Nationwide Building Society (NBS) Earnings Call Transcript & Summary

Good morning, and thank you for joining us for Nationwide Building Society's H1 Results Call. I'm Debbie Crosbie, the Chief Executive; and joining me are Muir Mathieson, our CFO; and Chris Rhodes, the Chief Executive of Virgin Money. Nationwide continues to make excellent progress against our strategy. We have delivered record H1 growth in our core markets of mortgages and retail deposits, a strong service performance and our highest ever return of value back to our members. The society remains #1 for customer satisfaction among our peer group for the 12th consecutive year, stretching our lead to the most significant in almost 5 years. Our approach to provide better value products was demonstrated through our record H1 growth in both the mortgage and retail deposit markets, outperforming with a record net lending out-turn and increased market share despite competitive pressures. We continue to grow our presence in current accounts, once again attracting 1 in 6 of the overall market switchers. A key highlight this half is more than doubling openings of our refreshed student proposition to achieve a 30% market share of student accounts. This demonstrates that our new brand and marketing strategy really resonates with younger customers. Despite the recent reductions in bank base rate, we have continued to prioritize value for our members with average deposit rates over the past 6 months that were 30% higher than the market average. Our mortgages also remained well priced in a highly competitive market, helping to deliver record H1 growth and market-leading levels of retention. Our focus on value across core products has contributed to a record level of member financial benefit of just over GBP 0.9 billion, representing the difference between the pricing our members enjoyed compared to the average of the rest of the market. When also taking into account June fairer share payment of GBP 385 million, this totals a record GBP 1.3 billion of value for our members. As you will all know, our branch network remains fundamental to supporting our customers. Our branch promise means that we have committed to closing no branches until at least 2028. And we continue to see tangible benefits from investing in our branches. For example, we saw 35% of all new current account openings over the last 6 months taking place in a branch. Whilst we are committed to our face-to-face services, we are continuing to enhance and improve our digital services at pace to ensure that we really can deliver on giving our customers the choice of how they want to bank with us and simply brilliant service across all our touch points. Our digital service Mortgage Manager platform is used by over half of our customers at deal maturity to switch to our best rates in a matter of minutes. This supports market-leading levels of retention. We're also continuing to enhance our digital capabilities, including the use of AI to streamline account openings and provide better customer support. Innovation and creating responsible solutions to help customers navigate long-term challenges is at the heart of our mutual purpose. Our unique Helping Hand mortgage was extended to enable first-time buyers to borrow 6x income, unlocking homeownership for many of those who could not otherwise achieve it. I'm delighted that this record of exceptional delivery in both product and service performance with appropriate focused investment has been achieved whilst maintaining strong cost discipline. And finally, we are very proud to have launched our new Fairer Futures social impact strategy, helping to tackle 3 of the biggest issues we see in society today: youth homelessness, families living in poverty; and people living with dementia. We're now the headline partner to 3 key charities, Centrepoint, Action for Children, and Dementia U.K., who will help us making a meaningful difference across these important causes. As part of this, we are also rolling out dementia clinics in 200 of our branches. Now as you're all aware, we completed the acquisition of Virgin Money on the 1st of October. This was a unique opportunity underpinned by an exceptionally strong business case. And I'm pleased to say that this means the newly combined Nationwide Group is now the second largest retail banking institution in the U.K. with significant scale across our core product offerings of mortgages, retail savings and current accounts. We now have a connection with 1 in 3 people in the U.K. Our ambitions are not only to build around scale, but also delivering the benefits of mutuality to more people, including to the business banking sector for the first time. Muir will provide more detail on the financial benefits of the transaction shortly, but I would emphasize the purchase price of GBP 2.8 billion was significantly below the net asset value of Virgin Money. So we have booked a significant day 1 gain of GBP 2.3 billion, much of which will flow directly through capital, ensuring that we maintain peer-leading CET1 ratio. I believe this demonstrates the strength of the deal for the society's members and also for Virgin Money customers who will benefit because Virgin Money no longer have to service dividends and share buybacks and all profits remain within the group. I want to reiterate that our business case is not based on the realization of aggressive cost synergies. So as previously outlined, we can and will take a measured customer-first approach to integration following the conclusion of a detailed 18-month strategic review. In the meantime, Virgin Money will continue as a separate legal entity with a separate Board, management team and banking license. Chris' appointment as CEO will ensure we benefit from his leadership and extensive banking experience, and we will continue to work closely together over the coming years. I'm now going to hand to Muir to run through the financials, including further detail on the acquisition.

Thank you, Debbie, and good morning, everyone. We have delivered record H1 growth on both sides of the balance sheet, increasing market share in our core products of mortgages and retail deposits whilst increasing our lead in customer satisfaction over our peer group. I am pleased to say this has been delivered against another robust financial performance. We have continued to price competitively throughout the year, which means member financial benefit has increased to GBP 950 million, a record H1 performance. When taking our fairer share payments into account, we delivered over GBP 1.3 billion of value to our members over the last 6 months. Underlying profits reduced to GBP 959 million compared to GBP 1.26 billion in H1 last year as anticipated due to changes in bank base rates and our choice to offer competitive rates. Statutory profit is GBP 391 million lower than underlying profit, primarily due to the GBP 385 million fairer share payment, which we announced in May and that was paid in June. Total income reduced by GBP 320 million compared to H1 last year, with a net interest margin of 150 basis points ahead of the low to mid-140s guided at the full year. Underlying costs remain well controlled with cost growth tracking below the 4% guidance we provided in May. Asset quality remains strong and better than the industry average. Balance sheet growth in the period primarily reflects record H1 growth in mortgage net lending of GBP 6.3 billion and an increase in liquidity balances. Record H1 retail deposit growth of GBP 8.3 billion reflects strong inflows into our competitively priced savings accounts and capitalized interest from higher pay rates. In light of recent market developments, I can confirm that Nationwide does not have any historic exposure to motor finance. Capital ratios remain strong with the leverage ratio growing to 6.7% and the CET1 ratio increasing to 28.4%. Net interest margin has increased by 4 basis points compared to the H2 NIM for '23-'24, supported by retail deposits and our structural hedge. NIM is lower than H1 last year, mainly because of the impact from changes in bank base rate and our choice of offering competitive rates. Mortgage market activity has shown signs of recovery through 2024, with mortgage approval volumes approaching the levels seen pre-pandemic despite the higher interest rate environment. Mortgage book margins continued to decline, but at a decreasing pace. New business completions in the first half of the financial year were written at 76 basis points over swap rates above previous periods. The retail deposit market continues to grow in line with expectations with the mix of balances between savings and personal current accounts broadly stable. Our average pay rate for deposits is 318 basis points, 74 basis points higher than the market average deposit rate. Despite recent bank base rate cuts, our member financial benefit, which measures the value delivered to members through better pricing, increased to GBP 950 million from GBP 885 million in H1 last year. We expect deposit margins to continue to decrease as base rate reduces with the broad expectation that the margin widening, which occurred as rates increased will be reversed as rates fall. In addition, there will be a timing disbenefit because of the lag between base rate reductions and the feed-through to customer rates. We continue to maintain cost discipline. Underlying costs increased by 3.5%, slightly below the 4% guidance provided in May as inflationary increases were partially offset by efficiencies within strategic investment programs and other cost items. We also incurred GBP 26 million of one-off acquisition-related expenses in the period that were excluded from our underlying profit. The net impairment charge of GBP 7 million is lower than the same period last year. The multiple economic scenarios are broadly consistent with the year-end. The weightings applied to each scenario remain unchanged with a 15% weighting applied to the Sphere downside scenario. Within our provisions, we continue to reflect modeled adjustments for borrower affordability challenges. We judge that this overlay remains appropriate, and the methodology for determining the uplift remains unchanged. The total adjustment has decreased by GBP 40 million, however, as a result of the improved economic conditions, including higher wages, lower mortgage rates and lower inflation. Coverage for the owner-occupied portfolio is unchanged compared to the end of the last financial year at 6 basis points. Buy-to-let coverage has decreased by 3 basis points to 50 basis points, reflecting the revised rate and inflation outlook. Unsecured coverage is lower by 70 basis points at 9.5 percentage points. Secured 3-month plus arrears are almost unchanged at 42 basis points, which is significantly below the industry average. The average LTV of new mortgage business increased to 73% from 71% in H1 last year, driven by our support of first-time buyers. The average stock LTV is stable at 55%, supported by our market-leading levels of retention. Forbearance balances have reduced slightly to GBP 960 million. Mortgage charter interest-only balances, the majority of which are excluded from forbearance are GBP 875 million compared to GBP 1.4 billion at the last year-end. Unsecured 3-month plus arrears have decreased from 136 basis points to 124 basis points, which is below the pre-pandemic level of 132 basis points. The 12-month average LCR was 186% compared to 191% at the end of the prior year, primarily driven by the repayment of GBP 4 billion of TFSME drawings. On-balance sheet liquidity totals GBP 51 billion compared to GBP 39 billion of deposit balances in excess of the GBP 85,000 FSCS limit. In addition, we hold circa GBP 87 billion of drawdown capacity at the Central Bank, much of which can be drawn intraday. We have issued approximately GBP 4.8 billion equivalent of wholesale funding financial year-to-date, including a GBP 750 million AT1 issuance in September. We will continue to be a regular issuer in benchmark size across the liability structure in our core currencies of sterling, euro and dollar. Our current expectation is that Nationwide Group issuance will total between GBP 3 billion to GBP 5 billion equivalent over the rest of our financial year. Our issuance plans will continue to take account of credit rating agency requirements for loss absorbing capacity. On a pre-acquisition stand-alone basis, our capital resources are well in excess of regulatory requirements with substantial buffers across risk-based, leverage and MREL frameworks. Following completion of the Virgin Money acquisition on 1st of October, we can now confirm the key day 1 financial metrics for the combined group. The agreed acquisition price of GBP 2.8 billion was significantly below the fair value of Virgin Money's net assets as of 1st of October. This has resulted in a GBP 2.3 billion gain on acquisition, GBP 1.8 billion of which will flow into group capital resources. In line with the prevailing accounting standard, approximately GBP 600 million of new intangibles were created through the transaction, representing the expected future value of site deposits and credit card relationships acquired from Virgin Money on day 1. This is expected to unwind through the I&E over circa 7 years, in line with the appropriate behavioral assumptions. Consistent with the guidance we provided earlier in the year, the combined group's CET1 ratio remains peer-leading at 19.6%. The capital position reflects the day 1 net financial impact of acquiring the VM business and all transaction-associated adjustments, including the cost of the amendments to the Virgin Enterprises trademark license agreements. The leverage ratio remains comfortably above regulatory requirements at 5.4% or 5.2% after accounting for the impact of exercising our option to call Nationwide's AT1 on 20th of December as announced earlier this morning. Liquidity resources remain healthy with a group spot LCR of 153%. The first consolidated group accounts to the new reporting date of 31st of March will be published in May 2025. Thank you, and I will now pass back to Debbie.

So thank you, Muir. So in summary, it's been another excellent 6 months for Nationwide. We've delivered record growth, record value back to members and great service, underpinned by a robust financial performance. The benefits of acquiring Virgin Money are significant, and we're looking forward to bringing the benefits of the U.K.'s first mutual full-service banking provider to more people across society. So thank you, and we're now happy to go to questions.

Thanks, Debbie, and good morning, everyone. [Operator Instructions] I can see we've already had a few come in, so we'll jump straight in. The first one is from Lee Street at Citi and probably directed at Muir. What is the combined group NIM, including Virgin Money? And what is a realistic expectation for the lower bound of NIM over the next 3 years based on the current rate trajectory?

Yes. Thanks very much for the question, Lee. You will have seen that we haven't disclosed any combined performance metrics like net interest margin today. And as just covered, we will give the first full group update in May 2025 for the period ended 31st of March. So I'm afraid you'll have to wait and see exactly how the group NIM looks. You'll be well aware that Virgin Money runs at a higher net interest margin than Nationwide for 3 reasons: one is the greater proportion of credit card balances compared to nationwide. Secondly, the business lending that Virgin Money undertakes. And thirdly, the greater proportion of personal current accounts and business current accounts, which also gets structurally hedged by Virgin Money. So you will see an uplift to the group NIM and should expect to see that delta by the full year, and we'll give you more guidance on what to expect after that. On a Nationwide stand-alone basis, you'll broadly see a continuation of the trends we talked about earlier. You've seen that mortgage margins inflow now are pretty close to the stock. So that's really a reducing headwind. Still some headwinds to come from the timing impact of bank base rate decreases, but quite a tailwind now from our structural hedge as well. So you should see -- broadly expect to see a continuation of the trends we reported this morning.

Thanks, Muir. And just sticking on the net interest income subject, are you happy with your NII sensitivity? And would you like to grow other income streams? And if so, to what extent?

So we -- part of the benefits of acquiring Virgin Money and as already touched on in terms of their different business mix is less sensitivity to the interest rate cycle. So on a Nationwide stand-alone basis, we are heavily reliant upon net interest income, as you say, Lee. And as interest rates go down, clearly, there will be lower margin for Nationwide in line with the rest of the sector and importantly, for us, less opportunity to pass value back to our members. With the acquisition of Virgin Money and its different mix, that will be somewhat more muted. So we will have some cushioning impact in a lower rate environment. I should say, of course, with business lending and higher unsecured lending, the flip side of that is somewhat higher credit exposures, but that's perfectly manageable within the overall capacity of the nationwide balance sheet and our capital strength.

Thanks, Muir. A question here for Debbie from John Cronin at SeaPoint Insights. So John has asked, can I please come back to the share build in mortgages that you delivered in the first half? How should we expect your share of mortgage drawdowns in particular to evolve from here? Are further niche initiatives like the first-time buyer proposition you referenced on the agenda to support growth? And secondly, what about the business banking book now that you have a meaningful presence in that space, what is the scale of the ambition in the medium term?

Okay. So well, thank you, John. So first of all, on mortgages, I mean, we're very pleased with the growth that we've delivered. And what I'd say is, not only are we doing very well in new business, we're also doing exceptionally well with market-leading retention rates. And as I mentioned in my update, our Mortgage Manager technology here has really delivered great benefits to our customers. They can switch within minutes. So what you should expect is in the Nationwide brand, we'll continue to drive those propositions and always look for new and innovative ways. We're particularly strong in first-time buyers, and it's really important that we support that market. We've taken about 20% of the market in the first half of this year, and you should expect all of that to continue. Looking ahead, I think Virgin Money does give us some really interesting options to specialize in different areas. I'll maybe ask Chris to comment on how you see the evolution of the mortgage market and share that we can hopefully sustain and grow given the Virgin Money acquisition before we come to business banking.

Yes. Look, I mean, together, there's now 16% market share at the group level. Some of the technology that Debbie talked about, the price -- approach to pricing, retention, are all the things that we would hope to bring to Virgin Money and improve our performance in line with what we've seen in NBS. And I think second half of the year momentum looks pretty good on that basis.

Yes. We're very optimistic about the second half of the year. And then just briefly on business banking. Look, there is a strong ambition and one of the core reasons for acquiring the Virgin Money business was to bring business banking to -- into the mutual model to deliver not just to NBS customers, but actually grow our reach in business banking nationwide. Now it's very early days. We're only 8 weeks in. And first and foremost, we're going to be focusing on really investing in that service proposition, not just in business banking, but right across Virgin Money, and Chris might want to make some comments. So the ambition is strong, but I think you're going to have to wait probably 18 months to 2 years before we talk more about that ambition in business banking. But what I'd say is watch this space, there's significant ambition.

Yes. So John, our business case always envisaged an investment in service and technology in order to drive the business forward. We've announced the creation of 500 new jobs today focused on IT and customer service. In Virgin Money, there's an absolutely fantastic SME proposition, digitally orientated. I want to invest in the scalability of that before we open that to Nationwide members, which, as you say, Debbie, I guess, is 18 months, 2 years away. I mean there's 250,000 small businesses in Virgin Money. There's a lot of nationwide customers who run their own business, and there's a great opportunity there.

Thank you. And just pivoting over to capital, so position this one at Muir. So a question both from Lee Street and Luis Guido. What is your target management buffer over leverage requirements? And do we expect our requirements to change?

Yes. Thanks, Lee and Luis. Look, at 5.4% or even 5.2% after the call of the AT1, we're still in a very comfortable leverage position and would still be in the pack, if not towards the front end of the pack there in addition, of course, to our market-leading position on CET1. So pretty comfortable. The way we always think about our risk appetite from a capital perspective is if our business went through a stress test as severe as the Bank of England stress test, will we still stay above MDA buffers and still retain the ability to pay our distributions and keep that choice open to us. And so far, we've always managed to do that through Bank of England stress tests with some considerable buffer. You'll have to wait until the first combined Bank of England stress test on a combined group basis. But if you actually take the ACS stress test from 2022, where both the results for Virgin Money and Nationwide were published and combine them on a pro rata basis, I think you can come to a pretty safe conclusion there as well. So very happy with our capital strength. We should expect to see all other things being equal, a slight increase in our D-SIB buffer or O-SII buffer over a 12-month period, given we're just now at the next grade up in terms of scale of the business.

Thanks, Muir. Just following up on capital. A question from Corinne Cunningham, Autonomous. Can you give an estimate of the impact of Basel 3.1 as of January 2026?

So no impact from Basel 3.1 or negligible to even maybe even a small positive impact from Basel 3.1 on day 1. At the full year, we'll say a bit more around endpoint impacts on a combined group basis. No impact day 1.

And just rounding off on the capital questions Muir, from Lee. You highlight you are requesting to renew your right to tender CCDS. Is there a particular reason for this? Or should I regard this as something you will seek to renew every year?

We want to keep the option open. Clearly, we are in that strong capital position. We have been very happy to be able to provide liquidity to the market, keep the instrument alive and keep interest in the instrument strong and healthy. So it's important to us that we retain that option should we choose to take it, either to buy back more of the CCDS or indeed, the CCDS that we have bought back today, be free to recycle those back into the market.

Thanks, Muir. And then a question from Domenico Maggio at Jefferies. Do you have any need for further sub debt issuance, for example, due to rating agency considerations following our recent AT1 and Tier 2 issuance?