Nationwide Building Society

Good morning everyone and welcome to Nationwide Building Society's full year results call. I'm joined this morning by Chris Rose, our Chief Financial Officer, Muir Matheson, our Deputy Chief Financial Officer and Treasurer, Robert, our Chief Economist, Robert Gardner, and I'm Debbie Crosby, the Chief Executive. We are making strong progress against our strategy despite the economic challenges and market pressures that have impacted our costs. Our financial performance is the strongest on record, with higher profits related mainly to increases in the bank base rate. This performance has allowed us to support members in new ways as they faced into the cost of living crisis. We invested £100 million into practical support, including an online hub, a dedicated cost of living telephone hotline, and we donated an additional £1 million to debt organisations and charities. We also launched a cashback offer on supermarket shopping, which delivered benefit directly to almost 5 million of our members. Our branch network is central to our support for customers, and I was particularly pleased to extend our branch promise today to 2024, which means we will not leave a town or city in which we are based without a branch. In addition to our face-to-face services, we are continuing to enhance and improve our digital services to ensure that we can really deliver on giving our customers the choice of how they want to bank with us and simply brilliant service across all of our touchpoints. I'm pleased that we remained number one for customer satisfaction amongst our peer group. That's now for 11 years running with a 3.8 percentage lead. As a mutual, we aim to reward our savings customers with the highest savings rate we possibly can, whilst ensuring we remain financially sustainable over the long term. On average, deposit rates over the year were 65% higher than the market average, leading to an increase in our share of deposits. We looked after almost one in every 10 pounds saved in the UK. Our mortgage book grew to over 200 billion, whilst our market share remained broadly flat, despite a highly competitive environment. We also grew our current accounts by over 3% to over 9 million accounts, with 1 in 5 current account switchers moving to Nationwide, supported by our switching incentive. All of this contributed to Nationwide delivering its highest ever level of member financial benefit of just over £1 billion. Of course, we're here to support our customers today and for the long term, which is why it's important that we maintain our financial strength. Our leverage ratio, which measures our ability to withstand economic shocks, stands at 6%, well above our minimum regulatory threshold. As our customers need to evolve, we are innovating and modernising. So that journey began in earnest over the last year as we refined our purpose as well as refreshing our business strategy. Although we provide banking services, we're not a bank. I believe that we have a significant and important role to play in delivering value and service in banking that offers a real alternative to the UK big banks. Our new purpose is to provide banking that's fairer, more rewarding and for the good of society. We aim to return greater value to members, deliver higher quality distinctive services and be a force for good for society, whilst operating as efficiently as possible. But today marks our biggest statement yet on using our financial strength to benefit our members. We have announced our nationwide fairer share payment which will distribute £340 million of profit direct to eligible members with the deepest relationships through a £100 payment directly into their current account in June. To reward our loyal saving customers we are also launching the nationwide fairer share bond which has a highly competitive interest rate and is available to all our members. These come on top of more than a billion pound we return to our savings and borrowing members through better rates over the last financial year. It is because we are a building society and owned by our members that we can reward them in ways that others can't. It's now almost a year since I started at Nationwide and in that time I've seen the great potential we have to build a modern mutual that provides the best value in banking, brilliant service and be good for society. I hope that our ongoing commitment to deliver the services and products that our members value continues to help the society thrive and stand out as a force for good for value and fairness. I'm now going to hand you to Chris, who's going to take you through the all-important numbers.

Thank you, Debbie. Good morning, everyone. The economic outlook remains uncertain, and with rising bank rates and high inflation, customers have responded well to this difficult environment. And as a consequence, asset quality remains strong, and the rise in arrears we expected has not materialised. We have continued to price very competitively, particularly for deposits. Our market share of deposits has increased from 9.4% to 9.6%. Our member financial benefit has increased from 0.3 billion to 1.1 billion, largely because we have passed on a higher percentage of bank rate increases than the market. We ended our financial year in a strong position, with increased profits, a leverage ratio of 6% and a 12-month LCR of 180%. It is the strength of our financial performance that means we are able to announce our fairer share payment, where eligible members will benefit from a £340 million distribution that will be paid in June this year. So, turning to our financial performance. Underlying profits increased by 39% to £2.2 billion compared to £1.6 billion a year ago. Statutory profit is £4 million lower than underlying profit due to below-the-line hedging items. Total income was 21% higher, driven by improved savings margins, with the net interest margin increasing to 1.57% from 1.26% a year ago. Underlying costs are 89 million higher, reflecting higher business-as-usual run costs, partially offset by lower restructuring costs, and the non-repeat of fraud costs from last year. Asset quality remains strong, with stable arrears during the period. The net loan impairment charge of £126 million reflects ongoing economic uncertainty. Provision for liability and charges saw a small release of £9 million compared to a £56 million charge in the prior year, as the remediation of legacy member processes draws to an end. A broadly stable balance sheet reflects 2.7 billion growth in lending, offset by a decline in liquidity and other assets. During the period, 4.5 billion of Bank of England TFSME was repaid. Deposit growth of 9.1 billion reflects strong inflows into deposit accounts and growth in our current account base. During the second half of the year, deposit balances grew by 6 billion. Capital ratios remained strong, with the leverage ratio growing to 6% and the CET1 ratio increasing to 26.5%. During the year, net interest income increased as a result of higher deposit margins, partially offset by lower lending margins. Approximately 55% of the change in base rate has been passed through to our retail variable savings base. Our average member deposit rate for total deposits is now 178 basis points, which is 53 basis points higher than the market average deposit rate. This compares to 11 basis points 12 months ago. As a consequence, our member financial benefit, which measures the value returned to members through better long-term pricing, increased to £1.1 billion in the financial year. The net interest margin increased to 1.57% for the full year. We expect margins to remain broadly stable in the year ahead, as reductions in mortgage book margins offset the benefit of higher bank base rates. Mortgage book margins continue to decline from their peak as mortgages written during the pandemic run off. Completions in the last quarter of the financial year were written at circa 65 basis points on a blended basis. The mortgage market remains very competitive and we expect new business margins to remain broadly stable at this level for most of the year as market volumes remain approximately 20% lower than 12 months ago. The deposit market is also becoming more competitive as volume growth slows and the market continues to refinance TFSME maturities. We are likely to see deposit margins level off and then decline later in the year as we reach peak bank rate and competition increases. Total costs increased by 89 million due to inflationary increases in business as usual run costs partially offset by lower restructuring costs and the non-repeat of one-off fraud costs. However, total costs were 3% lower than reported prior to the pandemic for the year to April 2020. We expect costs in the next 12 months to be approximately 4% higher as a consequence of inflationary pressures and volume growth. This year's cost of risk is six basis points, reflecting greater economic uncertainty and affordability challenges presented by higher inflation and interest rates. This is broadly in line with the pre-pandemic period. The provision charge includes modelled adjustments of £199 million. These comprise a probability of default uplift for continued economic uncertainty impacting borrower affordability and a loss given default uplift for lower valuations on properties subject to cladding risk. Secured asset quality is strong with stable arrears levels and falling levels of forbearance. The average LTV of new business reduced to 69%, whilst the average stock LTV increased to 55% from 52%, reflecting recent house price declines. Unsecured arrears have risen slightly, but remain below pre-pandemic levels. The economic environment has deteriorated compared to 12 months ago with a significant level of uncertainty, which we have reflected in the wide range of outcomes in our economic scenarios and the probabilities we have allocated to each. On a probability-weighted average basis, we expect larger falls in house prices and a greater rise in unemployment compared to our expectations 12 months ago. We now expect house prices to fall by 4.5% from December 2022 levels in our base case, compared to an expectation of modest increases in last year's base case. Our downside and severe downsides both have material falls in house prices, and we have allocated a combined 45% probability to these two scenarios. the labour market remains resilient with a current unemployment rate of 3.9%. Despite this, we have increased our peak unemployment rate in our base case to 5% compared to 4.2% 12 months ago, reflecting a more sustained period of higher bank rate. Inflation and higher interest rates continue to present the biggest risk to borrower affordability, and this is reflected in our IFRS 9 charge, including the modelled PD uplift. IFRS 9 staging and provisions reflect the continued uncertainty and the wide range of possible macroeconomic outcomes. Total provisions for expected credit losses have increased to £765 million from £746 million a year ago. Coverage for prime mortgages was stable at 5 basis points, with coverage across buy to let lending increasing from 26 basis points to 44 basis points. This reflects the affordability pressure and uncertainty we see in this segment of lending. Stage 2 balances for secured lending have increased by $19 billion. $12 billion of this increase is due to incorporating the additional modelled PD uplift relating to inflation and higher rates into the staging allocation, with the remainder being due to updated economics and model changes. Coverage for unsecured lending has reduced slightly from 11.4 basis points to 10.6 basis points, but remains elevated compared to pre-COVID levels. Liquid assets represent 95% of our liquidity and investment portfolio, with a balance made up of securities that are non-liquidity eligible or posted as collateral. Our liquid assets primarily comprise cash and government bonds. All assets have at least a single A rating and are accounted for at fair value through other comprehensive income. Any fixed rate instruments in the liquid assets portfolio are fully asset swapped at purchase for the duration of the investment and our net mark to market position including hedges at the financial year end was a positive 0.1 billion. Total deposits of 187 billion comprise of 183 billion in deposits from retail members and 4 billion of business savings deposits. £29 billion, 15% of deposit balances, are in excess of the £85,000 FSCS limit. Total liquidity balances represent over 170% of uninsured deposits. In addition, we estimate that we have approximately £70 billion of drawdown capacity at the central bank, much of which can be drawn intraday. The 12-month LCR was 180%. Our internal assessment of liquidity, which is in excess of minimum regulatory requirements and therefore our binding constraint, takes into account behavioural factors including the level of uninsured balances, digital activity and the use of open banking facilities. Our liquidity and funding position remains strong. We continue to pre-fund our repayment of TFSME drawings, and when all TFSME has been repaid, our expected LCR will sit in the range of 135% to 145%. This is broadly in line with pre-pandemic levels. We repaid £4.5 billion of our total £21.7 billion drawings in March, which was ahead of any contractual repayment dates. We issued 8 billion sterling equivalent of wholesale funding during the year and expect issuance in the next financial year to be in the range 6 to 8 billion depending on the size of the mortgage and savings markets. At present it is our intention to maintain at least one benchmark outstanding in each instrument type across the liability structure. We continue to ensure our issuance plans take account of credit rating agency requirements for loss-absorbing capacity. Our capital resources are in excess of regulatory requirements, with substantial buffers across risk-based, leverage and MREL frameworks. The Society holds surplus capital of £5.1 billion to the leverage requirement and £8.1 billion to the risk-based requirements. The PRA has consulted on Basel 3.1 and our interpretation of the draft rules suggests our CET1 ratio would reduce to low to mid 20% on a pro forma end point basis. The leverage ratio will remain our tier 1 binding constraint. Following the PRA granting a one-year general prior permission to repurchase up to 2% of CET1 resources, effective from January 2023, we accepted tenders of £100 million of CCDS under our open market repurchase facility in February. The 2% is dynamic, so based on CET resources as reported today, circa 175 million of repurchase capacity remains until the end of 2023. Any future repurchases remain at nationwide discretion and subject to PRA permission remaining in place. We have today announced a nationwide fairer share payment to return £340 million of value directly to eligible members in June. Whilst we would like this to be an ongoing payment, any future payments remain discretionary, subject to the ongoing satisfactory financial performance of the society. The fairer share payment will only be considered after any payment of capital distributions, including those for AT1 and CCDS. Thank you. We would be very happy to take your questions.

Thank you, Chris, and good morning, everyone. If you'd like to ask a question, please type it into the webcast portal. We do already have a few questions. So the first one is from Rohith Chandrarajan from Bank of America, and it's one for Robert. What are your expectations for mortgage lending, and are there early signs of a recovery in mortgage demand?