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Edited Transcript of POB_p.L earnings conference call or presentation 29-May-20 9:00am GMT

Full Year 2020 Nationwide Building Society Earnings Call

SWINDON Jun 29, 2020 (Thomson StreetEvents) -- Edited Transcript of Nationwide Building Society earnings conference call or presentation Friday, May 29, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alex Wall

Nationwide Building Society - Head of Capital, Rating Agencies & IR

* Chris S. Rhodes

Nationwide Building Society - CFO & Executive Director

* Joe D. Garner

Nationwide Building Society - CEO & Executive Director

* Robert Gardner

Nationwide Building Society - Chief Economist

* Sara Bennison

Nationwide Building Society - Chief Product & Marketing Officer

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Presentation

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Operator [1]

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Hello and welcome to the Nationwide 2020 Full Year Results Investor Call. My name is Val, and I will be your coordinator for today's event. Please note this conference is being recorded. (Operator Instructions)

I will now hand you over to your host, Joe Garner, to begin today's conference. Thank you.

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Joe D. Garner, Nationwide Building Society - CEO & Executive Director [2]

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Good morning, and thank you for joining Nationwide Building Society's 2019-2020 Results Presentation. I'm Joe Garner, Chief Executive. And with me are Chris Rhodes, Chief Financial Officer; Sara Bennison, our Chief Product and Marketing Officer; Muir Mathieson, our Treasurer; and Robert Gardner, our Chief Economist. This call is taking place against the backdrop that was unthinkable 6 or even 3 months ago. The coronavirus and the government's necessary response to it have rearranged social and economic norms. The pandemic is, first and foremost, a human crisis, and I'd like to talk briefly about our response to it before turning to our results.

Nationwide is a building society guided by a social purpose. We are mutually motivated to work together, supporting each other through good times and bad. We're in a strong position to do this today, having built a strong capital position over the last 10 years, which you can see in our U.K. leverage ratio of 4.7%. We've more than doubled our common equity Tier 1 ratio from 14.5% in 2014 to 31.9% today. We also performed strongly in the latest Bank of England stress test. We are able to use this strength to support the financial well-being of our members, colleagues, suppliers and society more broadly. I'd like to express my gratitude and appreciation to all our employees who have kept our network open for essential services. While over half of our employees are working from home, we've managed to keep 9 out of 10 branches open, and branch-based colleagues are now helping answer calls alongside our call centers.

I'm also humbled by the countless acts of kindness from colleagues that I hear of every day. For example, [Joanne], in our Penarth branch, who supported one of our members through the death of her husband from COVID-19 with compassion and practical assistance; or [Kevin], who quietly slipped a birthday card for a member into her passbook; or there's [Bernie], who helped an elderly member who was self-isolating by delivering not only the cash he needed for shopping, but also a food hamper.

We are fortunate to have a culture where we really do believe in supporting each other and our members through thick and thin. We're working hard to support our employees at this anxious time by reducing worries about job security and promising all our employees that their jobs are secure this year.

Our employees are also helping borrowers who need financial support, agreeing some 280,000 payment holidays by the end of April. We're also extending our financial support package into 2021 with a promise that no mortgage member will lose their home in the next year as a result of coronavirus-related financial distress. We're helping renters as well by offering mortgage payment holidays to landlords whose tenants need a rental holiday as a result of coronavirus. And members are helping us to help them by reducing branch visits and choosing our digital and phone services more often.

We're also looking after our suppliers, especially micro and SME suppliers, by paying them more quickly to maintain cash flow and help them stay in business. And we're working to support our communities, for example, by donating our TV advertising space to shelter, and funding extra shelter advisers to help people solve their housing or welfare problems. I hope this gives you a sense of how we're working together with our employees, members, suppliers and communities to provide essential financial services while also keeping people in jobs and homes.

The impact of the coronavirus has been so profound, but it's hard to remember that for 11 out of 12 months of the financial year we were operating normally. We've completed the third full year of our strategy, building society nationwide. This outlines how as a member-owned society we were focused on creating a culture where our employees can thrive, empowering them to give members the best value and service we can. It also highlighted how we would invest in maintaining our core financial strength and resilience and in contributing to our communities.

The society has grown strongly since we implemented our strategy. We've attracted 1 million more members and deepened relationships with them. More than 1 in 5 of all members now have more than 1 product with us. Our mortgage lending remains robust, while our current account balances are at new highs.

After this period of rapid growth, last year, we chose to moderate the pace of growth to protect margins and value to existing members, which we signaled in our half year in November. Our current account base continues to grow at a good pace, and we've reached our long-term objective of achieving a 10% market share of all current accounts during the year. We have proved that it is possible to break into the current account market, challenging the grip of the big banks.

Our mortgage lending was in line with expectations, including a strong showing from our buy-to-let subsidiary, The Mortgage Works. Member deposits grew by GBP 5.7 billion, and our stock market share was stable.

On top of this robust product volume performance, we're also delivering on our commitments to members. Our key performance indicators on service, value and strength make sure we stay focused on our members' needs. We've maintained our service fleet and achieved our objective of reaching the top 5 of the all-sector U.K. Customer Satisfaction Index. We've delivered value to members, both directly and through our member financial benefits of GBP 715 million, and indirectly through supporting members changing needs. For example, during the year, we helped older people make more of their money through later-life lending and encouraged a savings habit with savings campaigns and price draws. We've also invested in updating our branches and digital capabilities.

Financially, we remain strong. Our U.K. leverage ratio has been above target for the last 3 years. We are pleased to have met or be on track to meet all of these KPIs at the end of the financial year.

Underlying profit declined to GBP 469 million for several reasons. We made conscious choices last year that we knew would constrain profits. We gave more value to members, which compressed our margin, and we continued to invest strongly in our digital future. We also set aside provisions to settle legacy PPI claims, as disclosed at the half year.

Profits were also impacted by the coronavirus. There is an initial impact of credit provisions alone of GBP 101 million in our 2019-'20 results, reflecting the expected increase in credit losses from payment holidays and future economic uncertainty.

One of the indirect impacts of the coronavirus was the cut in base rate, which puts further pressure on margin. This, in turn, contributed to our decision to hold our plans to launch a business banking service. Unfortunately, the interest rate and economic outlook and the business case for launching an account is no longer commercially viable. This was a difficult decision, but the right one, so that we can prioritize supporting current members and colleagues through the pandemic.

You can see on the screen some of the highlights of our year. We're proud to be the U.K.'s most trusted financial brand, the lead for customer satisfaction and to have received Which's Banking Brand of the Year accolade for the third year running. We've invested in our communities and a more sustainable future.

However, it is clear that the U.K. and the world economy are entering an incredibly difficult period. Nationwide remains financially strong and committed to supporting our members, our employees and the communities through the challenges ahead.

Now let me hand to Chris to talk about the financials in more detail, and then we'll take your questions. Chris?

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Chris S. Rhodes, Nationwide Building Society - CFO & Executive Director [3]

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Thank you, Joe, and good morning, everyone.

We ended our financial year in a position of financial strength, able to support our members whilst continuing to invest for the future. We have a strong balance sheet with a leverage ratio of 4.7% and a liquidity coverage ratio of 163%.

So turning to our financial performance. Underlying profits are 40% lower at GBP 469 million compared with GBP 788 million a year ago. Statutory profit is down by a further GBP 48 million, largely as a result of below-the-line hedge accounting gains not being repeated in this year. Total income was 4% lower, reflecting the net impact of lower margins and the base rate -- and the March base rate reduction, offsetting a 1% growth in lending balances.

Operational costs, excluding the additional technology-related items, including depreciation and our investment in Nationwide for Business, were broadly flat. As we look forward, we now expect our total cost to fall as we respond to the challenges presented by the current economic environment.

Pre-COVID asset quality remained strong, and arrears levels reduced during the period. The impairment charge for the year was GBP 209 million, including GBP 101 million charge for additional provisions linked to COVID-19. I will come back to these numbers and the approach we have adopted in more detail later in the presentation.

The charge for other provisions was GBP 56 million, compared with a release of GBP 15 million in the prior year. This largely reflects an increase in PPI provisions. Member financial benefit was GBP 715 million compared to GBP 705 million last year, consistent with the strategy of offering long-term good value for our members.

4% balance sheet growth reflects a rise in liquidity and an increase of GBP 3.1 billion in retail consumer lending balances, with a decline in other lending balances of GBP 1.2 billion as a consequence of the continued runoff of our commercial lending book.

Our commercial real estate balances have now fallen to around GBP 1 billion.

Liquidity increased by GBP 4.7 billion as we continue our approach to maintaining a prudent liquidity position through the cycle. Deposit growth of GBP 5.7 billion reflects ongoing current account retail savings growth in a competitive market. Our cost of retail funding reduced by 7 basis points in the year, maintaining a 32 basis point differential to the market.

Capital ratios remained strong. The CET1 ratio declined slightly to 31.9%, the U.K. leverage ratio reduced to 4.7%, reflecting the net AT1 redemption.

During the year, margins continued to reduce as a result of competitive new lending plays, back book runoff and the impact of the base rate reduction in March. Margins stabilized in the second half of the year as stable new business margins and changes in the asset mix offset the margin reduction on the mortgage back book.

As we look forward into 2021, we continue to expect further margin decline of several basis points. However, there is significant uncertainty around a number of the moving parts, particularly the impact of payment holidays and concessions for unsecured lending.

New business pricing for mortgages is broadly stable as the -- as is the pace of run-off to the back book. This contributes 2 to 3 basis points of expected margin decline, whilst the structural hedge and higher liquidity accounts for a further couple of basis points.

The impact of low interest rates and changes to overdraft pricing continue to place significant downward pressure on current account income. Going forward, current account growth will be lower, reflecting this income pressure and the increasing costs of regulatory compliance.

Having achieved our 10% market share aspiration, the focus will be on meeting the needs of our existing members.

The impact of -- including Nationwide for Business, the cost base is broadly taking the trend of the last few years. The depreciation charge includes GBP 124 million of software impairment costs as a consequence of our ongoing technology investment. And there is a one-off credit from the future closure of our DB pension scheme.

As I said, going forward, costs will reduce as we focus on driving improved efficiency in response to the pressures of the current economic environment. There will also be a reprioritization of our investment spend, which will reduce the cost impact of our investment portfolio. We will provide a full update on our cost targets at the half year.

Impairment charges before the estimated impact of the pandemic are in line with recent experience and expectation. Asset quality metrics are very stable with a slight decline in arrears levels during the year. We have shown the impact of our COVID impairment assessment, the red bar on the chart.

As we look forward, there is clearly significant uncertainty and a lack of available data to determine the impact of the pandemic on credit losses. As a consequence, we have taken a two-pronged approach to our IFRS 9 expected credit losses.

Firstly, we have created a new COVID-19 economic scenario that captures the sharp shock to the economy, but also aims to reflect the significant support that is being provided by the government, meaning the historic observed link between GDP, unemployment and house prices are less correlated than we would have seen in previous shocks. We will clearly monitor data flows carefully, modify our economic scenarios, as appropriate in future periods, as more data becomes available.

We have run this new scenario through our IFRS 9 models and calculated our ECL, assuming that this is our base case. We have also adjusted the weightings of the upside and the downside scenarios. This results in a GBP 57 million uplift in our expected credit losses.

Secondly, we have considered the credit risk relating to payment holidays. While they do not automatically signify a significant increase in credit risk, we recognize that in some instances, borrowers will be in financial difficulties as a consequence of the pandemic. We have booked a provision increase for payment holidays based on 20% to 30% of them experiencing an increasing credit risk, which adds a further GBP 36 million to our ECL. This overlay captures all payment holidays that were known at, or just after our year-end. Together with a small increase in provisions against commercial lending, the total COVID-related increase is GBP 101 million.

With the extension to the furlough scheme and ongoing uncertainties, we will not see meaningful performance data until later in the year. The overlays, together with our normal IFRS 9 modeling, generates a loss charge for the year of GBP 209 million compared to the prior year of GBP 113 million.

Pre-pandemic asset quality remains strong with stable arrears levels and mortgage areas of circa 60% of industry levels. Total provisions for expected credit losses have increased by GBP 121 million to GBP 786 million with coverage ratios increasing across all portfolios as a consequence of the overlays.

Total payment holidays included in the ECL overlay are GBP 258,000, representing 15% of the mortgage book and 6% of the retail unsecured credit books. Mortgage payment holidays reflect the composition of the book as a whole, with a slight skew to more recent business.

Since the financial year-end, payment holiday volumes have increased by 9% to 280,000. We have included more details on payment holidays as at the end of April in the appendices to the presentation.

The customer redress charge has been driven principally by a surge in the number of PPI complaints up to the August deadline. Our CET1 ratio has reduced to 31.9%, with retained earnings being offset by higher risk-weighted assets and other movements. Growth in risk-weighted assets was driven by the regulatory change for the capital treatment of non-STS securitization and some other small movements. Lending RWAs reduced, reflecting the ongoing runoff of our commercial portfolio.

Our capital resources are in excess of regulatory requirements across CET1, leverage and MREL frameworks with leverage remaining our binding constraint. From an MREL perspective, we already meet future regulatory requirements and expect to manage ongoing maturities and new issuance to maintain this position.

Our liquidity and funding ratios are in excess of regulatory requirements. Our year-end liquidity ratio of 163% remains elevated, reflecting our prudent approach and prefunding of future maturities we undertook in January this year.

We aim to remain active in the wholesale funding markets across a range of platforms and currencies. We will use TFSME to refinance our existing TFS maturities. Our plans assume we retain our prudent approach to funding, retaining higher levels of liquidity for as long as market uncertainties remain.

Now let me hand you back to Joe. Joe, you're on mute. Joe, I think it's kind of the phrase that we...

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Joe D. Garner, Nationwide Building Society - CEO & Executive Director [4]

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Sorry, sorry, sorry. You got me. Thank you, Chris.

So to summarize, we continue to make real progress on our strategy of building society nationwide. But today, we face new challenges whose long-term impact is impossible to predict accurately. But we face into them from a position of strength, financially, with strong capital, liquidity and a conservative risk profile; and strategically, with a social purpose and member focus that will guide our actions through these difficult times. We'll use this strength to continue to support our employees and members.

Now I'll pass over to Alex, who is going to coordinate your questions. Thank you.

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Questions and Answers

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Alex Wall, Nationwide Building Society - Head of Capital, Rating Agencies & IR [1]

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Thank you, Joe. We've had quite a number of questions this morning. We're going to do everything that we can to get to all of them, but please be patient with us.

Our first questions are from Lee Street at Citi. "Can you give us any guidance on the net interest margin? Has it bottomed out? Where do you expect it to finish at year-end? Where do you expect credit costs to finish at the year-end? What proportion of Stage 2 loans do you expect to finish up to Stage 3 loans? Finally, what are your issuance plans for the year?"

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Joe D. Garner, Nationwide Building Society - CEO & Executive Director [2]

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Chris, I think a whole clutch of question for you there.

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Chris S. Rhodes, Nationwide Building Society - CFO & Executive Director [3]

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Yes, that's kind of all of me in there. And some of those, Lee, I don't see I'd be able to get to some of the detail. But let me give you the opening view on margin. So I believe, in our forecast, we'll see, as I said, several basis points of margin -- margin decline is clearly slowing. So what we know with a reasonable -- great, thanks, Carly -- you can see from the slide here. What we know is new business margins have broadly bottomed and indeed margins today are slightly higher than you see on the chart in front of you. Taking that position and the continued runoff of the back book has 2 to 3 basis points of margin compression from there. We've clearly got low base rates, flat yield curve and another couple of basis points there. The unknown component is where overdraft concessions, which are currently interest-free and overdraft pricing ultimately land not a huge impact for Nationwide. We've only got GBP 250 million-or-so of overdrafts, but the unknown is the unsecured component. So few single-digit basis points of decline, a slower rate of decline than we saw in the last 12 months.

Now in terms of where does the impairment charge go, it's an interesting one in a sense of how IFRS 9 works. So the, if you like, the change in our economic scenarios has accelerated the recognition of future loss charges. Now that's fundamentally what the GBP 101 million is about. The future loss charge, therefore, will depend -- be dependent on 2 unknown things. One, do we change our economic scenarios and the weightings attached to them as the data flows? I think, as I said, we won't have meaningful data till at least September or October. But if we change the economic scenarios and they become more negative or we change the weightings of the scenarios we currently got, that will then result in another one-off charge.

The other component, again, to which we haven't got perfect foresight on is the arrears performance, which will ultimately drive the migration from Stage 1 to Stage 2 and to Stage 3 potentially, ultimately. Now again, the reason for creating the payment holiday overlay is specifically to call out that we don't quite know clearly what's going to happen to performance of payment holidays, but that is the most significant element of unknown performance. So in that sense, in providing for 20% of payment holidays for mortgages to be in financial distress. We have covered a large part of the expected credit loss associated with mortgages and payment holidays. Similarly, that is the case for unsecured lending as well.

Alex, can you remind me of the second half of Lee's questions? I think I've covered the margins and outlook for credit charges.

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Alex Wall, Nationwide Building Society - Head of Capital, Rating Agencies & IR [4]

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It's the expectations on movements between Stage 2 and Stage 3 during this period. And then finally, issuance plans for the year, Chris.

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Chris S. Rhodes, Nationwide Building Society - CFO & Executive Director [5]

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Yes. So the Stage 2 to Stage 3, really, again, we're not going to know until we've got clarity on payment holidays, about what percentage of payment holidays would the long-term financial distress and therefore would move into Stage 3 default. I really do not have a view on that. And I go back and point to that's why we've done the payment holiday overlay so we can track that and show you what's happening over a period of time.

And the next final component was around?

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Alex Wall, Nationwide Building Society - Head of Capital, Rating Agencies & IR [6]

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Issuance plans, Chris, please.

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Chris S. Rhodes, Nationwide Building Society - CFO & Executive Director [7]

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Issuance plans. Look, we remain active. We will be active when there is appropriate time in the market across all the funding platforms, exactly as I said in my presentation.

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Joe D. Garner, Nationwide Building Society - CEO & Executive Director [8]

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Can we move on?

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Alex Wall, Nationwide Building Society - Head of Capital, Rating Agencies & IR [9]

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That's great. We had a lot of questions on negative rates. But this one is from Alvaro Serrano of Morgan Stanley. "Can you please discuss what negative rates would do to the business as well as any potential sensitivity? Could you also maybe share with us how you would respond from a pricing perspective? Do you see room to lower mortgage pricing?"

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Joe D. Garner, Nationwide Building Society - CEO & Executive Director [10]

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Should I just say, just a broad perspective on the negatives rate question and then hand to Chris in terms of any potential impact. Of course, it is a possibility, and something that hasn't been ruled out. But as I was saying earlier, I think the evidence from around the world is they are, at best, unproven. And what we can see when the FPC's work in this area is that the supply of credit to the economy is vital for the recovery. And therefore, it's very questionable what negative rates might potentially do for that. So whilst not ruled out, I think there's a degree of reticence around them. And Chris, do you want to take [things]?

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Chris S. Rhodes, Nationwide Building Society - CFO & Executive Director [11]

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Certainly, certainly. Look, whilst not in the preliminary results announcements, we do make the disclosure in the full annual report and accounts, which is the mechanical calculation of the repriced impact of a 25 basis point cut in base rates from the current position, and it's a GBP 17 million a year reduction in net interest, assuming there were no management actions to mitigate it. So that's the scale of impact on Nationwide's net interest margin as a consequence of the reprice impact of the 25 basis points, [cutting those] rates.

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Alex Wall, Nationwide Building Society - Head of Capital, Rating Agencies & IR [12]

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Great. Next question is from Alastair Ryan at Bank of America Merrill Lynch. "How can you tell if a mortgage is bad when everyone can ask for a holiday? How long a period of mortgage holiday is good before people get out of the habit of paying it and becomes bad? What's the latest outlook for new mortgage lending? And what's an acceptable market share for Nationwide?" So I think that was 4 questions there.

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Chris S. Rhodes, Nationwide Building Society - CFO & Executive Director [13]

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Yes. Yes, shall I maybe start? And then Joe, you can talk about some of the digital holidays -- or digital journeys we've used to try and [try]. So in a sense, Alastair, as of today, the answer is we don't know. There clearly, the first payment holidays come up to maturity during June. We are creating a set of digital journeys against which there will be initial income and expenditure assessment. Clearly, if as a consequence of that income expenditure assessment, you should -- you can afford to pay your mortgage, we would steer you to not have a payment holiday and to pay your mortgage equally. If that points to a temporary cash flow difference, so you're furloughed, and you've got 20% reduction in income, there's a range of options available to you.

And at the other extreme, clearly, if your job has disappeared and you know that, then you will go into a more detailed collections and recovery process where we'll do a detailed assessment of your income and expenditure. In those cases, I think we are assuming that they will be for both capital purposes and IFRS 9 purposes in default. In terms of trying to work that out there clearly is a little bit of customer disclosure that we're reliant on in terms of that self-assessment through the digital journey.

But actually, we would encourage anyone who can pay to pay.

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Joe D. Garner, Nationwide Building Society - CEO & Executive Director [14]

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And can I just take the market share point and be really, really clear about this? We exist to serve our members and look after the long-term health of the society. We will not chase a market share number. Sometimes, it's in the interest of the society to grow more rapidly. Sometimes, it's in the interest of the society to consolidate. But we won't chase a market share number.

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Chris S. Rhodes, Nationwide Building Society - CFO & Executive Director [15]

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Yes. And how long do people take to get out of the habit of paying the mortgage? Almost an impossible question to answer. But look, when furlough comes to an end in the autumn, we will have much more clarity about which jobs have permanently disappeared, whose income has been permanently reduced versus those members who have not seen that outcome. And that's the point when the clear data will emerge.

For the purposes of provisioning at the moment, we've assumed 20% of those who got payment holiday are in some form of financial distress. Because of the LTV profile and because of how we've looked the probability of default, that is 90% of the expected loss associated with those members who've got payment holiday.

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Alex Wall, Nationwide Building Society - Head of Capital, Rating Agencies & IR [16]

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Great. Got a beauty coming here from Jennifer Cook at Exane. "Apologies for the detailed question, but from Page 90 of the prelims, that's note 8. What percentage of those on payment holidays is categorized as the highest risk? Have you made this assessment on an LTV basis?"

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Chris S. Rhodes, Nationwide Building Society - CFO & Executive Director [17]

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Right. Okay. So payment holidays, across all portfolios, broadly look like the book as a whole. They are, not surprisingly, slightly skewed to more recent business. So the LTV's a few points higher than the book as a whole.

But I revert back, I think, Alex, to the answer I gave before, which is, in assessing the payment holiday -- potential payment holiday impact on our expected credit losses, we have stratified all the probability of defaults associated with the mortgages that have applied for and been granted a payment holiday. And for mortgages, we've taken the top 20% of PDs and calculated the expected loss using the COVID U-shaped economic scenario that is our central scenario. And that covers 90% of the expected loss that would flow from our entire population of payment holidays. Hopefully, that is the answer you're looking for. If not, feel free to come back and ask a clarification.

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Alex Wall, Nationwide Building Society - Head of Capital, Rating Agencies & IR [18]

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Don't worry. Knowing Jennifer like I do, I'm sure she will. As a follow-up question that's come in from Alastair Ryan, "What does the COVID experience do to your view of the size of the branch network?"

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Joe D. Garner, Nationwide Building Society - CEO & Executive Director [19]

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Okay. So it's an interesting one. First of all, important to remember that the branch network is not the big driver of cost in the provision of retail financial services today. It's much more about the technology and risk management, et cetera.

Maybe I could bring Sara in on this to talk about how actually we've been using our branch network to support our service proposition more broadly and actually rediscovering some of the value rather than the cost of our branch...

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Sara Bennison, Nationwide Building Society - Chief Product & Marketing Officer [20]

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Yes. So happy to pick that one up. And I think it's a really interesting one. So obviously, we had a position before the crisis that clearly we're sticking to around our branch promise, which actually runs until the end of May 2021 anyway, which was not to leave a town or a city that we're already in without provision of branch services, and we did that because we know that there's a whole group of members to whom that's really important and that remains so.

I think one of the things that's interesting about the crisis, and I suppose it's one of those kind of potential silver linings that we're all looking for, is how we're using resources in branches differently. So at the moment, and for the first time through the crisis, we trained up our branch colleagues to be able to take calls and be able to respond to digital messaging to take some of the pressure off the contact centers that we were finding. And actually, that's been a really interesting experiment, incredibly productive with some of our kind of wisest heads and who were able to respond in brilliant ways to our members. So I think where it all nets out, we don't kind of think about it in terms of what's a number that's right. It's more about the productivity of the resource that we have there and the commitment to the members who still want that. So I hope that helps answer the question.

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Joe D. Garner, Nationwide Building Society - CEO & Executive Director [21]

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Because we're seeing a fundamental redefinition of office, home and high street. And maybe in the future, we'll be thinking about these things quite differently. Even if a branch is not having footfall today, our people can be very gainfully occupied, serving members online and on the telephone. So we haven't reached conclusions yet, but we've been learning a lot through that.

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Alex Wall, Nationwide Building Society - Head of Capital, Rating Agencies & IR [22]

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Thanks, both. Next question is from Rohith Chandra-Rajan, Bank of America Merrill Lynch. "How would you characterize the differences between your COVID-19 provision and the Bank of England's desktop COVID-19 stress for the system? " And then a second question, "13 basis points of provision coverage on mortgages looks lighter than some peers that appear to have a similar mortgage mix. Please, could you discuss your confidence in the resilience of the book?"

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Joe D. Garner, Nationwide Building Society - CEO & Executive Director [23]

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Would it be a good idea for Robert to comment on the comparison of economic scenarios and talk about the coverage, yes? Robert?

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Robert Gardner, Nationwide Building Society - Chief Economist [24]

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Yes. So if you look at the scenario that we explored in the Bank of England and they are obviously quite different. They were seeking to address something very different as well. They wanted to prove that -- or explore whether the system as a whole was robust enough to deal with this sort of shock. And therefore, we're trying to look at worst-case scenarios, I guess, thinking about it in those terms. So their approach, it was very different in how they viewed the scenario as well.

If you look at the scenario itself, we assumed that house prices fell by 14% in our scenario. And the Bank of England, I think, assumed around 16%, peak-to-trough decline. So that was not different.

The unemployment rate assumptions were more adverse in the Bank of England scenario in the near term. So they assumed a peak in the unemployment rate that was much higher. So we went to about 7.5%. They went to about 9.5%. However, in the outer years, they assumed that the unemployment rate fell back very quickly towards current levels, where we assume that takes longer to fall back towards where the pre-pandemic sort of level. So hopefully, that gives you a sense of the differences in those, but also important to remember the difference in why -- or the question, if you like, that the PRA was asking when it was looking at that Bank of England scenario as well.

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Chris S. Rhodes, Nationwide Building Society - CFO & Executive Director [25]

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Okay. Coverage ratios. So yes, the overall coverage ratio for the mortgage portfolio is lower than competitors fundamentally reflects the underlying quality of the portfolio. So I'd point you at 2 data points. One, the arrears percentage, which is 60% of industry averages. I'd argue, for this comparison, even more importantly, look at the coverage ratio by staging in the IFRS 9 tables, and you'll broadly see that actually the lower coverage ratio for Nationwide is driven by the fact that we have a lower proportion of Stage 2 and, in particular, Stage 3 loans. So our coverage against Stage 1, Stage 2 and Stage 3 is not out of line. It's a mix point.

I'm also conscious, Alex, we didn't go back to Alastair on what percentage of customers really need a payment holiday. Don't -- we don't really know, but I can point at some data. So if you look at our unsecured payment holidays, they are 6% of the total book. And we do know the credit turnover through the current account for those who've got overdraft payment holidays has reduced by 20%. So certainly, I conclude from that, not all of the 15% of mortgages that have got a payment holiday actually needed one. And I think, certainly, in the early stage, that the real behavioral component of the most prudent people saying, "I need to get myself prepared for this. I can have a payment holiday. I'm going to take it as an insurance policy." And it's those customers we would expect to resume paying in June. So not all mortgage payment holidays are because of financial distress. There's certainly a component in there that kind of took it for an insurance policy. And that's sort of backed up by what we see in credit turnover through current account

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Alex Wall, Nationwide Building Society - Head of Capital, Rating Agencies & IR [26]

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Fantastic. And as promised, there is a follow-up from Jennifer at Exane. "Chris, when you say you've made the ECL assessment on the top 20% of PDs, were these on PDs assessed pre-COVID? Or have you tried to pro forma the PDs for COVID, mindful that many consumers' circumstances have now materially changed? Were there any differences at the product level?"

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Chris S. Rhodes, Nationwide Building Society - CFO & Executive Director [27]

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Yes. So they are the pre-COVID PDs. So it is the top 20% highest PDs on a pre-COVID basis. We have no data to make an assessment post COVID. So remember, the things that would drive a change in PD would be fundamental performance, i.e., arrears or broadly, credit data from the credit bureaus where IFRS 9 PDs are offset by a combination of performance with us and performance in the market as a whole. Neither of those 2 data points have yet emerged, so they are pre-COVID PDs.

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Joe D. Garner, Nationwide Building Society - CEO & Executive Director [28]

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And it's important, I think, just to step back for it to remember that some of the reasons that we don't know these things is that the people themselves won't know it. We are yet to know how many people on furlough will revert to employment, how many will result in redundancy, how many in something in between. So it's not just that we don't know a lot of these things, a lot of these things are not yet known. And therefore, we've made what we hope are a sensible set of assumptions based on what we can see around the range.

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Alex Wall, Nationwide Building Society - Head of Capital, Rating Agencies & IR [29]

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Thanks, Joe. As a follow-up to Alastair Ryan's question, we've got a question from Aman Rakkar at Barclays. "What proportion of your buy-to-let payment holidays landlord customers are experiencing underlying renters not paying? Do you have this data available?"

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Chris S. Rhodes, Nationwide Building Society - CFO & Executive Director [30]

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So no, we don't have this data because we don't have line of sight to the underlying tenant. However, I think what is really important is the way the proposition for payment holidays and the way the dialogue is taking place with our buy-to-let borrowers is that if their tenant is unable to pay and we will grant you a payment holiday or the mortgage as a consequence of the impact on your tenant, and I can tell you that buy-to-let -- although our specialist mortgage portfolio, which is fundamentally our buy-to-let portfolio has 13% payment holidays, slightly lower than the 16% payment holidays on the prime book. And of course, just to remind you all, we lend in a slightly different way in that we lend in a way where the buy-to-let portfolio has to be self-financing. So all our assessment of its investability of the buy-to-let properties on its rental yield rather than that being subsidized from the landlord. Therefore, you make a couple leaps of logic, 13% of the tenants associated with our buy-to-let portfolio have had some kind of payment challenge requiring the landlord to request payment holiday.

I know there's a couple of logic leaps in there. And again, it won't be as high as 13% because some landlords will have perhaps expected tenants to stop paying. But actually, it was really important that we made the link to landlords to tell them that if their tenant couldn't pay, then we would grant them a payment holiday.

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Alex Wall, Nationwide Building Society - Head of Capital, Rating Agencies & IR [31]

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Great. It looks like just 2 more questions. One follow-up that's come in from Lee Street is just noting the commitments that you have made to your members. "Do you expect payment holidays to be extended further? And would you be willing to grant further extensions to payment holidays?"

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Joe D. Garner, Nationwide Building Society - CEO & Executive Director [32]

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So I guess the answer to that is we do expect that in some circumstances it will be right to grant an extension of the payment holiday. But I think important -- it's been reported a bit as though there's going to be a blanket extension for everyone. That's not what we're seeing at all. We're being really clear that the best outcome if someone can pay is to go back to paying in full. We then will have options in between. And then in some cases, there'll be an extended payment holiday. But I think -- we think we're -- subject to the regulatory guidance being confirmed, expect it early next week, we're in good shape of managing that process at scale.

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Alex Wall, Nationwide Building Society - Head of Capital, Rating Agencies & IR [33]

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Fantastic. And then the last question at the moment as it looks, 2 questions from Christy Hajiloizou of Barclays. "Which books are most vulnerable near term to the crisis? How should we think about your social housing and buy-to-let book's performance?" And the second part of the question, on capital. "Can you give some guidance as to the trajectory of the capital position and the important moving parts on RWA inflation, reg changes such as mortgage floors, et cetera?"

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Joe D. Garner, Nationwide Building Society - CEO & Executive Director [34]

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And just before Chris answers that, I think I preface it by saying the books that are most vulnerable are in activities that we do not participate at all, typically more in the corporate or motor finance, et cetera within our range of current and historic activities. Chris?

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Chris S. Rhodes, Nationwide Building Society - CFO & Executive Director [35]

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So within our range, the books that are most vulnerable would be cards and loans, relatively small proportion of the total balance sheet, but the biggest percentage uplift in expected loss was on the unsecured portfolios. And they would be the portfolios that would clearly bear credit losses ahead of mortgages. It is really good advice to members to make sure you pay your mortgage ahead of paying unsecured credit. Well understood in that sense.

Social housing, there have been no payment holidays granted for social housing. Landlords, by the nature of that business, including the title, I suppose, social housing, most of the rent is paid through housing benefit and that should largely be unimpacted by the COVID crisis.

And on buy-to-let, I guess I go back to my previous answer, which is we don't have the underlying data about tenants, but we do have the second order impact on payment holidays, which payment holidays on buy-to-let are circa 13% of the portfolio.

Now in terms of risk-weighted asset inflation and how we should view that. So a couple of observations to make. One, the new hybrid models will not come in, in this financial year. So remember, therefore, Nationwide remains on point-in-time models that are volatile through the economic cycle, as you clearly see in the stress test that was published in December.

In terms of risk-weighted asset inflation, it's going to be an adjustment, a relatively slow burn increase in risk-weighted assets associated with the performance of the underlying assets over a period of time. And of course, payment holidays will mean it is a few months before those data points emerge. So what would drive an increase in risk-weighted assets is the probability of default migration, which will be driven by a combination of arrears performance, underlying risk characteristics and arguably, most importantly, those who emerge from their payment holiday with no job, when that's clear to us and then they have no job, they will jump from a performing status to a default status, and that will drive an increase in risk-weighted assets.

Again, we don't have the perfect foresight to know how that is going to play out. And I think that is a data point that we will talk about at the half year. But clearly, there will be some volatility in our RWAs from our point-in-time models, but it will be driven by the underlying performance, and that will take some time to emerge.

And capital floors, et cetera, are delayed in the sense of what we might see play out there, but we see no reason why we won't meet those requirements into the future.

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Alex Wall, Nationwide Building Society - Head of Capital, Rating Agencies & IR [36]

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That's fantastic. There's no further questions, Joe. Can I hand back to you?

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Joe D. Garner, Nationwide Building Society - CEO & Executive Director [37]

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Okay. Thank you. Thank you for those really incisive questions. And thank you for the team for doing what's been nothing short of a heroic job in preparing this level of disclosure in such a volatile environment.

But I hope that what does come through from the presentation is that we came into this impacted period from a position of tremendous financial strength with a conservative risk profile. And what that's enabling us to do is to stand by our members through this difficult time. Thank you very much.