Preliminary results announcement for the year ended 4 April 2005
Results highlights
Business & financial review
Consolidated income and expenditure account
Consolidated balance sheet
Consolidated cash flow statement
Consolidated statement of total recognised gains and losses
Notes to the preliminary results announcement
Other information
Contacts
Tables
1. Interest receivable and similar income
2. Interest payable and similar charges
3. Administrative expenses and depreciation
4. Provisions for bad and doubtful debts
5. Provisions for Liabilities and Charges
6. Amounts written off/(released) and provisions against fixed asset investments
7. Revaluation reserve
8. General reserve
9. Reconciliation of operating profit to net operating cash (outflow) from operating activities
10. Segmental Reporting
Basis of Preparation
Results Highlights
Review
Nationwide has again delivered a very strong set of financial results and an exceptional operating performance for the financial year ending 4 April 2005 supporting our proposition that a well managed 'modern mutual' can deliver real value to its membership and make an impact in the financial services market place. Profit before taxation was £517.1m, an increase of 21% over the previous year's £426.8m and total assets grew by 10% to £111.6bn (2004 - £101.4bn). These results have generated improvements in our key measures of efficiency with costs to mean total assets ratio falling to 0.86% (2004 - 0.93%) and costs to income ratio falling to 59.9% (2004 - 64.1%).
Nationwide's strategy is to deliver value to its membership by providing financial services products with competitive interest rates and lower fees and charges, underpinned by policies of fairness, honesty and transparency as befits the world's largest building society. Compared with a portfolio of similar products provided by our competitors, our pricing policy generated a pricing benefit to members equivalent to an estimated £644m (2004 - £588m). Combined with retained earnings for the year of £365.3m (2004 - £317.9m), this generated total Member Value of £1,009m (2004 - £906m).
We have been successful across a wide range of financial services products but it is in our core markets of mortgages and savings where performance has continued to be strong. Net lending of £10.9bn (2004 - £13.2bn) exceeded par share by £2.9bn representing over 11.8% (2004 - 12.8%) of net lending in the UK and maintaining our position as the fourth largest lender in the UK. We are the second largest deposit taker with total member deposits growing by £6.7bn to £72.6bn (2004 - £65.9bn) representing a market share of 9.0% (2004 - 6.9%).
Financial & business highlights
'Mutual franchise goes from strength to strength'
- pre-tax profit up 21% to £517.1m (2004 - £426.8m)
- retained earnings up 15% to £365.3m (2004 - £317.9m)
- total assets up 10% to £111.6bn (2004 - £101.4bn)
- gross capital increased by 15% to £7.1bn (2004 - £6.2bn)
- strong solvency ratio of 11.7% (2004 - 11.7%)
- ratio of costs to mean total assets down to 0.86% (2004 - 0.93%), falling for the 16th successive year
- ratio of costs to income reduced to 59.9% (2004 - 64.1%)
Mortgages
- gross advances of £23.2bn representing a market share of 8.4% (2004 - £24.4bn, 8.5%)
- retention of mortgage business has been strong with principal repaid representing a market share of 6.7%, well below our par share of 8.6%
- net lending of £10.9bn representing a market share of 11.8% (2004 - £13.2bn, 12.8%)
- retail residential mortgage balances increased by 16% to £78.2bn (2004 - £67.3bn)
- UCB Home Loans, the Society's specialist mortgage lender, recorded a strong performance with gross mortgage advances of £1.7bn (2004: £1.9bn)
Savings
- balances increased by 10% to £72.6bn (2004 - £65.9bn), representing a 9.0% (2004 - 6.9%) share of the retail savings market
- the online product range was expanded with the launch of an Internet based, 1 year fixed rate savings bond
- £2.7bn of Fixed Rate Savings Bonds issued (2004 - £2.7bn)
Banking & Consumer Lending
- gross personal loan lending increased by 23% to £1,107m (2004 £897m)
- gross credit card lending increased over 36% to £1.9bn (2004 - £1.4bn)
- new credit card accounts issued totalled 217,000 (2004 - 222,000)
- total credit card accounts up 22% to 796,000 (2004 - 653,000)
- number of current accounts grew 17% to 3,150,000 (2004 - 2,700,000)
- total consumer receivables has now reached £2.3bn (2004 - £1.9bn)
Insurance and Investments
- total 'in force' general insurance covers totalled 1,521,000 policies (2004 - 1,578,000)
- Nationwide Investment Group product sales remained strong at 139,000 (2004 - 159,000)
- total Nationwide Life 'in force' policies grew 6% to 775,000 policies (2004 - 733,000)
- funds under management in Nationwide Unit Trust Managers increased to £2.0bn (2004 - £1.7bn)
- new low risk fund (Target Return Fund) launched
- Nationwide Unit Trust Managers re-launched its full range of investments, abolishing initial charges and introducing a £20 minimum investment
Commercial Lending
- gross advances of £4.3bn (2004 - £4.1bn), a growth of 5%
- net lending totalled £670m (2004 - £1.6bn)
- total commercial balances at 4 April 2005 of £12.7bn representing 11% of total assets (2004 - £12.1bn, 12%)
Social Responsibility
- £1m was donated to our associated charity, the Nationwide Foundation
- Nationwide recognised as an exemplar organisation by Investors in People (IIP) the only financial services company to achieve this
- recognised as the UK's best large employer by the Sunday Times
Chief executive's review
Philip Williamson, chief executive, said: "These results provide clear evidence that more and more people are defecting from the banks and choosing to do business with Nationwide because we give them a better deal. We have consistently delivered lower mortgage rates and higher savings rates than the vast majority of our competitors. However, it's not just the value we deliver in our core product areas of mortgages and savings that's been appreciated; current accounts, personal loans and credit cards are all surging ahead very positively. Over 875,000 new customers have joined us over the past 12 months - that's over 2,000 every day. This is a testimony to the fact that, with no shareholders to worry about, we genuinely put our members at the heart of everything we do.
"In the past year we have successfully led the campaign to raise awareness of the growing threat to free cash machines and have made a major commitment to the communities in which we operate. Nearly 70 branches and agencies have already benefited from our £300m 6 year investment programme, our call centre operations in the UK have been refurbished and we have opened a new call centre in Sheffield. Our investment in the branch network, UK call centres and the Internet is designed to help make Nationwide's customer service the best of any bank or building society in the UK.
"These results are a real tribute to Nationwide's people and the continuing energy each of them invests in our business every single day. I am enormously proud of the very high level of enthusiasm and dedication they consistently show to our members. Without their significant contribution Nationwide would not have become the very real force in financial services it is today."
Business & financial review
Nationwide achieved its strategic goals of delivering value to its membership, combined with a strong profit to support continued investment in the Society and the future growth of the balance sheet. Our success in delivering a broad range of financial services products enabled us to increase total assets by 10% from £101.4bn last year to £111.6bn and generated a profit before tax of £517.1m (2004 - £426.8m). Our member base grew by 383,000 during the year to more than 11 million members.
During the year we generated an estimated £644m (2004 - £588m) in the form of pricing benefit to our members by offering better rates and by charging lower fees and charges than our competitors. Over the medium term we aim to fund our growth through retained profits. This year we retained £365.3m (2004 - £317.9m), an increase of 15% on last year, to support the strong 10% growth in our assets over the year.
We are investing in our infrastructure to develop a modern business and in the summer of 2004 announced a £300m, six year programme to ensure that our branch, telephones and other access channels are maintained at the modern standards expected by our members. The strength of Nationwide's retail franchise is key to our strategy and enabled us to continue to increase our level of retail funding.
Regulatory change is a major theme and we have successfully implemented the changes required by the introduction of mortgage and general insurance regulation. This was achieved with minimal disruption to our members and is in line with our aim to always comply fully with all relevant rules and regulations.
We have also invested in our people and we are very proud of the fact that Nationwide was recently recognised as the UK's best large employer by the Sunday Times.
Mortgages
We provide a comprehensive range of very competitive mortgage products both directly, through branches, over the phone, via the Internet, and through intermediaries. Unlike the majority of other lenders all our mortgage products are available to both new and existing customers. We believe it is unfair to offer attractive deals to new customers which are not available to long standing existing customers.
The Nationwide Group achieved £10.9bn of net lending (2004 - £13.2bn), representing a market share of 11.8% (2004 - 12.8%) against a par market share of 8.6%. We maintain our position as the fourth largest lender in the UK.
- the UK experienced a slightly weaker mortgage market as equity withdrawal reduced from its peak the previous year. However, remortgaging remained strong, accounting for nearly 43% of total market lending
- total gross lending was £23.2bn (2004 - £24.4bn), a market share of 8.4% (2004 - 8.5%). Nationwide was particularly successful in attracting re-mortgage business, gaining a share of 9.5% (2004 - 10.0%) of the re-mortgage market
- we were again highly successful in retaining borrowers. This excellent performance was partly driven by our policy of charging between 0.5% to 1.0% less interest on our standard variable rate mortgage compared with our major competitors. Our policy of selling simple mortgage products available to all borrowers also helped this excellent retention. In addition, good service and an active policy of customer contact enabled us to retain borrowers with maturing fixed rate and tracker rate mortgage products. Our 6.7% market share of principal repaid in the Group was well below our mortgage par share of 8.6%. We estimate this excellent retention performance contributed £3.5bn to our total net mortgage lending
- UCB Home Loans, the Society's specialist mortgage lender, also recorded a good performance with gross mortgage advances of £1.7bn (2004 - £1.9bn) and net advances of £556m (2004 - £718m). UCBHL deals mainly with self certified mortgages, for borrowers who find it difficult to obtain loans from mainstream lenders, and with Buy to Let applications
- buy to let gross advances for the year were £450m (2004 - £418m) resulting in buy to let balances totalling £1.1bn at the year end (2004 - £0.7bn). The proportion of buy to let balances compared to Group loans to customers at the year end was 1.16% (2004 - 0.91%)
Asset quality remains very strong. Our responsible approach to lending has ensured that our arrears levels are better than industry averages. The average loan to value (LTV) of new residential mortgage lending was 52% (2004 - 52%), while the estimated LTV of our total book is 37% (2004 - 38%).
Residential mortgage arrears (3 months or more) have reduced by 17% over the past twelve months. Nationwide continues to significantly outperform the secured lending market with the proportion of total secured lending currently more than three months in arrears being 0.31% (2004 - 0.37%) against an industry average of 0.80% (CML figures as at December 2004).
Savings
Nationwide is now the second largest savings provider in the UK with our savings accounts, on average, 0.45% better priced than those of our competitors. The great majority of our retail funding is in the form of UK retail member deposits. In addition, we accept offshore deposits and deposits which do not convey member status.
The competition for retail funds remained strong during the year. Despite this continued competition, we achieved a 9.0% (2004 - 6.9%) share of the overall increase in UK retail savings, representing £6.7bn (2004 - £5.0bn). This compares favourably with a par share of 8.0%. Total retail member deposits as at 4 April 2005 amounted to £72.6bn (2004 - £65.9bn).
Strong savings flows were primarily driven by our e-Savings and fixed rate bond products. We also launched a range of special bonds available only to existing members including a Summer Bond at a fixed rate of 6.0% and a Christmas Bond at a fixed rate of 6.0%. In addition, we launched our first e-bond offering a one year fixed rate of 5.0%.
Banking & Consumer Lending - Personal Loans
Personal loans are offered through the Society's personal loans subsidiary, Nationwide Trust Limited. Gross unsecured personal loan lending increased by 23% to £1,107m (2004 - £897m), driven by our strategy of offering keener pricing combined in a single rate available to all borrowers irrespective of the amount borrowed. Loans are sold through our retail network, over the telephone and via the Internet. Nationwide Trust has in excess of 270,000 unsecured personal loan customers.
We adopt a cautious approach to all of our lending activities, particularly unsecured lending. Last year we rejected approximately one in every two unsecured loan applications received and our credit assessment process looks at the impact of an assumed increase in interest rates to determine a borrower's ability to service their debt in more difficult economic conditions. We already have other relationships with nearly three quarters of those to whom we provide personal loans.
Banking & Consumer Lending - Credit Cards
With over 1,300 brands available in the UK, offering a variety of rates, fees, terms and conditions, the credit card market is complex. As part of our drive for greater transparency Nationwide was the first UK card provider to publish a credit card comparison table to help consumers make an informed choice and successfully lobbied for it to be adopted by all card providers.
We issued 217,000 new credit card accounts (2004 - 222,000) taking total accounts up to 796,000 (2004 - 653,000) and total cards in issue to 1,054,000 (2004 - 868,000). Balances outstanding on credit cards as at 4 April 2005 amounted to £563m (2004 - £467m).
Banking & Consumer Lending - Current Accounts
The Society's current account, FlexAccount, is a key product in developing and retaining customer relationships. We offer a highly competitive account with a range of good value features including up to 3% credit interest. More than 25% of FlexAccount customers now regularly use our Internet Banking service and over 2.1m members are registered to use Nationwide's online banking service.
The total number of Nationwide current accounts has now passed the 3 million mark, with the number of current accounts growing by 450,000 during the year (2004 - 406,000). The Society attracted 9% of people changing their current account provider, double its par share. Source: NOP FRS, March 2005.
General Insurance
During the year over 374,000 general insurance covers were sold and our general insurance book stood at over 1.5m covers as at 4 April 2005. We typically use leading insurers as third-party underwriters. This provides us with an important source of non-interest income and we earned £101.7m (2004 - £75.5m) from commission and profit share.
Nationwide's Car Insurance Price Promise was launched in October. This offer provides the guarantee that if policyholders buy car insurance from Nationwide and subsequently find a better priced quote, the difference will be refunded. The Promise underlines the competitiveness of the Society's car insurance product and generated a growth in the motor insurance book of over 40%.
Life Assurance and Investments
The Society, through its wholly owned subsidiaries, Nationwide Life Limited (NL) and Nationwide Unit Trust Managers Limited (NUTM), writes a range of investment and protection products. These include two types of insurance product; term life assurance and critical illness cover. 74,000 life products were sold during the year (2004 - 96,000 products).
We also provide our customers with a range of personal investment products, including unit trusts, pension contracts, guaranteed equity bonds and equity individual savings accounts (ISAs). At 4 April 2005 our range of unit trust investment products held by our customers had a market value of approximately £2.0bn (2004 - £1.7bn).
We further expanded our product range during the year with the launch of two new investment products - a low risk fund (Target Return fund) and our Child Trust Fund. Nationwide was one of only four high street providers to offer the choice of an equity or cash based Child Trust Fund, with over 65,000 applications received by the Year End. Nationwide Unit Trust Managers also re-launched its full range of investments, abolishing initial charges and introducing a £20 minimum investment.
Our life insurance subsidiary is consolidated in the Group using the embedded value method. The change in the embedded value of the long term life assurance business is included within other operating income and has increased from last year to £50.0m (2004 - £44.8m).
Commercial Lending
Commercial mortgage lending totalled £4.3bn (2004 - £4.1bn), representing an increase of 5%, with balances outstanding of £12.7bn (2004 - £12.1bn). This reflects a good year in all three business units which deal with loans:
- to UK registered social landlords secured on residential property
- secured on commercial property
- to support Private Finance Initiatives
Asset quality remains strong. Commercial lending arrears levels of three months or more have improved year on year from 87 to 79 cases. Arrears balances were £2.6m (2004 - £3.8m) representing a 32% decrease.
We remain the lender with the largest volume of funding commitments to Registered Social Landlords. Many Registered Social Landlords have seen their businesses mature, particularly those that originally received the transfer of municipal housing stock from local authorities. Whilst there have been fewer new stock transfers this year there have been several refinancings and increases in borrowing as registered social landlords respond to government initiatives on efficiency and new housebuilding especially in the south east.
Treasury
Total wholesale funding increased by £2.3bn, mainly in support of lending growth. At 4 April 2005, wholesale balances stood at £29.1bn (2004 - £26.8bn) representing a funding ratio of 28.6%.
During the year the Society has enjoyed a strong appetite from wholesale funding investors and has operated successful Medium Term Note programmes in the Dollar, Euro and Sterling markets.
Increasing importance is being placed on diversifying our global investor base through our investor relations activities and during the year we established a €5.0bn French Commercial Paper Programme.
In addition to raising wholesale funds we also raised €750m (£513.9m) of capital in the year through a subordinated debt programme. Investor appetite for Nationwide subordinated debt is strong and the issuance was substantially oversubscribed.
Liquidity balances totalled £15.1bn at 4 April 2005 (2004 - £17.4bn) representing a prudential liquidity ratio of 11.5% (2004 - 15.3%). Prudential liquidity has been managed down in the year to improve the efficiency of the Balance Sheet.
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+ |
Outlook
We expect lower levels of economic growth to impact on the housing and lending markets during 2005. After 5 years of double digit house price inflation we expect the housing market to experience a soft landing with house prices slowing to an annual growth rate of about 2% by the end of the year. Gross mortgage lending is expected to fall slightly, but be held up by continuing high levels of remortgaging. Significantly lower levels of mortgage equity withdrawal will mean that net lending will not hold up so well compared with 2004 levels.
Lower mortgage equity withdrawal and continued strong competition from credit providers who are seeking increased levels of retail funding mean that conditions in the retail savings market are likely to be significantly more competitive in 2005.
The combined competition in the mortgage and savings markets will continue to put downward pressure on interest margins. An expectation of slower economic growth resulting from more subdued demand and weaker global conditions means that an increase in interest rates in 2005 is now less likely. Our central view is that interest rates will remain at around the 4.75% mark during 2005. However, the impact of historically high oil prices and other input prices on inflation creates upside risk. Even if the Monetary Policy Committee does increase rates this year, we do not expect this to be by more than 25 basis points.
We will work hard to deliver another set of excellent results with good growth in all of our key markets, further improvement in our efficiency and stringent control over asset quality. This should lead to the delivery of increased profits while maintaining the distribution of substantial pricing benefits to our members.
Financial review
Profit
The Group has seen a strong growth in profit before tax of 21%, at £517.1m (2004 - £426.8m). Profit after taxation was £365.3m (2004 - £317.9m) an increase of 15%. The increase in profit was consistent with our strategy of moving to a level of retained earnings that supports the growth in the Balance Sheet. During the year retained earnings were supplemented with additional capital to maintain a strong Solvency Ratio of 11.7% (2004 - 11.7%).
Net Interest Income
Group net interest income increased by 8%, or £90.5m to £1,189.2m (2004 - £1,098.7m). The net interest margin was 1.12% (2004 - 1.18%). This reduction was the consequence of continued competition causing downward pressure on the spread between savings and lending rates, the continuing fall in the proportion of mortgage balances paying standard variable rates and an increase in the cost of funds compared with base rate. Some of this impact was offset by the higher differential between LIBOR and base rates enjoyed this year compared with the previous year.
Non Interest Income
Group non interest income increased by 35%, or £87.5m, to £338.5m (2004 - £251.0m). Fees and commissions receivable increased by £84.6m to £377.4m (2004 - £292.8m). Non interest income has been further enhanced by a reduction in fees and commissions payable of £2.0m to £109.1m (2004 - £111.1m).
Fees receivable from lending activity increased by £34m as a result of increased reservation fees for fixed rate and tracker mortgage products, in line with the market. However, we have positioned our fees to remain, on average, lower than those of our competitors. Fees from our banking business increased by £14.6m to £110.6m (2004 - £96.0m) as a result of the strong growth in our FlexAccount business during the last two years. Commissions from our insurance businesses increased by £32.6m to £164.2m (2004 - £131.6m) resulting from growth in our life business, the renegotiation of general insurance contracts and benign weather conditions in the UK.
The cost of securing business reduced due to lower survey fees and lower mortgage incentive costs.
Administrative Expenses and Depreciation
Total administrative expenses including depreciation increased by £49.7m, or 6%, to £915.3m (2004 - £865.6m). This was against a background of a strong growth in new business with total assets increasing by 10%, growth in margin income of 8% and growth in other income of 35%. As a result, the costs to income ratio, one of our principal measures of efficiency, improved from 64.1% last year to 59.9% this year. We also saw an improvement in our costs to mean total assets ratio from 0.93% to 0.86%, the 16th successive year we have seen an improvement.
The growth in administration expenses has been driven by employee costs. During the year headcount increased by 346 (full time equivalent employees) but is planned to remain flat going forward. The total charge in respect of pensions increased by £38.6m to £84.7m (2004 - £46.1m). As at 4 April 2005 the net retirement benefits liability was £239m (4 April 2004 - £302m) as measured under the assumptions contained in Financial Reporting Standard 17 - Retirement Benefits (FRS 17).
Provisions for Bad and Doubtful Debts
The total charge for bad and doubtful debts increased by £3.0m to £46.6m. The combination of high quality lending, relatively low interest rates and house price inflation all contributed to a reduction in the charge on the secured loan portfolio. We have experienced an increase in the provision charge for unsecured lending products and this is broadly in line with the increased volumes of lending.
In the two principal loan portfolios, residential and commercial, the accounts 3 months or more in arrears fell by 17% and 9% respectively. Against this background of improved credit quality, general provisions have remained static year on year in these two portfolios.
Provisions for Contingent Liabilities and Commitments
Like many other distributors of savings and investment products, Nationwide is facing an increasing level of concern on the part of current and former members and customers about the value of some of their life assurance products and investment policies, particularly endowment policies sold principally before 1990 by the Society, intended as repayment vehicles for mortgage borrowings. Against a background of falling investment returns it is possible that the value of some investment policies will not be sufficient to fully repay mortgages on maturity. Complaints from members, who claim they did not appreciate this risk, are reviewed on an individual basis and with reference to the circumstances prevailing at the date the policies were sold. In some cases this gives rise to the payment of compensation to put the borrower in the equivalent position as if the mortgage had been written on capital repayment terms.
Provisions raised of £46.7m (2004 - £39.9m) include £44.6m (2004 - £34.1m) for the cost of customer redress relating to all current and estimated future endowment review claims based on current trends and investment performance.
Amounts Written off/(Released) Fixed Asset Investments
Provisions were increased by £2.0m during the year (2004 - release of £26.2m) against an investment asset portfolio of £2.2bn (2004 - £1.8bn), primarily comprising asset backed securities and corporate bonds. The charge results from an additional provision on one part of the portfolio, set against a modest improvement in the underlying market value of the assets contained in the remainder of the portfolio. This is in contrast to the dramatic improvement in the value of the assets seen in the previous year.
Taxation
The effective rate of tax was 29.4% (2004 - 25.5%), compared with the standard rate of corporation tax of 30%. Nationwide carries out its commercial activities and structures its business in a tax efficient manner and this is reflected in the Group tax charge.
Capital
Regulatory capital stood at £6.9bn (2004 - £6.2bn) with the Group's total solvency ratio remaining strong at 11.7% (2004 - 11.7%). The Tier 1 solvency ratio stood at 9.1% (2004 - 9.3%). The Tier 2 ratio stands at 2.6% (2004 - 2.4%) reflecting low levels of subordinated debt. Both ratios remain well in excess of the minimum established by the Society's regulator.
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.
| Pricing Benefit distributed to members | 2005 £m |
2004 £m |
| Benefit to borrowers | 216 | 223 |
| Benefit to savers | 259 | 236 |
| Benefit to members with other products | 169 | 129 |
| Total | 644 | 588 |
Regulation
As a mutual organisation our strategy and policies are designed to put our members first, to maintain our financial strength and to safeguard our assets. We aim to maintain a relatively low risk profile and to comply fully with all relevant rules and regulations.
A key theme of our regulator is "treating customers fairly". In particular, we welcomed the introduction of new regulation of mortgages and insurance during the year and we successfully implemented all the changes required by the new regulations with minimal disruption for our members.
International Financial Reporting Standards
We will be preparing our accounts under International Financial Reporting Standards (IFRS) from the financial year ended 4 April 2006 onwards. For comparative purposes, our results for the financial year ended 4 April 2005 will be restated under IFRS and disclosed in our interim report and the Annual Reports and Accounts for the financial year ending 4 April 2006.
As a first time adopter of IFRS from next year, we are required to produce an IFRS compliant opening balance sheet. Adjustments arising from the application of IFRS, except where comparative figures are not required to be restated, will be reflected in the retained reserves in the opening balance sheet. Comparative figures do not have to be restated for IAS 39 (Financial Instruments) and IFRS 4 (Insurance Contracts) and the transitional adjustments for these standards will be made as at 5 April 2005.
The overall impact on our reserves at 5 April 2005 is expected to be a reduction of approximately 5% of our reserves under UK GAAP at 4 April 2005. The table below identifies the main areas of change. From 5 April 2005 the accounts will be impacted by changes in the fair values of investment securities and derivatives and volatility arising where the Group does not qualify for hedge accounting. The future impact of the changes in the treatment of fee income and costs will depend on the mix of the fees and costs and the rate of future growth.
| Issue | Impact on Opening Reserves |
| Retirement Benefits The deficit on the Group's retirement benefit funds is now included as a liability on the balance sheet. |
The impact will be a decrease in general reserves at 5 April 2005 equivalent to the deficit in the retirement benefit funds net of tax and prior year prepayments. |
| Loan related fees and costs The majority of loan related fees and costs (for example, application and survey fees, introducer commission and early redemption fees) are deferred and recognised over the expected life of the loan. |
We currently recognise fees and costs on an incurred basis. The impact of recognising them over the expected life of loans will result in a net credit being carried on the balance sheet for future recognition and a corresponding reduction in general reserves. |
| Loan Impairment Under IFRS, an impairment provision can only be made where there is objective evidence that a loss has occurred. |
The more prescriptive requirements are expected to reduce provision levels on the balance sheet with a corresponding increase in general reserves. |
| Derivatives IFRS requires derivatives to be included on the balance sheet at their fair value, with changes in value being included in the income and expenditure account. |
The resulting income statement volatility will be mitigated by the application of hedge accounting. However some volatility will remain and a decrease in opening reserves is expected. |
| Investment Securities Investment (or Debt) Securities are measured at fair value with changes in their values going through a separate 'Available for Sale' (AFS) reserve. |
There will be an increase in the opening reserves as overall, the fair values of our investment securities exceed their historic cost. |
The Group is planning to make a more detailed announcement on the impact of IFRS later in the year.
Basel 2
We have made further investment to ensure we are compliant with the Basel 2 Capital Accord when it is introduced in 2007. Our work includes the development of risk management systems that will form the core element of our future management information systems and reporting. We believe the composition of our business and the quality of our asset base will lead to Nationwide potentially benefiting from a lower regulatory capital requirement under the new regime.
CONSOLIDATED INCOME AND EXPENDITURE ACCOUNT
For the year ended 4 April 2005
| Note | 2005 £m |
2004 £m | ||
| Interest receivable and similar income | 1 | 5,094.8 | 3,870.8 | |
| Interest payable and similar charges | 2 | 3,905.6 | 2,772.1 | |
| Net interest receivable | 1,189.2 | 1,098.7 | ||
| Fees and commissions receivable | 377.4 | 292.8 | ||
| Fees and commissions payable | (109.1) | (111.1) | ||
| Other operating income | 70.2 | 69.3 | ||
| Total income | 1,527.7 | 1,349.7 | ||
| Administrative expenses | 815.8 | 756.8 | ||
| Depreciation and amortisation | 3 | 99.5 | 108.8 | |
| Operating profit before provisions | 612.4 | 484.1 | ||
| Provisions for bad and doubtful debts | 4 | 46.6 | 43.6 | |
| Provisions for Contingent Liabilities and Commitments | 5 | 46.7 | 39.9 | |
| Amounts written off/(released) fixed asset investments | 6 | 2.0 | (26.2) | |
| Profit on ordinary activities before tax | 517.1 | 426.8 | ||
| Tax on profit on ordinary activities | 151.8 | 108.9 | ||
| Profit for the financial year | 365.3 | 317.9 | ||
| % | % | |||
| Net interest receivable as a % of mean total assets | 1.12 | 1.18 | ||
| Costs as a % of mean total assets | 0.86 | 0.93 | ||
| Pre tax profit as a % of mean total assets | 0.49 | 0.46 | ||
| Retained profit as a % of growth in Risk Weighted Assets | 5.69 | 3.50 |
CONSOLIDATED BALANCE SHEET
As at 4 April 2005
| ASSETS | Note | 2005 £m |
2004 £m | |
| Liquid assets | ||||
| Cash in hand and balances with the Bank of England | 362.5 | 310.5 | ||
| Loans and advances to credit institutions | 635.6 | 1,464.1 | ||
| Debt securities | 14,145.0 | 15,650.8 | ||
| Loans and advances to customers | ||||
| Loans fully secured on residential property | 82,303.2 | 70,762.2 | ||
| Loans fully secured on land | 7,300.5 | 7,433.5 | ||
| Other loans | 3,118.2 | 2,510.5 | ||
| Investments | ||||
| Equity shares | 14.9 | 9.0 | ||
| Tangible fixed assets | 894.2 | 857.6 | ||
| Other assets | 436.6 | 409.9 | ||
| Prepayments and accrued income | 463.6 | 237.4 | ||
| 109,674.3 | 99,645.5 | |||
| Long term life assurance business assets | 1,917.3 | 1,782.9 | ||
| Total assets | 111,591.6 | 101,428.4 | ||
| LIABILITIES | ||||
| Shares | 72,594.1 | 65,943.9 | ||
| Amounts owed to credit institutions | 1,650.6 | 2,229.3 | ||
| Amounts owed to other customers | 5,076.5 | 4,836.5 | ||
| Debt securities in issue | 22,377.6 | 19,706.5 | ||
| Other liabilities | 490.4 | 419.0 | ||
| Accruals and deferred income | 353.5 | 284.6 | ||
| Provisions for liabilities and charges | 5 | 60.7 | 55.4 | |
| Subordinated liabilities | 1,439.8 | 925.6 | ||
| Subscribed capital | 692.2 | 691.7 | ||
| 104,735.4 | 95,092.5 | |||
| Revaluation reserve | 7 | 228.0 | 211.9 | |
| General reserve | 8 | 4,710.9 | 4,341.1 | |
| 109,674.3 | 99,645.5 | |||
| Long term life assurance business liabilities | 1,917.3 | 1,782.9 | ||
| Total liabilities | 111,591.6 | 101,428.4 | ||
| % | % | |||
| Liquidity ratio | ||||
| Funding limit | 28.6 | 28.9 | ||
| Lending limit | 12.2 | 13.1 | ||
| Solvency ratios: | ||||
| Tier 1 | 9.1 | 9.3 | ||
| Tier 2 | 2.6 | 2.4 | ||
| Total | 11.7 | 11.7 |
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 4 April 2005
| Note | 2005 £m |
2004 £m | ||
| Net cash (outflow) from operating activities | 9 | (1,836.3) | (177.1) | |
| Returns on investments and servicing of finance | ||||
| Interest paid on subordinated liabilities | (46.7) | (35.2) | ||
| Interest paid on subscribed capital | (46.9) | (23.8) | ||
| Taxation | (91.1) | (95.2) | ||
| Capital expenditure and financial investment | ||||
| Purchase of investment securities | (27,557.0) | (27,249.5) | ||
| Sale and maturity of investment securities | 29,216.4 | 26,943.9 | ||
| Purchase of tangible fixed assets | (126.0) | (126.8) | ||
| Sale of tangible fixed assets | 12.0 | 13.8 | ||
| 1,545.4 | (418.6) | |||
| (475.6) | (749.9) | |||
| Financing | ||||
| Issue of subscribed capital | - | 400.0 | ||
| Issue of subordinated liabilities | 513.9 | 341.9 | ||
| Increase/(decrease) in cash | 9 | 38.3 | (8.0) | |
CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
For the year ended 4 April 2005
| Note | 2005 £m |
2004 £m | ||
| Profit for the financial year | 365.3 | 317.9 | ||
| Unrealised surplus on revaluation of properties | 20.6 | 49.0 | ||
| 385.9 | 366.9 | |||
| Translation difference on foreign currency investments | - | (7.9) | ||
| Translation difference on foreign currency hedge | - | 11.3 | ||
| Taxation on translation difference on foreign currency hedge | - | (3.4) | ||
| Total gains and losses recognised relating to the year | 385.9 | 366.9 | ||
NOTES TO THE PRELIMINARY RESULTS ANNOUNCEMENT
For the year ended 4 April 2005
| 1. Interest receivable and similar income | 2005 £m |
2004 £m | ||
| On loans fully secured on residential property | 3,988.5 | 3,065.3 | ||
| On other loans | 672.9 | 575.8 | ||
| On debt securities | 574.5 | 534.4 | ||
| On other liquid assets | 55.4 | 15.5 | ||
| Net expense on financial instruments hedging assets | (196.5) | (320.2) | ||
| 5,094.8 | 3,870.8 | |||
| 2. Interest payable and similar charges | 2005 £m |
2004 £m | ||
| On shares | 2,769.7 | 2,031.8 | ||
| On subscribed capital | 47.3 | 27.8 | ||
| On deposits and other borrowing | ||||
| - subordinated liabilities | 48.9 | 40.0 | ||
| - other | 1,010.3 | 684.4 | ||
| Net expense/(income) on financial instruments hedging liabilities | 29.4 | (11.9) | ||
| 3,905.6 | 2,772.1 |
| 3. Administrative expenses and depreciation | 2005 £m |
2004 £m | ||
| Employee costs | ||||
| - wages | 321.1 | 312.4 | ||
| - social security costs | 29.8 | 29.5 | ||
| - other pension costs | 84.7 | 46.1 | ||
| 435.6 | 388.0 | |||
| Depreciation | 99.5 | 108.8 | ||
| Other administrative expenses | 380.2 | 368.8 | ||
| 915.3 | 865.6 | |||
| 4. Provisions for bad and doubtful debts | 2005 £m |
2004 £m | ||
| Provisions charge/(credit) for the year: | ||||
| Specific - loans fully secured on residential property | (0.3) | (4.9) | ||
| - loans fully secured on land | (1.4) | 0.5 | ||
| - other loans | 48.1 | 39.0 | ||
| 46.4 | 34.6 | |||
| General - loans fully secured on residential property | - | 8.1 | ||
| - loans fully secured on land | - | 5.4 | ||
| - other loans | 0.2 | (4.5) | ||
| 0.2 | 9.0 | |||
| 46.6 | 43.6 | |||
| Provisions balances at end of year: | ||||
| Specific - loans fully secured on residential property | 5.9 | 5.9 | ||
| - loans fully secured on land | 7.1 | 9.9 | ||
| - other loans | 50.0 | 41.9 | ||
| 63.0 | 57.7 | |||
| General - loans fully secured on residential property | 99.9 | 99.9 | ||
| - loans fully secured on land | 60.0 | 60.0 | ||
| - other loans | 4.4 | 4.2 | ||
| 164.3 | 164.1 | |||
| 227.3 | 221.8 | |||
| 5. Provisions for Liabilities and Charges | 2005 £m |
2004 £m | ||
| Provision charge for the year: | ||||
| Customer redress | 46.7 | 39.9 | ||
| Other provisions | 0.4 | 1.9 | ||
| 47.1 | 41.8 | |||
| Provision balances at the end of the year | ||||
| Customer redress | 49.0 | 42.8 | ||
| Other provisions | 11.7 | 12.6 | ||
| 60.7 | 55.4 |
| 6. Amounts written off/(released) and provisions against fixed asset investments | 2005 £m |
2004 £m | ||
| Provision charge/(release) for the year: | ||||
| Specific | 12.1 | (16.3) | ||
| General | (10.1) | (9.9) | ||
| 2.0 | (26.2) | |||
| Provision balances at end of year | ||||
| Specific | 14.1 | 1.9 | ||
| General | 15.7 | 25.8 | ||
| 29.8 | 27.7 |
These provisions have been deducted in arriving at the carrying value of debt securities in the balance sheet.
| 7. Revaluation reserve | 2005 £m |
2004 £m | ||
| At start of year | 211.9 | 165.1 | ||
| Surplus/(deficit) on revaluation: | ||||
| Fixed assets | 24.3 | 24.9 | ||
| Investment properties | (3.7) | 24.1 | ||
| Transfer to general reserve | (4.5) | (2.2) | ||
| At end of year | 228.0 | 211.9 | ||
| 8. General reserve | 2005 £m |
2004 £m | ||
| At start of year | 4,341.1 | 4,021.0 | ||
| Profit for the year | 365.3 | 317.9 | ||
| Transfer from revaluation reserve | 4.5 | 2.2 | ||
| At end of year | 4,710.9 | 4,341.1 |
The general reserve includes £93.1m (2004 - £96.6m) of unrealised profit in respect of the increase in the value of the Group's long term life assurance business.
Translation gains arising from foreign currency borrowings, used to hedge investments in overseas subsidiary undertakings, of £nil (2004 - translation gains of £11.3m), together with the related tax charge of £nil (2004 - tax charge of £3.4m), giving net gains of £nil (2004 - net gains of £7.9 m), have been taken to reserves. These translation movements are matched by corresponding foreign exchange translation movements on the net assets of overseas subsidiary undertakings in the Group financial statements.
| Capital Structure | 2005 £m |
2004 £m | ||
| Capital: Tier 1 | 5,410.9 | 4,905.8 | ||
| Tier 2 | 1,837.0 | 1,308.5 | ||
| Deductions | (309.1) | (27.9) | ||
| Total Capital | 6,938.8 | 6,186.4 | ||
| Total Risk Weighted Assets | 59,182.6 | 52,765.1 | ||
| Risk Asset Ratios: | ||||
| Total Capital | 11.7% | 11.7% | ||
| Tier 1 | 9.1% | 9.3% |
| Group's profit ratios | 2005 % |
2004 % | ||
| Post Tax return on Capital | 6.53 | 6.50 | ||
| Post Tax return on mean assets | 0.41 | 0.39 | ||
| Post Tax return on mean risk weighted assets | 0.77 | 0.76 |
| 9. Reconciliation of operating profit to net operating cash (outflow) from operating activities |
2005 £m |
2004 £m | ||
| Operating profit | 517.1 | 426.8 | ||
| Provisions for bad and doubtful debts | 46.6 | 43.6 | ||
| Loans and advances written off, net of recoveries | (41.2) | (36.5) | ||
| Amounts written off/(released) fixed asset investments | 2.0 | (26.2) | ||
| Depreciation and amortisation | 99.5 | 108.8 | ||
| Interest on subordinated liabilities | 48.9 | 40.0 | ||
| Interest on subscribed capital | 47.3 | 27.8 | ||
| Profit on sale of tangible fixed assets | (2.1) | (2.1) | ||
| (Increase) in value of long term life assurance business | (50.0) | (44.8) | ||
| Other non-cash movements | (192.6) | 325.1 | ||
| Net (increase) in loans and advances to customers | (12,021.2) | (14,979.9) | ||
| Net increase in shares | 6,650.2 | 4,991.7 | ||
| Net (decrease)/ increase in amounts owed to credit institutions and other customers | (338.7) | 767.5 | ||
| Net increase in debt securities in issue | 2,671.1 | 8,618.4 | ||
| Net decrease/(increase) in loans and advances to credit institutions | 814.8 | (458.4) | ||
| Net (increase) in other assets | (187.9) | (182.4) | ||
| Net increase in other liabilities | 99.9 | 203.5 | ||
| Net cash (outflow) from operating activities | (1,836.3) | (177.1) |
Analysis of the balances of cash as shown in the balance sheet
| 2005 £m |
Flows £m |
2004 £m | |||
| Cash in hand and balances with the Bank of England | 362.5 | 52.0 | 310.5 | ||
| Loans and advances to credit institutions repayable on demand | 125.7 | (13.7) | 139.4 | ||
| 488.2 | 38.3 | 449.9 |
10.Segmental Reporting
Analysis of class of business
| Group | Group | |||||||
| 2005 | 2004 | |||||||
| Profit before tax £m |
Total assets £m |
Net assets £m |
Profit before tax £m |
Total assets £m |
Net assets £m | |||
| Retail | 297.1 | 82,810.9 | 3,498.0 | 270.5 | 71,255.3 | 3,039.9 | ||
| Commercial | 164.5 | 12,997.5 | 844.0 | 139.7 | 12,322.5 | 800.2 | ||
| Group | 55.5 | 15,783.2 | 596.9 | 16.6 | 17,850.6 | 712.9 | ||
| Group | 517.1 | 111,591.6 | 4,938.9 | 426.8 | 101,428.4 | 4,553.0 | ||
The group operates entirely in the UK and the Isle of Man and accordingly no geographical analysis has been presented.
Basis of Preparation
The accounting policies used in preparing the Accounts are consistent with those used last year.
Other Information
The preliminary financial information set out in this announcement which was approved by the Board of Directors on 18th May 2005, does not constitute accounts within the meaning of section 73 of the Building Societies Act 1986.
The financial information for the years ended 4 April 2005 and 4 April 2004 has been extracted from the Annual Accounts for those years. Annual Accounts for the year ended 4 April 2004 have been filed with the Financial Services Authority and Registry of Friendly Societies in England and Wales and those for the year ended 4 April 2005 will be lodged with the Financial Services Authority and the Mutual Societies Registration following publication. The Auditors' Report on the Annual Accounts for the year ended 4 April 2004 was unqualified.
Contacts
|
Media |
City | |
|
Alan Oliver |
Sarah Hill | |
|
Jennifer Williams |
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.