DBRS: Nationwide Meets PRA Leverage Ratio Requirement Due to Improved Earnings and Capital Issuance

Summary:
• PRA adjusted leverage ratio increased to 3.2%, now above the 3% requirement.
• Underlying Profit before Tax (PBT) of GBP 924 million, up 113% year on year (YoY) driven by lower impairment charges and strong net interest income.
• DBRS rates Nationwide Building Society at AA (low) with a Negative trend for Long-Term Senior Debt & Deposits.

DRBS Ratings Limited (DBRS) views Nationwide Building Society’s (Nationwide or the Society) full year results to April 4, 2014 as demonstrating progress in improving its leverage and strengthening its profitability. As of April 4, 2014 the Prudential Regulatory Authority (PRA) adjusted leverage ratio was 3.2%, above the 3% requirement and a substantial improvement on the 2.1% level at end-2012. This reflects the Society’s improved earnings performance, but also the issuance of GBP 550 million of Core Capital Deferred Shares (CCDS) in Q4 2013 and GBP 1 billion of Additional Tier 1 capital in Q1 2014. 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

On an underlying basis in the financial year to April 4, 2014, the Society reported PBT of GBP 924 million, an increase of 113% YoY following strong growth in net interest income. This basis excludes transformation costs, fair value losses from derivatives and hedge accounting, and the FSCS costs and bank levy. On a statutory basis the Society reported PBT of GBP 677 million, up from GBP 168 million in the year to April 4, 2013. Impairment charges were reduced by 35% during the financial year to GBP 383 million, primarily reflecting a reduction in the level of provisions required for the commercial real estate portfolio. The asset quality of the core residential mortgage book has also remained very strong, with the residential mortgage arrears ratio declining further to 0.63% as of April 4, 2014.

As well as leading to an improvement in the leverage ratio, the combination of higher profits, CCDS issuance and the deleveraging of legacy treasury and Commercial Real Estate assets have also led to an increase in the Society’s fully-loaded common equity tier 1 (CET1) ratio to 14.5% at April 4, 2014, from a pro-forma 9.1% at April 4, 2013. As a result of a further reduction in the Society’s non-UK commercial real estate exposures since the year-end, the CET1 ratio has further improved by an additional 50 basis points.

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.