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