Good morning, everyone, welcome to Nationwide Building Society's Full Year Results Call. I'm joined this morning by Chris Rhodes, our Chief Financial Officer, Muir Mathieson, our Deputy Chief Financial Officer and Treasurer, Robert, our Chief Economist, Robert Gardner, and I'm Debbie Crosbie, 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 GBP 100 million into practical support, including an online hub, a dedicated cost of living telephone hotline, and we donated an additional GBP 1 million to debt organizations and charities.
We also launched a cashback offer on supermarket shopping, which delivered benefit directly to almost GBP 5 million of our members. Our branch network is central to our support for customers. I was particularly pleased to extend our branch promise 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% lead.
As a mutual, we aim to reward our savings customers with the highest savings rate we possibly can, while 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 1 in every 10 GBP saved in the U.K. Our mortgage book grew to over GBP 200 billion, while 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 GBP 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' needs evolve, we are innovating and modernizing. 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 U.K. 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. 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 GBP 340 million of profit direct to eligible members with the deepest relationships through a GBP 100 payment directly into their current account in June. To reward our loyal saving customers, we're 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 GBP 1 billion we returned 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, 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 gonna hand you to Chris, who's gonna take you through the all-important numbers.
Thank you, Debbie. Good morning, everyone. The economic outlook remains uncertain. With rising bank rates and high inflation, customers have responded well to this difficult environment. As a consequence, asset quality remains strong, and the rise in arrears we expected has not materialized. 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 GBP 0.3 billion to GBP 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 GBP 340 million distribution that will be paid in June this year. Turning to our financial performance. Underlying profits increased by 39%, to GBP 2.2 billion compared to GBP 1.6 billion a year ago. Statutory profit is GBP 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 GBP 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 GBP 126 million reflects ongoing economic uncertainty. Provision for liability and charges saw a small release of GBP 9 million compared to a GBP 56 million charge in the prior year, as the remediation of legacy member processes draws to an end. A broadly stable balance sheet reflects GBP 2.7 billion growth in lending, offset by a decline in liquidity and other assets. During the period, GBP 4.5 billion of Bank of England TFSME was repaid. Deposit growth of GBP 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 GBP 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 GBP 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 rate. 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. 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 GBP 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. 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 6 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 modeled adjustments of GBP 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%, while 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 labor 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 rates. 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 modeled 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 GBP 765 million from GBP 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 two balances for secured lending have increased by GBP 19 billion. GBP 12 billion of this increase is due to incorporating the additional modeled 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, 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, our net mark to market position, including hedges at the financial year-end, was a positive GBP 0.1 billion. Total deposits of GBP 187 billion comprise of GBP 183 billion in deposits from retail members and GBP 4 billion of business savings deposits.
GBP 29 billion, 15%, of deposit balances are in excess of the GBP 85,000 FSCS limit. Total liquidity balances represent over 170%, of uninsured deposits. In addition, we estimate that we have approximately GBP 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 behavioral 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%-145%. This is broadly in line with pre-pandemic levels.
We repaid GBP 4.5 billion of our total GBP 21.7 billion drawings in March, which was ahead of any contractual repayment dates. We issued GBP 8 billion equivalent of wholesale funding during the year, and expect issuance in the next financial year to be in the range of GBP 6 billion-GBP 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 cap, 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 GBP 5.1 billion to the leverage requirement and GBP 8.1 billion to the risk-based requirements.
The PRA has consulted on Basel 3.1. Our interpretation of the draft rules suggest our CET1 ratio would reduce to low to mid 20%, on a pro forma endpoint basis. The leverage ratio will remain our Tier 1 binding constraint. Following the PRA granting a 1-year general prior permission to repurchase up to 2%, of CET1 resources effective from January 2023, we accepted tenders of GBP 100 million of CCDS under our open market repurchase facility in February. The 2% is dynamic. Based on CET resources as reported today, circa GBP 175 million of repurchase capacity remains until the end of 2023. Any future repurchases remain at Nationwide's discretion and subject to PRA permission remaining in place.
We have today announced the Nationwide Fairer Share payment to return GBP 340 million of value directly to eligible members in June. 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. 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. 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?
We are seeing modest recovery in mortgage approvals seen from the Bank of England data and industry-wide application data again suggests things are improving gradually. The market is likely to remain relatively subdued in the near term because we do have household finances still under pressure. If you look at housing affordability, it is still more stretched than it was when mortgage rates were at their lows in 2021. We do expect activity to gradually move higher, although being relatively subdued, as I say, by historic standards.
Thank you, Robert. The next question is from Ali Woods. What do you expect to happen to mortgage spreads going forward? A follow up from Rohith, how has the mix between lending to existing customers and new customers impacted spreads? If Chris, you could take that, please.
Like I said, in the last quarter, completions were at 65 basis points. Current spot is broadly at 65 basis points, and I expect that to persist for the remainder of the year because of the subdued market that Robert has talked to. The mix between existing and new is roughly 50/50. I think if I remember the numbers correctly, the equivalent of the 65 was 68 when we gave you the half year update.
Thank you, Chris. I've got a question from Lee Street at Citi, another one on margin for you, Chris. What was your Q4 exit net interest margin, and can you add a bit more color on the net interest income trend you expect for the next financial year?
Thanks, Lee. Look, I'm guiding you to a broadly flat margin for the year as a whole. In terms of Q4, I'm not gonna disclose that number, but if I point you back to the presentation, you can see the H2 margin was 166 basis points. We are clearly expecting some moderation in the run rate margin out of the second half of the year. I'm guiding you to roughly 157 for the year as a whole.
Thank you. A question now on pass-through for you, Chris, as well. How do you expect the evolution of pass-through to play out going forward? Maybe Debbie, you can come in with a follow-up on that, which is can you comment on your response to the Treasury Select Committee on pass-through?
To date, we've passed through 55%, of bank rate rises, and that's the reason for the increase in member financial benefit from GBP 300 million to GBP 1.1 billion. My expectation is that both future base rate rises and indeed the deposit market as a whole will become more competitive in the next 12 months. There are lower volumes out there. There were clearly outflows in Q1, and there is TFSME to refinance. My expectation is that deposit margins will fall this coming year, hence the guidance on margin. You would in all reasonable expectations expect mortgage margins to respond to that. Again, I think that is towards the tail end of the year as we start to see the impact of margins having hit their peak.
Thanks. Yeah, just briefly on the Treasury Select. We're still finalizing the response. As you'd expect, we're gonna cover the fact that all of our profits.
Retained for the benefit of members. It's absolutely our mission to ensure that where we can affordably pass through more, we will. As Chris has already covered, our pass-through rate is around 65%, higher than the other high street banks. We think we've positioned ourself very well. They're also interested in the practices that we have around on-sale and off-sale rates, and, you know, how do we think about informing customers and members when new rates arrive. We're very proactive, we don't have different on-sale and off-sale rates. What we do is we make sure that we give access to our members to all of the rates that they qualify for. We proactively reach out to our customers when we have a new rate and encourage them to consider it as appropriate to them.
Whilst we're still finalizing the response, I'm optimistic that we've got some very good things to explain to Treasury Select Committee about how we think about pass-through and how we reward our loyal members.
Thank you. There's a question on deposit mix for Chris, please. Two-thirds of deposits are instant access. Have you seen much movement in that? How do you expect it to evolve?
In terms of overall shape of the deposit base, what we have seen is movements from current accounts, and obviously to Debbie's point, lower paying instant access accounts into term products and term ISAs. I would expect as we progress through the year to continue to see deposit pressure or deposit outflow from current accounts into interest-bearing accounts, and at the moment, that would reflect in a greater proportion of term. I think as we see bank rate peak and the yield curve effectively step down, that trend will slow in terms of movements into fixed rates, but I continue to expect a migration from current accounts into interest-bearing products.
Thank you. One for Muir, please. Any thoughts on potential changes to funding or liquidity regulation or the deposit guarantee? That's from Rohith as well.
Yeah. Thanks, Rohith. Clearly, in light of the banking failures globally in the earlier months this year, it is a hot topic around deposit guarantee and how that might impact funding and liquidity regulations as well, and it is a subject of hot debate for regulators, central banks globally. I think a key focus for the regulators in the UK is continuity of access as much as the absolute level of deposits that are guaranteed or with the FSCS 85K limits. In terms of funding and liquidity regulation, I think it has become clear that no one single metric should be relied upon too heavily.
Certainly the way that we always think about prudently managing the balance sheet, we look at a range of metrics, a range of scenarios, a combination of risks to make sure that Nationwide will stay resilient, whatever the scenario.
Thank you. Moving on to credit quality and asset quality. Question from Lee Street. What are your thoughts on the increase in Stage 2 balances, Chris, please?
Yeah. Thanks, thanks. That's, there's two drivers. One is a sort of basis of preparation increase. It's GBP 12 billion of the increase in stage two across the mortgage portfolio is simply down to the fact that we have incorporated what last year we call the post-model adjustments. This year it's the modeled PD uplift into the staging criteria. Wasn't there last year, that's GBP 12 billion of the GBP 19 billion total increase. The balance is down to the change in the economic scenarios, particularly the slightly higher interest rates and the sensitivity of those models to interest rates. Two-thirds of the increase is purely a basis of prep.
Thank you. On a similar topic from Luis Garrido, what do you expect the NPL ratio to be in the Buy-to-Let book in the next year, Chris?
I'm not sure that's a number we can kind of point you to. It's a very hard number to estimate. What I can point you to is the risk section of the preliminary results. If you kinda do your little spreadsheet and work through the PDs, you can work out the expected PD inherent within the expected loss charge. The only observation I would make is we're not seeing arrears rise at the moment. The expected loss charge assumes they do. The current trend is not aligned to that, as it were.
Thank you. I've got a couple of questions about the Nationwide Fairer Share payment. Where will that be reported in the P&L going forward? Are the capital ratios that we report on page 17 pro forma for that distribution, please?
it was declared and approved last night, therefore it is neither in the capital numbers or in the P&L or balance sheet. It will appear in the P&L next year. It, it, because it is a distribution of member value, it appears on the face of the P&L. It will be above provisions and charges. you will see it reduce profit, we will highlight underlying profit pre and post-member distribution. it'll be on the face of the P&L from next year.
Thank you. Back to credit quality again, if that's okay, Chris. In terms of sensitivity, if the severe downside were to happen throughout next year, what would the P&L outcome be?
Wow, okay. Let me point you to note eight, where we disclose the expected loss charge of 100%, allocation to each scenario. If we were to assume 100%, to the severe downside and the severe downside remained the same, the GBP 760 million current expected loss would rise to GBP 1.35 billion. That gives you effectively a GBP 600 million uplift in the ECL. To that, you would need to add broadly write-offs during the year. There will be a, if you like, GBP 700 million P&L charge, all things being equal, same scenario, same start point.
Thank you. A question on the mortgage market share. It was lower in the second half of the year, and the question is commenting on competition in this space. Can you give any indication on market shares going forward?
Our strategic objective is to maintain our current position and therefore by implication, hold our market share of stock broadly stable. As you point out, we went back 20 basis points during the year. In the summer, competition was intense and margins were not at a level where we wanted to compete very strongly. That set us up with a pipeline slightly smaller than we would normally have heading into the fiscal event. Clearly, the fiscal event has somewhat created some volatility and reduction in volume. Our expectation is for broadly stable market share, but this year was impacted by our view on margins in the height of the summer and the disruption from the fiscal event in the autumn.
Thank you. A question for Debbie. Is there any appetite to potentially deploy some of our excess capital to acquisitions?
We are really focused on our strategy as stated, and improving what we do today. Of course, if something presented itself that was very attractive for our members, we'd evaluate it, but we have no immediate plans to look at that at the moment.
I've got a question, a specific one on the Fairer Share. How does that work for joint account holders?
They both get it, as long as they both qualify. That's if they both have a current account and they both have an additional mortgage or savings account with a GBP 100 balance, they will both get it.
Thank you, Debbie. A question for Muir. Can you describe the benefit you received from your structural hedge this year, please?
Yeah, of course. We've got a disclosure on slide 24 in the appendices to the presentation today, which unpacks our structural hedge. What you can see in that disclosure is we've got a total quantum of structural hedge in place of GBP 43 billion. We structurally hedge our general reserves, our CCDS, and what we prudently deem to be stable current accounts. The receive fixed leg of that hedge during the year has increased from 0.64% to 1.17%. You can see there what the additional tailwind we're getting from that structural hedge now is.
Thank you. Back to the Fairer Share payment. What criteria have you set for deciding the amount of member distributions, and how does that align with the CCDS and AT1 distribution decisions?
We've set ourselves a set of financial guard rails that I will describe rather than put a precise number on. In a sense, we are post any Fairer Share distribution and clearly post our normal capital distributions. The society needs to generate sufficient profit to keep its leverage ratio stable and absorb balance sheet growth. Clearly, that number moves around depending on the size of the mortgage market and therefore the growth in the balance sheet. The principal approach is we will be capital self-sufficient post the Fairer Share payment on an ongoing basis with a stable leverage position. The GBP 100, interestingly, was a piece of work through the autumn that we did when we reset the strategy. Clearly, Debbie led us all through.
Member research came back and said somewhere between GBP 75 and GBP 100 is what members would expect as a fair reward for their loyalty and contribution to the Society.
Can I just add to that one, as well, Chris, just to really emphasize, the comment you made earlier that the Fairer Share payment only gets considered after.
Yeah
distributions on CCDS and AT1 are made in full.
Yeah. Whilst it's not a technical creditor hierarchy, it's our own imposed creditor hierarchy.
Thank you. I've got a question for Muir, please. Are you able to disclose the spot LCR at the end of the year and at the half one point, please?
We don't, we don't disclose spot. We disclose our average, but you can hopefully see very clearly from the chart on slide 15, how the 12-month rolling average has trended over the year. Just the most important point to say here is, whilst it sits at very strong 180% today, and has sat around that level for some time now, we expect that to trend back down to 135%-145%, as Chris said, once we've fully repaid TFSME. In fact, we have essentially pre-funded all of our TFS repayments to that level. If we chose to, we could repay all of our TFSME today, and our LCR would sit at around that level, which is comparable to pre-pandemic levels.
Thank you, Muir. A few questions on the new strategy, so I will merge them into one question for you, Debbie.
Okay.
Which is essentially, are you planning to diversify the business as part of your new kind of purpose and strategy that you've set out?
I think what we all recognize is that the history of Nationwide has meant that it's really focused on savings and mortgages. We have made, a number of recent strides in gaining current accounts, but I just reiterate the importance that we believe on expanding our current account relationships to really deepen those relationships so that we can ensure that we can provide a wider range of services to our existing members. That's current accounts, that will push into mortgages, savings, credit cards, personal lending. The initial focus of the strategy is all about deepening the relationships, attracting new members and new customers. As we look ahead into horizon two and three, of course, we'll evaluate new opportunities, and, you know, we've always had an ambition, if the right opportunity presented itself to consider in the future, maybe looking at owner-managed businesses.
That's not for now. It's absolutely the focus on doing what we do really well, expanding the reach that we have with existing members and continuing to attract newer, younger, and more diverse relationships for the future.
Thank you. A question, which is another general one. Do you think there are any prospects that the Bank of England will increase the minimum reserve requirements for banks and building societies?
Not, no.
No.
We've got no.
No insight.
... insights and no, intelligence on that, no.
Thank you. Now a more specific one on margin. You shared the information that 19 basis points of the margin was from timing impact. Will that fall away as rates stabilize, please?
Yes.
Short answer.
Short answer. Time-timing difference. If rates stabilize, there is no timing difference.
Thank you. Just as a reminder, if you've got any further questions, please type them into the box on the portal. We've got a quick follow-up on Fairer Share. Since it's going through the P&L, will there be a benefit from a tax shield?
We are assuming it's corporation tax deductible. Clearly, we have to agree that with HMRC.
Okay. I don't think that there are any more questions at this point, so I'd like to hand back to Debbie to close the call, please.
Okay. Just very briefly, we are very proud of the strong financial results, but in particular, the way that this has allowed us to announce the Fairer Share, and of course, that is on top of our GBP 1 billion of member financial benefit. We're very confident that we're in very rude health. We're a very safe and secure institution. Thank you for your questions. Look forward to talking to you all again at the half.