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2003-04 RESULTS
Graham BealeGroup Finance Director
2003-04 RESULTS
Graham BealeGroup Finance Director
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Overview
Results Highlights
Strategic Focus
Performance Highlights
Summary of Results
Market Outlook
Today’s Agenda
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Overview
2003-04 Results
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Results Highlights
%£m£m
17773906Total Member Value Generated
15510588Pricing Benefit
21353427Pre Tax Profit
Increase02/0303/04Profit up 21%.....
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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….
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“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
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Performance Highlights
2003-04 Results
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Key Business Areas
Lending
Savings
Insurance BankingMemberBenefit
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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
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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
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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%
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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
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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
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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
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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
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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%
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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
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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….
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Key Business Areas
Lending
Savings
Insurance BankingMemberBenefit
ValueGenerationCommercial Treasury
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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
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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
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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
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Summary of Results
2003-04 Results
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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
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Income by category
%£m£m
1,259
228
1,031
02/03
71,350Total Income
10251Non-Interest Income
71,099Net Interest Income
Change03/04
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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
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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
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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
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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
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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
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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
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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
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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
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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% %
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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
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Summary
2003-04 Results
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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
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Market Outlook
2003-04 Results
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Recent Trends
Housing Market
Lending & Savings Markets
Retail Spreads
Outlook
Debt levels
Interest rates
Economy
Market Outlook
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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 %
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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
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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%
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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%
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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
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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
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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
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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
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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
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Questions
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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%)
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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
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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
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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
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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
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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%
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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
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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