U.K.’s Nationwide releases robust earnings and capital report

On the face of it, Nationwide’s earnings report looks extremely good: 15% Tier 1 Capital, Pre-tax profit of nearly £400 million.  Given this financial institution’s leverage to the residential housing market, their results stand in stark contrast to the likes of Chelseat.gif, which was downgraded by Fitch last week with four other U.K. building societies.  The Nationwide shows performance that also stands in stark contrast to HBOS, the erstwhile king of residential property in U.K. bank lending.  Clearly, one must understand the stark contrast demonstrates that reckless risk-taking has been a major factor in the downfall of both HBOS and RBS.  I should also note that Nationwide is not a public company.  It never demutualised as did the Halifax, a prime reason for the dichotomy in risk profiles.

Here is the press release below. Take the self-congratulatory statements (“Nationwide is the largest UK banking institution not to have raised capital during the year”) with a pinch of salt:

Nationwide Building Society today announced its results for the year ended 4 April 2009. This set of results demonstrates a resilient performance in an exceptionally difficult market place. During the period, the Society has remained free from government support, has not needed to raise additional capital and its assets have increased organically in addition to the integration of three regional brands. Nationwide continues to hold high levels of liquidity and remains well capitalised with a Tier 1 ratio of 15.1% and a high quality balance sheet. Whilst the levies payable under the Financial Services Compensation Scheme (FSCS) have had a significant impact on statutory profit, the Society remains profitable and is here for the long-term providing consumers with a real and attractive alternative to the banks.

Nationwide has performed well in unprecedented and challenging market conditions:

  • Underlying profit before tax of £393 million (2008: £781 million). The reduction of 50% reflects the cost of carrying additional liquidity and margin compression in a low interest rate environment, together with an increase in impairment provisions in the current recessionary conditions.
  • Reported profit before tax for the year of £212 million (2008: £686 million).
  • Reported profit is after an exceptional charge of £241 million in respect of FSCS levies covering the Group’s share of interest for the full three year period of the HM Treasury loan to FSCS. These levies account for more than half of the fall in reported profit.
  • Despite the challenging environment, an estimated £680 million benefit has been provided to members in the year through competitive interest rates and lower fees and charges.
  • Total assets, including the impact of the mergers with The Derbyshire and The Cheshire Building Societies and acquisition of certain assets and liabilities of Dunfermline Building Society, increased by 13% to £202.4 billion (2008: £179.0 billion).

Prudent and robust balance sheet:

  • Strong capital ratios with a Tier 1 ratio of 15.1% and Core Tier 1 ratio of 12.1% (Basel II, IRB basis). Nationwide is the largest UK banking institution not to have raised capital during the year.
  • Balance sheet funded predominantly by retail savings, with our wholesale funding ratio of 28.6% (4 April 2008: 31.0%) being one of the lowest levels within UK banking institutions.
  • Loans originated by Nationwide continue to perform strongly, with the proportion of residential mortgage accounts more than 3 months in arrears of 0.60%, compared with the CML industry average of 2.39% as at 31 March 2009. The CML industry average has deteriorated at twice the rate of Nationwide’s arrears on originated loans in the year to 31 March 2009.
  • Mortgage assets acquired through mergers with Derbyshire and Cheshire and the purchase of Dunfermline’s prime residential assets have been fair valued on a basis which makes allowance for anticipated losses over the remaining life of the loans. As a result of this fair valuation exercise, Group profits should be protected from future losses.
  • The recession has impacted the commercial property market particularly in the second half of the year and has resulted in a significant increase in the number and value of commercial arrears cases, albeit from a very low base. The number of Nationwide originated commercial cases 3 or more months in arrears is 179 (4 April 2008: 66).
  • The proportion of unsecured personal loan balances over 30 days in arrears increased to 7.15% (2008: 5.88%), but remains significantly less than the industry average of 17.0%.
  • The Society’s core liquidity ratio at 4 April 2009 was 12.8% (4 April 2008: 8.9%).
  • The AFS reserve has increased to £2.0 billion negative, net of tax (4 April 2008: £0.4 billion negative). The Available for Sale (AFS) assets have been carefully reviewed based upon latest performance data and no significant additional impairment has been booked in the second half of the year. The majority of these assets were purchased with the intention of holding them to maturity and we continue to expect to recover full value for substantially all of them over their residual life.

Proactive response to market conditions:

  • Merger transactions with The Derbyshire and The Cheshire Building Societies were successfully completed in December 2008, three months after announcement.
  • Acquisition of prime residential loans, retail liabilities and other selected assets and liabilities of Dunfermline Building Society completed in March 2009.
  • Portman integration was completed ahead of schedule, with total merger synergies of £90 million to be delivered by the end of 2009/10.
  • Retail savings franchise expanded into the Republic of Ireland with the opening of a branch in Dublin.

Nationwide’s chief executive, Graham Beale, said, “History will record 2008 as a year of fundamental change to banks and financial institutions across the world. Nationwide has remained strong in the midst of all this turbulence and has been the only major UK banking institution not to raise capital or seek access to Government sponsored capital enhancing schemes. This reflects a combination of our naturally high capital and prudent lending practices which are the hallmark features of a strong building society.

“Profitability has been adversely affected by the low interest rate environment and increased provisions as a result of the current recession. Our reported profit is 53% lower than it would otherwise have been because there is an exceptional charge of £241 million relating to the levies payable to the FSCS.

“We regard the fact that the FSCS charge is not linked to the level of risk posed to the financial system by individual institutions, but instead is allocated by share of the retail savings market, as illogical and unfair, producing a disproportionate outcome for the low risk retail funded institutions, particularly building societies. This view is shared by 173 cross party MPs. We have also lobbied for an increase in the FSCS limit from £50,000 to at least £100,000 which would reassure savers with independent institutions that they have similar protection as those with Government owned, nationalised and part-nationalised banks.

“During the year we played our part in promoting financial stability by merging with the Derbyshire and Cheshire building societies in December 2008 and by acquiring selected assets and liabilities of Dunfermline Building Society in March 2009. In addition, the Group also expanded its retail savings franchise by opening a branch in Ireland in March 2009.

“The size of the mortgage and savings market has contracted significantly in the year as a result of the extreme economic conditions. In addition, aggressive deposit taking by state owned institutions such as NS&I and Northern Rock effectively took in excess of 70% of the savings market in the second half of 2008. Against this background we maintained our competitive position with healthy market shares of over 8% for mortgages and 10% for savings deposit growth.

“Market conditions will remain challenging throughout 2009 and beyond. In particular, the low interest rate environment will continue to depress margin and higher levels of unemployment and business failures will inevitably lead to increased loan loss provisions. However, we remain confident that Nationwide’s high quality balance sheet and robust capital ratios will continue to underpin our financial strength and place us in a strong position to trade through these conditions and remain a real and attractive alternative to the banks.”


Originally published at Credit Writedowns and reproduced here with the author’s permission.