Interim Results Announcement for the period ended 30 September 2006

Transcription

1 Interim Results Announcement for the period ended 30 September 2006 IFRS Underlying Results These interim results have been prepared using International Financial Reporting Standards ('IFRS'). Where appropriate, certain aspects of the results are presented to reflect management's view of the underlying results, to provide a clearer representation of the performance of the Group. Profit before tax shown on a reported basis and underlying basis are set out on page 7. Underlying profit before tax of 306.0m equates to reported profit before tax of 336.4m adjusted for the deduction of net gains of 32.2m from derivatives and hedge accounting and the addition of policyholder tax of 1.8m. HIGHLIGHTS Nationwide Building Society today announced its results for the half year ended 30 September Financial performance Underlying profit before tax up 20.1% to 306.0m (30 September underlying 254.8m) Record reported profit before tax up 32.1% to 336.4m (30 September m) Total assets up 7.5% to 129.6bn (4 April bn) Underlying ratio of costs to income down 1.9% to 58.7% (4 April %) Net interest margin up 5bps to 1.11% (4 April %), as a result of a favourable interest rate environment and effective margin management Member value Members have benefited by around 280m through competitive interest rates and lower fees and charges. In addition to this, profits of 233.4m have been retained for future growth and investment Nationwide appeared in best buy tables 1,075 times between April and September 2006, across all products The Society has refurbished and re-sited over 220 branches and 100 agencies (over a third of the retail network) since the establishment of its investment programme to improve access to services for members. The additional sales space created is equivalent to that from an extra 83 branches As a result of the recently announced plans to merge with the Portman Building Society, 13 million people will be members of a bigger society, offering market leading products and pricing, underpinned by a strong commitment to mutuality. The proposed merger will provide members with a larger network of branches and agencies, improving access to products and services Operating highlights Lending and banking activities

2 Residential mortgages o Nationwide is the UK's fourth largest mortgage lender o High quality residential gross lending up 34% to 14.5bn (30 September bn). Net lending up almost 50% to 5.9bn (30 September bn). Number of mortgage sales up 17% on the same period in 2005/6. The Society introduced an online mortgage application facility allowing customers to choose their product, reserve the deal and complete their mortgage application over the internet Nationwide's 3 month + arrears cases are less than one third of the industry average (0.25% compared to 0.90%, CML - September 2006) average loan-to-value (LTV) of new lending 59% (4 April %) and seasoned book 39% (4 April %) o Nationwide appeared in mortgage best buy tables 272 times between April and September 2006 Commercial lending o Commercial gross lending up 67% to a record 3.6bn (30 September bn) and record net lending up 221% to 1.8bn (30 September bn) number of loans 3 months or more in arrears 63 (4 April ), the lowest level in 10 years Banking products o Total current accounts up 8% to 3,936,000 (4 April ,644,000) o Total credit cards in issue up 10% to 1,346,000 (4 April ,222,000) o Nationwide appeared in banking products best buy tables 383 times between April and September 2006 Unsecured lending o Cautious approach to new lending in a market where credit losses continue to increase. Net loans broadly unchanged at 1.8bn (4 April bn) our share of loans 30 days or more in arrears is 5.4% - 34% below industry average (Finance and Leasing Association - September 2006) Retail savings o Nationwide is the UK's second largest savings provider o Retail savings deposits grew to 84.1bn, a 4% increase on 4 April 2006 e-savings balances up 7% to 14.6bn. Number of accounts now exceeds 1 million ISA cash balances up 8% to 21.5bn new three year loyalty fixed rate bond launched in August 2006 to reward long term members o Nationwide appeared in savings best buy tables 106 times between April and September 2006 Insurance

3 o General insurance new covers up 21% to 258,000 (30 September ,000) new household insurance product launched July 2006 insurance income up 16% to 50.4m (30 September m) o Life and investment products in force up 4% to 953,000 (4 April ,000) relaunch of life insurance protection product in May 2006 number of life insurance sales up 14% from the same period in 2005/6 Balance sheet growth o Nationwide is the world's largest building society with total assets of 129.6bn, up 7.5% from 4 April 2006 risk weighted assets grew by 7.2% from 4 April 2006 to 68.2bn o Reserves up 3.5% to 5.2bn and total regulatory capital up 2.5% to 7.2bn from 4 April 2006 tier 1 capital ratio 8.5% (4 April %) total capital ratio 10.5% (4 April %) Social responsibility The Society funds its own charity, the Nationwide Foundation, to offer support to those in need in the UK, focussing on social exclusion - Society donations to date exceed 24m Over 250,000 raised for Macmillan, our employee nominated charity, during the period Nationwide is the main sponsor of Disability Sport Events in a deal worth 1m over seven years and raised 100,000 for the charity by encouraging voting at this year's AGM The Society switched to renewable energy sources for its electricity, resulting in lower carbon dioxide emissions from its buildings Over 10 million Cats Eyes for Kids (branded reflectors) donated to primary school pupils since 2001 Local Heritage Initiative funding supported more than 1,400 local projects involving 1.5m people in a six year programme that concluded in September 2006 Nationwide Awards for Voluntary Endeavour have recognised 1,400 individuals and groups this year Franchise Nationwide has recently announced renewed agreements to be the Official Team Sponsor for the England, Wales and Northern Ireland Football teams and an Official Partner of the Scotland Football team Sponsorship of the Nationwide Mercury Prize for music and the Nationwide Mercury Prize Art Competition is in its third year Nationwide achieved third position in Sunday Times 20 Best Big Companies to work for 2006 with a special award for "Giving Something Back" and further nominations for "Best for Leadership", "Wellbeing" and "Work and Home Life Balance". In addition, Nationwide was accredited by Sunday Times Best Big Companies to work for with its top three star rating, demonstrating high levels of engagement with staff. Nationwide is recognised as an Investors in People Champion, an accolade given to organisations that are innovative, inspirational and willing to share best practice with others Nationwide has won over 40 awards in the last twelve months including:

4 o o o o o o Your Mortgage Awards 2005/6 - Best Building Society; Best First Time Buyer Mortgage Lender; Best Remortgage Lender; Best Self Employed and Best Buy to Let Mortgage Lender (UCB Home Loans) Financial Adviser Awards Mortgages 5 star winner (UCB Home Loans) Financial Advisor Awards Building Society of the Year, Mortgage Lender of the Year Your Money Magazine Awards Best Financial Services Provider; Best Savings Provider; Best Online Credit Card Service Category Award at the Human Capital Awards sponsored by the CBI Count Me In Award from English Federation of Disability Sport for commitment to develop opportunities for disabled people to access sport and physical activity Philip Williamson, Chief Executive, said: "It has been an outstanding first half to this financial year. We have delivered substantial benefits to members and our profits are higher than ever before. We are providing consumers with a real alternative to the banks. Our reputation for providing great value products and services has been underlined by the fact that we have appeared in best-buy tables on no less than 1,075 occasions in the half-year. "In a competitive mortgage market, we have achieved very high levels of lending with gross residential lending of 14.5bn, up 34% on the corresponding period last year. Developments such as our online mortgage application facility will help us maintain momentum in residential mortgage lending. Commercial lending has performed particularly strongly increasing by 67% to 3.6bn. We have achieved this growth while maintaining our focus on quality business. "In the UK retail savings market we have once again proved to be a very popular choice for savers. We have continued to see a very high level of current account openings - more than 1 in 10 of all new current accounts opened in the UK are with Nationwide. Our share of the credit card market has also increased. "We continue to invest heavily in upgrading our branches and have recruited an extra 350 people into our branch network and UK call centres. "This is my last results announcement as Chief Executive before handing over the reins to Graham Beale. Nationwide, as a thriving mutual business, is in superb shape. We are extremely well placed to meet the challenges ahead. These are exciting times for the Society, particularly as we prepare for the forthcoming merger with the Portman and I have no doubt that our members will continue to prosper under the new management team." BUSINESS REVIEW OVERVIEW We operate as a retailer of a broad range of personal financial services products to provide maximum value to our membership through better pricing and an excellent service delivered using an efficient distribution and support infrastructure. The success of this strategy is evidenced by our delivering a broad range of financial services products to our members whilst increasing our underlying profit before tax to 306.0m, an increase of 20.1% compared with 30 September 2005 underlying results of 254.8m. This resulted in 233.4m profit (30 September m) being retained in the business for future growth and investment. At the same time we also generated around 280m in the form of pricing benefit to our members by offering better rates and by charging lower fees and charges than our competitors.

5 We have performed well in a highly competitive mortgage market. We have maintained our focus on prime quality residential loans, achieving net advances of 5.9bn up almost 50% on the same period in 2005/06. We achieved a market share of 10.5%, above our par share of 8.9%. The quality of our residential mortgage book remains high and the incidence of arrears continues to be less than one third of the industry average (CML - September 2006). The average loan to value of the residential book remains at 39% Our funding is primarily from retail members. We have maintained our position as number two retail savings provider in the UK with balances growing by 3.2bn, representing an 8.7% market share, slightly below our par share. We continued to increase our share of the current account and credit card markets. Our market share of new current account openings in the UK is over 10%. We are now over two years into the 300m six-year programme to improve access by phone, post, on-line or through our network of branches and agencies. So far, over 220 branches and 100 agencies (over a third of the retail network) have been refurbished. The additional sales space created is equivalent to that from an extra 83 branches. In addition to this investment in infrastructure, we are investing 100m over the next five years in our front line employees including recruiting an extra 350 people into our branch network and call centres. Profit before tax on a reported basis and underlying basis are set out as follows: 30 September 2006 Underlying Policyholder tax As reported Derivatives and hedge accounting Net interest income Other income net of claims on insurance contracts Gains from derivatives and hedge accounting 32.2 (32.2) - - Total income net of claims on insurance contracts (32.2) Administrative expenses Depreciation and amortisation Impairment losses on loans and advances to customers Provisions for liabilities and charges Impairment gains on investment securities (3.5) - - (3.5) Profit before tax (32.2) Underlying Policyholder tax As reported 30 September 2005 Derivatives and hedge accounting Net interest income

6 Other income net of claims on insurance contracts (6.2) Losses from derivatives and hedge accounting (6.3) Total income net of claims on insurance contracts (6.2) Administrative expenses Depreciation and amortisation Impairment losses on loans and advances to customers Provisions for liabilities and charges Impairment gains on investment securities Profit before tax (6.2) April 2006 Underlying Policyholder tax As reported Derivatives and hedge accounting Net interest income 1, ,234.3 Other income net of claims on insurance contracts (8.9) Gains from derivatives and hedge accounting 10.9 (10.9) - - Total income net of claims on insurance contracts 1,655.5 (10.9) (8.9) 1,635.7 Administrative expenses Depreciation and amortisation Impairment losses on loans and advances to customers Provisions for liabilities and charges Impairment gains on investment securities (3.6) - - (3.6) Profit before tax (10.9) (8.9) PERFORMANCE BY BUSINESS STREAM Nationwide operates three main business streams as follows: Personal financial services Mortgages, savings, banking, consumer lending, general insurance, life insurance and investment business. Commercial Commercial lending and Treasury income generation activities together with at.home nationwide ltd, the Society's former residential letting subsidiary. Group Treasury group operations, capital and items classified as being non-attributable to our core business areas.

7 The contribution to underlying profit before tax against underlying comparatives by each of these business streams is set out in the table below. Period to 30 September 2006 Underlying Contribution before tax Period to 30 September 2005 Underlying Growth % Personal financial services Commercial (0.3) Group Total PERSONAL FINANCIAL SERVICES (PFS) BUSINESS STREAM Period to 30 September 2006 Underlying Period to 30 September 2005 Underlying Growth % Net interest income Other income Total income ,273.1 Expenses Impairment and other provisions Contribution from PFS Year to 4 April 2006 Underlying Year to 4 April 2006 Underlying The underlying contribution from the PFS business stream increased by 42.3% to 149.1m which represents just under half of the Group's total contribution. All of the pricing benefit given to our members is delivered through this business stream which reduces its relative contribution. Net interest income increased by 18.0% reflecting the increase in lending and deposit balances, effective interest rate management and the beneficial interest environment.

8 Other income increased by 14.0% and comprised income earned from insurance products and administration and transaction fees. Expenses increased by 9.2% reflecting growth in volumes, particularly high transaction products such as our credit card and current account. Unsecured loan impairment charges increased to 55.2m (30 September m) reflecting increased delinquency experienced across the whole market. However, unsecured asset quality continues to compare favourably with the industry. Secured impairment charges remained minimal for the half year reflecting our high quality lending policy. Lending Loans and advances to customers total 109.1bn, an increase of 7.6% on the position at the last year end. Of this total, 92.8bn, (85%) relates to retail lending activity. The composition of our PFS lending continues to be low risk. At 30 September 2006, the composition remains unchanged from that at the year end with 95% of our PFS lending being residential mortgages, 2% buy-to-let mortgages, 2% unsecured personal loans with the balance of 1% lending on overdrafts and credit cards. This mix is not expected to change significantly going forward. UK residential mortgage market A strengthening housing market in the first half of 2006/7 provided a boost to mortgage lending. Above trend house purchase levels, supported by increased buy-to-let activity, along with continued house price growth gave a lift to gross lending. The value of total market gross advances increased by an estimated 20% in the first half compared with the same period a year earlier. Despite growing affordability pressures, first-time buyer numbers held up relatively well, accounting for 36% of all house purchase transactions. This combined with continued equity withdrawal by home movers and remortgagers, led to a pick up in net lending, which also grew by an estimated 20% in the first half of the year compared with the first half of 2005/6. UK residential mortgages - Nationwide performance During the period, we have consolidated our position as the UK's fourth largest mortgage lender. Total gross lending was up 34% to 14.5bn (30 September bn), an estimated market share of 8.2% (30 September %). Net lending was up almost 50% to 5.9bn (30 September bn) an estimated market share of 10.5% (30 September %) taking total residential mortgage balances to 90.1bn. As well as the strong performance on gross advances, net advances have benefited from our highly successful record in retaining borrowers with maturing fixed rate and tracker rate mortgage products. Our 7.2% (30 September %) market share of principal repaid in the Group was below our mortgage par share of 8.9%. This success in retaining mortgage customers is due to our policy of actively engaging with customers before the end of their product's term together with our attractive and competitive range of products. The success of the half year is evidenced by the Group achieving record gross advances of 3.1bn in August and it starts the second half year with a healthy pipeline of 8.3bn of new business yet to complete.

9 During the half year, competition for new mortgages has been fierce. The Society has run two high profile marketing campaigns over the last 6 months and has also implemented a number of changes to its range of mortgage products. These have included the introduction of a very low rate 2-year fixed product with a higher reservation fee designed to be attractive to customers coming to the Society through intermediaries and via our retail network alike. We have introduced an online mortgage application facility allowing customers to choose their product, reserve the deal and complete their mortgage application over the internet. Our mortgage initiatives contributed to a 17% increase in number of mortgage sales over the same period in 2005/6 and also led to us appearing in mortgage best buy tables 272 times. The Society is also one of three lenders supporting the government's shared Open Market Homebuy scheme for key workers which was launched on 2 October The profile of our new lending has remained low risk. Based on value, the proportion of lending to first time buyers has increased to 21% (4 April %). 76% (4 April %) of new lending was in respect of next time buyers, remortgage and further advances with the borrowers having a proven payment track record. Only 3% (4 April %) was in respect of buy to let. Our prudent lending to creditworthy customers is demonstrated by continuing high asset quality. The average loan to value (LTV) of the residential book has remained at 39% (4 April %) and new lending has averaged 59% (4 April %). The overall proportion of mortgages 3 or more months in arrears as a proportion of the book is 0.25% (4 April %) compared to the September 2006 CML average of 0.90% (30 March %). Current accounts FlexAccount, the Society's current account, continues to be a key product in developing and retaining customer relationships. We offer a highly competitive account with a range of good value features including a market leading rate of up to 4.25% credit interest and no charge for overseas transactions. The total number of Nationwide current accounts grew by 8% over the half year to 3,936,000 (4 April ,644,000). Credit cards The Society continues to differentiate its credit card in a competitive market place by promoting the benefits of not charging for international use and allocating payments to clear the most expensive debt first. Total credit card market gross lending has continued to fall throughout the first half year and is 5% down on the same period last year. Despite this slowing market we achieved gross lending of 1.3bn (30 September bn) and issued 124,000 new credit card accounts (30 September ,000). The total number of accounts in issue broke through the 1 million mark in May and ended the half year at 1,067,000 (4 April ,000) with the total number of cards in issue up 10% to 1,346,000 (4 April ,222,000). Balances outstanding on credit cards at the end of the half year amounted to 741m (4 April m). As with other forms of unsecured lending, there has been an increase in the impairment charge in line with industry-wide credit experience. However, asset quality compared with the industry remains very favourable with the value of accounts 30 days or more in arrears as a percentage of the book being 7.5% (4 April %). This is around 30% lower than the average for members of APACS.

10 Personal loans Personal loans are offered through the Society's personal loans subsidiary, Nationwide Trust Limited. Gross unsecured personal loan lending was 0.6bn (30 September bn). The reduction reflected our cautious approach to new lending in a market where credit losses continue to increase. Nationwide Trust has in excess of 300,000 unsecured personal loan customers, a 3% decrease on the position at the end of the last financial year. The average loan size has increased, however, so that loans outstanding are broadly unchanged at 1.8bn (4 April bn). We continue to maintain prudent lending criteria employing the use of credit scoring, affordability and indebtedness rules as part of our assessment of whether to lend or not. This process results in approximately one in every two unsecured loan applications received being rejected. Most of our borrowers are 'known to Nationwide' with over three quarters already being members or customers of the Group. In line with industry-wide credit experience, we have seen increases in the impairment charge on our personal loan book. However, lending criteria have been tightened recently and the continuing high levels of asset quality are demonstrated by the ratio of the value of loans 30 days or more in arrears as a percentage of the total book being 5.4% (4 April %). This is around 34% lower than the average for members of the Finance and Leasing Association. Savings and investments UK savings and investments market UK retail savings balances increased by 3.9% in the first half of 2006/7 compared with the same period last year. The growth in balances was supported by relatively strong retail savings rates as lenders continued to compete for funds. A stable economic and labour market background has also played a role. Volatility in global equity markets in the early part of the financial year does not seem to have dented the attractiveness of equity based savings products. UK savings and investments market - Nationwide performance The Society remains the UK's second largest savings provider. We have taken a balanced approach to raising retail funds achieving an 8.7% (30 September %) share of the overall increase in UK retail savings. This represents a 3.2bn, or 4%, increase in our members' savings balances over the half year with total retail member deposits as at 30 September 2006 amounting to 84.1bn (4 April bn). Member savings represent our primary source of funding. Our highly popular e-savings, cash Individual Savings Account (ISA) and Monthly Income 65+ products drove the bulk of net receipts generating 2.7bn (30 September bn). The Society's new three year loyalty fixed rate bond, which was launched in August 2006, was also popular, attracting over 0.5bn of net receipts by the end of the half year. These products have contributed to our 106 mentions in savings best buy tables during the period. The Society, through its wholly owned subsidiary Nationwide Unit Trust Managers Limited (NUTM), offers a range of investment products including unit trusts and equity ISAs. At 30 September 2006 our range of unit trust based investment products held by our customers had a market value of over 2.6bn (4

11 April bn). Sales of the Target Return Fund were particularly strong in the first half year. This fund was the fifth best selling ISA fund in the UK in the first quarter of our financial year and the High Income Fund was the third best selling ISA Corporate Bond fund over the same period. The Society also sells investment products through its wholly owned subsidiary, Nationwide Life Limited (NL). NL provides guaranteed equity bonds, sales of which were up 34% on the comparable half-year period for 2005/6. Insurance The major development in the Society's range of general insurance products over the half year was the launch of a new home insurance product in July. This new product is designed to meet our members' needs having improved cover and pricing, supported by an enhanced sales process. During the half year, around 170,000 (30 September ,000) home insurance products were sold. In total, sales were up 21% to 258,000 new covers (30 September ,000) over the half year and the book stood at over 1.6 million (4 April million) covers at the end of the half year. We have continued to use leading insurers as third-party underwriters and the commission and profit share we receive is an important source of non-interest income. Over the half year insurance income was up 16% to 50.4m (30 September m). The Society also writes a range of insurance products through Nationwide Life Limited (NL), including life insurance and critical illness cover. A major relaunch of protection products was staged in May throughout the retail network. This resulted in a 14% increase in number of sales during the six months to 30 September 2006, with 42,000 life policies being sold (30 September ,000 policies). Pricing benefit The estimated pricing benefit is calculated by comparing the price of each of our products (including interest rates, fees and charges) with the equivalent products of our main competitors. During the half year we generated pricing benefit of around 280m (30 September m) by offering better rates and by charging lower fees and charges than our competitors. Distribution channels We are continuing the 300m, six year investment programme announced in 2004 to develop a modern business and to ensure that our branch, telephones and other access channels are maintained at the standards expected by our members. This programme is going very well with a number of technology investments having already been successfully deployed and over 220 branches and 100 agencies refurbished or re-sited since its inception. The additional sales space created is equivalent to that from an extra 83 branches. To allow our customers to do business, when and how they wish, we have continued our investment in UK call centres and have added 125 jobs into our newly opened facility in Wakefield. All of our call centres remain in the UK. In addition to the investment in physical infrastructure we are also progressing well with our investment in front facing branch employees with over 800 people promoted and an extra 100 people being deployed to strengthen our sales and service proposition. COMMERCIAL BUSINESS STREAM

12 Growth Period to 30 September 2006 Period to 30 September 2005 Year to 4 April 2006 % Net interest income Other income (6.0) 37.3 Total income Expenses Impairment and other provisions (2.5) (2.9) (13.8) (0.9) Contribution from Commercial (0.3) The underlying contribution from the commercial business stream decreased by 0.3% to 99.9m, largely as a result of continued pressure on margins. This represents around a third of the Group's total contribution. The commercial loan book continues to be high quality, with record levels of gross lending achieved in the year. Underlying contribution from investment assets held by Treasury, also included in this business stream was 9.5m (30 September m) an increase of 13.1%. Commercial lending Commercial lending is an established part of our business and of our total loans and advances to customers of 109.1bn, 16.3bn (15%) is in respect of commercial lending. The composition of our commercial portfolio at 30 September 2006 was 31% to UK Registered Social Landlords, 6% to support Private Finance Initiatives and the balance of 63% secured on other commercial property. Loans to Registered Social Landlords are secured on residential property. Loans advanced under Private Finance Initiatives are secured on cash flows from Government backed contracts. Commercial property loans are secured against properties supported by strong cash flows and tenant covenants. In addition loans are well diversified by industry type and geographic location. There is no speculative lending and no development finance. In terms of counterparty concentration, the largest single borrower represents only 1.5% of the total commercial book. We remain the lender with the largest volume of funding commitments to Registered Social Landlords. Gross commercial lending in the period totalled 3.6bn (30 September bn) representing an increase of 67%. Redemptions have been contained, resulting in a 221% increase in net lending to 1.8bn (30 September bn). Asset quality remains strong. Commercial lending arrears levels of three months or more have improved from 69 cases at 4 April 2006 to 63 cases at 30 September 2006, the lowest level in 10 years. at.home nationwide

13 at.home was the Society's residential letting subsidiary. The subsidiary represented a non-core, non strategic activity and it was decided to dispose of the business. The disposal of the majority of at.home's property portfolio was completed in July The contribution from at.home nationwide, including the gain on disposal, was 8.5m (30 September m). GROUP BUSINESS STREAM Growth Period to 30 September 2006 Period to 30 September 2005 Year to 4 April 2006 % Net interest income Other income Total income Expenses Contribution from Group Contribution from the Group business stream was 57.0m (30 September m). The contribution from this business stream includes the contribution derived from capital held for regulatory purposes in excess of that allocated to other business streams, on the basis of an economic capital assessment, together with other elements of contribution that cannot be allocated directly to business streams. It also includes contribution from the Group's Treasury operations, excluding the contribution from assets held solely for investment purposes which is included in the contribution from the Commercial business stream. Liquidity Liquidity balances totalled 16.7bn at 30 September 2006 (4 April bn) representing a prudential liquidity ratio of 10.3% (4 April %). We continue to have no exposure to emerging markets. 93.8% of our Treasury investment portfolio comprised assets which are rated single A or better. Wholesale funding Total wholesale funding increased by 5.7bn. At 30 September 2006, wholesale balances stood at 34.9bn (4 April bn) representing a funding ratio of 29.3% (4 April %). This is one of the lowest levels of wholesale funding of organisations of comparable size and provides significant headroom for additional funding in the future in addition to our retail deposit taking activities. The Society has continued to enjoy a strong appetite from wholesale funding investors and has operated successful Medium Term Note programmes in the Dollar, Euro and Sterling markets.

14 Our short and medium term credit ratings from the major rating agencies have remained stable during the year. They are as follows: Short term Fitch IBCA F1+ AA- Moody's P-1 Aa3 S&P A-1 A+ Long term PERFORMANCE BY INCOME STATEMENT CATEGORY Profit A Summary Income Statement is as follows: Period to 30 September 2006 Period to 30 September 2005 Growth Year to 4 April 2006 % Net interest income ,234.3 Other income Total income ,635.7 Expenses Impairment and other provisions Underlying profit before tax Derivatives and hedge accounting 32.2 (6.3) Policyholder tax (1.8) 6.2 (129.0) 8.9 Reported profit before tax The Group has seen a strong growth in underlying profit before tax of 20.1% to 306.0m compared with the period ended 30 September The increase in profit was consistent with our strategy of retaining sufficient profit to allow continued investment in the business and to support its future growth. On a reported basis, profit before tax has increased 32.1% to 336.4m from 254.7m for the same period in 2005/6. However, the reported 30 September 2006 profit includes fair value gains from derivatives and hedge accounting ( 32.2m) and policyholder tax ( 1.8m). Management's view is that a comparison of likefor-like underlying results provides the best measure of performance. Net interest income

15 Net interest income is earned on a combination of our PFS and Commercial products together with interest income from activity within Treasury. Net interest income increased by 14.7% to 679.4m for the half year compared with the same period last year. A beneficial interest rate environment and effective margin management throughout the half year has increased the net interest margin by 5 basis points to 1.11% (4 April %). Throughout the current half year we have had a LIBOR denominated net asset exposure of approximately 29bn which benefited from LIBOR being an average of 22 basis points higher than base rate. This differential was 13 basis points higher than last year and its impact represented 3 of the 6 basis points increase in the net interest margin. Other income Other income primarily comprises income earned from the sale and manufacture of insurance products together with administration and transaction fees not included within interest margin. During the half year underlying other income increased by 11.5% to 200.5m compared with 30 September 2005 underlying results. Income in the period was also boosted by the contribution, including the gain on disposal, of 8.5m from at.home nationwide, the Society's residential letting subsidiary. Expenses Growth Expenses Period to 30 September 2006 Period to 30 September 2005 Year to 4 April 2006 % Employee costs: Wages and salaries Social security costs (6.7) 29.6 Pension costs - defined benefit plans Other administrative expenses Depreciation and amortisation Total expenses amounted to 516.2m representing an increase of 8.8% over the period ended 30 September This increase compares with a rise in underlying total income of 14.0%.

16 Total expenses include increased costs arising from the continued investment in our customer service improvement programme and retailing proposition, including the recruitment of an extra 350 people into our branch network and UK call centres. Whilst increasing costs in the current year, these initiatives will continue to improve our retailing capacity and ensure continued future income growth. Our cost to mean total asset ratio remained unchanged from the last half year at 0.84% and the underlying cost to income ratio, one of our principal measures of efficiency, improved by 1.9% to 58.7% (4 April %). Impairment losses on loans and advances and other provisions Growth Period to 30 September 2006 Period to 30 September 2005 Year to 4 April 2006 % Secured lending 1.1 (1.4) Unsecured lending Customer redress (41.7) 32.1 Treasury investments (3.5) - N/A (3.6) Our high quality lending policy has again resulted in a minimal impairment charge arising from secured lending. In line with other lenders offering unsecured products, we have experienced an increase in the impairment charge driven by a higher level of write offs and the balances of accounts moving into arrears. However, at 6.0% (April %), arrears as a percentage of the unsecured books remain around 30% lower than industry averages with our increase being due to the seasoning of the book. The charge from customer redress primarily relates to the estimated cost of all current and estimated future endowment review claims. Following an improvement in the credit quality of available for sale investment securities a reversal of a previous impairment loss has been recognised resulting in a 3.5m credit from treasury investments. Derivatives and hedge accounting All derivatives entered into by Nationwide are recorded on the balance sheet at fair value with any fair value movements being taken to the income statement. Derivatives are only used to limit the extent to which the Group will be affected by changes in interest rates, exchange rates or other factors specified in building society legislation. Derivatives are therefore used exclusively to hedge risk exposures and are not used for speculative purposes.

17 Where effective hedge accounting relationships can be established, the movement in the fair value of the derivative instrument is offset in full or in part by opposite movements in fair value of the underlying asset or liability being hedged. Any ineffectiveness arising from different movements in fair value will trend to zero over time so any recorded ineffectiveness is excluded from underlying results in that accounting period. In addition, we enter into certain derivative contracts which although efficient economically cannot be included in effective hedge accounting relationships. Consequently, although the implicit interest cost of the underlying instrument and associated derivatives are included in "Net interest income" in the income statement, fair value movements on such derivatives are included in "Gains from derivatives and hedge accounting". These fair value movements are therefore also excluded from underlying results as they will not be realised in cash terms. Accordingly 32.2m gains from derivatives and hedge accounting has been deducted to arrive at underlying profit. In future periods if net losses are recorded these will similarly be added in calculating underlying profit. Policyholder Tax As a result of the requirement to consolidate the Group's life business on a line by line basis, the income statement includes amounts attributable to policyholders which affect profit before tax, the most significant of which is policyholder tax. Tax on policyholder investment returns is included in the Group's tax charge rather than being offset against the related income. In order to provide a clearer representation of the performance of the Group, these items have been offset in underlying results. Taxation The effective rate of tax was 30.6% (4 April %) compared with the standard rate of corporation tax of 30%. Stripping out the life assurance subsidiary, the effective rate of tax was 30.9% (4 April %). CAPITAL STRUCTURE Regulatory capital stood at 7.2bn (4 April bn) with the Group's total solvency ratio remaining strong at 10.5% (4 April %). The Tier 1 solvency ratio stood at 8.5% (4 April %). Both ratios remain well in excess of the minimum established by the Society's Regulator. At 30 September 2006 At 30 September 2005 At 4 April 2006 Tier 1 General reserve 5, , ,825.6 Permanent interest bearing shares (note i) Pension fund deficit add back (note ii) Intangible assets (84.0) (44.9) (80.5)

18 5, , ,571.1 Tier 2 Revaluation reserve Subordinated debt (note i) 1, , ,484.0 Collective impairment allowance , , ,746.2 Deductions Total capital 7, , ,983.6 Risk weighted assets ( bn) Tier 1 ratio (%) Total capital (%) Tier 2 to Tier 1 ratio (%) Notes (i) Permanent interest bearing shares and subordinated debt exclude any fair value adjustments arising from micro hedging that are included in the consolidated balance sheet. (ii) The regulatory capital rules allow the pension fund deficit to be added back to regulatory capital and a deduction taken instead for an estimate of the additional contributions to be made in the next 5 years, less associated deferred tax. Nationwide continues to invest in its systems and processes as part of its preparations for Basel II. We remain of the view that the Internal Ratings Based approach offered under the Accord provides potential for a reduction in our regulatory capital position. Basel II commences on 1st January 2007 and is fully implemented on 1st January PENSION FUND (RETIREMENT BENEFIT OBLIGATIONS) The majority of Group employees are members of the Nationwide Pension Fund (the Fund). The Group operates both Final Salary and Career Average Revalued Earnings (CARE) defined benefit arrangements. The valuation of the Fund at 30 September 2006 resulted in a deficit of 288.0m (31 March m) using the methodology set out in IAS 19. Our total retirement benefit liability under IAS 19, including other schemes, is 299.1m (4 April m). On an actuarial basis the Fund deficit is estimated at

19 around 100m (4 April m). We have been actively managing this deficit and have taken a number of steps to contain and reduce the deficit over time: Final Salary arrangements closed to new members since December 2001 Employee contributions (final salary arrangements) increased from 5% to 7% A series of three special contributions of 50m to be paid in the period 2005/ /07 The trustees have worked closely with their advisors to optimise the investment strategy for the Fund's assets. We will continue to review our options to manage the Fund in a timely and responsible way such that the deficit is reduced to a neutral position over the next ten years. OUTLOOK During the first half of 2006/7 the economy continued to strengthen. However, a combination of factors including increased high street spending and higher oil price rises led to increased inflation and a quarter point increase in the Bank of England base rate in August While oil prices subsequently reduced, inflation did not fall sufficiently to prevent a second quarter point rise in November In spite of increased interest rates, we expect the economy to remain fairly robust during the rest of the financial year. A strong labour market where increases in employment have been outstripped by increased participation in the workforce seems to be containing further crucial wage inflation and could mean that rates will peak at 5%. The Nationwide Consumer Confidence Index continued to be a useful barometer of consumers' feelings about the economy, jobs and incomes. During the first half of 2006/7, consumers' confidence was, on the whole, weaker than in the same period last year, but is now showing some signs of recovery. Following the increase in interest rates in August, confidence dipped to an all time low for the index, but the survey indicated that consumers have remained fairly positive about employment - a pattern which has been borne out in the official economic data. The Nationwide House Price Index showed the rate of house price growth accelerated in the six months to September Annual house price inflation reached 8.2% in September compared with only 5.3% in March. Strong demand pushed house prices up further than we anticipated this time last year. Buy-tolet demand, fuelled by both high levels of immigration and worsening affordability for first-time buyers, played a significant role in this performance. We expect market conditions to cool as a result of deteriorating affordability, rising interest rates and moderating expectations of future house price growth. House prices will, however, be supported into 2007 by continued robust economic performance, a strong labour market and the slow rate of housing supply growth. A stronger housing market in the first half of 2006/7 provided a boost to mortgage lending. Above trend house purchase levels, together with continued house price growth led to increased gross lending in spite of growing affordability pressures. As a result we now expect gross lending in the 2006/7 financial year to be around 320bn and net lending around 97bn. We do not expect a significant increase in residential arrears and possessions as a result of the reasonably robust economic and labour market outlook, despite high levels of debt.

20 Unsecured lending is weaker than earlier years primarily due to reduced credit card borrowing as lenders withdrew free balance transfer deals across the market. Personal loan lending has slowed only modestly. Higher interest rates and tighter credit criteria mean we expect credit card and personal loan net lending to be lower than 2005/6 at around 1bn and 8.5bn respectively. We will continue to work hard to deliver another set of outstanding results and to provide our members with greater value and excellent service. We will continue to seek further improvement in our efficiency and maintain stringent control over asset quality. In particular we are reviewing a number of initiatives to improve our capacity and capability to reduce overall costs and improve income. These should lead to the delivery of increased profits for the full year while maintaining the distribution of substantial pricing benefits to our members. Graham Beale Group Finance Director 15 November 2006 CONSOLIDATED INCOME STATEMENT For the period ended 30 September 2006 Notes Period to 30 September 2006 Period to 30 September 2005 Interest receivable and similar income 2 3, , ,799.9 Interest expense and similar charges 3 2, , ,565.6 Net interest income ,234.3 Fee and commissions income Fee and commissions expense (1.9) (2.3) (2.9) Premiums on insurance contracts and fair value gains on insurance assets Income from investments Other operating income Gains/(losses) from derivatives and hedge accounting 32.2 (6.3) 10.9 Total income ,863.9 Insurance claims and change in liabilities Total income net of claims on insurance contracts ,655.5 Administrative expenses Year ended 4 April 2006 (Audited)

21 Depreciation and amortisation Impairment losses on loans and advances to customers Provisions for liabilities and charges Impairment (gains) on investment securities 10 (3.5) - (3.6) Profit before tax Taxation Profit after tax CONSOLIDATED BALANCE SHEET As at 30 September 2006 At 30 September 2006 At 30 September 2005 At 4 April 2006 (Audited) Notes ASSETS Cash and balances with the Bank of England Loans and advances to banks 1, , ,364.0 Investment securities - available for sale 14, , ,007.7 Derivative financial instruments Insurance and other financial assets at fair value 1, , ,918.2 Fair value adjustment for portfolio hedged risk (206.3) (52.2) Loans and advances to customers 8 109, , ,347.6 Investments in equity shares Value of in force life insurance contract business Intangible fixed assets Property, plant and equipment Investment properties Accrued income and expenses prepaid Deferred tax assets Other assets Total assets 129, , ,586.0 LIABILITIES

22 Shares 84, , ,918.6 Deposits from banks 3, , ,697.4 Other deposits 4, , ,161.4 Due to customers 2, , ,608.3 Debt securities in issue 24, , ,767.6 Fair value adjustment for portfolio hedged risk (4.9) Derivative financial instruments Insurance contracts liabilities 1, , ,190.5 Other liabilities Provisions for liabilities and charges Accruals and deferred income Subordinated liabilities 9 1, , ,446.3 Permanent interest bearing shares Current tax liabilities Retirement benefit obligations Total liabilities 124, , ,554.6 General reserve 10 5, , ,825.6 Revaluation reserve Available for sale reserve Total reserves & liabilities 129, , ,586.0 CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE For the period ended 30 September 2006 Period to 30 September 2006 Period to 30 September 2005 Year ended 4 April 2006 (Audited) Available for sale investments - net fair value (loss)/gain (17.1) Property revaluation Actuarial loss on retirement benefit (64.2) (62.1) (6.1)