2003-04 Results - Nationwide Building Society...Shares Debt Securities Other SD & PIBS Reserves...

2

2003-04 RESULTS

Graham BealeGroup Finance Director

2003-04 RESULTS

Graham BealeGroup Finance Director

3

Overview

Results Highlights

Strategic Focus

Performance Highlights

Summary of Results

Market Outlook

Today’s Agenda

4

Overview

2003-04 Results

5

Results Highlights

%£m£m

17773906Total Member Value Generated

15510588Pricing Benefit

21353427Pre Tax Profit

Increase02/0303/04Profit up 21%.....

6

Results Highlights

4017.424.4Mortgage Advances

%£bn£bn

-11.68%11.72%Solvency Ratio

215.16.2Total Capital

1985.4101.4Total Assets

Increase02/0303/04Assets exceed £100bn….

7

“Modern mutual”

No shareholders – aim is to generate maximum value for members for:

Distribution – Pricing BenefitRetaining – fund growth of businessInvesting – in our people and in our business

Business approachFull range of FS productsFull range, integrated distribution channelsStrong organic growthUK focused

Strategic Focus

8

Performance Highlights

2003-04 Results

9

Key Business Areas

Lending

Savings

Insurance BankingMemberBenefit

10

Lending - Net Mortgage GrowthGross Advances £24.4bn – 8.5% market sharePrincipal Repaid £11.1bn - 6.1% market shareNet Lending £13.2bn – 12.8% market share

10.2 17.4 24.47.31.8

13.2048

12162024

01/02 02/03 03/04

Gross Advances Net Lending£bn

11

Competitor Net Lending 2003Relative to Par Share of the Market

5.8

-2.4 -1.6 -6.8

2.9 2.0-1.1 -0.2

-8

-6

-4

-2

0

2

4

6

NBS

Abbey A&LBarcl

ays

HBOS

HSBCLloyd

s

RBS%

All numbers are 2003 calendar year

12

Lending - Mortgage Retention82% retained 6 months post maturityBoosted net lending by c.£4.5bn in 2003/04

7.5 6.8 6.1

8.5 8.0 7.9

0

2

4

6

8

10

01/02 02/03 03/04

Market Share Principal Repaid Par Share%

13

Responsible lenderNo lending over 95% Loan to ValueLoan size based on ability to service repayment

Society only lends in core marketsHouse purchaseRe-mortgageFurther advances

Specialist lending through UCBSelf Certified – robust approval systems in placeBuy to Let – total balances £750m – c.1% of Group Residential balances

Quality of Lending

14

Lending – Control of Arrears

0

1

2

34

5

6

7

8

Dec'93

Dec'94

Dec'95

Dec'96

Dec'97

Dec'98

Dec'99

Dec'00

Dec'01

Dec'02

Dec ' 0

3

Nationwide CML Average

December 2003Nationwide = 0.41%Market = 0.81%

%

Mortgage Arrears 3 Months Plus

Arrears levels keep falling

15

Lending – Unsecured LoansRecord levels of lending in recent months

Gross advances £897m – up 25%

Net Advances £181m – up 49%Total balances £1,190m – up 18%

Single pricing for all loan sizes - 6.7% APRStrenuous credit assessment

1 in 2 cases rejected80% of lending to existing Nationwide customers

16

Savings£5.0bn increase in savings balances (6.9% market share)

Renewed focus on retail savings in market – strong competitionInflows into e-savings, fixed rate bonds and member loyalty bondsTotal balances £65.9bn – UK’s thirdlargest Retail Savings provider

17

Banking500,000 new Current Accounts (8.3% market share – par 4% )

3 million customers23% regularly use our online bank

222,000 Credit Cards issued – up 25%Gross lending £1.4bn (1% market share)868,000 cards in issueGood quality - benchmark performance for accounts over limit 1.3% - average 3.9%

18

Insurance159,000 new Life policies and Investmentproducts issued – up 5%

Strong sales of term assurance – up 16%No with profit salesMortgage payment protection free of charge for first 12 months

529,000 General Insurance covers soldTotal covers 1.6mAll underwritten by third parties

19

Cross Holding

1.651.70Average Product Groups per member

%m%m

20.330.4With 5+ products40.450.5With 4 products90.9101.1With 3 products

222.3222.4With 2 products60 6.6

10.5636.6With 1 product

11.0Total Members

02/0303/04

Cross holding ratio improved despite adding 0.5m new members….

20

Key Business Areas

Lending

Savings

Insurance BankingMemberBenefit

ValueGenerationCommercial Treasury

21

Commercial

Gross lending £4.1bn – up 6% Net Lending £1.6bn – up 15%Outstanding balances represent 14% of total Group lending20 year track recordWhole book is secured

No development financeAsset quality strong - arrears balances only 0.03% of total book (2003 – 0.04%)Strong margin and fee contribution

22

TreasuryWholesale funding used to support asset growth

Additional £9.4bn raised – wholesale funding ratio 28.9%Active MTN programmes – UK, USA, Euro

Capital raising$625m Sub Debt £400m PIBS – very attractive pricing –1.5x over subscribed

Liquid assets and investment - £17.4bn

23

Planning for strong organic growth...Mortgages above par growth – net lending 9-11% p.a.Savings to grow at par shareStrong growth in other PFS linesControlled growth of Commercial & Treasury

…while continuing to closely manage...Margin & spreads – to deliver required profitAsset quality – to maintain earnings qualityProfit retention – strong solvency ratioProfit distribution – meaningful differenceInvestment – building a modern business

Looking forward

24

Summary of Results

2003-04 Results

25

Income & Expenditure

%£m£m

263

353

(99)

(807)

1,259

02/03

21427Profit Before Tax

21318Profit Post Tax

(42)(57)Provisions / Write Offs

7(866)Expenses & Deprec.

71,350Total Income

03/04

26

Income by category

%£m£m

1,259

228

1,031

02/03

71,350Total Income

10251Non-Interest Income

71,099Net Interest Income

Change03/04

27

Net Interest Margin

1.60 1.34 1.29 1.181.660.0

0.5

1.0

1.5

2.0

99/00 00/01 01/02 02/03 03/04

%

Margin impacted by low interest rate environment

28

Competitor NIMs 2002 and 2003

1.50 1.95 2.27 2.75 3.13 3.201.45 1.73 1.77 2.23 2.61 2.97 3.041.831.331.230.0

1.0

2.0

3.0

NBS

Abbey A&L

HBOS

HSBCBarcl

ays

RBSLloyd

sDecember 2002 December 2003%

c.1.67 if PricingBenefit included

29

Efficiency

1.10 1.06 1.04 1.01 0.93

64.165.064.857.357.4

0.8

1.2

99/00 00/01 01/02 02/03 03/040

20

40

60

80Costs : MTA Costs : Income% %

Costs : Mean Total Assets fallen for 15th yearTargeting improvement in Cost : Income ratio to 55% by 2006-07

30

Competitor Efficiency 2003

0.93 1.07 1.24 1.50 1.76 2.00 2.302.12

57 51 5363

98

5765

45

0.0

0.5

1.0

1.5

2.0

2.5

NBS

HBOS

AbbeyBarc

lays

A&L

RBS

Lloyds

HSBC

0

20

40

60

80

100

120Costs : MTA Costs : Income% %

Consistent assumptions used

31

Provisions charge

(98)(58)(58)Total

£m£m02/0303/04

(38)(38)26 26 Fixed asset investments(11)(11)(40)(40)Liabilities provisions(49)(49)(44)(44)Bad debt provisions

Liabilities provision includes £34m for customer redress relating to current and future endowment review claimsFixed asset investment held at mark to market –enjoyed improvements in underlying value

32

Balance Sheet Assets

April 2003

62.7%

1.9%

3.2%19.9%

12.3%

Mortgages Consumer CommercialLiquidity Other

April 2004

65.8%

1.8% 3.3%17.2%11.9%

Mortgages Consumer CommercialLiquidity Other

High quality asset composition – 98.2% secured / AA rated

33

Balance Sheet Liabilities

April 2004

65.0%

1.6%

4.5%

26.4% 2.5%

Shares Debt SecuritiesOther SD & PIBSReserves

April 2003

71.4%

4.9%

1.0%20.4% 2.3%

Shares Debt SecuritiesOther SD & PIBSReserves

Efficient funding of asset growth

34

Capital Solvency Ratios

11.48 10.96 11.51 11.68 11.72

10.369.91

10.499.64 9.30

6

8

10

12

99/00 00/01 01/02 02/03 03/046

8

10

12Total Capital Tier 1% %

A+A-1S & PAa3P-1Moody’sAA-F1+Fitch IBCA

Long TermShort TermCredit Rating

35

Competitor SR’s end 2003

11.5 13.3 10.8 12.8 11.1 10.7 11.3 11.8

9.110.1

7.4 7.9 7.6 7.4 7.49.5

02468

101214

NBSAbbey A&L

Barclay

sHBOS

HSBCLloyd

s

RBS

02468101214

Solvency Ratio Tier 1 Ratio% %

36

Basel IIOn course to achieve IRB statusCore risk systems in place / being developedShould be a net beneficiary

International Accounting StandardsOn schedule to report in 2005/06

Mortgage & Insurance RegulationDeveloping appropriate policies and processesGreater transparency consistent with Nationwide’s agendaWill be compliant on time

Regulation

37

Summary

2003-04 Results

38

Strong financial results...Profits up 21% to £427mCapital strength - total solvency 11.72%Asset quality – average LTV of 38% (41%)Efficiency - Cost:MTA down again for 15th year

…underpin growth across all of our marketsTotal Assets up 19% in 03/0412.8% share of net mortgage market6.9% share of savings market508,000 new current accounts issuedSecured commercial lending assets exceed £12bn

Summary

39

Market Outlook

2003-04 Results

40

Recent Trends

Housing Market

Lending & Savings Markets

Retail Spreads

Outlook

Debt levels

Interest rates

Economy

Market Outlook

41

Housing MarketHousing market accelerated in last six months

75

115

155

195

Apr-01 Sep-01 Feb-02 Jul-02 Dec-02 May-03 Oct-03 Mar-040

15

30

Housing transactions (adjusted)Housing transactions3 month annualised house price growth (RHS)

Source: Nationwide, Inland Revenue

000’s %

42

Mortgage rates‘Front’ book – ‘Back’ book gap persistsWorth £600 off annual payment for £100k mortgage

4.0%

5.0%

6.0%

7.0%

Apr-01 Sep-01 Feb-02 Jul-02 Dec-02 May-03 Oct-03 Mar-04

SVR New Fixed New Variable

Source: Nationwide, Survey of Mortgage Lenders

43

Mortgage LendingHousing market being driven by existing ownersEquity withdrawal boosting net lendingInternal switching equivalent to remortgage advances

-40%-20%

0%20%40%60%80%

Q101 Q301 Q102 Q302 Q103 Q303 Q104

First-time buyer Existing homeownerRemortgage Further AdvanceBuy-to-Let/Other

Source: Nationwide, Survey of Mortgage Lenders

% year

22%

37%

6%

35%

12%

34%

7%

43%

5%

44

Mortgage BookChurn is reducing proportion of SVR balances

25bp SVR increase yields 17bp book rate rise

December 2000

47%

18%

2%33%

Standard

Discount

Fix/Cap

Tracker

Source: Nationwide Estimates

February 2004

30%

23%

13%

34%

45

Retail FundingRetail Savings flows are strong

8% of income vs average 6% 1960-2003But retail saving has been outstripped by lending

£350£450£550£650£750£850£950

£1,050

Jan-95 Jul-96 Jan-98 Jul-99 Jan-01 Jul-02 Jan-04

Retail lending balances Retail deposit balances£bn

Source: Bank of England

46

Remortgage churn & deals pushing mortgage rates downSavings rates broadly stable since 2002

Retail Spreads

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Apr-00 Jan-01 Oct-01 Jul-02 Apr-03 Jan-04

%

0.5

1.0

1.5

2.0

2.5

3.0

3.5Market Nationwide

Source: Nationwide, Bank of England

47

Debt Levels

50%

100%

150%

200%

250%

Q180 Q183 Q186 Q189 Q192 Q195 Q198 Q101 Q104

Total Debt Mortgages

Source: Bank of England

% o

f ann

ual d

ispo

sabl

e pa

y

Debt at record levelsMore widespread borrowingEasier servicing & confidence in economy

48

Interest Rate OutlookDebt servicing sensitive to rising interest rates

Peak in rates of c5% expected8% base rate moves payments back to peak

3%

5%

7%

9%

11%

13%

1980 1983 1986 1989 1992 1995 1998 2001 200420%

24%

28%

32%

36%

40%

Mortgage rate, nominal post taxMortgage payments (RHS)Forecasts

Source: Nationwide, NES, SML

% o

f dis

posa

ble

pay

49

Economic OutlookEconomy to grow in line with trendLabour market to remain supportive

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Q180 Q183 Q186 Q189 Q192 Q195 Q198 Q101 Q104-6%

-4%-2%

0%2%

4%6%

8%

Unemployment (LHS) GDP

Source: ONS

000 % year

Questions

53

Lending - UCB

Gross advances £1.9bn - up 19%

Net advances £0.7bn - up 40%

Outstanding Balances £4.8bn – up 17%

Deals with:Self Certified applicationsBuy to Let

Robust approval processes & strong control of arrearsOnly 3.7% of customers in arrears (2003 -3.95%)

54

Retail banking spreads

1.18 0.82 0.83 0.68 0.82 1.00 0.76 0.83 0.93 0.71

-0.34 -0.64 -0.53 -0.55 -0.35 -0.37 -0.51 -0.49 -0.48 -0.47

1.52 1.46 1.36 1.431.17

1.37 1.27 1.32 1.411.18

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

99/00H1

99/00H2

00/01H1

00/01H2

01/02H1

01/02H2

02/03H1

02/03H2

03/04H1

03/04H2

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0Asset Spread Liabilities Spread Total Spread

55

Charge for losses

£m£m£m£m

TotalH2H1

(1)

(15)

4

10

16

(6)

18

(26)

6

38

33

5

8719Group Total38(11)Treasury

102Commercial

3928Total Retail Banking

2917Banking

1111Residential Mortgages

02/0303/04

56

Asset Quality

£m£m

38(26)Investment assets0.33%0.28%% of book

4944Loan lossof which:

8718Charge0.40%0.30%% of book

272250Balance Sheet

02/0303/04

57

Balance Sheet Liabilities

%£bn£bn

20.01.51.8Life Assurance Assets

7.562.767.4Retail Shares & Deposits

57.116.125.3Wholesale & Other

19.65.16.1Capital

17.985.4100.7Total Liabilities

Change02/0303/04

58

Competitor Asset Growth 2003

19

-14

10 11 13 17

-1

15

-20

-10

0

10

20

NBS

AbbeyLloyd

sBarcl

ays

RBSHSBC Ban

k

HBOS

A&L%

59

Asset Quality Arrears at Arrears at record lowslows

Debt servicing relatively easyDebt servicing relatively easyUnemployment at 30Unemployment at 30--year lowyear low

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

H1 1994 H2 1995 H1 1997 H2 1998 H1 2000 H2 2001 H1 2003

Mortgages, 6month + arrearsPersonal loans, 2payments or >31 daysCredit Cards, 2payments or >31 days

Source: CML, FLA

% of outstanding cases

60

Maintain Pricing Benefit - over £500m p.a.Meaningful spread – 75bp above competitionBalance distribution between borrowers, savers and other customers

Add to Capital from Retained ProfitMaintain Tier 1 ratio above 8.0%

Net Interest Margin of 1.20%

Reduce Cost : Income ratio to 55% by 2006/07Hold costs below rate of earnings inflationGrow income by more than 8% per annum

Strategic Targets