Nationwide Building Society (NBS) Earnings Call Transcript & Summary

Welcome to the Nationwide Building Society 2020 Interim Results Call. My name is Patrick, and I will be your coordinator for today's event. [Operator Instructions] I'm now handing you over to your host, Joe Garner, to begin today's conference. Thank you.

Good morning. Thank you for joining us this morning for Nationwide Building Society's results for the first half of the 2021 financial year. I'm Joe Garner, the Society's Chief Executive. Also on the call with me are Chris Rhodes, our Finance Director; Sara Bennison, our Chief Product and Marketing Officer; Muir Mathieson, our Director of Treasury; and Robert Gardner, our Chief Economist. 2020 has, of course, been dominated by the pandemic. It's brought the biggest disruption to our members and the economy and our society in living memory. As a mutual, our core purpose has always been a social one, and supporting our members and communities has been our top priority. This has only been possible because of the financial strength that underpins the society. I'd like to start by talking about how we've supported people so far. On this slide, you can see our 4 key priorities over the last 6 months. Our first was to look after our members, particularly those who found themselves in financial difficulties. We put together a home support package to support those members most in need. We granted mortgage payment holidays for almost 0.25 million members and about 60,000 payment breaks on loans and credit cards. We also paused repossessions for 4 months longer than the FDA's guidance. Other members needed different kinds of support, and we overcame operational health and family challenges to support and serve our 16 million members. For example, for vulnerable members who couldn't visit us, we set up a dedicated helpline, organized cash deliveries and also video appointments. All but a few of our 650-plus branches have been opened throughout and helped our call centers by answering over 100,000 calls from members every month since March. Our office colleagues shifted to homeworking virtually overnight with 9 out of 10 still working remotely while keeping our offices running on much reduced occupancy. And we retrained and redeployed hundreds of colleagues to support the parts of the society where member demand for our services was highest. Our second priority was to do what we could to help homebuyers in the housing market after the country emerged from the first national knockdown. We're the U.K.'s second largest mortgage lender, and we are acutely aware of how important the housing market is for the overall economy. We were determined to be in the market with competitive lending but also to lend responsibly given the huge uncertainties that lie ahead. We were one of the few lenders to continue to offer higher LTVs for first-time buyers, helping around 21,000 people onto the housing ladder despite the pandemic. Another key priority was to look after our employees and our communities. To help alleviate anxiety for our colleagues, we committed to preserving jobs for 2020. We've also put a number of well-being measures in place to support our employees' mental and physical health. We knew that many communities would be adversely affected by the abrupt drop in funding for charities during lockdown. We saw a way we could help engage charity's freedom to spend the GBP 10 million of funding from Nationwide in whatever way they felt appropriate. High Streets are suffering badly as well, and we're doing our part in protecting High Street by extending our branch pledge. This is our promise to keep a branch in every town where we are today until at least 2023. This helps preserve access to services, provides a special point of social contact for our members and a sense of community that's so important to us now. None of this support would have been possible if the society were not financially very strong. We take a conservative approach to our finances, which is evident in our strong capital position. Profit has never been the principal measure by which we judge our success. But our stable profit, income and margin, all point to the resilience of the society, which means we're able to continue supporting members and the economy in these incredibly challenging times. As I said earlier, we see this support as a key part of our social purpose. This is nothing new for us. We have a long record of trying to do the right thing. For example, Oakfield, our funding of the not-for-profit development in Swindon of 239 sustainable homes with a focus on community, is looking at new ways to increase housing supply that communities want and need. This slide shows you some of the ways in which we've contributed positively to the lives of our members, our employees and our communities in the recent and more distant past. The pandemic undoubtedly presents a major challenge, but it's not the only one our country faces today. Too many people still lack good quality homes, the know-how to manage their finances, owe the respect to their payers. These are areas that we believe that as a building society and the mutual we can help. We've been working for some time to develop 5 commitments which were aligned to the UN sustainable development goals for change. We've set ourselves challenging targets to make sure that we really do make a difference and help build a stronger, kinder, greener society. To that end, we're supporting the transition to a net 0 economy. In April 2020, all of Nationwide's operations became carbon neutral, and we said no ways to landfill. We're making GBP 1 billion of funding available for our green digital borrowing mortgage that offers a lower initial interest rate to make green home improvements. And as I outlined at the Green Horizon Summit last week, we've also set ourselves the ambition for at least 50% of all homes in our mortgage lending book being EPC C rated or above by 2030, and we're working towards disclosing the carbon emissions from our mortgage book overall. The pandemic has dominated the first half, and it might well dominate the rest of the year, too. However, it has not derailed our strategy, which I'd like to remind you of before moving on to our current performance. This page summarizes our strategy, Building Society Nationwide, what we will do and how we will do it. We've recently carried out a strategy review, which has confirmed the direction of the strategy, although it will evolve to respond to the social and economic trends. This strategy puts us on a growth path. Since 2016, we've added 1 million new members and achieved a strategic target of 10% share of current accounts. Given the strength of our membership base, pre-COVID, we'd already chosen to moderate the pace of growth. And in the last 6 months, we continued to consolidate our strong position with very resilient trading. As you know, the housing market was effectively closed during lockdown and then bounced back pretty strongly. We saw good post-lockdown demand from first-time buyers and landlords, which contributed to positive net lending. Although unsurprisingly, the growth was lower than last year. In view of the huge uncertainties that lie ahead, we have tightened lending criteria to ensure we're lending responsibly. On the current account front, although fewer accounts were opened, our share remained above or at par. Our market share of deposits dipped slightly, as we knew it would, after we repriced our savings account. The reprice was a third inevitability after the base rate fell to our lowest -- to its lowest rate ever. However, we do take seriously our role in encouraging a strong savings culture in the U.K. And in the space of ultra-low interest rates, we continue to look for new ways to reward members and encourage savings. Recent examples include our Start to Save proposition, high price draws and a mutual bond, which combine a competitive fixed rate interest with a chance to win GBP 10,000 on top. Now I'd like to look briefly at our KPIs. These are the metrics that measure the things our members want from us: Excellent service, good value and a stable and secure society. This year, 2 of our KPIs were impacted by our savings reprice. First was our member financial benefit. We've directed the majority of financial benefit to save us in recent years, so the pandemic-related base rate cut brought this below our target. Rewarding members for their loyalty is an important part of what we do. And so we've been looking for new ways to give value to savings. For example, price draws linked to savings account. Our customer satisfaction as tracked by FRS reflected members' disappointment after we reduced savings rates. While still significantly ahead of our peer group at 3.4%, we tracked slightly below our target. We've remained very focused on serving members to the best of our ability, and we've gone to extra lengths to maintain service and support during the pandemic. So we are pleased that this was recognized by which who named us their banking brand of the year for the fourth year running with special mention for our pandemic response. We also ranked second overall in the all sector U.K. customer satisfaction index. Finally, we remain financially safe and secure, as you can see from our strong leverage ratio. The resilience of our finances is also clear in our stable underlying profit and strong capital and liquidity, which Chris will comment on in more detail. Chris?

Thank you, Joe. Good morning, everyone. As you've heard, we've continued to support our members through the pandemic with our home support package whilst continuing to lend to those members wanting to buy a home. We've also made good progress in responding to the financial challenge of the pandemic, with the margin stabilizing and costs reducing. It is still early days in terms of assessing the long-term impact of COVID-19 on our members' finances and our longer-term asset quality. The stock of mortgage payment holidays has fallen from a high point of 246,000 to 12,000 by the beginning of November, broadly in line with our expectations at the year-end. We continue to have a strong balance sheet with a leverage ratio of 5% and an LCR of 153%. So turning to our financial performance. In line with our expectation, underlying profits are broadly flat at GBP 305 million compared with GBP 307 million a year ago. Statutory profit is higher at GBP 361 million compared to GBP 309 million as a result of below-the-line hedge accounting gain, which are largely a reversal of the movements we saw at the end of last financial year. Total income was broadly flat, reflecting a rise in net interest income, offset by the impact of lower overdraft charges, non-repeat of the fair value gain on Visa shares and our buyback of covered bonds as we continue to optimize wholesale liabilities to support our credit rating and reduce our funding costs. Operational costs are GBP 92 million lower than the same period last year, reflecting the reduction in the impact of investment spend and run costs, partially offset by higher restructuring costs. We expect costs in the 2021 financial year to be approximately GBP 100 million lower than last year, with a further reduction of around GBP 100 million in '21-'22. Impairments increased by GBP 82 million compared to the same period last year, reflecting the deterioration in the economic outlook included in our multiple economic scenarios and the estimated impact of payment deferrals. The charge for other provisions was GBP 26 million compared with a charge of GBP 52 million in the prior year. Member financial benefit was GBP 140 million compared to GBP 375 million in the same period last year. This reflects the reduction in deposit pricing that took place following the base rate cut. The latest data point shows that our average deposit pricing is 2 basis points higher than the market average of 26 basis points. 5% balance sheet growth reflects a rising liquidity and a growth of GBP 1.8 billion in mortgage balances, with a decline in other lending balances reflecting prepayment of the registered social landlord portfolio and the paydown of unsecured credit. Liquidity balances increased by GBP 11.2 billion due to increased wholesale funding. Deposit growth of GBP 1.3 billion reflects ongoing current account growth, which has been partially offset by an outflow from savings accounts following the rate reductions in May and the subsequent outflows to NS&I who maintained a very competitive rate position during the summer. Outflows to NS&I have fallen significantly following their rate reduction announcement in September. Capital ratios remained strong. The CET1 ratio increased to 34.5%, mainly due to retained profits for the period and a small reduction in risk-weighted assets. The U.K. leverage ratio increased to 5%, reflecting the growth in retained earnings and the AT1 issuance of GBP 750 million. Margins stabilized during the period, reflecting improved new business pricing for mortgages and an increase in the benefit from our structural hedges. In the second half of the year, we expect margins to be stable as mortgage new business continues to offset the continued runoff of the back book. The cost base has reduced by GBP 92 million as we have reprioritized our investment spend over the medium term. Reductions in business as usual costs in new business as usual run costs have been partially offset by increased restructuring costs and the cost impacts of responding to the pandemic. We expect this trend to continue for the full year. Impairment charges have increased by GBP 82 million to GBP 139 million, reflecting an increase in our expected losses from payment deferrals and a deterioration in the economic outlook included in our multiple economic scenarios. This compares with GBP 157 million charge in the second half of last year. The cost of risk of 14 basis points continues to benefit from the low-risk nature of our assets and the continued runoff of our CRE portfolio. We have used 4 economic scenarios in assessing our impairment charge for the period. Each of the scenarios reflect the impact of COVID-19 to different degrees. This can be seen in the significant fall in GDP, and rising unemployment is seen in all scenarios. In the central scenario, GDP recovers to levels slightly higher than those used in the central scenario as of 4th of April. For unemployment and HPI, the impacts are comparable to previous assumption. Although the impacts are slightly delayed, the rise in unemployment is higher by 8.5%. The new downside scenario reflects both a higher peak level of unemployment and a more gradual recovery in the economy. Bank base rate is forecast to remain at 0.1% for the central and downside scenarios between 2020 and 2024 whilst the upside scenario assumes a small increase to 0.25% by 2024. The economic scenarios and assumptions used for modeling credit losses reflect our forward-looking view of the economy as at 30th of September, so do not take into account developments after that date, such as the economic impacts of the second lockdown and the extension of government support. IFRS 9 staging remains stable across all portfolios with movement attributable to increased PDs for mortgages that have extended payment holidays and the impact of lower interest rates. Mortgage Stage 2 balances have decreased by GBP 1.9 billion during the period. The prime portfolio Stage 2 balances have increased by GBP 1 billion, largely as a result of moving higher risk payment holiday cases to Stage 2 from Stage 1. Right to let Stage 2 balances have reduced by GBP 2.9 billion, mainly due to a reduction in refinance risk associated with low-risk interest-only loan. This is as a result of the expectation that interest rates remain low for the foreseeable future, which means that on a modeled basis, more loans will pass affordability and their contractual maturity debt. A high level of support has been provided to our borrowers during the pandemic. A total of 246,000 mortgage borrowers and 60,000 borrowers with loans and credit cards received support by payment deferral, with a further 31,000 that is benefiting from interest-free overdraft support. Performance of these has been broadly in line with our expectation. And as of 1st of November, the total number of payment deferrals has fallen to 12,000 mortgages, 5,000 credit cards and loans, against which we have an expected loss provision of GBP 64 million. We remain strongly capitalized with a CET1 ratio of 34.5% and a leverage ratio of 5%. Our capital resources are in excess of regulatory requirements across CET1, leverage and MREL framework with U.K. 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. In terms of our capital outlook over the medium term, our position will be affected by new IRB modeling standards for residential mortgages and the progressive implementation of standardized floors from 2023. We currently expect new through-the-cycle IRB models to be affected by January 22 at the latest, reducing our CET1 ratio by approximately 1/3 to low 20s. The newly proposed floors for mortgage risk weight that are in consultation will, if implemented, reduce our CET1 ratio by a further 100 basis points. Our liquidity and funding ratios are in excess of regulatory requirements. Our half year liquidity rate -- our half year-end liquidity ratio of 153% remains elevated. We remain active in wholesale funding markets across a range of platforms and currency as well as our sterling AT1 issuance in June, we issued in the euro and U.S. dollar senior preferred markets in the period. This is in part to meet Moody's loss given failure requirements, and we will continue to ensure our issuance plans take account of this. 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.

Thank you, Chris. Before we take your questions, let me quickly summarize where we are and how we see the immediate future. As I said earlier, although dealing with the pandemic fallout has been our immediate priority over the last 6 months, we've maintained our focus on our long-term strategy, building society nationwide. People will always want a home to live in and to save for their future, and we're committed to helping them with both. We'll continue actively helping our members achieve their financial goals and provide them with excellent service. We'll continue supporting communities and High Street to rebuild post pandemic. We'll be accelerating our own transition to a more digital world. And above all, we'll maintain our financial strength, enabling to support our members now and in the future. Thank you for listening. We'd now be happy to take your questions. Over to you, Charlie.

Thank you, Joe. So the first question we have in, which has been raised by a number of people, is that, obviously, we've seen higher mortgage margins in half 1 and NIM is stable, if anything, slightly up. How do you -- do you think that this improvement is going to be sustainable looking forward?

So I think, I'd -- excuse me, for a minute.

I don't think that was you, Chris. Was it?

I don't make that kind of noise, Joe? No.

I know. You won't. Bark away, Chris. Bark away.

All right. Go away, dog. Sorry. Okay. Back to margins. Look, I think a couple of observations. We are probably at peak mortgage margins. And therefore, I do expect pricing to moderate over the coming years. However, we also haven't yet seen deposit pricing feed through into the margins. You saw the chart earlier on because, of course, there was a timing impact in half 1. And overall, if I sort of think about our numbers for our full year forecast, I'm very much expecting margins to be stable, if not up very slightly from where they are now. As we look forward into '21-'22, certainly the first half, I think we've got a good line of sight to based on the pipeline of mortgages we're seeing at the moment and the overall level of completion. So again, I expect margin stability in '21-'22. Beyond that, I'm not going to forecast in a sense because, I think, the uncertainty is too great neither though do I expect margins to return in the short-term to where they were pre-pandemic.

Thank you, Chris. So the second question we have from Rohit from Bank of America. So in mortgage, we've seen -- in terms of volumes, we've seen net lending contributed more from buy-to-let than residential. We've seen our share of current accounts remain stable in savings, if anything, slightly down. Again, do you think these sort of balance trends are likely to continue?

No, I think they're going to be certainly different on a go-forward basis as I start at the end with deposits. As I referenced, we saw quite an outflow to NS&I based on their pricing position in the summer. That has very much changed, and I expect to see both current account and deposit inflow in the full year. And therefore, that trend move a little bit -- excuse me, a second. In terms of mortgages, we've got a good pipeline of prime mortgage completion. So whilst we remain strong, buy-to-let, again, we would reasonably expect to see a change in the mix of net lending with it more skewed to prime purchase as well as buy-to-let rather than be predominantly buy-to-let. So I think the first half was impacted by a combination of NS&I on the deposit side and the lockdown, which particularly impacted purchase business more so than remortgage business.

Thank you, Chris. So our next question is from Lee at Citi. So -- excuse me, U.K. leverage ratio is now 5%. Do you have an upper bound in mind that you would be -- will be inclined to exceed?

So we don't have an upper bound. I mean, clearly, we are working through the impact of the long-term changes in terms of risk weight floors. And leverage remains our binding constraint in terms of as far as we can see. But I don't have an upper bound in mind. I think it's fair to say, though, and probably not going to be issuing whilst leverage is above 5%, there would clearly be organic profit growth that may increase leverage over the longer term.

Great. Thanks, Chris. And then moving on to a question from Alastair, Bank of America. And if the bank were to take base rate negative, would you be expecting to price up on mortgages to offset that?

I think on this one, it was probably a good idea because there'll be a few questions around this, I'd imagine. Maybe I could ask Robert to comment sort of more broadly on our view on negative interest rates.

Sure. I think important to say that the MPC has been very clear. So if you look at the August Monitory Policy Report, they've made it very clear that while it is a tool in the toolkit, the circumstances at the time would be really important in determining whether or not negative rates are likely to be effective or an appropriate tool to use at any point in time. The MPC have recognized there's a risk that negative interest rates could be counterproductive because if they do put pressure on lender's margins, it could adversely affect the availability and cost of credit. Now clearly, the PRA consulting with lenders at the moment on how negative rates might be implemented. And hopefully, we'll learn a bit more about -- their views about when they think negative rates might be appropriate in the circumstances, which they use them when that consultation has closed and they report back.

Thank you, Robert. So our next question is in relation to current accounts. So HSBC have flagged, they could imagine charging for current accounts. How would Nationwide feel about this? Could we pitch ourselves doing that?

Well, we've got Sara with us who leads in that whole area, and I think can give a fairly clear answer. Sara?

Yes, I think it's a very short answer in that we don't have plans for charging for current accounts. I mean, clearly, if the negative rate scenario comes to pass, then we'd look to look at all manner of modes managing that for retail customers and members, but no plans to do that.

Thank you, Sara. So the next question, again, this has been picked up by more than 1 person, so I'll sort of paraphrase. Do you have any concerns about the longer-term sustainability of the building society model, given the potential for very low rates for a long time? And would you consider any potential M&A or building society consolidation activity?

Okay. So to answer the first part, that is no. What we've seen really clearly through this is actually how demand for housing and desire to save always creates an opportunity there. And look at our performance through what has been unquestionably the most challenging economic period in history, and we have shown real resilience. So I think we're very confident there. In terms of M&A, we're always open-minded, and we'll look at any opportunities through the lens of what is in our members' interest today and in the future.

Great. Thanks, Joe. So then if we -- excuse me, we have a question coming in from -- another question from Lee at Citi. Do we have a view on how much more senior nonpreferred we may need to issue in respect of the Moody's loss given the year framework?

Chris will answer. Chris? Chris will.

Muir, do you want to talk about our issuance plans if you could do so.