TIDMCVBP
RNS Number : 1073R
Coventry Building Society
04 March 2021
4 March 2021
Coventry Building Society delivers a resilient performance,
providing outstanding service to members and investing for the
future.
Commenting on these results, Steve Hughes, Chief Executive
Coventry Building Society, said:
I was immensely proud to join the Society in April. 2020 was an
unprecedented year as a result of the Covid-19 pandemic but we
remained open for business, continuing to meet the needs of our
members and customers and providing great service. We have
continued to invest for the future while delivering a robust
financial performance and we balanced the differing needs of
borrowers, savers and those in financial difficulty. I am proud of
my colleagues who have lived our values and our belief in putting
members first.
Financial results for the 12 months ended 31 December 2020
include:
-- Mortgages: Mortgage balances have increased by GBP1.2bn to GBP43.5bn.
-- Savings: Savings balances increased by GBP1.9bn to GBP38.2bn.
-- Member value: The average weighted savings rate paid to
members was 1.18%, 0.55% higher than the average paid in the market
and equivalent to an additional GBP197m in interest to savers(1)
.
-- Member outcomes: The Society delivered outstanding service
with a Net Promoter Score of +73(2) and supported 39,000 borrowers
with payment holidays.
-- Profit: Profit before tax was resilient at GBP124m (2019:
GBP147m) after booking GBP36m of incremental provisions for
potential future credit losses.
-- Capital and liquidity strength: Common Equity Tier 1 (CET 1)
ratio remains well above statutory requirements at 33.0% whilst the
Society's Leverage Ratio on a UK modified basis increased to 4.6%.
The Liquidity Coverage Ratio of 179% is also considerably above the
regulatory minimum requirement.
-- Leading cost efficiency: At 0.49%(4) the Society continues to
report amongst the lowest cost to mean assets ratio of any UK
building society, whilst continuing to invest significantly in its
technology infrastructure and digital capability.
-- Outstanding employee engagement: The Society has a 3 star
rating for colleague engagement and was recognised for being 2(nd)
in the Sunday Times Best Big Companies to Work For list.
-- Supporting communities: Whilst face to face activity has been
limited due to lockdown, we have increased emergency support for
our community partners, tackling immediate needs and the longer
term consequences of the pandemic. 43% of colleagues have been
engaged in charitable activity over the last 12 months (2019:
82%).
AN UNPRECEDENTED YEAR
When I joined the Society at the end of April, the impacts of
the Covid-19 pandemic were still emerging. Since then, the ongoing
health crisis, combined with the economic and social impacts of
ongoing lockdown restrictions have had a major impact on all our
lives. I would like to thank all key workers across the country for
all they have done during this time and my thoughts go out to
everyone who has been impacted by the pandemic.
I am very proud of the way that my colleagues responded to the
unprecedented disruption and their focus and dedication supporting
our members and each other. I would like to thank them for their
hard work during this time and for the warm welcome I have received
in my first eight months.
The pandemic required us to change the way we worked and
delivered our services. We kept our branches open, making them
Covid-secure for our employees and customers. We increased
resources in our customer service centres allowing more calls to be
answered and invested in technology to allow the majority of our
colleagues to work from home. We made improvements to our website
to provide information and support for members who access their
accounts online.
We helped 39,000 mortgage customers with payment holidays and we
have worked with them so that they understand the impacts of the
holiday on their future mortgage payments. We will continue to
support those in financial difficulty once the payment holiday
period ends.
The reduction in the Bank of England Base Rate reduced the
income we earn from our mortgages and our liquidity investments.
This required us to make some difficult short term decisions on
savings and mortgage rates to protect the financial resilience of
the Society which is in members' long term interest.
DELIVERING A RESILIENT performance
Despite the challenging environment, we maintained our industry
leading service levels, grew our mortgage and savings balances and
made good progress delivering our technology programmes. Our profit
before tax, while lower year on year at GBP124 million (2019:
GBP147 million), underpins our strong capital ratios, a key measure
of our long term resilience.
Our mortgage growth of 3.0% (2019: 7.6%) was in line with the
market growth rate(3) . This rate of growth is lower than previous
years which reflects the effective closure of the housing market
during the first lockdown, lower remortgaging activity and our
concious decision to manage mortgage volumes at points in the year.
Market activity picked up significantly in the second half of the
year and we selectively increased our participation. We remain
focused on lower risk, high quality secured mortgage lending with
an average loan to value on loans originated in the year of 63.7%
(2019: 63.7%).
Our savings balances increased by 5% (2019: 8.9%), compared with
market household deposit growth of over 10%(3) . Our savings growth
was ahead of the growth in mortgages but below the market where
households held more of their balances in current accounts as the
level of consumer spending fell. Our average savings rate fell to
1.18% (2019: 1.49%) following a 0.65% reduction in Bank of England
Base Rate to 0.10% and compares favourably to a UK average savings
rate of 0.63%(3) . This means that we paid additional interest of
GBP197 million(1) to our savings members in 2020 (2019: GBP228
million) when compared to the market average. We cannot operate in
isolation from the market but we are committed to providing value
to our members.
The uncertain economic outlook, particularly in those industries
most impacted by Covid-19, has led us to set aside an additional
GBP36 million of provisions for potential future credit losses in
our mortgage book, notwithstanding the fact that the book is low
risk and continues to perform well with no significant losses to
date.
Spending our members' money wisely and maintaining our relative
cost efficiency is a key priority for us. In 2020 our cost to mean
asset ratio remained broadly stable at 0.49%(4) (2019: 0.48%). Our
total management expenses increased to GBP246 million (2019: GBP229
million) and the increase included additional spend on our
technology and change programmes.
Our profit in the year has resulted in us maintaining our strong
capital ratios. Our Common Equity Tier 1 ratio was 33.0% (2019:
32.0%), well above the regulatory minimum requirement. Our Leverage
Ratio increased to 4.6% (2019: 4.4%(5) ) and our Liquidity Coverage
Ratio was 179% (2019: 214%). These metrics demonstrate the strength
and stability of the organisation and underpin our desire to be a
safe and secure home for our members' money.
Investing for the future
The Society has a significant investment agenda and we have
continued to make good progress on our change projects throughout
the year. The pandemic has reinforced our understanding that
consumers value choice, flexibility and simplicity in how they
manage their financial needs.
Building strong technology infrastructure and operational
resilience is a core element of our investment programme including
new data centres, upgrading our databases and establishing a
testing capability that will allow more agile and cost-effective
change. Digitising our mortgage and savings business is a key
strategic focus, allowing customers to self-serve, reducing our
paper and other resource use and unlocking the potential for future
partnerships. We delivered technology to support stronger online
authentication in the first half of 2020. We have also started work
on the foundations for future digital functionality for all of our
channels. We aim to bring the best of our personal touch to a
digital world and continue to offer customers choice around how
they access our products and services.
Our members value the fantastic personal service we provide
through branches and over the phone and we are continuing to invest
in these channels. Our branch redesign programme was paused during
the first lockdown, but we restarted this activity while ensuring
that Covid-secure measures were in place and we redesigned four
branches in 2020, with the considerable investment in our branches
due to be completed by 2022. This coupled with investment in our
brand will see us continue to build on our aim of being locally
loved in our communities and also result in a brand that is also
better recognised across the UK.
A focused strategy with purpose, members and our people at its
core
It has been fantastic to engage with the Board and all 2,700
colleagues of setting the long term direction of the Society.
We have spent time focused on our purpose and the positive role
we can play in society. It will drive our decision making, inform
our strategy and will be the focus of our efforts for members, our
communities and our environment. Our purpose of giving people the
power to be better off through life means all our stakeholders will
be better off because of the contribution of the Society.
We won't get everything right first time, but our purpose will
be the standard to which we will hold ourselves. Unless we can
demonstrate through our actions that people are better off trusting
us with their savings and borrowing needs, better off working with
us, and that we are contributing to a fairer and more sustainable
wider society, then we will not be delivering our full potential
and will not be acting in the long term interests of our membership
or our society.
As a mutually owned building society we will always believe in
putting our Members First. Providing a safe home for people's
savings and enabling others to buy homes is what we have done
throughout our long history and will continue to be at the core of
what we do. In 2020 we have re-shaped our strategy and all of our
colleagues have been engaged in this process. We have a clear
ambition and have defined the priorities that we need to deliver on
to achieve it.
This ambition is focused on being the best in our core markets
of mortgages and savings with a clear focus on brilliant
propositions meeting the needs of consumers, providing industry
leading service, investing in our brand, our colleagues and
providing members and customers choice through human or digital
channels. Our values are built around the acronym CARES - Caring,
Ambitious, Responsible, Empowering and Straightforward. These
values recognise what has made the Society great but also look to
the future - I see these values being lived by my colleagues every
day and I know this is what our members and customers
experience.
We look forward to sharing our progress on our strategic
priorities as we move forward.
SUPPORTING Our colleagues
We did not furlough any of our colleagues and we have worked to
help our people impacted by the pandemic. Measures included
extending our Carers Flex scheme to allow additional flexibility
for those colleagues who have caring and childcare responsibilities
and launching a service to allow all colleagues to access an online
GP through video consultations. We have also launched an Employee
Assistance Programme which provides a wellbeing hub and telephone
counselling.
We responded quickly to new ways of working to enable our
colleagues to serve members and run the Society safely. This
included setting up equipment and technology to allow 75% of our
office-based colleagues to work from home. We also transformed our
branch and head office sites to ensure that these locations are
Covid-secure. It was an incredible time to join a business having
to try and build relationships and trust remotely but technology
has been our friend and I have been able to virtually meet most of
my 2,700 colleagues and have virtually visited all of our branches
and operations. Engagement has been excellent and I have been able
to get a real sense of the fantastic culture of the organisation
and deep rooted belief of putting Members First.
Our colleagues continued to deliver excellent services to
members throughout the year as measured by our Net Promoter
Score(2) of +73 (2019: +74). We have also maintained high levels of
colleague engagement as a 3* employer in the Sunday Times Best
Large Companies to Work For list, achieving second place in the
rankings in February 2020 as previously reported. It is also great
to get external recognition for the fantastic service we provide
and the quality of our products. To receive continued recognition
from Fairer Finance for the simplicity and transparency of our
products and from Which? for the quality of our service is
testament to what we are about. I am immensely proud of these
achievements.
We are committed to creating the right environment at the
Society, one where everyone feels that they can belong. We have
pledged to sign up to the Race at Work Charter in 2021 which is an
important next step for us. The Society employs more women than
men, but this mix reverses in senior leadership roles - we want to
see that change. Likewise, our ambition is to see more ethnic
diversity in our managerial population. I look forward to reporting
our progress to you.
We continue to create employment opportunities with our
apprenticeship and graduate offers, providing great development
opportunities for our colleagues and adding to our capability
across the organisation. It has been fantastic to meet all new
joiners this year and see the talent and dynamism they will bring
to our future.
The voice of our colleagues is important in supporting our
decision making. My Society is a forum of 30 colleagues from around
the business and is attended by Peter Ayliffe our Deputy Chair.
They meet quarterly and have had the opportunity to engage in
strategy development, engagement and remuneration matters and play
an important part in informing Board decisions.
MAKING A DIFFERENCE IN Our communities
Making a real difference to our communities and to wider society
is really important to everyone at the Society. We have programmes
that focus on financial education and employment skills, creating
opportunity for young people, addressing food poverty and
homelessness in our home city of Coventry and reducing loneliness
and isolation in our communities.
The opportunities for our colleagues to be directly involved in
community activity in 2020 were limited by the pandemic so we
supported our communities in new and different ways. Supporting
education and creating opportunity for young people is critical. We
worked with schools to provide stationery to children studying at
home. We launched a GBP50,000 grant scheme to help Coventry primary
school pupils deliver additional maths support to help pupils after
time out of traditional education during the year. We also moved
our employability programme online so that we can offer this to
pupils without face to face sessions.
The pandemic has heightened the social challenges our
communities face. We increased funding to a number of charities
across Coventry that provide food and shelter to those most in
need. We also provided support to University Hospital Coventry
& Warwickshire Charity, so it could increase support to its own
employees and their patient's families. Our branches continue to
support local causes as well as providing financial services to
members and in doing so reduce loneliness and isolation for those
who were unable to meet up with friends and family.
Our members continued to save in our Poppy Bonds savings product
which resulted in a further GBP0.8 million donation to The Royal
British Legion, bringing our support for the charity to almost
GBP19 million. These donations make a real difference to current
and former members of the armed forces and their families including
benefit, debt and financial support and housing and employment
support for those most in need.
We have focused and exciting plans for 2021 as we bring our
purpose to life in our heartland and communities.
LOOKING AHEAD
2020 was an unprecedented year, impacting the health and lives
of millions of people and also impacting the livelihoods of many
others and the performance of the wider UK economy.
We expect the outlook to be uncertain for some time to come and
we will continue to run the Society prudently. We aim to continue
to provide brilliant service and good value to our members and
customers with a strong focus on the wellbeing of our colleagues as
well.
Our capital strength allows us to invest for the long term
giving current and future generations flexible mortgage and savings
propositions and genuine choice around how they access our products
and services supported by great teams across our branches, contact
centres and head offices. Capital is also needed to fund growth.
Our resilience through previous periods of economic uncertainty
gives us confidence we will continue to grow in the years ahead,
supporting people who want to save and who want to buy their own
homes and giving them the power to be better off through life.
I would like to thank our members, colleagues, customers and
partners for their support and loyalty. I am delighted to have
joined the Society and look forward to working with my colleagues
to see the Society achieve its potential and fulfil its
ambition.
OVERNANCE
1. The Society's average month end savings rate compared with
the Bank of England average rate for household interest-bearing
deposits on the Society's mix of products.
2. Net Promoter Score (NPS) is a measure of customer advocacy
that ranges between -100 and +100 which represents how likely a
customer is to recommend our products and services
3. Source: Bank of England
4. Administrative expenses, depreciation and amortisation/Average total assets.
5. During the year the Society has refined its calculation of
this measure. Had this applied in 2019 the comparative would be
4.6%.
FINANCIAL REVIEW
Income statement
Overview
In 2020, the Society has faced significant challenges resulting
from the pandemic and our focus has been on supporting members,
customers and colleagues through these unprecedented times. Our
results for the year are impacted by the following factors which
relate to the pandemic:
-- We have increased our provisions for future expected credit
losses (ECLs) in the light of the continued uncertainty surrounding
the future economic outlook.
-- While our net interest income increased in the year, the
0.65% reduction in the Bank of England Base Rate in March had a
negative impact on our net interest income.
-- Mortgage growth, while in line with the market, has been
moderated from previous years due to the significant economic
uncertainty.
As a result, profits for the year have reduced to GBP124 million
(2019: GBP147 million). This reflects a strong recovery in the
second half of the year following profits reported in our Interim
Financial Report to 30 June 2020 of GBP22 million.
The Society remains committed to providing long term sustainable
value to members through competitively priced savings and mortgage
products while ensuring we continue to invest to improve services
and the long term resilience of your Society.
In running the Society we seek to balance the needs of our
mortgage and savings members. As reported in our Interim Financial
Report, the impact of the 0.65% reduction in the Bank of England
Base Rate in March had the effect of reducing net interest
income.
In order to mitigate the impact of this, we took the difficult
decision to reduce the rates of interest paid to our savings
members. The time lag between the Bank of England Base Rate changes
and repricing savings rates reduced net interest income in the year
by GBP18 million.
In overall terms, our net interest margin for the year reduced
by 0.02% to 0.81% (2019: 0.83%). Of this reduction, 0.04% was due
to the impact of the repricing following the Base Rate fall. This
was offset by an increase of 0.02% relating to improving returns on
our mortgage book. At 0.81%, our net interest margin has improved
significantly from the 0.72% reported at the half year in line with
our expectation that net interest margin would return towards 2019
levels.
Despite the reductions in savings rates, the Society has
continued to pay favourable savings rates compared with the market
average, balancing distribution of member value and the long term
health and resilience of the Society. GBP197 million (2019: GBP228
million) of additional interest was paid to savings members as
compared with average market rates(1) .
Costs have increased GBP17 million to GBP246 million (2019:
GBP229 million). Day-to-day operating costs increased by GBP11
million to GBP160 million (2019: GBP149 million) and spending on
our strategic investment programme increased by GBP5 million to
GBP57 million (2019: GBP52 million) with a further GBP1 million
increase in the depreciation of previous investment.
The economic environment remains very uncertain and our
expectations are for a rise in unemployment and house price falls
in the period ahead. Notwithstanding the very strong asset quality
and overall low risk nature of our balance sheet we recognised
GBP36 million of additional provisions in the year for ECLs on the
Society's mortgage portfolio. Significant judgement and estimation
has been applied in calculating expected credit losses given the
uncertain environment. More information on the ECL provision is set
out below.
2020 2019
GBPm GBPm
======================= ======= =======
Interest receivable 859.9 1,010.5
======================= ======= =======
Interest payable (451.4) (613.8)
======================= ======= =======
Net interest income 408.5 396.7
======================= ======= =======
Other income (0.1) 0.1
======================= ======= =======
Losses on derivatives
and hedge accounting (0.7) (17.2)
======================= ======= =======
Total income 407.7 379.6
======================= ======= =======
Management expenses (245.6) (229.1)
======================= ======= =======
Impairment charge (36.4) (2.1)
======================= ======= =======
Provisions (0.5) -
======================= ======= =======
Charitable donation to
Poppy Appeal (0.8) (1.2)
======================= ======= =======
Profit before tax 124.4 147.2
======================= ======= =======
Tax (23.0) (25.5)
======================= ======= =======
Profit for the year 101.4 121.7
======================= ======= =======
Net interest income
Net interest income has increased to GBP409 million (2019:
GBP397 million) despite the Bank of England Base Rate reductions in
March which reduced income by GBP18 million. This reduction was
offset by an increase of GBP30 million due to growth and higher
margins on our mortgage assets. There has also been a small
reduction in future expected income recognised due to changes in
customer behaviour. We will continue to assess the impact of
changes in customer behaviour that occurs as a result of product
and market developments.
Net interest margin
Net interest margin has decreased by 0.02% to 0.81%. This is the
result of a reduction of 0.04% relating to the impact of the
reduction in Bank of England Base Rate, partly offset by an
increase of 0.02% reflecting an improvement in the margin on our
mortgage book.
2020 2019
GBPm GBPm
===================== ====== ======
Net interest income 409 397
===================== ====== ======
Average total assets 50,515 47,801
===================== ====== ======
%%
===================== ====== =====
Net interest margin 0.81 0.83
===================== ====== ======
Derivatives and hedge accounting
The Society uses derivative financial instruments solely for
risk management purposes to manage interest rate and currency risk
arising from its mortgage and savings activity and from
non-sterling, fixed rate wholesale funding. Over the last 12
months, the Society has continued to enhance its hedge accounting
processes, in part to improve hedge effectiveness. The loss of GBP1
million for the year represents hedge ineffectiveness and fair
value movements on derivatives where hedge accounting has not been
obtained (2019: GBP17 million loss). These fair value movements
represent timing differences and include adjustments to fair values
as a result of Covid-19 related mortgage payment holidays.
Management expenses
Overall management expenses have increased by GBP17 million or
7%. Of the GBP17 million increase in management expenses,
day-to-day operating costs increased by GBP11 million to GBP160
million (2019: GBP149 million). The increase was due to salary and
cost inflation, higher IT costs as investment programmes deliver
and GBP4 million of costs incurred in response to the pandemic,
including costs to facilitate remote working, personal protective
equipment for colleagues and modifications to our branch and head
office buildings.
Spending on our strategic investment programmes increased by
10%, or GBP5 million, to GBP57 million (2019: GBP52 million) with a
further GBP1 million increase in depreciation of previous
investment spend referenced in day-to-day operating costs above.
Investment in the year has focused on a new mortgage platform,
improving the resilience and security of our technology and some
early investment in digital capabilities.
Running the Society efficiently remains at the heart of the
Society's strategy enabling us to provide better value to members.
The cost to mean total assets ratio of 0.49%(2) (2019: 0.48%) is
expected to remain among the lowest in the UK building society
sector and we will continue to invest in the Society for the
benefit of members and to ensure the long term health and
sustainability of the Society.
impairment charge
The full economic impacts of the pandemic are uncertain and it
is expected that government support such as payment holidays and
the furlough scheme have obscured potential credit deterioration in
the mortgage book. Notwithstanding very strong asset quality and
the overall low risk nature of our balance sheet, it is against
this backdrop we have made provisions for ECLs of GBP36 million
(2019: GBP2 million). We have undertaken a significant amount of
work over an extended period in order to seek to identify and
properly consider a range of potential risks in a range of
different scenarios including a scenario where house prices fall by
a third and unemployment doubles. We have sought to estimate the
impact of all of these risks in assessing ECLs.
By 31 December 2020, 39,000 members had taken Covid-19 related
mortgage payment holidays, representing just under 15% by value of
the mortgage loan book. There were 2,600 active payment holidays at
the year end and 98% of the accounts with expired payment holidays
had resumed mortgage payments. A further 2% of payment holiday
customers are continuing to experience financial difficulties and
we remain committed to supporting them through these challenging
times.
The unprecedented nature of Covid-19 and the availability of
payment holidays means that the calculation of expected credit
losses has required significant judgement and estimation
techniques. Of the total charge for the period, GBP33 million
relates to a post model adjustment (PMA) where existing models do
not fully reflect the ECLs arising from Covid-19 implications. The
PMA has principally been calculated using the following
techniques:
-- By segmenting the book to identify higher risk segments and
uplifting probability of default (PDs) accordingly. Higher risk
segments include loans with a Covid-19 related payment holiday and
those loans which have not taken a payment holiday but where
external credit data indicates a deterioration in credit quality.
The PDs applied in calculating the PMA have been uplifted by an
average of 7.5%, weighted by value.
-- We have reversed the benefit from the positive house price
inflation we have seen since the start of the pandemic. HPI growth
has been particularly strong in the second half of 2020 driven by
temporary government support to keep the housing market strong such
as stamp duty holiday which is expected to end on 31 March 2021. We
believe this has only delayed the potential for house price falls
in the near term and as such we have removed the impact of these
increases when calculating ECLs.
-- We have begun an assessment of more granular house price
information on our mortgage book and this provides a more accurate
view of indexed LTVs and risks associated with pockets of negative
equity.
The remaining GBP3 million of ECL increase relates to worsening
forward-looking macroeconomic scenarios and increases in the
modelled ECL provision. The alternative scenarios reflect a range
of possible outcomes as the economy emerges from the pandemic.
IFRS 9 requires loans to be assessed as 'stage 2' where there
has been a significant increase in credit risk. During 2020 we have
extended the criteria for stage 2 to include accounts which have
taken a mortgage payment holiday of greater than three months and
accounts with mortgage payment holidays where there are indications
of a deterioration in credit quality. The remaining payment holiday
cases have been left in stage 1. This change in criteria has
resulted in 6.0% of loans being transferred into stage 2 (2019:
nil) but despite this 91.3% of the book remains in stage 1 (2019:
97.0%).
As a result of these changes the ECL provision now equates to
0.11% of the overall mortgage book (2019: 0.03%). The materially
higher level of ECL provision coverage is reflective of both the
unprecedented nature of the environment and the potential risks in
the period ahead.
Provisions
There is a small charge of GBP0.5 million (2019: GBPnil) for
provisions for liabilities. This relates to legal and redress
cases.
Charitable donation to the Poppy Appeal
The Society continued to support The Royal British Legion's
Poppy Appeal with GBP0.8 million donated during the year (2019:
GBP1.2 million), bringing the total donated over the Society's
relationship with the Legion to almost GBP19 million.
Taxation
In 2020, the corporation tax charge was GBP23 million (2019:
GBP26 million), an effective tax rate of 18.5% (2019: 17.3%).
Balance Sheet
Overview
In line with the underlying strategy the overall shape of the
Balance Sheet has remained consistent during the year. Mortgage
balances and liquidity have grown during the year by GBP1.2 billion
and GBP0.4 billion respectively, with mortgage growth funded by
growth in retail savings.
A summarised Balance Sheet is set out below:
2020 2019
GBPm GBPm
========================= ======== ========
Assets
========================= ======== ========
Loans and advances to
customers 43,482.8 42,234.7
========================= ======== ========
Liquidity 7,314.5 6,854.7
========================= ======== ========
Other 701.0 441.4
========================= ======== ========
Total assets 51,498.3 49,530.8
========================= ======== ========
Liabilities
========================= ======== ========
Retail funding 38,151.1 36,238.1
========================= ======== ========
Wholesale funding 10,367.9 10,605.4
========================= ======== ========
Subordinated liabilities
and subscribed capital 67.2 67.1
========================= ======== ========
Other 706.0 417.4
========================= ======== ========
Total liabilities 49,292.2 47,328.0
========================= ======== ========
Equity
========================= ======== ========
General reserve 1,835.1 1,773.3
========================= ======== ========
Other equity instruments 415.0 415.0
========================= ======== ========
Other (44.0) 14.5
========================= ======== ========
Total equity 2,206.1 2,202.8
========================= ======== ========
Total liabilities and
equity 51,498.3 49,530.8
========================= ======== ========
Loans and advances to customers
Our lending strategy remains unchanged and is focused on high
quality, low loan to value loans within the prime residential
market. These loans are primarily distributed through third party
intermediaries, giving the Society a regionally diverse mortgage
portfolio in a cost-effective manner.
In 2020, we advanced GBP6.7 billion of mortgages (2019: GBP8.6
billion) and mortgage balances grew by GBP1.2 billion (2019: GBP3.0
billion). The year on year growth in mortgages of 3.0% is in line
with mortgage market growth of 3.0%(3) resulting in our market
share remaining the same as 2019 at 2.9%.
This year, our approach to lending was more cautious in light of
the pandemic, market disruption and the significant uncertainty we
faced. As a result, our growth was lower than 2019 but still in
line with the market.
New lending of owner-occupier mortgages accounted for 60% of
total new lending in 2020 (2019: 67%) at an average loan to value
(LTV) of 65.5% (2019: 64.8%). Total mortgage assets at 31 December
2020 stood at GBP43.4 billion (2019: GBP42.2 billion) which
comprises GBP25.7 billion of owner-occupier loans (2019: GBP25.5
billion) and GBP17.7 billion buy to let loans (2019: GBP16.7
billion).
The balance weighted indexed loan to value of the mortgage book
at 31 December 2020 decreased to 52.8%(4) (2019: 55.4%). Arrears
have been impacted by borrowers' ability to meet payments against
the economic backdrop of Covid-19 and increased slightly in 2020,
but remain significantly better than the industry as a whole. As at
31 December 2020, 0.09% of mortgage balances were 2.5% or more in
arrears (2019: 0.08%) compared with the latest available industry
average of 0.69%(5) .
Possessions and forbearance have been supported by mortgage
payment holidays and have remained low with 22 cases in possession
at the year end (2019: 33) and forbearance levels down by 17.1%
year on year in value terms and 21.3% in number of cases.
Liquidity
On-balance sheet liquid assets have increased to GBP7.3 billion
(2019: GBP6.9 billion) as we maintained a prudent liquidity buffer
given the uncertain economic environment. While the Liquidity
Coverage Ratio (LCR) reduced from elevated levels in 2019, it
continued to be very strong at 179% (2019: 214%), significantly
above the minimum regulatory requirement.
Liquid assets are principally held in deposits at the Bank of
England and UK Government investment securities. This means that
asset quality remains very high with 93% of the portfolio rated
Aaa-Aa3 (2019: 96%). 98% of liquid assets are held in UK sovereign
or UK financial institutions (2019: 99%).
Included in liquid assets are GBP1.0 billion of assets held at
fair value through other comprehensive income (FVOCI). As at 31
December 2020, the balance on the FVOCI reserve was a GBP2 million
gain, net of tax (2019: GBP4 million gain, net of tax).
Retail funding
Retail savings increased in the year by GBP2.0 billion to
GBP38.2 billion (2019: GBP36.2 billion), representing growth of
5.3%, compared with market growth of 10.2%(3) . The Society's
savings market share reduced slightly to 2.5%(3) (2019: 2.6%).
The Society continued to support the cash ISA market,
maintaining our market share at 6.3%(3) (2019: 6.3%). Our growth
was supported through our partnership with Hargreaves Lansdown
where we expanded our product range through its Active Savings
platform to include a restricted access savings account. Our
performance in the year reflects both our mortgage performance and
our position of being predominantly funded by retail savings with
88% of mortgage loans funded by retail savings (2019: 86%).
Wholesale funding
We use wholesale funding to make our funding more diverse,
enabling growth and lowering risk, both of which benefit
members.
We materially increased our funding capabilities in 2020, with
issuances from two new funding vehicles. In July 2020, we accessed
the RMBS market through our Economic Master Issuer programme
(GBP0.35 billion), our first issuance of this type through a Master
Trust RMBS. In October 2020, we retained issuance from our newly
created Godiva Covered Bonds LLP which utilises buy to let loans
and enables us to further collateralise government funding schemes.
In addition, in January we completed a GBP0.5 billion covered bond
issuance and in the second half of the year issued GBP0.35 billion
of unsecured debt. These were offset by GBP1.5 billion of
maturities in the year.
In March 2020 the Bank of England launched the Term Funding
Scheme with additional incentives for SMEs (TFSME) to enable
lenders to support new lending into the wider economy. To date, we
have drawn GBP2.3 billion of funding under the Scheme, replacing
some of the planned wholesale funding and we have repaid GBP2.0
billion of the previous Term Funding Scheme leaving GBP4.55 billion
of Central Bank Term Funding outstanding as at 31 December 2020
(2019: GBP4.25 billion).
Equity
The Society's equity is predominantly made up of its general
reserve and Additional Tier 1 (AT 1) capital. While the Society
made post-tax profits of GBP101 million in the year, total equity
remained in line with last year at GBP2.2 billion, reflecting GBP29
million distribution to AT 1 capital holders and negative movements
in the cash flow hedge and pension reserves which largely offset
the post-tax profits.
Pension fund
The pension scheme assets and liabilities are recorded in the
Society's accounts and the overall position was a surplus of GBP10
million at the end of 2020 (2019: GBP24 million). These assets and
liabilities are impacted by market movements and the reduction in
the year is driven by the fall in UK corporate bond yields in the
second half of 2020. The Society continues to monitor the pension
scheme to ensure that there is no scheme deficit over the medium
term.
Regulatory capital
We hold capital to protect members against future losses. As we
grow our mortgage book the amount of capital we need to hold to
meet the Capital Requirements Directive (CRD) IV increases.
The Society's CRD IV capital position(6) as at 31 December 2020
is summarised below. During the year, capital available for CET 1
or 'capital resources' increased by GBP92 million, primarily driven
by profit after tax of GBP101 million.
The increase in capital, partly offset by a 2% increase in risk
weighted assets (RWAs), has increased our CET 1 ratio to 33% (2019:
32%). We expect this to continue to be among the highest reported
in the UK.
Our new IRB models have been approved by the PRA in the year
which accounted for a 2% increase in RWAs. The new models have a
much wider distribution of risk grades meaning that accounts are
likely to move between grades more frequently and are more
sensitive to factors such as HPI in the risk grade allocation.
However, prior to the implementation of the new IRB models, the
underlying RWAs had decreased by less than 1% which was driven by
offsetting factors relating to mortgage growth of 3%, improvements
in the loan to value of mortgages largely as a result of increases
in HPI and a reduction in RWAs for derivatives.
The PRA has recently released a consultation paper (CP14/20):
"Internal Ratings Based UK mortgage risk weights: Managing
deficiencies", which recommends flooring both average and
individual IRB UK mortgage risk weights. If this were to be
implemented as proposed, our CET 1 ratio would reduce by
approximately 6%. From 2023, Basel IV RWA floors are being phased
in and will reduce the Society's reported CET 1 ratio further, as
they do not give full credit for our very low risk mortgage book.
Applying the Basel IV RWA floors to the year end figures on a full
transition basis would result in a CET 1 ratio of 17%.
The Society's Total Capital Requirement (TCR) has been updated
to reflect changes in the regulatory setting of buffers, and the
update of the Pillar 2 requirement to an absolute amount. As a
result, our TCR at December 2020 was GBP574 million, equating to
10.6% of RWAs (2019: GBP590 million; 11.2%). We comfortably meet
this requirement using CET 1 capital alone.
We are not currently bound by regulatory leverage ratios but we
monitor leverage ratios on both a CRR(7) and UK basis. The UK ratio
differs from the CRR basis in that it includes a restriction on the
amount of AT 1 capital that can be included in leverage capital and
excludes central bank claims with a maturity less than three months
from leverage exposure.
The CRR and UK leverage ratios have increased slightly to 4.3%
and 4.6%(8) respectively (2019: 4.1% and 4.4% respectively) driven
by the increase in capital resources in the year.
End-point End-point
31 Dec 31 Dec
2020 2019
GBPm GBPm
======================== ========= =========
Capital resources:
======================== ========= =========
Common Equity Tier 1
(CET 1) capital 1,783.3 1,691.0
======================== ========= =========
Total Tier 1 capital 2,198.3 2,106.0
======================== ========= =========
Total capital 2,198.3 2,106.0
======================== ========= =========
Risk weighted assets 5,410.6 5,283.6
======================== ========= =========
Capital and leverage
ratios: %%
======================== ========= ========
Common Equity Tier 1
(CET 1) ratio 33.0 32.0
======================== ========= =========
CRR leverage ratio(6) 4.3 4.1
======================== ========= =========
UK leverage ratio(8,10) 4.6 4.4
======================== ========= =========
1. The Society's average month end savings rate compared with
the Bank of England average rate for household interest-bearing
deposits on the Society's mix of products.
2. Administrative expenses, depreciation and amortisation/Average total assets.
3. Source: Bank of England
4. LTV is calculated using the Nationwide Building Society
quarterly regional House Price Index (HPI).
5. Source: Prudential Regulation Authority - latest available information at 30 September 2020.
6. Excluding any IFRS 9 transitional provisions which were negligible.
7. Capital Requirements Regulation.
8. During the year the Society has refined its calculation of
this measure. Had this applied in 2019 the comparative would be
4.6%.
9. The CRR leverage ratio is calculated in accordance with the
definitions of CRD IV as amended by the European Commission
delegated regulation.
10. The UK leverage ratio includes a restriction on the amount
of Additional Tier 1 capital and excludes central bank reserves
from the calculation of leverage exposures.
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