Date issued: 20 Nov 2009

NATIONWIDE BUILDING SOCIETY RESULTS FOR THE HALF-YEAR ENDED 30 SEPTEMBER 2009

Nationwide Building Society announced today its results for the half year ended 30 September 2009. Despite challenging market conditions, Nationwide has delivered an underlying profit of £117 million whilst maintaining a well capitalised and liquid balance sheet with a Core Tier 1 capital ratio of 12.0% and core liquidity ratio of 12.9%. The Society is the UK’s leading mutual, providing consumers with a real and attractive alternative to the high street banks.

Solid performance in challenging market conditions:

• Underlying profit before tax of £117 million (30 September 2008: £322 million). Compressed margins due to the sustained low interest rate environment and increased credit impairment provisions have resulted in a reduction in profit compared with the same period last year.
• Reported profit before tax of £143 million (30 September 2008: £374 million), including the impact of hedge related fair value adjustments and a gain on the acquisition of the social housing loan portfolio of the former Dunfermline Building Society.
• Net interest margin of 0.91% (30 September 2008: 0.99%, six months to 4 April 2009: 0.88%) reflecting higher retail funding costs offset by gains from liquidity management.
• Costs down 6%, £39 million, on a like-for-like basis through Portman merger integration synergies and business transformation.
• Strong sales performance including a 38% increase in unit sales of Investment products. Almost £1 billion of customer investments in the period, including £580 million of funds invested in Guaranteed Equity Bonds.
• The Group achieved an estimated 8.3% share of the gross residential mortgage market, writing new business with an average loan to value (LTV) of 63%. Our approach to new lending has remained cautious striking an appropriate balance between our desire to support existing members, first time buyers and the wider economy, with the need to maintain a prudent lending risk profile.
• Retail funding balances reduced by £5.6 billion reflecting intense competition and uneconomic pricing within a distorted competitive landscape for retail savings. We are prepared to continue to pursue a strategy of not seeking to maximize market share while such distortions remain. We remain the second biggest retail savings provider in the UK with balances of £122.7 billion and our commitment to this market in the medium to long term is undiminished.

Strong asset quality:

• Nationwide originated residential loans continue to perform strongly with 0.66% (4 April 2009: 0.64%) of accounts more than three months in arrears at 30 September 2009, compared with the CML industry average of 2.40% as at 30 September 2009 (31 March 2009: 2.41%). Accounts in arrears continue to be just over a quarter of the level reported by the CML as a whole.
• Total impairment charge on loans and advances to customers of £317 million (30 September 2008: £74 million, six months to 4 April 2009: £320 million).
• Impairment charges include provisions relating to commercial property loans of £180 million (30 September 2008: £25 million, six months to 4 April 2009: £146 million) reflecting recessionary conditions and significant decline in property values. Cumulative impairment charges over the last two years on commercial property finance portfolios amount to approximately 2.6% of total balances whilst valuations have fallen by over 40%,
  demonstrating the overall quality of the portfolio and our policy of lending based on rental flows rather than solely capital values.
• The performance of the assets acquired from the mergers with Cheshire, Derbyshire and Dunfermline building societies have been satisfactory and anticipated losses remain in line with the allowances made at acquisition.
• The proportion of unsecured personal loan balances over 30 days in arrears is 7.20% (4 April 2009: 7.15%). This remains significantly less than the industry average of 19.2% (31 March 2009: 15.8%).

Well capitalised and liquid balance sheet:

• Total assets of £199 billion (4 April 2009: £202 billion).
• Strong capital ratios maintained with a Core Tier 1 ratio of 12.0%, Tier 1 ratio of 15.0% and total solvency ratio of 19.1%. (4 April 2009: 12.0%, 15.1% and 19.5% respectively).
• Predominantly retail funded balance sheet. Wholesale funding ratio increased modestly to 30.4% (4 April 2009: 28.6%) but still one of the lowest across UK banking institutions.
• The Society continues to access wholesale markets and in September 2009 Nationwide successfully issued a £700 million 10-year Senior Unsecured Bond without government backing. Since the reporting date, £3.25 billion of residential mortgage backed securities (RMBS) funding has been completed in October 2009.
• High levels of liquidity have been maintained, focusing on highly liquid government bonds and central bank reserve accounts. The core liquidity ratio at 30 September 2009 was 12.9% (4 April 2009: 12.8%).
• Improvement of £801 million in market value of Available For Sale (AFS) portfolio. Market value shortfall in AFS reserve of £1.2 billion at 30 September 2009 (4 April 2009: £2.0 billion).

Nationwide’s chief executive, Graham Beale, said:

“Market conditions continue to be challenging, with strong competition in both residential lending and retail funding markets. Our performance has been substantially affected by the low interest rate environment and the dramatic fall in commercial property valuations which have led to compression in our margin and a sustained higher level of impairments in line with our experience during the second half of last year. Nevertheless, we have remained profitable, benefiting from high quality assets and a conservative business model which allows us to withstand hostile market conditions and continue to support our members at a difficult time. As a mutual we do not seek to maximise profit and we carry high levels of capital.

“During the last six months we have followed a responsible approach, supporting the availability of credit within our core lending markets whilst also ensuring that our policy of prudent lending and cash flow management is maintained. We have elected not to chase market share in a retail savings market which is subject to serious competitive distortion and uneconomic pricing, often by institutions which benefit from actual or perceived unlimited Government guarantees. Our diverse funding capability and strong reputation mean that we are able to exercise choice in how we fund our balance sheet.

“The reform of the banking sector is now gathering pace and the recent White Paper, Reforming Financial Markets, the Walker Review and the raft of proposals from the FSA in relation to capital, funding and liquidity will herald an unprecedented level of change. Whilst we welcome many of the proposals and will fully support the objective of creating a more secure framework for banking regulation, we remain concerned that some of the changes could undermine the future of the building society sector which the Government has said it wants to protect. It is critical that the fundamental changes being contemplated in relation to capital adequacy do not result in restricted access to capital markets for building societies. The treatment of capital and access to inorganic capital is fundamental to the future of the mutual sector and we would encourage the FSA in particular not to back the sector into a corner by an overly rigid or super-equivalent interpretation of the EU Capital Requirements Directive. Such a policy would be, in execution if not by intention, anti mutual and we would be determined to challenge it.

“We continue to lobby the Tripartite authorities to review the way in which Financial Services Compensation Scheme levies are allocated across the industry to ensure that low risk organisations like Nationwide are not unfairly disadvantaged by the basis of allocation which does not recognise the level of risk which individual organisations pose to the system.

“Looking ahead we expect the remainder of this year and next to present a very difficult trading environment. Economic recovery is forecast to be slow and we expect interest rates to remain at their current level until at least the fourth quarter of 2010. We are also cautious on future prospects for the housing market. The growth in house prices over recent months appears to be driven by lack of supply, and growth in unemployment throughout 2010 will inevitably exert downward pressure on house prices. Notwithstanding this, our strong capital base, low risk profile and highly liquid balance sheet continues to underpin our financial strength and ability to meet our core objective of providing financial security and support to our members.”

Notes to editors

The full Half Year End Results Announcement is available here

Photographs of Chief Executive
http://www.nationwide.co.uk/mediacentre/graham_beale.asp

Photographs of Executive Directors:
http://www.nationwide.co.uk/mediacentre/executive_directors.asp

Underlying Results

Profit before tax shown on a reported and underlying basis are set out on page 12 of the full results announcement. Reported profit before tax of £143 million has been adjusted for the movement in the value of derivatives and hedge accounting of £15 million, a credit of £1 million in respect of the provision for Financial Services Compensation Scheme (FSCS) costs and a gain of £40 million relating to the acquisition of the former Dunfermline Building Society social housing portfolio, to derive an underlying profit before tax of £117 million.

Forward Looking Statements

Statements in this document are forward looking with respect to plans, goals and expectations relating to the future financial position, business performance and results of Nationwide. 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. By their nature, all forward looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond the control of Nationwide including, amongst other things, UK domestic and global economic and business conditions, market related risks such as fluctuation in interest rates and exchange rates, inflation/ deflation, the impact of competition, changes in customer preferences, risks concerning borrower credit quality, delays in implementing proposals, the timing, impact and other uncertainties of future acquisitions or other combinations within relevant industries, the policies and actions of regulatory authorities, the impact of tax or other legislation and other regulations in the jurisdictions in which Nationwide operates. As a result, Nationwide’s actual future financial condition, business performance and results may differ materially from the plans, goals and expectations expressed or implied in these forward looking statements. Due to such risks and uncertainties Nationwide cautions readers not to place undue reliance on such forward looking statements.

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

This document does not constitute or form part of 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.