Nationwide Building Society

Welcome to Nationwide Building Society. Good morning to everyone and welcome to Nationwide Building Society's Interim Results Call. I'm Debbie Crosby, the Chief Executive Officer, and I'm joined today by Chris Rhodes, our Chief Financial Officer, Muir Matheson, our Deputy CFO and Treasurer, and Robert Gardner, our Chief Economist. We have delivered a strong financial performance in uncertain economic environment and our underlying profit before tax is up 29% to 1.262 billion for the first half. We provide customers with great value products, choice in the way they bank with us and the best possible service. As a result, we've grown our deposit and mortgage balances and our financial strength means that we can invest in even better products and services to increase value for our members. We are reporting our highest ever half-year member financial benefit of £885 million, which means that including our first member fairer share payment in June, we have delivered 1.2 billion of value to our members and evidence of our strategic commitment to rewarding our members. You will have seen that we've extended our branch promise to not leave any town or city in which we are based until 2026. And we now are delighted to say that we have the largest branch network by brand in the UK. We believe these things demonstrate the benefit of a mutual model and are also reflected in our customer satisfaction scores where we have remained first among our peer group for over 11 years and extending our current lead to 5.2%. We recognise the challenges facing our customers in the current environment and have continued our cost of living helpline as well as delivering the changes in line with the government's mortgage charter we've proactively contacted 1.3 million customers to explain the support available. As more households adjusted expenditure priorities in the higher interest rate environment, we will continue to support those borrowers who face payment difficulties. Our rebrand last month was the most significant in 36 years and will help us to build stronger relationships with our members now and in the future. Our branches have really benefited from the rebrand and we thought you might find some of our data interesting to understand the rationale behind our branch promise. Our most engaged customers are those who use our branches as well as other channels. Earlier this year, we saw more than half our fairer share bond openings by value originate through our branch network, showing that there is still a strong customer demand for face-to-face support and interaction with certain transactions. Furthermore, the annual lifetime value of our branch originated sales more than covers the cost of running the branch network. We also continue to invest in digital channels to ensure customers have choice in the way that they bank with us. Our mobile app is showing increased engagement and our digital self-service mortgage manager platform allows our customers to switch to our best rates in a matter of minutes. We're also investing to grow our customer base through service improvements and our current account switching incentive which we relaunched in September 23. The economic outlook is uncertain, housing market activity will remain subdued and household deposit growth has slowed. Whilst nationwide is performing strongly, we're not complacent. Our strategy is to safeguard the future strength of the society and provide a good way to bank for customers. We have a unique business model combining scale and mutuality. We are the main challenger to the shareholder-owned banks and use our mutual status to make a meaningful impact on communities and improve society. I'd now like to hand to Chris to give you the numbers in more detail.

Thank you, Debbie. Good morning, everyone. Over the last six months, we have delivered a good performance with both mortgages and deposits growing in line with our stock share. Balance sheet strength has improved with the leverage ratio increasing to 6.4% and the 12-month LCR increasing to 191%, reflecting the strong deposit flow. So, turning to our financial performance. Underlying profits are £1.26 billion, compared with £980 million a year ago. Statutory profit is £273 million lower than underlying profit due to our £344 million fairer share payment, partially offset by a gain of £71 million in below the line hedging. Total income was 12% higher, reflecting improved savings margins following base rate rises, partially offset by a reduction in mortgage margins. Other income reduced by £23 million due to cashback during April as part of our cost of living support for customers. Costs are up £32 million, 3% higher, reflecting higher inflation and volume growth partially offset by efficiency initiatives. Asset quality remains in line with pre-COVID levels, with arrears increasing slightly, and this is reflected in the impairment charge of £54 million, which is £54 million lower than the same period last year. The charge for other provisions was £18 million, broadly similar to last year, reflecting ongoing remediation of legacy member processes. The balance sheet was broadly stable during the period, with an increase of 0.6 billion in mortgage balances and a 2 billion increase in liquidity. Deposit growth of 4.2 billion reflects a strong performance in our traditional savings franchise, partially offset by a reduction in current account balances. Capital ratios remain strong. The CET1 ratio increased to 27.4%, and the leverage ratio increased to 6.4%. Income increased compared to the same period last year as a result of higher retail deposit margins, with the net interest margin increasing to 1.66% compared to 1.48% in the first half of last year. The net interest margin was unchanged compared to the second half of the last financial year. During the period, the margin on the mortgage book reduced to 110 basis points, reflecting ongoing competition for both owner-occupied and buy-to-let mortgages. Completions of new business in the first six months of the year recorded a margin of circa 60 basis points on a blended basis. The pipeline of new business expected to complete over coming months has a margin of 55 basis points. and the current new business margins are circa 65 basis points. In the second half of the year, mortgage book margins are expected to decline at a similar pace to half one. Deposit book margins improved by five basis points during the period as a consequence of base rate rises. Over the last two years, approximately 57% of the change in base rate has been passed through to our retail variable savings base. The total deposit beta across our book is approximately 50% when accounting for balance movements across all savings and current accounts. Our average member deposit rate for total deposits is now 292 basis points, which is 82 basis points higher than the market average deposit rate, compared to 53 basis points six months ago. This is the main reason behind the increase in member financial benefit before the fairer share impact and can be seen in the chart in the top right, which shows the growing differential in our deposit rates versus the market average. We expect net interest margin to reduce in the second half of the year with the margin for the full year expected to be broadly in line with the prior year NIM at circa 155 basis points as previously guided. This reflects the ongoing reduction in mortgage margins and an increase in retail funding costs as deposits migrate from instant access accounts and current accounts to term products. Costs increased by 32 million, reflecting inflationary impacts and volume growth, partially offset by ongoing efficiencies. There will be further restructuring costs in the second half of the year, and we expect the full year cost increase to be around 4%, which is below the current rate of inflation. Now, Debbie has outlined the rationale behind our commitment to branches and our multi-channel approach. It's worth noting that the total cost of NationWise Branch Network is approximately £190 million per annum, 8% of our total cost base, and is more than covered by the value of branch sales. The net cost is lower when we include the benefits of multi-skilled branch colleagues undertaking non-branch work. The cost of risk in the half year reduced to three basis points, an annualised equivalent of five basis points. This reflects the broadly stable but uncertain outlook with stable ECL coverage. This compares to an average annualised cost of risk before the pandemic of six basis points. we continue to hold model adjustments for affordability challenges linked to inflation and higher interest rates, which reflect an expectation that arrears will increase in the future. Numbers taking up interest-only concessions from the mortgage charter have been modest. At the 30th of September, only 5,000 had taken these concessions, and as of today, only circa 8,000. This compares to a peak of 256,000 payment holidays granted during COVID. The expected cost of risk for interest only concessions resulting from the mortgage charter are covered by the affordability adjustment. Careers levels are increasing slightly, but remain below expectations when compared to the ECL provision. Three months arrears have increased to 38 basis points compared to 32 basis points 12 months ago and at the year end. This continues to compare favourably to the industry average of 84 basis points. Average stock LTV remained flat at 55% compared to the year end. Three months plus arrears on the unsecured portfolio have fallen slightly to 114 basis points compared to 128 basis points 12 months ago and 121 basis points at the year end. The economic outlook continues to be uncertain with a similar outlook to the year end. This is reflected in our economic scenarios, which continue to cover a wide range of potential outcomes. We remain cautious about the outlook, given the uncertainties that lie ahead. As part of our assessment of expected credit losses, we have looked at upcoming fixed rate mortgage maturities and modelled an adjustment to reflect the risks associated with possible payment shocks. We have extended the modelled adjustment to include accounts that have matured to new fixed rates in the last 15 months, as well as looking forward for 24 months. The look back is to ensure that we fully capture the risks associated with higher rates as customers budget and use savings to support their mortgage payments. Over the next 12 months, 20% of the fixed rate book will mature, though over a quarter of current fixed rate balances have now refinanced onto higher rates or are new to lending since September 2022. This cohort is performing well with early stage arrears lower than the overall book. Our liquidity and funding ratios support our financial strength. with a 12 month average liquidity coverage ratio of 191% at the half year. Balance sheet liquidity totals 53 billion compared to 35 billion of deposits above the FSCS limit. In addition, we hold an estimated 75 billion of drawdown capacity at the central bank. We have repaid 8.6 billion of TF-SME ahead of the contractual maturity date, leaving 13.1 billion of drawings outstanding. If all outstanding TF-SME drawings had been fully repaid at 30th September, our LCR would have stood at 140%. Our plans assume we retain a prudent approach to wholesale funding by targeting maturities beyond the TFSME redemption window. And we continue to plan to issue between six and eight billion sterling equivalent this financial year. We continue to ensure our issuance plans take account of credit rating agency requirements for loss absorbing capacity. we remain strongly capitalised. The leverage ratio increased to 6.4% and the CET1 ratio increased to 27.4%, driven by retained profits in the period. 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 billion to the risk-based requirements. The leverage ratio is expected to remain our tier one binding constraint. During 2023, we have repurchased 175 million of CCDS under the 12 months general prior permission. We have now reapplied for regulatory permission for a further 12 months. Thank you. We will be now 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 already have a few questions. The first one has come in from Lee Street at Citigroup. I think it's one for Debbie. Given your capital position, is there any appetite in the short or medium term to consider M&A?