2003-04 RESULTS
Graham Beale
Group Finance Director
2
Today’s Agenda
zOverview
Results Highlights
Strategic Focus
zPerformance Highlights
zSummary of Results
zMarket Outlook
3
2003-04 Results
Overview
4
Results Highlights
Profit up 21%.....
03/04
02/03 Increase
£m
£m
%
Pre Tax Profit
427
353
21
Pricing Benefit
588
510
15
Total Member Value
Generated
906
773
17
5
Results Highlights
Assets exceed £100bn….
03/04
£bn
Mortgage Advances
02/03 Increase
£bn
%
24.4
17.4
40
Total Assets
101.4
85.4
19
Total Capital
6.2
5.1
21
11.72% 11.68%
-
Solvency Ratio
6
Strategic Focus
z “Modern mutual”
z No shareholders – aim is to generate maximum
value for members for:
Distribution – Pricing Benefit
Retaining – fund growth of business
Investing – in our people and in our business
z Business approach
Full range of FS products
Full range, integrated distribution channels
Strong organic growth
UK focused
7
2003-04 Results
Performance Highlights
8
Key Business Areas
Lending
Insurance
Member
Benefit
Banking
Savings
9
Lending - Net Mortgage Growth
z Gross Advances £24.4bn – 8.5% market share
z Principal Repaid £11.1bn - 6.1% market share
z Net Lending £13.2bn – 12.8% market share
Gross Advances
£bn
Net Lending
24
20
16
12
8
4
0
10.2
1.8
01/02
17.4
7.3
02/03
24.4
13.2
03/04
10
Competitor Net Lending 2003
%
Relative to Par Share of the Market
6
4
2
5.8
S
-0.2
RB
C
HS
B
Ll
oy
ds
-1.1
O
S
L
2.0
-6.8
HB
-1.6
A&
S
ey
Ab
b
-4
NB
-2
-2.4
Ba
rc
la
ys
0
2.9
-6
-8
All numbers are 2003 calendar year
11
Lending - Mortgage Retention
z 82% retained 6 months post maturity
z Boosted net lending by c.£4.5bn in 2003/04
%
10
Market Share Principal Repaid
Par Share
8.5
8.0
7.9
7.5
6.8
6.1
01/02
02/03
03/04
8
6
4
2
0
12
Quality of Lending
z Responsible lender
No lending over 95% Loan to Value
Loan size based on ability to service repayment
z Society only lends in core markets
House purchase
Re-mortgage
Further advances
z Specialist lending through UCB
Self Certified – robust approval systems in place
Buy to Let – total balances £750m – c.1% of
Group Residential balances
13
Lending – Control of Arrears
z Arrears levels keep falling
Mortgage Arrears 3 Months Plus
%
8
Nationwide
CML Average
7
6
December 2003
Nationwide = 0.41%
Market
= 0.81%
5
4
3
2
1
D
ec
'0
2
D
ec
'0
3
D
ec
'0
1
D
ec
'0
0
D
ec
'9
9
D
ec
'9
8
D
ec
'9
7
D
ec
'9
6
D
ec
'9
5
D
ec
'9
4
D
ec
'9
3
0
14
Lending – Unsecured Loans
z Record levels of lending in recent months
Gross advances £897m – up 25%
Net Advances £181m – up 49%
Total balances £1,190m – up 18%
z Single pricing for all loan sizes - 6.7% APR
z Strenuous credit assessment
1 in 2 cases rejected
80% of lending to existing Nationwide
customers
15
Savings
z £5.0bn increase in savings balances (6.9%
market share)
Renewed focus on retail savings in
market – strong competition
Inflows into e-savings, fixed rate bonds
and member loyalty bonds
Total balances £65.9bn – UK’s third
largest Retail Savings provider
16
Banking
z 500,000 new Current Accounts (8.3% market
share – par 4% )
3 million customers
23% regularly use our online bank
z 222,000 Credit Cards issued – up 25%
Gross lending £1.4bn (1% market share)
868,000 cards in issue
Good quality - benchmark performance
for accounts over limit 1.3% - average
3.9%
17
Insurance
z 159,000 new Life policies and Investment
products issued – up 5%
Strong sales of term assurance – up 16%
No with profit sales
Mortgage payment protection free of
charge for first 12 months
z 529,000 General Insurance covers sold
Total covers 1.6m
All underwritten by third parties
18
Cross Holding
Cross holding ratio improved despite adding
0.5m new members….
Total Members
With 1 product
With 2 products
With 3 products
With 4 products
With 5+ products
Average Product Groups
per member
03/04
m
11.0
6.6
2.4
1.1
0.5
0.4
1.70
%
60
22
10
5
3
02/03
m
10.5
6.6
2.3
0.9
0.4
0.3
%
63
22
9
4
2
1.65
19
Key Business Areas
Lending
Insurance
Member
Benefit
Banking
Savings
Commercial
Value
Generation
Treasury
20
Commercial
z Gross lending £4.1bn – up 6%
z Net Lending £1.6bn – up 15%
z Outstanding balances represent 14% of total
Group lending
z 20 year track record
z Whole book is secured
No development finance
z Asset quality strong - arrears balances only
0.03% of total book (2003 – 0.04%)
z Strong margin and fee contribution
21
Treasury
z Wholesale funding used to support asset
growth
Additional £9.4bn raised – wholesale
funding ratio 28.9%
Active MTN programmes – UK, USA, Euro
z Capital raising
$625m Sub Debt
£400m PIBS – very attractive pricing –
1.5x over subscribed
z Liquid assets and investment - £17.4bn
22
Looking forward
Planning for strong organic growth...
z Mortgages above par growth – net lending 9-11% p.a.
z Savings to grow at par share
z Strong growth in other PFS lines
z Controlled growth of Commercial & Treasury
…while continuing to closely manage...
z Margin & spreads – to deliver required profit
z Asset quality – to maintain earnings quality
z Profit retention – strong solvency ratio
z Profit distribution – meaningful difference
z Investment – building a modern business
23
2003-04 Results
Summary of Results
24
Income & Expenditure
03/04
02/03
£m
£m
%
Total Income
1,350
1,259
7
Expenses & Deprec.
(866)
(807)
7
Provisions / Write
Offs
(57)
(99)
(42)
Profit Before Tax
427
353
21
Profit Post Tax
318
263
21
25
Income by category
03/04
Net Interest Income
Non-Interest Income
Total Income
02/03 Change
£m
£m
%
1,099
1,031
7
251
228
10
1,350
1,259
7
26
Net Interest Margin
Margin impacted by low interest rate environment
%
2.0
1.5
1.0
0.5
0.0
1.66
1.60
1.34
1.29
1.18
99/00
00/01
01/02
02/03
03/04
27
Competitor NIMs 2002 and 2003
December 2002
%
3.0
December 2003
c.1.67 if Pricing
Benefit included
2.0
1.0
Ll
oy
ds
S
RB
Ba
rc
la
ys
C
HS
B
O
S
HB
L
A&
ey
Ab
b
NB
S
0.0
1.33 1.23 1.50 1.45 1.95 1.73 1.83 1.77 2.27 2.23 2.75 2.61 3.13 2.97 3.20 3.04
28
Efficiency
z Costs : Mean Total Assets fallen for 15th year
z Targeting improvement in Cost : Income ratio to 55%
by 2006-07
%
Costs : MTA
1.2
57.4
57.3
Costs : Income
64.8
65.0
64.1
%
80
60
40
20
0.8
1.10
1.06
1.04
1.01
0.93
99/00
00/01
01/02
02/03
03/04
0
29
Competitor Efficiency 2003
%
2.5
Costs : MTA
Costs : Income
98
100
2.0
65
1.5
57
57
63
53
51
45
1.0
80
60
40
0.5
Consistent assumptions used
20
BC
0
HS
s
S
RB
L
A&
oy
d
Ll
Ba
rc
l
ay
s
y
be
Ab
O
HB
NB
S
0.93 1.07 1.24 1.50 1.76 2.00 2.12 2.30
S
0.0
%
120
30
Provisions charge
03/04
02/03
£m
£m
Bad debt provisions
(44)
(49)
Liabilities provisions
(40)
(11)
26
(38)
(58)
(98)
Fixed asset investments
Total
z Liabilities provision includes £34m for customer
redress relating to current and future endowment
review claims
z Fixed asset investment held at mark to market –
enjoyed improvements in underlying value
31
Balance Sheet Assets
High quality asset composition – 98.2% secured / AA rated
April 2003
April 2004
17.2%
11.9%
3.3%
1.8%
19.9%
12.3%
3.2%
1.9%
62.7%
65.8%
Mortgages
Liquidity
Consumer
Other
Commercial
Mortgages
Liquidity
Consumer
Other
Commercial
32
Balance Sheet Liabilities
Efficient funding of asset growth
26.4%
April 2004 2.5%
1.6%
April 2003 2.3%
20.4%
1.0%
4.9%
4.5%
71.4%
65.0%
Shares
Other
Reserves
Debt Securities
SD & PIBS
Shares
Other
Reserves
Debt Securities
SD & PIBS
33
Capital Solvency Ratios
%
12
Total Capital
10.36
9.91
Tier 1
10.49
9.64
10
9.30
8
6
%
12
10
8
11.48
10.96
11.51
11.68
11.72
99/00
00/01
01/02
02/03
03/04
Credit Rating
Fitch IBCA
Moody’s
S&P
Short Term
F1+
P-1
A-1
Long Term
AAAa3
A+
6
34
Competitor SR’s end 2003
%
14
Solvency Ratio
12
10.1
9.1
10
7.4
8
Tier 1 Ratio
12
9.5
7.9
7.6
%
14
7.4
7.4
10
8
6
6
4
4
2
2
0
S
11.8
RB
Ll
oy
ds
HS
B
HB
10.7 11.3
C
11.1
O
S
12.8
Ba
rc
la
ys
L
A&
ey
13.3 10.8
Ab
b
NB
S
0
11.5
35
Regulation
Basel II
z On course to achieve IRB status
z Core risk systems in place / being developed
z Should be a net beneficiary
International Accounting Standards
z On schedule to report in 2005/06
Mortgage & Insurance Regulation
z Developing appropriate policies and processes
z Greater transparency consistent with Nationwide’s
agenda
z Will be compliant on time
36
2003-04 Results
Summary
37
Summary
Strong financial results...
z Profits up 21% to £427m
z Capital strength - total solvency 11.72%
z Asset quality – average LTV of 38% (41%)
z Efficiency - Cost:MTA down again for 15th year
…underpin growth across all of our markets
z Total Assets up 19% in 03/04
z 12.8% share of net mortgage market
z 6.9% share of savings market
z 508,000 new current accounts issued
z Secured commercial lending assets exceed £12bn
38
2003-04 Results
Market Outlook
39
Market Outlook
z Recent Trends
Housing Market
Lending & Savings Markets
Retail Spreads
z Outlook
Debt levels
Interest rates
Economy
40
Housing Market
z Housing market accelerated in last six months
Housing transactions (adjusted)
Housing transactions
3 month annualised house price growth (RHS)
000’s
195
%
30
155
115
15
75
0
Apr-01 Sep-01 Feb-02 Jul-02 Dec-02 May-03 Oct-03 Mar-04
Source: Nationwide, Inland Revenue
41
Mortgage rates
z ‘Front’ book – ‘Back’ book gap persists
z Worth £600 off annual payment for £100k mortgage
SVR
New Fixed
New Variable
7.0%
6.0%
5.0%
4.0%
Apr-01 Sep-01 Feb-02 Jul-02 Dec-02 May-03 Oct-03 Mar-04
Source: Nationwide, Survey of Mortgage Lenders
42
Mortgage Lending
z Housing market being driven by existing owners
z Equity withdrawal boosting net lending
z Internal switching equivalent to remortgage advances
%
year
35%
80%
First-time buyer
Remortgage
Buy-to-Let/Other
Existing homeowner
Further Advance
5%
60%
6% 40%
34%
20%
7%
37%
0%
22% -20%
12%
-40%
43%
Q101
Q301
Q102
Q302
Source: Nationwide, Survey of Mortgage Lenders
Q103
Q303
Q104
43
Mortgage Book
z Churn is reducing proportion of SVR balances
25bp SVR increase yields 17bp book rate rise
December 2000
February 2004
33%
2%
34%
Standard
13%
Discount
Fix/Cap
18%
Source: Nationwide Estimates
Tracker
47%
23%
30%
44
Retail Funding
z Retail Savings flows are strong
8% of income vs average 6% 1960-2003
But retail saving has been outstripped by lending
£bn
£1,050
Retail lending balances
Retail deposit balances
£950
£850
£750
£650
£550
£450
£350
Jan-95
Jul-96
Source: Bank of England
Jan-98
Jul-99
Jan-01
Jul-02
Jan-04
45
Retail Spreads
z Remortgage churn & deals pushing mortgage rates
down
z Savings rates broadly stable since 2002
%
3.5
Market
Nationwide
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
Apr-00
Jan-01
Oct-01
Source: Nationwide, Bank of England
Jul-02
Apr-03
Jan-04
46
Debt Levels
z Debt at record levels
% of annual disposable pay
More widespread borrowing
Easier servicing & confidence in economy
Total Debt
Mortgages
250%
200%
150%
100%
50%
Q180
Q183
Q186
Source: Bank of England
Q189
Q192
Q195
Q198
Q101
Q104
47
Interest Rate Outlook
Mortgage rate, nominal post tax
Mortgage payments (RHS)
Forecasts
13%
40%
11%
36%
9%
32%
7%
28%
5%
24%
3%
1980
20%
1983
1986
1989
Source: Nationwide, NES, SML
1992
1995
1998
2001
% of disposable pay
z Debt servicing sensitive to rising interest rates
Peak in rates of c5% expected
8% base rate moves payments back to peak
2004
48
Economic Outlook
z Economy to grow in line with trend
z Labour market to remain supportive
3,500
%
year
8%
3,000
6%
2,500
4%
2,000
2%
1,500
0%
1,000
-2%
500
-4%
0
-6%
000
Unemployment (LHS)
Q180
Q183
Q186
Q189
Q192
Q195
GDP
Q198
Q101
Q104
Source: ONS
49
Questions
Lending - UCB
z Gross advances £1.9bn - up 19%
z Net advances £0.7bn - up 40%
z Outstanding Balances £4.8bn – up 17%
z Deals with:
¾ Self Certified applications
¾ Buy to Let
z Robust approval processes & strong control
of arrears
z Only 3.7% of customers in arrears (2003 3.95%)
53
Retail banking spreads
Asset Spread
Liabilities Spread
Total Spread
2.0
2.0
1.52
1.5
1.46
1.36
1.43
1.37
1.17
1.27
1.32
1.41
1.18
1.5
1.0
1.0
0.5
0.5
0.0
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
-0.5
-1.0
-1.5
0.0
-0.5
99/00 99/00 00/01 00/01 01/02 01/02 02/03 02/03 03/04 03/04
H1
H2
H1
H2
H1
H2
H1
H2
H1
H2
-1.0
-1.5
54
Charge for losses
03/04
02/03
H1
H2
Total
£m
£m
£m
£m
Residential Mortgages
11
(6)
5
11
Banking
17
16
33
29
Total Retail Banking
28
10
38
39
2
4
6
10
(11)
(15)
(26)
38
19
(1)
18
87
Commercial
Treasury
Group Total
55
Asset Quality
03/04
£m
02/03
£m
250
272
0.30%
0.40%
18
87
Loan loss
44
49
% of book
0.28%
0.33%
(26)
38
Balance Sheet
% of book
Charge
of which:
Investment assets
56
Balance Sheet Liabilities
03/04
02/03 Change
£bn
£bn
%
67.4
62.7
7.5
25.3
16.1
57.1
Life Assurance Assets
1.8
1.5
20.0
Capital
6.1
5.1
19.6
100.7
85.4
17.9
Retail Shares &
Deposits
Wholesale & Other
Total Liabilities
57
Competitor Asset Growth 2003
%
20
10
19
11
13
15
17
L
A&
O
S
HB
HS
B
C
RB
Ba
nk
S
-1
Ll
oy
ds
ey
-10
Ab
b
NB
S
-14
Ba
rc
la
ys
0
10
-20
58
Asset Quality
z Arrears at record lows
¾ Debt servicing relatively easy
¾ Unemployment at 30-year low
% of
outstanding
cases
Mortgages, 6month + arrears
Personal loans, 2payments or >31 days
Credit Cards, 2payments or >31 days
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
H1 1994 H2 1995 H1 1997 H2 1998 H1 2000 H2 2001
Source: CML, FLA
H1 2003
59
Strategic Targets
z Maintain Pricing Benefit - over £500m p.a.
Meaningful spread – 75bp above competition
Balance distribution between borrowers, savers
and other customers
z Add to Capital from Retained Profit
Maintain Tier 1 ratio above 8.0%
z Net Interest Margin of 1.20%
z Reduce Cost : Income ratio to 55% by 2006/07
Hold costs below rate of earnings inflation
Grow income by more than 8% per annum
60