DBRS: Nationwide: Stronger profitability and CCDS issuance drives improvement in leverage ratio

Summary:
•Progress being made towards the required 3% leverage ratio target, due to improved profitability and Core Capital Deferred Shares issuance.
•Improving performance in the nine months to 31 December 2013 with reasonable underlying profit growth, continued solid credit quality in the retail lending book, and a further reduction in commercial real estate exposures.
•DBRS rates Nationwide Building Society at AA (low) with a Negative trend for Long-Term Senior Debt & Deposits.

DBRS Ratings Limited (DBRS) considers Nationwide Building Society’s (Nationwide or the Society) results for the nine months to 31 December 2013 reflect the relative progress the Society has made towards strengthening its profitability and leverage. In the period, the Society managed to increase its CRD4 leverage ratio to 2.6% at 31 December 2013, from 2.3% at 30 September 2013. This reflects the Society’s gradually improving profitability and increased capital flexibility, following the issuance of GBP 550 million of Core Capital Deferred Shares (CCDS) in the last quarter of 2013. The CCDS is a deeply subordinated, perpetual capital instrument that is loss absorbing on a going concern basis and as a result meets the new regulatory definition of core equity tier 1.

The Prudential Regulatory Authority (PRA) requires Nationwide to reach an adjusted leverage ratio of 3% by December 2015. The PRA adjusted ratio includes an increase in risk-weights for residential mortgage loans, and a reduction in capital resources to take account of estimated future losses. DBRS therefore views positively that the capital adjustment for Nationwide’s commercial real estate (CRE) assets has been reduced to GBP 0.1 billion, from GBP 0.4 billion. This takes into account the further deleveraging of the book and the increased level of provisions taken against the book. The increased levels of profit, CCDS issuance and the deleveraging of the CRE book have also led to an improvement in the Society’s common equity tier 1 (CET1) ratio to 13.1% at 31 December 2013, from 9.1% at 4 April 2013.

In the nine month period to end-2013 Nationwide reported an underlying profit before tax of GBP 539 million, up from GBP 263 million in the same period of 2012. This reflects improvement in the net interest margin (NIM) to 1.17%, from 0.93%. The asset quality of the retail lending book remained very strong with the residential mortgage arrears ratio reducing further to 0.67% as of 31 December 2013.

Since the start of the financial year in April 2013 the Society has reduced its total CRE exposures by GBP 1.7 billion, or 17% of gross balances. DBRS views this positively, although notes that CRE impairment charges are likely to remain elevated for the remainder of the financial year.

DBRS rates Nationwide Building Society at AA (low) with a Negative trend for Long-Term Senior Debt & Deposits.

Notes:
All figures are in British Pound (GBP) unless otherwise noted.

[Amended on December 23th, 2014 to remove unnecessary disclosures.]