Preliminary Results Announcement For the year ended 4 April 2008

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Highlights
Chief Executive's Review
Business review
Responsibility statement
Consolidated income statement
Consolidated balance sheet
Consolidated statement of recognised income and expense
Consolidated statement of movements in reserves
Consolidated cash flow statement
Notes to the Preliminary Results Announcement
Additional information
Other information
Contacts

IFRS Underlying Results

These results have been prepared in line with International Financial Reporting Standards accounting policies ('IFRS'). Where appropriate, certain aspects of the results are presented to reflect management's view of the underlying results, to provide a clearer representation of the performance of the Group.

Profit before tax shown on a reported basis and an underlying basis are set out on page 10. Reported profit before tax of £686.1 million has been adjusted for movements in the value of derivatives and hedge accounting of £30.7 million, policyholder tax of £14.8 million, and items relating to the Portman merger and disposal of subsidiaries totalling £49.5 million, to derive an underlying profit before tax of £781.1 million.

Impact of Portman Merger on Financial Results

On 28 August 2007, the Society merged with Portman Building Society. The assets and liabilities acquired as a result of the merger are incorporated at their carrying value in the Portman cessation accounts, adjusted to reflect the Group's accounting policies. The income statement includes the income and expenditure relating to former Portman business from 28 August 2007.

Forward Looking Statements

Certain statements in this Preliminary Announcement are forward looking. Although Nationwide believes that the expectations reflected in these forward looking statements are reasonable, we can give no assurance that these expectations will prove to be an accurate reflection of actual results. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward looking statements.

We undertake no obligation to update any forward looking statements whether as a result of new information, future events or otherwise.

HIGHLIGHTS

Nationwide Building Society today announced its results for the year ended 4 April 2008.

Strong performance in an unprecedented year

• Underlying profit before tax up 17% to £781.1 million (2007: underlying £668.6 million).
• Reported profit before tax, which includes merger and similar costs of £59.0 million, up 5% to £686.1 million (2007: £652.0 million).
• With a focus on the delivery of real value to our members we estimate £690 million benefit has been provided to members in the year through competitive interest rates and lower fees and charges.
• Net interest income up 21% to £1,796.3 million (2007: £1,479.3 million).
• Underlying cost to income ratio improved to 55.7% (2007: 56.6%).

Prudent and robust balance sheet

• Following the merger with Portman, total assets up 30% to £179.0 billion (2007: £137.4 billion).
• Balance sheet funded predominantly by retail savings, with our wholesale funding ratio of 31.0% (2007: 28.4%) being one of the lowest levels within our peer group.
• Proportion of mortgage accounts 3 months or more in arrears of 0.36%, significantly less than the industry average of 1.21%.
• Charge for impairment losses on loans and advances down 21% to £105.9 million.
• Total capital increased by 19% to £9.5 billion (2007: £8.0 billion).
• Basel II solvency ratio of 12.4%, with Tier 1 of 9.7% and Core Tier 1 of 8.1%.

Net lending funded from retail deposits

• Exceptional performance in the retail savings market, attracting £9.1 billion of net retail deposits, an estimated market share of 19%.
• Conservative and sustainable approach to lending and focus on quality resulting in Group net residential mortgage lending of £6.7 billion (2007: £11.2 billion).
• Total Group net lending of £8.9 billion, including Commercial lending of £2.4 billion, funded by retail deposits of £9.1 billion.

Response to Credit Crunch

• Balance sheet growth moderated to reduce cash flow strain.
• Lending volumes contained to match retail deposits.
• Liquidity levels increased to £27.3 billion (2007: £14.0 billion) increasing Prudential liquidity ratio to 15.7% (2007: 10.4%) making balance sheet more robust.
• Investment in 6 structured investment vehicles (SIVs) have been restructured resulting in an increase to our impairment charge of £67.1 million in the second half of the year, creating a total charge of £102.2 million.
• No direct exposure to U.S. sub-prime mortgages.

Strategic Developments

• Merger with Portman Building Society successfully completed on 28 August 2007. The enlarged society has over 900 retail outlets and around 14 million members. Synergies of approximately £90 million per year are expected to be achieved by 2009/10.
• Strategic Distribution Agreement with Legal & General for the supply of protection, investment and pension products effective from February 2008. Nationwide's customers now benefit from access to a wide range of competitively priced products from one of the UK's top providers.

Nationwide's chief executive, Graham Beale, said,

"Nationwide has delivered a strong performance in a challenging year during which the industry has faced unprecedented market conditions.

"Our underlying profit increased by 17% and we have been able to return approximately £690 million to our members through better pricing than our competitors. We have concluded the largest ever building society merger and the integration of the Portman business is on track to deliver synergies of £90 million a year by 2009/10. In addition we have completed the sale of our life insurance and investment business to Legal & General; our new distribution agreement with L&G will provide our members with access to a broad range of market leading products.

"Nationwide has an inherently conservative business model with a strong capital base, high levels of retail funding and a low loan to deposit ratio. We funded our net lending in the year entirely from retail receipts. Our consistently prudent approach to lending over a number of years during which we have focused on quality rather than volume, means our arrears remain at very low levels, and are less than a third of the industry average.

"The Society is conscious of the difficulties faced by consumers in these disrupted market conditions and we are playing our part to help by continuing to focus on offering mortgages that meet the needs of both existing members and first time home buyers. We are particularly pleased to have been able to provide a safe home for savers during recent months, with an estimated market share for retail deposits of 19%.

"We welcome the Bank of England recent initiative with the Special Liquidity Scheme and continue to work with the regulatory authorities in their efforts to deliver liquidity support to the markets. This should ease increased funding costs and contribute towards the recovery of more normal market conditions.

"Whilst the environment will remain challenging, the market now has a much more transparent and realistic view of the cost of risk. Through ongoing prudent cash flow management and disciplined risk based decisions, I am confident that Nationwide will continue to provide its customers and members with the security and value for which we are known."

FINANCIAL SUMMARY

	2008	2007	Change
Financial Performance	£m	£m	%
Underlying total income	2,212.5	1,923.2	15.0
Underlying profit before tax	781.1	668.6	16.8
Reported profit before tax	686.1	652.0	5.2
Lending Volumes	£bn	£bn
Group residential – gross	27.1	29.1	(6.9)
Group residential – net	6.7	11.2	(40.2)
Commercial – gross	6.1	7.4	(17.6)
Commercial – net	2.4	3.4	(29.4)
Consumer finance – net unsecured lending	(0.2)	-	-
Savings Volumes
Retail savings deposits growth	13.3	5.9	125.4
Net receipts	9.1	3.3	175.8
Key Ratios	%	%
Cost to income ratio – underlying basis	55.7	56.6
Cost to income ratio – reported basis	59.4	57.6
Net interest margin	1.12	1.14
	2008	2007	Change
Balance Sheet	£m	£m	%
Total growth (including merger with Portman)
Total assets	179,026.6	137,378.5	30.3
Loans and advances to customers	142,803.7	115,938.4	23.2
Member savings balances	113,815.8	86,795.4	31.1
Total shares, deposits and loans (SDLs)	167,364.2	125,288.6	33.6
Total regulatory capital	9,474.4	7,960.7	19.0
Organic growth (excluding take on balances relating to merger with Portman)
Total assets	159,045.4	137,378.5	15.8
Loans and advances to customers	125,806.9	115,938.4	8.5
Member savings balances	100,052.6	86,795.4	15.3
Asset Quality	%	%
Group residential mortgages : - Proportion of accounts 3 months or more in arrears - Average loan to value of residential mortgage book	0.36 43	0.31* 39
Commercial accounts 3 months or more in arrears	0.56	0.66
Key Ratios	%	%
Solvency ratio**	12.4	11.0
Tier 1 ratio	9.7	8.7
Core Tier 1 ratio	8.1	7.3
Wholesale funding ratio	31.0	28.4
Prudential liquidity ratio	15.7	10.4
Loan to deposit ratio***	117.2	124.6

* restated as explained on page 14

** all solvency ratios are given on a Basel II basis for 2008, and Basel I basis for 2007

*** loans and advances to customers divided by (shares + other deposits + amounts due to customers)

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CHIEF EXECUTIVE'S REVIEW

Strong performance in an unprecedented year

We have delivered a strong performance in what has been an exceptional year for the Society and the financial services industry. On 28 August 2007 we completed the biggest ever building society merger with Portman, creating an enlarged Society with assets now exceeding £179 billion. We also faced, from early August onwards, a challenging operating environment arising from the unprecedented conditions in the world's financial markets. Against this background we have delivered underlying profit before tax of £781 million, up 17%, and reported pre-tax profit of £686 million, up 5% on the previous financial year.

The increase in profit in part reflects the growth of the organisation with product sales up 22% and total assets up 30% since the previous year end. However, notwithstanding our greater size, our increased profits represent a very robust performance particularly because they are stated after charging £102 million to the Income Statement for the impairment of certain treasury assets.

Prudent and robust balance sheet

In a period of market uncertainty, we believe our business model, based on traditional building society values with a focus on retail funding and prudent residential lending, has resulted in us having one of the strongest and safest balance sheets of its kind in the UK. Our total capital has increased 19% from £8.0 billion to £9.5 billion largely through a combination of the effect of the merger and retained earnings of the enlarged business, and our Basel II capital ratios are strong with a tier 1 ratio of 9.7% and total solvency ratio of 12.4%. Our asset quality is high, with mortgage arrears of 0.36% being less than a third of the industry average. Our average loan to value of new mortgage business was 61% and we continue to decline approximately three out of every five personal loan applications. We have a strong retail franchise with approximately 70% of our balance sheet funding derived from retail deposits from members. Our loan to deposit ratio is 117% and as a result we have been well placed to manage our funding through the liquidity crisis.

Net lending funded from retail deposits

We have adopted a prudent approach to lending throughout the whole year and our continuing focus on quality has resulted in a controlled reduction in the overall volume of lending. Group net residential mortgage lending was £6.7 billion, (2007: £11.2 billion) representing a market share of 7.1%. Commercial net lending was £2.4 billion, £1.0 billion lower than the previous year. Due to our cautious approach our unsecured lending balances reduced by £0.2 billion.

We continue to be regarded as a 'safe haven' for investors and in response to the challenging funding environment we have used our significant retail presence to increase our share of the savings market. In total we attracted £9.1 billion of net retail receipts, an estimated 19% share of the UK savings market. This exceptional performance and our prudent approach to lending has meant that we have been able to fund all of our net lending in the year from retail deposits.

Continuing to fund successfully in wholesale markets

We have operated throughout the latter part of this financial year in extremely difficult wholesale credit market conditions. These conditions began in August 2007, with concerns relating to the U.S. sub-prime mortgage market rapidly escalating to a wider liquidity crisis. While some institutions have been affected by losses from direct sub-prime exposure, all have found it more difficult to obtain funding in the wholesale markets.

Nationwide's business model has served us well throughout this difficult period. Our strong retail savings franchise reduces our reliance on wholesale markets. The quality of our balance sheet, our reputation for prudent management of our business, and our range of attractive products have all contributed to a significant increase in retail and wholesale inflows in this financial year.

To maintain a diverse and flexible range of funding options, alongside our retail franchise we manage a wide range of wholesale banking and other institutional relationships, both in the UK and overseas. Although liquidity in the money markets has tightened considerably, with the majority of banks willing to lend wholesale money only for shorter periods and at more expensive rates, our pro-active funding strategy and broad investor base have allowed us to continue to fund the business successfully throughout the credit crunch.

Increased holdings of liquidity

In light of these challenging conditions, we implemented a strategy to increase our liquidity, and increased our liquidity portfolio to £27.3 billion (2007: £14.0 billion) and the prudential ratio increased from 10.4% at the start of the year to 15.7% at 4 April 2008. As part of this increase we have focused on increasing our holdings of extremely high grade, government backed investments providing the Group with the greatest security against unforeseen disruption in market conditions. We have successfully pursued this strategy without having to resort to uneconomic funding options. Other than an extension of our sale and repurchase (repo) activity, we have not resorted to methods of funding outside our usual channels.

On 21 April 2008 the Bank of England announced a Special Liquidity Scheme which it hopes will ease liquidity constraints in the market. In common with major UK banks, Nationwide has agreed to participate in the Scheme which we expect will provide a cost effective source of funds relative to current market conditions.

High quality treasury assets

Nationwide's liquidity and investment assets are of a very high quality. We have no direct exposure to U.S. sub-prime mortgages with indirect exposure through CDOs of only £4.2 million. Over 97% of our total treasury assets are rated A or better.

We have not been wholly immune to the problems in the financial markets however and have incurred impairment losses on our investments in Structured Investment Vehicles (SIVs). At the start of the financial crisis in August 2007, we held £167.0 million in seven SIVs, all of which were established by reputable and financially strong bank sponsors. SIVs have been particularly badly affected by the liquidity issues in the market with funding for them being withdrawn. During the second half of the year we restructured our whole investment holding in five of the SIV investments and a 50% holding in one other. As a consequence of the restructuring, underlying assets were purchased at a discounted price of £1,155 million in exchange for our original investments in the SIVs, and we have recorded impairment charges on our total SIV portfolio during the second half of the year of £67.1 million, making a full year charge of £102.2 million. The £1,155 million of assets acquired as part of the restructuring of our SIV investments have been assessed against current market conditions and prices and there are no assets that are considered to warrant further impairment. Our net exposure to ongoing investments in SIVs at 4 April 2008 amounts to only £1.7 million.

During the year we also refinanced our asset backed commercial paper conduit. The conduit held a US$3.1 billion portfolio of high grade investments which have now been purchased by the Society. Prior to the purchase by the Society, the conduit had been treated as on balance sheet for accounting purposes, so these assets have always been fully reflected in the Group balance sheet.

The cumulative mark-to-market adjustment on the Treasury portfolios at 4 April 2008, recorded in the Available for Sale Reserve, amounts to a reduction of £418.3 million net of tax, representing approximately 1.6% on a total portfolio of £25.5 billion. Given the underlying quality of the assets that make up this portfolio, the adjustment in the price of these assets has been due to widening credit spreads largely driven by liquidity issues in the wholesale markets rather than material changes in underlying performance. These assets are not impaired and we currently expect to obtain full value for them on maturity.

Focus on key strengths

Nationwide is committed to remaining mutual and our aim is to have the size, scale and reach of the retail banks combined with traditional building society values of transparency and long term good value. Our prime focus is on the delivery of real value to our membership and we have been reshaping our business in order to focus on our key strengths.

Our merger with Portman is progressing well. The majority of the first phase of integration activity has been completed and we are already seeing the financial benefits. As planned, further integration work will continue for the next 12 to 18 months and we are on track to deliver further synergies in the next financial year. From 2009/10, we expect the merger to deliver total synergies of approximately £90 million per year.

The benefits of scale from the merger will provide real opportunities to enhance our growth in core markets. We are now the second largest mortgage lender and the second largest retail savings provider in the U.K.

In Consumer Finance we opened 516,000 new current accounts, an estimated market share of 8% and increased our current account base to just over 4.4 million. We achieved a 4% growth in the number of credit card accounts, compared to a 3% fall in the market overall, and received an award for 'Most Responsible Credit Card Lending Practices' at The Card Awards 2008.

We sold 709,000 new general insurance covers in the year, an increase of 29% over the previous year. In February we completed the sale of our investment and protection subsidiaries to Legal & General and implemented a distribution agreement to sell Legal & General products. This alliance will result in a more customer-friendly sales process, faster service and a wider range of investment and protection products for our members, including a new Ethical Trust.

In March this year we announced a £300 million major business transformation programme. The programme will modernise our technology with an integrated, next generation technology platform, and streamline core processes whilst supporting business growth. This investment, once completed in 2012, will enable us to reduce costs and enhance the value and service we offer to our members.

Social Responsibility

We have been awarded a Gold Award for our commitment to Corporate Social Responsibility by Business in the Community.

The Nationwide Education website was launched in September 2007 with child road safety as its initial theme, and this interactive website is now used in schools across the UK. In addition, through our separate Cats' Eyes for Kids initiative, we have distributed more than 12 million road safety reflectors throughout the UK since October 2001. As part of our commitment to financial education, we sponsored The Teenager's Guide to Money, written by Jonathan Self, which was published in November 2007.

At last year's AGM, our members endorsed our decision to donate at least 1% of our pre-tax profits to charity, community and environmental activities. We have long supported the communities from which we have grown, and since 1993 our employees and members have raised over £5 million for our flagship charity Macmillan Cancer Support.

To mark a decade of recognising the importance of volunteering, the Society has entered into an agreement with the Heritage Lottery Fund. This will widen the scope of the Nationwide Awards for Voluntary Endeavour to encompass the theme of heritage.

Prepared for future challenging conditions

The events over the last year have served to highlight uncertainties in the global financial markets. This has necessitated a reassessment of their operation by the Tripartite Authorities, in conjunction with International counterparts. Nationwide has participated fully in discussions with the Tripartite Authorities and continues to work with them to develop measures that will ensure the future financial stability of the UK financial services sector.

The UK economy is entering a period of significantly slower growth over the course of 2008. Nationwide's main markets are affected by these developments, and we are likely to see this reflected in lower house prices and significantly lower lending growth. We will continue to adopt a prudent approach to lending with a focus on high quality borrowers. We are particularly keen to support existing members and have introduced products to support first time buyers.

Whilst the outlook for the UK housing and mortgage markets is subdued, we remain positive about the household savings market. As the equity and housing markets have weakened, consumers have turned to retail deposits as a safe home for their wealth. Until current market conditions normalise, we will continue to manage the business with the aim of funding our retail asset growth from retail savings balance growth.

On 24 April 2008, the results of the preliminary hearing into bank charges was announced. The judge ruled that the fees and charges for unauthorised overdrafts were subject to the fairness test contained in the Unfair Terms in Consumer Contracts Regulations 1999. The judgement did not deal with the question of whether the amounts charged are fair.  The judgement may be appealed. We continue to believe that our charges are fair and transparent. Ultimately, we are committed to finding a resolution to the bank charges debate which should bring clarity to both consumers and the industry.

It remains difficult to predict how long the current market conditions will last. However our business model, financial strength and diverse range of funding options provide a strong platform, allowing us to continue to manage the business successfully for the benefit of our members during these difficult times.

Graham Beale
Chief Executive
21 May 2008

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BUSINESS REVIEW

INCOME STATEMENT OVERVIEW

Profit before tax on a reported basis and underlying basis are set out below. Certain aspects of results are presented to reflect management's view of underlying results, to provide a clearer representation of the performance of the Group.

Underlying profit before tax equates to reported profit before tax adjusted for the add back of movements in the value of derivatives and hedge accounting, policyholder tax, items related to the Portman merger and the net impact of disposal of our investment and protection subsidiaries to Legal and General.

Year to 4 April 2008	As reported £m	Fair value and other adjustments £m	Merger and disposal £m	Underlying £m
Net interest income	1,796.3	-	-	1,796.3
Other income net of claims on insurance contracts	410.9	14.8	(9.5)	416.2
Fair value adjustments from derivatives and hedge accounting	(30.7)	30.7	-	-
Total income net of claims on insurance contracts	2,176.5	45.5	(9.5)	2,212.5
Administrative expenses	1,167.8	-	59.0	1,108.8
Depreciation and amortisation	124.3	-	-	124.3
Impairment losses on loans and advances to customers	105.9	-	-	105.9
Provisions for liabilities and charges	(9.8)	-	-	(9.8)
Impairment losses on investment securities	102.2	-	-	102.2
Profit before tax	686.1	45.5	49.5	781.1

Year to 4 April 2007	As reported £m	Fair value and other adjustments £m	Merger and disposal £m	Underlying £m
Net interest income	1,479.3	-	-	1,479.3
Other income net of claims on insurance contracts	445.9	(2.0)	-	443.9
Fair value adjustments from derivatives and hedge accounting	0.9	(0.9)	-	-
Total income net of claims on insurance contracts	1,926.1	(2.9)	-	1,923.2
Administrative expenses	984.5	-	14.1	970.4
Depreciation and amortisation	124.4	-	5.4	119.0
Impairment losses on loans and advances to customers	133.6	-	-	133.6
Provisions for liabilities and charges	36.5	-	-	36.5
Impairment gains on investment securities	(4.9)	-	-	(4.9)
Profit before tax	652.0	(2.9)	19.5	668.6

Fair value and other adjustments include movements in the fair value of derivatives and hedge accounting of £30.7 million (2007: gain of £0.9 million) and policyholder tax of £14.8 million (2007: gain of £2.0 million).

Profit

A Summary Income Statement on an underlying basis is as follows:

	2008 Underlying £m	2007 Underlying £m	Growth %
Net interest income	1,796.3	1,479.3	21.4
Other income	416.2	443.9	(6.2)
Total income	2,212.5	1,923.2	15.0
Expenses	1,233.1	1,089.4	13.2
Impairment and other provisions	198.3	165.2	20.0
Underlying profit before tax	781.1	668.6	16.8

Underlying profit for the year was £781.1 million, up 16.8% on the previous financial year.

Total income increased by £289.3 million, partially as a result of the interest rate environment described below, and also in part due to the merger with Portman. Operating expenses increased by £143.7 million reflecting increased investment spend in the business, together with costs arising from the enlarged operations following the merger. An impairment loss of £102.2 million has been charged to the Income Statement in the year relating to SIV investments. This has been partly offset by a reduction in the level of impairment losses on loans and advances, and a small reduction in other provisions.

On a reported basis, profit before tax was £686.1 million, up 5.2% on the previous year. The reported profit includes £59.0 million of merger and similar costs, of which £52.3 million are merger related, including £28.1 million of redundancy provision. The remainder of these costs relate to the set up costs of the new distribution agreement with Legal & General and profit on disposal of £9.5 million relates to the disposal of the Society's protection and investment subsidiaries to L&G as part of the same transaction. Profit before tax also includes movements in the fair value of derivatives and hedge accounting of £30.7 million and policyholder tax of £14.8 million (as explained on page 14).

PERFORMANCE BY INCOME STATEMENT CATEGORY

Net interest income

Net interest income increased by 21.4% to £1,796.3 million in 2008 compared with 2007. Although the money markets have been impacted by the lack of liquidity, the resulting interest rate environment has been beneficial to the Society. This, coupled with proactive margin management has meant that the Group achieved a net interest margin broadly in line with the previous year at 1.12%.

	2008 Underlying £m	2007 Underlying £m
Net interest income	1,796.3	1,479.3
Weighted average total assets	160,265.0	129,826.0
	%	%
Net interest margin excluding Libor / Bank base rate differential	1.02	1.08
Libor / Bank base rate	0.12	0.06
Impact of holding additional liquidity	(0.02)	-
Net interest margin	1.12	1.14

The underlying margin has fallen from that achieved last year for two key reasons. The first is that competitively priced retail mortgage business written in 2006/07 has had a full year effect upon the group net interest margin this year. This competitive pricing continued into the first half of this year. Savings products have also contributed to the reduction in net interest margin, due largely to the competitively priced fixed rate bond products available during the second half of the year as competition for retail funds increased.

As a consequence of our strong retail savings franchise, which is predominantly base rate related, the Society's Libor denominated net asset exposure has averaged approximately £33 billion during the year to 4 April 2008. The interest rate environment has led to Libor rates received being on average 51 basis points higher than bank base rate. This differential is 26 basis points greater than the same period last year, contributing around 12 basis points to the Group's net interest margin.

With a strong retail franchise we have not been as severely affected by the issues in the money market as some of our competitors. Impacts on the net interest margin of our Treasury business have been limited as we have been able to fund the growth in loans and mortgages from our retail book avoiding the need to enter into uneconomic long-term wholesale funding arrangements. We have chosen to hold a higher level of Prudential Liquidity, primarily assets which qualify for 8 day liquidity, which has been broadly funded by higher levels of wholesale funding. This has increased our weighted average total assets held over the course of the year and consequently reduced our margin by circa 2 basis points.

We anticipate that our underlying margin (excluding the impact of Libor / base rate differential) will remain broadly stable in 2008/09.

Other income

Other income represents income earned from the sale and manufacture of insurance and investment products together with administration and transaction fees not included within interest margin. Other income also includes dividends on equities held within the Treasury investment portfolio.

Other income for the year on an underlying basis was £416.2 million, £27.7 million lower than the last financial year. There were two main drivers of this reduction; the first is that other income last year included £14.5 million of rental income and profit on disposal relating to at.home nationwide, the Society's residential letting subsidiary which sold its business and property portfolio in July 2006. In addition, the Society's profit share from home insurance has fallen sharply this year as a direct result of the severe storms and widespread floods experienced during 2007.

Expenses

	2008 Underlying £m	2007 Underlying £m	Growth %
Employee costs:
· Wages and salaries	430.7	385.8	11.6
· Social security costs	34.4	29.1	18.2
· Pension costs	100.3	94.2	6.5
	565.4	509.1	11.0
Other administrative expenses	543.4	461.3	17.8
Depreciation and amortisation	124.3	119.0	4.5
	1,233.1	1,089.4	13.2

Total underlying expenses amounted to £1,233.1 million, representing an increase of 13.2% over the year ended 4 April 2007. This increase compares with a rise in underlying total income of 15.0% which has led to a fall in our underlying cost to income ratio to 55.7% (2007: 56.6%). The Portman merger has had a significant impact on underlying costs reflecting the increased size of the business since the merger was completed in August 2007. We estimate the impact of Portman related costs in 2007/08 expenses to be around £70 million, accounting for almost half of the year on year increase in the Group's cost base. Approximately £78 million of cost savings per annum are planned as part of the overall synergies from the Portman transaction, which are estimated to amount to £90 million per annum by the end of 2009/10.

There has also been a significant increase of £26 million in spend on investment projects and change programmes as the new executive management team drive to improve the Society's infrastructure. This increased investment will ensure that we continue to improve the overall quality of our customer experience and increase our penetration in our core personal financial services markets.

The Society continues to focus on its cost base and the investments to improve our infrastructure will lead to efficiency savings in future years. We envisage our Group cost to income ratio will not change significantly next year, but will then start to show an improvement as the results of this investment start to feed through.

Impairment losses on loans and advances

	2008 £m	2007 £m	Growth %
Secured lending	(16.0)	0.5	n/a
Unsecured lending	121.9	133.1	(8.4)
	105.9	133.6	(20.7)

Impairment losses on loans and advances of £105.9 million were £27.7 million lower than the previous year and reflect the quality of both secured and unsecured lending. The level of provision cover (provision as percentage of assets) for residential mortgages has remained consistent over the year. The charge for unsecured lending has reduced by 8.4% compared to 2007, reflecting our cautious approach with continued emphasis on credit quality.

Impairment losses on investment securities and other provisions

	2008 £m	2007 £m	Growth %
Customer redress	(9.8)	36.5	n/a
Treasury investments	102.2	(4.9)	n/a

The credit during the year for customer redress relates to the release of small provisions across a number of areas including endowment claims and mortgage exit administration fees.

The impairment charge of £102.2 million on treasury investments relates to Structured Investment Vehicles (SIVs). Nationwide's exposure to SIVs and the position in respect of these vehicles are covered in more detail in the section on Treasury portfolios on pages 16 to 19.

On 24 April 2008, the results of the preliminary hearing into bank charges were announced. Whilst the judge ruled that the charges are subject to a test of fairness, the judgement may be subject to appeal and does not deal with the question of whether the amounts charged are fair. We continue to believe that our charges are fair and transparent, and given the uncertainty as to the final outcome of the case, we do not currently hold a provision in respect of this issue.

Derivatives and hedge accounting

All derivatives entered into by Nationwide are recorded on the balance sheet at fair value with any fair value movements being taken to the income statement. Derivatives are only used to limit the extent to which the Group will be affected by changes in interest rates, exchange rates or other market indices. Derivatives are therefore used exclusively to hedge risk exposures and are not used for speculative purposes.

The charge of £30.7 million (2007: £0.9 million pre-tax gain) relating to fair value adjustments on derivatives and hedge accounting represents the net fair value adjustment on derivative instruments that are matching risk exposures on an economic basis. Some income statement volatility arises on these items due to accounting ineffectiveness of designated hedges, or because hedge accounting has not been adopted or is not achievable on certain items. The charge is primarily due to timing differences in cashflows and interest rate reset dates between the derivative instruments and the hedged assets and liabilities. The impact can be volatile, especially so in current market conditions, but will trend to zero over time and has been excluded in reporting the Group's underlying performance.

Policyholder Tax

Prior to the disposal of Nationwide Life and as a consequence of the requirement to consolidate the Group's life business on a line by line basis, the income statement includes amounts attributable to policyholders which affect profit before tax, the most significant of which is policyholder tax. Tax on policyholder investment returns is included in the Group's tax charge rather than being offset against the related income. In order to provide a clearer representation of the performance of the Group, these items have been removed from underlying results.

Taxation

The statutory reported tax charge for the year is £190.8 million (2007: £188.4 million). This represents an effective tax rate of 27.8% (2007: 28.9%), which is lower than the statutory rate in the UK of 30%. The lower rate arises principally as a result of tax free profits on the sale of Nationwide Life and NUTM, and because of the impact of policyholder tax in Nationwide Life up to the date of disposal as referred to above.

BALANCE SHEET

Loans and advances to customers

Our loans and advances to customers continues to have a low risk profile. The mix of lending has remained broadly consistent over the year although, following the merger with Portman, moved slightly away from consumer finance and commercial lending towards residential mortgages.

Lending remains predominantly concentrated on high quality secured products with residential mortgages accounting for 83.6% (2007: 81.9%) of our total loans and advances to customers, commercial lending 14.2% (2007: 15.4%), consumer finance 2.0% (2007: 2.7%) and the remaining 0.2% relating to other lending.

Loans and advances to customers	2008 £bn	%	2007 £bn	%
Retail – Prime residential mortgages	105.5	73.7	88.7	76.3
Non–Retail – Specialist residential mortgages	14.1	9.9	6.5	5.6
Total residential mortgages	119.6	83.6	95.2	81.9
Commercial lending	20.3	14.2	17.9	15.4
Consumer finance	2.8	2.0	3.1	2.7
Other lending	0.3	0.2	-	-
Gross balances	143.0	100.0	116.2	100.0
Less: Impairment provisions and fair value adjustment	(0.2)	-	(0.3)	-
Total	142.8		115.9

Retail residential mortgages of £105.5 billion (2007: £88.7 billion) relate to Nationwide branded advances made through our branch network and intermediary channels. Non-Retail residential mortgages totalling £14.1 billion (2007: £6.5 billion) are advances made through our Specialist Lending brands, UCB and TMW, who primarily operate in the Buy to Let and self-certification markets. Within Non-Retail residential mortgages is a very small exposure to the adverse market with just 0.05% (2007: 0.00%) of all advances relating to sub prime lending.

Asset quality of our residential mortgage portfolios remains excellent and we have continued to focus on affordability and loan to value (LTV) ratios. The total number of residential mortgages 3 or more months in arrears as a proportion of the total book remains very low at 0.36% (2007: 0.31%) and for prime residential mortgages the proportion is 0.30% (2007: 0.28%). The figures for 2007 have been restated, to include as arrears those cases where customers are making an agreed payment for less than the contractual amount. The year on year increase in the 2008 measures arises from the merger with Portman where arrears levels were slightly higher, although well within our risk appetite. Overall, the number of cases 3 or months in arrears as a proportion of total cases remains excellent amounting to less than one third of the industry average of 1.21% (2007: 1.01%).

Our positive position compared to the industry is also evidenced in the Specialist Lending portfolios where the number of cases 3 or months in arrears as a proportion of total cases is 1.11% (2007: 0.91%).

Over the year, the average LTV of residential mortgages lending has been 61% (2007: 58%) and the average indexed LTV of residential mortgages at the year end is 43% (4 April 2007: 39%).

The number of residential properties taken into possession during the year was 400 (2007: 347). This represents only 1.41% (2007: 1.43%) of the total number of repossessions recorded during the year by the CML against our share of stock of 12.79%.

Our commercial lending portfolio of £20.3 billion (2007: £17.9 billion) comprises £12.9 billion (2007: £11.3 billion) secured on commercial property ("Property Finance"), £6.3 billion (2007: £5.6 billion) advanced to Registered Social Landlords and £1.1 billion (2007: £1.0 billion) advanced under the Private Finance Initiative. We have never suffered losses on our lending to Registered Social Landlords or on Private Finance Initiatives and there are currently no arrears of three months or more on these portfolios. Our Property Finance portfolio is well diversified by industry type and by borrower and we have no significant exposure to development finance. Property Finance lending is on investment property supported by strong tenant cashflows, and is therefore not immediately exposed to falls in capital value. The proportion of Property Finance cases three months or more in arrears as at 4 April was 0.66%, and equates to 66 cases (2007: 0.77%, 84 cases).

In consumer finance, the balance of accounts more than 30 days in arrears has reduced and our performance compared to the industry has significantly improved. For Personal Loans and Credit Cards, the table below shows our arrears levels are significantly lower than averages for the industry (FLA and APACS):

Percentage of accounts more than 30 days in arrears	2007/08 NBS %	2007/08 Industry %	2006/07 NBS %	2006/07 Industry %
Personal Loans	5.88	11.20	6.12	8.10
Credit Card	4.50	7.99	5.81	8.19

Funding

The Society has well diversified sources of funding. Almost 70% of funding has been provided by retail savings, and we attracted a total of £9.1 billion of net retail deposits in the year, an estimated 19% market share. This excellent performance was driven by our competitive loyalty and fixed rate bond pricing, combined with our commitment to better value savings across the range of products. The net retail deposits provided more than the funding required for our total residential, commercial and consumer finance net lending in the year, which totalled £8.9 billion.

Wholesale funding increased to £50.1 billion at 4 April 2008 (4 April 2007: £35.6 billion), in part due to the merger with Portman. The wholesale funding ratio increased to 31.0% (4 April 2007: 28.4%), reflecting additional funding which has been primarily utilised to strengthen the quality and size of our liquidity portfolio.

In recent years Nationwide had sought to extend the diversity of its wholesale funding sources. This policy has increased our ability to access funding in the recent difficult market conditions.

Nationwide has continued to access wholesale funding throughout the year. In July we issued our first US dollar covered bond, securing $2 billion of funding, with a €1 billion issue following in September. Although the long term public issuance markets have been effectively closed for the second half of the year, we have continued to demonstrate our ability to raise funds through privately placed covered bond issues, issuing approximately £0.8 billion between 30 September 2007 and the financial year end.

We have used our repo agreement activity to provide additional wholesale funding. Assets eligible for repurchase within our Treasury Portfolio have been used to provide £9.5 billion of funding as at 4 April 2008. Certificates of Deposit (CD) also contribute to our funding, with outstandings of £8.8 billion at the year end compared with £6.4 billion last year. US Commercial Paper (CP) issuance remains strong, and as at 4 April 2008 USCP balances amounted to $6.6 billion (4 April 2007: $5.6 billion, excluding the CP issuance of the conduit).

The following table analyses the change in wholesale funding:

Wholesale Funding portfolio mix	2008 %	2007 %
Repo Agreements	17.8	0.5
Deposits	13.2	15.7
CDs	17.6	17.5
CP	8.2	12.4
Covered Bonds	18.7	16.2
MTNs	22.4	28.7
Other non-retail (inc Nationwide Life)	2.1	9.0
Total	100.0	100.0

We are developing a securitisation capability and expect to use this to enhance our wholesale funding options once this market reopens.

While other longer term funding options have been available to us, we consider these to be uneconomic at this point in time. The strength of our retail savings franchise and continued availability of wholesale funding have allowed us to actively manage the balance between duration and cost of funding.

Our short and long term credit ratings from the major rating agencies are as follows:

	Long Term	Short Term	Subordinated	Outlook
Standard and Poors	A+	A-1	A	Stable
Moody's	Aa2	P-1	Aa3	Stable
Fitch	AA-	F1+	A+	Stable

Treasury Portfolios

Group treasury assets at 4 April 2008 were £31.6 billion (4 April 2007: £17.5 billion). The assets are held in two portfolios – the liquidity portfolio and the investment portfolio. At 4 April 2008, the liquidity portfolio totalled £27.3 billion (4 April 2007: £14.0 billion) and the investment portfolio totalled £4.3 billion (4 April 2007: £3.5 billion).

There is a rigorous credit process in place which assesses the risks of all assets before they are acquired and which continues throughout the period that they are held in either of the portfolios. Credit approval is undertaken by an independent Risk Management Division.

Nationwide has no exposure to emerging markets and only minimal exposure to non investment grade debt in the portfolios. Nationwide has no exposure to hedge funds.

Treasury assets, in the majority of cases, are valued using market prices or prices obtained from counterparties. In cases where market prices are not available, discounted cash flow valuation models are used.

Out of our total £31.6 billion of treasury assets held in the liquidity and investment portfolio, £25.5 billion are held as 'available for sale' (AFS) and under IFRS they are marked-to-market through reserves. These fair value movements have no effect on the Group's profit for the year or its capital position. As at 4 April 2008 the balance on the AFS reserve was £418.3 million negative, net of tax. Given the underlying quality of the assets that make up this portfolio, the adjustment in the price of these assets has been due to widening credit spreads largely driven by liquidity issues in the wholesale markets rather than widespread material changes in underlying performance. These assets are not impaired and we currently expect to obtain full value for them on maturity.

Treasury Liquidity Portfolio

The Liquidity Portfolio totalled £27.3 billion as at 4 April 2008 (4 April 2007: £14.0 billion). Of this balance, £26.5 billion qualified as Prudential Liquidity (4 April 2007: £12.9 billion) representing a Prudential Liquidity ratio of 15.7% (4 April 2007: 10.4%). All of our prudential liquidity is rated A or better with 78% rated AA or above. We continue to manage the liquidity portfolio conservatively, with over 20% of the portfolio held in sovereign exposure.

The core 8-day liquidity portfolio, comprising the most liquid assets, is consistently managed at a level well in excess of the building society regulatory minimum of 3.5% of shares, deposits and loans. As at 4 April 2008, the core 8 day liquidity portfolio had increased to £16.2 billion representing a ratio of 9.9%. The proportion of 8-day qualifying assets has increased to 59.6% of the prudential liquidity portfolio from 41.4% at last year end.

Analysis of Liquidity Portfolio:

Liquidity Portfolio	April 2008 £bn	AAA %	AA %	A %	UK %	US %	Europe %	Other %	April 2007 £bn
Loans to financial institutions	2.3	-	76	24	19	4	75	2	0.8
Certificates of deposit and commercial paper	7.3	-	64	36	52	-	47	1	4.6
Bank of England reserve account	2.9	100	-	-	100	-	-	-	0.2
Residential mortgage backed securities – RMBS	3.5	100	-	-	44	-	49	7	2.1
Floating rate notes	6.0	10	46	44	14	4	61	21	4.2
Covered bonds	0.8	93	7	-	-	3	91	6	0.6
Gilts	3.3	100	-	-	100	-	-	-	-
Qualifying Prudential Liquidity assets	26.1	43	35	22	49	1	43	7	12.5
Cash and balances with the Bank of England	0.4	100	-	-	100	-	-	-	0.4
Prudential Liquidity	26.5								12.9
Clearing accounts	0.2								0.2
Other (including items in transit)	0.6								0.9
Total liquidity portfolio	27.3								14.0

Treasury Investment Portfolio

At 4 April 2008, the investment portfolio totalled £4.3 billion (4 April 2007: £3.5 billion). Approximately 88% of the investment portfolio was rated AA or better. The composition of the portfolio has not changed significantly during the year, apart from the impact of the SIV capital note restructuring as described below.

Analysis of Investment Portfolio:

	Investment Portfolio	April 2008 £bn	AAA %	AA %	A %	Other %	UK %	US %	Europe %	Other %	April 2007 £bn
(i)	Residential mortgage backed securities – RMBS	0.3	59	14	27	-	40	59	1	-	0.4
(ii)	Collateralised loan obligations - CLO	0.5	100	-	-	-	26	67	7	-	0.4
(iii)	Collateralised debt obligations – CDO	0.1	98	-	2	-	-	100	-	-	-
(iv)	Credit card backed securities	0.3	100	-	-	-	49	51	-	-	0.2
(v)	Commercial mortgage backed securities	0.9	81	16	3	-	55	11	34	-	0.6
(vi)	US student loan	0.7	99	1	-	-	-	100	-	-	0.7
(vii)	Corporate bond portfolio	0.2	17	83	-	-	37	12	51	-	0.4
(viii)	Financial institutions including subordinated debt	0.6	-	59	37	4	24	33	37	6	0.1
(ix)	SIVs	-	-	-	-	-	-	-	-	-	0.2
(x)	Other corporate bonds	0.4	100	-	-	-	100	-	-	-	0.4
(xi)	Other investments	0.3	42	13	3	42	20	49	28	3	0.1
	Total	4.3	70	18	8	4	37	44	18	1	3.5

(i) Our total investment holdings in RMBS are £285.0 million. Our total US exposure within this portfolio is £169.2 million, made up of £97.2 million Alt A and £72.0 million Prime First Lien mortgages, all rated AAA. The combined average FICO score is 710 and the average LTV is 77.7%. The exposure below AAA is to strong well established UK and European issuers.

(ii) CLO's comprise £484.8 million of AAA rated assets. Although corporate default rates are beginning to rise, the underlying portfolios of leveraged loans continue to perform in line with expectations.

(iii) The CDO exposure is made up of six CDO's, four of which are AAA representing 98% of the exposure. Two CDOs are backed by AAA rated US prime RMBS (74%), three CDOs of US ABS were purchased as part of SIV restructures (7%) and we own one US Trust Preferred CDO (19%). There is no direct exposure to commercial real estate CDO's and no exposure to synthetic CDO's.

(iv) The credit card portfolio is all AAA rated and is performing in line with expectations.

(v) The CMBS portfolio is exposed to established commercial real estate markets with the bulk of our holdings in the UK and Germany. Underlying collateral consists of office, retail, industrial and warehouse exposures with experienced sponsors supporting the underlying loans; we hold limited exposure to leisure markets. Despite capital values falling in the UK there have been no rating revisions across the portfolio.

(vi) The US student loan portfolio comprises 60% FFELP (Federal Family Education Loan Programme) originated loans which are 98% guaranteed by the US Government, and 40% Alternative Student Loans.

(vii) The £218.5 million corporate bond portfolio includes £182.5 million of assets where the credit risk has been hedged by entering in to credit default swaps (CDS) with an AA rated European financial institution.

(viii) Of the £577.4 million held from financial institutions, £374.3 million is classified as subordinated debt, of which approximately 85% is from European issuers. The increase in the size of this portfolio in the year is attributable to assets received on exchange of SIV capital notes.

(ix) At the start of the credit crunch in August 2007, we held investments of £167.0 million in seven structured investment vehicles (SIV's). We have since participated in five restructures and one partial restructure of these SIV investments. As a consequence of the restructuring, nominal £1,199 million of assets were purchased at a discounted market value of £1,155 million, over 95% of which are rated AA or above. In addition, £43.5 million of restructured capital notes were exchanged at a discounted market value of £11.2 million. The net fair value of the remaining SIV capital notes, excluding the £11.2 million restructured notes, totalled £1.7 million at 4 April 2008. During the year we have recognised an impairment loss of £102.2 million on the initial SIV investments. We remain confident that the quality of the underlying assets held, or received as a result of the exchanges, is sound and that the risk of further significant impairment losses relating to these assets remains low.

(x) The other corporate bonds of £445 million include £379 million of assets repaid in full on maturity shortly after the year-end. All the remaining exposures are whole business securitisations which all benefit from AAA rated monoline insurance wraps.

(xi) Included within other investments category are £132.5 million of unrated coupon strips, underpinned by AA rated financial institutions, £43.2 million of AAA rated mixed equipment leases, £47.0 million of AAA rated other European consumer finance loans, £26.7 million of AAA rated auto finance and £31.2 million structured notes issued by funding vehicles of AA rated insurance companies.

CAPITAL STRUCTURE

Total capital has increased 19% from £8.0 billion to £9.5 billion arising from the following:

• An increase in retained earnings; and
• Strategic changes in the Nationwide Group most notably the merger with Portman and disposal of Nationwide investment group.

Capital is held by the Group to protect its depositors, to cover its inherent risks, to provide a cushion for unexpected losses, and to support the development of the business. In assessing the adequacy of its capital, the Group considers its risk appetite, the material risks to which the Group is exposed and the appropriate management strategies required to manage those risks.

The Group is required to manage its capital in accordance with the rules issued by its regulator, the Financial Services Authority (FSA). Prior to 1 January 2008 the Group followed the requirements of the Capital Accord (Basel I). Since 1 January 2008 the Group has complied with the EU Capital Requirements Directive (Basel II). At 4 April 2008 and throughout the financial year, the Group complied with the capital requirements that were in force. As at 4 April 2008 the Group calculated its capital requirement on a Standardised basis.

The Group's Internal Ratings Based (IRB) Waiver Application was recently approved by the FSA. There are a number of conditions which we are addressing prior to submitting an updated Individual Capital Assessment (ICA) based on the IRB approach later this year.

The following table shows the make up of Group capital as at 4 April 2008. Regulatory capital stood at £9.5 billion (2007: £8.0 billion) with the Group's Basel II total solvency ratio remaining strong at 12.4% (2007: 11.0% on Basel I basis). The Basel II Tier 1 solvency ratio stood at 9.7% (2007: 8.7% on Basel I basis).

	2008 £m Basel 2	2007 £m Basel 1
Tier 1
General reserve	6,303.4	5,295.8
Permanent interest bearing shares (Note 1)	1,244.9	1,045.4
Pension fund deficit add back (Note 2)	19.0	106.0
Intangible assets (Note 3)	(136.9)	(106.1)
Deductions from Tier 1 capital (Note 4)	(5.9)	(20.2)
	7,424.5	6,320.9
Tier 2
Revaluation reserve	121.2	128.2
Subordinated debt (Notes 1 and 5)	1,743.2	1,617.0
Collective impairment allowance	191.4	184.0
Deductions from Tier 2 capital (Note 4)	(5.9)	(20.2)
	2,049.9	1,909.0
Deductions (Note 6)	-	(269.2)
Total capital	9,474.4	7,960.7
Risk weighted assets - Pillar 1 (Note 7) Retail mortgages	43,835.7	47,582.3
Commercial loans	17,305.9	16,073.6
Treasury	7,891.2	5,190.2
Other	3,604.0	3,624.4
Operational Risk	3,962.5	-
Market Risk	39.0	-
	76,638.3	72,470.5
Key capital ratios:
Total capital	9,474.4	7,960.7
Core Tier 1 (%) (Note 8)	8.1	7.3
Tier 1 ratio (%) (Note 8)	9.7	8.7
Total capital (%) (Note 8)	12.4	11.0
Tier 2 to Tier 1 ratio (%)	27.6	30.3

Notes

(1) Permanent interest bearing shares and subordinated debt include any fair value adjustments arising from micro hedging and adjustments for unamortised premiums and discounts that are included in the consolidated balance sheet.

(2) The regulatory capital rules allow the pension fund deficit to be added back to regulatory capital and a deduction taken instead for an estimate of the additional contributions to be made in the next 5 years, less associated deferred tax.

(3) Intangible assets do not qualify as capital for regulatory purposes.

(4) Certain deductions from capital are required to be allocated, 50% to Tier 1 and 50% to Tier 2 capital.

(5) On 11 April 2008 the Group, with the consent of the FSA, redeemed early €400m of Subordinated Floating Rate Notes due 2013. Because of the impending redemption, the Notes do not qualify as capital at 4 April 2008.

(6) The sale of Nationwide Life Limited during the year allowed the release of the £269.2 million deduction from capital as at 4 April 2007 shown above.

(7) The measurement of risk weighted assets differs significantly under Basel II and so the stated figures for 4 April 2007 are not directly comparable with those for 4 April 2008. (For example, under Basel II retail mortgages that are considered to be secured and not past due are weighted at 35%; under Basel I the same mortgage assets were weighted at 50%).

(8) Calculated as relevant capital divided by Risk Weighted Assets. Core Tier 1 relates to Tier 1 capital excluding Permanent Interest Bearing shares.

PENSION FUND (RETIREMENT BENEFIT OBLIGATIONS)

The Group operates Final Salary, Career Average Revalued Earnings (CARE) defined benefit arrangements and defined contribution arrangements.

The valuation of the Nationwide Pension Fund (the Fund) at 4 April 2008 resulted in a deficit of £32.0 million (2007 - £163.0 million) using the methodology set out in IAS 19. Our total retirement benefit liability under IAS 19, including other schemes, is £39.7 million (2007 - £172.4 million). We have been actively managing our retirement benefit liability and have taken a number of steps to contain and reduce the deficit over time:

• Final Salary arrangements closed to new members since December 2001 and CARE arrangements closed in May 2007;
• Employee contributions (final salary arrangements) increased from 5% to 7%;
• Special contributions of £200 million paid in the period 2005/06 - 2007/08; and
• The Trustees continue to work closely with their advisors to optimise the investment strategy for the Fund's assets.

We will continue to review our options to manage the Fund in a responsible way. Following the full triennial valuation of the Fund as at 31 March 2007 a plan has been developed to clear the deficit by 2013.

The Portman final salary scheme was closed to new entrants in 2001. Additional contributions of £3.5 million per annum are being paid to ensure that the scheme is fully funded.

PERFORMANCE BY BUSINESS STREAM

From the beginning of this financial year, Nationwide reclassified its business streams, with all customer facing activities classed as either Retail or Non-Retail. This brings the business streams in line with the organisational structure of the Group. The Retail business stream consists of the activities which were previously classed as the Personal Financial Services stream, apart from specialist lending activity, which has now been moved to the Non-Retail stream. In addition, Treasury income generation activities, previously included in the Commercial business stream have now been moved to Group. Comparative numbers have been restated accordingly.

Nationwide now classifies its business streams as follows:

Retail

• Mortgages and Savings
• Consumer Finance
• Insurance and Investments
• Distribution channels supporting these three product divisions

Non-Retail

• Commercial lending
• Specialist mortgage lending

Group

• Treasury group operations and income generation activities
• Capital
• Items classified as being non-attributable to our core business areas.

The contribution to underlying profit before tax against underlying comparatives by each of these business streams is set out in the table below.

	2008 Underlying £m	2007 Underlying £m	Growth %
Retail	263.6	276.6	(4.7)
Non-Retail	268.7	231.9	15.9
Group	248.8	160.1	55.4
Total contribution before tax	781.1	668.6	16.8

RETAIL BUSINESS STREAM

	2008 Underlying £m	2007 Underlying £m	Growth %
Total income	1,462.3	1,410.2	3.7
Expenses	1,098.3	965.0	13.8
Impairment and other provisions	100.4	168.6	(40.5)
Contribution from Retail	263.6	276.6	(4.7)

The overall contribution from Retail fell by 4.7% to £263.6 million in the year.

Total income, which includes the impact of the merger with Portman, grew by 3.7%. This moderate growth in part reflects the pressure on the underlying margin arising from the very competitive mortgage market last year, together with the higher rates seen in the retail savings market over the second half of the year. It also reflects a fall in insurance profit share arising from the severe storms and widespread floods experienced in 2007.

Expenses have increased by 13.8% reflecting the increased investment in the business and the additional costs of operating a larger retail network post merger. Impairment and other provisions fell by £68.2 million reflecting a lower charge for unsecured lending and the release of other provisions for endowments and mortgage exit administration fees.

MORTGAGES AND SAVINGS

Residential mortgages

The volume of lending within the UK mortgage market was broadly flat over the last financial year, although this masks a sharp slowdown in the second half of the year due to the ongoing impact of the credit crunch and weakening in housing market sentiment. The volume of house purchase transactions has continued to slow, resulting in house purchase lending down 12% year on year.

Poor affordability has reduced the numbers of first-time buyers in the market. This, combined with a significant weakening in equity withdrawal by home movers and remortgages, has led to weaker levels of net lending. Total net lending was down 15% year on year and the second half of this year was 32% weaker than the comparable period.

In the current market environment, the lack of liquidity has put pressure on funding. This has led many lenders to reposition their products and reassess their exposure to risk. Against this environment of reduced supply and increased costs of borrowing, many borrowers have been seeking to switch products, to minimise "payment shock" and secure ongoing finance. This has resulted in reduced levels of net lending but continued high levels of remortgaging as a proportion of the overall market.

We had a long-standing prudent approach to lending prior to the credit crunch and this policy has continued throughout the year. Our focus is on quality and not volume and as a result our prime retail gross mortgage lending reduced to £23.1 billion (2007: £26.9 billion). All of our net lending has been funded by retail deposits in the year. Net lending reduced to £4.9 billion (2007: £10.6 billion) representing a market share of 5.2%, well below our natural market share of 9.2%.

We have maintained a low risk-appetite to lending. We closely monitor affordability and loan to value (LTV) profile and all lending is subject to credit assessment. In light of current market conditions we have recently tightened our credit criteria and reduced the number of products on offer within the 90-95% LTV band.

Our asset quality remains high. The average LTV ratio of new retail residential lending was 59% whilst the average LTV of the residential book was 41%. The number of prime mortgages 3 or more months in arrears as a proportion of the book, at 0.30%, remains very low compared with the Council of Mortgage Lenders industry average of 1.21%.

The number of retail residential properties taken into possession during the year was 258, which represents less than 1% of the total recorded by the Council of Mortgage Lenders.

Within our product range, our five year fixed rate mortgage has proved popular for many customers looking for stability in their mortgage payments. We also continue to offer an innovative 25 year fixed rate mortgage, with a borrower option to redeem the mortgage after ten years with no early redemption penalty.

We actively engage with our customers before the end of their product's term. Existing loyal members have access to our full product range and can be rewarded with a substantial discount against their product reservation fee. As a result, our mortgage retention performance has remained strong. Prime residential mortgage redemptions were £18.2 billion, representing a market share of 7.2%, which is below our 9.2% par share.

Under the current market conditions, we understand borrowers' concerns regarding the availability of affordable mortgages. Our principal focus at this time will be our existing members and home buyers, including first time buyers. We are committed to offering good value mortgages, whilst maintaining a prudent and sustainable approach to lending.

Retail savings

UK retail savings balances increased by 8% in the year to 4 April 2008. The growth in balances has been supported by strong employment, a rising base rate during the first half of the year and continued competition for retail funds.

Retail savings continue to represent our primary source of funding and our performance in this market has been excellent. We attracted a total of £9.1 billion of net retail deposits in the year, an estimated market share of 19%. This significant inflow was driven by our competitive loyalty and fixed rate bond pricing, combined with our commitment to better value savings across the range of products.

The Group's total retail member deposits as at 4 April 2008 amounted to £113.8 billion (2007: £86.8 billion). Despite the fiercely competitive savings market, we achieved a 17.1% share of the overall increase in UK retail savings balances.

Following the merger, we are now starting the process of transferring ex-Portman savings accounts onto Nationwide systems. Due to the volume of accounts, the savings migration process will be delivered in three distinct phases, the first phase of which was completed in early May 2008.

Looking ahead, we anticipate that competition for retail savings will intensify as banks seek to diversify their funding sources. As a mutual, our focus will be to ensure we continue to operate in a clear and transparent way, offering our customers long term good value.

CONSUMER FINANCE

Current Accounts

The Society's current account, FlexAccount, is a key product in developing and retaining lasting customer relationships. The product offers both existing and new customers a rate of interest of up to 3.50% on credit balances and an authorised overdraft rate of 9.9%. In addition, our no charge policy for overseas card transactions helps to attract new customers.

Our internet bank remains one of the best in the market. Around 53% of FlexAccount customers now regularly use our internet banking service, and over 3.2 million members are registered to use this service.

We opened 516,000 new current accounts (2007: 580,000) in the year. Our market share of new accounts is estimated at 8% (based on CACI's Current Account and Savings Database for the period to Dec 2007). The total number of Nationwide current accounts has grown by around 374,000 to just over 4.4 million.

In March this year we announced a £300 million major business transformation programme. The first phase of the programme will focus on current accounts, with subsequent phases supporting savings, mortgages and branch systems. The significant investment we are undertaking in our core banking systems will ultimately provide us with increased flexibility to develop and tailor our products to better suit our customer needs.

Nationwide is committed to the industry wide 'Faster Payments' scheme that will speed up the transfer of money between banks and building societies. We will adopt a phased approach to ensure that this new service is launched smoothly and securely. From 27 May, a number of our FlexAccount customers will be able to receive payments via the Faster Payments service. Later in the year all FlexAccount customers will be able to send and receive Faster Payments through the Online Bank and in due course all Nationwide accounts will also benefit from Faster Payments.

Along with a number of UK banks, the Society has experienced a number of customer requests for the repayment of unauthorised overdraft fees. On 27 July 2007, the Society and a number of banks together with the Office of Fair Trading, asked the UK High Court to clarify the legal position regarding these fees. The first phase of the test case process was heard by the Court between 16 January and 8 February 2008, and dealt with certain preliminary issues. On 24 April 2008 the judge ruled that the charges applied by Nationwide and the banks involved in the case are subject to a test of fairness. Therefore, the next phase of the test case process will be to decide whether the overdraft charges applied by Nationwide and the banks are fair.

Credit cards

Whilst the total UK credit card market gross lending was only marginally higher than last year, we have continued to see growth in our lending with gross lending of almost £3.0 billion (2007: £2.7 billion).

In February 2008 the Society received an award for 'Most Responsible Credit Card Lending Practices' at The Card Awards 2008. The Society was recognised for its transparency and clarity of credit card information, for its positive order of payments and for offering commission free purchases abroad. The Society was also awarded a five star rating for its Gold Credit Card by the financial research company Defaqto.

We achieved a strong performance relative to the market with a 4% growth in the number of live accounts to 1,171,000 (2007: 1,122,000) compared to a 3% fall in the market overall. During the second half of the year we launched an initiative to manage the quality of the credit card base and this has resulted in an increase in the percentage of active accounts.

Balances outstanding on credit cards at 4 April 2008 were £801 million (2007: £746 million). Asset quality remains strong. On a consistent basis with the industry, our level of balances more than 30 days in arrears is 4.50% compared with the average of 7.99%.

In March 2008 the Society migrated its credit card account base to a new third party provider, TSYS, and as a consequence of the contract opened a new TSYS contact centre in Coventry to support our credit card customers. The contact centre will create up to 300 new jobs and reaffirms our commitment to UK based operations.

Personal loans

Personal loans are offered through Nationwide Trust Limited, a wholly owned subsidiary of the Society. Loans are sold through the branch network, over the telephone and via the internet.

We have maintained a cautious approach to unsecured lending, with a focus on credit quality. Our prudent lending criteria employs the use of credit scoring, affordability and indebtedness rules as part of our assessment of whether to lend or not. This process results in approximately three in every five unsecured loan applications received being declined.

The UK personal loans market has seen gross lending fall slightly in comparison with the previous year. Our prudent approach, and increase in pricing, has led to a reduction in our gross unsecured lending to £0.5 billion (2007: £0.9 billion).

Asset quality remains strong with the value of balances 30 or more days in arrears of 5.88% (2007: 6.12%). This is significantly better than the industry average of 11.20% (as at February 2008).

INSURANCE AND INVESTMENTS

General insurance

We sold 709,000 new general insurance covers in the year, an increase of 29% over the prior year. This strong performance has been driven by continued strong sales of buildings and contents cover to our new and existing mortgage customers as well as growth of our standalone home insurance sales through our direct channels.

The primary general insurance products offered by the Group are buildings and contents, payment protection, motor and travel insurances. Sales of general insurance products are often linked to, and therefore can be largely dependent upon, other product sales such as mortgages, personal loans and credit cards, although we have seen a significant growth in standalone sales in the year.

We have continued to use leading insurers as third-party underwriters and the commission and profit share we receive is an important source of non-interest income. Income for the year is down 9% to £113 million. The severe storms in January 2007 and widespread floods in June and July 2007 have led to a significant increase in buildings and contents insurance claims, which has impacted our profit share levels on the home insurance scheme. It is anticipated that next year's profit share levels will also be impacted.

Protection and investments

On 1 February 2008 the Society sold its wholly owned subsidiaries, Nationwide Life Limited (NL) and Nationwide Unit Trust Managers Limited (NUTM) to Legal & General (L&G). The new distribution agreement with L&G will provide an excellent opportunity for our members to choose from a broader range of competitively priced products from one of the UK's top financial services companies and enjoy an enhanced level of service.

We sell a broad range of protection products which customers are able to self select or receive advice from one of our qualified sales force. With the new L&G relationship we have started to sell Family Life Insurance which provides a regular monthly income in the event of death of a policyholder before their child reaches the age of 21, to help pay for the cost of raising a family. Throughout the year we have sold over 64,000 protection policies, a small reduction of 2% compared to the prior year.

Investment products were sold through our wholly owned subsidiary, Nationwide Unit Trust Managers Limited (NUTM) until February when it was sold to L&G. We currently sell a range of investment products including unit trusts, ISAs and Child Trust Funds. Through our partnership with L&G, we now offer the Legal & General Ethical Trust, which aims to provide the potential for reliable growth by investing in a portfolio of companies in the FTSE 350 Index, whose business conforms to a range of ethical and environmental guidelines. At 4 April 2008 our range of unit trust investment products held by our customers had a market value of over £2.8 billion (2007: £2.7 billion). The growth from new investments and fund performance in the year has been offset by the decline in the worldwide investment markets in the final quarter of the year.

Pricing benefit

Pricing benefit is the value that Nationwide estimates that it distributes to its members in the form of favourable product pricing (including interest rates, fees and charges) compared with our competitors. During the year we estimate that we generated pricing benefit of approximately £690 million by offering better rates and by charging lower fees and charges than our competitors.

Distribution channels

Nationwide operates a full, integrated multi-channel retail business which won several awards this year including Yourmoney.com award for Best National Network Personal Banking 2007. Performance has been strong with total Retail sales up by more than 20% on the previous year.

On the high street, our distribution capability includes a network of around 900 branches and agencies supported by 2,500 ATMs. Last year we invested nearly £60 million on high street operations. Whilst some of this facilitated the merger with Portman branches, we also added around 2,750m² of retailing space, the equivalent of 33 new branches.

Our Internet Bank is well established with around 2 million regular users. Customers have seen continued improvements in our on-line security over the last year.

We continue our commitment to UK-based customer call centres. Our six call centres handled 8.5 million calls during the year, an increase of 14%. In addition our Telephone Self Service has been improved to allow customers to manage more of their products for themselves on the phone. We are in the process of moving our Swindon Call Centre from our head office to a purpose built office elsewhere in the town.

Looking ahead, the priority for Distribution is to continue to work hard to resolve any outstanding merger-related customer service issues. In addition we will continue to build a modern and progressive distribution infrastructure.

NON-RETAIL BUSINESS STREAM

	2008 Underlying £m	2007 Underlying £m	Growth %
Total income	337.4	303.7	11.1
Expenses	73.8	70.2	5.1
Impairment and other provisions	(5.1)	1.6	n/a
Contribution from Non-Retail	268.7	231.9	15.9

The underlying contribution from the Non-Retail business stream increased by 15.9% to £268.7 million. This represents around a third of the Group's total underlying profit.

The increase in profit is primarily driven by the inclusion of the post merger results of The Mortgage Works plc (TMW) and from growth in Commercial contribution. In addition 2007 results include a £9.9 million contribution from at.home nationwide, a subsidiary which disposed of its business in that year. Adjusting the 2007 result for this, the year on year increase would be in excess of 20%.

Commercial lending

The Commercial Division's loan book now exceeds £20 billion (2007: £17.9 billion). Commercial lending is a significant part of our business accounting for 14% of total Group loan assets. The Division's contribution of £195 million is 11% ahead of the prior year and is approximately 25% of the Group underlying profit.

The Division took a cautious stance in response to uncertain market conditions and with a focus on existing customers the gross lending has decreased to £6.1 billion compared to the prior year (£7.4 billion). Net lending in the year was £2.4 billion (2007: £3.4 billion). We remain the lender with the largest volume of total facilities to Registered Social Landlords – this equates to approximately 17% market share. Net lending in this segment was £0.7 billion, (2007: £0.9 billion).

The commercial portfolio comprises loans in respect of commercial property (64%), social housing (31%) and Private Finance Initiatives (5%). Commercial property loans are fully secured against properties and are typically supported by highly diversified cash flows from long term covenanted tenants. Loans to social housing providers, largely Registered Social Landlords, are secured on residential portfolios whilst loans advanced under Private Finance Initiatives are secured on cash flows from Government backed contracts. The portfolio is well diversified by industry type and geographic location.

Asset quality is very high and we have never suffered any loss on our lending to Registered Social Landlords or under Private Finance Initiatives. The proportion of commercial property cases three months or more in arrears as at 4 April was 0.66%, and equates to 66 cases. (2007: 0.77% equating to 84 cases). Lending criteria have been tightened during the year with reduced maximum LTV levels at 75% down from 85%.

Specialist lending

The Specialist Lending Division comprises UCB Home Loans and TMW. Both companies operate primarily through mortgage intermediaries and are established brands in this market. The Division provides mortgage loans to private landlords ('Buy to Let'), self-employed borrowers and other non-conforming lending.

Gross lending in the year increased to £4.0 billion with the emphasis on the 'Buy to Let' market (59% of new lending). The total mortgage balances across the two brands exceeds £14 billion. Sub-prime lending of £76 million is approximately 0.5% of the total specialist lending book.

The period under review has been dominated by the impact of the credit crunch and the volatile trading conditions that have resulted. A number of specialist lenders, particularly those that securitise their mortgage books, have withdrawn from the market. Lending criteria has been significantly refined with selective product withdrawals and stricter criteria applied across the remaining product range. The Division has withdrawn from sub-prime lending, whilst maintaining a limited near-prime offering, and has withdrawn its 100% mortgage option. Criteria has been tightened in order to focus on value not volume, the most significant of which are the maximum LTV capped at 75% and lower maximum loan sizes. The average LTV for new business has increased slightly from 72% at the half year to 74% as at 4 April 2008.

The reduced competition in the specialist markets has allowed the Division to apply a more appropriate pricing of risk. New business margins have widened to more appropriate levels in the second half of the year compared to the intensely competitive first half.

The book composition at the year end is Buy to Let 60%, self certified 36% and other non-conforming 4%, the majority of which is prime / near-prime.

The growth in lending has been carefully managed without compromising asset quality. The proportion of accounts more than 3 months in arrears at 1.11% remains below the industry average of 1.21%, this average including prime as well as specialist lending. The average indexed LTV across all Specialist Lending is 63%.

The concern over new build apartments in city centres (excluding London) and those properties purchased via Investment Clubs remains, however TMW withdrew from this market in 2005 and UCB in 2007. We are one of only two Buy to Let lenders that have a portfolio proposition, with cross collateralisation of cash flows and equity. This is an attractive offering to serious investors in professional and semi-professional markets.

We are optimistic about trading conditions in terms of competition and new business margins and remain cautiously positive on the Buy to Let market. The shortage of property resulting from a number of factors, including a lack of new builds, inward migration, deferral of purchases and an increase in the number of mobile workers and students, should help to support rental demand. Landlords are seeing rental values rising, however, increasing refinancing costs and at best flat house price inflation are acting as a barrier.

The Division continues to drive through significant cost savings as a result of the merger synergies and further initiatives have been initiated as a response to current market conditions. The migration of UCB activity to Bournemouth has been delivered seamlessly, ahead of schedule with the overall migration accelerated by six months. First class customer service has been maintained throughout and both brands were awarded the prestigious Financial Adviser Five Star Service Award in 2007. New initiatives during the year, such as the roll out of new on-line application services within each brand, have provided an improved customer proposition with on-line applications now comprising in excess of 70% of all new business.

GROUP BUSINESS STREAM

	2008 Underlying £m	2007 Underlying £m	Growth %
Total income	412.8	209.3	97.2
Expenses	61.0	54.2	12.5
Impairment and other provisions	103.0	(5.0)	n/a
Contribution from Group	248.8	160.1	55.4

Contribution from the Group business stream grew significantly this year to £248.8 million (2007: £160.1 million), with net interest income being the main driver of the increase, partly offset by an impairment charge on treasury investments.

Net interest income in the Group business stream has benefited from the increased differential between Libor and bank base rate; the benefit of which is not passed onto the Retail and Non-Retail Business streams. The Society's exposure to movements in the differential between Libor and the bank base rate is managed through the prudent use of swaps linked to the base rate.

The Group business stream also benefits from the contribution derived from capital held for regulatory purposes in excess of that allocated to other business streams on the basis of an economic capital assessment. The surplus capital has increased in 2008, resulting in increased net interest income in this business stream.

Impairment provisions increased to £103.0 million compared with a release of £5.0 million last year. The charge in the year principally relates to an impairment provision on Structured Investment Vehicles (SIVs). More information on the Treasury portfolios, including SIVs, is provided on page 19 and analysis by asset type and rating is provided on pages 16 and 19.

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RESPONSIBILITY STATEMENT

The directors confirm that the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and income and expenditure of the Group as required by the Disclosure and Transparency rules (DTR 4.1.12). The management report includes a fair review of the development and performance of the business and the Group together with a description of the principal risks and uncertainties faced.

A full list of the Board of Directors will be disclosed in the Annual Report and Accounts. Nationwide's principal inherent risks are described in the Risk Management and Control section of the Business Review in the Annual Report and Accounts.

Signed on behalf of the Board by

Mark Rennison
Group Finance Director

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CONSOLIDATED INCOME STATEMENT
For the year ended 4 April 2008

	Not