RNS Number:1353M
Nationwide Building Society
16 November 2006
Nationwide Building Society
Interim Results Announcement
For the period ended
30 September 2006
CONTENTS
Page
Highlights 3
Business review 6
Consolidated income statement 19
Consolidated balance sheet 20
Consolidated statement of recognised income and expense 21
Consolidated cash flow statement 22
Notes to the Interim Results Announcement 23
Additional information 31
Independent review report 33
Other information 34
Contacts 34
IFRS Underlying Results
These interim results have been prepared using International Financial Reporting
Standards ('IFRS'). Where appropriate, certain aspects of the results are
presented to reflect management's view of the underlying results, to provide a
clearer representation of the performance of the Group.
Profit before tax shown on a reported basis and underlying basis are set out on
page 7. Underlying profit before tax of #306.0m equates to reported profit
before tax of #336.4m adjusted for the deduction of net gains of #32.2m from
derivatives and hedge accounting and the addition of policyholder tax of #1.8m.
HIGHLIGHTS
Nationwide Building Society today announced its results for the half year ended
30 September 2006.
Financial performance
* Underlying profit before tax up 20.1% to #306.0m (30 September 2005 -
underlying #254.8m)
* Record reported profit before tax up 32.1% to #336.4m (30 September
2005 - #254.7m)
* Total assets up 7.5% to #129.6bn (4 April 2006 - #120.6bn)
* Underlying ratio of costs to income down 1.9% to 58.7% (4 April 2006 -
60.6%)
* Net interest margin up 5bps to 1.11% (4 April 2006 - 1.06%), as a result
of a favourable interest rate environment and effective margin management
Member value
* Members have benefited by around #280m through competitive interest rates
and lower fees and charges. In addition to this, profits of #233.4m have
been retained for future growth and investment
* Nationwide appeared in best buy tables 1,075 times between April and
September 2006, across all products
* The Society has refurbished and re-sited over 220 branches and 100 agencies
(over a third of the retail network) since the establishment of its
investment programme to improve access to services for members. The
additional sales space created is equivalent to that from an extra 83
branches
* As a result of the recently announced plans to merge with the Portman
Building Society, 13 million people will be members of a bigger society,
offering market leading products and pricing, underpinned by a strong
commitment to mutuality. The proposed merger will provide members with a
larger network of branches and agencies, improving access to products and
services
Operating highlights
* Lending and banking activities
Residential mortgages
* Nationwide is the UK's fourth largest mortgage lender
* High quality residential gross lending up 34% to #14.5bn (30 September
2005 - #10.8bn). Net lending up almost 50% to #5.9bn (30 September
2005 - #4.0bn). Number of mortgage sales up 17% on the same period in
2005/6. The Society introduced an online mortgage application facility
allowing customers to choose their product, reserve the deal and
complete their mortgage application over the internet
- Nationwide's 3 month + arrears cases are less than one third of the
industry average (0.25% compared to 0.90%, CML - September 2006)
- average loan-to-value (LTV) of new lending 59% (4 April 2006 - 55%)
and seasoned book 39% (4 April 2006 - 39%)
* Nationwide appeared in mortgage best buy tables 272 times between
April and September 2006
Commercial lending
* Commercial gross lending up 67% to a record #3.6bn (30 September 2005
- #2.2bn) and record net lending up 221% to #1.8bn (30 September 2005 -
#0.6bn)
- number of loans 3 months or more in arrears 63 (4 April 2006 - 69), the
lowest level in 10 years
Banking products
* Total current accounts up 8% to 3,936,000 (4 April 2006 - 3,644,000)
* Total credit cards in issue up 10% to 1,346,000 (4 April 2006 - 1,222,000)
* Nationwide appeared in banking products best buy tables 383 times
between April and September 2006
Unsecured lending
* Cautious approach to new lending in a market where credit losses continue
to increase. Net loans broadly unchanged at #1.8bn (4 April 2006 - #1.7bn)
- our share of loans 30 days or more in arrears is 5.4% - 34% below
industry average (Finance and Leasing Association - September 2006)
* Retail savings
- Nationwide is the UK's second largest savings provider
- Retail savings deposits grew to #84.1bn, a 4% increase 4 April 2006
- e-savings balances up 7% to #14.6bn. Number of accounts now exceeds
1 million
- ISA cash balances up 8% to #21.5bn
- new three year loyalty fixed rate bond launched in August 2006 to reward
long term members
- Nationwide appeared in savings best buy tables 106 times between April
and September 2006
* Insurance
* General insurance new covers up 21% to 258,000 (30 September 2005 -
214,000)
- new household insurance product launched July 2006
- insurance income up 16% to #50.4m (30 September 2005 - #43.4m)
* Life and investment products in force up 4% to 953,000 (4 April 2006 -
915,000)
- relaunch of life insurance protection product in May 2006
- number of life insurance sales up 14% from the same period in 2005/6
* Balance sheet growth
* Nationwide is the world's largest building society with total assets
of #129.6bn, up 7.5% from 4 April 2006
- risk weighted assets grew by 7.2% from 4 April 2006 to #68.2bn
* Reserves up 3.5% to #5.2bn and total regulatory capital up 2.5% to
#7.2bn from 4 April 2006
- tier 1 capital ratio 8.5% (4 April 2006 - 8.8%)
- total capital ratio 10.5% (4 April 2006 - 11.0%)
Social responsibility
* The Society funds its own charity, the Nationwide Foundation, to offer
support to those in need in the UK, focussing on social exclusion -
Society donations to date exceed #24m
* Over #250,000 raised for Macmillan, our employee nominated charity,
during the period
* Nationwide is the main sponsor of Disability Sport Events in a deal
worth #1m over seven years and raised #100,000 for the charity by
encouraging voting at this year's AGM
* The Society switched to renewable energy sources for its electricity,
resulting in lower carbon dioxide emissions from its buildings
* Over 10 million Cats Eyes for Kids (branded reflectors) donated to
primary school pupils since 2001
* Local Heritage Initiative funding supported more than 1,400 local
projects involving 1.5m people in a six year programme that concluded in
September 2006
* Nationwide Awards for Voluntary Endeavour have recognised 1,400
individuals and groups this year
Franchise
* Nationwide has recently announced renewed agreements to be the Official
Team Sponsor for the England, Wales and Northern Ireland Football teams
and an Official Partner of the Scotland Football team
* Sponsorship of the Nationwide Mercury Prize for music and the Nationwide
Mercury Prize Art Competition is in its third year
* Nationwide achieved third position in Sunday Times 20 Best Big Companies
to work for 2006 with a special award for "Giving Something Back" and
further nominations for "Best for Leadership", "Wellbeing" and "Work and
Home Life Balance". In addition, Nationwide was accredited by Sunday
Times Best Big Companies to work for with its top three star rating,
demonstrating high levels of engagement with staff. Nationwide is
recognised as an Investors in People Champion, an accolade given to
organisations that are innovative, inspirational and willing to share
best practice with others
* Nationwide has won over 40 awards in the last twelve months including:
- Your Mortgage Awards 2005/6 - Best Building Society; Best First Time
Buyer Mortgage Lender; Best Remortgage Lender; Best Self Employed
and Best Buy to Let Mortgage Lender (UCB Home Loans)
- Financial Adviser Awards 2005 - Mortgages 5 star winner (UCB Home
Loans)
- Financial Advisor Awards 2005 - Building Society of the Year,
Mortgage Lender of the Year
- Your Money Magazine Awards 2006 - Best Financial Services Provider;
Best Savings Provider; Best Online Credit Card
- Service Category Award at the Human Capital Awards sponsored by the
CBI
- Count Me In Award from English Federation of Disability Sport for
commitment to develop opportunities for disabled people to access
sport and physical activity
Philip Williamson, Chief Executive, said: "It has been an outstanding first half
to this financial year. We have delivered substantial benefits to members and
our profits are higher than ever before. We are providing consumers with a real
alternative to the banks. Our reputation for providing great value products and
services has been underlined by the fact that we have appeared in best-buy
tables on no less than 1,075 occasions in the half-year.
"In a competitive mortgage market, we have achieved very high levels of lending
with gross residential lending of #14.5bn, up 34% on the corresponding period
last year. Developments such as our online mortgage application facility will
help us maintain momentum in residential mortgage lending. Commercial lending
has performed particularly strongly, increasing by 67% to #3.6bn. We have
achieved this growth while maintaining our focus on quality business.
"In the UK retail savings market we have once again proved to be a very popular
choice for savers. We have continued to see a very high level of current
account openings - more than 1 in 10 of all new current accounts opened in the
UK are with Nationwide. Our share of the credit card market has also increased.
"We continue to invest heavily in upgrading our branches and have recruited an
extra 350 people into our branch network and UK call centres.
"This is my last results announcement as chief executive before handing over the
reins to Graham Beale. Nationwide, as a thriving mutual business, is in superb
shape. We are extremely well placed to meet the challenges ahead. These are
exciting times for the Society, particularly as we prepare for the forthcoming
merger with the Portman and I have no doubt that our members will continue to
prosper under the new management team."
BUSINESS REVIEW
OVERVIEW
We operate as a retailer of a broad range of personal financial services
products to provide maximum value to our membership through better pricing and
an excellent service delivered using an efficient distribution and support
infrastructure.
The success of this strategy is evidenced by our delivering a broad range of
financial services products to our members whilst increasing our underlying
profit before tax to #306.0m, an increase of 20.1% compared with 30 September
2005 underlying results of #254.8m. This resulted in #233.4m profit (30
September 2005 - #175.3m) being retained in the business for future growth and
investment. At the same time we also generated around #280m in the form of
pricing benefit to our members by offering better rates and by charging lower
fees and charges than our competitors.
We have performed well in a highly competitive mortgage market. We have
maintained our focus on prime quality residential loans, achieving net advances
of #5.9bn up almost 50% on the same period in 2005/06. We achieved a market
share of 10.5%, above our par share of 8.9%. The quality of our residential
mortgage book remains high and the incidence of arrears continues to be less
than one third of the industry average (CML - September 2006). The average loan
to value of the residential book remains at 39%.
Our funding is primarily from retail members. We have maintained our position
as number two retail savings provider in the UK with balances growing by #3.2bn,
representing an 8.7% market share, slightly below our par share.
We continued to increase our share of the current account and credit card
markets. Our market share of new current account openings in the UK is over
10%.
We are now over two years into the #300m six-year programme to improve access by
phone, post, on-line or through our network of branches and agencies. So far,
over 220 branches and 100 agencies (over a third of the retail network) have
been refurbished. The additional sales space created is equivalent to that from
an extra 83 branches. In addition to this investment in infrastructure, we are
investing #100m over the next five years in our front line employees including
recruiting an extra 350 people into our branch network and call centres.
Profit before tax on a reported basis and underlying basis are set out as
follows:
30 September 2006 As reported Derivatives Policyholder tax Underlying
and hedge
accounting
#m #m #m #m
Net interest income 679.4 - - 679.4
Other income net of claims on insurance contracts 198.7 - 1.8 200.5
Gains from derivatives and hedge accounting 32.2 (32.2) - -
Total income net of claims on insurance contracts 910.3 (32.2) 1.8 879.9
Administrative expenses 454.7 - - 454.7
Depreciation and amortisation 61.5 - - 61.5
Impairment losses on loans and advances to customers 56.3 - - 56.3
Provisions for liabilities and charges 4.9 - - 4.9
Impairment gains on investment securities (3.5) - - (3.5)
Profit before tax 336.4 (32.2) 1.8 306.0
30 September 2005 As reported Derivatives Policyholder tax Underlying
and hedge
accounting
#m #m #m #m
Net interest income 592.3 - - 592.3
Other income net of claims on insurance contracts 186.0 - (6.2) 179.8
Losses from derivatives and hedge accounting (6.3) 6.3 - -
Total income net of claims on insurance contracts 772.0 6.3 (6.2) 772.1
Administrative expenses 416.3 - - 416.3
Depreciation and amortisation 58.1 - - 58.1
Impairment losses on loans and advances to customers 34.5 - - 34.5
Provisions for liabilities and charges 8.4 - - 8.4
Impairment gains on investment securities - - - -
Profit before tax 254.7 6.3 (6.2) 254.8
4 April 2006 As reported Derivatives Policyholder tax Underlying
and hedge
accounting
#m #m #m #m
Net interest income 1,234.3 - - 1,234.3
Other income net of claims on insurance contracts 410.3 - (8.9) 401.4
Gains from derivatives and hedge accounting 10.9 (10.9) - -
Total income net of claims on insurance contracts 1,655.5 (10.9) (8.9) 1,635.7
Administrative expenses 873.7 - - 873.7
Depreciation and amortisation 117.5 - - 117.5
Impairment losses on loans and advances to customers 76.6 - - 76.6
Provisions for liabilities and charges 32.1 - - 32.1
Impairment gains on investment securities (3.6) - - (3.6)
Profit before tax 559.2 (10.9) (8.9) 539.4
PERFORMANCE BY BUSINESS STREAM
Nationwide operates three main business streams as follows:
* Personal financial services
Mortgages, savings, banking, consumer lending, general insurance, life
insurance and investment business.
* Commercial
Commercial lending and Treasury income generation activities together with
at.home nationwide ltd, the Society's former residential letting subsidiary.
* Group
Treasury group operations, capital and items classified as being
non-attributable to our core business areas.
The contribution to underlying profit before tax against underlying comparatives
by each of these business streams is set out in the table below.
Contribution before tax
Period to Period to Growth Year to
30 September 30 September 4 April
2006 2005 2006
Underlying Underlying Underlying
#m #m % #m
Personal financial services 149.1 104.8 42.3 270.9
Commercial 99.9 100.2 (0.3) 194.2
Group 57.0 49.8 14.5 74.3
Total 306.0 254.8 20.1 539.4
PERSONAL FINANCIAL SERVICES (PFS) BUSINESS STREAM
Period to Period to Growth Year to
30 September 30 September 4 April
2006 2005 2006
Underlying Underlying Underlying
#m #m % #m
Net interest income 502.3 425.6 18.0 921.3
Other income 175.3 153.8 14.0 351.8
Total income 677.6 579.4 16.9 1,273.1
Expenses 468.3 428.7 9.2 896.2
Impairment and other provisions 60.2 45.9 31.2 106.0
Contribution from PFS 149.1 104.8 42.3 270.9
The underlying contribution from the PFS business stream increased by 42.3% to
#149.1m which represents just under half of the Group's total contribution. All
of the pricing benefit given to our members is delivered through this business
stream which reduces its relative contribution.
Net interest income increased by 18.0% reflecting the increase in lending and
deposit balances, effective interest rate management and the beneficial interest
environment.
Other income increased by 14.0% and comprised income earned from insurance
products and administration and transaction fees.
Expenses increased by 9.2% reflecting growth in volumes, particularly high
transaction products such as our credit card and current account.
Unsecured loan impairment charges increased to #55.2m (2006 - #35.9m) reflecting
increased delinquency experienced across the whole market. However, unsecured
asset quality continues to compare favourably with the industry. Secured
impairment charges remained minimal for the half year reflecting our high
quality lending policy.
Lending
Loans and advances to customers total #109.1bn, an increase of 7.6% on the
position at the last year end. Of this total, #92.8bn, (85%) relates to retail
lending activity.
The composition of our PFS lending continues to be low risk. At 30 September
2006, the composition remains unchanged from that at the year end with 95% of
our PFS lending being residential mortgages, 2% buy-to-let mortgages, 2%
unsecured personal loans with the balance of 1% lending on overdrafts and credit
cards. This mix is not expected to change significantly going forward.
UK residential mortgage market
A strengthening housing market in the first half of 2006/7 provided a boost to
mortgage lending. Above trend house purchase levels, supported by increased
buy-to-let activity, along with continued house price growth gave a lift to
gross lending. The value of total market gross advances increased by an
estimated 20% in the first half compared with the same period a year earlier.
Despite growing affordability pressures, first-time buyer numbers held up
relatively well, accounting for 36% of all house purchase transactions. This
combined with continued equity withdrawal by home movers and remortgagers, led
to a pick up in net lending, which also grew by an estimated 20% in the first
half of the year compared with the first half of 2005/6.
UK residential mortgages - Nationwide performance
During the period, we have consolidated our position as the UK's fourth largest
mortgage lender. Total gross lending was up 34% to #14.5bn (30 September 2005 -
#10.8bn), an estimated market share of 8.2% (30 September 2005 - 7.3%). Net
lending was up almost 50% to #5.9bn (30 September 2005 - #4.0bn) an estimated
market share of 10.5% (30 September 2005 - 8.3%) taking total residential
mortgage balances to #90.1bn. As well as the strong performance on gross
advances, net advances have benefited from our highly successful record in
retaining borrowers with maturing fixed rate and tracker rate mortgage products.
Our 7.2% (30 September 2005 - 6.9%) market share of principal repaid in the
Group was below our mortgage par share of 8.9%. This success in retaining
mortgage customers is due to our policy of actively engaging with customers
before the end of their product's term together with our attractive and
competitive range of products. The success of the half year is evidenced by the
Group achieving record gross advances of #3.1bn in August and it starts the
second half year with a healthy pipeline of #8.3bn of new business yet to
complete.
During the half year, competition for new mortgages has been fierce. The Society
has run two high profile marketing campaigns over the last 6 months and has also
implemented a number of changes to its range of mortgage products. These have
included the introduction of a very low rate 2-year fixed product with a higher
reservation fee designed to be attractive to customers coming to the Society
through intermediaries and via our retail network alike. We have introduced an
online mortgage application facility allowing customers to choose their product,
reserve the deal and complete their mortgage application over the internet. Our
mortgage initiatives contributed to a 17% increase in number of mortgage sales
over the same period in 2005/6 and also led to us appearing in mortgage best buy
tables 272 times. The Society is also one of three lenders supporting the
government's shared Open Market Homebuy scheme for key workers which was
launched on 2 October 2006.
The profile of our new lending has remained low risk. Based on value, the
proportion of lending to first time buyers has increased to 21% (4 April 2006 -
15%). 76% (4 April 2006 - 82%) of new lending was in respect of next time
buyers, remortgage and further advances with the borrowers having a proven
payment track record. Only 3% (4 April 2006 - 3%) was in respect of buy to let.
Our prudent lending to creditworthy customers is demonstrated by continuing high
asset quality. The average loan to value (LTV) of the residential book has
remained at 39% (4 April 2006 - 39%) and new lending has averaged 59% (4 April
2006 - 55%). The overall proportion of mortgages 3 or more months in arrears as
a proportion of the book is 0.25% (4 April 2006 - 0.28%) compared to the
September 2006 CML average of 0.90% (30 March 2006 - 0.97%).
Current accounts
FlexAccount, the Society's current account, continues to be a key product in
developing and retaining customer relationships. We offer a highly competitive
account with a range of good value features including a market leading rate of
up to 4.25% credit interest and no charge for overseas transactions.
The total number of Nationwide current accounts grew by 8% over the half year to
3,936,000 (4 April 2006 - 3,644,000).
Credit cards
The Society continues to differentiate its credit card in a competitive market
place by promoting the benefits of not charging for international use and
allocating payments to clear the most expensive debt first.
Total credit card market gross lending has continued to fall throughout the
first half year and is 5% down on the same period last year. Despite this
slowing market we achieved gross lending of #1.3bn (30 September 2005 - #1.1bn)
and issued 124,000 new credit card accounts (30 September 2005 - 133,000). The
total number of accounts in issue broke through the 1 million mark in May and
ended the half year at 1,067,000 (4 April 2006 - 974,000) with the total number
of cards in issue up 10% to 1,346,000 (4 April 2006 - 1,222,000). Balances
outstanding on credit cards at the end of the half year amounted to #741m (4
April 2006 - #670m).
As with other forms of unsecured lending, there has been an increase in the
impairment charge in line with industry-wide credit experience. However, asset
quality compared with the industry remains very favourable with the value of
accounts 30 days or more in arrears as a percentage of the book being 7.5% (4
April 2006 - 6.9%). This is around 30% lower than the average for members of
APACS.
Personal loans
Personal loans are offered through the Society's personal loans subsidiary,
Nationwide Trust Limited. Gross unsecured personal loan lending was #0.6bn (30
September 2005 - #0.7bn). The reduction reflected our cautious approach to new
lending in a market where credit losses continue to increase. Nationwide Trust
has in excess of 300,000 unsecured personal loan customers, a 3% decrease on the
position at the end of the last financial year. The average loan size has
increased, however, so that loans outstanding are broadly unchanged at #1.8bn (4
April 2006 - #1.7bn).
We continue to maintain prudent lending criteria employing the use of credit
scoring, affordability and indebtedness rules as part of our assessment of
whether to lend or not. This process results in approximately one in every two
unsecured loan applications received being rejected. Most of our borrowers are
'known to Nationwide' with over three quarters already being members or
customers of the Group.
In line with industry-wide credit experience, we have seen increases in the
impairment charge on our personal loan book. However, lending criteria have been
tightened recently and the continuing high levels of asset quality are
demonstrated by the ratio of the value of loans 30 days or more in arrears as a
percentage of the total book being 5.4% (4 April 2006 - 4.6%). This is around
34% lower than the average for members of the Finance and Leasing Association.
Savings and investments
UK savings and investments market
UK retail savings balances increased by 3.9% in the first half of 2006/7
compared with the same period last year. The growth in balances was supported
by relatively strong retail savings rates as lenders continued to compete for
funds. A stable economic and labour market background has also played a role.
Volatility in global equity markets in the early part of the financial year does
not seem to have dented the attractiveness of equity based savings products.
UK savings and investments market - Nationwide performance
The Society remains the UK's second largest savings provider. We have taken a
balanced approach to raising retail funds achieving an 8.7% (30 September 2005 -
12.4%) share of the overall increase in UK retail savings. This represents a
#3.2bn, or 4%, increase in our members' savings balances over the half year with
total retail member deposits as at 30 September 2006 amounting to #84.1bn (4
April 2006 - #80.9bn). Member savings represent our primary source of funding.
Our highly popular e-Savings, cash Individual Savings Account (ISA) and Monthly
Income 65+ products drove the bulk of net receipts generating #2.7bn (30
September 2005 - #3.4bn). The Society's new three year loyalty fixed rate bond,
which was launched in August 2006, was also popular, attracting over #0.5bn of
net receipts by the end of the half year. These products have contributed to our
106 mentions in savings best buy tables during the period.
The Society, through its wholly owned subsidiary Nationwide Unit Trust Managers
Limited (NUTM), offers a range of investment products including unit trusts and
equity ISAs. At 30 September 2006 our range of unit trust based investment
products held by our customers had a market value of over #2.6bn (4 April 2006 -
#2.5bn). Sales of the Target Return Fund were particularly strong in the first
half year. This fund was the fifth best selling ISA fund in the UK in the first
quarter of our financial year and the High Income Fund was the third best
selling ISA Corporate Bond fund over the same period.
The Society also sells investment products through its wholly owned subsidiary,
Nationwide Life Limited (NL). NL provides guaranteed equity bonds, sales of
which were up 34% on the comparable half-year period for 2005/6.
Insurance
The major development in the Society's range of general insurance products over
the half year was the launch of a new home insurance product in July. This new
product is designed to meet our members' needs having improved cover and
pricing, supported by an enhanced sales process. During the half year, around
170,000 (30 September 2005 - 100,000) home insurance products were sold. In
total, sales were up 21% to 258,000 new covers (30 September 2005 - 214,000)
over the half year and the book stood at over 1.6 million (4 April 2006 - 1.5
million) covers at the end of the half year.
We have continued to use leading insurers as third-party underwriters and the
commission and profit share we receive is an important source of non-interest
income. Over the half year insurance income was up 16% to #50.4m (30 September
2005 - #43.4m).
The Society also writes a range of insurance products through Nationwide Life
Limited (NL), including life insurance and critical illness cover. A major
relaunch of protection products was staged in May throughout the retail network.
This resulted in a 14% increase in number of sales during the six months to 30
September 2006, with 42,000 life policies being sold (30 September 2005 - 37,000
policies).
Pricing benefit
The estimated pricing benefit is calculated by comparing the price of each of
our products (including interest rates, fees and charges) with the equivalent
products of our main competitors. During the half year we generated pricing
benefit of around #280m (30 September 2005 - #350m) by offering better rates and
by charging lower fees and charges than our competitors.
Distribution channels
We are continuing the #300m, six year investment programme announced in 2004 to
develop a modern business and to ensure that our branch, telephones and other
access channels are maintained at the standards expected by our members. This
programme is going very well with a number of technology investments having
already been successfully deployed and over 220 branches and 100 agencies
refurbished or re-sited since its inception. The additional sales space created
is equivalent to that from an extra 83 branches. To allow our customers to do
business, when and how they wish, we have continued our investment in UK call
centres and have added 125 jobs into our newly opened facility in Wakefield. All
of our call centres remain in the UK. In addition to the investment in physical
infrastructure we are also progressing well with our investment in front facing
branch employees with over 800 people promoted and an extra 100 people being
deployed to strengthen our sales and service proposition.
COMMERCIAL BUSINESS STREAM
Period to Period to Growth Year to
30 September 30 September 4 April
2006 2005 2006
#m #m % #m
Net interest income 97.6 95.2 2.5 199.6
Other income 20.5 21.8 (6.0) 37.3
Total income 118.1 117.0 0.9 236.9
Expenses 20.7 19.7 5.1 43.6
Impairment and other provisions (2.5) (2.9) (13.8) (0.9)
Contribution from Commercial 99.9 100.2 (0.3) 194.2
The underlying contribution from the commercial business stream decreased by
0.3% to #99.9m, largely as a result of continued pressure on margins. This
represents around a third of the Group's total contribution. The commercial
loan book continues to be high quality, with record levels of gross lending
achieved in the year. Underlying contribution from investment assets held by
Treasury, also included in this business stream, was #9.5m (30 September 2005 -
#8.4m) an increase of 13.1%.
Commercial lending
Commercial lending is an established part of our business and of our total loans
and advances to customers of #109.1bn, #16.3bn (15%) is in respect of commercial
lending.
The composition of our commercial portfolio at 30 September 2006 was 31% to UK
Registered Social Landlords, 6% to support Private Finance Initiatives and the
balance of 63% secured on other commercial property. Loans to Registered Social
Landlords are secured on residential property. Loans advanced under Private
Finance Initiatives are secured on cash flows from Government backed contracts.
Commercial property loans are secured against properties supported by strong
cash flows and tenant covenants. In addition loans are well diversified by
industry type and geographic location. There is no speculative lending and no
development finance. In terms of counterparty concentration, the largest single
borrower represents only 1.5% of the total commercial book. We remain the lender
with the largest volume of funding commitments to Registered Social Landlords.
Gross commercial lending in the period totalled #3.6bn (30 September 2005 -
#2.2bn) representing an increase of 67%. Redemptions have been contained,
resulting in a 221% increase in net lending to #1.8bn (30 September 2005 -
#0.6bn).
Asset quality remains strong. Commercial lending arrears levels of three months
or more have improved from 69 cases at 4 April 2006 to 63 cases at 30 September
2006, the lowest level in 10 years.
at.home nationwide
at.home was the Society's residential letting subsidiary. The subsidiary
represented a non-core, non strategic activity and it was decided to dispose of
the business. The disposal of the majority of at.home's property portfolio was
completed in July 2006. The contribution from at.home nationwide, including the
gain on disposal, was #8.5m (30 September 2005 - #6.0m).
GROUP BUSINESS STREAM
Period to Period to Growth Year to
30 September 30 September 4 April
2006 2005 2006
#m #m % #m
Net interest income 79.5 71.5 11.0 113.4
Other income 4.7 4.2 14.6 12.3
Total income 84.2 75.7 11.2 125.7
Expenses 27.2 25.9 5.0 51.4
Contribution from Group 57.0 49.8 14.5 74.3
Contribution from the Group business stream was #57.0m (30 September 2005 -
#49.8m). The contribution from this business stream includes the contribution
derived from capital held for regulatory purposes in excess of that allocated to
other business streams, on the basis of an economic capital assessment, together
with other elements of contribution that cannot be allocated directly to
business streams. It also includes contribution from the Group's Treasury
operations, excluding the contribution from assets held solely for investment
purposes which is included in the contribution from the Commercial business
stream.
Liquidity
Liquidity balances totalled #16.7bn at 30 September 2006 (4 April 2006 -
#14.7bn) representing a prudential liquidity ratio of 10.3% (4 April 2006 -
10.0%).
We continue to have no exposure to emerging markets. 93.8% of our Treasury
investment portfolio comprised assets which are rated single A or better.
Wholesale funding
Total wholesale funding increased by #5.7bn. At 30 September 2006, wholesale
balances stood at #34.9bn (4 April 2006 - #29.2bn) representing a funding ratio
of 29.3% (4 April 2006 - 26.6%). This is one of the lowest levels of wholesale
funding of organisations of comparable size and provides significant headroom
for additional funding in the future in addition to our retail deposit taking
activities.
The Society has continued to enjoy a strong appetite from wholesale funding
investors and has operated successful Medium Term Note programmes in the Dollar,
Euro and Sterling markets.
Our short and medium term credit ratings from the major rating agencies have
remained stable during the year. They are as follows:
Short term Long term
Fitch IBCA F1+ AA-
Moody's P-1 Aa3
S&P A-1 A+
PERFORMANCE BY INCOME STATEMENT CATEGORY
Profit
A Summary Income Statement is as follows:
Period to Period to Growth Year to
30 September 30 September 4 April
2006 2005 2006
#m #m % #m
Net interest income 679.4 592.3 14.7 1,234.3
Other income 200.5 179.8 11.5 401.4
Total income 879.9 772.1 14.0 1,635.7
Expenses 516.2 474.4 8.8 991.2
Impairment and other provisions 57.7 42.9 34.5 105.1
Underlying profit before tax 306.0 254.8 20.1 539.4
Derivatives and hedge accounting 32.2 (6.3) 611.1 10.9
Policyholder tax (1.8) 6.2 (129.0) 8.9
Reported profit before tax 336.4 254.7 32.1 559.2
The Group has seen a strong growth in underlying profit before tax of 20.1% to
#306.0m compared with the period ended 30 September 2005. The increase in
profit was consistent with our strategy of retaining sufficient profit to allow
continued investment in the business and to support its future growth.
On a reported basis, profit before tax has increased 32.1% to #336.4m from
#254.7m for the same period in 2005/6. However, the reported 30 September 2006
profit includes fair value gains from derivatives and hedge accounting (#32.2m)
and policyholder tax (#1.8m). Management's view is that a comparison of
like-for-like underlying results provides the best measure of performance.
Net interest income
Net interest income is earned on a combination of our PFS and Commercial
products together with interest income from activity within Treasury.
Net interest income increased by 14.7% to #679.4m for the half year compared
with the same period last year. A beneficial interest rate environment and
effective margin management throughout the half year has increased the net
interest margin by 5 basis points to 1.11% (4 April 2006 - 1.06%).
Throughout the current half year we have had a LIBOR denominated net asset
exposure of approximately #29bn which benefited from LIBOR being an average of
22 basis points higher than base rate. This differential was 13 basis points
higher than last year and its impact represented 3 of the 6 basis points
increase in the net interest margin.
Other income
Other income primarily comprises income earned from the sale and manufacture of
insurance products together with administration and transaction fees not
included within interest margin. During the half year underlying other income
increased by 11.5% to #200.5m compared with 30 September 2005 underlying
results. Income in the period was also boosted by the contribution, including
the gain on disposal, of #8.5m from at.home nationwide, the Society's
residential letting subsidiary.
Expenses
Period to Period to Growth Year to
30 September 2006 30 September 4 April
2005 2006
#m #m % #m
Expenses
Employee costs:
* Wages and salaries 187.5 168.8 11.1 348.7
* Social security costs 13.8 14.8 (6.7) 29.6
* Pension costs - defined benefit plans 45.6 39.9 14.3 81.1
246.9 223.5 10.5 459.4
Other administrative expenses 207.8 192.8 7.8 414.3
Depreciation and amortisation 61.5 58.1 5.9 117.5
516.2 474.4 8.8 991.2
Total expenses amounted to #516.2m representing an increase of 8.8% over the
period ended 30 September 2005. This increase compares with a rise in
underlying total income of 14.0%.
Total expenses include increased costs arising from the continued investment in
our customer service improvement programme and retailing proposition, including
the recruitment of an extra 350 people into our branch network and UK call
centres. Whilst increasing costs in the current year, these initiatives will
continue to improve our retailing capacity and ensure continued future income
growth.
Our cost to mean total asset ratio remained unchanged from the last half year at
0.84% and the underlying cost to income ratio, one of our principal measures of
efficiency, improved by 1.9% to 58.7% (4 April 2006 - 60.6%).
Impairment losses on loans and advances and other provisions
Period to Period to Growth Year to
30 September 30 September 4 April
2006 2005 2006
#m #m % #m
Secured lending 1.1 (1.4) 178.6 2.9
Unsecured lending 55.2 35.9 53.8 73.7
Customer redress 4.9 8.4 (41.7) 32.1
Treasury investments (3.5) - N/A (3.6)
57.7 42.9 34.5 105.1
Our high quality lending policy has again resulted in a minimal impairment
charge arising from secured lending.
In line with other lenders offering unsecured products, we have experienced an
increase in the impairment charge driven by a higher level of write offs and the
balances of accounts moving into arrears. However, at 6.0% (April 2006 - 5.3%),
arrears as a percentage of the unsecured books remain around 30% lower than
industry averages with our increase being due to the seasoning of the book.
The charge from customer redress primarily relates to the estimated cost of all
current and estimated future endowment review claims.
Following an improvement in the credit quality of available for sale investment
securities a reversal of a previous impairment loss has been recognised
resulting in a #3.5m credit from treasury investments.
Derivatives and hedge accounting
All derivatives entered into by Nationwide are recorded on the balance sheet at
fair value with any fair value movements being taken to the income statement.
Derivatives are only used to limit the extent to which the Group will be
affected by changes in interest rates, exchange rates or other factors specified
in building society legislation. Derivatives are therefore used exclusively to
hedge risk exposures and are not used for speculative purposes.
Where effective hedge accounting relationships can be established, the movement
in the fair value of the derivative instrument is offset in full or in part by
opposite movements in fair value of the underlying asset or liability being
hedged. Any ineffectiveness arising from different movements in fair value will
trend to zero over time so any recorded ineffectiveness is excluded from
underlying results in that accounting period.
In addition, we enter into certain derivative contracts which although efficient
economically cannot be included in effective hedge accounting relationships.
Consequently, although the implicit interest cost of the underlying instrument
and associated derivatives are included in "Net interest income" in the income
statement, fair value movements on such derivatives are included in "Gains from
derivatives and hedge accounting". These fair value movements are therefore also
excluded from underlying results as they will not be realised in cash terms.
Accordingly #32.2m gains from derivatives and hedge accounting has been deducted
to arrive at underlying profit. In future periods if net losses are recorded
these will similarly be added in calculating underlying profit.
Policyholder Tax
As a result of the requirement to consolidate the Group's life business on a
line by line basis, the income statement includes amounts attributable to
policyholders which affect profit before tax, the most significant of which is
policyholder tax. Tax on policyholder investment returns is included in the
Group's tax charge rather than being offset against the related income. In
order to provide a clearer representation of the performance of the Group, these
items have been offset in underlying results.
Taxation
The effective rate of tax was 30.6% (4 April 2006 - 29.0%) compared with the
standard rate of corporation tax of 30%. Stripping out the life assurance
subsidiary, the effective rate of tax was 30.9% (4 April 2006 - 27.9%).
CAPITAL STRUCTURE
Regulatory capital stood at #7.2bn (4 April 2006 - #7.0bn) with the Group's
total solvency ratio remaining strong at 10.5% (4 April 2006 - 11.0%). The Tier
1 solvency ratio stood at 8.5% (4 April 2006 - 8.8%). Both ratios remain well
in excess of the minimum established by the Society's Regulator.
At At 30 September At 4 April
30 September 2005 2006
2006
#m #m #m
Tier 1
General reserve 5,014.1 4,564.5 4,825.6
Permanent interest bearing shares (note i) 700.0 700.0 700.0
Pension fund net deficit add back (note ii) 161.5 152.3 126.0
Intangible assets (84.0) (44.9) (80.5)
5,791.6 5,371.9 5,571.1
Tier 2
Revaluation reserve 117.0 103.0 117.0
Subordinated debt (note i) 1,441.1 1,463.5 1,484.0
Collective impairment allowance 158.5 150.2 145.2
1,716.6 1,716.7 1,746.2
Deductions 347.5 322.2 333.7
Total capital 7,160.7 6,766.4 6,983.6
Risk weighted assets (#bn) 68.2 61.1 63.6
Tier 1 ratio (%) 8.5 8.8 8.8
Total capital (%) 10.5 11.0 11.0
Tier 2 to Tier 1 ratio (%) 29.6 32.0 31.3
Notes
(i) Permanent interest bearing shares and subordinated debt exclude any fair
value adjustments arising from micro hedging that are included in the
consolidated balance sheet.
(ii) The regulatory capital rules allow the pension fund deficit to be added
back to regulatory capital and a deduction taken instead for an estimate of the
additional contributions to be made in the next 5 years, less associated
deferred tax.
Nationwide continues to invest in its systems and processes as part of its
preparations for Basel II. We remain of the view that the Internal Ratings
Based approach offered under the Accord provides potential for a reduction in
our regulatory capital position. Basel II commences on 1st January 2007 and is
fully implemented on 1st January 2008.
PENSION FUND (RETIREMENT BENEFIT OBLIGATIONS)
The majority of Group employees are members of the Nationwide Pension Fund (the
Fund). The Group operates both Final Salary and Career Average Revalued
Earnings (CARE) defined benefit arrangements.
The valuation of the Fund at 30 September 2006 resulted in a deficit of #288.0m
(31 March 2006 - #283.0m) using the methodology set out in IAS 19. Our total
retirement benefit liability under IAS 19, including other schemes, is #299.1m
(4 April 2006 - #294.2m). On an actuarial basis the Fund deficit is estimated
at around #100m (4 April 2006 - #100m). We have been actively managing this
deficit and have taken a number of steps to contain and reduce the deficit over
time:
* Final Salary arrangements closed to new members since December 2001
* Employee contributions (final salary arrangements) increased from 5% to 7%
* A series of three special contributions of #50m to be paid in the period
2005/06 - 2006/07
* The trustees have worked closely with their advisors to optimise the
investment strategy for the Fund's assets.
We will continue to review our options to manage the Fund in a timely and
responsible way such that the deficit is reduced to a neutral position over the
next ten years.
OUTLOOK
During the first half of 2006/7 the economy continued to strengthen. However, a
combination of factors including increased high street spending and higher oil
price rises led to increased inflation and a quarter point increase in the Bank
of England base rate in August 2006. While oil prices subsequently reduced,
inflation did not fall sufficiently to prevent a second quarter point rise in
November 2006. In spite of increased interest rates, we expect the economy to
remain fairly robust during the rest of the financial year. A strong labour
market where increases in employment have been outstripped by increased
participation in the workforce seems to be containing further crucial wage
inflation and could mean that rates will peak at 5%.
The Nationwide Consumer Confidence Index continued to be a useful barometer of
consumers' feelings about the economy, jobs and incomes. During the first half
of 2006/7, consumers' confidence was, on the whole, weaker than in the same
period last year, but is now showing some signs of recovery. Following the
increase in interest rates in August, confidence dipped to an all time low for
the index, but the survey indicated that consumers have remained fairly positive
about employment - a pattern which has been borne out in the official economic
data.
The Nationwide House Price Index showed the rate of house price growth
accelerated in the six months to September 2006. Annual house price inflation
reached 8.2% in September compared with only 5.3% in March. Strong demand pushed
house prices up further than we anticipated this time last year. Buy-to-let
demand, fuelled by both high levels of immigration and worsening affordability
for first-time buyers, played a significant role in this performance. We expect
market conditions to cool as a result of deteriorating affordability, rising
interest rates and moderating expectations of future house price growth. House
prices will, however, be supported into 2007 by continued robust economic
performance, a strong labour market and the slow rate of housing supply growth.
A stronger housing market in the first half of 2006/7 provided a boost to
mortgage lending. Above trend house purchase levels, together with continued
house price growth led to increased gross lending in spite of growing
affordability pressures. As a result we now expect gross lending in the 2006/7
financial year to be around #320 billion and net lending around #97bn .
We do not expect a significant increase in residential arrears and possessions
as a result of the reasonably robust economic and labour market outlook, despite
high levels of debt.
Unsecured lending is weaker than earlier years primarily due to reduced credit
card borrowing as lenders withdrew free balance transfer deals across the
market. Personal loan lending has slowed only modestly. Higher interest rates
and tighter credit criteria mean we expect credit card and personal loan net
lending to be lower than 2005/6 at around #1bn and #8.5bn respectively.
We will continue to work hard to deliver another set of outstanding results and
to provide our members with greater value and excellent service. We will
continue to seek further improvement in our efficiency and maintain stringent
control over asset quality. In particular we are reviewing a number of
initiatives to improve our capacity and capability to reduce overall costs and
improve income. These should lead to the delivery of increased profits for the
full year while maintaining the distribution of substantial pricing benefits to
our members.
Graham Beale
Group Finance Director
15 November 2006
CONSOLIDATED INCOME STATEMENT
For the period ended 30 September 2006
Period to Period to Year ended
30 September 30 September 4 April
2006 2005 2006
Notes (Unaudited) (Unaudited) (Audited)
#m #m #m
Interest receivable and similar income 2 3,111.5 2,809.0 5,799.9
Interest expense and similar charges 3 2,432.1 2,216.7 4,565.6
Net interest income 679.4 592.3 1,234.3
Fee and commissions income 153.4 133.7 309.3
Fee and commissions expense (1.9) (2.3) (2.9)
Premiums on insurance contracts and fair
value gains on insurance assets 4 97.4 131.6 278.9
Income from investments 4.4 7.1 7.9
Other operating income 22.0 15.5 25.5
Gains/(losses) from derivatives and hedge
accounting 32.2 (6.3) 10.9
Total income 986.9 871.6 1,863.9
Insurance claims and change in
liabilities 76.6 99.6 208.4
Total income net of claims on insurance
contracts 910.3 772.0 1,655.5
Administrative expenses 5 454.7 416.3 873.7
Depreciation and amortisation 61.5 58.1 117.5
Impairment losses on loans and advances
to customers 6 56.3 34.5 76.6
Provisions for liabilities and charges 7 4.9 8.4 32.1
Impairment (gains) on investment
securities 10 (3.5) - (3.6)
Profit before tax 336.4 254.7 559.2
Taxation 103.0 79.4 162.0
Profit after tax 233.4 175.3 397.2
CONSOLIDATED BALANCE SHEET
As at 30 September 2006
At At At
30 September 30 September 4 April
2006 2005 2006
(Unaudited) (Unaudited) (Audited)
#m #m #m
Notes
ASSETS
Cash and balances with the Bank of England 322.2 437.4 368.6
Loans and advances to banks 1,488.5 1,304.3 1,364.0
Investment securities - available for sale 14,905.7 13,910.9 13,007.7
Derivative financial instruments 589.6 570.0 674.2
Insurance and other financial assets at fair value 1,848.0 1,825.2 1,918.2
Fair value adjustment for portfolio hedged
risk (206.3) 276.3 (52.2)
Loans and advances to customers 8 109,071.4 97,751.5 101,347.6
Investments in equity shares 28.7 15.3 22.0
Value of in force life insurance contract business 127.6 122.5 125.4
Intangible fixed assets 84.0 44.9 80.5
Property, plant and equipment 643.4 624.8 648.0
Investment properties 34.0 257.5 279.1
Accrued income and expenses prepaid 175.6 188.1 283.7
Deferred tax assets 114.6 90.7 110.0
Other assets 362.9 265.9 409.2
Total assets 129,589.9 117,685.3 120,586.0
LIABILITIES
Shares 84,137.5 76,748.0 80,918.6
Deposits from banks 3,504.7 2,690.6 2,697.4
Other deposits 4,018.1 3,277.8 3,161.4
Due to customers 2,811.2 2,463.3 2,608.3
Debt securities in issue 24,577.9 21,862.0 20,767.6
Fair value adjustment for portfolio hedged
risk (4.9) 11.4 53.9
Derivative financial instruments 493.0 867.1 714.7
Insurance contracts liabilities 1,208.7 1,132.7 1,190.5
Other liabilities 498.8 427.3 515.8
Provisions for liabilities and charges 7 27.1 38.9 40.3
Accruals and deferred income 476.2 694.3 230.1
Subordinated liabilities 9 1,452.8 1,515.8 1,446.3
Permanent interest bearing shares 9 740.8 745.3 741.2
Current tax liabilities 141.5 122.9 174.3
Retirement benefit obligations 299.1 358.6 294.2
Total liabilities 124,382.5 112,956.0 115,554.6
General reserve 10 5,014.1 4,564.5 4,825.6
Revaluation reserve 11 117.0 103.0 117.0
Available for sale reserve 12 76.3 61.8 88.8
Total reserves & liabilities 129,589.9 117,685.3 120,586.0
CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE
For the period ended 30 September 2006
Period to Period to Year ended
30 September 30 September 4 April
2006 2005 2006
(Unaudited) (Unaudited) (Audited)
#m #m #m
Available for sale investments
- net fair value (loss)/gain (17.1) 16.3 55.3
Property revaluation - - 24.1
Actuarial loss on retirement benefit obligations (64.2) (62.1) (6.1)
Taxation on items through equity 23.9 15.5 (23.4)
Net income recognised directly in reserves (57.4) (30.3) 49.9
Net profit for the period 233.4 175.3 397.2
Total recognised income and expense for the period 176.0 145.0 447.1
Impacts arising from changes in accounting policies
Adoption of IFRS 4 and IAS 39 - 33.3 33.3
Tax on adoption of IFRS 4 and IAS 39 - (12.6) (12.6)
Adoption of IFRS 4 and IAS 39 - 20.7 20.7
CONSOLIDATED CASH FLOW STATEMENT
For the period ended 30 September 2006
Period to Period to Year ended
30 September 30 September 4 April
2006 2005 2006
(Unaudited) (Unaudited) (Audited)
#m #m #m
Notes
Cash flows from operating activities
Profit before tax 336.4 254.7 559.2
Adjustments for:
* Non-cash items included in profit
before tax 13 86.3 129.4 133.1
* Changes in operating assets 13 (7,218.2) (6,374.3) (10,110.1)
* Changes in operating liabilities 13 8,810.4 5,886.9 8,519.8
* Interest paid on subordinated
liabilities (30.8) (20.9) (54.8)
* Interest paid on permanent
interest bearing shares (23.5) (23.4) (46.8)
* Taxation (116.3) (68.2) (149.5)
Net cash flows from operating activities 1,844.3 (215.8) (1,149.1)
Cash flows from investing activities
Purchase of investment securities (3,419.2) (5,785.5) (9,989.9)
Sale and maturity of investment securities 2,789.9 5,505.0 10,286.5
Purchase of property, plant and equipment (51.5) (51.9) (76.9)
Sale of property, plant and equipment 4.4 2.2 1.9
Purchase of investment properties - (15.6) (23.1)
Sale of investment properties 253.1 0.7 5.0
Purchase of intangible fixed assets (20.8) (21.0) (77.6)
Cash flows from investing activities (444.1) (366.1) 125.9
Net increase/(decrease) in cash 1,400.2 (581.9) (1,023.2)
Cash and cash equivalents at start of period 3,962.1 4,985.3 4,985.3
Cash and cash equivalents at end of period 13 5,362.3 4,403.4 3,962.1
NOTES TO THE INTERIM RESULTS ANNOUNCEMENT
1 Basis of preparation
The accounting policies adopted by the Group in the preparation of its 2006/07
interim results and those which the Group currently expects to adopt in its
annual accounts for the year ended 4 April 2007 are consistent with those
disclosed in the annual accounts for the year ended 4 April 2006, copies of
which are available at www.nationwide.co.uk/abouts_nationwide/results_accounts.
The accounting policies and disclosures adopted reflect the Group's current view
of best practice. They are in accordance with IFRS standards which have been,
or are expected to be endorsed by the EU and in effect for the year ended 4
April 2007.
These interim results have been prepared using IAS 34 'Interim Financial
Reporting' for the first time.
IFRS is subject to ongoing review and endorsement by the EU or possible
amendment by interpretative guidance from the International Accounting Standards
Board and is therefore subject to change. In addition practice may develop with
regard to interpretation and application of the standards or further standards
may be introduced with the option for early adoption. We will update our
results for any such changes should they occur. The Group's full year Annual
Report and Accounts may, therefore, be prepared in accordance with different
accounting policies to those used in this document.
The Group has had no material or unusual related party transactions during the
half-year to 30 September 2006. Related party transactions for the half-year to
30 September 2006 are similar in nature to those for the year ended 4 April
2006. Full details of the Group's related party transactions for the year to 4
April 2006 can be found in the 2005 Annual Report and Accounts.
2 Interest receivable and similar income
Period to Period to Year ended
30 September 30 September 4 April
2006 2005 2006
(Unaudited) (Unaudited) (Audited)
#m #m #m
On loans fully secured on residential property 2,327.4 2,164.9 4,481.8
On other loans 407.0 362.3 743.6
On investment securities 313.0 260.4 548.4
On other liquid assets 65.1 20.8 64.8
Other interest receivable 0.6 0.6 1.1
Net expense on financial instruments hedging assets (56.6) (43.5) (127.8)
Expected return on pension assets 55.0 43.5 88.0
3,111.5 2,809.0 5,799.9
3 Interest expense and similar charges
Period to Period to Year ended
30 September 30 September 4 April
2006 2005 2006
(Unaudited) (Unaudited) (Audited)
#m #m #m
On shares 1,609.3 1,529.9 3,126.0
On permanent interest bearing shares 23.1 23.0 47.1
On deposits and other borrowings
* Subordinated liabilities 32.3 31.4 64.8
* Other 215.4 184.6 379.8
Debt securities in issue 488.9 383.8 830.0
Foreign exchange difference 0.4 0.6 2.3
Net expense on financial instruments hedging liabilities 16.7 22.4 35.6
Pension interest cost 46.0 41.0 80.0
2,432.1 2,216.7 4,565.6
4 Premiums on insurance contracts and fair value gains on insurance assets
Period to Period to Year ended
30 September 30 September 4 April
2006 2005 2006
(Unaudited) (Unaudited) (Audited)
#m #m #m
Net insurance premiums receivable 80.9 62.6 146.9
Fair value gains on insurance assets 16.5 69.0 132.0
97.4 131.6 278.9
The Group, as a proxy for policyholders, is required to record taxes on
investment income and gains each year. Fair value gains on insurance assets
therefore include a loss of #1.8m (30 September 2005 - gain of #6.2m, 4 April
2006 - gain of #8.9m) on policyholder assets which are offset by gains/losses
included in the taxation charge.
5 Administrative expenses
Period to Period to Year ended
30 September 30 September 4 April
2006 2005 2006
(Unaudited) (Unaudited) (Audited)
#m #m #m
Employee costs:
* Wages and salaries 187.5 168.8 348.7
* Social security costs 13.8 14.8 29.6
* Pension costs - defined benefit plans 45.6 39.9 81.1
246.9 223.5 459.4
Other administration expenses 207.8 192.8 414.3
454.7 416.3 873.7
6 Impairment losses on loans and advances to customers
Period to Period to Year ended
30 September 30 September 4 April
2006 2005 2006
(Unaudited) (Unaudited) (Audited)
#m #m #m
Impairment charge for the period
Loans fully secured on residential property (0.2) 1.5 0.9
Loans fully secured on land 1.3 (2.9) 2.0
Other loans 55.2 35.9 73.7
56.3 34.5 76.6
Impairment provision at the end of the period
Loans fully secured on residential property 30.9 32.8 31.9
Loans fully secured on land 32.9 27.9 32.8
Other loans 106.3 95.3 91.9
170.1 156.0 156.6
These provisions have been deducted from the appropriate asset values in the
balance sheets.
7 Provisions for liabilities and charges
Period to Period to Year ended
30 September 30 September 4 April
2006 2005 2006
(Unaudited) (Unaudited) (Audited)
#m #m #m
At 5 April 2006 40.3 49.0 49.0
Provisions utilised (18.1) (18.5) (40.8)
Charge for year 4.9 8.4 32.1
At 30 September 2006 27.1 38.9 40.3
Provisions have been made in respect of various customer claims including
potential claims on endowment policies.
8 Loans and advances to customers
At At At
30 September 30 September 4 April
2006 2005 2006
(Unaudited) (Unaudited) (Audited)
#m #m #m
Loans fully secured on residential property 96,089.8 86,639.1 89,587.4
Loans fully secured on land 9,214.1 7,485.7 8,050.2
Other loans 3,679.5 3,434.7 3,592.3
108,983.4 97,559.5 101,229.9
Fair value adjustment for micro hedged risk 88.0 192.0 117.7
109,071.4 97,751.5 101,347.6
Loans fully secured on land include #510.4m (30 September 2005 - #737.5m, 4
April 2006 - #578.7m) of loans which are fully secured on residential property
but are classified as 'loans fully secured on land' in accordance with the
Building Societies Act 1997.
At At At
30 September 30 September 4 April
2006 2005 2006
(Unaudited) (Unaudited) (Audited)
#m #m #m
Residential mortgages 83,881.9 76,225.7 78,256.4
Commercial 16,328.0 13,369.0 14,535.4
UCB prime lending 4,081.3 4,306.6 4,298.6
UCB buy to let 2,153.9 1,309.3 1,660.2
Unsecured personal lending 1,766.4 1,679.1 1,740.6
Credit card 741.1 654.0 670.1
Overdrawn current accounts 200.9 171.8 225.2
109,153.5 97,715.5 101,386.5
Impairment provisions (170.1) (156.0) (156.6)
Fair value adjustment for micro hedged risk 88.0 192.0 117.7
109,071.4 97,751.5 101,347.6
9 Subordinated liabilities and permanent interest bearing shares
Period to Period to Year ended
30 September 30 September 4 April
2006 2005 2006
(Unaudited) (Unaudited) (Audited)
#m #m #m
Subordinated liabilities
Subordinated notes 1,441.1 1,463.5 1,484.0
Fair value adjustment for micro hedged risk 18.2 59.5 (30.7)
Unamortised premiums and issue costs (6.5) (7.2) (7.0)
1,452.8 1,515.8 1,446.3
Permanent interest bearing shares 700.0 700.0 700.0
Fair value adjustment for micro hedged risk 48.8 53.6 49.4
Unamortised premiums and issue costs (8.0) (8.3) (8.2)
740.8 745.3 741.2
All of the Society's subordinated notes and permanent interest bearing shares
(PIBS) are unsecured. The Society may, with the prior consent of the FSA,
redeem some of the subordinated notes early. The PIBS are repayable, at the
option of the Society with the prior consent of the FSA.
The subordinated notes rank pari passu with each other and behind claims against
the Society of all depositors, creditors and investing members. The PIBS rank
pari passu with each other and behind claims of the subordinated notes. The
claims of the PIBS holders in a winding-up or dissolution of the Society would
be restricted to the principal amount of the PIBS together with the interest
accrued.
NOTES TO THE INTERIM RESULTS ANNOUNCEMENT
10 General reserve
Movements in general reserve were as follows: Period to Period to Year ended
30 September 30 September 4 April
2006 2005 2006
(Unaudited) (Unaudited) (Audited)
#m #m #m
At 4 April 2006 4,460.6 4,460.6
Adoption of IAS 39 and IFRS 4 (27.9) (27.9)
At 5 April 2006 4,825.6 4,432.7 4,432.7
Profit for the period 233.4 175.3 397.2
Actuarial (loss) on retirement benefit obligations (64.2) (62.1) (6.1)
Tax on actuarial (loss) on retirement benefit obligations 19.3 18.6 1.8
At 30 September 2006 5,014.1 4,564.5 4,825.6
During the period an impairment gain of #3.5m (30 September 2005 - #nil, 4 April
2006 - gain of #3.6m) has been recognised in the income statement as a result of
an improvement in the credit quality of available for sale investment
securities. As a consequence a cumulative impairment loss at 30 September 2006
of #7.0m (30 September 2005 - #14.1m, 4 April 2006 - #10.5m) has been charged to
the general reserve.
11 Revaluation reserve
Movements in the revaluation reserve were as follows: Period to Period to Year ended
30 September 30 September 4 April
2006 2005 2006
(Unaudited) (Unaudited) (Audited)
#m #m #m
At 5 April 2006 117.0 103.0 103.0
Revaluation increase on land and buildings - - 24.1
(Increase) in deferred tax liability on revaluation of
land and buildings - - (10.1)
At 30 September 2006 117.0 103.0 117.0
12 Available for sale reserve
Movements in the available for sale reserve were as Period to Period to Year ended
follows: 30 September 30 September 4 April
2006 2005 2006
(Unaudited) (Unaudited) (Audited)
#m #m #m
At 4 April 2006 - -
Adoption of IAS 39 48.6 48.6
At 5 April 2006 88.8 48.6 48.6
Net (loss)/gain from changes in fair value (20.4) 16.3 59.8
Amounts transferred to income statement on disposal and
impairment 3.3 - (4.5)
Decrease/(Increase) in tax liability 4.6 (3.1) (15.1)
At 30 September 2006 76.3 61.8 88.8
13 Notes to the cash flow statement
Period to Period to Year ended
30 September 30 September 4 April
2006 2005 2006
(Unaudited) (Unaudited) (Audited)
#m #m #m
Non-cash items included in profit before tax
Net increase/(decrease) in impairment provisions 13.5 10.7 (70.8)
Impairment (gains) on investment securities (3.5) - (3.6)
Depreciation and amortisation 61.5 58.1 117.5
(Profit) on sale of property, plant and equipment and
investment property (8.4) (0.1) (1.6)
Interest on subordinated liabilities 32.3 31.4 64.8
Interest on permanent interest bearing shares 23.1 23.0 47.1
(Gain) on the revaluation of land and buildings - - (3.5)
(Gain) on the revaluation of investment properties - - (5.9)
(Gains)/losses from derivatives and hedge accounting (32.2) 6.3 (10.9)
86.3 129.4 133.1
Changes in operating assets
Loans and advances to banks (203.8) (13.8) (21.5)
Investment securities 284.5 (316.3) (409.0)
Derivative financial instruments and fair value
adjustment for portfolio hedged risk 300.7 (1,048.8) (507.0)
Other financial assets at fair value 43.0 - (463.5)
Loans and advances to customers (7,767.2) (5,040.3) (8,437.2)
Other operating assets 124.6 44.9 (271.9)
(7,218.2) (6,374.3) (10,110.1)
Changes in operating liabilities
Shares 3,218.9 4,153.9 8,324.5
Deposits from banks, customers and others 1,866.9 919.0 954.4
Derivative financial liabilities and fair value
adjustment for portfolio hedged risk (280.4) 713.1 609.5
Debt securities in issue 3,810.3 (515.6) (1,610.0)
Insurance contract liabilities 18.2 0.6 58.4
Retirement benefit obligations 4.9 7.0 (57.4)
Other operating liabilities 171.6 608.9 240.4
8,810.4 5,886.9 8,519.8
Cash and cash equivalents
Cash and balances with the Bank of England 322.2 437.4 368.6
Loans and advances to other banks repayable
in 3 months or less * 1,353.5 1,424.1 1,460.0
Investment securities with a maturity period of 3
months or less 3,686.6 2,541.9 2,133.5
5,362.3 4,403.4 3,962.1
* The loans and advances to other banks repayable in 3 months or less include
amounts classified as 'Other financial assets at fair value' on the balance
sheet.
The Group is required to maintain balances with the Bank of England which, at 30
September 2006, amounted to #143.5m (30 September 2005 - #133.5m, 4 April 2006 -
#138.8m). These balances are included within loans and advances to banks on the
balance sheet and are not included in the cash and cash equivalents in the cash
flow statement as they are not liquid in nature.
14 Segmental reporting
Period to 30 September 2006 (unaudited) Personal Commercial Group Total
Financial
Services
#m #m #m #m
Net interest income 602.1 438.8 (361.5) 679.4
Revenue from other segments (99.8) (341.2) 441.0 -
502.3 97.6 79.5 679.4
Other income 173.5 20.5 4.7 198.7
Total revenue 675.8 118.1 84.2 878.1
Expenses (note i) (528.5) (18.2) (27.2) (573.9)
Segment results (note ii) 147.3 99.9 57.0 304.2
Gains from derivatives and hedge accounting 32.2
Profit before tax 336.4
Taxation 103.0
Profit after tax 233.4
Period to 30 September 2005 (unaudited) Personal Commercial Group Total
Financial
Services
#m #m #m #m
Net interest income 510.9 400.3 (318.9) 592.3
Revenue from other segments (85.3) (305.1) 390.4 -
425.6 95.2 71.5 592.3
Other income 160.0 21.8 4.2 186.0
Total revenue 585.6 117.0 75.7 778.3
Expenses (note i) (474.6) (16.8) (25.9) (517.3)
Segment results (note ii) 111.0 100.2 49.8 261.0
(Losses) from derivatives and hedge accounting (6.3)
Profit before tax 254.7
Taxation 79.4
Profit after tax 175.3
Period to 4 April 2006 (audited) Commercial Group Total
Personal
Financial
Services
#m #m #m #m
Net interest income 1,116.0 898.3 (780.0) 1,234.3
Revenue from other segments (194.7) (698.7) 893.4 -
921.3 199.6 113.4 1,234.3
Other income 360.7 37.3 12.3 410.3
Total revenue 1,282.0 236.9 125.7 1,644.6
Expenses (note i) (1,002.2) (42.7) (51.4) (1,096.3)
Segment results (note ii) 279.8 194.2 74.3 548.3
Gains from derivatives and hedge accounting 10.9
Profit before tax 559.2
Taxation 162.0
Profit after tax 397.2
Notes
(i) Expenses includes impairment losses on loans and advances to customers,
provisions for liabilities and charges and impairment gains on investments but
excludes losses/(gains) from derivatives and hedge accounting.
(ii) The Personal Financial Services segment differs from the corresponding
underlying result in the Business Review (see page 8) as the latter excludes the
tax attributable to policyholder earnings.
The Group operates predominantly in the UK and the Isle of Man and accordingly
no geographical analysis has been presented.
15 Debt securities
We have maintained our level of longer term funding, being fixed and floating
rate notes (FRN), through the issuance of a US$1.75bn FRN and a US$0.25bn
private placement to replace maturing positions in the period.
ADDITIONAL INFORMATION
a) Retail loan portfolio
The average loan to value ('LTV') ratio of the Group's retail loan portfolio is
estimated at 39% (4 April 2006 - 39%) whilst the average LTV of new residential
mortgage lending was 59% (4 April 2006 - 55%). Further LTV information on the
Group's retail loan portfolio is set out as follows:
At At
30 September 2006 4 April
% 2006
%
Loan to value analysis:
Total book
90% 2 1
Average loan to value of stock (indexed) 39 39
Average loan to value of new business 59 55
New business profile:
First time buyers 21 15
Home movers 32 25
Remortgagers 44 57
Buy to let 3 3
b) Retail and commercial loan payment due status
The table below provides further information on retail loans and advances by
payment due status:
At At
30 September 2006 4 April
2006
#bn % #bn %
Not impaired:
Neither past due nor impaired 91.1 98 85.2 98
Past due up to 3 months but not impaired 1.4 2 1.4 2
Impaired
Past due 3 to 6 months 0.2 - 0.2 -
Past due 6 to 12 months 0.1 - 0.1 -
Past due over 12 months (#29.4 million) - - - -
Possessions* (#14.1 million) - - - -
92.8 100 86.9 100
* Against possession cases, #13.9m of collateral is held.
The table below provides further information on commercial loans by payments due
status:
At At
30 September 2006 4 April
2006
#bn % #bn %
Not impaired:
Neither past due nor impaired 15.9 98 14.1 97
Past due up to 3 months but not impaired 0.4 2 0.4 3
Impaired
Past due 3 to 6 months - - - -
Past due 6 to 12 months - - - -
Past due over 12 months (#13.7 million) - - - -
Possessions (#0.0 million) - - - -
16.3 100 14.5 100
Loans in the analyses above which are less than 3 months past due have
collective impairment allowances set aside to cover credit losses on loans which
are in the early stages of arrears.
Independent Review Report
Independent Review Report to Nationwide Building Society
Introduction
We have been instructed by the Society to review the financial information for
the period ended 30 September 2006 which comprises the income statement, the
balance sheet, the cash flow statement, the statutory statement of total
recognised income and expense and the related notes for the period ended 30
September 2006. We have read the other information contained in the Interim
Results Announcement and considered whether it contains any apparent
misstatements or material inconsistencies with the financial information.
Directors' responsibilities
The Interim Results Announcement, including the financial information contained
therein, is the responsibility of, and has been approved by the Directors. The
Listing Rules of the Financial Services Authority require that the accounting
policies and presentation applied to the interim figures should be consistent
with those applied in preparing the preceding annual accounts except where any
changes, and the reasons for them, are disclosed.
This interim report has been prepared in accordance with the International
Accounting Standard 34, "Interim financial reporting".
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1999/4
"Review of interim financial information" issued by the Auditing Practices
Board. A review consists principally of making enquiries of Group management
and applying analytical procedures to the financial information and underlying
financial data and, based thereon, assessing whether the disclosed accounting
policies have been applied. A review excludes audit procedures such as tests of
controls and verification of assets, liabilities and transactions. It is
substantially less in scope than an audit and therefore provides a lower level
of assurance. Accordingly we do not express an audit opinion on the financial
information. This report, including the conclusion, has been prepared for and
only for the Society for the purpose of the Listing Rules of the Financial
Services Authority and for no other purpose. We do not, in producing this
report, 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.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the period ended 30
September 2006.
PricewaterhouseCoopers LLP 15 November 2006
Chartered Accountants
London
Other Information
The interim financial information set out in this announcement is unaudited and
does not constitute accounts within the meaning of section 73 of the Building
Societies Act 1986.
The financial information for the year ended 4 April 2006 has been extracted
from the Annual Accounts for that year. The Annual Accounts for the year ended
4 April 2006 have been filed with the Financial Services Authority and Registry
of Friendly Societies in England and Wales. The Auditors' Report on these
Annual Accounts was unqualified.
Contacts
Alan Oliver
01793 655956
07850 810745 (mobile)
alanm.oliver@nationwide.co.uk
Steve Cowdry
01793 657112
07850 810746 (mobile)
steve.cowdry@nationwide.co.uk
These materials are not 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 the means of a prospectus that may be obtained from the
Society and will contain detailed information about the Society and management
as well as financial statements.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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