31)
4,796
(2,313)
2,483
446
(248)
52
(7)
2,726
(2,223)
(129)
-
(6)
368
(114)
254
2018*
£m
4,501
(72)
4,429
(1,964)
2,465
445
(244)
(78)
(26)
2,562
(1,995)
(97)
2
(20)
452
(115)
337
176
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Statements of comprehensive income
For the year ended 4 April 2019
Profit after tax
Other comprehensive income/(expense)
Items that will not be reclassified to the income statement
Remeasurements of retirement benefit obligations:
Retirement benefit remeasurements before tax
Taxation
Revaluation of property:
Revaluation before tax
Taxation
Items that may subsequently be reclassified to the income statement
Cash flow hedge reserve:
Fair value movements taken to members’ interests and equity
Amount transferred to income statement
Taxation
Fair value through other comprehensive income reserve:
Fair value movements taken to members’ interests and equity
Amount transferred to income statement
Taxation
Available for sale reserve:
Fair value movements taken to members’ interests and equity
Amount transferred to income statement
Taxation
Other comprehensive income/(expense)
Total comprehensive income
Notes
Group
2019
£m
618
2018*
£m
745
Society
2019
£m
254
2018*
£m
337
30
11
26
11
11
11
11
210
(57)
153
(2)
1
(1)
152
540
(100)
(112)
328
12
(28)
4
(12)
468
1,086
29
(7)
22
2
(1)
1
23
(2,316)
2,057
68
(191)
50
(8)
(11)
31
(137)
608
210
(57)
153
(2)
1
(1)
152
434
(249)
(47)
138
13
(27)
3
(11)
279
533
26
(8)
18
2
(1)
1
19
(418)
342
19
(57)
50
(8)
(11)
31
(7)
330
*The year to 4 April 2019 is prepared on an IFRS 9 basis; comparatives are prepared on an IAS 39 basis. On implementation of IFRS 9 the available for sale reserve was replaced by the fair value through other comprehensive income reserve.
The notes on pages 181 to 247 form part of these financial statements.
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Annual Report and Accounts 2019
Annual Report and Accounts 2019
Balance sheets
At 4 April 2019
Notes
4 April 2019
£m
Group
5 April 2018*
£m
4 April 2018*
£m
4 April 2019
£m
Society
5 April 2018*
£m
4 April 2018*
£m
Assets
Cash
Loans and advances to banks and similar institutions
Investment securities
Derivative financial instruments
Fair value adjustment for portfolio hedged risk
Loans and advances to customers
Investments in Group undertakings
Intangible assets
Property, plant and equipment
Accrued income and expenses prepaid
Deferred tax
Current tax assets
Other assets
Total assets
Liabilities
Shares
Deposits from banks and similar institutions
Other deposits
Fair value adjustment for portfolio hedged risk
Debt securities in issue
Derivative financial instruments
Other liabilities
Provisions for liabilities and charges
Accruals and deferred income
Subordinated liabilities
Subscribed capital
Deferred tax
Current tax liabilities
Retirement benefit obligations
Total liabilities
Members’ interests and equity
Core capital deferred shares
Other equity instruments
General reserve
Revaluation reserve
Cash flow hedge reserve
Fair value through other comprehensive income reserve
Available for sale reserve
Total members’ interests and equity
Total members’ interests, equity and liabilities
13
15
14
33
25
26
11
16
17
18
15
27
19
20
11
30
31
32
12,493
4,009
16,234
3,562
411
199,051
-
1,324
889
184
53
-
91
238,301
153,969
20,149
5,074
(17)
35,942
1,593
583
199
346
6,706
250
144
89
105
225,132
1,325
992
10,418
64
320
50
14,361
3,493
13,046
4,121
(144)
191,421
-
1,342
887
164
144
-
102
228,937
148,003
20,436
4,693
(53)
34,118
2,337
345
274
336
5,497
263
49
53
345
216,696
1,325
992
9,802
68
(8)
62
13,169
238,301
12,241
228,937
14,361
3,493
13,046
4,121
(109)
191,593
-
1,342
887
164
98
-
102
229,098
148,003
20,436
4,693
(53)
34,118
2,337
345
273
336
5,497
263
49
53
345
216,695
1,325
992
9,951
68
(8)
75
12,403
229,098
12,493
3,994
16,232
2,614
411
164,447
32,220
1,312
887
1,299
39
-
87
236,035
153,969
19,091
6,619
(17)
32,354
2,959
2,857
198
346
6,706
250
33
49
103
225,517
1,325
992
8,056
64
25
56
10,518
236,035
14,361
3,477
13,046
3,108
(144)
158,087
31,296
1,330
885
1,535
127
4
100
227,212
148,003
19,248
6,110
(53)
29,734
3,746
3,549
272
335
5,497
263
23
-
342
217,069
1,325
992
7,804
68
(113)
67
10,143
227,212
14,361
3,477
13,046
3,108
(109)
158,175
31,296
1,330
885
1,535
95
4
100
227,303
148,003
19,248
6,110
(53)
29,734
3,746
3,549
271
335
5,497
263
23
-
342
217,068
1,325
992
7,883
68
(113)
80
10,235
227,303
*Comparatives have been restated as detailed in note 1. Balances at 5 April 2018 have been prepared under IFRS 9 as detailed in note 37.
The notes on pages 181 to 247 form part of these financial statements.
Approved by the Board of directors on 20 May 2019.
D L Roberts Chairman
J D Garner Chief Executive Officer
M M Rennison Chief Financial Officer
Annual Report and Accounts 2019
Balance sheets
At 4 April 2019
Assets
Cash
Loans and advances to banks and similar institutions
Investment securities
Derivative financial instruments
Fair value adjustment for portfolio hedged risk
Loans and advances to customers
Investments in Group undertakings
Intangible assets
Property, plant and equipment
Accrued income and expenses prepaid
Deferred tax
Current tax assets
Other assets
Total assets
Liabilities
Shares
Other deposits
Deposits from banks and similar institutions
Fair value adjustment for portfolio hedged risk
Debt securities in issue
Derivative financial instruments
Other liabilities
Provisions for liabilities and charges
Accruals and deferred income
Subordinated liabilities
Subscribed capital
Deferred tax
Current tax liabilities
Retirement benefit obligations
Total liabilities
Members’ interests and equity
Core capital deferred shares
Other equity instruments
General reserve
Revaluation reserve
Cash flow hedge reserve
13
15
14
33
25
26
11
16
17
18
15
27
19
20
11
30
31
32
4 April 2019
5 April 2018*
4 April 2018*
4 April 2019
5 April 2018*
4 April 2018*
Group
Society
Notes
£m
£m
£m
£m
238,301
228,937
229,098
236,035
227,212
227,303
12,493
4,009
16,234
3,562
411
199,051
-
1,324
889
184
53
-
91
153,969
20,149
5,074
(17)
35,942
1,593
6,706
583
199
346
250
144
89
105
1,325
992
10,418
64
320
50
14,361
3,493
13,046
4,121
(144)
191,421
-
1,342
887
164
144
-
102
148,003
20,436
4,693
(53)
34,118
2,337
345
274
336
5,497
263
49
53
345
1,325
992
9,802
68
(8)
62
14,361
3,493
13,046
4,121
(109)
191,593
-
1,342
887
164
98
-
102
148,003
20,436
4,693
(53)
34,118
2,337
345
273
336
5,497
263
49
53
345
1,325
992
9,951
68
(8)
75
12,493
3,994
16,232
2,614
411
164,447
32,220
1,312
887
1,299
39
-
87
153,969
19,091
6,619
(17)
32,354
2,959
2,857
198
346
6,706
250
33
49
103
1,325
992
8,056
64
25
56
£m
14,361
3,477
13,046
3,108
(144)
158,087
31,296
1,330
885
1,535
127
4
100
148,003
19,248
6,110
(53)
29,734
3,746
3,549
272
335
5,497
263
23
-
342
1,325
992
7,804
68
(113)
67
10,143
227,212
£m
14,361
3,477
13,046
3,108
(109)
158,175
31,296
1,330
885
1,535
95
4
100
148,003
19,248
6,110
(53)
29,734
3,746
3,549
271
335
5,497
263
23
-
342
1,325
992
7,883
68
(113)
80
10,235
227,303
225,132
216,696
216,695
225,517
217,069
217,068
Fair value through other comprehensive income reserve
Available for sale reserve
Total members’ interests and equity
Total members’ interests, equity and liabilities
13,169
238,301
12,241
228,937
12,403
229,098
10,518
236,035
*Comparatives have been restated as detailed in note 1. Balances at 5 April 2018 have been prepared under IFRS 9 as detailed in note 37.
The notes on pages 181 to 247 form part of these financial statements.
178
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Group statement of movements in members’ interests and equity
For the year ended 4 April 2019
At 4 April 2018
IFRS 9 transition (note i)
At 5 April 2018
Profit for the year
Net remeasurements of retirement benefit obligations
Net revaluation of property
Reserve transfer
Net movement in cash flow hedge reserve
Net movement in FVOCI reserve
Total comprehensive income
Distribution to the holders of core capital deferred shares
Distribution to the holders of Additional Tier 1 capital (note ii)
At 4 April 2019
For the year ended 4 April 2018
At 5 April 2017
Profit for the year
Net remeasurements of retirement benefit obligations
Net revaluation of property
Net movement in cash flow hedge reserve
Net movement in available for sale reserve
Total comprehensive income
Issue of core capital deferred shares
Distribution to the holders of core capital deferred shares
Distribution to the holders of Additional Tier 1 capital (note ii)
At 4 April 2018
Total
£m
12,403
(162)
12,241
618
153
(1)
-
328
(12)
1,086
(108)
(50)
13,169
Core capital
deferred shares
£m
1,325
-
1,325
-
-
-
-
-
-
-
-
-
1,325
Core capital
deferred shares
£m
531
-
-
-
-
-
-
794
-
-
1,325
Other equity
instruments
£m
992
-
992
-
-
-
-
-
-
-
-
-
992
Other equity
instruments
£m
992
-
-
-
-
-
-
-
-
-
992
Available for
sale reserve
£m
75
(75)
General reserve
£m
9,951
(149)
9,802
618
153
-
3
-
-
774
(108)
(50)
10,418
Revaluation
reserve
£m
68
-
68
-
-
(1)
(3)
-
-
(4)
-
-
64
Cash flow
hedge reserve
£m
(8)
-
(8)
-
-
-
-
328
-
328
-
-
320
General reserve
£m
9,316
745
22
-
-
-
767
-
(82)
(50)
9,951
Revaluation
reserve
£m
67
-
-
1
-
-
1
-
-
-
68
Cash flow
hedge reserve
£m
183
-
-
-
(191)
-
(191)
-
-
-
(8)
Available for
sale reserve
£m
44
-
-
-
-
31
31
-
-
-
75
FVOCI
reserve
£m
62
62
-
-
-
-
-
(12)
(12)
-
-
50
Total
£m
11,133
745
22
1
(191)
31
608
794
(82)
(50)
12,403
Approved by the Board of directors on 20 May 2019.
D L Roberts Chairman
J D Garner Chief Executive Officer
M M Rennison Chief Financial Officer
Notes:
i.
ii.
Adjustments on implementation of IFRS 9 as detailed in note 37.
The distribution to the holders of Additional Tier 1 capital is shown net of an associated tax credit of £18 million (2018: £18 million).
The notes on pages 181 to 247 form part of these financial statements.
S
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179
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Society statement of movement in members’ interests and equity
For the year ended 4 April 2019
At 4 April 2018
IFRS 9 transition (note i)
At 5 April 2018
Profit for the year
Net remeasurements of retirement benefit obligations
Net revaluation of property
Reserve transfer
Net movement in cash flow hedge reserve
Net movement in FVOCI reserve
Total comprehensive income
Distribution to the holders of core capital deferred shares
Distribution to the holders of Additional Tier 1 capital (note ii)
At 4 April 2019
For the year ended 4 April 2018
At 5 April 2017
Profit for the year
Net remeasurements of retirement benefit obligations
Net revaluation of property
Net movement in cash flow hedge reserve
Net movement in available for sale reserve
Total comprehensive income
Issue of core capital deferred shares
Distribution to the holders of core capital deferred shares
Distribution to the holders of Additional Tier 1 capital (note ii)
At 4 April 2018
Total
£m
10,235
(92)
10,143
254
153
(1)
-
138
(11)
533
(108)
(50)
10,518
Core capital
deferred shares
£m
1,325
-
1,325
-
-
-
-
-
-
-
-
-
1,325
Core capital
deferred shares
£m
531
-
-
-
-
-
-
794
-
-
1,325
Other equity
instruments
£m
992
-
992
-
-
-
-
-
-
-
-
-
992
Other equity
instruments
£m
992
-
-
-
-
-
-
-
-
-
992
Available for
sale reserve
£m
80
(80)
General reserve
£m
7,883
(79)
7,804
254
153
-
3
-
-
410
(108)
(50)
8,056
Revaluation
reserve
£m
68
-
68
-
-
(1)
(3)
-
-
(4)
-
-
64
Cash flow
hedge reserve
£m
(113)
-
(113)
-
-
-
-
138
-
138
-
-
25
General reserve
£m
7,660
337
18
-
-
-
355
-
(82)
(50)
7,883
Revaluation
reserve
£m
67
-
-
1
-
-
1
-
-
-
68
Cash flow
hedge reserve
£m
(56)
-
-
-
(57)
-
(57)
-
-
-
(113)
Available for
sale reserve
£m
49
-
-
-
-
31
31
-
-
-
80
FVOCI
reserve
£m
67
67
-
-
-
-
-
(11)
(11)
-
-
56
Total
£m
9,243
337
18
1
(57)
31
330
794
(82)
(50)
10,235
Notes:
i.
ii.
Adjustments on implementation of IFRS 9 as detailed in note 37.
The distribution to the holders of Additional Tier 1 capital is shown net of an associated tax credit of £18 million (2018: £18 million).
The notes on pages 181 to 247 form part of these financial statements.
Annual Report and Accounts 2019
180
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Society statement of movement in members’ interests and equity
For the year ended 4 April 2019
At 4 April 2018
IFRS 9 transition (note i)
At 5 April 2018
Profit for the year
Net remeasurements of retirement benefit obligations
Net revaluation of property
Reserve transfer
Net movement in cash flow hedge reserve
Net movement in FVOCI reserve
Total comprehensive income
Distribution to the holders of core capital deferred shares
Distribution to the holders of Additional Tier 1 capital (note ii)
At 4 April 2019
For the year ended 4 April 2018
At 5 April 2017
Profit for the year
Net remeasurements of retirement benefit obligations
Net revaluation of property
Net movement in cash flow hedge reserve
Net movement in available for sale reserve
Total comprehensive income
Issue of core capital deferred shares
Distribution to the holders of core capital deferred shares
Distribution to the holders of Additional Tier 1 capital (note ii)
At 4 April 2018
Notes:
i.
ii.
Core capital
Other equity
General reserve
Revaluation
Cash flow
deferred shares
instruments
reserve
hedge reserve
Available for
sale reserve
£m
1,325
1,325
£m
992
992
1,325
992
£m
531
£m
992
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
794
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
£m
7,883
(79)
7,804
254
153
-
3
-
-
410
(108)
(50)
8,056
£m
7,660
337
18
-
-
-
-
355
(82)
(50)
7,883
£m
68
68
-
-
-
-
-
-
-
(1)
(3)
(4)
64
£m
67
-
-
1
-
-
1
-
-
-
£m
(113)
(113)
-
-
-
-
-
-
-
-
138
138
25
£m
(56)
(57)
(57)
-
-
-
-
-
-
-
1,325
992
68
(113)
Total
£m
10,235
(92)
10,143
254
153
(1)
-
138
(11)
533
(108)
(50)
10,518
FVOCI
reserve
£m
67
67
-
-
-
-
-
-
-
(11)
(11)
56
Total
£m
9,243
337
18
1
(57)
31
330
794
(82)
(50)
10,235
£m
80
(80)
£m
49
-
-
-
-
-
-
-
31
31
80
Core capital
deferred shares
Other equity
instruments
General reserve
Revaluation
Cash flow
reserve
hedge reserve
Available for
sale reserve
Adjustments on implementation of IFRS 9 as detailed in note 37.
The distribution to the holders of Additional Tier 1 capital is shown net of an associated tax credit of £18 million (2018: £18 million).
The notes on pages 181 to 247 form part of these financial statements.
Cash flow statements
For the year ended 4 April 2019
Cash flows (used in)/generated from operating activities
Profit before tax
Adjustments for:
Non-cash items included in profit before tax
Changes in operating assets and liabilities
Taxation
Net cash flows (used in)/generated from operating activities
Notes
36
36
Cash flows used in investing activities
Purchase of investment securities
Sale and maturity of investment securities
Purchase of property, plant and equipment
Sale of property, plant and equipment
Purchase of intangible assets
Net cash flows used in investing activities
Cash flows generated from/(used in) financing activities
Distributions paid to the holders of core capital deferred shares
Distributions paid to the holders of Additional Tier 1 capital
Issue of core capital deferred shares
Issue of debt securities
Redemption of debt securities in issue
Interest paid on debt securities in issue
Issue of subordinated liabilities
Redemption of subordinated liabilities
Interest paid on subordinated liabilities
Redemption of subscribed capital
Interest paid on subscribed capital
Net cash flows generated from/(used in) financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at start of year
Cash and cash equivalents at end of year
36
*Comparatives have been restated as detailed in note 1.
The notes on pages 181 to 247 form part of these financial statements.
Group
Society
2019
£m
833
1,401
(2,514)
(135)
(415)
(9,020)
6,298
(156)
12
(371)
(3,237)
(108)
(68)
-
27,956
(25,970)
(592)
1,029
-
(222)
(13)
(14)
1,998
(1,654)
17,510
15,856
2018*
£m
977
1,202
7,255
(236)
9,198
(7,090)
3,553
(159)
10
(365)
(4,051)
(82)
(68)
794
22,298
(27,737)
(679)
3,995
(1,251)
(141)
-
(14)
(2,885)
2,262
15,248
17,510
2019
£m
368
1,409
(2,874)
(41)
(1,138)
(9,018)
6,298
(156)
12
(371)
(3,235)
(108)
(68)
-
27,956
(25,288)
(552)
1,029
-
(222)
(13)
(14)
2,720
(1,653)
17,494
15,841
2018*
£m
452
1,184
7,812
(140)
9,308
(7,090)
3,553
(159)
10
(365)
(4,051)
(82)
(68)
794
21,389
(26,970)
(643)
3,995
(1,251)
(141)
-
(14)
(2,991)
2,266
15,228
17,494
S
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181
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements
1. Statement of accounting policies
Basis of preparation
IFRS 9 ‘Financial Instruments’
These financial statements have been prepared in accordance with International Financial Reporting
Standards (IFRS) as published by the International Accounting Standards Board (IASB) and interpretations
issued by the IFRS Interpretations Committee of the IASB as adopted by the European Union. These financial
statements have also been prepared in accordance with those parts of the Building Societies (Accounts and
Related Provisions) Regulations 1998 (as amended) applicable to organisations reporting under IFRS.
The financial statements have been prepared under the historical cost convention as modified by the
revaluation of investment properties, branches and non-specialised buildings, financial assets measured
at fair value through other comprehensive income (FVOCI), and derivatives and certain other financial assets
and liabilities measured at fair value through profit and loss (FVTPL). As stated in the Directors’ report,
the directors consider that it is appropriate to continue to adopt the going concern basis in preparing
the accounts.
A summary of the Group’s accounting policies is set out below. The accounting policies have been consistently
applied, except for changes arising from adoption of new and revised IFRSs and certain voluntary changes in
accounting policy, as described below.
The Group has adopted the requirements of IFRS 9 from 5 April 2018. The classification and measurement
and impairment requirements have been applied retrospectively by adjusting the opening balance sheet at the
date of initial application, with no restatement of comparatives. The impacts on the Group’s and Society’s
balance sheet and members’ interests and equity at 5 April 2018 are included in note 37. Additional
information on the transition to IFRS 9 can be found in Nationwide’s ‘Report on Transition to IFRS 9: Financial
Instruments’, available on the Society’s website at nationwide.co.uk
IFRS 9 also includes an accounting policy choice to continue applying IAS 39 hedge accounting, which the
Group has exercised within these financial statements. The revised accounting policies following the adoption
of IFRS 9 are set out in the sections below.
Consequential amendments to IAS 1 ‘Presentation of Financial Statements,’ arising from IFRS 9, introduced a
requirement to present separately interest revenue calculated using the effective interest rate method. The
Group has therefore disaggregated the previous line item for interest receivable and similar income into two
separate components for amounts:
Further information about judgements in applying accounting policies and critical accounting estimates is
provided in note 2.
•
•
calculated using the effective interest rate method, and
other.
Adoption of new and revised IFRSs
Comparative amounts have been restated.
The Group has adopted the following standards with effect from 5 April 2018:
IFRS 15 ‘Revenue from Contracts with Customers’
•
•
IFRS 9 ‘Financial Instruments’
IFRS 15 ‘Revenue from Contracts with Customers’.
Further information on the impacts of adopting these new standards is set out below.
In addition, a number of amendments and improvements to accounting standards have been issued by the
International Accounting Standards Board (IASB) with an effective date of 1 January 2018. Those relevant to these
financial statements, being minor amendments to IFRS 2 ‘Classification and Measurement of Share-based
Payment Transactions’ and IAS 40 ‘Transfers of Investment Property’, were adopted with no significant impact for
the Group or Society.
The Group has applied IFRS 15 ‘Revenue from Contracts with Customers’ from 5 April 2018. The standard
applies to all contracts with customers but does not apply to financial instruments, lease contracts or non-
monetary exchanges. IFRS 15 has introduced a principles-based approach for revenue recognition, with
revenue being recognised as the related obligations are satisfied.
The Group has assessed revenue streams within the scope of IFRS 15 and concluded that the timing of revenue
recognition is unchanged under the new standard. There is therefore no transitional impact from adopting
this standard.
Annual Report and Accounts 2019
Notes to the financial statements
1. Statement of accounting policies
Basis of preparation
IFRS 9 ‘Financial Instruments’
These financial statements have been prepared in accordance with International Financial Reporting
Standards (IFRS) as published by the International Accounting Standards Board (IASB) and interpretations
issued by the IFRS Interpretations Committee of the IASB as adopted by the European Union. These financial
statements have also been prepared in accordance with those parts of the Building Societies (Accounts and
Related Provisions) Regulations 1998 (as amended) applicable to organisations reporting under IFRS.
The financial statements have been prepared under the historical cost convention as modified by the
revaluation of investment properties, branches and non-specialised buildings, financial assets measured
at fair value through other comprehensive income (FVOCI), and derivatives and certain other financial assets
and liabilities measured at fair value through profit and loss (FVTPL). As stated in the Directors’ report,
the directors consider that it is appropriate to continue to adopt the going concern basis in preparing
the accounts.
A summary of the Group’s accounting policies is set out below. The accounting policies have been consistently
applied, except for changes arising from adoption of new and revised IFRSs and certain voluntary changes in
accounting policy, as described below.
Further information about judgements in applying accounting policies and critical accounting estimates is
provided in note 2.
Adoption of new and revised IFRSs
The Group has adopted the requirements of IFRS 9 from 5 April 2018. The classification and measurement
and impairment requirements have been applied retrospectively by adjusting the opening balance sheet at the
date of initial application, with no restatement of comparatives. The impacts on the Group’s and Society’s
balance sheet and members’ interests and equity at 5 April 2018 are included in note 37. Additional
information on the transition to IFRS 9 can be found in Nationwide’s ‘Report on Transition to IFRS 9: Financial
Instruments’, available on the Society’s website at nationwide.co.uk
IFRS 9 also includes an accounting policy choice to continue applying IAS 39 hedge accounting, which the
Group has exercised within these financial statements. The revised accounting policies following the adoption
of IFRS 9 are set out in the sections below.
Consequential amendments to IAS 1 ‘Presentation of Financial Statements,’ arising from IFRS 9, introduced a
requirement to present separately interest revenue calculated using the effective interest rate method. The
Group has therefore disaggregated the previous line item for interest receivable and similar income into two
separate components for amounts:
calculated using the effective interest rate method, and
•
•
other.
Comparative amounts have been restated.
The Group has adopted the following standards with effect from 5 April 2018:
IFRS 15 ‘Revenue from Contracts with Customers’
•
•
IFRS 9 ‘Financial Instruments’
IFRS 15 ‘Revenue from Contracts with Customers’.
Further information on the impacts of adopting these new standards is set out below.
In addition, a number of amendments and improvements to accounting standards have been issued by the
International Accounting Standards Board (IASB) with an effective date of 1 January 2018. Those relevant to these
financial statements, being minor amendments to IFRS 2 ‘Classification and Measurement of Share-based
Payment Transactions’ and IAS 40 ‘Transfers of Investment Property’, were adopted with no significant impact for
this standard.
the Group or Society.
The Group has applied IFRS 15 ‘Revenue from Contracts with Customers’ from 5 April 2018. The standard
applies to all contracts with customers but does not apply to financial instruments, lease contracts or non-
monetary exchanges. IFRS 15 has introduced a principles-based approach for revenue recognition, with
revenue being recognised as the related obligations are satisfied.
The Group has assessed revenue streams within the scope of IFRS 15 and concluded that the timing of revenue
recognition is unchanged under the new standard. There is therefore no transitional impact from adopting
182
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
1. Statement of accounting policies (continued)
Other changes in accounting policy
Income statement presentation
While not necessarily required by the adoption of IFRS 9 as described above, voluntary changes in accounting
policy have also been made in relation to the presentation of certain income and expense relating to financial
instruments. In particular, the opportunity has been taken to reclassify certain items previously included in
interest receivable and similar income/(expense) to reflect better the nature of the transactions, with gains
and losses recognised on the disposal of investment securities classified as FVOCI (2018: available for sale)
now presented in other operating income. Comparatives have been restated as shown below:
Income statement extract for the year ended 4 April 2018
Group
Interest receivable and similar income
Other operating income/(expense)
Society
Interest receivable and similar income
Other operating income/(expense)
Previously
published
£m
4,818
(84)
4,437
(86)
Adjustment
Restated
£m
(7)
7
(8)
8
£m
4,811
(77)
4,429
(78)
This reclassification has no impact on the Group’s or Society’s net assets or members’ interests and equity at 4
April 2018 and no impact on the Group’s or Society’s net cash flows generated from operating activities or
cash and cash equivalents for the year ended 4 April 2018.
Balance sheet presentation
To provide a more meaningful presentation of the Group’s collateral, repurchase agreement and reverse
repurchase agreement balances, amounts held with counterparties which are non-banking financial
institutions and central clearing houses are now presented with similar balances held with banking
counterparties within newly named categories of ‘loans and advances to banks and similar institutions’ and
‘deposits from banks and similar institutions.’ Previously, balances with non-banking and central clearing
house counterparties were presented separately within ‘loans and advances to customers’ and ‘other
deposits,’ and similar balances with banking counterparties were included within ‘loans and advances to
banks’ and ‘deposits from banks’.
Additionally, following the closure of the Group’s Isle of Man and Republic of Ireland operations in the year
ended 4 April 2018, the remaining balances within ‘due to customers’ have been combined with ‘other
deposits’.
Comparatives have been restated to reflect these reclassifications as shown below:
Balance sheet extract at 4 April 2018
Group
Loans and advances to banks and similar institutions (note i)
Loans and advances to customers
Deposits from banks and similar institutions (note ii)
Other deposits
Due to customers
Society
Loans and advances to banks and similar institutions (note i)
Loans and advances to customers
Deposits from banks and similar institutions (note ii)
Other deposits
Due to customers
Notes:
i.
ii.
Previously ‘Loans and advances to banks’.
Previously ‘Deposits from banks’.
Previously
published
£m
3,422
191,664
19,404
5,323
402
3,406
158,246
18,216
6,740
402
Adjustment
Restated
£m
71
(71)
1,032
(630)
(402)
71
(71)
1,032
(630)
(402)
£m
3,493
191,593
20,436
4,693
-
3,477
158,175
19,248
6,110
-
These reclassifications have no impact on the Group’s or Society’s net assets or members’ interests and equity
at 4 April 2018. ‘Net cash flows generated from operating activities’ have increased by £66 million for the year
ended 4 April 2018, and ‘cash and cash equivalents’ as at 4 April 2018 and 5 April 2017 have increased by
£71 million and £5 million, respectively, as collateral held with non-banking counterparties is now included in
cash equivalents, consistent with collateral held with banking counterparties.
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Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
1. Statement of accounting policies (continued)
Future accounting developments
The following pronouncements, relevant to the Group, have been adopted by the EU but are either not effective at 4 April 2019 or are voluntary and have therefore not been applied in preparing these financial statements:
Pronouncement
IFRS 16 Leases
IFRS 9 Financial Instruments – Hedge
Accounting
Nature of change
For lessee accounting there will no longer be a distinction between operating and finance leases. Lessees will
capitalise leases through the recognition of assets representing the contractual rights of use. The present value of
contractual payments will be recognised as lease liabilities. Lessees will recognise interest expense on the lease
liability and a depreciation charge on the right-of-use asset. IFRS 16 will not result in a significant change to lessor
accounting.
The Group will adopt IFRS 16 on a modified retrospective basis. This is expected to result in the recognition of
right-of-use assets of approximately £180 million and a lease liability of approximately £190 million in respect of
leased branch and office properties previously classified as operating leases, with no expected impact to members’
interest and equity. As permitted by the transition option, comparative figures for the prior year will not be
restated. The Group intends to take advantage of certain exemptions within IFRS 16, including the election not to
recognise a lease liability and right-of-use asset for leases with a term not exceeding 12 months or for which the
underlying asset is of low value.
The transition requirements of IFRS 9 include an option to continue to apply the existing hedge accounting
requirements of IAS 39 until the development of a separate standard on accounting for dynamic risk management
(macro hedge accounting). The Group continued to apply this option in its financial statements for the year ended
4 April 2019. The Group intends to voluntarily adopt the hedge accounting provisions of IFRS 9 with effect from 5
April 2019, but will continue to apply the scope exception to apply IAS 39 for fair value hedge accounting for a
portfolio hedge of interest rate risk.
The adoption of IFRS 9 hedge accounting provisions will allow the Group to make use of the improvements the
standard has made available for micro hedge accounting. This includes the ability to choose to exclude currency
basis spreads from hedge designation and instead report this element of fair valuation directly in a hedge reserve
within equity. Adoption will be on a prospective basis, and is not expected to have a significant impact for the
Group.
Effective date
Accounting periods beginning on or after
1 January 2019
Voluntary adoption for accounting periods
beginning on or after 1 January 2018
Prepayment Features with Negative
Compensation (Amendments to IFRS 9)
These amendments allow financial assets with a prepayment option that could result in the option’s holder
receiving compensation for early termination to meet the ‘solely payments of principal and interest’ (SPPI)
condition if specified criteria are met.
Accounting periods beginning on or after
1 January 2019
These amendments are not expected to have a significant impact for the Group.
IFRIC 23 Uncertainty over Income Tax
Treatments
This interpretation clarifies the accounting for uncertainties in income tax treatments.
Accounting periods beginning on or after
1 January 2019
The interpretation is not expected to have a significant impact for the Group.
Annual Report and Accounts 2019
Notes to the financial statements (continued)
1. Statement of accounting policies (continued)
Future accounting developments
The following pronouncements, relevant to the Group, have been adopted by the EU but are either not effective at 4 April 2019 or are voluntary and have therefore not been applied in preparing these financial statements:
Pronouncement
IFRS 16 Leases
Nature of change
Effective date
For lessee accounting there will no longer be a distinction between operating and finance leases. Lessees will
Accounting periods beginning on or after
capitalise leases through the recognition of assets representing the contractual rights of use. The present value of
1 January 2019
contractual payments will be recognised as lease liabilities. Lessees will recognise interest expense on the lease
liability and a depreciation charge on the right-of-use asset. IFRS 16 will not result in a significant change to lessor
accounting.
IFRS 9 Financial Instruments – Hedge
The transition requirements of IFRS 9 include an option to continue to apply the existing hedge accounting
Voluntary adoption for accounting periods
Accounting
requirements of IAS 39 until the development of a separate standard on accounting for dynamic risk management
beginning on or after 1 January 2018
The Group will adopt IFRS 16 on a modified retrospective basis. This is expected to result in the recognition of
right-of-use assets of approximately £180 million and a lease liability of approximately £190 million in respect of
leased branch and office properties previously classified as operating leases, with no expected impact to members’
interest and equity. As permitted by the transition option, comparative figures for the prior year will not be
restated. The Group intends to take advantage of certain exemptions within IFRS 16, including the election not to
recognise a lease liability and right-of-use asset for leases with a term not exceeding 12 months or for which the
underlying asset is of low value.
(macro hedge accounting). The Group continued to apply this option in its financial statements for the year ended
4 April 2019. The Group intends to voluntarily adopt the hedge accounting provisions of IFRS 9 with effect from 5
April 2019, but will continue to apply the scope exception to apply IAS 39 for fair value hedge accounting for a
portfolio hedge of interest rate risk.
The adoption of IFRS 9 hedge accounting provisions will allow the Group to make use of the improvements the
standard has made available for micro hedge accounting. This includes the ability to choose to exclude currency
basis spreads from hedge designation and instead report this element of fair valuation directly in a hedge reserve
within equity. Adoption will be on a prospective basis, and is not expected to have a significant impact for the
Group.
Prepayment Features with Negative
These amendments allow financial assets with a prepayment option that could result in the option’s holder
Accounting periods beginning on or after
Compensation (Amendments to IFRS 9)
receiving compensation for early termination to meet the ‘solely payments of principal and interest’ (SPPI)
1 January 2019
condition if specified criteria are met.
These amendments are not expected to have a significant impact for the Group.
IFRIC 23 Uncertainty over Income Tax
This interpretation clarifies the accounting for uncertainties in income tax treatments.
Accounting periods beginning on or after
Treatments
1 January 2019
The interpretation is not expected to have a significant impact for the Group.
184
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
1. Statement of accounting policies (continued)
Future accounting developments (continued)
Pronouncement
Nature of change
Annual Improvements to IFRS Standards
2015 – 2017 Cycle
Amendments have been made to four standards:
•
•
•
•
IFRS 3 ‘Business Combinations’
IFRS 11 ‘Joint Arrangements’
IAS 12 ‘Income Taxes’
IAS 23 ‘Borrowing Costs’.
Effective date
Accounting periods beginning on or after
1 January 2019
The amendment to IAS 12 clarifies that an entity should recognise the tax consequences of dividends where the
transactions or events that generated the distributable profits are recognised. As a result of its application, the
income tax consequences of distributions on Additional Tier 1 instruments will be presented in profit or loss rather
than directly in members’ interests and equity. Comparative information will be restated.
If the amendment had been applied in the year ended 4 April 2019, the impact would have been a £18 million
increase in profit after tax with no effect on members’ interests and equity.
The amendments to other accounting standards are not expected to have a significant impact for the Group.
Plan Amendment, Curtailment or Settlement
(Amendments to IAS 19)
The amendments require an entity to use updated assumptions to determine current service cost and net interest
for the remainder of the period after a plan amendment, curtailment or settlement and clarifies the effect of such
activities on the requirements regarding an asset ceiling.
Accounting periods beginning on or after
1 January 2019
The Group will apply the amendments to any pension plan amendments, curtailments or settlements which occur
prospectively from the effective date.
The following pronouncement which may be relevant to the Group but is neither adopted by the EU nor effective at 4 April 2019 has not been applied in preparing these financial statements.
Pronouncement
Nature of change
Effective date
IFRS 17 Insurance Contracts
IFRS 17 establishes the principles for the recognition, measurement, presentation and disclosure of insurance
contracts within the scope of the standard.
Accounting periods beginning on or after
1 January 2021
The requirements of IFRS 17 are currently being assessed; however, it is not expected that the new standard will
have a significant impact for the Group.
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185
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
1. Statement of accounting policies (continued)
Basis of consolidation
Interest receivable and interest expense
The assets, liabilities and results of the Society and its undertakings, which include subsidiaries and structured
entities, are included in the financial statements on the basis of accounts made up to the reporting date.
The Group consolidates an entity from the date on which the Group: (i) has power over the entity; (ii) is
exposed to, or has rights to variable returns from its involvement with the entity; and (iii) has the ability to
affect those returns through the exercise of its power. The assessment of control is based on all facts and
circumstances. The Group reassesses whether it controls an entity if facts and circumstances indicate that
there are changes to one or more of the three elements of control. The Group deconsolidates subsidiaries
from the date that control ceases.
A structured entity is an entity in which voting or similar rights are not the dominant factor in deciding
control. Structured entities are consolidated when the substance of the relationship indicates control.
The Group considers factors such as the purpose and design of the entity, size and exposure to variability
of returns and nature of the relationship.
Upon consolidation, all intra-Group assets and liabilities, equity, income, expenses and cash flows relating
to transactions between members of the Group are eliminated.
Investments in subsidiary undertakings are stated in the Society accounts at cost less provisions for any
impairment in value. The directors consider it appropriate for administrative and commercial reasons that
subsidiary undertakings have financial years ending on 31 March. Adjustment is made for individually
significant transactions arising between 31 March and the Society’s year end.
Securitisation transactions
The Group has securitised certain mortgage loans by the transfer of the loans to structured entities controlled
by the Group. The securitisation enables a subsequent issuance of debt, either by the Society or the structured
entities, to investors who gain the security of the underlying assets as collateral. Those structured entities are
fully consolidated into the Group accounts.
The transfers of the mortgage loans to the structured entities are not treated as sales by the Society. The
Society continues to recognise the mortgage loans on its own balance sheet after the transfer because it
retains their risks and rewards through the receipt of substantially all of the profits or losses of the structured
entities. In the accounts of the Society, the proceeds received from the transfer are accounted for as a deemed
loan repayable to the structured entities.
As explained in note 14, the Group has also entered into self issuances of debt to be used as collateral for
repurchase (‘repo’) and similar transactions. Investments in self issued debt and the related obligation,
together with the related income, expenditure and cash flows, are not recognised in the Society’s or Group’s
financial statements. This avoids the ‘grossing-up’ of the financial statements that would otherwise arise.
To manage interest rate risk, the Society enters into derivative transactions with the structured entities,
receiving a rate of interest based on the securitised mortgages and paying a rate inherent in the debt
issuances. These internal derivatives are treated as part of the deemed loan and not separately fair valued
because the relevant mortgage loans are not derecognised. All other derivatives relating to securitisations are
treated as explained in the derivatives and hedge accounting policy below.
For instruments measured at amortised cost the effective interest rate (EIR) method is used to measure the
carrying value of a financial asset or liability and to allocate associated interest income or expense over the
relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments
or receipts over the expected life of the financial instrument or, when appropriate, a shorter period, to the net
carrying amount of the financial asset or financial liability.
In calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of
the financial instrument (for example early redemption penalty charges) and anticipated customer behaviour
but does not consider future credit losses. The calculation includes all fees received and paid and costs borne
that are an integral part of the effective interest rate, transaction costs, and all other premiums or discounts
above or below market rates.
Interest income is calculated by applying the EIR to the gross carrying amount of non-credit impaired financial
assets. For credit-impaired financial assets the interest income is calculated by applying the EIR to the
amortised cost of the credit-impaired financial assets (i.e. net of the allowance for expected credit losses
(ECLs)). Where loans are credit impaired on origination, or when purchased from third parties, the carrying
amount at initial recognition is net of the lifetime ECL at that date. For these assets the EIR reflects the ECLs in
determining the future cash flows expected to be received from the financial asset.
Interest receivable and similar income/(expense) calculated using the effective interest rate method also
includes interest on financial assets classified as fair value through other comprehensive income, and on
derivatives in qualifying hedge relationships.
Interest income not calculated using the effective interest rate method, including interest on financial assets
classified as fair value through profit or loss and derivatives not in qualifying hedge relationships, is presented
as other interest receivable and similar income/(expense).
Fees and commissions
Fees and commission income and expense includes fees other than those that are an integral part of EIR. Fees
and commissions relating to current accounts, mortgages and credit cards are either:
•
•
transaction-based and therefore recognised when the performance obligation related to the transaction is
fulfilled, or
related to the provision of services over a period of time and therefore recognised on a systematic basis
over the life of the agreement as services are provided.
The transaction prices and provision of services are defined within the product terms and conditions.
Trail commission relating to investments under administration, general insurance and protection products
sold on behalf of third parties may include variable consideration. Where this is the case the trail commission
is recognised either on the accruals basis or, if the uncertainties are more significant, once the uncertainties
are resolved.
Fee and commission income is generally earned from short-term contracts with payment terms that do not
include a significant financing component.
Annual Report and Accounts 2019
Notes to the financial statements (continued)
1. Statement of accounting policies (continued)
The assets, liabilities and results of the Society and its undertakings, which include subsidiaries and structured
entities, are included in the financial statements on the basis of accounts made up to the reporting date.
The Group consolidates an entity from the date on which the Group: (i) has power over the entity; (ii) is
exposed to, or has rights to variable returns from its involvement with the entity; and (iii) has the ability to
affect those returns through the exercise of its power. The assessment of control is based on all facts and
circumstances. The Group reassesses whether it controls an entity if facts and circumstances indicate that
there are changes to one or more of the three elements of control. The Group deconsolidates subsidiaries
from the date that control ceases.
A structured entity is an entity in which voting or similar rights are not the dominant factor in deciding
control. Structured entities are consolidated when the substance of the relationship indicates control.
The Group considers factors such as the purpose and design of the entity, size and exposure to variability
of returns and nature of the relationship.
Upon consolidation, all intra-Group assets and liabilities, equity, income, expenses and cash flows relating
to transactions between members of the Group are eliminated.
Investments in subsidiary undertakings are stated in the Society accounts at cost less provisions for any
impairment in value. The directors consider it appropriate for administrative and commercial reasons that
subsidiary undertakings have financial years ending on 31 March. Adjustment is made for individually
significant transactions arising between 31 March and the Society’s year end.
Securitisation transactions
Basis of consolidation
Interest receivable and interest expense
Segmental reporting
186
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
1. Statement of accounting policies (continued)
For instruments measured at amortised cost the effective interest rate (EIR) method is used to measure the
carrying value of a financial asset or liability and to allocate associated interest income or expense over the
relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments
or receipts over the expected life of the financial instrument or, when appropriate, a shorter period, to the net
carrying amount of the financial asset or financial liability.
In calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of
the financial instrument (for example early redemption penalty charges) and anticipated customer behaviour
but does not consider future credit losses. The calculation includes all fees received and paid and costs borne
that are an integral part of the effective interest rate, transaction costs, and all other premiums or discounts
above or below market rates.
Interest income is calculated by applying the EIR to the gross carrying amount of non-credit impaired financial
assets. For credit-impaired financial assets the interest income is calculated by applying the EIR to the
amortised cost of the credit-impaired financial assets (i.e. net of the allowance for expected credit losses
(ECLs)). Where loans are credit impaired on origination, or when purchased from third parties, the carrying
amount at initial recognition is net of the lifetime ECL at that date. For these assets the EIR reflects the ECLs in
determining the future cash flows expected to be received from the financial asset.
Interest receivable and similar income/(expense) calculated using the effective interest rate method also
includes interest on financial assets classified as fair value through other comprehensive income, and on
derivatives in qualifying hedge relationships.
Interest income not calculated using the effective interest rate method, including interest on financial assets
classified as fair value through profit or loss and derivatives not in qualifying hedge relationships, is presented
as other interest receivable and similar income/(expense).
Fees and commission income and expense includes fees other than those that are an integral part of EIR. Fees
and commissions relating to current accounts, mortgages and credit cards are either:
The Group’s Executive Committee is responsible for allocating resources and assessing the performance
of the business and is therefore identified as the chief operating decision maker.
The Group has determined that it has one reportable segment as the Executive Committee reviews
performance and makes decisions based on the Group as whole. No segmental analysis is required on
geographical lines as substantially all of the Group’s activities are in the United Kingdom. As a result,
no segmental disclosure is provided.
Intangible assets
Intangible assets held by the Group consist primarily of externally acquired and internally developed computer
software which is held at cost less accumulated amortisation and impairment. In accordance with IAS 38
‘Intangible Assets’, software development costs are capitalised if it is probable that the asset created will
generate future economic benefits. Costs incurred to establish technological feasibility or to maintain existing
levels of performance are recognised as an expense.
Web development costs are capitalised where the expenditure is incurred on developing an income
generating website.
Where applicable, directly attributable borrowing costs incurred in the construction of qualifying assets are
capitalised.
Computer software intangible assets are amortised using the straight line method over their estimated useful
lives of between 3 and 10 years. Amortisation commences when the assets are ready for their intended use.
Estimated useful lives are reviewed annually and adjusted, if appropriate, in the light of technological
developments, usage and other relevant factors.
Computer software is reviewed for indicators of impairment at each reporting date and whenever events or
changes in circumstances indicate that the carrying amount may not be recoverable. Where the carrying
amount is not recoverable the asset is written down immediately to the estimated recoverable amount, based
on value in use calculations.
transaction-based and therefore recognised when the performance obligation related to the transaction is
Property, plant and equipment
Freehold and long leasehold properties comprise mainly branches and office buildings.
Branches and non-specialised buildings are stated at revalued amounts, being the fair value, determined by
market-based evidence at the date of the valuation, less any subsequent accumulated depreciation and
subsequent impairment. Valuations are completed annually, as at 4 April, by external, independent and
qualified surveyors who have recent experience in the location and type of properties. Valuations are
performed in accordance with the Royal Institution of Chartered Surveyors Appraisal and Valuation Standards
and are performed on a vacant possession basis, using a comparative method of valuation with reference to
sales prices and observable market rents for similar properties in similar locations.
Increases in the valuations of branches and non-specialised buildings are credited to other comprehensive
income except where they reverse decreases for the same asset previously recognised in the income
statement, in which case the increase in the valuation is recognised in the income statement. Decreases in
valuations are recognised in the income statement except where they reverse amounts previously credited to
The Group has securitised certain mortgage loans by the transfer of the loans to structured entities controlled
by the Group. The securitisation enables a subsequent issuance of debt, either by the Society or the structured
entities, to investors who gain the security of the underlying assets as collateral. Those structured entities are
fully consolidated into the Group accounts.
Fees and commissions
The transfers of the mortgage loans to the structured entities are not treated as sales by the Society. The
Society continues to recognise the mortgage loans on its own balance sheet after the transfer because it
retains their risks and rewards through the receipt of substantially all of the profits or losses of the structured
entities. In the accounts of the Society, the proceeds received from the transfer are accounted for as a deemed
loan repayable to the structured entities.
•
•
fulfilled, or
As explained in note 14, the Group has also entered into self issuances of debt to be used as collateral for
repurchase (‘repo’) and similar transactions. Investments in self issued debt and the related obligation,
together with the related income, expenditure and cash flows, are not recognised in the Society’s or Group’s
financial statements. This avoids the ‘grossing-up’ of the financial statements that would otherwise arise.
To manage interest rate risk, the Society enters into derivative transactions with the structured entities,
receiving a rate of interest based on the securitised mortgages and paying a rate inherent in the debt
issuances. These internal derivatives are treated as part of the deemed loan and not separately fair valued
because the relevant mortgage loans are not derecognised. All other derivatives relating to securitisations are
treated as explained in the derivatives and hedge accounting policy below.
related to the provision of services over a period of time and therefore recognised on a systematic basis
over the life of the agreement as services are provided.
The transaction prices and provision of services are defined within the product terms and conditions.
Trail commission relating to investments under administration, general insurance and protection products
sold on behalf of third parties may include variable consideration. Where this is the case the trail commission
is recognised either on the accruals basis or, if the uncertainties are more significant, once the uncertainties
are resolved.
Fee and commission income is generally earned from short-term contracts with payment terms that do not
include a significant financing component.
other comprehensive income for the same asset, in which case the decrease in valuation is recognised in
other comprehensive income.
The Group holds a small number of investment properties comprising properties held for rental. These are
stated at fair value, determined by market-based evidence at the date of the valuation. Valuations are
completed annually, as at 4 April, by independent surveyors. Changes in fair value are included in the income
statement. Depreciation is not charged on investment properties.
Other property, plant and equipment, including specialised administration buildings, are included at historical
cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly
attributable to the acquisition of the items, major alterations and refurbishments.
Where applicable, directly attributable borrowing costs incurred in the construction of qualifying assets are
capitalised.
Land is not depreciated. The depreciation of other assets commences when the assets are ready for their
intended use and is calculated using the straight line method to allocate their cost or valuation over the
following estimated useful lives:
Branches and non-specialised buildings
Specialised administration buildings
Plant and machinery
Equipment, fixtures, fittings and vehicles
60 years
up to 60 years
5 to 15 years
3 to 10 years
Estimated useful lives and residual values are reviewed annually and adjusted, if appropriate, in the light of
technological developments, usage and other relevant factors.
Assets are reviewed for indicators of impairment at each reporting date and whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. Where the carrying amount is not
recoverable the asset is written down immediately to the estimated recoverable amount.
Gains and losses on disposals are included in other operating income/(expense) in the income statement.
Leases
Operating leases are leases that do not transfer substantially all the risks and rewards incidental to ownership
to the lessee. Operating lease payments and receipts are charged or credited to the income statement on a
straight line basis over the life of the lease.
Taxation including deferred tax
Current tax payable on profits, based on the applicable tax law in each jurisdiction, is recognised as an
expense in the period in which profits arise.
Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax
bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax is
determined using tax rates and laws that have been enacted or substantively enacted by the balance sheet
date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is
settled.
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Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
1. Statement of accounting policies (continued)
Deferred tax assets are recognised where it is probable that future taxable profits will be available against
which the temporary differences can be utilised. Deferred tax is provided on temporary differences arising
from investments in subsidiaries, except where the timing of the reversal of the temporary difference is
controlled by the Group and it is probable that the difference will not reverse in the foreseeable future. The tax
effects of tax losses available for carry forward are recognised as a deferred tax asset when it is probable that
future taxable profits will be available against which these losses can be utilised.
Deferred tax assets and liabilities are offset where there is a legally enforceable right to offset current tax
assets against current tax liabilities and where the deferred tax assets and liabilities relate to income taxes
levied by the same taxation authority on either the same taxable entity or different taxable entities where
there is an intention to settle on a net basis.
Tax related to the fair value remeasurement of financial assets measured at FVOCI, which is charged or
credited to other comprehensive income and accumulated in the FVOCI reserve, is also credited or charged to
other comprehensive income and is subsequently reclassified from other comprehensive income to the
income statement together with the associated deferred loss or gain.
Tax related to movements in the fair value of derivatives that are subject to cash flow hedge accounting, which
are charged or credited to other comprehensive income and accumulated in the cash flow hedge reserve, is
also credited or charged to other comprehensive income and is subsequently reclassified from other
comprehensive income to the income statement together with the associated deferred loss or gain from cash
flow hedge accounting.
Tax related to movements in the valuation of property, which are charged or credited to other comprehensive
income and accumulated in the revaluation reserve, is also credited or charged to other comprehensive
income and accumulated in the revaluation reserve.
Tax related to remeasurements of retirement benefit obligations, which are charged or credited to other
comprehensive income and accumulated in the general reserve, is also credited or charged to other
comprehensive income.
Employee benefits
(a) Pensions
The Group operates a number of defined benefit and defined contribution pension arrangements.
Defined benefit pension arrangements
Actuarial remeasurements arise from experience adjustments (the effects of differences between previous
actuarial assumptions and what has actually occurred) and changes in forward looking actuarial assumptions.
Actuarial remeasurements are recognised in full, in the year they occur, in other comprehensive income.
Past service costs are recognised immediately in the income statement.
Defined contribution pension arrangements
A defined contribution arrangement is one into which the Group and the employee pay fixed contributions,
without any further obligation to pay additional contributions. Payments to defined contribution schemes are
charged to the income statement as they fall due.
(b) Other post retirement obligations
The Group provides post retirement healthcare to a small number of former employees. The Group recognises
this obligation and the actuarial remeasurement in a similar manner to the defined benefit pension plans.
(c) Other long term employee benefits
The cost of bonuses payable 12 months or more after the end of the year in which they are earned is accrued
over the period from the start of the performance year until all relevant criteria have been met.
(d) Short term employee benefits
The cost of short term employee benefits, including wages and salaries, social security costs and healthcare
for current employees, is recognised in the year of service.
Provisions
A provision is recognised where there is a present obligation as a result of a past event, it is probable that the
obligation will be settled and it can be reliably estimated. This includes management’s best estimate of
amounts payable for customer redress.
The Group has an obligation to contribute to the Financial Services Compensation Scheme (FSCS) to enable
the FSCS to meet compensation claims from, in particular, retail depositors of failed banks. A provision is
recognised, to the extent that it can be reliably estimated, when the Group has an obligation in accordance
with IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ and the levy is legally enforceable, in line
with IFRIC 21 ‘Levies’. The amount provided is based on information received from the FSCS and the Group’s
historic share of industry protected deposits.
A defined benefit plan is one that defines the benefit an employee will receive on retirement, depending on
such factors as age, length of service and salary.
Financial assets
The liability recognised on the balance sheet in respect of the defined benefit pension plans is the present
value of the defined benefit obligation at the balance sheet date less the fair value of plan assets. The defined
benefit obligation is calculated by independent actuaries using the projected unit credit method and
assumptions agreed with the Group. The present value of the defined benefit obligation is determined by
discounting the estimated future cash flows derived from yields of high quality corporate bonds that have
terms to maturity approximating to the terms of the related pension liability.
Financial assets comprise cash, loans and advances to banks and similar institutions, investment securities,
derivative financial instruments and loans and advances to customers.
Recognition and derecognition
All financial assets are recognised initially at fair value. Purchases and sales of financial assets are accounted
for at trade date. Financial assets acquired through a business combination or portfolio acquisition are
recognised at fair value at the acquisition date. Financial assets are derecognised when the rights to receive
cash flows have expired or where the assets have been transferred and substantially all the risks and rewards
of ownership have been transferred.
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Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
1. Statement of accounting policies (continued)
The fair value of a financial instrument on initial recognition is normally the transaction price (plus directly
attributable transaction costs for financial assets which are not subsequently measured at fair value through
profit or loss). On initial recognition, it is presumed that the transaction price is the fair value unless there is
observable information available in an active market to the contrary. Any difference between the fair value at
initial recognition and the transaction price is recognised immediately as a gain or loss in the income
statement where the fair value is based on a quoted price in an active market or a valuation using only
observable market data. In all other cases, any gain or loss is deferred and recognised over the life of the
transaction, or until valuation inputs become observable.
Modification of contractual terms
An instrument that is renegotiated is derecognised if the existing agreement is cancelled and a new
agreement is made on substantially different terms (such as renegotiations of commercial loans). Residential
mortgages reaching the end of a fixed interest deal period are deemed repricing events, rather than a
modification of contractual terms, as the change in interest rate at the end of the fixed rate period was
envisaged in the original mortgage contract.
Where an instrument is renegotiated and not derecognised (for example forbearance), the change is
considered a modification of contractual terms. Where this arises, the gross carrying amount of the loan is
recalculated as the present value of the renegotiated or modified contractual cash flows, discounted at the
loan’s original effective interest rate. Any gain or loss on recalculation is recognised immediately in the income
statement.
Tax related to movements in the valuation of property, which are charged or credited to other comprehensive
The cost of short term employee benefits, including wages and salaries, social security costs and healthcare
Classification and measurement
The classification and subsequent measurement of financial assets is based on an assessment of the Group’s
business models for managing the assets and their contractual cash flow characteristics. Financial assets are
classified into the following three categories:
(a) Amortised cost
Financial assets held to collect contractual cash flows and where contractual terms comprise solely payments
of principal and interest (SPPI) are classified as amortised cost. This category of financial assets includes cash,
loans and advances to banks and similar institutions, the majority of the Group’s residential and commercial
mortgage loans, all unsecured lending, and certain investment securities within a ‘hold to collect’ business
model.
Financial assets within this category are recognised on either the receipt of cash or deposit of funds into one
of the Group’s bank accounts (for cash and loans and advances to banks and similar institutions), when the
funds are advanced to borrowers (for residential, commercial and unsecured lending) or on the trade date for
purchases of investment securities. After initial recognition, the assets are measured at amortised cost using
the effective interest rate method, less provisions for expected credit losses.
(b) Fair value through other comprehensive income
Debt instruments held in a business model whose objective is achieved by both collecting contractual cash
flows and selling financial assets, and where contractual terms comprise solely payments of principal and
interest, are classified and measured at FVOCI. This category of financial assets includes most of the Group’s
investment securities which are held to manage liquidity requirements.
Annual Report and Accounts 2019
Notes to the financial statements (continued)
1. Statement of accounting policies (continued)
Deferred tax assets are recognised where it is probable that future taxable profits will be available against
which the temporary differences can be utilised. Deferred tax is provided on temporary differences arising
from investments in subsidiaries, except where the timing of the reversal of the temporary difference is
controlled by the Group and it is probable that the difference will not reverse in the foreseeable future. The tax
effects of tax losses available for carry forward are recognised as a deferred tax asset when it is probable that
future taxable profits will be available against which these losses can be utilised.
Actuarial remeasurements arise from experience adjustments (the effects of differences between previous
actuarial assumptions and what has actually occurred) and changes in forward looking actuarial assumptions.
Actuarial remeasurements are recognised in full, in the year they occur, in other comprehensive income.
Past service costs are recognised immediately in the income statement.
Defined contribution pension arrangements
Deferred tax assets and liabilities are offset where there is a legally enforceable right to offset current tax
assets against current tax liabilities and where the deferred tax assets and liabilities relate to income taxes
levied by the same taxation authority on either the same taxable entity or different taxable entities where
A defined contribution arrangement is one into which the Group and the employee pay fixed contributions,
without any further obligation to pay additional contributions. Payments to defined contribution schemes are
charged to the income statement as they fall due.
there is an intention to settle on a net basis.
Tax related to the fair value remeasurement of financial assets measured at FVOCI, which is charged or
credited to other comprehensive income and accumulated in the FVOCI reserve, is also credited or charged to
The Group provides post retirement healthcare to a small number of former employees. The Group recognises
other comprehensive income and is subsequently reclassified from other comprehensive income to the
this obligation and the actuarial remeasurement in a similar manner to the defined benefit pension plans.
income statement together with the associated deferred loss or gain.
Tax related to movements in the fair value of derivatives that are subject to cash flow hedge accounting, which
are charged or credited to other comprehensive income and accumulated in the cash flow hedge reserve, is
also credited or charged to other comprehensive income and is subsequently reclassified from other
comprehensive income to the income statement together with the associated deferred loss or gain from cash
flow hedge accounting.
The cost of bonuses payable 12 months or more after the end of the year in which they are earned is accrued
over the period from the start of the performance year until all relevant criteria have been met.
(b) Other post retirement obligations
(c) Other long term employee benefits
(d) Short term employee benefits
Provisions
income and accumulated in the revaluation reserve, is also credited or charged to other comprehensive
for current employees, is recognised in the year of service.
income and accumulated in the revaluation reserve.
Tax related to remeasurements of retirement benefit obligations, which are charged or credited to other
comprehensive income and accumulated in the general reserve, is also credited or charged to other
comprehensive income.
Employee benefits
(a) Pensions
The Group operates a number of defined benefit and defined contribution pension arrangements.
Defined benefit pension arrangements
A defined benefit plan is one that defines the benefit an employee will receive on retirement, depending on
Financial assets
such factors as age, length of service and salary.
The liability recognised on the balance sheet in respect of the defined benefit pension plans is the present
value of the defined benefit obligation at the balance sheet date less the fair value of plan assets. The defined
benefit obligation is calculated by independent actuaries using the projected unit credit method and
assumptions agreed with the Group. The present value of the defined benefit obligation is determined by
discounting the estimated future cash flows derived from yields of high quality corporate bonds that have
terms to maturity approximating to the terms of the related pension liability.
A provision is recognised where there is a present obligation as a result of a past event, it is probable that the
obligation will be settled and it can be reliably estimated. This includes management’s best estimate of
amounts payable for customer redress.
The Group has an obligation to contribute to the Financial Services Compensation Scheme (FSCS) to enable
the FSCS to meet compensation claims from, in particular, retail depositors of failed banks. A provision is
recognised, to the extent that it can be reliably estimated, when the Group has an obligation in accordance
with IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ and the levy is legally enforceable, in line
with IFRIC 21 ‘Levies’. The amount provided is based on information received from the FSCS and the Group’s
historic share of industry protected deposits.
Financial assets comprise cash, loans and advances to banks and similar institutions, investment securities,
derivative financial instruments and loans and advances to customers.
Recognition and derecognition
All financial assets are recognised initially at fair value. Purchases and sales of financial assets are accounted
for at trade date. Financial assets acquired through a business combination or portfolio acquisition are
recognised at fair value at the acquisition date. Financial assets are derecognised when the rights to receive
cash flows have expired or where the assets have been transferred and substantially all the risks and rewards
of ownership have been transferred.
Financial assets within this category are recognised on trade date. The assets are measured at fair value using,
in the majority of cases, market prices or, where there is no active market, prices obtained from market
participants. In sourcing valuations, the Group makes use of a consensus pricing service, in line with standard
industry practice. In cases where market prices or prices from market participants are not available,
discounted cash flow models are used
Interest on FVOCI assets is recognised in interest receivable and similar income in the income statement,
using the effective interest rate method.
Unrealised gains and losses arising from changes in value are recognised in other comprehensive income.
Provisions for expected credit losses and foreign exchange gains or losses are recognised in the income
statement.
Cumulative gains or losses arising on sale are recognised in the income statement, net of any credit or foreign
exchange gains or losses already recognised.
(c) Fair value through profit or loss
All other financial assets are measured at FVTPL. Financial assets within this category include derivative
instruments and a small number of residential and commercial loans and investment securities with
contractual cash flow characteristics which do not meet the SPPI criteria. The contractual terms for these cash
flows include contingent or leverage features, or returns based on movements in underlying collateral values
such as house prices.
Fair values are based on observable market data, valuations obtained by third parties or, where these are not
available, internal models. Gains or losses arising from changes in the fair value of these instruments and on
disposal are recognised in the income statement within other operating income/(expense).
Hedge accounting is not applied to assets classified as FVTPL; however, hedging may be applied for economic
purposes. Gains or losses arising from changes in the fair value of derivatives economically hedging FVTPL
financial assets is also included within other operating income/(expense).
Impairment of financial assets
Financial assets within the scope of IFRS 9 expected credit loss (ECL) requirements comprise all financial debt
instruments measured at either amortised cost or FVOCI. These include cash, loans and advances to banks
and similar institutions, and the majority of investment securities and loans and advances to customers. Also
within scope are irrevocable undrawn commitments to lend and intra-group lending (the latter being
eliminated on consolidation in the Group accounts).
The ECL represents the present value of expected cash shortfalls following the default of a financial instrument
or undrawn commitment. A cash shortfall is the difference between the cash flows that are due in accordance
with the contractual terms of the instrument and the cash flows that the Group expects to receive.
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189
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
1. Statement of accounting policies (continued)
The allowance for ECLs is based on an assessment of the probability of default, exposure at default and loss
given default, discounted at the effective interest rate to give a net present value. The estimation of ECLs is
unbiased and probability weighted, taking into account all reasonable and supportable information, including
forward looking economic assumptions and a range of possible outcomes. ECLs are typically calculated from
initial recognition of the financial asset for the maximum contractual period that the Group is exposed to the
credit risk. However, for revolving credit loans such as credit cards and overdrafts, the Group’s credit risk is
not limited to their contractual period and therefore the expected life of the loan and associated undrawn
commitment is calculated based on the behavioural life of the loan.
For financial assets recognised in the balance sheet at amortised cost, the allowance for ECLs is offset against
the gross carrying value so that the amount presented in the balance sheet is net of impairment provisions.
For financial assets classified as FVOCI, any credit losses recognised are offset against cumulative fair value
movements within the other comprehensive income reserve. For separately identifiable irrevocable loan
commitments, where the related financial asset has not yet been advanced, the provision is presented in
provisions for liabilities and charges in the balance sheet.
Forward looking economic inputs
ECLs are calculated by reference to information on past events, current conditions and forecasts of future
economic conditions. Multiple economic scenarios are incorporated into ECL calculation models. These
scenarios are based on external sources where available and appropriate, and internally generated
assumptions in all other cases. To capture any non-linear relationship between economic assumptions and
credit losses, a minimum of three scenarios is used. This includes a central scenario which reflects the Group’s
view of the most likely future economic conditions, together with an upside and a downside scenario
representing alternative plausible views of economic conditions, weighted based on management’s view of
their probability.
Credit risk categorisation
Qualitative factors that may indicate a significant change in credit risk include concession events where full
repayment of principal and interest is envisaged, on a discounted basis.
Further information about the identification of significant increases in credit risk is provided in note 10.
Stage 3: credit impaired (or defaulted) loans
Financial assets are transferred into stage 3 when there is objective evidence that an instrument is credit
impaired. Provisions for stage 3 assets are made on the basis of credit default events expected to occur over
the lifetime of the instrument. Assets are considered credit impaired when:
•
•
•
contractual payments of either principal or interest are past due by more than 90 days;
there are other indications that the borrower is unlikely to pay such as signs of financial difficulty,
probable bankruptcy, breaches of contract and concession events which have a detrimental impact on the
present value of future cashflows; or
the loan is otherwise considered to be in default.
Interest income on stage 3 credit impaired loans is recognised in the income statement on the loan balance
net of the ECL provision. The balance sheet value of stage 3 loans reflects the contractual terms of the assets,
and continues to increase over time with the contractually accrued interest.
Purchased or originated credit impaired loans
Where loans are credit impaired on origination, or when purchased from third parties, the carrying amount at
initial recognition is net of the lifetime ECL at that date. Thereafter, any subsequent change (favourable or
unfavourable) in the lifetime ECL is recognised in the income statement. POCI loans are separately disclosed
as credit impaired loans and cannot be transferred out of the POCI designation, even if there is a significant
improvement in credit quality.
For the purpose of calculating ECLs, assets are categorised into three 'stages' as follows:
Transfers between stages
Stage 1: no significant increase in credit risk since initial recognition
On initial recognition, and for financial assets where there has not been a significant increase in credit risk
since the date of advance, provision is made for losses from credit default events expected to occur within the
next 12 months. Expected credit losses for these stage 1 assets continue to be recognised on this basis unless
there is a significant increase in the credit risk of the asset.
Stage 2: significant increase in credit risk
Financial assets are categorised as being within stage 2 where an instrument has experienced a significant
increase in credit risk since initial recognition. For these assets, provision is made for losses from credit default
events expected to occur over the lifetime of the instrument.
Whether a significant increase in credit risk has occurred is ascertained by comparing the probability of
default at the reporting date to the probability of default at origination, based on quantitative and qualitative
factors. Quantitative considerations take into account changes in the residual lifetime probability of default
(PD) of the asset. As a backstop, all assets with an arrears status of more than 30 days past due on contractual
payments are considered to be in stage 2.
Transfers from stage 1 to 2 occur when there has been a significant increase in credit risk and from stage 2 to
3 when credit impairment is indicated as described above.
For assets in stage 2 or 3, loans can transfer back to stage 1 or 2 once the criteria for a significant increase in
credit risk or impairment are no longer met. For loans subject to concession events such as forbearance,
accounts are transferred back to stage 1 or 2 only after being up to date for a period of 12 months.
Write-off
Loans remain on the balance sheet, net of associated provisions, until they are deemed to have no reasonable
expectation of recovery. Loans are generally written off after realisation of any proceeds from collateral and
upon conclusion of the collections process, including consideration of whether an account has reached a point
where continuing attempts to recover are no longer likely to be successful. Where a loan is not recoverable, it
is written off against the related provision for loan impairment once all the necessary procedures have been
completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously
written off decrease the value of impairment losses recorded in the income statement.
For financial assets recognised in the balance sheet at amortised cost, the allowance for ECLs is offset against
the lifetime of the instrument. Assets are considered credit impaired when:
Annual Report and Accounts 2019
Notes to the financial statements (continued)
1. Statement of accounting policies (continued)
The allowance for ECLs is based on an assessment of the probability of default, exposure at default and loss
given default, discounted at the effective interest rate to give a net present value. The estimation of ECLs is
unbiased and probability weighted, taking into account all reasonable and supportable information, including
forward looking economic assumptions and a range of possible outcomes. ECLs are typically calculated from
initial recognition of the financial asset for the maximum contractual period that the Group is exposed to the
credit risk. However, for revolving credit loans such as credit cards and overdrafts, the Group’s credit risk is
not limited to their contractual period and therefore the expected life of the loan and associated undrawn
commitment is calculated based on the behavioural life of the loan.
the gross carrying value so that the amount presented in the balance sheet is net of impairment provisions.
For financial assets classified as FVOCI, any credit losses recognised are offset against cumulative fair value
movements within the other comprehensive income reserve. For separately identifiable irrevocable loan
commitments, where the related financial asset has not yet been advanced, the provision is presented in
provisions for liabilities and charges in the balance sheet.
Forward looking economic inputs
ECLs are calculated by reference to information on past events, current conditions and forecasts of future
economic conditions. Multiple economic scenarios are incorporated into ECL calculation models. These
scenarios are based on external sources where available and appropriate, and internally generated
assumptions in all other cases. To capture any non-linear relationship between economic assumptions and
credit losses, a minimum of three scenarios is used. This includes a central scenario which reflects the Group’s
view of the most likely future economic conditions, together with an upside and a downside scenario
representing alternative plausible views of economic conditions, weighted based on management’s view of
their probability.
Credit risk categorisation
For the purpose of calculating ECLs, assets are categorised into three 'stages' as follows:
Stage 1: no significant increase in credit risk since initial recognition
On initial recognition, and for financial assets where there has not been a significant increase in credit risk
since the date of advance, provision is made for losses from credit default events expected to occur within the
next 12 months. Expected credit losses for these stage 1 assets continue to be recognised on this basis unless
there is a significant increase in the credit risk of the asset.
Stage 2: significant increase in credit risk
Financial assets are categorised as being within stage 2 where an instrument has experienced a significant
increase in credit risk since initial recognition. For these assets, provision is made for losses from credit default
events expected to occur over the lifetime of the instrument.
Whether a significant increase in credit risk has occurred is ascertained by comparing the probability of
default at the reporting date to the probability of default at origination, based on quantitative and qualitative
factors. Quantitative considerations take into account changes in the residual lifetime probability of default
(PD) of the asset. As a backstop, all assets with an arrears status of more than 30 days past due on contractual
payments are considered to be in stage 2.
repayment of principal and interest is envisaged, on a discounted basis.
Further information about the identification of significant increases in credit risk is provided in note 10.
Stage 3: credit impaired (or defaulted) loans
Financial assets are transferred into stage 3 when there is objective evidence that an instrument is credit
impaired. Provisions for stage 3 assets are made on the basis of credit default events expected to occur over
•
•
•
contractual payments of either principal or interest are past due by more than 90 days;
there are other indications that the borrower is unlikely to pay such as signs of financial difficulty,
probable bankruptcy, breaches of contract and concession events which have a detrimental impact on the
present value of future cashflows; or
the loan is otherwise considered to be in default.
Interest income on stage 3 credit impaired loans is recognised in the income statement on the loan balance
net of the ECL provision. The balance sheet value of stage 3 loans reflects the contractual terms of the assets,
and continues to increase over time with the contractually accrued interest.
Purchased or originated credit impaired loans
Where loans are credit impaired on origination, or when purchased from third parties, the carrying amount at
initial recognition is net of the lifetime ECL at that date. Thereafter, any subsequent change (favourable or
unfavourable) in the lifetime ECL is recognised in the income statement. POCI loans are separately disclosed
as credit impaired loans and cannot be transferred out of the POCI designation, even if there is a significant
improvement in credit quality.
Transfers between stages
For assets in stage 2 or 3, loans can transfer back to stage 1 or 2 once the criteria for a significant increase in
credit risk or impairment are no longer met. For loans subject to concession events such as forbearance,
accounts are transferred back to stage 1 or 2 only after being up to date for a period of 12 months.
Write-off
Loans remain on the balance sheet, net of associated provisions, until they are deemed to have no reasonable
expectation of recovery. Loans are generally written off after realisation of any proceeds from collateral and
upon conclusion of the collections process, including consideration of whether an account has reached a point
where continuing attempts to recover are no longer likely to be successful. Where a loan is not recoverable, it
is written off against the related provision for loan impairment once all the necessary procedures have been
completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously
written off decrease the value of impairment losses recorded in the income statement.
Qualitative factors that may indicate a significant change in credit risk include concession events where full
Financial liabilities
Level 3 – Valuation technique using significant unobservable inputs
190
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
1. Statement of accounting policies (continued)
Borrowings, including shares, deposits, debt securities in issue, subordinated liabilities and permanent
interest bearing shares (subscribed capital) are recognised initially at fair value, being the issue proceeds net
of premiums, discounts and transaction costs incurred.
All borrowings are subsequently measured at amortised cost using the effective interest rate method.
Amortised cost is adjusted for the amortisation of any premiums, discounts and transaction costs. The
amortisation is recognised in interest expense and similar charges using the effective interest rate method.
The Group previously included within other deposits amounts relating to the sale of protected equity bonds
(PEBs) on behalf of Legal & General. These deposits were designated at fair value upon initial recognition, with
changes in fair value recognised in gains/(losses) from derivatives and hedge accounting, along with fair value
movements in the associated equity-linked derivatives which were used to economically hedge the
instruments. These deposits matured during the year ended 4 April 2018.
Derivative financial liabilities are measured at FVTPL. Borrowings that are designated as hedged items are
subject to measurement under the hedge accounting requirements described in the derivatives and hedge
accounting policy below.
Financial liabilities are derecognised when the obligation is discharged, cancelled or has expired. The financial
liabilities of dormant shares and deposit accounts are extinguished when balances have been transferred to
the Government-backed unclaimed asset scheme under the terms of the Dormant Accounts and Building
Society Accounts Act 2008 with no impact on the income statement.
Fair value of assets and liabilities
IFRS 13 ‘Fair Value Measurement’ requires an entity to classify assets and liabilities held at fair value, and
those not measured at fair value but for which the fair value is disclosed, according to a hierarchy that reflects
the significance of observable market inputs in calculating those fair values. The three levels of the fair value
hierarchy are defined below:
Transfers from stage 1 to 2 occur when there has been a significant increase in credit risk and from stage 2 to
3 when credit impairment is indicated as described above.
Level 1 – Valuation using quoted market prices
Assets and liabilities are classified as Level 1 if their value is observable in an active market. Such instruments
are valued by reference to unadjusted quoted prices for identical assets or liabilities in active markets where
the quoted price is readily available, and the price reflects actual and regularly occurring market transactions
on an arm’s length basis. An active market is one in which transactions occur with sufficient volume and
frequency to provide pricing information on an ongoing basis.
Level 2 – Valuation technique using observable inputs
Assets and liabilities classified as Level 2 have been valued using models whose inputs are observable in an
active market. Valuations based on observable inputs include derivative financial instruments such as swaps
and forward rate agreements which are valued using market standard pricing techniques, and options that
are commonly traded in markets where all the inputs to the market standard pricing models are observable.
They also include investment securities valued using consensus pricing or other observable market prices.
Assets and liabilities are classified as Level 3 if their valuation incorporates significant inputs that are not
based on observable market data (‘unobservable inputs’). A valuation input is considered observable if it can
be directly observed from transactions in an active market, or if there is compelling external evidence
demonstrating an executable exit price. An input is deemed significant if it is shown to contribute more than
10% to the valuation of a financial instrument. Unobservable input levels are generally determined based on
observable inputs of a similar nature, historical observations or other analytical techniques.
Derivatives and hedge accounting
Derivatives are entered into to reduce exposures to fluctuations in interest rates, exchange rates, market
indices and credit risk, and are not used for speculative purposes.
(a) Derivative financial instruments
Derivatives are carried at fair value with movements in fair values recorded in the income statement.
Derivative financial instruments are principally valued by discounted cash flow models using yield curves that
are based on observable market data or are based on valuations obtained from third parties. For collateralised
positions the Group uses discount curves based on overnight indexed swap rates such as Sonia, and for non-
collateralised positions the Group uses discount curves based on term Libor rates.
In the first instance fair values are calculated using mid prices. An adjustment is then made to derivative
assets and liabilities to value them on a bid and offer basis respectively. The bid-offer adjustment is calculated
on a portfolio basis and reflects the costs that would be incurred if substantially all residual net portfolio
market risks were closed out using available hedging instruments or by disposing of or unwinding actual
positions. The methodology for determining the bid-offer adjustments involves netting between long and short
positions and the grouping of risk by type, in accordance with hedging strategy. Bid-offer spreads are derived
from market sources such as broker data and are reviewed periodically. In measuring fair value, separate
credit valuation and debit valuation adjustments are made for counterparty or own credit risk to the extent not
already included in the valuation.
All derivatives are classified as assets where their fair value is positive and liabilities where their fair value is
negative. Where there is the legal right and intention to settle net, then the derivative is classified as a net
asset or liability, as appropriate.
Where cash collateral is received, to mitigate the risk inherent in amounts due to the Group, it is included as a
liability within deposits from banks and similar institutions. Similarly, where cash collateral is given, to
mitigate the risk inherent in amounts due from the Group, it is included as an asset in loans and advances to
banks and similar institutions. Where securities collateral is received the securities are not recognised in the
accounts as the Group does not obtain the risks and rewards of the securities. Where securities collateral is
given, the securities have not been derecognised as the Group has retained substantially all the risks and
rewards of ownership.
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191
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
1. Statement of accounting policies (continued)
(b) Embedded derivatives
The Group discontinues hedge accounting when:
Some complex contracts may be hybrid in nature, in that a derivative element is included within a non-
derivative host contract, in which case the derivative is termed an embedded derivative. If the host contract is
an asset, it falls under the scope of IFRS9 and the entire contract has its accounting classification assessed
under IFRS9. If the host contract is a liability it does not fall under the scope of IFRS9 and the embedded
derivative is then separated and treated as a standalone derivative instrument if:
•
•
•
its economic characteristics are not closely related to the host,
a separate instrument with the same terms would meet the definition of a derivative, and
the hybrid contract is not already being fair valued through the income statement.
(c) Hedge accounting
The Group applies IAS 39 for all of its hedge accounting requirements. When transactions meet the criteria
specified in IAS 39, the Group can apply two types of hedge accounting: either hedges of the changes in fair
value of the financial asset or liability (fair value hedge accounting) or hedges of the variability in cash flows of
the financial asset or liability (cash flow hedge accounting). The Group does not have hedges of net
investments. The financial statement note for derivative financial instruments sets out the split of the
derivative portfolio between fair value, cash flow and no hedge accounting at the balance sheet date.
At inception each hedge relationship is formally documented, including a description of the hedged item (a
financial asset or liability which is being economically hedged) and the hedging instrument (a derivative), as
well as the methods which will be used to assess the effectiveness of the hedge. Hedges are required to be
highly effective (i.e. the fair value offset between hedged item and hedging instrument is in the 80-125%
range) on both a retrospective and a prospective basis.
Fair value and cash flow hedges may have residual hedge ineffectiveness. This is the degree to which the
change in fair value of the hedging instrument does not offset the change in fair value of the hedged item. This
ineffectiveness is recognised in the income statement and typically arises from:
i)
ii)
iii)
iv)
differences in the magnitude or timing of future expected cashflows in the hedged item and hedging
instrument;
differences in the market curves used to value the hedged item and hedging instrument;
unexpected adjustments to either the hedged item or hedging instrument, due to early repayments or
disposals;
the ongoing amortisation of any existing balance sheet mismatch between the fair value of the hedged
item and hedging instrument.
i)
ii)
iii)
it is evident from testing that a hedging instrument is not, or has ceased to be, highly effective as a hedge;
the hedging instrument expires, or is sold, terminated or exercised;
the hedged item matures or is sold or repaid or, in the case of a forecasted item, is no longer deemed to
be highly probable to occur.
The Group may also decide to cease hedge accounting even though the hedge relationship continues to be
highly effective by ceasing to designate the financial instrument as a hedge.
Fair value hedge accounting
Fair value hedge accounting results in the carrying value of the hedged item being adjusted to reflect changes
in fair value attributable to the risk being hedged. This creates an offset to the fair value movements of the
hedging instrument. Changes in the fair value of the hedged items and hedging instruments are recorded in
the income statement.
For larger and distinctively identifiable assets and liabilities, such as investment securities and debt securities
in issue, a single or small number of hedging instruments may be used. This is referred to as a micro fair value
hedge. If the hedge is highly effective, the Group adjusts the carrying value of that specific asset or liability to
reflect changes in its fair value due to movements in the designated benchmark rate, such as Libor or Sonia.
This creates an offset to the fair value movement of the hedging instruments.
For hedged items which are classified as FVOCI, such as investment securities, there is no further need to
adjust their carrying value as they are already held at fair value. Instead, hedge accounting results in an
amount being removed from the FVOCI reserve and instead reported in the income statement, to create an
offset to the change in fair value of the hedging instrument.
For balances within homogeneous portfolios, such as mortgages, savings and commercial loans, derivatives
may be used to hedge risks on a portfolio basis. The Group creates separate portfolio (macro) hedges for
assets and liabilities. The Group determines the hedged item by identifying portfolios of similar assets or
liabilities and scheduling the expected future cash flows from these items into repricing time buckets, based
on expected rather than actual repricing dates. A portion of the total cashflow from each time bucket is then
included in the hedged item. The size of this portion is set so that it is expected to create a highly effective fair
value offset to the equivalent future cashflows from the hedging instruments. If the hedge is highly effective
the Group records an adjustment in the fair value adjustment for portfolio hedged risk category on the balance
sheet. Macro hedges are frequently rebalanced to include new business.
In fair value hedge accounting relationships, if the hedging instrument no longer meets the criteria for hedge
accounting, the cumulative fair value hedge adjustment is amortised over the period to maturity of the
previously designated hedge relationship. If the hedged item is sold or repaid, the unamortised fair value
adjustment is immediately recognised in the income statement.
Annual Report and Accounts 2019
Notes to the financial statements (continued)
1. Statement of accounting policies (continued)
192
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
1. Statement of accounting policies (continued)
(b) Embedded derivatives
The Group discontinues hedge accounting when:
Cash flow hedge accounting
Equity instruments
Some complex contracts may be hybrid in nature, in that a derivative element is included within a non-
derivative host contract, in which case the derivative is termed an embedded derivative. If the host contract is
an asset, it falls under the scope of IFRS9 and the entire contract has its accounting classification assessed
under IFRS9. If the host contract is a liability it does not fall under the scope of IFRS9 and the embedded
derivative is then separated and treated as a standalone derivative instrument if:
i)
ii)
iii)
it is evident from testing that a hedging instrument is not, or has ceased to be, highly effective as a hedge;
the hedging instrument expires, or is sold, terminated or exercised;
the hedged item matures or is sold or repaid or, in the case of a forecasted item, is no longer deemed to
be highly probable to occur.
The Group may also decide to cease hedge accounting even though the hedge relationship continues to be
highly effective by ceasing to designate the financial instrument as a hedge.
•
•
•
its economic characteristics are not closely related to the host,
a separate instrument with the same terms would meet the definition of a derivative, and
the hybrid contract is not already being fair valued through the income statement.
Fair value hedge accounting
(c) Hedge accounting
The Group applies IAS 39 for all of its hedge accounting requirements. When transactions meet the criteria
specified in IAS 39, the Group can apply two types of hedge accounting: either hedges of the changes in fair
value of the financial asset or liability (fair value hedge accounting) or hedges of the variability in cash flows of
the financial asset or liability (cash flow hedge accounting). The Group does not have hedges of net
investments. The financial statement note for derivative financial instruments sets out the split of the
derivative portfolio between fair value, cash flow and no hedge accounting at the balance sheet date.
At inception each hedge relationship is formally documented, including a description of the hedged item (a
financial asset or liability which is being economically hedged) and the hedging instrument (a derivative), as
well as the methods which will be used to assess the effectiveness of the hedge. Hedges are required to be
highly effective (i.e. the fair value offset between hedged item and hedging instrument is in the 80-125%
range) on both a retrospective and a prospective basis.
Fair value and cash flow hedges may have residual hedge ineffectiveness. This is the degree to which the
change in fair value of the hedging instrument does not offset the change in fair value of the hedged item. This
ineffectiveness is recognised in the income statement and typically arises from:
i)
ii)
iii)
iv)
instrument;
disposals;
differences in the magnitude or timing of future expected cashflows in the hedged item and hedging
differences in the market curves used to value the hedged item and hedging instrument;
unexpected adjustments to either the hedged item or hedging instrument, due to early repayments or
the ongoing amortisation of any existing balance sheet mismatch between the fair value of the hedged
item and hedging instrument.
Fair value hedge accounting results in the carrying value of the hedged item being adjusted to reflect changes
in fair value attributable to the risk being hedged. This creates an offset to the fair value movements of the
hedging instrument. Changes in the fair value of the hedged items and hedging instruments are recorded in
the income statement.
For larger and distinctively identifiable assets and liabilities, such as investment securities and debt securities
in issue, a single or small number of hedging instruments may be used. This is referred to as a micro fair value
hedge. If the hedge is highly effective, the Group adjusts the carrying value of that specific asset or liability to
reflect changes in its fair value due to movements in the designated benchmark rate, such as Libor or Sonia.
This creates an offset to the fair value movement of the hedging instruments.
For hedged items which are classified as FVOCI, such as investment securities, there is no further need to
adjust their carrying value as they are already held at fair value. Instead, hedge accounting results in an
amount being removed from the FVOCI reserve and instead reported in the income statement, to create an
offset to the change in fair value of the hedging instrument.
For balances within homogeneous portfolios, such as mortgages, savings and commercial loans, derivatives
may be used to hedge risks on a portfolio basis. The Group creates separate portfolio (macro) hedges for
assets and liabilities. The Group determines the hedged item by identifying portfolios of similar assets or
liabilities and scheduling the expected future cash flows from these items into repricing time buckets, based
on expected rather than actual repricing dates. A portion of the total cashflow from each time bucket is then
included in the hedged item. The size of this portion is set so that it is expected to create a highly effective fair
value offset to the equivalent future cashflows from the hedging instruments. If the hedge is highly effective
the Group records an adjustment in the fair value adjustment for portfolio hedged risk category on the balance
sheet. Macro hedges are frequently rebalanced to include new business.
In fair value hedge accounting relationships, if the hedging instrument no longer meets the criteria for hedge
accounting, the cumulative fair value hedge adjustment is amortised over the period to maturity of the
previously designated hedge relationship. If the hedged item is sold or repaid, the unamortised fair value
adjustment is immediately recognised in the income statement.
In a cash flow hedge accounting relationship, the portion of the hedging instrument’s fair value movement
that is deemed to be an effective hedge is deferred to the cash flow hedge reserve, instead of being
immediately recognised in the income statement. The ineffective portion of the derivative fair value movement
is recognised immediately in the income statement.
Issued financial instruments are classified as equity instruments where the contractual arrangement with the
holder does not result in the Group having a present obligation to deliver cash, another financial asset or a
variable number of equity instruments. Where the Group does have a present obligation, the instrument is
classified as a financial liability.
Amounts deferred to the cash flow hedge reserve are subsequently recycled to the income statement. This
recycling occurs when the underlying asset or liability being hedged impacts the income statement, for
example when interest payments are recognised. In cash flow hedge accounting relationships, if the derivative
no longer meets the criteria for hedge accounting, the cumulative gain or loss from the effective portion of the
movement in the fair value of the derivative remains in other comprehensive income until the cash flows from
the underlying hedged item are recognised in the income statement. If the hedged item is sold or repaid, the
cumulative gain or loss in other comprehensive income is immediately recognised in the income statement.
Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported on the balance sheet if, and only if, there
is a currently enforceable legal right to set off the recognised amounts and there is an intention to settle on a
net basis, or to realise an asset and settle the liability simultaneously.
Sale and repurchase agreements (including securities borrowing and lending) and collateralised total
return swaps
Investment and other securities may be lent or sold subject to a commitment to repurchase them at a pre-
determined price (a repo) or a right to continue to receive all future cash flows and changes in capital value on
collateral pledged (a total return swap). Such securities are retained on the balance sheet when substantially
all the risks and rewards of ownership (typically, the interest rate risk and credit risk on the asset) remain
within the Group, and the counterparty liability is included separately on the balance sheet within deposits
from banks and similar institutions as appropriate.
Similarly, where the Group borrows or purchases securities subject to a commitment to resell them (a reverse
repo) or settle all future cash flows and changes in capital value to a third party on collateral held (a reverse
total return swap) but does not acquire the risks and rewards of ownership, the transactions are treated as
collateralised loans within loans and advances to banks and similar institutions, and the securities are not
included on the balance sheet.
The difference between sale and repurchase price is accrued over the life of the agreements using the
effective interest rate method.
The proceeds of the issuance of equity instruments are included in equity. Costs incurred that are incremental
and directly attributable to the issuance are deducted from the proceeds (net of applicable tax).
Distributions to holders of equity instruments are recognised when they become irrevocable and are
deducted, net of tax where applicable, from the general reserve.
Foreign currency translation
The consolidated financial statements are presented in sterling, which is the functional currency of the Society.
Items included in the financial statements of each of the Group’s entities are measured using sterling which is
also the functional currency of each entity. Foreign currency transactions are translated into sterling using the
exchange rates prevailing at the dates of the transactions.
Monetary items denominated in foreign currencies are retranslated at the rate prevailing at the balance sheet
date. Foreign exchange gains and losses resulting from the retranslation and settlement of these items are
recognised in the income statement as disclosed in note 7.
Cash flow hedge accounting is applied to derivatives which are used to economically hedge foreign currency
items.
Cash and cash equivalents
For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than
three months maturity from the date of acquisition, included within cash and loans and advances to banks
and similar institutions on the balance sheet.
Contingent liabilities
Contingent liabilities are possible obligations whose existence is dependent on the outcome of uncertain
future events, or those where the outflow of resources is uncertain or cannot be measured reliably.
During the ordinary course of business the Group is subject to threatened or actual legal proceedings. All such
material cases are periodically reassessed, with the assistance of external professional advisers where
appropriate, to determine the likelihood of incurring a liability. The Group does not disclose amounts in
relation to contingent liabilities associated with such claims where the likelihood of any payment is remote or
where such disclosure could be seriously prejudicial to the conduct of the claims.
IFRS disclosures
The audited sections in the Business and Risk Report and the Report of the directors on remuneration form an
integral part of these financial statements. These disclosures (where marked as ‘audited’) are covered by the
Independent auditors’ report for this Annual Report and Accounts.
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193
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
2. Judgements in applying accounting policies and critical accounting estimates
The preparation of the Group’s financial statements in accordance with IFRS involves management making judgements and estimates when applying those accounting policies that affect the reported amounts of assets, liabilities,
income and expense. Actual results may differ from those on which management’s estimates are based. Estimates and assumptions are continually evaluated and are based on historical experience and other factors, including
expectations of future events that are believed to be reasonable.
The most significant sources of estimation uncertainty made by management in applying the Group’s accounting policies, which are deemed critical to the Group’s results and financial position, are disclosed in the following notes.
These accounting estimates include areas of significant judgement.
Area with significant judgements or estimates
Impairment losses and provisions on loans and advances to customers
Provisions for customer redress
Retirement benefit obligations (pensions)
Note
10
27
30
3. Interest receivable and similar income
On financial assets measured at amortised cost:
Residential mortgages
Connected undertakings
Other loans
Other liquid assets
Investment securities
On investment securities measured at FVOCI (2018: available for sale)
On financial instruments hedging assets in a qualifying hedge accounting relationship
Total interest receivable and similar income calculated using the effective interest
rate method
Other interest and similar income/(expense) (note ii)
Total
Group
Society
2019
£m
4,469
-
656
137
27
167
(315)
5,141
(23)
5,118
2018
(note i)
£m
4,532
-
677
67
14
115
(543)
4,862
(51)
4,811
2019
£m
3,377
783
644
137
27
166
(307)
4,827
(31)
4,796
2018
(note i)
£m
3,409
756
664
67
14
114
(523)
4,501
(72)
4,429
Notes:
i.
ii.
Comparative balances have been restated to present separately interest receivable and similar income calculated using the effective interest rate method as detailed in note 1.
Includes interest on financial instruments hedging assets that are not in a qualifying hedge accounting relationship.
Annual Report and Accounts 2019
Notes to the financial statements (continued)
2. Judgements in applying accounting policies and critical accounting estimates
The preparation of the Group’s financial statements in accordance with IFRS involves management making judgements and estimates when applying those accounting policies that affect the reported amounts of assets, liabilities,
income and expense. Actual results may differ from those on which management’s estimates are based. Estimates and assumptions are continually evaluated and are based on historical experience and other factors, including
expectations of future events that are believed to be reasonable.
The most significant sources of estimation uncertainty made by management in applying the Group’s accounting policies, which are deemed critical to the Group’s results and financial position, are disclosed in the following notes.
These accounting estimates include areas of significant judgement.
Area with significant judgements or estimates
Impairment losses and provisions on loans and advances to customers
Provisions for customer redress
Retirement benefit obligations (pensions)
Note
10
27
30
3. Interest receivable and similar income
On financial assets measured at amortised cost:
Residential mortgages
Connected undertakings
Other loans
Other liquid assets
Investment securities
On investment securities measured at FVOCI (2018: available for sale)
On financial instruments hedging assets in a qualifying hedge accounting relationship
Total interest receivable and similar income calculated using the effective interest
rate method
Other interest and similar income/(expense) (note ii)
Total
Notes:
i.
ii.
Group
2019
£m
2018
(note i)
£m
Society
2019
£m
2018
(note i)
£m
4,469
4,532
3,377
3,409
-
656
137
27
167
(315)
5,141
(23)
5,118
-
677
67
14
115
(543)
4,862
(51)
4,811
783
644
137
27
166
(307)
4,827
(31)
4,796
756
664
67
14
114
(523)
4,501
(72)
4,429
Comparative balances have been restated to present separately interest receivable and similar income calculated using the effective interest rate method as detailed in note 1.
Includes interest on financial instruments hedging assets that are not in a qualifying hedge accounting relationship.
194
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
4. Interest expense and similar charges
On shares held by individuals
On subscribed capital
On deposits and other borrowings:
Subordinated liabilities
Connected undertakings
Other
On debt securities in issue
Net income on financial instruments hedging liabilities
Interest on net defined benefit pension liability (note 30)
Total
Group
Society
2019
£m
1,335
14
238
-
207
673
(270)
6
2,203
2018
£m
1,140
15
175
-
320
712
(563)
8
1,807
2019
£m
1,335
14
238
48
210
612
(150)
6
2,313
2018
£m
1,140
15
175
34
320
669
(397)
8
1,964
In the year to 4 April 2018 interest on deposits and other borrowings included an expense of £210 million in relation to the maturity and redemption of Protected Equity Bond (PEB) deposits which had returns linked to the
performance of specified stock market indices. The PEBs, all of which had matured at 4 April 2018, were economically hedged using equity-linked derivatives. Net income on financial instruments hedging liabilities in the year to 4
April 2018 included income of £206 million in relation to the associated derivatives. Further details are included in note 22.
5. Fees and commission income and expense
Group
Current account and savings
General insurance
Protection and investments
Mortgage
Credit card
Other fees and commissions
Fee and commission
Income
£m
261
65
63
13
43
4
449
2019
Expense
£m
(202)
-
-
(1)
(39)
(6)
(248)
Net
£m
59
65
63
12
4
(2)
201
Income
£m
246
76
65
16
42
4
449
2018
Expense
£m
(187)
-
-
(2)
(45)
(10)
(244)
Net
£m
59
76
65
14
(3)
(6)
205
The Society’s fee and commission income and expense is as shown above for the Group, except that it excludes £3 million (2018: £4 million) of mortgage income.
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195
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
6. Other operating income/expense
Gains on financial assets measured at FVTPL
Gains on FVOCI investment securities (2018: available for sale investment securities)
Other income/(expense)
Total
Note:
i.
Comparatives have been restated as detailed in note 1.
Group
2019
£m
23
27
4
54
2018
(note i)
£m
-
33
(110)
(77)
Society
2019
£m
22
27
3
52
2018
(note i)
£m
-
34
(112)
(78)
Other income/(expense) includes the net amount of rental income, profits or losses on the sale of property, plant and equipment and increases or decreases in the valuations of branches and non-specialised buildings which are not
recognised in other comprehensive income. There were no gains or losses on disposal of financial assets measured at amortised cost in the year ended 4 April 2019 (2018: £nil). In the year ended 4 April 2018, other
income/(expense) included a £116 million loss from a debt buy-back exercise.
7. Gains/losses from derivatives and hedge accounting
As a part of its risk management strategy, the Group uses derivatives to economically hedge financial assets and liabilities. More information on how the Group manages market risk can be found in the Business and Risk Report.
Hedge accounting is employed by the Group to minimise the accounting volatility associated with the change in fair value of derivative financial instruments. This volatility does not reflect the economic reality of the Group’s hedging
strategy. The Group only uses derivatives for the hedging of risks; however, income statement volatility can still arise due to hedge accounting ineffectiveness or because hedge accounting is either not applied or is not currently
achievable. The overall impact of derivatives will remain volatile from period to period as new derivative transactions replace those which mature to ensure that interest rate and other market risks are continually managed.
Note 1 describes how fair value and cash flow hedge accounting affect the financial statements and the main sources of the residual hedge ineffectiveness remaining in the income statement. Further information on the current
derivative portfolio and the allocation to hedge accounting types is included in note 15.
Gains/(losses) from fair value hedge accounting
Gains/(losses) from cash flow hedge accounting
Net gain from mortgage pipeline (note i)
Fair value (losses)/gains from other derivatives (note ii)
Foreign exchange retranslation (note iii)
Total
Group
Society
2019
£m
24
23
-
(18)
7
36
2018
£m
(86)
17
50
5
13
(1)
2019
£m
8
(34)
-
8
11
(7)
2018
£m
7
(33)
50
(39)
(11)
(26)
Notes:
i.
Includes the fair value movement of both interest rate swaps, which are used to economically hedge expected new mortgage business, and firm mortgage commitments, where the Group has elected to fair value those commitments to reduce the accounting
mismatch. The Group has not applied this fair value option for new mortgage business in the year ended 4 April 2019; therefore, the fair value movements of the interest rate swaps have been reported in ‘fair value (losses)/gains from other derivatives’.
Other derivatives are those used for economic hedging purposes, but which are not currently in a hedge accounting relationship.
ii.
iii. Gains or losses arise from the retranslation of foreign currency monetary items not subject to effective hedge accounting.
Gains of £24 million (2018: losses of £86 million) from fair value hedge accounting include losses of £9 million (2018: losses of £42 million) from macro hedges, due to hedge ineffectiveness and the amortisation of existing balance
sheet amounts, and gains of £33 million relating to micro hedges (2018: losses of £44 million) which arise due to a combination of hedge ineffectiveness, disposals and restructuring, and the amortisation of existing balance sheet
amounts.
Annual Report and Accounts 2019
Notes to the financial statements (continued)
6. Other operating income/expense
Gains on financial assets measured at FVTPL
Gains on FVOCI investment securities (2018: available for sale investment securities)
Other income/(expense)
Total
Note:
i.
Comparatives have been restated as detailed in note 1.
Group
2019
£m
23
27
4
54
2018
(note i)
£m
-
33
(110)
(77)
Society
2019
£m
22
27
3
52
2018
(note i)
£m
-
34
(112)
(78)
Other income/(expense) includes the net amount of rental income, profits or losses on the sale of property, plant and equipment and increases or decreases in the valuations of branches and non-specialised buildings which are not
recognised in other comprehensive income. There were no gains or losses on disposal of financial assets measured at amortised cost in the year ended 4 April 2019 (2018: £nil). In the year ended 4 April 2018, other
income/(expense) included a £116 million loss from a debt buy-back exercise.
7. Gains/losses from derivatives and hedge accounting
As a part of its risk management strategy, the Group uses derivatives to economically hedge financial assets and liabilities. More information on how the Group manages market risk can be found in the Business and Risk Report.
Hedge accounting is employed by the Group to minimise the accounting volatility associated with the change in fair value of derivative financial instruments. This volatility does not reflect the economic reality of the Group’s hedging
strategy. The Group only uses derivatives for the hedging of risks; however, income statement volatility can still arise due to hedge accounting ineffectiveness or because hedge accounting is either not applied or is not currently
achievable. The overall impact of derivatives will remain volatile from period to period as new derivative transactions replace those which mature to ensure that interest rate and other market risks are continually managed.
Note 1 describes how fair value and cash flow hedge accounting affect the financial statements and the main sources of the residual hedge ineffectiveness remaining in the income statement. Further information on the current
derivative portfolio and the allocation to hedge accounting types is included in note 15.
196
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
7. Gains/losses from derivatives and hedge accounting (continued)
Fair value hedge accounting
The Group’s risk management approach is to use interest rate derivatives to economically hedge the fair value of fixed rate assets and liabilities. The market risk from fixed rate assets and liabilities may be netted down before deciding
to use derivatives. The derivatives used are predominantly interest rate swaps, which convert fixed rate cashflows to a benchmark floating rate such as Libor or Sonia. In addition, bond forwards are used to reduce swap spread risk
within the investment securities portfolio and inflation swaps are used to economically hedge contractual inflation risk within investment securities. The table below provides further information on the Group’s fair value hedges.
Fair value hedge accounting
2019
Hedged item balance sheet
classification
Assets:
Loans and advances to customers (note ii)
Investment securities
Investment securities
Total assets
Liabilities:
Shares (note iii)
Debt securities in issue
Subordinated liabilities
Subscribed capital
Total liabilities
Total fair value hedges
Hedging instrument
Risk category
Hedged item
Instrument
Change in fair value used for
determining hedge
ineffectiveness
Interest rate swaps
Interest rate swaps, bond forwards
Inflation swaps
Interest rate
Interest rate
Interest rate and inflation
Interest rate swaps
Interest rate swaps
Interest rate swaps
Interest rate swaps
Interest rate
Interest rate
Interest rate
Interest rate
£m
396
230
16
642
(37)
(31)
(3)
-
(71)
571
£m
(406)
(193)
(15)
(614)
38
28
4
(3)
67
(547)
Hedge
ineffectiveness
recognised in
the income
statement
£m
(10)
37
1
28
1
(3)
1
(3)
(4)
24
Carrying
amount
of the
hedged item
£m
94,635
13,292
1,439
109,366
4,131
4,662
2,407
240
11,440
Of which:
accumulated
fair value
adjustment
(note i)
£m
1,294
323
19
1,636
(17)
642
37
40
702
Group
Society
2019
£m
24
23
-
(18)
7
36
2018
£m
(86)
17
50
5
13
(1)
2019
£m
(34)
8
-
8
11
(7)
2018
£m
7
(33)
50
(39)
(11)
(26)
ii.
iii.
Gains/(losses) from fair value hedge accounting
Gains/(losses) from cash flow hedge accounting
Net gain from mortgage pipeline (note i)
Fair value (losses)/gains from other derivatives (note ii)
Foreign exchange retranslation (note iii)
Total
Notes:
i.
ii.
amounts.
Includes the fair value movement of both interest rate swaps, which are used to economically hedge expected new mortgage business, and firm mortgage commitments, where the Group has elected to fair value those commitments to reduce the accounting
mismatch. The Group has not applied this fair value option for new mortgage business in the year ended 4 April 2019; therefore, the fair value movements of the interest rate swaps have been reported in ‘fair value (losses)/gains from other derivatives’.
Other derivatives are those used for economic hedging purposes, but which are not currently in a hedge accounting relationship.
iii. Gains or losses arise from the retranslation of foreign currency monetary items not subject to effective hedge accounting.
Gains of £24 million (2018: losses of £86 million) from fair value hedge accounting include losses of £9 million (2018: losses of £42 million) from macro hedges, due to hedge ineffectiveness and the amortisation of existing balance
sheet amounts, and gains of £33 million relating to micro hedges (2018: losses of £44 million) which arise due to a combination of hedge ineffectiveness, disposals and restructuring, and the amortisation of existing balance sheet
Notes:
i.
Debt securities in issue and subordinated liabilities include £440 million and £23 million respectively of accumulated fair value adjustments relating to hedged items no longer in a hedge accounting relationship. This is mainly due to the migration of fair value
hedges to cash flow hedges, which results in the hedged item no longer being adjusted for fair value gains and losses. Where hedges have been migrated, the ongoing amortisation of the closing accumulated fair value adjustment is presented in the cash
flow hedge accounting table below within the change in fair value of the instrument as it offsets the ongoing amortisation of derivative fair value.
Some of the Group’s loans and advances to customers have been included as hedged items in macro fair value hedges of interest rate risk. £411 million of the accumulated fair value hedge adjustment is recognised in the separate balance sheet asset ‘Fair
value adjustment for portfolio hedged risk.’ The remaining amount relates to the fair value adjustment to commercial loans in a micro fair value hedge accounting relationship and is included in the carrying value of these loans as shown in note 14.
Some of the Group’s shares have been included as hedged items in macro fair value hedges of interest rate risk. All of the accumulated fair value hedge adjustment has been recognised in the separate balance sheet liability for ‘Fair value adjustment for
portfolio hedged risk.’
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197
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
7. Gains/losses from derivatives and hedge accounting (continued)
Cash flow hedge accounting
The Group’s risk management approach may be to create future cash flow certainty. The Group uses a combination of foreign currency interest rate swaps and cross currency interest rate swaps to hedge non-sterling debt securities
in issue and subordinated liabilities. The hedging instruments remove the uncertainty caused by interest and foreign exchange rate movements on coupon and principal payments. In addition, inflation swaps are used to hedge RPI-
linked debt securities in issue. The Group also uses sterling interest rate swaps to hedge some of its re-pricing lag risk. In this instance the hedging instruments result in the Group receiving a fixed rate of interest and so are
designated as hedges of variable rate loans and advances to customers. The table below provides further information on the Group’s cash flow hedges.
Cash flow hedge accounting
2019
Hedged item balance sheet
classification
Assets:
Loans and advances to customers
Total assets
Liabilities:
Debt securities in issue
Debt securities in issue
Subordinated liabilities
Total liabilities
Total cash flow hedges
Hedging instrument
Risk category
Hedged item
Instrument
Change in fair value used for
determining hedge
ineffectiveness
Interest rate swaps
Interest rate
Inflation swaps
Interest rate swaps, cross currency
interest rate swaps
Interest rate swaps, cross currency
interest rate swaps
Interest rate and inflation
Interest rate and foreign
exchange
Interest rate and foreign
exchange
£m
(2)
(2)
(10)
(49)
(308)
(367)
(369)
£m
2
2
10
85
335
430
432
Changes in instrument fair value reported as
Hedge
ineffectiveness
recognised in
the income
statement
£m
Foreign exchange
retranslation
recycled to the
income statement
(note i)
£m
Net amounts
deferred to
other
comprehensive
income
£m
-
-
-
10
13
23
23
-
-
-
(190)
159
(31)
(31)
2
2
10
265
163
438
440
Amounts accumulated
in the cash flow hedge reserve
(excluding deferred taxation)
Continuing hedges Discontinued hedges
£m
2
2
6
357
44
407
409
£m
-
-
-
19
-
19
19
Note:
i.
The foreign exchange retranslation recycled to the income statement offsets foreign exchange retranslation on the hedged item.
The deferral of fair value movements to the cash flow hedge reserve, and the transfer of amounts from the cash flow hedge reserve to the income statement, are shown in the consolidated statement of comprehensive income. The
net deferral to other comprehensive income of gains before tax of £440 million (2018: £259 million losses) is driven by changes in derivative valuations caused by movements in interest rates and foreign exchange rates. These gains
amount to £328 million (2018: £191 million losses) after tax. All forecast transactions included as hedged items in cash flow hedges are still expected to occur.
Annual Report and Accounts 2019
Notes to the financial statements (continued)
7. Gains/losses from derivatives and hedge accounting (continued)
198
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
8. Administrative expenses
The Group’s risk management approach may be to create future cash flow certainty. The Group uses a combination of foreign currency interest rate swaps and cross currency interest rate swaps to hedge non-sterling debt securities
in issue and subordinated liabilities. The hedging instruments remove the uncertainty caused by interest and foreign exchange rate movements on coupon and principal payments. In addition, inflation swaps are used to hedge RPI-
linked debt securities in issue. The Group also uses sterling interest rate swaps to hedge some of its re-pricing lag risk. In this instance the hedging instruments result in the Group receiving a fixed rate of interest and so are
designated as hedges of variable rate loans and advances to customers. The table below provides further information on the Group’s cash flow hedges.
Hedged item balance sheet
Hedging instrument
Risk category
Hedged item
Instrument
Continuing hedges Discontinued hedges
Loans and advances to customers
Interest rate swaps
Interest rate
Debt securities in issue
Inflation swaps
Interest rate and inflation
Interest rate swaps, cross currency
Interest rate and foreign
interest rate swaps
interest rate swaps
exchange
exchange
Interest rate swaps, cross currency
Interest rate and foreign
Change in fair value used for
Changes in instrument fair value reported as
determining hedge
ineffectiveness
Amounts accumulated
in the cash flow hedge reserve
(excluding deferred taxation)
Hedge
Foreign exchange
ineffectiveness
recognised in
retranslation
recycled to the
Net amounts
deferred to
other
income statement
comprehensive
(note i)
£m
income
£m
the income
statement
£m
£m
(2)
(2)
(10)
(49)
(308)
(367)
(369)
£m
2
2
10
85
335
430
432
-
-
-
10
13
23
23
-
-
-
(190)
159
(31)
(31)
2
2
10
265
163
438
440
£m
2
2
6
357
44
407
409
£m
-
-
-
19
-
19
19
Cash flow hedge accounting
Cash flow hedge accounting
2019
classification
Assets:
Total assets
Liabilities:
Debt securities in issue
Subordinated liabilities
Total liabilities
Total cash flow hedges
Note:
Employee costs:
Wages and salaries
Bonuses
Social security costs
Pension costs
Other administrative expenses (note i):
Other staff related costs
Property operating lease rental
Other property running costs
Printing, postage and stationery
IT and communications
Marketing and advertising
Product operating costs
Legal, professional and consultancy
Other operating costs
Bank levy
Depreciation, amortisation and impairment
Total
Notes
30
27
Group
2019
£m
525
55
65
181
826
129
31
91
32
264
63
58
108
60
836
43
549
2,254
2018
£m
524
61
66
173
824
101
30
94
34
225
74
54
85
61
758
45
397
2,024
Society
2019
£m
520
55
65
179
819
127
31
91
32
264
63
57
108
39
812
43
549
2,223
2018
£m
518
61
65
171
815
100
30
94
34
225
74
54
84
43
738
45
397
1,995
i.
The foreign exchange retranslation recycled to the income statement offsets foreign exchange retranslation on the hedged item.
The deferral of fair value movements to the cash flow hedge reserve, and the transfer of amounts from the cash flow hedge reserve to the income statement, are shown in the consolidated statement of comprehensive income. The
net deferral to other comprehensive income of gains before tax of £440 million (2018: £259 million losses) is driven by changes in derivative valuations caused by movements in interest rates and foreign exchange rates. These gains
amount to £328 million (2018: £191 million losses) after tax. All forecast transactions included as hedged items in cash flow hedges are still expected to occur.
Note:
i.
Categories have been updated to better align with how the Group manages and monitors expenses. Comparatives have been restated to align with the current year presentation.
The bonus expense within employee costs in the above table includes £6 million (2018: £6 million) of long-term bonuses which will be paid more than one year from the balance sheet date.
Executive directors and certain senior executives are entitled to bonus payments under the Directors’ Performance Award (DPA) scheme. Under this scheme, awards are based on current year results but are paid over a period of up
to seven years, with part of the awards linked to the value of Nationwide’s core capital deferred shares (CCDS). The payment of deferred elements remains subject to further discretion by the Remuneration Committee. These bonuses
are recognised in the income statement over the period from the start of the performance year until all relevant criteria have been met.
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199
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
8. Administrative expenses (continued)
The table below shows actual and expected charges to the income statement in respect of all DPA bonuses for each relevant scheme year:
Income statement charge for long-term bonuses
Directors Performance Award:
2016/17 and previous years
2017/18
2018/19
Income statement charge for long-term bonuses
Actual
2017/18
£m
6.8
8.8
-
15.6
Group and Society
Actual
2018/19
(note i)
Expected
2019/20
(note ii)
£m
3.0
3.1
8.8
14.9
£m
1.6
1.3
3.4
6.3
Expected
2020/21 and
beyond
(note ii)
£m
2.1
2.1
4.3
8.5
Notes:
i.
ii.
In the year ended 4 April 2019, £5 million (2018: £6 million) was recognised in the income statement in relation to awards linked to share based payments, being amounts dependent on the performance of the Group’s CCDS. This payment is deferred and
therefore included in accruals and deferred income on the balance sheet.
The amount expected is an estimate based on past performance together with current assumptions of future leaver rates and future CCDS performance. From 2016/17 the period over which bonuses are recognised in the income statement was extended
based on a change to the bonus deferral period from five to seven years.
Directors’ emoluments, including details of the bonus scheme, are shown in the Report of the directors on remuneration in accordance with Schedule 10A, paragraphs 1 to 9 of the Building Societies Act 1986.
The remuneration of the external auditors, PricewaterhouseCoopers LLP, is set out below:
External auditors’ remuneration
Audit fees for the Group and Society statutory audit
Fees payable for other services:
Audit of Group subsidiaries
Audit-related assurance services
Total audit and audit-related assurance services
Other non-audit services
Total
Group
Society
2019
£m
3.6
0.4
0.7
4.7
2.1
6.8
2018
£m
3.3
0.4
0.7
4.4
1.1
5.5
2019
£m
3.6
-
0.7
4.3
2.1
6.4
2018
£m
3.3
-
0.7
4.0
1.1
5.1
Audit fees for the year ended 4 April 2019 include amounts related to the transition of auditors.
The Group’s policy in relation to the use of its auditors on non-audit engagements sets out the types of services they are generally precluded from performing. All non-audit services are subject to pre-approval by the Audit Committee.
Fees for ‘other non-audit services’ for the year ended 4 April 2019 are primarily for assurance work undertaken in relation to delivery of the Group’s incremental technology investment.
The table below shows actual and expected charges to the income statement in respect of all DPA bonuses for each relevant scheme year:
Annual Report and Accounts 2019
Notes to the financial statements (continued)
8. Administrative expenses (continued)
Income statement charge for long-term bonuses
Directors Performance Award:
2016/17 and previous years
Income statement charge for long-term bonuses
2017/18
2018/19
Notes:
i.
ii.
therefore included in accruals and deferred income on the balance sheet.
based on a change to the bonus deferral period from five to seven years.
Audit fees for the Group and Society statutory audit
Fees payable for other services:
Audit of Group subsidiaries
Audit-related assurance services
Total audit and audit-related assurance services
Other non-audit services
Total
Group and Society
Actual
2018/19
(note i)
Expected
2019/20
(note ii)
Expected
2020/21 and
beyond
(note ii)
£m
2.1
2.1
4.3
8.5
£m
1.6
1.3
3.4
6.3
Actual
2017/18
£m
6.8
8.8
-
15.6
2019
£m
3.6
0.4
0.7
4.7
2.1
6.8
£m
3.0
3.1
8.8
14.9
2018
£m
3.3
0.4
0.7
4.4
1.1
5.5
2019
£m
3.6
-
0.7
4.3
2.1
6.4
2018
£m
3.3
-
0.7
4.0
1.1
5.1
The remuneration of the external auditors, PricewaterhouseCoopers LLP, is set out below:
External auditors’ remuneration
Group
Society
Audit fees for the year ended 4 April 2019 include amounts related to the transition of auditors.
The Group’s policy in relation to the use of its auditors on non-audit engagements sets out the types of services they are generally precluded from performing. All non-audit services are subject to pre-approval by the Audit Committee.
Fees for ‘other non-audit services’ for the year ended 4 April 2019 are primarily for assurance work undertaken in relation to delivery of the Group’s incremental technology investment.
200
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
9. Employees
The average number of persons employed during the year was:
Full time
Part time
Total
Society:
Central administration
Branches
Subsidiaries
Total
Group
2019
£m
13,841
4,444
18,285
11,296
6,982
7
18,285
2018
£m
14,247
4,240
18,487
11,098
7,348
41
18,487
Society
2019
£m
13,834
4,444
18,278
11,296
6,982
-
18,278
2018
£m
14,211
4,235
18,446
11,098
7,348
-
18,446
In the year ended 4 April 2019, £5 million (2018: £6 million) was recognised in the income statement in relation to awards linked to share based payments, being amounts dependent on the performance of the Group’s CCDS. This payment is deferred and
The amount expected is an estimate based on past performance together with current assumptions of future leaver rates and future CCDS performance. From 2016/17 the period over which bonuses are recognised in the income statement was extended
Central administration employee numbers include employees engaged in direct customer facing operations in administrative centres.
10. Impairment losses and provisions on loans and advances to customers
Directors’ emoluments, including details of the bonus scheme, are shown in the Report of the directors on remuneration in accordance with Schedule 10A, paragraphs 1 to 9 of the Building Societies Act 1986.
The following tables set out impairment losses and reversals during the year and the closing provision balances which are deducted from the relevant asset values in the balance sheet:
Impairment losses/(reversals)
Prime residential
Specialist residential
Consumer banking
Commercial and other lending
Total
Impairment provisions
Prime residential
Specialist residential
Consumer banking
Commercial and other lending
Total
Group
2019
£m
(1)
(16)
114
16
113
4 April
2019
£m
44
162
418
41
665
2018
(note i)
£m
3
8
97
(1)
107
Group
5 April
2018
(note i)
£m
47
188
365
29
629
Society
2019
£m
(1)
-
114
16
129
4 April
2018
(note i)
£m
36
109
298
15
458
2018
(note i)
£m
3
-
97
(1)
99
4 April
2019
£m
44
3
418
41
506
Society
5 April
2018
(note i)
£m
47
4
365
29
445
4 April
2018
(note i)
£m
36
-
298
15
349
Note:
i.
5 April 2018 balances are prepared under IFRS 9. Comparatives for the year ended and as at 4 April 2018 are prepared under IAS 39.
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i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
O
t
h
e
r
I
n
f
o
r
m
a
t
i
o
n
201
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
10. Impairment losses and provisions on loans and advances to customers (continued)
Critical accounting estimates and judgements
Impairment is measured as the impact of credit risk on the present value of management’s estimate of future cash flows. In determining the required level of impairment provisions, the Group uses outputs from statistical models,
incorporating a number of estimates and judgements to determine the Probability of Default (PD), the Exposure at Default, and the Loss Given Default for each loan. The most significant areas of estimation uncertainty are:
•
•
•
the use of forward-looking information
the performance of interest only mortgages at maturity
the level of future recoveries for consumer banking.
The most significant area of judgement is:
•
the approach to identifying significant increases in credit risk and impairment.
The Group’s approach to each of these estimates and judgements is described in more detail below.
Use of forward-looking economic information
Forward-looking economic information is incorporated into the measurement of provisions in two ways: as an input to the calculation of ECL and as a factor in determining the staging of an asset. Management exercises judgement in
estimating future economic conditions which are incorporated through modelling of multiple economic scenarios (MES).
The use of MES ensures that the calculation of ECL captures a range of possible outcomes. It addresses the risk of non-linearity in the relationship between credit losses and economic conditions, with provisions increasing more in
unfavourable conditions (particularly severe conditions) than they reduce in favourable conditions. The IFRS 9 ECL provision recognised is therefore the probability-weighted sum of the provisions calculated under a range of economic
scenarios. For the retail and commercial portfolios, the Group has adopted the use of three main economic scenarios (referred to as the central, upside and downside scenarios). The scenarios and the weightings are derived using
external data and statistical methodologies, together with management judgement, to determine scenarios which span an appropriately wide range of plausible economic conditions.
The central scenario represents the most likely economic forecast and is aligned with the central scenario used in the Group’s financial planning processes. This scenario reflects moderate economic growth and low house price inflation
over the projection period of 2019-23, after which the economic variables are assumed to revert gradually to long run average rates by 2028. At 5 April 2018 and 4 April 2019 this scenario is assigned a 50% probability weighting. The
upside and downside economic scenarios are judged less likely and have been given 20% and 30% weightings respectively at 4 April 2019 (5 April 2018: 30% and 20% respectively). The downside scenario reflects a period of recession
in 2019 and 2020, accompanied by a fall in house prices during this period, followed by gradual recovery in subsequent years and reversion to a lower long-term growth rate by 2028. The upside scenario reflects stable economic growth
over the projection period, accompanied by house price inflation in excess of 4% per year, and reversion to higher long-term growth rates by 2028.
In addition to the three economic scenarios described above, additional provision has been made to reflect the risks associated with a low probability, severe downside scenario. In management’s judgement, this additional provision is
required to fully reflect the non-linearity in the relationship between expected losses and economic conditions. The adjustment is calculated as the difference between a 10% probability for this scenario, and a reduction of 10% in the
downside scenario; this probability has increased from 5% at 5 April 2018 due to increased economic uncertainty. At 4 April 2019, this additional provision represents £97 million (5 April 2018: £85 million) of the total £133 million
(5 April 2018: £110 million) MES impact. In this severe downside scenario, real GDP growth over a five year period is slightly negative. In the first two years unemployment rises sharply by 4.8%, and house prices fall by 33% from peak to
trough, before gradual recovery from year 3 onwards. Due to the way in which the additional provision has been calculated, the results of this scenario have not been used in determining the reported stage allocation of loans, although in
this scenario an increased proportion of loans are assumed to migrate to stage 2 and stage 3 over the projection period.
Annual Report and Accounts 2019
Notes to the financial statements (continued)
10. Impairment losses and provisions on loans and advances to customers (continued)
202
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
10. Impairment losses and provisions on loans and advances to customers (continued)
Critical accounting estimates and judgements
Critical accounting estimates and judgements (continued)
Impairment is measured as the impact of credit risk on the present value of management’s estimate of future cash flows. In determining the required level of impairment provisions, the Group uses outputs from statistical models,
incorporating a number of estimates and judgements to determine the Probability of Default (PD), the Exposure at Default, and the Loss Given Default for each loan. The most significant areas of estimation uncertainty are:
The table below provides a summary of the simple average values of the key UK economic variables used within the economic scenarios, including the severe downside scenario, over the period from May 2019 to April 2024.
the use of forward-looking information
the performance of interest only mortgages at maturity
the level of future recoveries for consumer banking.
The most significant area of judgement is:
•
•
•
•
the approach to identifying significant increases in credit risk and impairment.
The Group’s approach to each of these estimates and judgements is described in more detail below.
Use of forward-looking economic information
Forward-looking economic information is incorporated into the measurement of provisions in two ways: as an input to the calculation of ECL and as a factor in determining the staging of an asset. Management exercises judgement in
estimating future economic conditions which are incorporated through modelling of multiple economic scenarios (MES).
The use of MES ensures that the calculation of ECL captures a range of possible outcomes. It addresses the risk of non-linearity in the relationship between credit losses and economic conditions, with provisions increasing more in
unfavourable conditions (particularly severe conditions) than they reduce in favourable conditions. The IFRS 9 ECL provision recognised is therefore the probability-weighted sum of the provisions calculated under a range of economic
scenarios. For the retail and commercial portfolios, the Group has adopted the use of three main economic scenarios (referred to as the central, upside and downside scenarios). The scenarios and the weightings are derived using
external data and statistical methodologies, together with management judgement, to determine scenarios which span an appropriately wide range of plausible economic conditions.
The central scenario represents the most likely economic forecast and is aligned with the central scenario used in the Group’s financial planning processes. This scenario reflects moderate economic growth and low house price inflation
over the projection period of 2019-23, after which the economic variables are assumed to revert gradually to long run average rates by 2028. At 5 April 2018 and 4 April 2019 this scenario is assigned a 50% probability weighting. The
upside and downside economic scenarios are judged less likely and have been given 20% and 30% weightings respectively at 4 April 2019 (5 April 2018: 30% and 20% respectively). The downside scenario reflects a period of recession
in 2019 and 2020, accompanied by a fall in house prices during this period, followed by gradual recovery in subsequent years and reversion to a lower long-term growth rate by 2028. The upside scenario reflects stable economic growth
over the projection period, accompanied by house price inflation in excess of 4% per year, and reversion to higher long-term growth rates by 2028.
In addition to the three economic scenarios described above, additional provision has been made to reflect the risks associated with a low probability, severe downside scenario. In management’s judgement, this additional provision is
required to fully reflect the non-linearity in the relationship between expected losses and economic conditions. The adjustment is calculated as the difference between a 10% probability for this scenario, and a reduction of 10% in the
downside scenario; this probability has increased from 5% at 5 April 2018 due to increased economic uncertainty. At 4 April 2019, this additional provision represents £97 million (5 April 2018: £85 million) of the total £133 million
(5 April 2018: £110 million) MES impact. In this severe downside scenario, real GDP growth over a five year period is slightly negative. In the first two years unemployment rises sharply by 4.8%, and house prices fall by 33% from peak to
trough, before gradual recovery from year 3 onwards. Due to the way in which the additional provision has been calculated, the results of this scenario have not been used in determining the reported stage allocation of loans, although in
this scenario an increased proportion of loans are assumed to migrate to stage 2 and stage 3 over the projection period.
Economic variables (average %)
Central scenario
Upside scenario
Downside scenario
GDP growth
Unemployment
HPI
BoE base rate
1.8
4.3
2.4
1.1
2.3
3.8
5.0
2.2
1.0
5.5
(2.4)
0.1
Severe
downside scenario
(used for additional
provision)
(0.1)
8.3
(5.2)
3.5
To give an indication of the sensitivity of ECLs to different economic scenarios, the table below shows the ECL if 100% weighting is applied to the upside, central and downside scenarios.
Sensitivity analysis impact of multiple economic scenarios
Upside scenario ECL
Central scenario ECL
Downside scenario ECL
4 April 2019
Residential mortgages
Consumer banking
Commercial and other lending
Total
5 April 2018
Residential mortgages
Consumer banking
Commercial and other lending
Total
£m
99
381
37
517
£m
112
383
37
532
£m
128
350
24
502
£m
143
352
24
519
£m
242
400
37
679
£m
279
374
24
677
The ECL for each scenario multiplied by the scenario probability will not reconcile to the final probability weighted ECL, since the stage allocation of loans varies in each scenario. In the probability weighted ECL, each loan is allocated to a
discrete stage based on the weighted average PD under the economic scenarios. The impact of the severe downside scenario on impairment provisions is explained above.
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c
e
B
u
s
i
n
e
s
s
a
n
d
R
i
s
k
R
e
p
o
r
t
i
F
n
a
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c
i
a
l
S
t
a
t
e
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e
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t
s
O
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I
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o
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m
a
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i
o
n
203
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
10. Impairment losses and provisions on loans and advances to customers (continued)
Critical accounting estimates and judgements (continued)
For prime and specialist residential mortgages, the estimate of future house price index (HPI) movements is a key assumption in estimating the eventual loss. The table below shows the sensitivity of provisions, in the central scenario
only, to a decrease/increase in Loss Given Default as a result of an immediate decrease/increase in house prices, with no change to subsequent house price inflation or to other assumptions:
Residential mortgages – impact of change in HPI
4 April 2019
10% decrease in HPI
10% increase in HPI
Increase/(decrease)
in provision
£m
29
(16)
Performance of interest only mortgages at maturity
An additional key area of management estimation is the allowance for the risk that a proportion of interest only mortgages will not be redeemed at their contractual maturity date, because a borrower does not have a means of capital
repayment or has been unable to refinance the loan. Buy to let mortgages are typically advanced on an interest only basis. Interest only balances for prime residential mortgages relate primarily to historical balances which were originally
advanced as interest only mortgages or where a change in terms to an interest only basis has been agreed. The impact of the allowance for unredeemed interest only mortgages at contractual maturity in the central scenario amounts to
£47 million (5 April 2018: £58 million), and has also been calculated for the other modelled scenarios, with an additional impact of £24 million (5 April 2018: £16 million) included in the impact of forward looking economic information
above. Interest only loans which are judged to have a significantly increased risk of inability to refinance at maturity are transferred to stage 2.
Consumer banking future recoveries
For consumer banking, the estimate of future recoveries is a key source of estimation uncertainty. The Group uses a combination of both historical data and management judgement in estimating the level and timing of future recoveries.
A 10% absolute change in expected future recoveries would result in an estimated £43 million change in the provision.
Identifying significant increases in credit risk (stage 2)
Loans are allocated to stage 1 or stage 2 according to whether there has been a significant increase in credit risk. The Group has used judgement to select both quantitative and qualitative criteria which are used to determine whether a
significant increase in credit risk has taken place. The primary quantitative indicators are the outputs of internal credit risk assessments. While different approaches are used within each portfolio, the intention is to combine current and
historical data relating to the exposure with forward-looking macroeconomic information to determine the probability of default (PD) at each reporting date. For retail loans, the main indicators of a significant increase in credit risk are
either of the following:
•
•
the residual lifetime PD exceeds a benchmark determined by reference to the maximum credit risk that would have been accepted at origination
the residual lifetime PD has increased by at least 75bps and a 4x multiple of the original lifetime PD (5 April 2018: 8x for residential mortgages, 4x for consumer banking). During the year the multiple has been reduced
from 8x to 4x for residential mortgages, following a review of staging criteria effectiveness. The impact on ECL of this change was immaterial.
These complementary criteria have been reviewed through detailed back-testing, using management performance indicators and actual default experience, and found to be effective in capturing events which would constitute
a significant increase in credit risk. The sensitivity of ECLs to stage allocation is such that a transfer of 1% of current stage 1 balances from stage 1 to stage 2 would increase provisions by £11 million for residential mortgages, and £5
million for consumer banking.
Identifying credit impaired loans (stage 3)
The identification of credit impaired loans is an important judgement within the IFRS 9 staging approach. A loan is credit impaired where it has an arrears status of more than 90 days past due,
is considered to be in default or it is considered unlikely that the borrower will repay the outstanding balance in full, without recourse to actions such as realising security.
204
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
11. Taxation
Tax charge in the income statement
Current tax:
UK corporation tax
Adjustments in respect of prior years
Total current tax
Deferred tax:
Current year charge/(credit)
Adjustments in respect of prior years
Effect of deferred tax provided at different tax rates
Total deferred taxation
Tax charge
Group
Society
2019
£m
209
(12)
197
6
9
3
18
215
2018
£m
246
(12)
234
(7)
9
(4)
(2)
232
2019
£m
131
(12)
119
(9)
9
(5)
(5)
114
The actual tax charge differs from the theoretical amount that would arise using the standard rate of corporation tax in the UK as follows:
Reconciliation of tax charge
Profit before tax:
Tax calculated at a tax rate of 19%
Adjustments in respect of prior years
Banking surcharge
Expenses not deductible for tax purposes/(income not taxable):
Depreciation on non-qualifying assets
Bank levy
Effect of results of LLP structured entity (note i)
Customer redress
Other
Effect of deferred tax provided at different tax rates
Tax charge
Group
Society
2019
£m
833
158
(3)
37
3
8
-
8
1
3
215
2018
£m
977
186
(3)
43
1
8
-
-
1
(4)
232
2019
£m
368
70
(3)
37
3
8
(6)
8
-
(3)
114
2018
£m
151
(32)
119
(11)
10
(3)
(4)
115
2018
£m
452
86
(22)
43
1
8
2
-
-
(3)
115
These complementary criteria have been reviewed through detailed back-testing, using management performance indicators and actual default experience, and found to be effective in capturing events which would constitute
a significant increase in credit risk. The sensitivity of ECLs to stage allocation is such that a transfer of 1% of current stage 1 balances from stage 1 to stage 2 would increase provisions by £11 million for residential mortgages, and £5
Note:
i.
The Society is liable for tax on the results of Nationwide Covered Bonds LLP, the profit or loss of which is reported within that entity.
Annual Report and Accounts 2019
Notes to the financial statements (continued)
10. Impairment losses and provisions on loans and advances to customers (continued)
Critical accounting estimates and judgements (continued)
Residential mortgages – impact of change in HPI
4 April 2019
10% decrease in HPI
10% increase in HPI
Performance of interest only mortgages at maturity
Increase/(decrease)
in provision
£m
29
(16)
For prime and specialist residential mortgages, the estimate of future house price index (HPI) movements is a key assumption in estimating the eventual loss. The table below shows the sensitivity of provisions, in the central scenario
only, to a decrease/increase in Loss Given Default as a result of an immediate decrease/increase in house prices, with no change to subsequent house price inflation or to other assumptions:
An additional key area of management estimation is the allowance for the risk that a proportion of interest only mortgages will not be redeemed at their contractual maturity date, because a borrower does not have a means of capital
repayment or has been unable to refinance the loan. Buy to let mortgages are typically advanced on an interest only basis. Interest only balances for prime residential mortgages relate primarily to historical balances which were originally
advanced as interest only mortgages or where a change in terms to an interest only basis has been agreed. The impact of the allowance for unredeemed interest only mortgages at contractual maturity in the central scenario amounts to
£47 million (5 April 2018: £58 million), and has also been calculated for the other modelled scenarios, with an additional impact of £24 million (5 April 2018: £16 million) included in the impact of forward looking economic information
above. Interest only loans which are judged to have a significantly increased risk of inability to refinance at maturity are transferred to stage 2.
For consumer banking, the estimate of future recoveries is a key source of estimation uncertainty. The Group uses a combination of both historical data and management judgement in estimating the level and timing of future recoveries.
A 10% absolute change in expected future recoveries would result in an estimated £43 million change in the provision.
Loans are allocated to stage 1 or stage 2 according to whether there has been a significant increase in credit risk. The Group has used judgement to select both quantitative and qualitative criteria which are used to determine whether a
significant increase in credit risk has taken place. The primary quantitative indicators are the outputs of internal credit risk assessments. While different approaches are used within each portfolio, the intention is to combine current and
historical data relating to the exposure with forward-looking macroeconomic information to determine the probability of default (PD) at each reporting date. For retail loans, the main indicators of a significant increase in credit risk are
the residual lifetime PD exceeds a benchmark determined by reference to the maximum credit risk that would have been accepted at origination
the residual lifetime PD has increased by at least 75bps and a 4x multiple of the original lifetime PD (5 April 2018: 8x for residential mortgages, 4x for consumer banking). During the year the multiple has been reduced
from 8x to 4x for residential mortgages, following a review of staging criteria effectiveness. The impact on ECL of this change was immaterial.
Consumer banking future recoveries
Identifying significant increases in credit risk (stage 2)
either of the following:
•
•
million for consumer banking.
Identifying credit impaired loans (stage 3)
The identification of credit impaired loans is an important judgement within the IFRS 9 staging approach. A loan is credit impaired where it has an arrears status of more than 90 days past due,
is considered to be in default or it is considered unlikely that the borrower will repay the outstanding balance in full, without recourse to actions such as realising security.
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B
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e
s
s
a
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d
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i
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k
R
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t
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F
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a
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c
i
a
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S
t
a
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205
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
11. Taxation (continued)
The tax on items through other comprehensive income is as follows:
Tax charge/(credit) on items through other comprehensive income
Relating to:
FVOCI investment securities (2018: available for sale investment securities)
Cash flow hedges
Property revaluation
Retirement benefit obligations
Total
Group
2019
£m
(4)
112
(1)
57
164
2018
(note i)
£m
11
(68)
1
7
(49)
Society
2019
£m
(3)
47
(1)
57
100
2018
(note i)
£m
11
(19)
1
8
1
Note:
i.
2019 balances are prepared under IFRS 9; 2018 prepared under IAS 39. Adjustments made on transition to IFRS 9 are detailed in note 37.
The Group tax credit through the fair value through other comprehensive income (FVOCI) reserve of £4 million (2018: charge through the available for sale reserve of £11 million) is made up of a charge of £4 million
(2018: charge of £8 million) through current tax and a credit of £8 million (2018: charge of £3 million) through deferred tax.
Reconciliation of tax charge to tax paid
The table below reconciles the corporation tax charge in the income statement to the taxation paid in the
consolidated cash flow statement:
Income statement tax charge
Deferred tax and prior year adjustments
Current tax liability
Prior year payments
Current year tax payments due after the end of the year
Tax paid per consolidated cash flow statement
Group
2019
£m
215
(6)
209
43
(117)
135
2018
£m
232
14
246
107
(117)
236
Group
2019
£m
(4)
112
(1)
57
164
2018
(note i)
£m
11
(68)
1
7
(49)
Society
2019
£m
(3)
47
(1)
57
100
2018
(note i)
£m
11
(19)
1
8
1
Annual Report and Accounts 2019
Notes to the financial statements (continued)
11. Taxation (continued)
The tax on items through other comprehensive income is as follows:
Tax charge/(credit) on items through other comprehensive income
FVOCI investment securities (2018: available for sale investment securities)
Relating to:
Cash flow hedges
Property revaluation
Retirement benefit obligations
Total
Note:
Reconciliation of tax charge to tax paid
The table below reconciles the corporation tax charge in the income statement to the taxation paid in the
consolidated cash flow statement:
Income statement tax charge
Deferred tax and prior year adjustments
Current tax liability
Prior year payments
Current year tax payments due after the end of the year
Tax paid per consolidated cash flow statement
Group
2019
£m
215
(6)
209
43
(117)
135
2018
£m
232
14
246
107
(117)
236
i.
2019 balances are prepared under IFRS 9; 2018 prepared under IAS 39. Adjustments made on transition to IFRS 9 are detailed in note 37.
The Group tax credit through the fair value through other comprehensive income (FVOCI) reserve of £4 million (2018: charge through the available for sale reserve of £11 million) is made up of a charge of £4 million
(2018: charge of £8 million) through current tax and a credit of £8 million (2018: charge of £3 million) through deferred tax.
206
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
11. Taxation (continued)
Deferred tax
Deferred tax is determined using tax rates and laws that are expected to apply in the period when the deferred tax asset is realised or deferred tax liability is settled based on rates enacted or substantively enacted at the balance
sheet date, including the banking surcharge where applicable. The Finance Act 2016 was enacted on 15 September 2016 and reduces the corporation tax rate from 19% to 17% from 1 April 2020.
The movements on the deferred tax account are as follows:
Deferred tax assets and liabilities are attributable to the following items:
Movements in deferred taxation
Deferred tax assets and liabilities
Group
Society
At 4 April
IFRS 9 transition (note i)
At 5 April
Deferred tax (charge)/credit in the income statement:
Accelerated capital allowances
Effect of deferred tax provided at different tax rates
Other items
Taxation on items through the income statement
Deferred tax (charge)/credit in other comprehensive
income:
FVOCI investment securities (2018: available for sale
investment securities)
Cash flow hedges
Property revaluation
Retirement benefit obligations
Effect of deferred tax provided at different tax rates
Taxation on items through other comprehensive income
At 4 April
Note:
i.
Adjustment on implementation of IFRS 9 as detailed in note 37.
2019
£m
49
46
95
4
(3)
(19)
(18)
6
(85)
1
(45)
(45)
(168)
(91)
2018
£m
3
-
4
(2)
2
(2)
48
1
(15)
12
44
49
2019
£m
72
32
104
4
5
(4)
5
6
(35)
1
(45)
(30)
(103)
6
2018
£m
72
1
3
-
4
(2)
13
1
(15)
(1)
(4)
72
Deferred tax assets
Accelerated capital allowances
Property revaluation
Available for sale investment securities
Fair value through other comprehensive income assets
Cash flow hedges
Retirement benefit obligations
Provisions for loan impairment
Other provisions
Deferred tax liabilities
Property revaluation
Cash flow hedges
Other provisions
Net deferred tax (liability)/asset
Group
2019
£m
(2)
1
-
(22)
-
28
-
48
53
(10)
(108)
(26)
(144)
(91)
2018
£m
(16)
1
(30)
39
92
1
11
98
(12)
(34)
(3)
(49)
49
Society
2019
£m
(5)
-
-
(22)
-
27
-
39
39
(10)
(9)
(14)
(33)
6
2018
£m
(16)
-
(30)
39
92
-
10
95
(12)
-
(11)
(23)
72
The majority of deferred tax assets are anticipated to be recoverable after one year. The Group considers that
there will be sufficient future trading profits in excess of profits arising from the reversal of existing taxable
temporary differences to utilise the deferred tax assets.
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i
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p
o
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G
o
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n
a
n
c
e
B
u
s
i
n
e
s
s
a
n
d
R
i
s
k
R
e
p
o
r
t
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
O
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I
n
f
o
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a
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i
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207
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
12. Classification and measurement
As the majority of the Group’s assets and liabilities are held within the Society, the disclosures in this note and notes 21 to 24 are on a consolidated basis. The following table summarises the classification of carrying amounts
of the Group’s financial assets and liabilities.
Classification of financial assets and liabilities
4 April 2019
Group
Financial assets
Cash
Loans and advances to banks and similar institutions
Investment securities
Derivative financial instruments
Fair value adjustment for portfolio hedged risk
Loans and advances to customers
Total financial assets
Other non-financial assets
Total assets
Financial liabilities
Shares
Deposits from banks and similar institutions
Other deposits
Fair value adjustment for portfolio hedged risk
Debt securities in issue
Derivative financial instruments
Subordinated liabilities
Subscribed capital
Total financial liabilities
Other non-financial liabilities
Total liabilities
Amortised cost
£m
12,493
4,009
1,656
-
411
198,922
217,491
153,969
20,149
5,074
(17)
35,942
-
6,706
250
222,073
Fair value
through other
comprehensive
income
£m
-
-
14,500
-
-
-
14,500
-
-
-
-
-
-
-
-
-
Fair value
through profit
or loss
£m
-
-
78
3,562
-
129
3,769
-
-
-
-
-
1,593
-
-
1,593
Total
Amortised cost
£m
£m
14,361
3,493
1,120
-
(144)
191,174
210,004
148,003
20,436
4,693
(53)
34,118
-
5,497
263
212,957
12,493
4,009
16,234
3,562
411
199,051
235,760
2,541
238,301
153,969
20,149
5,074
(17)
35,942
1,593
6,706
250
223,666
1,466
225,132
5 April 2018 (note i)
Fair value
through other
comprehensive
income
£m
Fair value
through profit
or loss
£m
-
-
45
4,121
-
247
4,413
-
-
-
-
-
2,337
-
-
2,337
-
-
11,881
-
-
-
11,881
-
-
-
-
-
-
-
-
-
Total
£m
14,361
3,493
13,046
4,121
(144)
191,421
226,298
2,639
228,937
148,003
20,436
4,693
(53)
34,118
2,337
5,497
263
215,294
1,402
216,696
Note:
i.
5 April 2018 balances are presented under IFRS 9. Balances have been restated as detailed in note 1 and adjustments made on transition to IFRS 9 are detailed in note 37.
As at 4 April 2019, the Group had no financial assets or liabilities (2018: none) for which it had taken the option to designate at FVTPL. Further details on the transition to IFRS 9 are included in note 37 and information on the fair
value of financial assets and liabilities is included in notes 21 to 23.
As the majority of the Group’s assets and liabilities are held within the Society, the disclosures in this note and notes 21 to 24 are on a consolidated basis. The following table summarises the classification of carrying amounts
Amortised cost
Total
Amortised cost
4 April 2019
Fair value
through other
comprehensive
Fair value
through profit
or loss
5 April 2018 (note i)
Fair value
through other
comprehensive
Fair value
through profit
or loss
Government and supranational investment securities
Other debt investment securities
Investments in equity shares
Total
Group and Society
2019
£m
12,306
3,909
19
16,234
2018
£m
9,592
3,450
4
13,046
208
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
13. Investment securities
The Group may use its investment securities as collateral. Investment securities of £30 million (2018: £30 million) have been pledged as collateral for UK payment schemes. Investment securities with a fair value of £1,694 million
(2018: £945 million) have been used as collateral in short term repurchase agreements. The Group also holds £1,333 million (2018: £403 million) of investment securities as collateral under reverse repurchase agreements which are
not recognised in the table above.
Further information on investment securities is included in the ‘Treasury assets’ section of the Business and Risk Report.
14. Loans and advances to customers
4 April 2019
5 April 2018 (note i)
4 April 2018 (note i)
Annual Report and Accounts 2019
Notes to the financial statements (continued)
12. Classification and measurement
of the Group’s financial assets and liabilities.
Classification of financial assets and liabilities
Group
Cash
Financial assets
Loans and advances to banks and similar institutions
Investment securities
Derivative financial instruments
Fair value adjustment for portfolio hedged risk
Loans and advances to customers
Total financial assets
Other non-financial assets
Total assets
Financial liabilities
Shares
Other deposits
Deposits from banks and similar institutions
Fair value adjustment for portfolio hedged risk
Debt securities in issue
Derivative financial instruments
Subordinated liabilities
Subscribed capital
Total financial liabilities
Other non-financial liabilities
Total liabilities
Note:
£m
12,493
4,009
1,656
-
411
198,922
217,491
153,969
20,149
5,074
(17)
35,942
-
6,706
250
222,073
income
£m
14,500
14,500
-
-
-
-
-
-
-
-
-
-
-
-
-
-
£m
-
-
-
78
3,562
129
3,769
-
-
-
-
-
-
-
1,593
1,593
£m
£m
14,361
3,493
1,120
-
(144)
191,174
210,004
148,003
20,436
4,693
(53)
34,118
-
5,497
263
212,957
12,493
4,009
16,234
3,562
411
199,051
235,760
2,541
238,301
153,969
20,149
5,074
(17)
35,942
1,593
6,706
250
223,666
1,466
225,132
income
£m
11,881
11,881
-
-
-
-
-
-
-
-
-
-
-
-
-
-
£m
-
-
-
45
4,121
247
4,413
-
-
-
-
-
-
-
2,337
2,337
Total
£m
14,361
3,493
13,046
4,121
(144)
191,421
226,298
2,639
228,937
148,003
20,436
4,693
(53)
34,118
2,337
5,497
263
215,294
1,402
216,696
Loans held at amortised cost
Gross Provisions
Group
Prime residential mortgages
Specialist residential mortgages
Consumer banking
Commercial and other lending
Total
£m
151,445
34,495
4,586
8,178
198,704
£m
(44)
(162)
(418)
(41)
(665)
Other
(note ii)
£m
-
-
-
883
883
£m
151,401
34,333
4,168
9,020
198,922
£m
72
-
-
57
129
£m
151,473
34,333
4,168
9,077
199,051
£m
143,869
33,245
4,107
9,540
190,761
£m
(47)
(188)
(365)
(29)
(629)
£m
189
-
-
58
247
£m
144,011
33,057
3,742
10,611
191,421
£m
144,049
33,250
4,107
9,602
191,008
£m
(36)
(109)
(298)
(15)
(458)
Loans held
at FVTPL
Total
Total
Loans held at amortised cost
Gross Provisions
Other
Total
Loans held
at FVTPL
Other
(note ii)
£m
-
-
-
1,042
1,042
Total
£m
143,822
33,057
3,742
10,553
191,174
4 April 2019
5 April 2018 (note i)
4 April 2018 (note i)
i.
5 April 2018 balances are presented under IFRS 9. Balances have been restated as detailed in note 1 and adjustments made on transition to IFRS 9 are detailed in note 37.
As at 4 April 2019, the Group had no financial assets or liabilities (2018: none) for which it had taken the option to designate at FVTPL. Further details on the transition to IFRS 9 are included in note 37 and information on the fair
value of financial assets and liabilities is included in notes 21 to 23.
Loans held at amortised cost
Gross Provisions
Society
Prime residential mortgages
Specialist residential mortgages
Consumer banking
Commercial and other lending
Total
£m
151,073
590
4,586
7,703
163,952
£m
(44)
(3)
(418)
(41)
(506)
Other
(note ii)
£m
-
-
-
883
883
£m
151,029
587
4,168
8,545
164,329
£m
72
-
-
46
118
£m
151,101
587
4,168
8,591
164,447
£m
143,425
663
4,107
9,059
157,254
£m
(47)
(4)
(365)
(29)
(445)
£m
-
-
-
1,042
1,042
£m
143,378
659
3,742
10,072
157,851
£m
189
-
-
47
236
£m
143,567
659
3,742
10,119
158,087
£m
143,603
663
4,107
9,108
157,481
£m
(36)
-
(298)
(15)
(349)
Other
(note ii)
£m
-
-
-
1,043
1,043
Loans held at amortised cost
Gross Provisions
Total
Loans held at amortised cost
Loans held
at FVTPL
Total
Loans held
at FVTPL
Total
Gross Provisions
Gross Provisions
Other
(note ii)
£m
-
-
-
1,043
1,043
£m
143,567
663
3,809
10,136
158,175
Total
£m
144,013
33,141
3,809
10,630
191,593
Total
Loans held at amortised cost
Total
Notes:
i.
ii.
5 April 2018 balances are presented under IFRS 9. Balances have been restated as detailed in note 1 and adjustments made on transition to IFRS 9 are detailed in note 37.
Loans held at amortised cost include a fair value adjustment for micro hedged risk for commercial loans hedged on an individual basis.
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209
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
14. Loans and advances to customers (continued)
The tables below summarise the movements in gross loans and advances to customers held at amortised cost, including the impact of ECL impairment provisions and excluding the fair value adjustment for micro hedged risk. The
lines within the tables are an aggregation of monthly movements over the year. Residential mortgages represent the majority of the Group’s loans and advances to customers. An additional table that summarises the movements for
the Group’s residential mortgages, is presented in the Credit risk section of the Business and Risk Report.
Reconciliation of movements in gross balances and impairment provisions
Group
At 5 April 2018
Stage transfers:
Transfers from Stage 1 to Stage 2
Transfers to Stage 3
Transfers from Stage 2 to Stage 1
Transfers from Stage 3
Net remeasurement of ECL arising from transfer of stage
Net movement arising from transfer of stage (note ii)
New assets originated or purchased (note iii)
Repayments and changes in risk parameters (note iv)
Other items impacting income statement charge/(reversal) including recoveries
Redemptions (note v)
Income statement charge for the year
Decrease due to write-offs
Other provision movements
4 April 2019
Net carrying amount
The reasons for key movements shown in the table above are as follows:
Non-credit impaired
Subject to 12 month ECL
Stage 1
Subject to lifetime ECL
Stage 2
Credit impaired (note i)
Subject to lifetime ECL
Stage 3 and POCI
Total
Gross balances
£m
169,049
Provisions Gross balances
£m
20,012
£m
48
Provisions Gross balances
£m
1,700
£m
284
Provisions Gross balances
£m
190,761
£m
297
Provisions
£m
629
(29,278)
(305)
37,282
187
7,886
38,717
(8,835)
2
(19,451)
-
-
187,368
(30)
(1)
266
3
(237)
1
30
(9)
-
(2)
-
-
68
187,300
29,278
(1,022)
(37,282)
573
(8,453)
-
(199)
-
(1,821)
-
-
9,539
30
(113)
(266)
24
287
(38)
-
32
-
(17)
-
-
261
9,278
-
1,327
-
(760)
567
-
(63)
(1)
(285)
(121)
-
1,797
-
114
-
(27)
20
107
-
29
(19)
(1)
(96)
19
336
1,461
-
-
-
-
-
38,717
(9,097)
1
(21,557)
(121)
-
198,704
-
-
-
-
70
70
30
52
(19)
(20)
113
(96)
19
665
198,039
•
•
•
•
The movement in gross balances is principally a result of £38,717 million of new lending, offset by a reduction of £30,654 million as a result of repayments and redemptions. The majority of these movements relate to
residential mortgages.
Of the £121 million of write-offs, £74 million relates to unsecured lending, £41 million to residential mortgages and £6 million to commercial and other lending.
Impairment provisions increased by £36 million in the period to £665 million. As shown in note 10, unsecured and commercial provisions increased in the period; however, these increases were offset by a reduction in
residential mortgages provisions.
The net £52 million increase in impairment provisions from ‘Repayments and changes in risk parameters’, includes the majority of the £23 million impact of changes made to the economic scenarios applied during the
period.
210
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
14. Loans and advances to customers (continued)
Reconciliation of movements in gross balances and impairment provisions
Society
At 5 April 2018
Stage transfers:
Transfers from Stage 1 to Stage 2
Transfers to Stage 3
Transfers from Stage 2 to Stage 1
Transfers from Stage 3
Net remeasurement of ECL arising from transfer of stage
Net movement arising from transfer of stage (note ii)
New assets originated or purchased (note iii)
Repayments and changes in risk parameters (note iv)
Other items impacting income statement charge/(reversal) including recoveries
Redemptions (note v)
Income statement charge for the year
Decrease due to write-offs
Other provision movements
4 April 2019
Net carrying amount
Non-credit impaired
Subject to 12 month ECL
Stage 1
Subject to lifetime ECL
Stage 2
Credit impaired
Subject to lifetime ECL
Stage 3
Total
Gross balances
£m
146,762
Provisions Gross balances
£m
9,471
£m
37
Provisions Gross balances
£m
1,021
£m
146
Provisions Gross balances
£m
157,254
£m
262
Provisions
£m
445
(19,307)
(207)
24,327
105
4,918
33,751
(8,570)
1
(17,270)
-
-
159,592
(24)
-
189
2
(168)
(1)
28
(9)
-
(1)
-
-
54
159,538
19,307
(600)
(24,327)
297
(5,323)
-
(167)
-
(738)
-
-
3,243
24
(88)
(189)
14
218
(21)
-
28
-
(5)
-
-
148
3,095
-
807
-
(402)
405
-
(48)
(1)
(164)
(96)
-
1,117
-
88
-
(16)
27
99
-
26
(14)
(1)
(82)
14
304
813
-
-
-
-
-
33,751
(8,785)
-
(18,172)
(96)
-
163,952
-
-
-
-
77
77
28
45
(14)
(7)
129
(82)
14
506
163,446
The movement in gross balances is principally a result of £38,717 million of new lending, offset by a reduction of £30,654 million as a result of repayments and redemptions. The majority of these movements relate to
v.
Of the £121 million of write-offs, £74 million relates to unsecured lending, £41 million to residential mortgages and £6 million to commercial and other lending.
Impairment provisions increased by £36 million in the period to £665 million. As shown in note 10, unsecured and commercial provisions increased in the period; however, these increases were offset by a reduction in
The net £52 million increase in impairment provisions from ‘Repayments and changes in risk parameters’, includes the majority of the £23 million impact of changes made to the economic scenarios applied during the
Notes:
i.
ii.
iii.
iv.
Group gross balances of credit impaired loans include £167 million (5 April 2018: £180 million) of purchased or originated credit impaired (POCI) loans, which are presented net of lifetime ECL impairment provisions of £6 million (5 April 2018: £7 million).
The remeasurement of provisions arising from a change in stage is reported within the stage to which the assets are transferred.
If a new asset is generated in the month, the value included is the closing gross balance and provision for the month. All new business written is included in Stage 1.
This line comprises capital repayments where the asset is not derecognised, changes in risk parameters, and changes to modelling inputs and methodology. The repayment value for gross balances is calculated as the closing gross balance for the month less
the opening gross balance for the month. The repayment value for provisions is calculated as the change in exposure at default (EAD) multiplied by opening provision coverage for the month. The provision movement for the change in risk parameters is
calculated for assets that do not move stage in the month.
For any asset that is derecognised in the month, the value disclosed is the provision at the start of that month.
The tables below summarise the movements in gross loans and advances to customers held at amortised cost, including the impact of ECL impairment provisions and excluding the fair value adjustment for micro hedged risk. The
lines within the tables are an aggregation of monthly movements over the year. Residential mortgages represent the majority of the Group’s loans and advances to customers. An additional table that summarises the movements for
the Group’s residential mortgages, is presented in the Credit risk section of the Business and Risk Report.
Non-credit impaired
Subject to 12 month ECL
Subject to lifetime ECL
Stage 1
Stage 2
Credit impaired (note i)
Subject to lifetime ECL
Stage 3 and POCI
Gross balances
Provisions Gross balances
Provisions Gross balances
Provisions Gross balances
Provisions
£m
169,049
(29,278)
(305)
37,282
187
7,886
38,717
(8,835)
(19,451)
2
-
-
187,368
£m
48
(30)
(1)
266
(237)
3
1
30
(9)
-
(2)
-
-
68
187,300
£m
20,012
29,278
(1,022)
(37,282)
573
(8,453)
(199)
(1,821)
-
-
-
-
9,539
£m
284
30
(113)
(266)
24
287
(38)
32
-
-
(17)
-
-
261
9,278
£m
1,700
-
-
1,327
(760)
567
-
(63)
(1)
(285)
(121)
-
1,797
Total
£m
190,761
-
-
-
-
-
1
38,717
(9,097)
(21,557)
(121)
-
198,704
£m
629
-
-
-
-
70
70
30
52
(19)
(20)
113
(96)
19
665
198,039
£m
297
114
-
-
(27)
20
107
-
29
(19)
(1)
(96)
19
336
1,461
Annual Report and Accounts 2019
Notes to the financial statements (continued)
14. Loans and advances to customers (continued)
Reconciliation of movements in gross balances and impairment provisions
Group
At 5 April 2018
Stage transfers:
Transfers from Stage 1 to Stage 2
Transfers to Stage 3
Transfers from Stage 2 to Stage 1
Transfers from Stage 3
Net remeasurement of ECL arising from transfer of stage
Net movement arising from transfer of stage (note ii)
New assets originated or purchased (note iii)
Repayments and changes in risk parameters (note iv)
Other items impacting income statement charge/(reversal) including recoveries
The reasons for key movements shown in the table above are as follows:
Redemptions (note v)
Income statement charge for the year
Decrease due to write-offs
Other provision movements
4 April 2019
Net carrying amount
•
•
•
•
residential mortgages.
residential mortgages provisions.
period.
S
t
r
a
t
e
g
i
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R
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p
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G
o
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n
a
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c
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B
u
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i
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e
s
s
a
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d
R
i
s
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R
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a
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S
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m
a
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i
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211
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
14. Loans and advances to customers (continued)
Maturity analysis
The following table shows the residual maturity of loans and advances to customers, based on their contractual maturity:
Residual maturity of loans and advances to customers
Repayable:
On demand
In not more than three months
In more than three months but not more than one year
In more than one year but not more than five years
In more than five years
Impairment provision on loans and advances
Fair value adjustment for micro hedged risk
Total
4 April 2019
£m
2,146
2,285
5,976
31,919
156,507
198,833
(665)
883
199,051
Group
5 April 2018
(note i)
£m
4 April 2018
(note i)
£m
2,087
2,211
5,729
30,546
150,435
191,008
(629)
1,042
191,421
2,087
2,211
5,729
30,545
150,436
191,008
(458)
1,043
191,593
4 April 2019
£m
2,146
2,099
5,836
30,234
123,755
164,070
(506)
883
164,447
Society
5 April 2018
(note i)
£m
4 April 2018
(note i)
£m
2,087
2,038
5,585
28,934
118,846
157,490
(445)
1,042
158,087
2,087
2,038
5,585
28,932
118,839
157,481
(349)
1,043
158,175
Note:
i.
5 April 2018 balances are presented under IFRS 9. Balances have been restated as detailed in note 1 and adjustments made on transition to IFRS 9 are detailed in note 37.
The maturity analysis is produced on the basis that where a loan is repayable by instalments, each such instalment is treated as a separate repayment. The analysis is based on contractual maturity rather than actual redemption
levels experienced, which are likely to be materially different. Arrears are spread across the remaining term of the loan.
Asset backed funding
Certain prime residential mortgages have been pledged to the Group’s asset backed funding programmes or utilised as whole mortgage loan pools for the Bank of England’s (BoE) Term Funding Scheme (TFS). The programmes have
enabled the Group to obtain secured funding. Mortgages pledged and the carrying values of the notes in issue are as follows:
Mortgages pledged to asset backed funding programmes
Group
Covered bond programme
Securitisation programme
Whole mortgage loan pools
Total
Mortgages
pledged
(note ii)
£m
22,656
6,936
24,117
53,709
Held by
third parties
(note iii)
£m
17,339
3,051
-
20,390
2019
Notes in issue
Held by the Group
Drawn
(note iv)
£m
-
-
17,001
17,001
Undrawn
(note v)
£m
-
339
-
339
Total notes
in issue
£m
17,339
3,390
17,001
37,730
Mortgages
pledged
(note ii)
£m
21,000
8,711
22,831
52,542
Held by
third parties
(note iii)
£m
16,035
3,655
-
19,690
2018
Notes in issue (note i)
Held by the Group
Drawn
(note iv)
£m
-
-
17,001
17,001
Undrawn
(note v)
£m
-
338
-
338
Total notes
in issue
£m
16,035
3,993
17,001
37,029
Prior year comparatives have been restated to present balances on a consistent basis with the current period.
Notes:
i.
ii. Mortgages pledged include £5.4 billion (2018: £8.7 billion) in the covered bond and securitisation programmes that are in excess of the amount contractually required to support notes in issue.
iii. Notes in issue which are held by third parties are included within debt securities in issue (note 18).
iv. Notes in issue, held by the Group and drawn are whole mortgage loan pools securing amounts drawn under the TFS. At 4 April 2019 the Group had outstanding TFS drawings of £17.0 billion (2018: £17.0 billion).
v.
Notes in issue, held by the Group and undrawn, are debt securities issued by the programmes to the Society and mortgage loan pools that have been pledged to the BoE but not utilised.
Annual Report and Accounts 2019
Notes to the financial statements (continued)
14. Loans and advances to customers (continued)
Maturity analysis
The following table shows the residual maturity of loans and advances to customers, based on their contractual maturity:
Residual maturity of loans and advances to customers
4 April 2019
4 April 2018
4 April 2019
Group
5 April 2018
(note i)
£m
2,087
2,211
5,729
30,546
150,435
191,008
(629)
1,042
191,421
£m
2,146
2,285
5,976
31,919
156,507
198,833
(665)
883
199,051
(note i)
£m
2,087
2,211
5,729
30,545
150,436
191,008
(458)
1,043
191,593
Society
5 April 2018
(note i)
£m
4 April 2018
(note i)
£m
2,087
2,038
5,585
28,934
118,846
157,490
(445)
1,042
158,087
2,087
2,038
5,585
28,932
118,839
157,481
(349)
1,043
158,175
£m
2,146
2,099
5,836
30,234
123,755
164,070
(506)
883
164,447
212
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
14. Loans and advances to customers (continued)
The Society established the Nationwide Covered Bond programme in November 2005. Mortgages pledged under the Nationwide Covered Bond programme provide security for issues of covered bonds made by the Society. During
the year ended 4 April 2019, £2.5 billion (sterling equivalent) of notes were issued, and £0.8 billion (sterling equivalent) of notes matured.
The Society established the Silverstone Master Trust securitisation programme in July 2008. The securitisation programme notes are issued by Silverstone Master Issuer plc and the issuance proceeds are used to purchase, for the
benefit of note holders, a share of the beneficial interest in the mortgages pledged by the Society and are consolidated into the accounts of the Group. The remaining beneficial interest in the pledged mortgages of £3.9 billion
(2018: £5.2 billion) stays with the Society and includes its required minimum seller share in accordance with the rules of the programme. The Group is under no obligation to support losses incurred by the programme or holders
of the notes and does not intend to provide such further support. The entitlement of note holders is restricted to payment of principal and interest to the extent that the resources of the programme are sufficient to support such
payment and the holders of the notes have agreed not to seek recourse in any other form. During the year ended 4 April 2019 a total of £0.7 billion (sterling equivalent) of notes matured, with no issuances in the period.
The securitisation programme notes are issued by Silverstone Master Issuer plc and are not included in the accounts of the Society. Silverstone Master Issuer plc is fully consolidated into the accounts of the Group.
The whole mortgage loan pools are pledged at the BoE under the TFS. Notes are not issued when pledging the mortgage loan pools at the BoE. Instead, the whole loan pool is pledged to the BoE and drawings are made
directly against the eligible collateral, subject to a haircut. At 4 April 2019, £24.1 billion (2018: £22.8 billion) of pledged collateral supported £17.0 billion (2018: £17.0 billion) of TFS drawdowns. There were no further drawdowns
during the year following the closure of the TFS drawdown window in February 2018.
In accordance with accounting standards, notes in issue and held by the Group are not recognised in the Group’s or Society’s balance sheets. Mortgages pledged are not derecognised from the Group or Society balance sheets as the
Group has retained substantially all the risks and rewards of ownership. The Group and Society continue to be exposed to the liquidity risk, interest rate risk and credit risk of the mortgages. No gain or loss has been recognised on
pledging the mortgages to the programmes.
The following table sets out the carrying value and fair value of the transferred assets and liabilities for the Silverstone Master Trust:
i.
5 April 2018 balances are presented under IFRS 9. Balances have been restated as detailed in note 1 and adjustments made on transition to IFRS 9 are detailed in note 37.
The maturity analysis is produced on the basis that where a loan is repayable by instalments, each such instalment is treated as a separate repayment. The analysis is based on contractual maturity rather than actual redemption
levels experienced, which are likely to be materially different. Arrears are spread across the remaining term of the loan.
At 4 April 2019
At 4 April 2018 (note i)
Transferred
assets
£m
6,936
8,711
Carrying value
Associated
liabilities
£m
(3,390)
(3,993)
Total
£m
3,546
4,718
Transferred
assets
£m
6,743
8,428
Fair value
Associated
liabilities
£m
(3,418)
(4,030)
Total
£m
3,325
4,398
Certain prime residential mortgages have been pledged to the Group’s asset backed funding programmes or utilised as whole mortgage loan pools for the Bank of England’s (BoE) Term Funding Scheme (TFS). The programmes have
enabled the Group to obtain secured funding. Mortgages pledged and the carrying values of the notes in issue are as follows:
Note:
i.
Prior year comparatives have been restated to present balances on a consistent basis with the current period.
The Society holds cash deposited by the Nationwide Covered Bond programme of £0.6 billion (2018: £0.4 billion) and by the Silverstone programme of £0.7 billion (2018: £0.4 billion).
Repayable:
On demand
In not more than three months
In more than three months but not more than one year
In more than one year but not more than five years
In more than five years
Impairment provision on loans and advances
Fair value adjustment for micro hedged risk
Total
Note:
Asset backed funding
Mortgages pledged to asset backed funding programmes
Group
Covered bond programme
Securitisation programme
Whole mortgage loan pools
Total
Notes:
2019
Notes in issue
Held by the Group
Mortgages
pledged
(note ii)
Held by
third parties
(note iii)
£m
22,656
6,936
24,117
53,709
£m
17,339
3,051
-
20,390
Drawn
(note iv)
£m
-
-
17,001
17,001
Undrawn
(note v)
Total notes
in issue
Mortgages
pledged
(note ii)
Held by
third parties
(note iii)
£m
339
-
-
339
£m
17,339
3,390
17,001
37,730
£m
21,000
8,711
22,831
52,542
£m
16,035
3,655
-
19,690
2018
Notes in issue (note i)
Held by the Group
Drawn
(note iv)
£m
-
-
17,001
17,001
Undrawn
(note v)
Total notes
in issue
£m
338
-
-
338
£m
16,035
3,993
17,001
37,029
i.
Prior year comparatives have been restated to present balances on a consistent basis with the current period.
ii. Mortgages pledged include £5.4 billion (2018: £8.7 billion) in the covered bond and securitisation programmes that are in excess of the amount contractually required to support notes in issue.
iii. Notes in issue which are held by third parties are included within debt securities in issue (note 18).
iv. Notes in issue, held by the Group and drawn are whole mortgage loan pools securing amounts drawn under the TFS. At 4 April 2019 the Group had outstanding TFS drawings of £17.0 billion (2018: £17.0 billion).
v.
Notes in issue, held by the Group and undrawn, are debt securities issued by the programmes to the Society and mortgage loan pools that have been pledged to the BoE but not utilised.
S
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f
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m
a
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i
o
n
213
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
15. Derivative financial instruments
All of the Group’s derivative financial instruments are used to manage economic risk, although not all of the derivatives are subject to hedge accounting. Note 7 sets out the link between economic risk management and the hedge
accounting applied by the Group. The table below provides an analysis of the notional amount and fair value of derivatives by both hedge accounting type and instrument type. The amount of ineffectiveness recognised for each hedge
type is shown in note 7. Contract/notional amount is the amount on which payment flows are derived and does not represent amounts at risk.
Derivatives by instrument and hedge type
Micro fair value hedges:
Interest rate swaps
Bond forwards
Inflation swaps
Macro fair value hedges:
Interest rate swaps
Cash flow hedges:
Interest rate swaps
Cross currency interest rate swaps
Inflation swaps
Not subject to hedge accounting:
Interest rate swaps
Cross currency interest rate swaps
Foreign exchange swaps
Other derivatives
2019
Group
Fair value
Assets
Liabilities
£m
68
-
1
69
2
2
1,129
2,023
34
3,186
72
215
15
3
305
£m
178
58
14
250
882
882
26
232
-
258
21
91
80
11
203
Contract/
notional
amount
£m
17,054
2,625
1,403
21,082
128,704
128,704
23,031
7,413
280
30,724
85,526
26,232
6,037
4,301
122,096
Society
Fair value
Assets
Liabilities
£m
171
-
1
172
2
2
51
139
34
224
724
1,474
15
3
2,216
£m
181
58
14
253
882
882
2
113
-
115
731
891
80
7
1,709
Contract/
notional
amount
£m
13,347
-
-
13,347
101,741
101,741
32,099
23,551
280
55,930
54,595
1,870
1,635
1,717
59,817
2018
Group
Fair value
Assets
Liabilities
£m
452
-
-
452
266
266
873
2,363
24
3,260
62
79
2
-
143
£m
297
-
-
297
1,344
1,344
287
254
-
541
77
39
27
12
155
Contract/
notional
amount
£m
17,152
-
-
17,152
101,741
101,741
7,162
6,016
280
13,458
77,795
23,039
1,635
1,717
104,186
Society
Fair value
Assets
Liabilities
£m
374
-
-
374
266
266
39
16
24
79
711
1,676
2
-
2,389
£m
501
-
-
501
1,344
1,344
180
199
-
379
574
909
27
12
1,522
Contract/
notional
amount
£m
12,673
2,625
1,403
16,701
128,704
128,704
47,472
23,860
280
71,612
63,827
6,866
6,037
4,301
81,031
Total
298,048
3,562
1,593
302,606
2,614
2,959
230,835
4,121
2,337
236,537
3,108
3,746
Annual Report and Accounts 2019
Notes to the financial statements (continued)
15. Derivative financial instruments
214
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
15. Derivative financial instruments (continued)
All of the Group’s derivative financial instruments are used to manage economic risk, although not all of the derivatives are subject to hedge accounting. Note 7 sets out the link between economic risk management and the hedge
accounting applied by the Group. The table below provides an analysis of the notional amount and fair value of derivatives by both hedge accounting type and instrument type. The amount of ineffectiveness recognised for each hedge
The contractual maturity of derivatives used as hedging instruments in micro fair value and cash flow hedges is provided in the table below. As described in note 1, macro fair value hedges are frequently rebalanced to include new
business. As a result, these hedges have not been included in the analysis below.
type is shown in note 7. Contract/notional amount is the amount on which payment flows are derived and does not represent amounts at risk.
Derivatives by instrument and hedge type
2019
Group
Fair value
Society
Fair value
2018
Group
Fair value
Society
Fair value
Assets
Liabilities
Assets
Liabilities
Assets
Liabilities
Assets
Liabilities
Contract/
notional
amount
£m
12,673
2,625
1,403
16,701
128,704
128,704
47,472
23,860
280
71,612
63,827
6,866
6,037
4,301
81,031
£m
68
-
1
69
2
2
1,129
2,023
34
3,186
72
215
15
3
305
Contract/
notional
amount
£m
17,054
2,625
1,403
21,082
128,704
128,704
23,031
7,413
280
30,724
85,526
26,232
6,037
4,301
122,096
£m
178
58
14
250
882
882
26
232
-
258
21
91
80
11
203
£m
171
172
-
1
2
2
51
139
34
224
724
1,474
15
3
2,216
Contract/
notional
amount
£m
13,347
-
-
13,347
101,741
101,741
32,099
23,551
280
55,930
54,595
1,870
1,635
1,717
59,817
£m
181
58
14
253
882
882
2
113
-
115
731
891
80
7
1,709
£m
452
-
-
452
266
266
873
2,363
24
3,260
62
79
2
-
143
Contract/
notional
amount
£m
17,152
-
-
17,152
101,741
101,741
7,162
6,016
280
13,458
77,795
23,039
1,635
1,717
104,186
£m
297
-
-
297
1,344
1,344
287
254
-
541
77
39
27
12
155
£m
374
-
-
374
266
266
39
16
24
79
711
1,676
2
-
2,389
£m
501
-
-
501
1,344
1,344
180
199
-
379
574
909
27
12
1,522
Micro fair value hedges:
Interest rate swaps
Bond forwards
Inflation swaps
Macro fair value hedges:
Interest rate swaps
Cash flow hedges:
Interest rate swaps
Cross currency interest rate swaps
Inflation swaps
Not subject to hedge accounting:
Interest rate swaps
Cross currency interest rate swaps
Foreign exchange swaps
Other derivatives
Total
298,048
3,562
1,593
302,606
2,614
2,959
230,835
4,121
2,337
236,537
3,108
3,746
Contractual maturity of hedging instruments (contract/notional amount)
2019
Group
Micro fair value hedges
Interest rate swaps
Bond forwards
Inflation swaps
Cash flow hedges
Interest rate swaps
Cross currency interest rate swaps
Inflation swaps
Less than
one year
£m
Between one
and five years
£m
More than
five years
£m
358
2,625
233
3,216
19,155
2,017
-
21,172
5,722
-
367
6,089
16,615
11,474
280
28,369
6,593
-
803
7,396
11,702
10,369
-
22,071
Contractual maturity of hedging instruments (contract/notional amount)
2018
Group
Micro fair value hedges
Interest rate swaps
Cash flow hedges
Interest rate swaps
Cross currency interest rate swaps
Inflation swaps
Less than
one year
£m
Between one
and five years
£m
More than
five years
£m
183
183
2,387
1,831
-
4,218
4,007
4,007
17,915
10,566
160
28,641
9,157
9,157
11,797
11,154
120
23,071
Total
£m
12,673
2,625
1,403
16,701
47,472
23,860
280
71,612
Total
£m
13,347
13,347
32,099
23,551
280
55,930
Society
Less than
one year
£m
Between one
and five years
£m
More than
five years
£m
1,866
2,625
233
4,724
14,180
191
-
14,371
6,276
-
367
6,643
4,560
2,985
280
7,825
8,912
-
803
9,715
4,291
4,237
-
8,528
Society
Less than
one year
£m
Between one
and five years
£m
More than five
years
£m
883
883
-
-
-
-
5,715
5,715
2,354
1,260
160
3,774
10,554
10,554
4,808
4,756
120
9,684
Total
£m
17,054
2,625
1,403
21,082
23,031
7,413
280
30,724
Total
£m
17,152
17,152
7,162
6,016
280
13,458
S
t
r
a
t
e
g
i
c
R
e
p
o
r
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G
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n
a
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c
e
B
u
s
i
n
e
s
s
a
n
d
R
i
s
k
R
e
p
o
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t
i
F
n
a
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c
i
a
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S
t
a
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m
e
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s
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I
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f
o
r
m
a
t
i
o
n
215
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
15. Derivative financial instruments (continued)
The weighted average rates of cash flow hedging instruments which achieve fixed rates are summarised in the table below. Fair value and cash flow hedging instruments which do not achieve a fixed rate have not been included in this
analysis.
Average rates achieved
2019
Cross currency interest rate swaps
Average EUR/GBP rate
Average USD/GBP rate
Average JPY/GBP rate
Average NOK/GBP rate
Average HKD/GBP rate
Interest rate swaps
Average fixed interest rate (GBP %)
Inflation swaps
Average fixed interest rate (GBP %)
Average inflation rate (RPI index)
Group
Society
Less than
one year
Between one
and five years
More than
five years
Total
Less than
one year
Between one
and five years
More than
five years
1.24
1.50
-
-
-
0.76
-
-
1.29
1.35
147.50
9.19
11.89
-
3.55
256.07
1.22
1.38
145.41
11.05
11.85
-
-
-
1.26
1.38
145.83
10.59
11.85
1.15
-
-
-
-
1.15
1.34
147.50
-
-
0.76
0.76
-
3.55
256.07
-
-
3.55
256.07
1.12
1.34
145.41
10.88
-
-
-
-
Total
1.14
1.33
145.83
10.88
-
0.76
3.55
256.07
16. Deposits from banks and similar institutions
Deposits from banks and similar institutions are repayable from the balance sheet date in the ordinary course of business as follows:
Accrued interest
Repayable:
On demand
In not more than three months
In more than three months but not more than one year
In more than one year but not more than five years
Total
Note:
i.
Comparatives have been restated as detailed in note 1.
Group
2019
£m
3
2,176
848
122
17,000
20,149
2018
(note i)
£m
2
2,430
952
52
17,000
20,436
Society
2019
£m
3
1,118
848
122
17,000
19,091
2018
(note i)
£m
2
1,242
952
52
17,000
19,248
For the Group and Society, deposits from banks and similar institutions include £17.0 billion (2018: £17.0 billion) drawn down against the Bank of England Term Funding Scheme (TFS) which is repayable within more than one year
but not more than five years.
Annual Report and Accounts 2019
Notes to the financial statements (continued)
15. Derivative financial instruments (continued)
analysis.
Average rates achieved
2019
Cross currency interest rate swaps
Average EUR/GBP rate
Average USD/GBP rate
Average JPY/GBP rate
Average NOK/GBP rate
Average HKD/GBP rate
Interest rate swaps
Average fixed interest rate (GBP %)
Inflation swaps
Average fixed interest rate (GBP %)
Average inflation rate (RPI index)
Group
Society
Less than
one year
Between one
and five years
More than
five years
Total
Less than
one year
Between one
and five years
More than
five years
1.24
1.50
-
-
-
-
-
1.29
1.35
147.50
9.19
11.89
3.55
256.07
1.26
1.38
145.83
10.59
11.85
3.55
256.07
1.15
-
-
-
-
-
-
1.15
1.34
147.50
-
-
-
3.55
256.07
1.12
1.34
145.41
10.88
-
-
-
-
0.76
-
0.76
0.76
Total
1.14
1.33
145.83
10.88
-
0.76
3.55
256.07
16. Deposits from banks and similar institutions
Deposits from banks and similar institutions are repayable from the balance sheet date in the ordinary course of business as follows:
Group
2019
£m
3
2,176
848
122
17,000
20,149
Society
2019
£m
3
1,118
848
122
17,000
19,091
2018
(note i)
£m
2
1,242
952
52
17,000
19,248
Accrued interest
Repayable:
On demand
Total
Note:
In not more than three months
In more than three months but not more than one year
In more than one year but not more than five years
i.
Comparatives have been restated as detailed in note 1.
but not more than five years.
For the Group and Society, deposits from banks and similar institutions include £17.0 billion (2018: £17.0 billion) drawn down against the Bank of England Term Funding Scheme (TFS) which is repayable within more than one year
1.22
1.38
145.41
11.05
11.85
-
-
-
2018
(note i)
£m
2
2,430
952
52
17,000
20,436
The weighted average rates of cash flow hedging instruments which achieve fixed rates are summarised in the table below. Fair value and cash flow hedging instruments which do not achieve a fixed rate have not been included in this
Other deposits are repayable from the balance sheet date in the ordinary course of business as follows:
216
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
17. Other deposits
Accrued interest
Repayable:
On demand
In not more than three months
In more than three months but not more than one year
In more than one year but not more than five years
Total
Note:
i.
Comparatives have been restated as detailed in note 1.
Group
2019
£m
1
2,141
778
2,138
16
5,074
2018
(note i)
£m
2
2,344
628
1,708
11
4,693
Society
2019
£m
1
3,686
778
2,138
16
6,619
2018
(note i)
£m
2
3,761
628
1,708
11
6,110
Other deposits comprise wholesale and commercial deposits. The Society’s other deposits as at 4 April 2019 include £1,545 million (2018: £1,417 million) of deposits from subsidiary undertakings.
18. Debt securities in issue
Certificates of deposit and commercial paper
Fixed and floating rate notes
Other debt securities
Fair value adjustment for micro hedged risk
Total
Debt securities in issue are repayable from the balance sheet
date in the ordinary course of business as follows:
Accrued interest
Residual maturity repayable:
In not more than one year
In more than one year
Fair value adjustment for micro hedged risk
Total
Group
Society
2019
£m
7,975
23,962
3,363
35,300
642
35,942
2018
£m
5,413
23,969
3,959
33,341
777
34,118
2019
£m
7,975
23,970
310
32,255
99
32,354
2018
£m
5,413
23,980
301
29,694
40
29,734
167
157
156
148
12,205
22,928
35,300
642
35,942
8,489
24,695
33,341
777
34,118
11,424
20,675
32,255
99
32,354
7,712
21,834
29,694
40
29,734
Debt securities in issue in the Group include £20,390 million (2018: £19,690 million), and in the Society include £16,746 million (2018: £15,312 million), secured on certain loans and advances to customers. Further information is
given in note 14.
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Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
19. Subordinated liabilities
Senior non-preferred
3.766% senior non-preferred notes (US Dollar 1 billion)
1.5% senior non-preferred notes (Euro 1 billion)
4.302% senior non-preferred notes (US Dollar 0.75 billion)
4.363% senior non-preferred notes (US Dollar 1 billion)
3.4675% senior non-preferred notes (Norwegian Kroner 1 billion)
0.805% senior non-preferred notes (Japanese Yen 1 billion)
0.9925% senior non-preferred notes (Japanese Yen 4 billion)
3.875% senior non-preferred notes (Norwegian Kroner 0.3 billion)
3.9% senior non-preferred notes (Norwegian Kroner 1 billion)
1.2775% senior non-preferred notes (Japanese Yen 3 billion)
Tier 2 Eligible
6.75% subordinated notes (Euro 0.75 billion)
4% subordinated notes (US Dollar 1.25 billion)
2% subordinated notes (Euro 1 billion)
4.125% subordinated notes (US Dollar 1.25 billion)
Fair value hedge accounting adjustments
Unamortised premiums and issue costs
Total
Issuance date
Next call date
Maturity date
8 March 2018
8 March 2018
8 March 2018
1 August 2018
5 October 2018
24 October 2018
30 October 2018
13 November 2018
13 November 2018
14 November 2018
22 July 2010
14 September 2016
25 July 2017
18 October 2017
8 March 2023
8 March 2025
8 March 2028
1 August 2023
24 October 2023
30 October 2025
14 November 2028
25 July 2024
18 October 2027
8 March 2024
8 March 2026
8 March 2029
1 August 2024
5 October 2026
24 October 2024
30 October 2026
13 November 2028
13 November 2028
14 November 2029
22 July 2020
14 September 2026
25 July 2029
18 October 2032
Group and Society
2019
£m
766
858
575
769
90
7
27
27
90
21
673
957
867
973
6,700
37
(31)
6,706
2018
£m
713
875
534
-
-
-
-
-
-
-
686
886
889
904
5,487
42
(32)
5,497
Senior non-preferred notes are a class of subordinated liability which rank equally with each other and behind the claims against the Society of all depositors, creditors and investing members other than holders of Tier 2 eligible
subordinated notes, permanent interest-bearing shares (PIBS), Additional Tier 1 (AT1) instruments and CCDS. The Tier 2 eligible subordinated notes rank equally with each other and ahead of claims against the Society of holders of
PIBS, AT1 instruments and CCDS.
During the year the Group issued US Dollar 1 billion, Norwegian Kroner 2.3 billion and Japanese Yen 8 billion of senior non-preferred notes as detailed above. The issuance of senior non-preferred notes will contribute to meeting
forthcoming minimum requirements for own funds and eligible liabilities (MREL).
The interest rate risk and foreign exchange risk arising from the issuance of fixed rate and foreign currency subordinated liabilities have been mitigated through the use of derivatives.
Annual Report and Accounts 2019
Notes to the financial statements (continued)
19. Subordinated liabilities
Senior non-preferred
3.766% senior non-preferred notes (US Dollar 1 billion)
1.5% senior non-preferred notes (Euro 1 billion)
4.302% senior non-preferred notes (US Dollar 0.75 billion)
4.363% senior non-preferred notes (US Dollar 1 billion)
3.4675% senior non-preferred notes (Norwegian Kroner 1 billion)
0.805% senior non-preferred notes (Japanese Yen 1 billion)
0.9925% senior non-preferred notes (Japanese Yen 4 billion)
3.875% senior non-preferred notes (Norwegian Kroner 0.3 billion)
3.9% senior non-preferred notes (Norwegian Kroner 1 billion)
1.2775% senior non-preferred notes (Japanese Yen 3 billion)
Tier 2 Eligible
6.75% subordinated notes (Euro 0.75 billion)
4% subordinated notes (US Dollar 1.25 billion)
2% subordinated notes (Euro 1 billion)
4.125% subordinated notes (US Dollar 1.25 billion)
Fair value hedge accounting adjustments
Unamortised premiums and issue costs
Total
PIBS, AT1 instruments and CCDS.
Issuance date
Next call date
Maturity date
8 March 2018
8 March 2018
8 March 2018
1 August 2018
5 October 2018
24 October 2018
30 October 2018
13 November 2018
13 November 2018
14 November 2018
22 July 2010
14 September 2016
25 July 2017
18 October 2017
8 March 2023
8 March 2025
8 March 2028
1 August 2023
24 October 2023
30 October 2025
14 November 2028
25 July 2024
18 October 2027
8 March 2024
8 March 2026
8 March 2029
1 August 2024
5 October 2026
24 October 2024
30 October 2026
13 November 2028
13 November 2028
14 November 2029
22 July 2020
14 September 2026
25 July 2029
18 October 2032
Group and Society
2019
£m
766
858
575
769
90
7
27
27
90
21
673
957
867
973
6,700
37
(31)
6,706
2018
£m
713
875
534
-
-
-
-
-
-
-
686
886
889
904
5,487
42
(32)
5,497
218
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
20. Subscribed capital
7.25% permanent interest-bearing shares
6.25% permanent interest-bearing shares
5.769% permanent interest-bearing shares
7.859% permanent interest-bearing shares
Floating rate (6-month Libor + 2.4%) permanent interest-bearing shares
6.875% permanent interest-bearing shares
Floating rate (3-month Libor + 1.5%) permanent interest-bearing shares
Fair value hedge accounting adjustments
Unamortised premiums and issue costs
Total
Notes
i
i
i
i
ii
Next call date
5 December 2021
22 October 2024
6 February 2026
13 March 2030
Group and Society
2019
£m
34
45
84
39
10
-
-
212
40
(2)
250
2018
£m
34
45
84
39
10
10
3
225
40
(2)
263
Notes:
i.
ii.
Repayable, at the option of the Society, in whole on the initial call date or every fifth anniversary thereafter. If not repaid on a call date, then the interest rate is reset at a margin to the yield on the then prevailing five-year benchmark gilt rate.
Only repayable in the event of winding up the Society.
During the year, there were two redemptions of subscribed capital at par. On 6 May 2018 the Group redeemed the £3 million floating rate (3-month Libor + 1.5%) PIBS and on 10 January 2019 the Group redeemed the £10 million
6.875% PIBS.
All PIBS are denominated in sterling and only repayable with the prior consent of the PRA.
PIBS rank equally with each other and the Group’s AT1 instruments. They are deferred shares of the Society and rank behind the claims against the Society of all noteholders, depositors, creditors and investing members of the
Society, other than the holders of CCDS.
Senior non-preferred notes are a class of subordinated liability which rank equally with each other and behind the claims against the Society of all depositors, creditors and investing members other than holders of Tier 2 eligible
subordinated notes, permanent interest-bearing shares (PIBS), Additional Tier 1 (AT1) instruments and CCDS. The Tier 2 eligible subordinated notes rank equally with each other and ahead of claims against the Society of holders of
The interest rate risk arising from the issuance of fixed rate PIBS has been mitigated through the use of interest rate swaps.
During the year the Group issued US Dollar 1 billion, Norwegian Kroner 2.3 billion and Japanese Yen 8 billion of senior non-preferred notes as detailed above. The issuance of senior non-preferred notes will contribute to meeting
forthcoming minimum requirements for own funds and eligible liabilities (MREL).
The interest rate risk and foreign exchange risk arising from the issuance of fixed rate and foreign currency subordinated liabilities have been mitigated through the use of derivatives.
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219
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
21. Fair value hierarchy of financial assets and liabilities held at fair value
As the majority of the Group’s assets and liabilities are held within the Society, the disclosures in notes 21 to 23 are on a consolidated basis. The following tables show the Group’s financial assets and liabilities that are held at fair value
by fair value hierarchy, balance sheet classification and product type:
2019
Fair values based on
2018
Fair values based on
Financial assets
Government and supranational investments
Other debt investment securities
Investments in equity shares
Total investment securities (note i)
Interest rate swaps
Cross currency interest rate swaps
Foreign exchange swaps
Inflation swaps
Swaptions
Total derivative financial instruments
Loans and advances to customers (note ii)
Total financial assets
Financial liabilities
Interest rate swaps
Cross currency interest rate swaps
Foreign exchange swaps
Bond forwards
Swaptions
Inflation swaps
Total derivative financial instruments
Total financial liabilities
Level 1
£m
12,306
1,202
-
13,508
-
-
-
-
-
-
-
13,508
-
-
-
-
-
-
-
-
Level 2
£m
Level 3
£m
-
989
-
989
1,271
2,238
15
35
3
3,562
-
4,551
(1,107)
(324)
(80)
(58)
(3)
(21)
(1,593)
(1,593)
-
62
19
81
-
-
-
-
-
-
129
210
-
-
-
-
-
-
-
-
Total
£m
12,306
2,253
19
14,578
1,271
2,238
15
35
3
3,562
129
18,269
(1,107)
(324)
(80)
(58)
(3)
(21)
(1,593)
(1,593)
Financial assets
Government and supranational investments
Other debt investment securities
Investments in equity shares
Total investment securities (note i)
Interest rate swaps
Cross currency interest rate swaps
Foreign exchange swaps
Inflation swaps
Equity index swaps
Total derivative financial instruments
Total financial assets
Financial liabilities
Interest rate swaps
Cross currency interest rate swaps
Foreign exchange swaps
Bond forwards
Swaptions
Inflation swaps
Total derivative financial instruments
Total financial liabilities
Level 2
£m
Level 3
£m
Level 1
£m
9,592
1,007
-
10,599
-
-
-
-
-
-
-
1,282
-
1,282
1,654
2,441
2
24
-
4,121
10,599
5,403
-
-
-
-
-
-
-
-
(2,002)
(293)
(27)
(1)
(3)
(7)
(2,333)
(2,333)
Total
£m
9,592
2,330
3
11,925
1,654
2,441
2
24
-
4,121
16,046
(2,006)
(293)
(27)
(1)
(3)
(7)
(2,337)
(2,337)
-
41
3
44
-
-
-
-
-
-
44
(4)
-
-
-
-
-
(4)
(4)
Notes:
i.
ii. On transition to IFRS 9, certain loans and advances to customers have been classified as FVTPL. Further information is included in note 37.
Investment securities exclude £1,656 million of investment securities held at amortised cost (2018: £1,120 million of held to maturity investment securities and £1 million of available for sale investments in equity shares).
The Group’s Level 1 portfolio comprises liquid securities for which traded prices are readily available.
Asset valuations for Level 2 investment securities are sourced from consensus pricing or other observable market prices. None of the Level 2 investment securities are valued using models. Level 2 derivative assets and liabilities are valued
from discounted cash flow models using yield curves based on observable market data.
More detail on the Level 3 portfolio is provided in note 22.
Transfers between fair value hierarchies
Instruments move between fair value hierarchies primarily due to increases or decreases in market activity or changes to the significance of unobservable inputs to valuation. There were no transfers between the Level 1 and Level 2
portfolios during the year.
Annual Report and Accounts 2019
Notes to the financial statements (continued)
220
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
21. Fair value hierarchy of financial assets and liabilities held at fair value
22. Fair value of financial assets and liabilities held at fair value – Level 3 portfolio
As the majority of the Group’s assets and liabilities are held within the Society, the disclosures in notes 21 to 23 are on a consolidated basis. The following tables show the Group’s financial assets and liabilities that are held at fair value
The main constituents of the Level 3 portfolio are as follows:
by fair value hierarchy, balance sheet classification and product type:
Investment securities
2019
Financial assets
Government and supranational investments
Other debt investment securities
Investments in equity shares
Total investment securities (note i)
Interest rate swaps
Cross currency interest rate swaps
Foreign exchange swaps
Inflation swaps
Swaptions
Total derivative financial instruments
Loans and advances to customers (note ii)
Total financial assets
Financial liabilities
Interest rate swaps
Cross currency interest rate swaps
Foreign exchange swaps
Bond forwards
Swaptions
Inflation swaps
Total derivative financial instruments
Total financial liabilities
Notes:
Fair values based on
Level 2
£m
Level 3
£m
2018
Fair values based on
Level 2
£m
Level 3
£m
Level 1
£m
12,306
1,202
13,508
13,508
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
989
-
-
989
1,271
2,238
15
35
3
3,562
-
4,551
(1,107)
(324)
(80)
(58)
(3)
(21)
(1,593)
(1,593)
Total
£m
12,306
2,253
19
14,578
1,271
2,238
15
35
3
3,562
129
18,269
(1,107)
(324)
(80)
(58)
(3)
(21)
(1,593)
(1,593)
-
62
19
81
129
210
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Financial assets
Government and supranational investments
Other debt investment securities
Investments in equity shares
Total investment securities (note i)
Interest rate swaps
Cross currency interest rate swaps
Foreign exchange swaps
Inflation swaps
Equity index swaps
Total derivative financial instruments
Total financial assets
Financial liabilities
Interest rate swaps
Cross currency interest rate swaps
Foreign exchange swaps
Bond forwards
Swaptions
Inflation swaps
Total derivative financial instruments
Total financial liabilities
Level 1
£m
9,592
1,007
10,599
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,282
1,282
1,654
2,441
2
24
-
4,121
(2,002)
(293)
(27)
(1)
(3)
(7)
(2,333)
(2,333)
Total
£m
9,592
2,330
3
11,925
1,654
2,441
2
24
-
4,121
(2,006)
(293)
(27)
(1)
(3)
(7)
-
41
3
44
-
-
-
-
-
-
-
-
-
-
-
(4)
(4)
(4)
(2,337)
(2,337)
10,599
5,403
44
16,046
i.
Investment securities exclude £1,656 million of investment securities held at amortised cost (2018: £1,120 million of held to maturity investment securities and £1 million of available for sale investments in equity shares).
ii. On transition to IFRS 9, certain loans and advances to customers have been classified as FVTPL. Further information is included in note 37.
The Group’s Level 1 portfolio comprises liquid securities for which traded prices are readily available.
Asset valuations for Level 2 investment securities are sourced from consensus pricing or other observable market prices. None of the Level 2 investment securities are valued using models. Level 2 derivative assets and liabilities are valued
from discounted cash flow models using yield curves based on observable market data.
More detail on the Level 3 portfolio is provided in note 22.
Transfers between fair value hierarchies
portfolios during the year.
Instruments move between fair value hierarchies primarily due to increases or decreases in market activity or changes to the significance of unobservable inputs to valuation. There were no transfers between the Level 1 and Level 2
The Level 3 items in this category primarily include £62 million (2018: £44 million) of investments in industry-wide banking and credit card service operations and £18 million of new investments made in Fintech companies during
the year.
Derivative financial instruments
During the year, derivatives economically hedging a small closed portfolio of equity release mortgages were settled upon sale of the associated loans.
Loans and advances to customers
On transition to IFRS 9, certain loans and advances to customers have been classified as FVTPL. Level 3 assets in this category include a closed portfolio of residential mortgages and a small number of commercial loans.
During the year, a portfolio of residential mortgages was transferred from Level 3 to Level 2 after a market price was obtained. These assets were subsequently sold.
The tables below set out movements in the Level 3 portfolio, including transfers in and out of Level 3.
Movements in Level 3 portfolio
Movements in Level 3 portfolio
Investment
securities
Derivative
financial
instruments
Loans and
advances to
customers
£m
44
1
45
-
4
15
18
(1)
-
81
£m
(4)
-
(4)
-
-
2
-
2
-
-
£m
247
247
8
-
6
-
(21)
(111)
129
At 5 April 2017
Gains/(losses) recognised in the income statement, within:
Net interest income/(expense)
(Losses)/gains from derivatives and hedge accounting
Other operating income
(Losses)/gains recognised in other comprehensive income:
Fair value movement taken to members’ interests and equity
Settlements
Disposals
At 4 April 2018
Investment
securities
£m
66
-
-
26
(18)
-
(30)
44
Derivative
financial
instruments
£m
228
Other deposits
– PEBs
(note iii)
£m
(810)
206
(232)
-
-
(206)
-
(4)
(210)
233
-
-
787
-
-
At 4 April 2018
IFRS 9 transition (note i)
At 5 April 2018
Gains/(losses)recognised in the income statement, within:
Net interest income
Gains from derivatives and hedge accounting (note ii)
Other operating income
Additions
Settlements/repayments
Transfers out of Level 3 portfolio
At 4 April 2019
Notes:
i.
ii.
iii.
Adjustment on implementation of IFRS 9 as detailed in note 37.
Includes foreign exchange revaluation gains/losses.
The PEBs matured in full during the year ended 4 April 2018.
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221
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
22. Fair value of financial assets and liabilities held at fair value – Level 3 portfolio (continued)
Level 3 portfolio sensitivity analysis of valuations using unobservable inputs
The fair value of financial instruments is, in certain circumstances, measured using valuation techniques based on market prices that are not observable in an active market or significant unobservable market inputs. Reasonable
alternative assumptions can be applied for sensitivity analysis, taking account of the nature of valuation techniques used, as well as the availability and reliability of observable proxy and historic data. The following table shows the
sensitivity of the Level 3 fair values to reasonable alternative assumptions (as set out in the table of significant unobservable inputs below) and the resultant impact of such changes in fair value on the income statement or members’
interests and equity:
Sensitivity of Level 3 fair values
2019
Investment securities (note i)
Loans and advances to customers
Total
Income statement
Other comprehensive income
Favourable
changes
£m
36
4
40
Unfavourable
changes
£m
(39)
(5)
(44)
Favourable
changes
£m
-
-
-
Unfavourable
changes
£m
-
-
-
Fair value
£m
81
129
210
Sensitivity of Level 3 fair values
2018
Investment securities (note i)
Derivative financial instruments
Total
Income statement
Favourable
changes
£m
-
-
-
Unfavourable
changes
£m
-
-
-
Other comprehensive income
Unfavourable
changes
£m
(35)
-
(35)
Favourable
changes
£m
25
-
25
Fair value
£m
44
(4)
40
Note:
i.
On adoption of IFRS 9 the Level 3 investment securities were classified as FVTPL. The sensitivity analysis on fair values in the table above therefore impacts the income statement in the current period. At 4 April 2018 Level 3 investment securities were
available for sale assets, with fair value movements recognised in other comprehensive income.
Alternative assumptions are considered for each product and varied according to the quality of the data and variability of the underlying market. The following table discloses the significant unobservable inputs underlying the above
alternative assumptions for assets and liabilities recognised at fair value and classified as Level 3, along with the range of values for those significant unobservable inputs. Where sensitivities are described the inverse relationship will
also generally apply. Some of the significant unobservable inputs used in fair value measurement are interdependent. Where this is the case, a description of those interrelationships is included below.
Significant unobservable inputs
Significant unobservable inputs
2019
Total
assets
Valuation
technique
Significant
unobservable
inputs
Range
(note i)
Weighted
average
(note ii)
Units
2018
Total
assets
Valuation
technique
Significant
unobservable
inputs
Range
(note i)
Units
Weighted
average
(note ii)
Investment securities
Loans and advances
to customers
£m
81
129
Discounted
cash flows
Discount rate
Share conversion
10.00
12.00
- 100.00
11.00
65.85
Discounted
cash flows
Discount rate
2.34
9.00
4.12
%
%
%
Investment securities
£m
44
Discounted
cash flows
Discount rate
Share conversion
10.00
-
12.00
100.00
11.00
66.45
%
%
Notes:
i.
ii. Weighted average represents the input values used in calculating the fair values for the above financial instruments.
The range represents the values of the highest and lowest levels used in the calculation of favourable and unfavourable changes as presented in the table of sensitivities above.
Annual Report and Accounts 2019
Notes to the financial statements (continued)
222
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
22. Fair value of financial assets and liabilities held at fair value – Level 3 portfolio (continued)
22. Fair value of financial assets and liabilities held at fair value – Level 3 portfolio (continued)
Level 3 portfolio sensitivity analysis of valuations using unobservable inputs
Discount rate
The fair value of financial instruments is, in certain circumstances, measured using valuation techniques based on market prices that are not observable in an active market or significant unobservable market inputs. Reasonable
alternative assumptions can be applied for sensitivity analysis, taking account of the nature of valuation techniques used, as well as the availability and reliability of observable proxy and historic data. The following table shows the
sensitivity of the Level 3 fair values to reasonable alternative assumptions (as set out in the table of significant unobservable inputs below) and the resultant impact of such changes in fair value on the income statement or members’
The discount rate is used to determine the present value of future cash flows. The level of the discount rate takes into account the time value of money, but also the risk or uncertainty of future cash flows. Typically, the greater the
uncertainty, the higher the discount rate. A higher discount rate leads to a lower valuation and vice versa.
Share conversion
Sensitivity of Level 3 fair values
Where the fair value of a security is affected by potential conversion into another instrument, share conversion is factored into the fair value. The higher the share conversion, the higher the valuation and vice versa.
23. Fair value of financial assets and liabilities measured at amortised cost
The following table summarises the carrying value and fair value of financial assets and liabilities measured at amortised cost on the Group’s balance sheet:
Fair value of financial assets and liabilities (note i)
Financial assets
Loans and advances to banks and similar institutions
Investment securities (note iii)
Loans and advances to customers:
Residential mortgages
Consumer banking
Commercial and other lending
Total
Financial liabilities
Shares
Deposits from banks and similar institutions
Other deposits
Debt securities in issue
Subordinated liabilities
Subscribed capital
Total
Carrying
value
£m
4,009
1,656
185,734
4,168
9,020
204,587
153,969
20,149
5,074
35,942
6,706
250
222,090
2019
Fair values based on
Level 1
£m
Level 2
£m
Level 3
£m
Total fair
value
£m
-
-
-
-
-
-
4,009
1,651
-
-
-
5,660
-
-
4,009
1,651
186,151
4,104
8,973
199,228
186,151
4,104
8,973
204,888
-
-
-
16,566
-
-
16,566
153,989
20,149
5,074
20,154
6,681
235
206,282
-
-
-
-
-
-
-
153,989
20,149
5,074
36,720
6,681
235
222,848
Carrying
value
£m
3,493
1,120
177,154
3,809
10,630
196,206
148,003
20,436
4,693
34,118
5,497
263
213,010
2018 (note ii)
Fair values based on
Level 1
£m
Level 2
£m
Level 3
£m
-
-
-
-
-
-
-
-
-
15,124
-
-
15,124
3,493
1,128
-
-
-
4,621
147,901
20,436
4,693
19,683
5,521
258
198,492
-
-
176,479
3,666
9,570
189,715
-
-
-
-
-
-
-
Total fair
value
£m
3,493
1,128
176,479
3,666
9,570
194,336
147,901
20,436
4,693
34,807
5,521
258
213,616
Notes:
i.
ii.
iii.
The tables above exclude cash for which fair value approximates to carrying value.
Comparatives have been restated as detailed in note 1.
The Group holds residential mortgage backed securities under a programme to securitise Bradford & Bingley plc residential mortgage assets. These financial assets are classified as amortised cost in the current period under IFRS 9; at 4 April 2018 they were
classified as held to maturity investment securities under IAS 39.
interests and equity:
Sensitivity of Level 3 fair values
2019
Investment securities (note i)
Loans and advances to customers
Total
Note:
Significant unobservable inputs
2019
Investment securities
Loans and advances
to customers
Notes:
Income statement
Other comprehensive income
2018
Income statement
Other comprehensive income
Fair value
Favourable
Unfavourable
Favourable
Unfavourable
changes
changes
changes
changes
£m
81
129
210
£m
36
4
40
£m
(39)
(5)
(44)
£m
-
-
-
£m
-
-
-
Investment securities (note i)
Derivative financial instruments
Total
Fair value
Favourable
changes
Unfavourable
changes
Favourable
changes
Unfavourable
changes
£m
44
(4)
40
£m
-
-
-
£m
-
-
-
£m
25
-
25
£m
(35)
-
(35)
i.
On adoption of IFRS 9 the Level 3 investment securities were classified as FVTPL. The sensitivity analysis on fair values in the table above therefore impacts the income statement in the current period. At 4 April 2018 Level 3 investment securities were
available for sale assets, with fair value movements recognised in other comprehensive income.
Alternative assumptions are considered for each product and varied according to the quality of the data and variability of the underlying market. The following table discloses the significant unobservable inputs underlying the above
alternative assumptions for assets and liabilities recognised at fair value and classified as Level 3, along with the range of values for those significant unobservable inputs. Where sensitivities are described the inverse relationship will
also generally apply. Some of the significant unobservable inputs used in fair value measurement are interdependent. Where this is the case, a description of those interrelationships is included below.
Total
assets
Valuation
technique
Significant
unobservable
inputs
Range
(note i)
average
(note ii)
Weighted
Units
2018
Total
assets
Valuation
technique
Significant
unobservable
inputs
Range
(note i)
Weighted
Units
average
(note ii)
Significant unobservable inputs
£m
81
129
Discounted
cash flows
Discounted
cash flows
Discount rate
10.00
12.00
Share conversion
- 100.00
11.00
65.85
Discount rate
2.34
9.00
4.12
%
%
%
Investment securities
£m
44
Discounted
cash flows
Discount rate
10.00
12.00
Share conversion
-
100.00
11.00
66.45
%
%
i.
The range represents the values of the highest and lowest levels used in the calculation of favourable and unfavourable changes as presented in the table of sensitivities above.
ii. Weighted average represents the input values used in calculating the fair values for the above financial instruments.
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s
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s
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223
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
23. Fair value of financial assets and liabilities measured at amortised cost (continued)
The fair values of loans and advances to customers are further analysed, between those impaired and those not impaired, as follows:
Fair value of loans and advances to customers
Residential mortgages
Consumer banking
Commercial and other lending
Total
Non-credit impaired
(Stages 1 and 2)
2019
Credit-impaired
(Stage 3 and POCI)
(note ii)
Total
Not impaired
Impaired
Total
2018 (note i)
Carrying
value
£m
184,338
4,140
8,983
197,461
Fair
value
£m
184,752
4,076
8,933
197,761
Carrying
value
£m
1,396
28
37
1,461
Fair
value
£m
1,399
28
40
1,467
Carrying
value
£m
185,734
4,168
9,020
198,922
Fair
value
£m
186,151
4,104
8,973
199,228
Carrying
value
£m
176,459
3,772
10,613
190,844
Fair
value
£m
175,813
3,642
9,556
189,011
Carrying
value
£m
695
37
17
749
Fair
value
£m
666
24
14
704
Carrying
value
£m
177,154
3,809
10,630
191,593
Fair
value
£m
176,479
3,666
9,570
189,715
Notes:
i.
ii.
Comparative balances are prepared under IAS 39, and have been restated as detailed in note 1.
POCI loans are those which were credit-impaired when purchased or originated.
Loans and advances to banks and similar institutions
Shares, deposits and amounts due to customers
The fair value of loans and advances to banks and similar institutions is estimated by discounting expected
cash flows at a market discount rate.
Investment securities
The fair value of investment securities is sourced from consensus pricing or other observable market prices.
Loans and advances to customers
The fair value of loans and advances to customers is estimated by discounting expected cash flows at rates
that reflect current rates for similar lending.
Consistent modelling techniques are used across the different loan books. The estimates take into account
expected future cash flows and future lifetime expected losses, based on historic trends and discount rates
appropriate to the loans, to reflect a hypothetical exit price value on an asset by asset basis. Variable rate loans
are modelled on estimated future cash flows, discounted at current market interest rates. Variable rate retail
mortgages are discounted at the currently available market standard variable interest rate (SVR) which, for
example, in the case of the Group’s residential base mortgage rate (BMR) mortgage book, generates a fair
value lower than the amortised cost value as those mortgages are priced below the SVR.
For fixed rate loans, discount rates have been based on the expected funding and capital cost applicable to the
book. When calculating fair values on fixed rate loans, no adjustment has been made to reflect interest rate
risk management through internal natural hedges or external hedging via derivatives.
The estimated fair value of shares, deposits and amounts due to customers with no stated maturity, including
non-interest-bearing deposits, is the amount repayable on demand. For items without quoted market prices
the estimated fair value represents the discounted amount of estimated future cash flows based on
expectations of future interest rates, customer withdrawals and interest capitalisation. For variable interest
rate items, estimated future cash flows are discounted using current market interest rates for new debt with
similar remaining maturity. For fixed rate items, the estimated future cash flows are discounted based on
market offer rates currently available for equivalent deposits.
Debt securities in issue
The estimated fair values of longer dated liabilities are calculated based on quoted market prices where
available or using similar instruments as a proxy for those liabilities that are not of sufficient size or liquidity to
have an active market quote. For those notes for which quoted market prices are not available, a discounted
cash flow model is used based on a current yield curve appropriate for the remaining term to maturity.
Subordinated liabilities and subscribed capital
The fair value of subordinated liabilities and subscribed capital is determined by reference to quoted market
prices of similar instruments.
Annual Report and Accounts 2019
Notes to the financial statements (continued)
23. Fair value of financial assets and liabilities measured at amortised cost (continued)
The fair values of loans and advances to customers are further analysed, between those impaired and those not impaired, as follows:
Fair value of loans and advances to customers
2019
Credit-impaired
(Stage 3 and POCI)
(note ii)
Non-credit impaired
(Stages 1 and 2)
Carrying
value
£m
Fair
value
£m
184,338
184,752
4,140
8,983
4,076
8,933
197,461
197,761
Total
Not impaired
Impaired
Total
Carrying
value
£m
1,396
28
37
1,461
Fair
value
£m
Carrying
value
£m
28
40
4,168
9,020
Fair
value
£m
4,104
8,973
Carrying
value
£m
176,459
3,772
10,613
1,399
185,734
186,151
1,467
198,922
199,228
190,844
Fair
value
£m
175,813
3,642
9,556
189,011
Carrying
value
£m
695
37
17
749
Fair
value
£m
666
24
14
704
Carrying
value
£m
177,154
3,809
10,630
191,593
Fair
value
£m
176,479
3,666
9,570
189,715
Comparative balances are prepared under IAS 39, and have been restated as detailed in note 1.
POCI loans are those which were credit-impaired when purchased or originated.
Loans and advances to banks and similar institutions
Shares, deposits and amounts due to customers
The fair value of loans and advances to banks and similar institutions is estimated by discounting expected
Residential mortgages
Consumer banking
Commercial and other lending
Total
Notes:
i.
ii.
cash flows at a market discount rate.
Investment securities
Loans and advances to customers
The fair value of investment securities is sourced from consensus pricing or other observable market prices.
The fair value of loans and advances to customers is estimated by discounting expected cash flows at rates
that reflect current rates for similar lending.
Consistent modelling techniques are used across the different loan books. The estimates take into account
expected future cash flows and future lifetime expected losses, based on historic trends and discount rates
appropriate to the loans, to reflect a hypothetical exit price value on an asset by asset basis. Variable rate loans
are modelled on estimated future cash flows, discounted at current market interest rates. Variable rate retail
mortgages are discounted at the currently available market standard variable interest rate (SVR) which, for
example, in the case of the Group’s residential base mortgage rate (BMR) mortgage book, generates a fair
value lower than the amortised cost value as those mortgages are priced below the SVR.
For fixed rate loans, discount rates have been based on the expected funding and capital cost applicable to the
book. When calculating fair values on fixed rate loans, no adjustment has been made to reflect interest rate
risk management through internal natural hedges or external hedging via derivatives.
The estimated fair value of shares, deposits and amounts due to customers with no stated maturity, including
non-interest-bearing deposits, is the amount repayable on demand. For items without quoted market prices
the estimated fair value represents the discounted amount of estimated future cash flows based on
expectations of future interest rates, customer withdrawals and interest capitalisation. For variable interest
rate items, estimated future cash flows are discounted using current market interest rates for new debt with
similar remaining maturity. For fixed rate items, the estimated future cash flows are discounted based on
market offer rates currently available for equivalent deposits.
Debt securities in issue
The estimated fair values of longer dated liabilities are calculated based on quoted market prices where
available or using similar instruments as a proxy for those liabilities that are not of sufficient size or liquidity to
have an active market quote. For those notes for which quoted market prices are not available, a discounted
cash flow model is used based on a current yield curve appropriate for the remaining term to maturity.
Subordinated liabilities and subscribed capital
The fair value of subordinated liabilities and subscribed capital is determined by reference to quoted market
prices of similar instruments.
224
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
24. Offsetting financial assets and financial liabilities
2018 (note i)
In accordance with IFRS 7 ‘Financial Instruments: Disclosures’ the following table shows the impact on financial assets and financial liabilities relating to transactions where:
The Group has financial assets and liabilities for which there is a legally enforceable right to set off the recognised amounts, and there is an intention to settle on a net basis, or realise the asset and liability simultaneously.
In accordance with IAS 32 ‘Financial Instruments: Presentation,’ where the right to set off is not unconditional in all circumstances this does not result in an offset of balance sheet assets and liabilities.
•
•
•
there is an enforceable master netting arrangement or similar agreement in place, an unconditional right to offset is in place and there is an intention to settle net (‘amounts offset’),
there is an enforceable master netting arrangement or similar agreement in place but the offset criteria are otherwise not satisfied (‘master netting arrangements’), and
financial collateral is paid and received (‘financial collateral’).
Offsetting financial assets and financial liabilities
2019
Gross
amounts
recognised
Amounts
offset
(note i)
£m
£m
Net amounts
reported on
the balance
sheet
£m
Master
netting
arrangements
Financial
collateral
(note ii)
£m
£m
3,973
1,320
5,293
2,649
1,680
4,329
(411)
(826)
(1,237)
(1,056)
(826)
(1,882)
3,562
494
4,056
1,593
854
2,447
(1,363)
-
(1,363)
(1,363)
-
(1,363)
(2,130)
(492)
(2,622)
(198)
(853)
(1,051)
Net amounts Gross amounts
recognised
Amounts offset
(note i)
£m
69
2
71
32
1
33
£m
4,288
403
4,691
2,506
945
3,451
£m
(167)
-
(167)
(169)
-
(169)
2018
Net amounts
reported on
the balance
sheet
£m
Master
netting
arrangements
Financial
collateral
Net amounts
£m
£m
£m
4,121
403
4,524
2,337
945
3,282
(1,959)
-
(1,959)
(1,959)
-
(1,959)
(2,157)
(403)
(2,560)
(333)
(945)
(1,278)
5
-
5
45
-
45
Financial assets
Derivative financial assets
Reverse repurchase agreements
Total financial assets
Financial liabilities
Derivative financial liabilities
Repurchase agreements
Total financial liabilities
Notes:
i.
ii.
Amounts offset for derivative financial assets of £411 million (2018: £167 million) include cash collateral netted of £85 million (2018: £3 million). Amounts offset for derivative financial liabilities of £1,056 million (2018: £169 million) include cash collateral
netted of £730 million (2018: £5 million).
The balances presented for financial collateral on reverse repurchase agreements and repurchase agreements are less than the financial collateral balances reported in note 13, as the amounts disclosed above are limited to the net amounts reported on the
balance sheet after amounts offset as shown in the table.
Master netting arrangements consist of agreements such as an ISDA Master Agreement, global master repurchase agreements and global master securities lending agreements, whereby outstanding transactions with the same
counterparty can be offset and settled net, either unconditionally or following a default or other predetermined event.
Financial collateral on derivative financial instruments consists of cash settled, typically daily or weekly, to mitigate the credit risk on the fair value of derivative contracts. Financial collateral on repurchase agreements typically
comprises highly liquid securities which are legally transferred and can be liquidated in the event of counterparty default.
The net amounts after offsetting under IFRS 7 presented above show the exposure to counterparty credit risk for derivative contracts after netting benefits and collateral, and are not intended to represent the Group’s actual exposure
to credit risk. This is due to a variety of credit mitigation strategies which are employed in addition to netting and collateral arrangements.
S
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c
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B
u
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i
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e
s
s
a
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d
R
i
s
k
R
e
p
o
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t
i
F
n
a
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c
i
a
l
S
t
a
t
e
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s
O
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a
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i
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225
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
25. Intangible assets
Group
2019
Cost
At 5 April 2018
Additions
Disposals
At 4 April 2019
Accumulated amortisation and impairment
At 5 April 2018
Amortisation charge
Impairment in the year
Disposals
At 4 April 2019
Net book value
At 4 April 2019
Group
2018
Cost
At 5 April 2017
Additions
Disposals
At 4 April 2018
Accumulated amortisation and impairment
At 5 April 2017
Amortisation charge
Impairment in the year
Disposals
At 4 April 2018
Net book value
At 4 April 2018
Computer software
Total computer software
Other intangible assets
Goodwill
Externally acquired
£m
Internally developed
£m
759
39
(23)
775
189
55
1
(23)
222
553
1,521
340
(185)
1,676
761
232
109
(185)
917
759
£m
2,280
379
(208)
2,451
950
287
110
(208)
1,139
1,312
£m
-
-
-
-
-
-
-
-
-
-
£m
12
-
-
12
-
-
-
-
-
12
Computer software
Total computer software
Other intangible assets
Goodwill
Externally acquired
£m
Internally developed
£m
591
187
(19)
759
155
53
-
(19)
189
570
1,371
181
(31)
1,521
590
189
13
(31)
761
760
£m
1,962
368
(50)
2,280
745
242
13
(50)
950
1,330
£m
40
-
(40)
-
39
1
-
(40)
-
-
£m
12
-
-
12
-
-
-
-
-
12
Total
£m
2,292
379
(208)
2,463
950
287
110
(208)
1,139
1,324
Total
£m
2,014
368
(90)
2,292
784
243
13
(90)
950
1,342
Computer software capitalised during the year primarily relates to the Group’s investment in infrastructure, new applications and software costs to meet the future strategic and regulatory needs of the business. The total cost
at 4 April 2019 includes £305 million (2018: £281 million) of assets in the course of construction which, to the extent that they are not yet ready for use by the business, have no amortisation charged against them. For all other
computer software capitalised the estimated useful life of individual assets is predominantly 5 years.
An impairment loss of £110 million (2018: loss of £13 million) was recognised in the year primarily in respect of assets impacted by the Group’s new technology investment.
The Society’s intangible assets are as shown above for the Group, except that they exclude the £12 million (2018: £12 million) of goodwill which relates to the acquisition of The Mortgage Works (UK) plc, and which is only recognised
at Group level.
Annual Report and Accounts 2019
Notes to the financial statements (continued)
25. Intangible assets
Accumulated amortisation and impairment
Group
2019
Cost
At 5 April 2018
Additions
Disposals
At 4 April 2019
At 5 April 2018
Amortisation charge
Impairment in the year
Disposals
At 4 April 2019
Net book value
At 4 April 2019
Group
2018
Cost
At 5 April 2017
Additions
Disposals
At 4 April 2018
At 5 April 2017
Amortisation charge
Impairment in the year
Disposals
At 4 April 2018
Net book value
At 4 April 2018
Accumulated amortisation and impairment
Computer software
Total computer software
Other intangible assets
Goodwill
Externally acquired
Internally developed
£m
759
39
(23)
775
189
55
1
(23)
222
553
£m
591
187
(19)
759
155
53
-
(19)
189
570
£m
1,521
340
(185)
1,676
761
232
109
(185)
917
759
£m
1,371
181
(31)
1,521
590
189
13
(31)
761
760
£m
2,280
379
(208)
2,451
950
287
110
(208)
1,139
1,312
£m
1,962
368
(50)
2,280
745
242
13
(50)
950
1,330
£m
-
-
-
-
-
-
-
-
-
-
£m
40
(40)
39
(40)
-
-
1
-
-
-
£m
12
-
-
12
-
-
-
-
-
12
£m
12
-
-
12
-
-
-
-
-
12
Total
£m
2,292
379
(208)
2,463
950
287
110
(208)
1,139
1,324
Total
£m
2,014
368
(90)
2,292
784
243
13
(90)
950
1,342
Computer software
Total computer software
Other intangible assets
Goodwill
Externally acquired
Internally developed
226
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
26. Property, plant and equipment
Group
2019
Cost or valuation
At 5 April 2018
Additions
Transfers (note i)
Revaluation
Disposals
At 4 April 2019
Accumulated depreciation and impairment
At 5 April 2018
Depreciation charge
Impairment
Disposals
At 4 April 2019
Net book value
At 4 April 2019
Group
2018
Cost or valuation
At 5 April 2017
Additions
Revaluation
Disposals
At 4 April 2018
Accumulated depreciation and impairment
At 5 April 2017
Depreciation charge
Disposals
At 4 April 2018
Net book value
At 4 April 2018
Branches and non-
specialised buildings
£m
Specialised
administration buildings
£m
220
9
6
(7)
(6)
222
-
-
-
-
-
222
182
-
(6)
-
-
176
83
3
-
-
86
90
Investment properties
Plant and machinery
£m
9
-
-
-
-
9
-
-
-
-
-
9
£m
252
26
-
-
-
278
153
23
-
-
176
102
Branches and non-
specialised buildings
£m
Specialised
administration buildings
£m
219
-
2
(1)
220
-
-
-
-
220
182
-
-
-
182
81
2
-
83
99
Investment properties
Plant and machinery
£m
8
-
1
-
9
-
-
-
-
9
£m
222
30
-
-
252
132
21
-
153
99
Equipment, fixtures,
fittings and vehicles
£m
948
136
-
-
(74)
1,010
488
115
11
(70)
544
466
Equipment, fixtures,
fittings and vehicles
£m
887
145
-
(84)
948
446
118
(76)
488
460
Total
£m
1,611
171
-
(7)
(80)
1,695
724
141
11
(70)
806
889
Total
£m
1,518
175
3
(85)
1,611
659
141
(76)
724
887
Computer software capitalised during the year primarily relates to the Group’s investment in infrastructure, new applications and software costs to meet the future strategic and regulatory needs of the business. The total cost
at 4 April 2019 includes £305 million (2018: £281 million) of assets in the course of construction which, to the extent that they are not yet ready for use by the business, have no amortisation charged against them. For all other
computer software capitalised the estimated useful life of individual assets is predominantly 5 years.
An impairment loss of £110 million (2018: loss of £13 million) was recognised in the year primarily in respect of assets impacted by the Group’s new technology investment.
The Society’s intangible assets are as shown above for the Group, except that they exclude the £12 million (2018: £12 million) of goodwill which relates to the acquisition of The Mortgage Works (UK) plc, and which is only recognised
at Group level.
Note:
i.
In the year ended 4 April 2019, a section of land adjacent to a specialised administration building was transferred to branches and non-specialised buildings following the decision to separate and market for sale.
Group property, plant and equipment at 4 April 2019 includes £2 million (2018: £2 million) of specialised administration buildings held by subsidiary undertakings.
Property, plant and equipment includes £95 million (2018: £78 million) of assets in the course of construction.
As at 4 April 2019, branches and non-specialised building includes £15 million of properties which are classified as held for sale (2018: £7 million)
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a
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c
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S
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a
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227
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
26. Property, plant and equipment (continued)
Branches and non-specialised buildings are valued annually by independent surveyors. The current use of all branches and non-specialised buildings equates to highest and best use, and there have been no changes to the valuation
technique during the year.
IFRS 13 requires that all assets held at fair value are classified according to a hierarchy that reflects the significance of observable market inputs in calculating those fair values. Branches and non-specialised buildings valuations are
classified within Level 2 of the fair value hierarchy.
27. Provisions for liabilities and charges
Group
At 4 April 2018
Transition to IFRS 9 (note i)
At 5 April 2018
Provisions utilised
Charge for the year
Release for the year
Net income statement charge (note ii)
At 4 April 2019
At 5 April 2017
Provisions utilised
Charge for the year
Release for the year
Net income statement charge (note ii)
At 4 April 2018
Bank levy
FSCS
£m
24
-
24
(46)
43
-
43
21
16
(37)
45
-
45
24
£m
15
-
15
(6)
1
(10)
(9)
-
42
(26)
-
(1)
(1)
15
Customer
redress
£m
221
-
221
(77)
79
(64)
15
159
305
(110)
34
(8)
26
221
Other
provisions
£m
13
1
14
(17)
26
(4)
22
19
24
(14)
6
(3)
3
13
Total
£m
273
1
274
(146)
149
(78)
71
199
387
(187)
85
(12)
73
273
Notes:
i.
ii.
On transition to IFRS 9, an expected credit loss provision of £1 million was recognised in respect of separately identifiable irrevocable loan commitments.
Of the net income statement charge of £71 million (2018: £73 million), a net charge of £6 million (2018: £25 million) relating to FSCS and customer redress is included in provisions for liabilities and charges, and a net charge of £65 million (2018: £48 million)
relating to bank levy and other provisions is included in administrative expenses.
The Group provisions for liabilities and charges include £1 million (2018: £2 million) of customer redress and expected credit loss (ECL) provisions relating to irrevocable loan commitments within its subsidiaries; all other amounts
relate to the Society.
Financial Services Compensation Scheme (FSCS)
The FSCS, the UK’s independent statutory compensation fund for customers of authorised financial services firms, pays compensation if a firm is unable to pay claims against it. Following the default of a number of deposit takers, the
FSCS borrowed funds of approximately £15.6 billion from HM Treasury, the interest on which was charged to firms through the FSCS levy. During the year, UK Asset Resolution (UKAR) sold portfolios relating to Bradford and Bingley
plc, and repaid the outstanding loan from HM Treasury. There are therefore no further amounts due in respect of this interest levy at 4 April 2019. In common with other financial institutions subject to the FSCS, the Group continues
to have a potential exposure to future levies resulting from any future failure of other financial institutions and consequential claims which arise against the FSCS as a result of any such failure.
IFRS 13 requires that all assets held at fair value are classified according to a hierarchy that reflects the significance of observable market inputs in calculating those fair values. Branches and non-specialised buildings valuations are
Annual Report and Accounts 2019
Notes to the financial statements (continued)
26. Property, plant and equipment (continued)
technique during the year.
classified within Level 2 of the fair value hierarchy.
27. Provisions for liabilities and charges
Group
At 4 April 2018
Transition to IFRS 9 (note i)
At 5 April 2018
Provisions utilised
Charge for the year
Release for the year
Net income statement charge (note ii)
At 4 April 2019
At 5 April 2017
Provisions utilised
Charge for the year
Release for the year
Net income statement charge (note ii)
At 4 April 2018
Notes:
i.
ii.
relate to the Society.
Financial Services Compensation Scheme (FSCS)
Bank levy
FSCS
Customer
redress
Other
provisions
(46)
£m
24
-
24
43
-
43
21
16
(37)
45
-
45
24
£m
15
-
15
(6)
1
(10)
(9)
-
42
(26)
-
(1)
(1)
15
£m
221
-
221
(77)
79
(64)
15
159
305
(110)
34
(8)
26
221
£m
13
1
14
(17)
26
(4)
22
19
24
(14)
6
(3)
3
13
Total
£m
273
1
274
(146)
149
(78)
71
199
387
(187)
85
(12)
73
273
Branches and non-specialised buildings are valued annually by independent surveyors. The current use of all branches and non-specialised buildings equates to highest and best use, and there have been no changes to the valuation
Customer redress
228
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
27. Provisions for liabilities and charges (continued)
During the course of its business, the Group receives complaints from customers in relation to past sales or ongoing administration. The Group is also subject to enquiries from and discussions with its regulators, governmental and
other public bodies, including the Financial Ombudsman Service (FOS), on a range of matters. Customer redress provisions are recognised where the Group considers it is probable that payments will be made as a result of such
complaints and other matters.
The Group holds provisions of £159 million (2018: £221 million) in respect of the potential costs of remediation and redress in relation to past sales of PPI, issues relating to administration of customer accounts, non-compliance with
consumer credit legislation and other regulatory matters.
Other provisions
Other provisions include amounts for severance costs, a number of property related provisions and ECLs on irrevocable personal loan and mortgage lending commitments.
Critical accounting estimates and judgements
Customer redress provisions
There is significant estimation uncertainty in estimating the probability, timing and amount of any cash outflows associated with customer redress provisions.
Provision for PPI
The amount of the provision relating to past sales of PPI is calculated based upon management’s best estimate of complaint volumes, average redress payments, referral rates to the Financial Ombudsman Service (FOS), uphold
rates internally and with the FOS, complaint handling costs and response rates from customer contact activity relating to previous sales. The amount provided at 4 April 2019 therefore reflects the compensation and
administrative costs associated with cases that the Group expects to uphold and the cost of processing invalid claims which the Group expects to receive up to the FCA’s deadline of August 2019.
At 4 April 2019, the Group held a PPI provision of £80 million (4 April 2018: £159 million). This represents management’s best estimate of future costs, including the expected impact of Plevin v Paragon Personal Finance
Limited. The principal uncertainty in this calculation is the impact of the ongoing FCA media campaign on complaints volumes in advance of the August 2019 complaints deadline.
On transition to IFRS 9, an expected credit loss provision of £1 million was recognised in respect of separately identifiable irrevocable loan commitments.
Of the net income statement charge of £71 million (2018: £73 million), a net charge of £6 million (2018: £25 million) relating to FSCS and customer redress is included in provisions for liabilities and charges, and a net charge of £65 million (2018: £48 million)
relating to bank levy and other provisions is included in administrative expenses.
The Group provisions for liabilities and charges include £1 million (2018: £2 million) of customer redress and expected credit loss (ECL) provisions relating to irrevocable loan commitments within its subsidiaries; all other amounts
Claims (‘000s of policies) (note i)
Average uphold rate (note ii)
Average redress per claim (note iii)
Cumulative to
31 March 2019
434
45%
£1,070
Future
expected
71
39%
£936
Sensitivity
10 = £9m
5% = £5m
£100 = £4m
The FSCS, the UK’s independent statutory compensation fund for customers of authorised financial services firms, pays compensation if a firm is unable to pay claims against it. Following the default of a number of deposit takers, the
FSCS borrowed funds of approximately £15.6 billion from HM Treasury, the interest on which was charged to firms through the FSCS levy. During the year, UK Asset Resolution (UKAR) sold portfolios relating to Bradford and Bingley
plc, and repaid the outstanding loan from HM Treasury. There are therefore no further amounts due in respect of this interest levy at 4 April 2019. In common with other financial institutions subject to the FSCS, the Group continues
to have a potential exposure to future levies resulting from any future failure of other financial institutions and consequential claims which arise against the FSCS as a result of any such failure.
Claims include responses to proactive mailing.
Notes:
i.
ii. The cumulative average uphold rate of claims includes responses to past proactive mailings. As a result, future expected average uphold rates are forecast to decline as no further proactive mailing activity is anticipated.
iii. Future expected average redress reflects the expected mix of future claims upheld.
Other provisions for customer redress
Provisions for other matters are in respect of issues relating to administration of customer accounts, non-compliance with consumer credit legislation and other regulatory matters, where an outflow is probable. Amounts
provided are based on management’s best estimate of the number of customers impacted and anticipated remediation. As any new matters emerge, an estimate is made of the outcome, although in some cases uncertainties
remain as to the eventual costs given the inherent difficulties in determining the number of impacted customers and the amount of any redress applicable. In the case of provisions relating to the administration of customer
accounts, if the number of impacted customers changed by 10%, the current provision would change by £7 million. Provisions will be adjusted in future periods as further information becomes available.
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229
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
28. Capital and leasing commitments
Capital expenditure contracted for but not accrued is as follows:
Capital commitments at 4 April
Capital expenditure relating to:
Intangibles
Property, plant and equipment
Total
Group and Society
2019
£m
51
58
109
2018
£m
44
44
88
The Group leases various offices, branches and other premises under non-cancellable operating lease arrangements. The leases have various terms, rent escalation clauses, renewal rights, and in some cases contingent rent payable.
Future minimum payments under operating leases relating to land and buildings were as follows:
Leasing commitments at 4 April
Amounts falling due:
Within one year
Between one and five years
After five years
Total
Group and Society
2019
£m
31
101
98
230
2018
(note i)
£m
30
96
96
222
Note:
i.
The prior year values for future minimum lease payments under non-cancellable leases have been restated to be consistent with the current year presentation. At 4 April 2018, the reported total future minimum lease payments was £248 million.
At the balance sheet date, future minimum lease payments receivable under non-cancellable operating leases were as follows:
Leasing amounts receivable as lessor at 4 April
Amounts falling due:
Within one year
Between one and five years
After five years
Total
Amounts receivable under non-cancellable subleases
29. Contingent liabilities
Group and Society
2019
£m
4
7
10
21
4
2018
£m
3
7
3
13
4
The Group does not expect the ultimate resolution of any current complaints, threatened or actual legal proceedings, regulatory or other matters to have a material adverse impact on its financial position.
Annual Report and Accounts 2019
Notes to the financial statements (continued)
28. Capital and leasing commitments
Capital expenditure contracted for but not accrued is as follows:
Capital commitments at 4 April
Capital expenditure relating to:
Intangibles
Property, plant and equipment
Total
Leasing commitments at 4 April
Amounts falling due:
Within one year
Between one and five years
After five years
Total
Note:
Amounts falling due:
Within one year
Between one and five years
After five years
Total
Amounts receivable under non-cancellable subleases
29. Contingent liabilities
Group and Society
Group and Society
2019
£m
51
58
109
2019
£m
31
101
98
230
2019
£m
4
7
10
21
4
2018
£m
44
44
88
2018
(note i)
£m
30
96
96
222
2018
£m
3
7
3
13
4
The Group leases various offices, branches and other premises under non-cancellable operating lease arrangements. The leases have various terms, rent escalation clauses, renewal rights, and in some cases contingent rent payable.
Future minimum payments under operating leases relating to land and buildings were as follows:
i.
The prior year values for future minimum lease payments under non-cancellable leases have been restated to be consistent with the current year presentation. At 4 April 2018, the reported total future minimum lease payments was £248 million.
At the balance sheet date, future minimum lease payments receivable under non-cancellable operating leases were as follows:
Leasing amounts receivable as lessor at 4 April
Group and Society
The Group does not expect the ultimate resolution of any current complaints, threatened or actual legal proceedings, regulatory or other matters to have a material adverse impact on its financial position.
230
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
30. Retirement benefit obligations
The Group operates two defined contribution pension schemes in the UK – the Nationwide Group Personal Pension Plan (GPP) and the Nationwide Temporary Workers Pension Scheme. New employees are automatically enrolled into
one of these schemes, with both schemes being administered by Aviva. Outside of the UK, there are defined contribution pension schemes for a small number of employees in the Isle of Man and Ireland.
The Group also has funding obligations to several defined benefit pension schemes, which are administered by boards of trustees. Pension trustees are required by law to act in the interests of all relevant beneficiaries and are
responsible for the investment policy of fund assets, as well as the day to day administration. The Group’s largest pension scheme is the Nationwide Pension Fund (the Fund). This is a contributory defined benefit pension scheme,
with both final salary and career average revalued earnings (CARE) sections. The Fund was closed to new entrants in 2007 and since that date employees have been able to join the GPP. Further information on the Group’s
obligations to defined benefit pension schemes are set out below.
Defined benefit pension schemes
Retirement benefit obligations on the balance sheet
Present value of funded obligations
Present value of unfunded obligations
Fair value of fund assets
Deficit at 4 April
Group
2019
£m
6,375
8
6,383
(6,278)
105
2018
£m
6,108
12
6,120
(5,775)
345
Most members of the Fund can draw their pension when they reach the Fund’s retirement age of 65. The level of pension benefits accrued before 1 April 2011 vary in methodology; however, most are based on 1/54th of final salary
for each year of service. Pension benefits accrued after 1 April 2011 are usually based on 1/60th of average earnings, revalued to age of retirement, for each year of service (also called CARE).
On the death of a Fund member, benefits may be payable in the form of a spouse/dependant’s pension, lump sum (paid within 5 years of a Fund member beginning to take their pension), or refund of Fund member contributions.
Fund members are able to place redundancy severance into their pension.
Approximately 31% of the Fund’s pension obligations have been accrued by current employees (active Fund members), 37% by former employees (deferred Fund members) and 32% by current pensioners and dependants. The
average duration of the Fund’s pension obligation is approximately 22 years, reflecting the obligation between current employees (27 years), deferred Fund members (24 years) and current pensioners (15 years).
The Group’s retirement benefit obligations include £2 million (2018: £2 million) recognised in a subsidiary company, Nationwide (Isle of Man) Limited. This obligation relates to a defined benefit scheme providing benefits based on
both final salary and CARE, which was closed to new entrants in 2009.
The Group’s retirement benefit obligations also include £8 million (2018: £12 million) in respect of unfunded legacy defined benefit arrangements.
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a
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231
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
30. Retirement benefit obligations (continued)
The amounts recognised in the income statement are as follows:
Retirement benefit obligations recognised in the income statement
Defined contribution cost
Defined benefit schemes
Current service cost
Past service cost
Curtailment gains
Administrative expenses
Included in employee costs (note 8)
Interest on net defined benefit liability (note 4)
Total
Group
2019
£m
83
89
12
(7)
4
181
6
187
Changes in the present value of the net defined benefit liability (including unfunded obligations) are as follows:
Movements in net defined benefit liability
Deficit at 5 April
Current service cost
Past service cost
Curtailment gains
Benefits paid directly by the Group
Interest on net defined benefit liability
Return on assets (greater)/less than discount rate
Contributions by employer
Administrative expenses
Actuarial losses/(gains) on defined benefit obligations
Deficit at 4 April
Group
2019
£m
345
89
12
(7)
(3)
6
(370)
(131)
4
160
105
2018
£m
78
95
5
(9)
4
173
8
181
2018
£m
423
95
5
(9)
-
8
1
(152)
4
(30)
345
Current service cost represents the increase in liabilities resulting from employees accruing service over the year. This includes salary sacrifice employee contributions.
Past service cost represents the increase in liabilities of the Fund arising from Fund members choosing to pay additional contributions (AVCs or pension credits) to boost their pension benefits. Included in the £12 million past service
cost in the table above is £9 million representing the Fund’s estimated Guaranteed Minimum Pensions (GMPs) equalisation obligation, following the High Court verdict on 26 October 2018 on GMP equalisation for men and women.
Curtailment gains are in respect of Fund members made redundant during the year. As an active member pension benefits are linked to the Retail Prices Index (RPI). When a member becomes a deferred member their pension
benefits are linked from that point to the Consumer Price Index (CPI), which reduces the liability.
Benefits paid directly by the Group relate to a settlement of a retirement benefit obligation for an unfunded legacy pension obligation paid directly by the Group.
The interest on net defined benefit liability represents the expected interest accruing on the liabilities over the year, offset by the expected interest income on assets.
Annual Report and Accounts 2019
Notes to the financial statements (continued)
30. Retirement benefit obligations (continued)
The amounts recognised in the income statement are as follows:
Retirement benefit obligations recognised in the income statement
Defined contribution cost
Defined benefit schemes
Current service cost
Past service cost
Curtailment gains
Administrative expenses
Included in employee costs (note 8)
Interest on net defined benefit liability (note 4)
Total
Movements in net defined benefit liability
Deficit at 5 April
Current service cost
Past service cost
Curtailment gains
Benefits paid directly by the Group
Interest on net defined benefit liability
Return on assets (greater)/less than discount rate
Contributions by employer
Administrative expenses
Deficit at 4 April
Actuarial losses/(gains) on defined benefit obligations
Group
2019
£m
83
Group
89
12
(7)
4
181
6
187
2019
£m
345
89
12
(7)
(3)
6
(370)
(131)
4
160
105
2018
£m
78
95
5
(9)
4
173
8
181
2018
£m
423
95
5
(9)
-
8
1
4
(152)
(30)
345
Changes in the present value of the net defined benefit liability (including unfunded obligations) are as follows:
Current service cost represents the increase in liabilities resulting from employees accruing service over the year. This includes salary sacrifice employee contributions.
Past service cost represents the increase in liabilities of the Fund arising from Fund members choosing to pay additional contributions (AVCs or pension credits) to boost their pension benefits. Included in the £12 million past service
cost in the table above is £9 million representing the Fund’s estimated Guaranteed Minimum Pensions (GMPs) equalisation obligation, following the High Court verdict on 26 October 2018 on GMP equalisation for men and women.
Curtailment gains are in respect of Fund members made redundant during the year. As an active member pension benefits are linked to the Retail Prices Index (RPI). When a member becomes a deferred member their pension
benefits are linked from that point to the Consumer Price Index (CPI), which reduces the liability.
Benefits paid directly by the Group relate to a settlement of a retirement benefit obligation for an unfunded legacy pension obligation paid directly by the Group.
The interest on net defined benefit liability represents the expected interest accruing on the liabilities over the year, offset by the expected interest income on assets.
232
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
30. Retirement benefit obligations (continued)
The £370 million gain relating to the return on assets greater than the discount rate (2018: £1 million loss from returns less than the discount rate) is driven by positive equity returns, positive increases in the value of government bond
holdings due to falling bond yields and an increase in long term inflation expectations.
The £131 million of employer contributions includes deficit contributions of £61 million (2018: £152 million), with the remainder relating to employer contributions in respect of future benefit accrual. The Group estimates that its
contributions to the defined benefit pension schemes (including deficit contributions under the current deficit recovery plan) during the year ending 4 April 2020 will be £126 million.
The £160 million actuarial loss on defined benefit obligations (2018: £30 million actuarial gain on defined benefit obligations) shown above is due to:
•
•
•
A £206 million loss (2018: £153 million gain) from changes in financial assumptions, including a 0.05% decrease in the discount rate and a 0.15% increase in assumed Retail Prices Index inflation, both of which increase the
value of the liabilities.
A £58 million gain (2018: £97 million loss) due to updating to the latest industry standard actuarial model for projecting future longevity improvements.
An experience loss of £12 million (2018: £26 million loss) reflecting the difference between previous estimates of long-term inflation assumptions and actual experience.
Changes in the present value of defined benefit obligations (including unfunded obligations) are as follows:
Movements in defined benefit obligations
At 5 April
Current service cost
Past service cost
Curtailment gains
Interest expense on retirement obligation
Experience losses on plan assumptions
Changes in demographic assumptions
Changes in financial assumptions
Benefits paid (note i)
At 4 April
Note:
i.
Includes £3 million benefit paid directly by the Group (2018: £nil).
Changes in the fair value of plan assets for the pension schemes are as follows:
Movements in plan assets
At 5 April
Interest income on assets
Return on assets (less)/greater than discount rate
Administrative expenses
Contributions by employer
Benefits paid
At 4 April
Group
2019
£m
6,120
89
12
(7)
148
12
(58)
206
(139)
6,383
Group
2019
£m
5,775
142
370
(4)
131
(136)
6,278
2018
£m
6,051
95
5
(9)
144
26
97
(153)
(136)
6,120
2018
£m
5,628
136
(1)
(4)
152
(136)
5,775
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Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
30. Retirement benefit obligations (continued)
The Group offers a salary sacrifice arrangement whereby employee contributions are deducted from pay before their salary is paid each month. Therefore, no employee contributions are reported in the table above; instead all
employee contributions are reflected in contributions by employer. In line with UK pensions legislation, a formal actuarial valuation (‘Triennial Valuation’) of the assets and liabilities of the Fund is carried out at least every three years
by independent actuaries. The effective date of the next Triennial Valuation of the Fund is 31 March 2019, from which point the Society and Trustee has 15 months to negotiate, among other things, a new Schedule of Contributions
and Deficit Recovery Plan.
The major categories of assets held for the pension schemes, stated at fair value, are as follows:
Categories of plan assets
Listed equities (quoted)
Government bonds (quoted)
Corporate bonds and other credit investments (quoted)
Infrastructure (unquoted)
Property (unquoted)
Private equity investments (unquoted)
Cash
Liability relating to repurchase agreement
Other assets and liabilities
Total
Group
2019
£m
881
3,846
591
312
612
380
294
(759)
121
6,278
2018
£m
813
3,350
554
324
581
317
175
(469)
130
5,775
The defined benefit pension schemes do not invest in the Group’s own financial instruments or property.
Assets described as quoted are based on unadjusted prices quoted in an active market and represent Level 1 assets as defined by IFRS 13. All private equity, infrastructure and property investments are Level 3 assets as defined by
IFRS 13. These assets have been valued using a combination of industry standard approaches, for example discounted cashflow models.
The Fund’s liabilities are partly hedged by matching assets, primarily government bonds and corporate bonds. In addition, the Fund invests in alternative matching assets such as property ground rents and property leases (included
in property above) that are expected to generate inflation linked income over the long term.
The Fund also holds return-seeking assets which are primarily listed equities. These are expected to generate a return over and above the Fund’s liabilities in the long term but may create risk and volatility in the short to medium
term.
During the year the Trustee has continued to reduce interest rate and inflation risk in the Fund, purchasing a number of government bonds amounting to a notional £653 million and transacting interest rate and inflation swaps
amounting to a notional £1.2 billion. These investments have been supported by the utilisation of a repurchase agreement (a loan, collateralised against the Fund’s government bonds), which totals £759 million at the year ended
4 April 2019 (2018: £469 million), and the sale of other assets, such as corporate bonds. This will reduce volatility from changes to long-term interest rates and inflation expectations.
The investments are monitored by both the Trustee and the Group to ensure they remain appropriate given the Fund’s long-term objectives.
Annual Report and Accounts 2019
Notes to the financial statements (continued)
30. Retirement benefit obligations (continued)
The major categories of assets held for the pension schemes, stated at fair value, are as follows:
and Deficit Recovery Plan.
Categories of plan assets
Listed equities (quoted)
Government bonds (quoted)
Corporate bonds and other credit investments (quoted)
Infrastructure (unquoted)
Property (unquoted)
Private equity investments (unquoted)
Liability relating to repurchase agreement
Other assets and liabilities
Cash
Total
The defined benefit pension schemes do not invest in the Group’s own financial instruments or property.
Group
2019
£m
881
3,846
591
312
612
380
294
(759)
121
6,278
2018
£m
813
3,350
554
324
581
317
175
(469)
130
5,775
The Group offers a salary sacrifice arrangement whereby employee contributions are deducted from pay before their salary is paid each month. Therefore, no employee contributions are reported in the table above; instead all
employee contributions are reflected in contributions by employer. In line with UK pensions legislation, a formal actuarial valuation (‘Triennial Valuation’) of the assets and liabilities of the Fund is carried out at least every three years
by independent actuaries. The effective date of the next Triennial Valuation of the Fund is 31 March 2019, from which point the Society and Trustee has 15 months to negotiate, among other things, a new Schedule of Contributions
The principal actuarial assumptions used are as follows:
Principal actuarial assumptions
234
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
30. Retirement benefit obligations (continued)
Discount rate
Future salary increases
Future pension increases (maximum 5%)
Retail price index (RPI) inflation
Consumer price index (CPI) inflation
2019
%
2.40
3.25
3.00
3.25
2.25
2018
%
2.45
3.10
2.90
3.10
2.10
The assumptions for mortality rates are based on standard mortality tables which allow for future improvements in life expectancies and are adjusted to represent the Fund’s membership. The assumptions made are illustrated in the
table below showing how long we would expect the average Fund member to live for after the age of 60, based on reaching that age at 4 April 2019 or in twenty years’ time at 4 April 2039.
Life expectancy assumptions
Age 60 at 4 April 2019
Males
Females
Age 60 at 4 April 2039:
Males
Females
2019
%
27.9
29.1
29.0
30.6
2018
%
28.0
29.3
29.2
30.8
Assets described as quoted are based on unadjusted prices quoted in an active market and represent Level 1 assets as defined by IFRS 13. All private equity, infrastructure and property investments are Level 3 assets as defined by
IFRS 13. These assets have been valued using a combination of industry standard approaches, for example discounted cashflow models.
The Fund’s liabilities are partly hedged by matching assets, primarily government bonds and corporate bonds. In addition, the Fund invests in alternative matching assets such as property ground rents and property leases (included
in property above) that are expected to generate inflation linked income over the long term.
Critical accounting estimates and judgements
Retirement benefit obligations
The Fund also holds return-seeking assets which are primarily listed equities. These are expected to generate a return over and above the Fund’s liabilities in the long term but may create risk and volatility in the short to medium
term.
The key assumptions used to calculate the defined benefit obligation are the discount rate, inflation assumptions (including salary increases) and mortality assumptions. If different assumptions were used, this could have a
material effect on the reported obligation. The sensitivity of the results to these assumptions are as follows:
During the year the Trustee has continued to reduce interest rate and inflation risk in the Fund, purchasing a number of government bonds amounting to a notional £653 million and transacting interest rate and inflation swaps
amounting to a notional £1.2 billion. These investments have been supported by the utilisation of a repurchase agreement (a loan, collateralised against the Fund’s government bonds), which totals £759 million at the year ended
4 April 2019 (2018: £469 million), and the sale of other assets, such as corporate bonds. This will reduce volatility from changes to long-term interest rates and inflation expectations.
Change in key assumptions at 4 April 2019
The investments are monitored by both the Trustee and the Group to ensure they remain appropriate given the Fund’s long-term objectives.
0.1% increase in discount rate
0.1% increase in inflation assumption
1 year increase in life expectancy at age 60 in respect of all members
(Decrease)/increase in deficit
from assumption change
£m
(139)
123
229
The above sensitivities apply to individual assumptions in isolation. The 0.1% sensitivity to the inflation assumption includes a corresponding 0.1% increase in future salary increases and future pension increases assumptions.
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235
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
31. Core capital deferred shares
Group and Society
At 4 April 2019
At 4 April 2018
Number of
shares
10,500,000
10,500,000
CCDS Share premium
£m
1,314
1,314
£m
11
11
Total
£m
1,325
1,325
CCDS are a form of Common Equity Tier 1 (CET1) capital which have been developed to enable the Group to raise capital from the capital markets. Previously issued Tier 1 capital instruments, PIBS, no longer meet the regulatory
capital requirements of CRD IV and are being gradually phased out of the calculation of capital resources under transitional rules.
CCDS are perpetual instruments. They rank equally to each other and are junior to claims against the Society of all depositors, creditors and investing members. Each holder of CCDS has one vote, regardless of the number of CCDS
held.
In the event of a winding up or dissolution of the Society and if a surplus was available, the amount that the investor would receive for each CCDS held is limited to the average principal amount in issue, which is currently £129.24 per
share.
There is a cap on the distributions that can be paid to holders of CCDS in any financial year. The cap is currently set at £16.36 per share and is adjusted annually in line with CPI.
A final distribution of £54 million (£5.125 per share) for the financial year ended 4 April 2018 was paid on 20 June 2018 and an interim distribution of £54 million (£5.125 per share) in respect of the period to 30 September 2018 was
paid on 20 December 2018. These distributions have been recognised in the statement of movements in members’ interests and equity.
Since the balance sheet date, the directors have declared a distribution of £5.125 per share in respect of the period to 4 April 2019, amounting in aggregate to £54 million. This has not been reflected in these financial statements as it
will be recognised in the year ending 4 April 2020, by reference to the date at which it was declared.
32. Other equity instruments
Group and Society
At 4 April 2019
At 4 April 2018
Total
£m
992
992
Other equity instruments are AT1 capital instruments with a notional value of £1 billion. AT1 instruments rank equally to each other and to PIBS. They are junior to claims against the Society of all depositors, creditors and investing
members, other than the holders of CCDS. AT1 instruments bear interest at a fully discretionary, non-cumulative initial rate of 6.875% per annum. Interest is paid semi-annually in June and December.
An interest payment of £34 million, covering the period to 19 June 2018, was paid on 20 June 2018 and an interest payment of £34 million, covering the period to 19 December 2018, was paid on 20 December 2018. These payments
have been recognised in the statement of movements in members’ interests and equity. AT1 instruments have no maturity date but are repayable at the option of the Society on 20 June 2019 and every fifth anniversary thereafter.
Event after the reporting period
On 24 April 2019, the Society notified investors of its intention to redeem the outstanding AT1 capital instruments in full on 20 June 2019.
An interest payment of £34 million, covering the period to 19 June 2019, will be paid at redemption on 20 June 2019 and will be recognised in the statement of movements in members’ interests and equity in the financial year
ending 4 April 2020. The impact on the Group’s capital is explained further in the Solvency risk section of the Business and Risk Report.
Annual Report and Accounts 2019
Notes to the financial statements (continued)
31. Core capital deferred shares
Group and Society
At 4 April 2019
At 4 April 2018
held.
share.
236
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
33. Investments in Group undertakings
The Society’s investments in Group undertakings are as follows:
Number of
shares
10,500,000
10,500,000
CCDS Share premium
£m
11
11
£m
1,314
1,314
Total
£m
1,325
1,325
CCDS are a form of Common Equity Tier 1 (CET1) capital which have been developed to enable the Group to raise capital from the capital markets. Previously issued Tier 1 capital instruments, PIBS, no longer meet the regulatory
capital requirements of CRD IV and are being gradually phased out of the calculation of capital resources under transitional rules.
CCDS are perpetual instruments. They rank equally to each other and are junior to claims against the Society of all depositors, creditors and investing members. Each holder of CCDS has one vote, regardless of the number of CCDS
At 5 April
Additions
Reversal of impairment
Disposals, redemptions and repayments
At 4 April
Shares
£m
315
-
-
-
315
2019
Loans
£m
30,981
1,431
-
(507)
31,905
Total
£m
31,296
1,431
-
(507)
32,220
Shares
£m
313
3
-
(1)
315
2018
Loans
£m
31,444
1,018
2
(1,483)
30,981
Total
£m
31,757
1,021
2
(1,484)
31,296
In the event of a winding up or dissolution of the Society and if a surplus was available, the amount that the investor would receive for each CCDS held is limited to the average principal amount in issue, which is currently £129.24 per
The reversal of impairment of £2 million during the year ended 4 April 2018 related to a Group undertaking that held a corporate loan portfolio.
There is a cap on the distributions that can be paid to holders of CCDS in any financial year. The cap is currently set at £16.36 per share and is adjusted annually in line with CPI.
A final distribution of £54 million (£5.125 per share) for the financial year ended 4 April 2018 was paid on 20 June 2018 and an interim distribution of £54 million (£5.125 per share) in respect of the period to 30 September 2018 was
paid on 20 December 2018. These distributions have been recognised in the statement of movements in members’ interests and equity.
Since the balance sheet date, the directors have declared a distribution of £5.125 per share in respect of the period to 4 April 2019, amounting in aggregate to £54 million. This has not been reflected in these financial statements as it
will be recognised in the year ending 4 April 2020, by reference to the date at which it was declared.
32. Other equity instruments
Group and Society
At 4 April 2019
At 4 April 2018
Total
£m
992
992
Other equity instruments are AT1 capital instruments with a notional value of £1 billion. AT1 instruments rank equally to each other and to PIBS. They are junior to claims against the Society of all depositors, creditors and investing
members, other than the holders of CCDS. AT1 instruments bear interest at a fully discretionary, non-cumulative initial rate of 6.875% per annum. Interest is paid semi-annually in June and December.
An interest payment of £34 million, covering the period to 19 June 2018, was paid on 20 June 2018 and an interest payment of £34 million, covering the period to 19 December 2018, was paid on 20 December 2018. These payments
have been recognised in the statement of movements in members’ interests and equity. AT1 instruments have no maturity date but are repayable at the option of the Society on 20 June 2019 and every fifth anniversary thereafter.
Event after the reporting period
On 24 April 2019, the Society notified investors of its intention to redeem the outstanding AT1 capital instruments in full on 20 June 2019.
An interest payment of £34 million, covering the period to 19 June 2019, will be paid at redemption on 20 June 2019 and will be recognised in the statement of movements in members’ interests and equity in the financial year
ending 4 April 2020. The impact on the Group’s capital is explained further in the Solvency risk section of the Business and Risk Report.
An amount of £807 million is included within both additions and disposals, redemptions and repayments during the year ended 4 April 2018 in relation to the incorporation and subsequent liquidation of a financing subsidiary.
Subsidiary undertakings
The interests of the Society in its subsidiary undertakings as at 4 April 2019 are set out below:
Subsidiary name
Principal subsidiaries
Derbyshire Home Loans Limited
E-Mex Home Funding Limited
Nationwide Syndications Limited
The Mortgage Works (UK) plc
UCB Home Loans Corporation Limited
Other subsidiaries
Dunfermline BS Nominees Limited
First Nationwide
Jubilee Mortgages Limited
Monument (Sutton) Limited
Nationwide (Isle of Man) Limited
NBS Ventures Management Limited
NBS Ventures Limited
Piper Javelin Holding Company Limited
Piper Javelin No 1 Limited
The Derbyshire (Premises) Limited
Notes
i
i
i
i
i
ii
ii
ii
ii
ii
ii
ii
ii
Subsidiary name
Dormant subsidiaries
Ashton Employment Limited (dissolved on 10 May 2019)
at.home nationwide Limited
Confederation Mortgage Services Limited
Ethos Independent Financial Services Limited
Exeter Trust Limited
LBS Mortgages Limited
Nationwide Anglia Property Services Limited
Nationwide Financial Service Limited
Nationwide Home Loans Limited
Nationwide Housing Trust Limited
Nationwide Investments (No.1) Limited
Nationwide International Limited
Nationwide Lease Finance Limited
Nationwide Mortgage Corporation Limited
Nationwide Overseas (UK) Limited
Nationwide Property Services (NBS) Limited
Nationwide Trust Limited
NBS CoSec Limited
NBS Fleet Services Limited
Staffordshire Leasing Limited
Notes:
i.
ii.
Audited accounts are prepared for all of the Group’s principal subsidiaries. All principal subsidiaries are regulated entities with the exception of Nationwide Syndications Limited.
For these companies, the Group has adopted the audit exemption for the year ended 4 April 2019 under Section 479A of the Companies Act 2006. The Society guarantees all outstanding liabilities of the exempted subsidiary undertakings.
The Society directly or indirectly holds 100% of the ordinary share capital for each subsidiary undertaking. NBS Ventures Management Limited was incorporated on 25 July 2018 and NBS Ventures Limited was incorporated on
24 September 2018. NBS CoSec Limited was incorporated on 7 January 2019. All of the subsidiary undertakings are limited liability companies, with the exception of First Nationwide which is an unlimited company.
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237
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
33. Investments in Group undertakings (continued)
The registered office for all subsidiary undertakings, other than those listed in the table below, is Nationwide House, Pipers Way, Swindon, SN38 1NW.
Subsidiary name
Ashton Employment Limited
Dunfermline BS Nominees Limited
Nationwide (Isle of Man) Limited
Registered office
39/40 Upper Mount Street, Dublin 2, 662881
Caledonia House, Carnegie Avenue, Dunfermline, KY11 8PJ
5-11 St. Georges Street, Douglas, Isle of Man, IM99 1RN
There are no significant restrictions on any of the Society’s subsidiaries in paying dividends or repaying loans, subject to their financial and operating performance and availability of distributable reserves.
The Group has no material shares in associates. Further details regarding the Group’s interests in equity shares are included in note 13.
Subsidiaries by virtue of control
Details of consolidated and unconsolidated structured entities are set out in note 34.
34. Structured entities
A structured entity is an entity in which voting or similar rights are not the dominant factor in deciding control. Structured entities are consolidated when the substance of the relationship indicates control.
Consolidated structured entities
Structured entities are assessed for consolidation in accordance with the accounting policy set out in note 1. The following structured entities are consolidated in the Group’s results:
Structured entity name
Nationwide Covered Bonds LLP
Silverstone Master Issuer plc
Silverstone Funding (No.1) Limited
Nature of business
Mortgage acquisition and guarantor of covered bonds
Funding vehicle
Funding vehicle
Registered office
Nationwide House, Pipers Way, Swindon, SN38 1NW
Wilmington Trust SP Services (London) Limited, Third Floor,
1 King’s Arms Yard, London, EC2R 7AF
Further details on the activities of the above structured entities are included in note 14. At 4 April 2018, the Group had a controlling interest in Cromarty CLO Limited. Following a deed of termination entered into during the year, the
Society ceased to have any interests in this entity. As a result, the entity is no longer consolidated as part of the Group as a structured entity.
Unconsolidated structured entities
The Group has interests in structured entities which it does not sponsor or control. These largely consist of holdings of mortgage backed securities, covered bonds and CLOs issued by entities that are sponsored by other unrelated
financial institutions. The entities are financed primarily by investments from investors, such as the purchase of issued notes.
The Group’s direct interests in unconsolidated structured entities comprise primarily investments in asset backed securities which are reported within investment securities on the balance sheet. The total carrying value of these
interests at 4 April 2019 is £3,847 million (2018: £3,391 million). Further details on the credit risk that the Group is exposed to in respect of these asset backed securities can be found in the ‘Treasury assets’ section of the Business
and Risk Report.
Management has concluded that the Group has no control or significant influence over these entities and that the carrying value of the interests held in these entities represents the maximum exposure to loss. During the year the
Group has not provided any non-contractual financial or other support to these entities and has no current intention of providing any such support. There were no transfers to or from these unconsolidated structured entities during
the year.
Annual Report and Accounts 2019
Notes to the financial statements (continued)
33. Investments in Group undertakings (continued)
The registered office for all subsidiary undertakings, other than those listed in the table below, is Nationwide House, Pipers Way, Swindon, SN38 1NW.
Subsidiary name
Ashton Employment Limited
Dunfermline BS Nominees Limited
Nationwide (Isle of Man) Limited
Registered office
39/40 Upper Mount Street, Dublin 2, 662881
Caledonia House, Carnegie Avenue, Dunfermline, KY11 8PJ
5-11 St. Georges Street, Douglas, Isle of Man, IM99 1RN
There are no significant restrictions on any of the Society’s subsidiaries in paying dividends or repaying loans, subject to their financial and operating performance and availability of distributable reserves.
The Group has no material shares in associates. Further details regarding the Group’s interests in equity shares are included in note 13.
Subsidiaries by virtue of control
Details of consolidated and unconsolidated structured entities are set out in note 34.
A structured entity is an entity in which voting or similar rights are not the dominant factor in deciding control. Structured entities are consolidated when the substance of the relationship indicates control.
34. Structured entities
Consolidated structured entities
Unconsolidated structured entities
and Risk Report.
the year.
Structured entities are assessed for consolidation in accordance with the accounting policy set out in note 1. The following structured entities are consolidated in the Group’s results:
Structured entity name
Nationwide Covered Bonds LLP
Silverstone Master Issuer plc
Silverstone Funding (No.1) Limited
Nature of business
Funding vehicle
Funding vehicle
Mortgage acquisition and guarantor of covered bonds
Nationwide House, Pipers Way, Swindon, SN38 1NW
Registered office
Wilmington Trust SP Services (London) Limited, Third Floor,
1 King’s Arms Yard, London, EC2R 7AF
Further details on the activities of the above structured entities are included in note 14. At 4 April 2018, the Group had a controlling interest in Cromarty CLO Limited. Following a deed of termination entered into during the year, the
Society ceased to have any interests in this entity. As a result, the entity is no longer consolidated as part of the Group as a structured entity.
The Group has interests in structured entities which it does not sponsor or control. These largely consist of holdings of mortgage backed securities, covered bonds and CLOs issued by entities that are sponsored by other unrelated
financial institutions. The entities are financed primarily by investments from investors, such as the purchase of issued notes.
The Group’s direct interests in unconsolidated structured entities comprise primarily investments in asset backed securities which are reported within investment securities on the balance sheet. The total carrying value of these
interests at 4 April 2019 is £3,847 million (2018: £3,391 million). Further details on the credit risk that the Group is exposed to in respect of these asset backed securities can be found in the ‘Treasury assets’ section of the Business
Management has concluded that the Group has no control or significant influence over these entities and that the carrying value of the interests held in these entities represents the maximum exposure to loss. During the year the
Group has not provided any non-contractual financial or other support to these entities and has no current intention of providing any such support. There were no transfers to or from these unconsolidated structured entities during
238
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
35. Related party transactions
Subsidiary, parent and ultimate controlling party
The Group is controlled by Nationwide Building Society, the ultimate parent, which is registered in England and Wales. Details of subsidiary undertakings are shown in note 33.
Key management personnel compensation
Members of the Executive Committee (including executive directors), together with the non-executive directors of the Society, are considered to be the key management personnel as defined by IAS 24 ‘Related Party Disclosures’.
Total compensation for key management personnel for the year was as follows:
Key management personnel compensation
Short term employee benefits
Other long-term benefits
Termination benefits
Share based payments
Total
2019
£’000
8,775
1,914
-
1,881
12,570
2018
(note i)
£’000
9,415
2,021
440
2,468
14,344
Note:
i.
Prior year comparatives have been updated to reflect a change to the Group’s definition of key management personnel, which previously included only the Society’s executive and non executive directors.
Other long-term benefits include amounts relating to long-term bonus schemes, some of which will be paid in future periods. Further information on these can be found in note 8. Share based payments include amounts that are
dependent on the performance of the CCDS. Further information is included in the Report of the directors on remuneration.
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Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
35. Related party transactions (continued)
Transactions with related parties
A number of transactions are entered into with related parties in the normal course of business. These include derivatives, loans, deposits and the payment and recharge of administrative expenses. The outstanding balances for other
related party transactions at the year end, and the associated income and expenses for the year are as follows:
Transactions with related parties
Loans payable to the Society
Loans outstanding at 5 April
Loans issued during the year
Loan impairment release
Loan repayments during the year
Loans outstanding at 4 April
Deposits payable by the Society
Deposits outstanding at 5 April
Deposits placed during the year
Deposit repayments during the year
Deposits outstanding at 4 April
Net interest income
Interest receivable
Interest expense
Other income and expenses
Fees and expenses paid to the Society
Other balance sheet items
Accrued income and expenses prepaid due to the Society
Other liabilities payable by the Society
Society subsidiaries
Key management personnel
2019
£m
30,981
1,431
-
(507)
31,905
1,417
280
(152)
1,545
783
48
19
1,114
2,282
2018
£m
31,444
1,018
2
(1,483)
30,981
1,569
18
(170)
1,417
756
34
17
1,370
3,207
2019
£m
2.9
0.6
-
(2.0)
1.5
4.7
8.0
(8.4)
4.3
-
-
-
-
-
2018
(note i)
£m
2.6
1.2
-
(0.9)
2.9
3.3
13.4
(12.0)
4.7
0.1
-
-
-
-
Note:
i.
Prior year comparatives have been updated to reflect a change to the Group’s definition of key management personnel, which previously included only the Society’s executive and non executive directors.
Loans issued and loan repayments during the year ended 4 April 2018 included £807 million in relation to the incorporation of a new financing subsidiary which was subsequently liquidated.
Transactions with key management personnel
Transactions with key management personnel are on the same terms and conditions applicable to other employees within the Group. A register is maintained by the Society containing details of loans, transactions and arrangements
made between the Society or its subsidiary undertakings and directors of the Society or persons connected with directors of the Society.
The register will be available for inspection by members at the Annual General Meeting on 18 July 2019 and during normal office hours at the Society’s principal office (Nationwide House, Pipers Way, Swindon, SN38 1NW) during the
period of 15 days prior to the meeting.
Transactions with Group companies
Transactions with Group companies arise in the normal course of business. Interest on outstanding loans and deposits accrues at a transfer price rate agreed between the Society and its subsidiary undertakings. The Society does not
charge the net defined benefit cost to the subsidiary undertakings that participate in the Nationwide Pension Fund. The pension cost to these subsidiary undertakings equals the contributions payable to the Fund.
A number of transactions are entered into with related parties in the normal course of business. These include derivatives, loans, deposits and the payment and recharge of administrative expenses. The outstanding balances for other
related party transactions at the year end, and the associated income and expenses for the year are as follows:
Annual Report and Accounts 2019
Notes to the financial statements (continued)
35. Related party transactions (continued)
Transactions with related parties
Transactions with related parties
Loans payable to the Society
Loans outstanding at 5 April
Loans issued during the year
Loan impairment release
Loan repayments during the year
Loans outstanding at 4 April
Deposits payable by the Society
Deposits outstanding at 5 April
Deposits placed during the year
Deposit repayments during the year
Deposits outstanding at 4 April
Net interest income
Interest receivable
Interest expense
Other income and expenses
Fees and expenses paid to the Society
Other balance sheet items
Accrued income and expenses prepaid due to the Society
Other liabilities payable by the Society
Note:
Transactions with key management personnel
period of 15 days prior to the meeting.
Transactions with Group companies
Society subsidiaries
Key management personnel
2019
£m
30,981
1,431
-
(507)
31,905
1,417
280
(152)
1,545
783
48
19
1,114
2,282
2018
£m
31,444
1,018
2
(1,483)
30,981
1,569
18
(170)
1,417
756
34
17
1,370
3,207
2019
£m
2.9
0.6
-
(2.0)
1.5
4.7
8.0
(8.4)
4.3
-
-
-
-
-
2018
(note i)
£m
2.6
1.2
-
(0.9)
2.9
3.3
13.4
(12.0)
4.7
0.1
-
-
-
-
i.
Prior year comparatives have been updated to reflect a change to the Group’s definition of key management personnel, which previously included only the Society’s executive and non executive directors.
Loans issued and loan repayments during the year ended 4 April 2018 included £807 million in relation to the incorporation of a new financing subsidiary which was subsequently liquidated.
240
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
36. Notes to the cash flow statements
Non-cash items included in profit before tax (note i)
Net increase in impairment provisions
Net decrease in provisions for liabilities and charges
Impairment recoveries on investment securities
Depreciation, amortisation and impairment
Profit on sale of property, plant and equipment
Loss on the revaluation of property, plant and equipment
Gain on the revaluation of investment properties
Interest on debt securities in issue
Interest on subordinated liabilities
Interest on subscribed capital
(Gains)/losses from derivatives and hedge accounting
Total
Changes in operating assets and liabilities (note i)
Loans and advances to banks and similar institutions
Net derivative financial instruments and fair value adjustment for portfolio hedged risk
Loans and advances to customers (note ii)
Other operating assets
Shares
Deposits from banks and similar institutions, customers and others
Debt securities in issue
Deferred taxation
Retirement benefit obligations
Other operating liabilities
Total
Cash and cash equivalents
Cash
Loans and advances to banks and similar institutions repayable in 3 months or less (notes ii and iii)
Total
Group
Society
2019
£m
36
(75)
-
549
(2)
4
-
673
238
14
(36)
1,401
(302)
(340)
(7,666)
(487)
5,966
94
(243)
186
(240)
518
(2,514)
12,493
3,363
15,856
2018
£m
20
(114)
(2)
397
(1)
-
(1)
712
175
15
1
1,202
17
679
(4,247)
970
3,461
7,560
(815)
(46)
(78)
(246)
7,255
2019
£m
61
(74)
-
549
(2)
4
-
612
238
14
7
1,409
(302)
(681)
(6,421)
(1,148)
5,966
352
(108)
98
(239)
(391)
(2,874)
14,361
3,149
17,510
12,493
3,348
15,841
2018
£m
21
(115)
(2)
397
(1)
-
(1)
669
175
15
26
1,184
17
569
(4,301)
1,175
3,461
7,391
(583)
-
(77)
160
7,812
14,361
3,133
17,494
IFRS 9 transition adjustments (as detailed in note 37) have been excluded from movements in balance sheet items.
Notes:
i.
ii. Comparatives have been restated as detailed in note 1.
iii. Cash equivalents include £1,982 million (2018: £2,071 million) of cash collateral posted with banking and similar counterparties.
Transactions with key management personnel are on the same terms and conditions applicable to other employees within the Group. A register is maintained by the Society containing details of loans, transactions and arrangements
made between the Society or its subsidiary undertakings and directors of the Society or persons connected with directors of the Society.
The register will be available for inspection by members at the Annual General Meeting on 18 July 2019 and during normal office hours at the Society’s principal office (Nationwide House, Pipers Way, Swindon, SN38 1NW) during the
The Group is required to maintain balances with the Bank of England and certain other central banks which, at 4 April 2019, amounted to £570 million (2018: £344 million). These balances are included within loans and advances to
banks and similar institutions on the balance sheet and are not included in the cash and cash equivalents in the cash flow statement as they are not liquid in nature.
Transactions with Group companies arise in the normal course of business. Interest on outstanding loans and deposits accrues at a transfer price rate agreed between the Society and its subsidiary undertakings. The Society does not
charge the net defined benefit cost to the subsidiary undertakings that participate in the Nationwide Pension Fund. The pension cost to these subsidiary undertakings equals the contributions payable to the Fund.
S
t
r
a
t
e
g
i
c
R
e
p
o
r
t
G
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v
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r
n
a
n
c
e
B
u
s
i
n
e
s
s
a
n
d
R
i
s
k
R
e
p
o
r
t
i
F
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a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
O
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e
r
I
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f
o
r
m
a
t
i
o
n
241
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
36. Notes to the cash flow statements (continued)
Liabilities arising from financing activities
Group
At 5 April
Issuances
Redemptions
Foreign exchange
Fair value and other movements
At 4 April
Liabilities arising from financing activities
Society
At 5 April
Issuances
Redemptions
Foreign exchange
Fair value and other movements
At 4 April
2019
Debt securities
in issue
£m
34,118
27,956
(25,970)
(44)
(118)
35,942
Subordinated
liabilities
£m
5,497
1,029
-
172
8
6,706
2019
Debt securities
in issue
£m
29,734
27,956
(25,288)
(117)
69
32,354
Subordinated
liabilities
£m
5,497
1,029
-
172
8
6,706
Subscribed
capital
£m
263
-
(13)
-
-
250
Subscribed
capital
£m
263
-
(13)
-
-
250
Total
£m
39,878
28,985
(25,983)
128
(110)
42,898
Debt securities
in issue
£m
40,339
22,298
(27,737)
(474)
(308)
34,118
Total
£m
35,494
28,985
(25,301)
55
77
39,310
Debt securities
in issue
£m
35,872
21,389
(26,970)
(361)
(196)
29,734
2018
Subordinated
liabilities
£m
2,940
3,995
(1,251)
(201)
14
5,497
2018
Subordinated
liabilities
£m
2,945
3,995
(1,251)
(201)
9
5,497
Subscribed
capital
£m
279
-
-
-
(16)
263
Subscribed
capital
£m
279
-
-
-
(16)
263
Total
£m
43,558
26,293
(28,988)
(675)
(310)
39,878
Total
£m
39,096
25,384
(28,221)
(562)
(203)
35,494
Annual Report and Accounts 2019
Notes to the financial statements (continued)
36. Notes to the cash flow statements (continued)
Liabilities arising from financing activities
Group
At 5 April
Issuances
Redemptions
Foreign exchange
Fair value and other movements
At 4 April
Liabilities arising from financing activities
Society
At 5 April
Issuances
Redemptions
Foreign exchange
Fair value and other movements
At 4 April
Debt securities
Subordinated
liabilities
Subscribed
capital
2019
Total
Debt securities
Subordinated
2018
Subscribed
capital
in issue
£m
34,118
27,956
(25,970)
(44)
(118)
35,942
in issue
£m
29,734
27,956
(25,288)
(117)
69
32,354
£m
5,497
1,029
-
172
8
6,706
£m
5,497
1,029
-
172
8
6,706
£m
263
(13)
-
-
-
250
£m
263
(13)
-
-
-
250
£m
39,878
28,985
(25,983)
128
(110)
42,898
£m
35,494
28,985
(25,301)
55
77
39,310
in issue
£m
40,339
22,298
(27,737)
(474)
(308)
34,118
in issue
£m
35,872
21,389
(26,970)
(361)
(196)
29,734
liabilities
£m
2,940
3,995
(1,251)
(201)
14
5,497
liabilities
£m
2,945
3,995
(1,251)
(201)
9
5,497
Debt securities
Subordinated
liabilities
Subscribed
capital
2019
Total
Debt securities
Subordinated
2018
Subscribed
capital
Total
£m
43,558
26,293
(28,988)
(675)
(310)
39,878
Total
£m
39,096
25,384
(28,221)
(562)
(203)
35,494
£m
279
-
-
-
(16)
263
£m
279
-
-
-
(16)
263
242
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
37. Adoption of IFRS 9
The Group has adopted IFRS 9 from 5 April 2018. As permitted by IFRS 9, comparatives have not been restated following adoption. The following tables summarise the adjustments to the Group’s and the Society’s balance sheet at
5 April 2018.
Group
Assets
Cash
Loans and advances to banks and similar institutions
Investment securities
Investment securities
Investment securities
Derivative financial instruments
Fair value adjustment for portfolio hedged risk
Loans and advances to customers
Loans and advances to customers
Assets not affected by changes arising from IFRS 9
Deferred tax
Total assets
Liabilities
Liabilities not affected by changes arising from IFRS 9
Provisions for liabilities and charges
Total liabilities
Members’ interests and equity
Capital and reserves not impacted by changes arising from IFRS 9
General reserve
Fair value through other comprehensive income reserve
Available for sale reserve
Total members’ interests and equity
Total members’ interests, equity and liabilities
IAS 39 category
IFRS 9 category
Amortised cost
Amortised cost
AFS
AFS
Amortised cost
FVTPL
Amortised cost
Amortised cost
Amortised cost
Amortised cost
Amortised cost
FVOCI
FVTPL
Amortised cost
FVTPL
Amortised cost
Amortised cost
FVTPL
Notes
ii
ii
iii
iv, v, vi
iv, vii
viii
ix
x
x
x
As at
4 April 2018
(note i)
£m
14,361
3,493
11,926
-
1,120
4,121
(109)
191,593
-
2,495
98
229,098
216,422
273
216,695
2,377
9,951
75
12,403
229,098
Classification
Measurement
Impairment
£m
-
-
(45)
45
-
-
-
(246)
246
-
-
-
-
-
-
-
13
62
(75)
-
-
£m
-
-
-
-
-
-
(35)
(2)
1
-
8
(28)
-
-
-
-
(28)
-
-
(28)
(28)
£m
-
-
-
-
-
-
-
(171)
-
-
38
(133)
-
1
1
-
(134)
-
-
(134)
(133)
As at
5 April 2018
(note i)
£m
14,361
3,493
11,881
45
1,120
4,121
(144)
191,174
247
2,495
144
228,937
216,422
274
216,696
2,377
9,802
62
12,241
228,937
S
t
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a
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e
g
i
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R
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p
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G
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n
a
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c
e
B
u
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i
n
e
s
s
a
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d
R
i
s
k
R
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t
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F
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a
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S
t
a
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a
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i
o
n
243
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
37. Adoption of IFRS 9 (continued)
Society
Assets
Cash
Loans and advances to banks and similar institutions
Investment securities
Investment securities
Investment securities
Derivative financial instruments
Fair value adjustment for portfolio hedged risk
Loans and advances to customers
Loans and advances to customers
Assets not affected by changes arising from IFRS 9
Deferred tax
Total assets
Liabilities
Liabilities not affected by changes arising from IFRS 9
Provisions for liabilities and charges
Total liabilities
Members’ interests and equity
Capital and reserves not impacted by changes arising from IFRS 9
General reserve
Fair value through other comprehensive income reserve
Available for sale reserve
Total members’ interests and equity
Total members’ interests, equity and liabilities
Notes
ii
ii
iii
iv, vi
iv, vii
viii
ix
x
x
x
IAS 39 category
IFRS 9 category
As at
4 April 2018
(note i)
£m
Amortised cost
Amortised cost
AFS
AFS
Amortised cost
FVTPL
Amortised cost
Amortised cost
Amortised cost
Amortised cost
Amortised cost
FVOCI
FVTPL
Amortised cost
FVTPL
Amortised cost
Amortised cost
FVTPL
14,361
3,477
11,926
-
1,120
3,108
(109)
158,175
-
35,150
95
227,303
216,797
271
217,068
2,272
7,883
80
10,235
227,303
Classification
Measurement
Impairment
£m
-
-
(45)
45
-
-
-
(231)
231
-
-
-
-
-
-
-
13
67
(80)
-
-
£m
-
-
-
-
-
-
(35)
3
5
-
8
(19)
-
-
-
-
(19)
-
-
(19)
(19)
£m
-
-
-
-
-
-
-
(96)
-
-
24
(72)
-
1
1
-
(73)
-
-
(73)
(72)
As at
5 April 2018
(note i)
£m
14,361
3,477
11,881
45
1,120
3,108
(144)
157,851
236
35,150
127
227,212
216,797
272
217,069
2,272
7,804
67
10,143
227,212
Comparatives have been restated as detailed in note 1.
Includes a debt security that has been transferred from available for sale investment securities to FVTPL due to its contractual cash flow characteristics.
The reduction in fair value for portfolio hedged risk relates to the removal of fair value hedge accounting adjustments for loans that have been reclassified from amortised cost to FVTPL, and which therefore no longer qualify for hedge accounting.
The reduction of amortised cost loans and advances to customers under IAS 39 relates to loans reclassified under IFRS 9 as FVTPL due to their contractual cash flow characteristics.
£2 million is the net impact of the transitional lifetime ECL adjustment on the balance sheet carrying value of POCI loans, and the adjustment to credit impaired loans to restore the carrying value to the contractual amount owed.
The reduction of the amortised cost loans and advances to customers due to impairment (Group: £171 million, Society: £96 million) is the difference between IFRS 9 ECL impairment and the IAS 39 incurred loss provisions.
Notes:
i.
ii.
iii.
iv.
v.
vi.
vii. Group carrying values of FVTPL loans and advances to customers increased by £1 million (Society: £5 million) on transition to IFRS 9.
viii. The valuation of the deferred tax assets recognised on adoption of IFRS 9 reflects HMRC’s legislation that the tax effect of the impact on adoption of IFRS 9 should be realised over the ten years following adoption. Deferred tax is determined using tax rates
and laws that are expected to apply in the period when the deferred tax asset is realised based on rates enacted or substantively enacted at the balance sheet date, including the banking surcharge when applicable.
ix. An additional £1 million has been provided separately within provisions for liabilities and charges. This relates to provisions against separately identifiable irrevocable commitments for the pipeline of personal loans, commercial loans and mortgages.
Overdrafts and credit card commitments are provided for within the ECL provision models, with allowance for future drawdowns made as part of the exposure at default (EAD) element of the ECL calculation for each account.
The transfer from the FVOCI reserve to general reserve relates to the accumulated AFS reserve in respect of financial instruments that have been reclassified from AFS to FVTPL.
x.
Annual Report and Accounts 2019
Notes to the financial statements (continued)
37. Adoption of IFRS 9 (continued)
Society
Assets
Cash
Deferred tax
Total assets
Liabilities
Loans and advances to banks and similar institutions
Investment securities
Investment securities
Investment securities
Derivative financial instruments
Fair value adjustment for portfolio hedged risk
Loans and advances to customers
Loans and advances to customers
Assets not affected by changes arising from IFRS 9
Liabilities not affected by changes arising from IFRS 9
Provisions for liabilities and charges
Total liabilities
Members’ interests and equity
Capital and reserves not impacted by changes arising from IFRS 9
General reserve
Fair value through other comprehensive income reserve
Available for sale reserve
Total members’ interests and equity
Total members’ interests, equity and liabilities
IAS 39 category
IFRS 9 category
As at
Classification
Measurement
Impairment
4 April 2018
(note i)
£m
£m
£m
£m
As at
5 April 2018
(note i)
£m
Amortised cost
Amortised cost
Amortised cost
Amortised cost
AFS
AFS
FVTPL
FVOCI
FVTPL
FVTPL
Amortised cost
Amortised cost
Amortised cost
Amortised cost
Amortised cost
Amortised cost
Amortised cost
FVTPL
Notes
ii
ii
iii
iv, vi
iv, vii
viii
ix
x
x
x
14,361
3,477
11,926
-
1,120
3,108
(109)
158,175
-
35,150
95
227,303
216,797
271
217,068
2,272
7,883
80
10,235
227,303
(45)
45
(231)
231
-
-
-
-
-
-
-
-
-
-
-
-
13
67
(80)
-
-
(35)
(19)
-
-
-
-
-
-
3
5
-
8
-
-
-
-
-
-
(19)
(19)
(19)
-
-
-
-
-
-
-
-
-
-
1
1
-
-
-
(96)
24
(72)
(73)
(73)
(72)
14,361
3,477
11,881
45
1,120
3,108
(144)
157,851
236
35,150
127
227,212
216,797
272
217,069
2,272
7,804
67
10,143
227,212
Notes:
i.
ii.
iii.
iv.
v.
vi.
Comparatives have been restated as detailed in note 1.
Includes a debt security that has been transferred from available for sale investment securities to FVTPL due to its contractual cash flow characteristics.
The reduction in fair value for portfolio hedged risk relates to the removal of fair value hedge accounting adjustments for loans that have been reclassified from amortised cost to FVTPL, and which therefore no longer qualify for hedge accounting.
The reduction of amortised cost loans and advances to customers under IAS 39 relates to loans reclassified under IFRS 9 as FVTPL due to their contractual cash flow characteristics.
£2 million is the net impact of the transitional lifetime ECL adjustment on the balance sheet carrying value of POCI loans, and the adjustment to credit impaired loans to restore the carrying value to the contractual amount owed.
The reduction of the amortised cost loans and advances to customers due to impairment (Group: £171 million, Society: £96 million) is the difference between IFRS 9 ECL impairment and the IAS 39 incurred loss provisions.
vii. Group carrying values of FVTPL loans and advances to customers increased by £1 million (Society: £5 million) on transition to IFRS 9.
viii. The valuation of the deferred tax assets recognised on adoption of IFRS 9 reflects HMRC’s legislation that the tax effect of the impact on adoption of IFRS 9 should be realised over the ten years following adoption. Deferred tax is determined using tax rates
and laws that are expected to apply in the period when the deferred tax asset is realised based on rates enacted or substantively enacted at the balance sheet date, including the banking surcharge when applicable.
ix. An additional £1 million has been provided separately within provisions for liabilities and charges. This relates to provisions against separately identifiable irrevocable commitments for the pipeline of personal loans, commercial loans and mortgages.
Overdrafts and credit card commitments are provided for within the ECL provision models, with allowance for future drawdowns made as part of the exposure at default (EAD) element of the ECL calculation for each account.
x.
The transfer from the FVOCI reserve to general reserve relates to the accumulated AFS reserve in respect of financial instruments that have been reclassified from AFS to FVTPL.
244
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
37. Adoption of IFRS 9 (continued)
The table below reconciles the opening IFRS 9 ECL provision to the increase in provision on the adoption of IFRS 9 on 5 April 2018:
Reconciliation of impairment provisions within staging bands
Group
Residential mortgages
Consumer banking
Commercial and other lending
Total
12 month ECL
Stage 1
£m
17
25
6
48
Lifetime ECL –
non-credit
impaired
Stage 2
£m
171
103
10
284
Lifetime ECL –
credit impaired
Stage 3 and
POCI
£m
47
237
13
297
Total ECL
Less IAS 39
provisions
£m
235
365
29
629
£m
(145)
(298)
(15)
(458)
Reconciliation of impairment provisions within staging bands
Society
Residential mortgages
Consumer banking
Commercial and other lending
Total
12 month ECL
Stage 1
£m
6
25
6
37
Lifetime ECL –
non-credit
impaired
Stage 2
£m
33
103
10
146
Lifetime ECL –
credit impaired
Stage 3
Total ECL
Less IAS 39
provisions
£m
12
237
13
262
£m
51
365
29
445
£m
(36)
(298)
(15)
(349)
Increase in
provision
on adoption
of IFRS 9
£m
90
67
14
171
Increase in
provision
on adoption
of IFRS 9
£m
15
67
14
96
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245
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
37. Adoption of IFRS 9 (continued)
IAS 39 accounting policies
The policies for financial assets and impairment of financial assets have changed from 5 April 2018, as
detailed in note 1, following the adoption of IFRS 9. The following principal accounting policies applied under
IAS 39 prior to 5 April 2018:
Financial assets
Financial assets are recognised initially at fair value. Purchases and sales of financial assets are accounted for
at trade date. Financial assets are derecognised when the rights to receive cash flows have expired or where
the assets have been transferred and substantially all of the risks and rewards of ownership have been
transferred.
The Group classifies its financial assets at inception into the following four categories:
(a) Financial assets at fair value through the income statement
This category consists of derivative financial assets used for risk management purposes and other financial
assets that are designated at fair value through the income statement by the Group.
Assets in this category are carried at fair value. The fair values of derivative instruments are calculated by
discounted cash flow models using yield curves that are based on observable market data or are based on
valuations obtained from third parties. Gains and losses arising from the changes in the fair values are
recognised in the income statement.
(b) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not
quoted in an active market. The Group’s residential and commercial mortgage loans, unsecured lending, loans
and advances to banks and cash are classified as loans and receivables.
Loans are recognised when the funds are advanced to customers. Loans and receivables are carried at
amortised cost using the effective interest rate method less provisions for impairment.
Loans and receivables acquired through a business combination or portfolio acquisition are recognised at fair
value at the acquisition date. The fair value at acquisition becomes the new amortised cost for acquired loans
and receivables. Fair value adjustments are made to reflect both credit and interest rate risk associated with
the acquired loan assets.
(c) Available for sale assets
Available for sale assets are non-derivative financial assets that are not classified into either of the two
categories above. The majority of available for sale assets are measured at fair value using, in the majority of
cases, market prices or, where markets have become inactive, prices obtained from market participants. In
sourcing valuations, the Group makes use of a consensus pricing service, in line with standard industry
practice. In cases where market prices or prices obtained from market participants are not available,
discounted cash flow models are used. Further information is provided in notes 21 and 22. Investments in
equities that do not have a quoted market price in an active market and whose value cannot be reliably
measured are recognised at cost.
Interest on available for sale assets is recognised using the effective interest rate method.
Unrealised gains and losses arising from changes in values are recognised in other comprehensive income,
except for amounts relating to impairment losses and foreign exchange gains and losses, which are
recognised in the income statement. Gains and losses arising on the sale of available for sale assets are
recognised in the income statement, including any cumulative gains or losses previously recognised in other
comprehensive income, which are reclassified to the income statement.
(d) Held to maturity
Held to maturity assets are non-derivative financial assets with fixed or determinable payments and fixed
maturity dates that the Group has the positive intention and ability to hold to maturity.
Held to maturity assets are carried at amortised cost using the effective interest rate method, less provisions for
impairment.
Impairment of financial assets
(a) Assets carried at amortised cost
The Group assesses at each balance sheet date whether, as a result of one or more events that occurred after
initial recognition, there is objective evidence that a financial asset or group of financial assets is impaired.
Evidence of impairment may include:
indications that the borrower or group of borrowers is experiencing significant financial difficulty
i)
ii) default or delinquency in interest or principal payments
iii) debt being restructured to reduce the burden on the borrower.
The Group first assesses whether objective evidence of impairment exists either individually for assets that are
separately significant or individually or collectively for assets that are not separately significant. If there is no
objective evidence of impairment for an individually assessed asset it is included in a group of assets with
similar credit risk characteristics and collectively assessed for impairment.
If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured
as the difference between the asset’s carrying amount and the present value of estimated future cash flows
discounted at the asset’s original effective interest rate. For loans in a hedge relationship, the effective interest
rate used for discounting is calculated using the carrying value of the loan including the hedge adjustment.
The resultant provisions are deducted from the appropriate asset values on the balance sheet.
The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group
to reduce any differences between loss estimates and actual loss experience. If, in a subsequent period, the
amount of impairment loss changes, the provision is adjusted and the amount of additional provision or
reversal is recognised in the income statement.
Loans remain on the balance sheet net of associated provisions until they are deemed no longer recoverable.
Where a loan is not recoverable, it is written off against the related provision for loan impairment once all the
necessary procedures have been completed and the amount of the loss has been determined. Subsequent
recoveries of amounts previously written off decrease the amount of impairment losses recorded in the
income statement.
The policies for financial assets and impairment of financial assets have changed from 5 April 2018, as
detailed in note 1, following the adoption of IFRS 9. The following principal accounting policies applied under
For retail loans cash flows are estimated based on past experience combined with the Group’s view of the
future considering the following factors:
246
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
37. Adoption of IFRS 9 (continued)
Retail loans
Loans subject to individual impairment assessment, whose terms have been renegotiated, are subject to
ongoing review to determine whether they remain impaired or are considered to be past due.
Where a loan is renegotiated on different terms such that it is substantially a different loan, the loan is
derecognised and a new loan is recognised at its fair value.
exposure to the customer
i)
ii) based on the number of days in arrears at the balance sheet date, the likelihood that a loan will progress
For those loans for which no individual impairment is recognised, a collective impairment assessment is
made, taking account of the following factors:
through the various stages of delinquency and ultimately be written off
iii) the amount and timing of expected receipts and recoveries
iv)
v)
the realisable value of any security at the estimated date of sale
the likely deduction of any costs involved in the recovery of amounts outstanding.
i)
size of the loan
ii) arrears status
iii) historical loss experience (adjusted for current market conditions)
iv)
the estimated period between impairment occurring and the loss being identified (’emergence period’).
The Group’s provision methodology recognises previous arrears as a driver of future possible default and
therefore accounts which have either capitalised arrears or have been in arrears in the last 12 months typically
attract a higher provision level.
(b) Available for sale assets
Commercial loans
In assessing objective evidence of a loss event for commercial loans, the following key indicators are
considered:
contractually due payments exceeding 30 days in arrears
i)
ii) high loan to value or low interest cover ratio
iii) other covenant breaches
iv)
v)
vi) restructuring of the debt relating to the borrower’s financial difficulties (‘forbearance’)
vii) local economic conditions (for example, where this impacts on the value of underlying collateral).
loss of significant tenants or other decreases in tenant quality
the probability of the borrower entering bankruptcy
Where there is objective evidence of impairment, cash flows are assessed on a case by case basis considering
the following factors:
i) aggregate exposure to the customer
ii)
the viability of the customer’s business model and their capacity to trade successfully out of financial
difficulties and generate sufficient cash flows to service debt obligations
iii) the amount and timing of expected receipts and recoveries of collateral
iv)
v)
the likely dividend available on liquidation or bankruptcy
the extent of other creditors’ claims ranking ahead of the Group’s, and the likelihood of other creditors
continuing to support the borrower
the complexity of determining the aggregate amount and ranking of all creditor claims and the extent to
which legal and insurance uncertainties are evident
vii) the realisable value of security at the expected date of sale
viii) the likely deduction of any costs involved in recovery of amounts outstanding
ix) when available, the secondary market price of the debt.
vi)
The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a
group of financial assets is impaired. If any such evidence exists for available for sale assets, the cumulative
loss, measured as the difference between the current amortised cost and the current fair value, less any
impairment loss on that asset previously recognised, is recognised in impairment losses/recoveries on
investment securities in the income statement.
A subsequent decline in the fair value of an available for sale asset is recognised in the income statement
when there is further objective evidence of impairment as a result of further decreases in the estimated future
cash flows of the financial asset. Where there is no further objective evidence of impairment, the decline in the
fair value of the financial asset is recognised in other comprehensive income.
If the fair value of an available for sale asset increases in a subsequent period, and the increase can be
objectively related to an event occurring after the impairment loss was recognised in the income statement,
the impairment loss is reversed through the income statement to the extent it reverses the previously
recognised impairment. Any gain in fair value in excess of the original impairment is recognised in other
comprehensive income. On disposal, where sales proceeds exceed the carrying amount of an impaired asset,
the proportion of the gain which offsets the previously recognised impairment loss is recognised as a credit in
impairment losses/recoveries on investment securities in the income statement.
Impairment losses recognised in the income statement on available for sale equity shares are not reversed
through the income statement.
Annual Report and Accounts 2019
Notes to the financial statements (continued)
37. Adoption of IFRS 9 (continued)
IAS 39 accounting policies
IAS 39 prior to 5 April 2018:
Financial assets
Financial assets are recognised initially at fair value. Purchases and sales of financial assets are accounted for
at trade date. Financial assets are derecognised when the rights to receive cash flows have expired or where
the assets have been transferred and substantially all of the risks and rewards of ownership have been
transferred.
The Group classifies its financial assets at inception into the following four categories:
impairment.
(a) Financial assets at fair value through the income statement
Impairment of financial assets
This category consists of derivative financial assets used for risk management purposes and other financial
(a) Assets carried at amortised cost
assets that are designated at fair value through the income statement by the Group.
Assets in this category are carried at fair value. The fair values of derivative instruments are calculated by
discounted cash flow models using yield curves that are based on observable market data or are based on
valuations obtained from third parties. Gains and losses arising from the changes in the fair values are
recognised in the income statement.
(b) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not
quoted in an active market. The Group’s residential and commercial mortgage loans, unsecured lending, loans
and advances to banks and cash are classified as loans and receivables.
Loans are recognised when the funds are advanced to customers. Loans and receivables are carried at
amortised cost using the effective interest rate method less provisions for impairment.
Loans and receivables acquired through a business combination or portfolio acquisition are recognised at fair
value at the acquisition date. The fair value at acquisition becomes the new amortised cost for acquired loans
and receivables. Fair value adjustments are made to reflect both credit and interest rate risk associated with
the acquired loan assets.
(c) Available for sale assets
Available for sale assets are non-derivative financial assets that are not classified into either of the two
categories above. The majority of available for sale assets are measured at fair value using, in the majority of
cases, market prices or, where markets have become inactive, prices obtained from market participants. In
sourcing valuations, the Group makes use of a consensus pricing service, in line with standard industry
practice. In cases where market prices or prices obtained from market participants are not available,
discounted cash flow models are used. Further information is provided in notes 21 and 22. Investments in
equities that do not have a quoted market price in an active market and whose value cannot be reliably
measured are recognised at cost.
Interest on available for sale assets is recognised using the effective interest rate method.
Unrealised gains and losses arising from changes in values are recognised in other comprehensive income,
except for amounts relating to impairment losses and foreign exchange gains and losses, which are
recognised in the income statement. Gains and losses arising on the sale of available for sale assets are
recognised in the income statement, including any cumulative gains or losses previously recognised in other
comprehensive income, which are reclassified to the income statement.
(d) Held to maturity
Held to maturity assets are non-derivative financial assets with fixed or determinable payments and fixed
maturity dates that the Group has the positive intention and ability to hold to maturity.
Held to maturity assets are carried at amortised cost using the effective interest rate method, less provisions for
The Group assesses at each balance sheet date whether, as a result of one or more events that occurred after
initial recognition, there is objective evidence that a financial asset or group of financial assets is impaired.
Evidence of impairment may include:
i)
indications that the borrower or group of borrowers is experiencing significant financial difficulty
ii) default or delinquency in interest or principal payments
iii) debt being restructured to reduce the burden on the borrower.
The Group first assesses whether objective evidence of impairment exists either individually for assets that are
separately significant or individually or collectively for assets that are not separately significant. If there is no
objective evidence of impairment for an individually assessed asset it is included in a group of assets with
similar credit risk characteristics and collectively assessed for impairment.
If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured
as the difference between the asset’s carrying amount and the present value of estimated future cash flows
discounted at the asset’s original effective interest rate. For loans in a hedge relationship, the effective interest
rate used for discounting is calculated using the carrying value of the loan including the hedge adjustment.
The resultant provisions are deducted from the appropriate asset values on the balance sheet.
The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group
to reduce any differences between loss estimates and actual loss experience. If, in a subsequent period, the
amount of impairment loss changes, the provision is adjusted and the amount of additional provision or
reversal is recognised in the income statement.
Loans remain on the balance sheet net of associated provisions until they are deemed no longer recoverable.
Where a loan is not recoverable, it is written off against the related provision for loan impairment once all the
necessary procedures have been completed and the amount of the loss has been determined. Subsequent
recoveries of amounts previously written off decrease the amount of impairment losses recorded in the
income statement.
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247
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Notes to the financial statements (continued)
Notes to the financial statements (continued)
38. Capital management
The Group is subject to the regulatory capital requirements applied by its regulator, the Prudential Regulation Authority (PRA). Regulatory capital comprises the Group’s general reserve, fair value through other comprehensive
income reserve, revaluation reserve, core capital deferred shares, other equity instruments, permanent interest-bearing shares (PIBS) and subordinated debt, subject to various adjustments and transitional arrangements required by
the capital rules.
During the year the Group complied with the capital requirements applied by the PRA. Further unaudited details about the Group’s capital position can be found in the ‘Solvency risk’ section of the Business and Risk Report.
39. Registered office
Nationwide is a building society, incorporated and domiciled in the United Kingdom. The address of its registered office is:
Nationwide Building Society
Nationwide House
Pipers Way
Swindon
SN38 1NW
Annual Report and Accounts 2019
Notes to the financial statements (continued)
38. Capital management
the capital rules.
39. Registered office
Nationwide Building Society
Nationwide House
Pipers Way
Swindon
SN38 1NW
The Group is subject to the regulatory capital requirements applied by its regulator, the Prudential Regulation Authority (PRA). Regulatory capital comprises the Group’s general reserve, fair value through other comprehensive
income reserve, revaluation reserve, core capital deferred shares, other equity instruments, permanent interest-bearing shares (PIBS) and subordinated debt, subject to various adjustments and transitional arrangements required by
During the year the Group complied with the capital requirements applied by the PRA. Further unaudited details about the Group’s capital position can be found in the ‘Solvency risk’ section of the Business and Risk Report.
Nationwide is a building society, incorporated and domiciled in the United Kingdom. The address of its registered office is:
248
Annual Report and Accounts 2019
Other
Information
249 Annual business statement
• Statutory percentages
• Other percentages
• Information relating to directors
• Directors’ service contracts
• Directors’ share options
252 Underlying profit
252 Forward looking statements
252 Glossary
253 Index
Chiz, member since 2015
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249
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Annual business statement for the year ended 4 April 2019
1. Statutory percentages
Statutory percentages
Lending limit
Funding limit
2019
%
6.25
29.21
Statutory limit
%
25.00
50.00
The above percentages have been calculated in accordance with the provisions of the Building Societies Act
1986 as amended by the Building Societies Act 1997 and the Modification of the Lending Limit and Funding
Limit Calculations Order 2004.
The lending limit measures the proportion of business assets not in the form of loans fully secured on
residential property and is calculated as (X-Y)/X where:
X =
business assets, being the total assets of the Group plus impairment provisions on loans and advances
to customers less liquid assets, property, plant and equipment, intangible fixed assets and investment
properties as shown in the Group balance sheet.
Y =
the principal of, and interest accrued on, loans owed to the Group which are fully secured
on residential property.
The funding limit measures the proportion of shares and borrowings not in the form of shares held
by individuals and is calculated as (X-Y)/X where:
X =
shares and borrowings, being the aggregate of:
i)
ii)
iii)
the principal value of, and interest accrued on, shares in the Society,
the principal of, and interest accrued on, sums deposited with the Society or any subsidiary
undertaking of the Society excluding offshore deposits in an EEA subsidiary, and
the principal value of, and interest accrued under, bills of exchange, instruments or agreements
creating or acknowledging indebtedness and accepted, made, issued or entered into by the Society or
any such undertaking, less any amounts qualifying as own funds.
Y =
the principal value of, and interest accrued on, shares in the Society held by individuals otherwise than
as bare trustees (or, in Scotland, simple trustees) for bodies corporate or for persons who include
bodies corporate.
The statutory limits are as laid down under the Building Societies Act 1986 as amended by the Building
Societies Act 1997 and ensure that the principal purpose of a building society is that of making loans which
are secured on residential property and are funded substantially by its members.
2. Other percentages
Other percentages
As a percentage of shares and borrowings:
Gross capital
Free capital
Liquid assets
Profit for the financial year as a percentage of mean total assets
Management expenses as a percentage of mean total assets
2019
%
9.4
8.6
15.2
0.26
0.96
2018
%
8.8
7.9
14.9
0.33
0.90
The above percentages have been prepared from the Society’s consolidated accounts and in particular:
•
•
•
•
•
•
‘Shares and borrowings’ represent the total of shares, deposits from banks and similar institutions, other
deposits and debt securities in issue
‘Gross capital’ represents the aggregate of general reserve, revaluation reserve, fair value through other
comprehensive income reserve (2018: available for sale reserve), cash flow hedge reserve, CCDS,
Additional Tier 1 capital, subscribed capital and subordinated liabilities
‘Free capital’ represents the aggregate of gross capital and provisions for collective impairment losses on
loans and advances to customers less property, plant and equipment and intangible assets
‘Liquid assets’ represent the total of cash, loans and advances to banks and similar institutions and
investment securities
‘Mean total assets’ represent the amount produced by halving the aggregate of total assets at the
beginning and end of the financial year
‘Management expenses’ represent administrative expenses including depreciation, amortisation and
impairment of property, plant and equipment and intangible assets.
Annual business statement for the year ended 4 April 2019
Annual Report and Accounts 2019
1. Statutory percentages
Statutory percentages
Lending limit
Funding limit
2019
%
6.25
29.21
Statutory limit
%
25.00
50.00
2. Other percentages
Other percentages
As a percentage of shares and borrowings:
Gross capital
Free capital
Liquid assets
The above percentages have been calculated in accordance with the provisions of the Building Societies Act
1986 as amended by the Building Societies Act 1997 and the Modification of the Lending Limit and Funding
Limit Calculations Order 2004.
The lending limit measures the proportion of business assets not in the form of loans fully secured on
residential property and is calculated as (X-Y)/X where:
X =
business assets, being the total assets of the Group plus impairment provisions on loans and advances
to customers less liquid assets, property, plant and equipment, intangible fixed assets and investment
properties as shown in the Group balance sheet.
Y =
the principal of, and interest accrued on, loans owed to the Group which are fully secured
on residential property.
The funding limit measures the proportion of shares and borrowings not in the form of shares held
by individuals and is calculated as (X-Y)/X where:
X =
shares and borrowings, being the aggregate of:
i)
ii)
the principal value of, and interest accrued on, shares in the Society,
the principal of, and interest accrued on, sums deposited with the Society or any subsidiary
undertaking of the Society excluding offshore deposits in an EEA subsidiary, and
iii)
the principal value of, and interest accrued under, bills of exchange, instruments or agreements
creating or acknowledging indebtedness and accepted, made, issued or entered into by the Society or
any such undertaking, less any amounts qualifying as own funds.
Y =
the principal value of, and interest accrued on, shares in the Society held by individuals otherwise than
as bare trustees (or, in Scotland, simple trustees) for bodies corporate or for persons who include
bodies corporate.
The statutory limits are as laid down under the Building Societies Act 1986 as amended by the Building
Societies Act 1997 and ensure that the principal purpose of a building society is that of making loans which
are secured on residential property and are funded substantially by its members.
2019
%
9.4
8.6
15.2
0.26
0.96
2018
%
8.8
7.9
14.9
0.33
0.90
Profit for the financial year as a percentage of mean total assets
Management expenses as a percentage of mean total assets
The above percentages have been prepared from the Society’s consolidated accounts and in particular:
•
•
•
•
•
•
‘Shares and borrowings’ represent the total of shares, deposits from banks and similar institutions, other
deposits and debt securities in issue
‘Gross capital’ represents the aggregate of general reserve, revaluation reserve, fair value through other
comprehensive income reserve (2018: available for sale reserve), cash flow hedge reserve, CCDS,
Additional Tier 1 capital, subscribed capital and subordinated liabilities
‘Free capital’ represents the aggregate of gross capital and provisions for collective impairment losses on
loans and advances to customers less property, plant and equipment and intangible assets
‘Liquid assets’ represent the total of cash, loans and advances to banks and similar institutions and
investment securities
‘Mean total assets’ represent the amount produced by halving the aggregate of total assets at the
beginning and end of the financial year
‘Management expenses’ represent administrative expenses including depreciation, amortisation and
impairment of property, plant and equipment and intangible assets.
250
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Annual business statement for the year ended 4 April 2019 (continued)
Annual business statement (continued)
3. Information relating to directors at 4 April 2019
Information relating to directors at 4 April 2019
Name and date of birth
Occupation
Date of appointment
Other directorships
D L Roberts
BSc (Hons), MBA, PhD (Honorary), CFifs
Chairman
12 September 1962
Non Executive Director
1 September 2014
R A Clifton
CBE, MA (Cantab), FRSA
30 January 1958
R M Fyfield
MA, BA (Hons)
3 May 1969
A Hitchcock
dipMBA, CEng, FIET
16 January 1965
J D Garner
MA (Cantab)
23 June 1969
M A Lenson
MBA, BA (Hons),
ACIB, FSI
17 September 1954
K A H Parry
OBE, MA (Cantab), FCA
29 January 1962
L M Peacock
BA (Hons)
26 December 1953
Baroness U K Prashar
CBE, PC
29 June 1948
T P Prestedge
12 February 1970
Campion Willcocks Limited
Beazley plc (Chairman)
Beazley Furlonge Limited (Chairman)
NHS Improvement (Associate Non Executive Director)
NHS England (Vice Chairman)
BrandCap Limited
Rita Clifton Limited
ASOS plc
Ascential plc
The Green Alliance Trust
Roku, Inc
Non Executive Director
1 July 2012
Non Executive Director
2 June 2015
Non Executive Director
2 December 2018
Executive Director
5 April 2016
UK Finance
British Triathlon Foundation Trust (Chairman)
Non Executive Director
18 July 2011
The Currency Cloud Group Limited
Non Executive Director
23 May 2016
Non Executive Director
18 July 2011
Non Executive Director
18 January 2017
Executive Director
28 August 2007
Daily Mail and General Trust plc
Intermediate Capital Group plc (Chairman)
KAH Parry Limited
Royal London Group (Chairman)
Serco Group plc
The Westminster Society for People with Learning Disabilities (Chair)
Hawkins Residents Limited
UK Community Foundations (Honorary President)
Cumberland Lodge (Chair)
Nationwide Anglia Property Services Limited
Dunfermline BS Nominees Limited
Monument (Sutton) Limited
NBS Ventures Limited
NBS Ventures Management Limited
The Derbyshire (Premises) Limited
The Nationwide Foundation
The Nationwide Trust Limited
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Annual Report and Accounts 2019
Annual Report and Accounts 2019
Annual business statement for the year ended 4 April 2019 (continued)
Annual business statement (continued)
3. Information relating to directors at 4 April 2019 (continued)
Information relating to directors at 4 April 2019
Name and date of birth
Occupation
Date of appointment
Other directorships
M M Rennison
BA (Hons), FCA
9 August 1960
Executive Director
1 February 2007
C S Rhodes
BSc (Hons), ACA
17 March 1963
T J W Tookey
BSc (Hons), FCA
17 July 1962
G Waersted
MBA
16 March 1955
Executive Director
20 April 2009
Non Executive Director
2 June 2015
Non Executive Director
1 June 2017
Confederation Mortgage Services Limited
Exeter Trust Limited
First Nationwide
LBS Mortgages Limited
Nationwide Anglia Property Services Limited
Nationwide Housing Trust Limited
Nationwide Investments (No.1) Limited
Nationwide Lease Finance Limited
Nationwide Mortgage Corporation Limited
Nationwide Syndications Limited
NBS Fleet Services Limited
NBS Ventures Management Limited
Staffordshire Leasing Limited
Arkose Funding Limited
Piper Javelin No.1 Limited
Piper Javelin Holding Company Limited
Silverstone Securitisation Holdings Limited
at.home Nationwide Limited
Derbyshire Home Loans Limited
E-Mex Home Funding Limited
Jubilee Mortgages Limited
The Mortgage Works (UK) plc
UCB Home Loans Corporation Limited
The Lending Standards Board Limited
NBS Ventures Management Limited
Westmoreland Court Management (Beckenham) Limited
Telenor ASA (Chair)
Petoro AS (Chair)
Lukris Invest AS
Fidelity International
Saferoad ASA
Documents may be served on any of the Directors c/o Addleshaw Goddard, One St Peter’s Square, Manchester M2 3DE.
Directors’ service contracts
Executive directors’ terms and conditions of employment are detailed in their individual contracts or service agreements which include a notice period of 12 months from the Society to the individual and a notice period of six months
from the individual to the Society. The notice period offered to any new recruit would be in line with this approach.
Directors’ share options
A proportion of executive directors’ variable pay is linked to the value of the Society’s core capital deferred shares (CCDS), details of which have been provided in the Report of the directors on remuneration. For 2018/19, the
Directors’ Performance Award (DPA) was the only variable pay plan in which directors participated. 20% of awards under the DPA is payable in June 2019 with 20% retained until June 2020. The remaining 60% is deferred, payable
between years three and seven following the date of award. 50% of the upfront portion and 60% of the deferred portion is linked to the performance of the Society’s core capital deferred shares (CCDS). These CCDS linked elements
are payable in cash subject to a 12 month retention period. No Directors held securities in Nationwide Building Society during the year.
Annual Report and Accounts 2019
Annual business statement for the year ended 4 April 2019 (continued)
3. Information relating to directors at 4 April 2019 (continued)
Information relating to directors at 4 April 2019
Name and date of birth
Occupation
Date of appointment
Other directorships
Executive Director
1 February 2007
Confederation Mortgage Services Limited
Exeter Trust Limited
First Nationwide
LBS Mortgages Limited
Nationwide Anglia Property Services Limited
Nationwide Housing Trust Limited
Nationwide Investments (No.1) Limited
Nationwide Lease Finance Limited
Nationwide Mortgage Corporation Limited
Nationwide Syndications Limited
NBS Fleet Services Limited
NBS Ventures Management Limited
Staffordshire Leasing Limited
Arkose Funding Limited
Piper Javelin No.1 Limited
Piper Javelin Holding Company Limited
Silverstone Securitisation Holdings Limited
at.home Nationwide Limited
Derbyshire Home Loans Limited
E-Mex Home Funding Limited
Jubilee Mortgages Limited
The Mortgage Works (UK) plc
UCB Home Loans Corporation Limited
The Lending Standards Board Limited
NBS Ventures Management Limited
Executive Director
20 April 2009
M M Rennison
BA (Hons), FCA
9 August 1960
C S Rhodes
BSc (Hons), ACA
17 March 1963
T J W Tookey
BSc (Hons), FCA
17 July 1962
G Waersted
MBA
16 March 1955
252
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Underlying profit
Profit before tax shown on a statutory and underlying basis is set out on page 27. Statutory profit before tax of £833 million has been adjusted to derive an underlying profit before tax of £788 million. The purpose of this measure is to reflect
management’s view of the Group’s underlying performance and to assist with like for like comparisons of performance across periods. Underlying profit is not designed to measure sustainable levels of profitability as that potentially requires
exclusion of non-recurring items even though they are closely related to (or even a direct consequence of) the Group’s core business activities. The components of underlying profit have changed in the period to more accurately reflect
underlying performance. For more information see page 27 of the Financial Review.
Nationwide has developed a financial performance framework based on the fundamental principle of maintaining its capital at a prudent level in excess of regulatory requirements. The framework provides parameters which allow it
to calibrate future performance and help ensure that it achieves the right balance between distributing value to members, investing in the business and maintaining financial strength. The most important of these parameters is
underlying profit which is a key component of Nationwide’s capital. We believe that a level of underlying profit of approximately £0.9 billion to £1.3 billion per annum over the cycle would meet the Board’s objective for sustainable
capital growth. This range will vary from time to time, and whether our profitability falls within or outside this range in any given financial year or period will depend on a number of external and internal factors, including conscious
decisions to provide value to members or to make investments in the business. It should not be construed as a forecast of the likely level of Nationwide’s underlying profit for any financial year or period within a financial year.
Forward looking statements
Certain statements in this document are forward looking with respect to plans, goals and expectations relating to the future financial position, business performance and results of Nationwide. Although Nationwide believes that the
expectations reflected in these forward looking statements are reasonable, Nationwide can give no assurance that these expectations will prove to be an accurate reflection of actual results. By their nature, all forward looking
statements involve risk and uncertainty because they relate to future events and circumstances that are beyond the control of Nationwide including, amongst other things, UK domestic and global economic and business conditions,
market related risks such as fluctuation in interest rates and exchange rates, inflation/deflation, the impact of competition, changes in customer preferences, risks concerning borrower credit quality, delays in implementing
proposals, the timing, impact and other uncertainties of future acquisitions or other combinations within relevant industries, the policies and actions of regulatory authorities, the impact of tax or other legislation and other
regulations in the jurisdictions in which Nationwide operates. The economic outlook also remains unusually uncertain due to Brexit. As a result, Nationwide’s actual future financial condition, business performance and results may
differ materially from the plans, goals and expectations expressed or implied in these forward-looking statements. Due to such risks and uncertainties Nationwide cautions readers not to place undue reliance on such forward-looking
statements.
Nationwide undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.
Non Executive Director
2 June 2015
Westmoreland Court Management (Beckenham) Limited
This document does not constitute or form part of an offer of securities for sale in the United States. Securities may not be offered or sold in the United States absent registration or an exemption from registration. Any public offering
to be made in the United States will be made by means of a prospectus that may be obtained from Nationwide and will contain detailed information about Nationwide and management as well as financial statements.
Non Executive Director
1 June 2017
Telenor ASA (Chair)
Petoro AS (Chair)
Lukris Invest AS
Fidelity International
Saferoad ASA
Glossary
The glossary for Annual Report and Accounts 2019 is available at:
https://www.nationwide.co.uk/about/corporate-information/results-and-accounts
Documents may be served on any of the Directors c/o Addleshaw Goddard, One St Peter’s Square, Manchester M2 3DE.
Directors’ service contracts
Directors’ share options
Executive directors’ terms and conditions of employment are detailed in their individual contracts or service agreements which include a notice period of 12 months from the Society to the individual and a notice period of six months
from the individual to the Society. The notice period offered to any new recruit would be in line with this approach.
A proportion of executive directors’ variable pay is linked to the value of the Society’s core capital deferred shares (CCDS), details of which have been provided in the Report of the directors on remuneration. For 2018/19, the
Directors’ Performance Award (DPA) was the only variable pay plan in which directors participated. 20% of awards under the DPA is payable in June 2019 with 20% retained until June 2020. The remaining 60% is deferred, payable
between years three and seven following the date of award. 50% of the upfront portion and 60% of the deferred portion is linked to the performance of the Society’s core capital deferred shares (CCDS). These CCDS linked elements
are payable in cash subject to a 12 month retention period. No Directors held securities in Nationwide Building Society during the year.
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253
Annual Report and Accounts 2019
Annual Report and Accounts 2019
Index
Accounting policies, Statement of (note 1)
Additional Tier 1 capital (note 32)
Administrative expenses (note 8)
Annual business statement
Audit Committee report
Auditors’ report, Independent
Balance sheets
Board of directors
Board Risk Committee report
Business and Risk Report
Business risk
Capital and leasing commitments (note 28)
Capital management (note 38)
Cash flow statements
Chairman’s letter
Chief Executive’s review
Classification and measurement (note 12)
Commercial and other lending, credit risk
Conduct and compliance risk
Consumer banking, credit risk
Contingent liabilities (note 29)
Core capital deferred shares (CCDS) (note 31)
Corporate governance, Report of the directors on
Credit risk
Customer redress (note 27)
Debt securities in issue (note 18)
Deposits from banks and similar institutions (note 16)
Derivative financial instruments (note 15)
Derivatives and hedge accounting, Gains/losses from (note 7)
Directors, Information relating to
Directors’ report
Directors’ service contracts
Directors’ share options
Employees (note 9)
Fair value hierarchy of financial assets and liabilities held at fair value (note 21)
Fair value of financial assets and liabilities held at fair value – Level 3 portfolio (note 22)
Fair value of financial assets and liabilities measured at amortised cost (note 23)
Fee and commission income and expense (note 5)
Financial review
Financial services compensation scheme (FSCS) (note 27)
Forward looking statements
Glossary
Group Directors
IFRS 9, Adoption of (note 37)
Impairment losses and provisions on loans and advances to customers (note 10)
Income statements
Intangible assets (note 25)
181
235
198
249
59
166
177
36
67
97
160
229
247
180
5
7
207
130
163
124
229
235
43
106
227
216
215
213
195
250
94
251
251
200
219
220
222
194
27
227
252
252
36
242
200
175
225
Interest expense and similar charges (note 4)
Interest receivable and similar income (note 3)
Investments in Group undertakings (note 33)
Investment securities (note 13)
Judgements in applying accounting policies and critical accounting estimates (note 2)
Liquidity and funding risk
Loans and advances to customers (note 14)
Market risk
Model risk
Nomination and Governance Committee report
Non-financial information
Notes to the accounts
Notes to the cash flow statements (note 36)
Offsetting financial assets and financial liabilities (note 24)
Operational risk
Other deposits (note 17)
Other operating income/expense (note 6)
Other equity instruments (note 32)
Pension risk
Principal risks and uncertainties
Property, plant and equipment (note 26)
Provisions for liabilities and charges (note 27)
Registered office (note 39)
Related party transactions (note 35)
Remuneration, Report of the directors on
Residential mortgages, credit risk
Retirement benefit obligations (note 30)
Risk management
Risk overview
Solvency risk
Statements of comprehensive income
Statements of movements in members’ interests and equity
Statutory percentages
Strategic Report
Structured entities (note 34)
Subordinated liabilities (note 19)
Subscribed capital (note 20)
Taxation (note 11)
Top and emerging risks
Treasury assets, credit risk
What have we done to build society this year
Who we are and what we do
194
193
236
208
193
139
208
154
161
75
33
181
240
224
161
216
195
235
159
99
226
227
247
238
81
111
230
103
26
150
176
178
249
2
237
217
218
204
98
135
3
4
If you have hearing or speech difficulties and are a textphone
user, you can call us direct in text on 0800 37 80 01.
We also accept calls via BT Text Relay. Just dial 18001 followed
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Nationwide Building Society
Head Office: Nationwide House, Pipers Way, Swindon, Wiltshire SN38 1NW.
nationwide.co.uk
G101 (A) 2019