TIDM88GV
RNS Number : 9121Q
Coventry Building Society
24 February 2023
24 February 2023
Coventry Building Society reports a strong performance
Commenting on these results, Steve Hughes, Chief Executive
Coventry Building Society, said:
"This was a really strong performance in unprecedented economic
conditions. We have balanced the needs of savers and borrowers
whilst ensuring the Society remained safe and secure. We protected
all members by lending responsibly and managing growth carefully in
volatile markets. Our financial performance enabled us to increase
capital to support future investment, resilience and growth. We
made great progress with our technology transformation, also
completing our branch redesign programme. It was a strong and
balanced performance in the interests of members and the long-term
resilience and relevance of the Society."
Growing mortgages and savings
-- Mortgage balances grew by GBP1.4bn (3%) to GBP48.0bn. We
managed growth in a disciplined way during the year in a period
which has seen significant market volatility.
-- Savings balances grew by GBP2.4bn (6%) to GBP42.3bn . The
Society delivered a very strong savings performance and once again
paid higher savings rates than the market average, increasing this
differential in 2022 to 0.62%, equivalent to an additional GBP230m
in interest for our savers (2021: GBP201m).
Strong financial performance whilst investing in the future
-- Profit before tax of GBP371m (2021: GBP233m). The rising
interest rate environment supported an improved income performance
with a net interest margin of 1.16% (2021: 0.90%) even after
offering better rates to savers and protecting variable rate
mortgage customers from the full increase in the Bank of England
Rate.
-- The Society's Leverage Ratio increased to 5.2% (2021: 4.8%).
Stronger profitability has materially strengthened our capital
position and resilience as we face into a weaker economic outlook.
Although the Common Equity Tier 1 (CET 1) ratio remains well above
statutory requirements at 27.4% there has been a reduction from
2021 (36.2%) due to changes in industry-wide regulation.
-- Very low and stable arrears balances of 0.17% of mortgages
more than three months in arrears (2021: 0.17%). The credit quality
of our mortgage book remains very strong although we are mindful of
the potential impact on unemployment and house prices from a weaker
economy and are monitoring and supporting mortgage customers who
may experience payment difficulties.
-- Our cost ratios remain strong and we are making significant
investment in our future. We made good progress upgrading core
infrastructure and investing in digital services, telephony and
branches, providing increased choice and services for members,
customers, employees and intermediary partners.
Market leading service and making a difference to the lives of
members, colleagues, and communities
-- Excellent customer service with Experience Net Promoter Score
of +75 during a period of exceptional demand from customers and
brokers. The Society also continues to report one of the lowest
complaint overturn rates by the Financial Ombudsman Service at
3%.
-- Increased community investment of GBP3.2m helping to tackle
cost of living issues whilst maintaining focus on three priorities
of homelessness, financial education/ employability and reducing
loneliness.
-- Recognised as a Great Place to Work. Improved position in
Great Place to Work survey as Colleague Trust Index increased to
+77 from +73.
Unprecedented economic conditions
The events of 2022 have been well documented and were remarkable
in the range and severity of their impact. A UK economy that had
little time to recover from the challenges of the Covid-19
pandemic, was hit by supply issues affecting fuel, energy and food,
as the consequences of the heartbreaking conflict in Ukraine spread
across Europe and the world.
These events were amplified by political instability at home and
unprecedented volatility in the financial markets which contributed
to significant swings in the costs of borrowing.
The overall economic story was one of rising prices. The UK
inflation rate hit its highest level for over 40 years with the
Bank of England increasing the base rate eight times during the
year, from a position of 0.25% on 1 January to 3.50% on 31
December, in response. The impact on people's day-to-day lives, has
left many struggling to cope with the rapidly increasing prices of
gas, electricity, fuel and food. The UK economy continues to face
economic headwinds with the Bank of England and other commentators
forecasting a long period of lower growth.
We've seen that the housing market is not immune to these
challenges. Following a period of high demand that began in 2021
and was sustained by supportive government policies, ultra-low
interest rates and changes in attitudes to home ownership, this
year's economic and political instability, combined with the steep
rise in borrowing costs, changed people's behaviours. There was a
movement towards re-mortgaging rather than new purchases, and
redemptions were higher than usual as many borrowers chose to exit
their existing mortgages early and lock into longer-term fixed
rates. From late summer, we saw the expected drop in house price
inflation and activity levels as confidence fell amongst potential
house buyers and sellers alike.
Whilst a rising interest rate environment is generally good news
for savers, the cost of living crisis has made the need for value
even more important. This has led to a significantly more active
savings market as consumers become more alert to the rates on offer
and this has benefitted the Society due to the consistent value we
offer.
The benefits of mutuality have never been clearer. One of the
strengths of our simple and straightforward business model is its
resilience to external stresses, and this enables us to take a
long-term view even when there are significant short-term
challenges. The clarity of direction that comes from mutual
ownership, without the need to satisfy shareholder demands, means
we make decisions based on what is best for members. This includes
ensuring our capital strength and investing for the future, as well
as managing our day-to-day products and services.
But it is the day to day that matters most to our members. It is
not for them to make the connection between mutual ownership and
long-term stability and security. They tell us very clearly what
they want - and that is great value, great service, and the support
we can give them, their families and their communities through good
times and bad. In such a volatile year, our ability to keep
delivering these things is how we judge success.
Delivering value to members
We are a simple business, focused purely on savings and
mortgages. Doing the right thing for members means balancing the
needs of savers and borrowers who are affected by a rising interest
rate environment in very different ways. Our aim to offer
competitive products over the long term means that members trust us
to get this balance right.
We maintained our track record of increasing our savings rates
above the market, which meant we paid an additional GBP230 million
of interest to our members than if we'd simply matched the average
rates paid in the market (2021: GBP201 million).(1) This shows very
clearly the difference in the way we approached the rising interest
rate environment compared with many of our competitors.
The strength of this approach was seen throughout the year,
combining leading offers in both ISA and non-ISA markets with
consistent and quickly communicated movements as the base rate
changed. We developed our loyalty proposition with a range of
bonds, and this has proved extremely popular with eligible members,
another reminder of the benefits that mutuality can provide and
nearly 80,000 members benefited from this. It is not surprising
that our product offering has been independently recognised, with
Moneynet awarding us 'Best Building Society Saving Provider',
Savings Champion naming us Best Building Society and Fairer Finance
awarding us its Gold Ribbon for savings for the eighth year in a
row.
Our strong response to the rising interest rate environment has
driven an increase in savings balances of 6.0% or GBP2.4 billion
(31 December 2021: GBP1.7 billion), with overall balances exceeding
GBP40 billion for the first time. Our ability to compete, attract
and retain savings balances remains a hugely important part of our
business model but also our purpose in making people better off
through life. This was very clear in the second half of the year
when we experienced a significant increase in savings activity. The
continued rise in interest rates and broader economic uncertainty
meant that, when members needed to talk to us, these conversations
were significantly longer and more complex than previously. It put
our services under real challenge, and I'm very proud of the way
colleagues responded and provided great outcomes even when it took
us longer to answer the phone.
Our purpose drives our mortgage lending too. Ensuring the right
outcomes for members, whether in terms of individual affordability
or protecting people from the possibility of negative equity, are
as important as ensuring competitive pricing. We also have a
responsibility to ensure our mortgage lending is profitable and
supports the Society's future stability and growth. This meant that
we took a deliberately cautious approach to lending in the first
half of the year. As the market position changed, and despite the
incredible volatility following the mini-budget, we kept our pledge
to intermediary partners and stayed open for business. We saw
record activity levels in the second half of the year as a result,
and I want to thank colleagues who put in fantastic efforts to make
sure our borrowers were able to change mortgages and move house
when they wanted to. I know their efforts were much appreciated by
mortgage brokers and their clients, and they continue to deserve
the independent recognition they receive from Which? and Fairer
Finance and Your Mortgage which awarded us 'Best Building
Society'.
Our pricing remained competitive, and we took purposeful
decisions not to increase all variable mortgage rates as the Bank
of England Base Rate moved. We also extended our participation in
the mortgage market and, following a very successful pilot, now
includes a new-build proposition in our range. This fits well with
our broader sustainability ambitions, being supportive of the
first-time buyer market and, through the improved energy efficiency
of new builds, our Climate Action Plan as well. It is possible that
the immediate cost of living crisis and general economic
uncertainty have affected people's desire to invest in enhancing
the energy efficiency of existing homes, and the performance of our
Green Together Reward, which offers incentives to do so, seems to
bear this out. Whilst I believe large-scale changes to people's
behaviour requires greater leadership and education from Government
as well as business, we will continue to explore ways of
encouraging action in this area. We also recognise that our level
of lending to first time buyers has fallen in 2022. This is partly
driven by fewer first time buyers entering the market and we retain
our long term commitment to supporting first time buyers.
Our mortgage growth of 3.0% or GBP1.4 billion (31 December 2021:
7.2%, GBP3.1 billion) compares with the overall UK market growth of
4.1%(2) . At just 0.17%(3) (2021: 0.17%) we continue to record very
low levels of arrears, but do expect more borrowers will require
our support in 2023.
Delivering on our service promise
I said earlier that our members expect a good service, and this
is a consistently strong part of who we are and what we do. In many
ways, we maintained this through 2022, but it was noticeable as the
interest rate environment changed, and under pressure of the cost
of living crisis, our members contacted us in greater numbers than
ever before and needed more time to deal with the complexity of
decisions they were facing.
Offering great products was also a factor in the number of calls
being taken, but the result was that our service came under
pressure, with some of our members having to wait longer than usual
to speak to us. What didn't change was the brilliant support they
received from our branch and contact centre teams when they did
talk to us and our Net Promoter Score(4) (NPS) - the primary way we
judge overall satisfaction with our service - remained outstanding
at +75 (2021: +76) for the Society as a whole.
We set a very high bar when it comes to customer service, and I
want to thank our members for their patience as well as my
colleagues for their fantastic efforts during these tough times. I
also want to reassure members and colleagues alike that we are
recruiting and training new colleagues and will provide the
resources needed to deliver the brilliant service they expect.
One thing that will help with this is the ongoing digitisation
of our mortgage and savings services, and we continue to make good
progress with this work. We rolled out digital product switching
capability across our intermediary network, with more than 80,000
switches undertaken by the end of the year. We launched SMS
authentication and are in the final stages of developing our mobile
savings app. With self-service options also enhancing our savings
maturity process, we are beginning to see the benefits of this
investment in terms of the efficiency and scalability which are
fundamental to our future growth plans.
Making progress on our digital plans is hugely important to us
and to our members. But so is the human touch, and in 2022 we
completed the multi-million pound transformation of our branch
network by opening our flagship branch in the heart of Coventry
city centre. All our branches have now been transformed into warm
and welcoming hubs at the heart of their local communities, and we
have received great feedback from the members who use them as well
as the colleagues who work in them. It underlines our commitment to
the high street for many years to come. What people might not see
is the integration of our customer-facing channels by which
colleagues in the branch network are increasingly able to provide
telephony and digital support - a flexible and joined-up approach
to providing the best possible service to members however they
contact us.
The investment we're making in frontline services is matched,
and at times enabled, by the technology transformation that is
happening behind the scenes, and here too we are making great
progress. These programmes are focused on improving the Society's
operational resilience, information security and the transformation
of our financial planning, controls and reporting as well as
providing the building blocks of new services. During the year, we
achieved significant milestones in moving core applications and
systems into new more secure data centres, as well as building the
underlying components of new digital services. The transformation
to new technologies is ongoing and on track, and I expect the
benefits to be even more obvious during 2023.
We are making significant investments in our future. Our capital
and revenue investment expenditure of GBP94 million in technology
and change programmes shows the importance we attach to this work.
Our cost to income ratio has improved to 43% as a result of our
strong income performance. However, our cost to mean asset ratio
and total management expenses increased to 0.52%(5) (2021: 0.50%)
and GBP295 million (2021: GBP264 million) respectively.
Investing in our services is hugely important to us. The
impending Consumer Duty regulations also lay out the expectations
on us to deliver the right customer outcomes. Our purpose and
culture are aligned to meet this expectation as we have shown this
year, whether by making our branches more accessible, supporting
vulnerable customers, delivering value to savers, or proactively
contacting borrowers who may be struggling in a rising interest
rate environment. Enabling the convenience, accessibility and ease
of our digital services will go hand in hand with the warmth of our
human touch.
Supporting our communities
I said earlier that members are clear about what they want from
us, and I have talked about what we delivered in terms of value and
service during 2022. They also want us to support the communities
they live in and conduct our business in a way that contributes
positively to some of the larger issues facing society, such as
financial education, food poverty, climate change and equal
opportunities.
Despite the external challenges, I remain absolutely committed
to the Society's sustainability agenda, and recommend taking the
time to read our annual Sustainability Report which provides more
detail on our Environmental, Social and Governance progress and
plans.
We have worked hard over the last two years to embed a new
community strategy that focuses on issues affecting people in
Coventry, the surrounding area and the communities our branches
serve. During this time, we have built brilliant partnerships in
the public, private and third sectors to deliver against three
objectives where we believe we can add resources, knowledge and
opportunities: Better Foundations, which targets housing issues;
Better Futures, which deals with aspiration, employability and
career development; and Better Connections, which supports the
isolated and vulnerable members of our community.
I am very proud that, as the cost of living crisis hit harder in
the latter half of the year, we were able to use these partnerships
to donate GBP1 million, in addition to our normal support, directly
to Coventry schools and local charities helping those most at risk,
as well as a contribution to every one of our branches across the
UK to support food banks in their communities.
2022 also brought to an end our long-standing and very
successful partnership with The Royal British Legion. We have
worked together for nearly 15 years, and during that time, the
Society has donated over GBP20 million to fund the Legion's work.
The new community strategy is the reason for the change. We'll
announce our new corporate partner very soon and are very excited
about the opportunities this partnership will bring in tackling one
of our priority issues, nationally and at a local level.
We also continue to make good progress in pursuit of our climate
change objectives. We received overwhelming support at our 2022
Annual General Meeting for our Climate Action Plan and have backed
that up with a transformation plan to achieve our Net Zero ambition
by 2040. This forms part of The Climate Pledge, which we signed
early in 2022 and which commits us to report our progress
accurately and transparently. I believe our actions in joining the
Science-Based Targets initiative shows that we are serious about
our climate change ambitions.
Engaging colleagues
The role played by my colleagues across the Society cannot be
overstated. In a very challenging year, they continued to do
everything possible to meet member expectations and deliver a great
service. In turn, we have worked hard to recognise and reward their
contribution and give them the support they and their families
need.
At a time of great change and uncertainty, when the headlines
have been full of discord and instability, it would have been
understandable for engagement and motivation to falter. Instead,
our second year participating in the Great Place to Work survey
showed an increase in overall engagement and a rise in 72 of the 78
measures the survey covered. I am very proud of this result which
positions the Society as one of the best organisations of its size
and shows the commitment we make on an organisational and
individual level to do the right things for our people.
A key aim is to recruit and develop talent that shares our
values, and I am really encouraged by the personal and career
development we're achieving at the Society. In 2022, over 45% of
vacancies were filled by internal candidates, something that I
believe is motivational for the individual but also great for the
Society's culture and future success.
As part of this, we want to build a colleague base that reflects
the diversity of our city and the communities we serve. We have
been recognised by Great Place to Work as being one of the best
places to work for women, ranking 14th amongst the top 39 super
large companies in this regard. Our aim is 50:50 representation on
our Board and 40% female representation in our management roles by
2025. We had more women than men on our management development
programmes this year and as well as on our apprentice and graduate
cohorts too. We continue to develop our working environment to
provide whatever support is needed.
We have a similar ambition for 25% of our manager roles to be
held by colleagues with an ethnic minority background by 2025.
Progress on this is slower than I would wish despite a lot of
initiatives and a lot of support across the business. As I have
said before, we will make a difference and I am hopeful that
initiatives that include a tailored talent programme, mentoring and
reverse mentoring and diversity and inclusion programmes for
recruiting managers will start to deliver real change.
Colleague wellbeing is something we are passionate about. We
measure it every quarter and have been able to track the impact of
the cost of living crisis on colleagues' mental and financial
wellbeing. We anticipated some of the impact in our 2022 pay award
but took the additional step of a GBP1,000 cost of living allowance
for all colleague's that were basic rate taxpayers. This payment
was made in a series of instalments from September 2022 through to
February 2023 and was massively appreciated. But whether it is
being proactive in the face of clear evidence of need or
anticipating and surprising colleagues with our range of wellbeing
initiatives, the result is clear in the brilliant engagement we
have. I have said before that our people are our greatest asset and
we will continue to recognise and appreciate them for all that they
do.
A strong and balanced performance
I wrote this thinking about what matters most to our members.
They expect great value and service, and they expect us to do the
right things for the wider community we serve. In times of
uncertainty and volatility, they also expect us to keep their money
safe and secure, and ensure the Society's financial strength and
stability.
In 2022, we delivered a strong and balanced performance across
all these objectives. Our profit before tax of GBP371 million was
higher than in 2021 (GBP233 million). This has been supported by
the increases in the Bank of England Base Rate which has improved
our margin and income performance notwithstanding the strong value
provided to members. More importantly, we took prudent decisions to
deliver the capital strength that will be needed to support future
growth and investment, particularly in view of a less certain
economic outlook.
It is a very positive thing for the Society and its members that
we continue to maintain a strong capital position. Our leverage
ratio increased to 5.2% (2021: 4.8%) and our Liquidity Coverage
Ratio was 195% (2021: 187%). Our Common Equity Tier 1 ratio at
27.4% (2021: 36.2%), is well above regulatory requirements and the
2022 reduction reflects a change in industry wide regulation. This
clearly demonstrates our financial strength and shows that we
provide a safe home for savers and borrowers alike.
Looking to the future with confidence
There seems little doubt that 2023 will see further economic
challenges. We can hope that inflation has peaked and we see
greater market stability, but the impact on our members and
colleagues of a 'new normal' in the cost of living will continue
with rising mortgage rates for existing members and mortgage demand
likely to remain subdued.
Having said that, the Society is well positioned. In 2022, we
took prompt decisions to communicate and reassure our savers and
continued to pay the best rates we could afford. We protected
borrowers from the extremes of the rising interest rate
environment, supported them through the flexibility of our product
design and kept the confidence of mortgage intermediaries by
maintaining our commitments to them despite the fast-moving market.
We grew, but grew appropriately, with the right focus on margin,
capital strength and economic outlook that balanced the needs of
all our stakeholders.
Just as importantly our investment in technology and the
transformation of our business is realising the benefits we aimed
for. In 2023 we expect to complete further steps towards the
digitisation of our savings and mortgage services, which will
deliver operational efficiencies, greater capacity and improvements
in the ease and convenience our members expect. We will continue to
expand our participation in the mortgage market, and support more
people in buying their homes. Saving members can expect a
consistently great service, supported by new digital capabilities.
And our resilience will continue to be strengthened by our ongoing
investment in our technological foundations.
Our performance makes me confident that we can continue to
protect our members and invest for the future despite the
challenges of economic and competitive headwinds.
I will finish by thanking our members, customers and partners
for their continued support and loyalty, and my colleagues across
the Society for their passion, professionalism and commitment.
1. Based on the Society's average month end savings rate
compared to the CACI Ltd's Current Account and Savings Database
rest of market average rate for savings accounts, excluding current
accounts and offset savings, for the 12 months of the year (2021:
first 11 months of the year).
2. Source: Bank of England.
3. Percentage of mortgages with more than three months of arrears.
4. Net Promoter Score (NPS) is a measure of customer advocacy
that ranges between -100 and +100, which represents how likely a
customer is to recommend our products and services.
5. Administrative expenses, depreciation and amortisation/Average total assets.
Income Statement
Overview
In 2022, the Society improved its financial performance after
the challenges in 2021 due to the Covid-19 pandemic and despite the
market volatility observed in the year. The following factors
impacted the 2022 financial results:
-- Net interest income increased by GBP181 million, driven by
the rising base rate environment with mortgage interest receivable
rising more quickly than interest payable on retail deposits. The
increase was also impacted by the GBP69 million charge recognised
in the prior year due to changes made to the estimations within our
Effective Interest Rate (EIR) calculation (2022: GBP17
million).
-- Gains on derivatives and hedge accounting of GBP27 million
(2021: GBP7 million loss) as a result of market volatility and
changes in customer behaviour.
-- We have increased our provisions for future expected credit
losses (ECLs) in light of the continued uncertainty surrounding the
economic outlook. As a result, GBP17 million of ECL provisions were
charged during the year, compared to a release of GBP29 million in
2021.
As a result, profit before tax for the year increased to GBP371
million (2021: GBP233 million).
2022 2021
GBPm GBPm
---------------------------- ------- -------
Interest receivable 1,421.1 833.9
---------------------------- ------- -------
Interest payable (763.8) (357.7)
---------------------------- ------- -------
Net interest income 657.3 476.2
---------------------------- ------- -------
Other income (1.6) (1.4)
---------------------------- ------- -------
Gain/ (loss) on derivative
financial instruments 26.8 (6.6)
---------------------------- ------- -------
Total income 682.5 468.2
---------------------------- ------- -------
Management expenses (294.8) (263.5)
---------------------------- ------- -------
Impairment (charge)/release (16.6) 28.7
---------------------------- ------- -------
Charitable donation to
Poppy Appeal (0.6) (0.6)
---------------------------- ------- -------
Profit before tax 370.5 232.8
---------------------------- ------- -------
Tax (84.3) (42.0)
---------------------------- ------- -------
Profit after tax 286.2 190.8
---------------------------- ------- -------
Net interest income
Net interest income increased to GBP657 million (2021: GBP476
million).
The Bank of England Base Rate increased eight times during the
year, increasing from 0.25% at 31 December 2021 to 3.50% at 31
December 2022.
Interest receivable on mortgages increased by GBP468 million,
predominantly as a result of the impact of base rate increases on
our mortgage book and growth in balances. The Society consciously
improved the competitiveness of the standard variable rate (SVR)
product to protect these customers from the impact of rising rates.
In addition, we benefitted from a GBP119 million increase related
to interest receivable on higher liquidity balances and rates.
Interest payable on retail savings increased by GBP286 million
following the eight base rate increases during 2022. For each base
rate change we have passed through on average 54% to our savings
members. Throughout 2022, the Society continued to pay above
average savings rates, returning GBP230 million (2021: GBP201
million) in member value compared to market average rates(1) ,
whilst continuing to invest in the Society and maintain its
long-term resilience.
The remaining GBP120 million movement related to higher interest
payable on our wholesale funding.
Net interest income included a charge of GBP17m (2021: GBP69
million) relating to a change to the future assumptions on mortgage
redemption behaviour as customers spend less time on SVR.
Net interest margin
At 1.16%, our net interest margin improved significantly from
the 0.90% reported in 2021 (1.03% excluding the impact of the prior
year EIR adjustment), as a result of the movements in net interest
income outlined above relative to our average total assets.
2022 2021
GBPm GBPm
===================== ============== ==============
Net interest income 657 476
===================== ============== ==============
Average total assets 56,698 53,014
===================== ============== ==============
% %
===================== ============== ==============
Net interest margin 1.16 0.90
===================== ============== ==============
Derivatives and hedge accounting
The Society uses derivative financial instruments (swaps) solely
for risk management purposes to manage interest rate and currency
risk arising from its fixed mortgage and savings activity and from
non-sterling and fixed rate wholesale funding.
The Society applies hedge accounting where possible and its
approach continued to be effective overall throughout the period.
The gain of GBP27 million for the year represents hedge
ineffectiveness and fair value movements on derivatives where hedge
accounting was not obtained (2021: GBP7 million loss), and includes
net gains from ineffectiveness arising from higher volumes of early
redemptions following changes in customer behaviour on both
mortgages and savings.
Management expenses
Overall management expenses increased by GBP31 million. The
increase in costs was primarily driven by an increase of GBP10
million in spending related to the Society's strategic investment
programme, salary and cost inflation across all of our operations,
accelerated depreciation as we consolidate our head office
footprint and the impact of higher variable pay in recognition of
the strong performance against our targets. We also finalised the
refurbishment of our branches and increased our contribution to
community and charitable activities.
Ensuring that we spend our members' money wisely and maintain
our cost efficiency advantage is a key part of the Society's
strategy. The cost to mean total assets ratio of 0.52%(2) (2021:
0.50%) is expected to remain among the lowest in the UK building
society sector. The cost to income ratio improved to 43%(3) (2021:
56%).
Expected credit losses
The performance of our mortgage book has remained strong
following the overall economic outlook in the first half of 2022
being better than expected in certain key metrics with the growth
in house prices and observed lower unemployment levels. However, in
the second half of the year, the economic outlook worsened with the
highest inflation levels in over 40 years and base rate now at the
highest level in over a decade.
The Society has updated its economic scenarios to account for a
period of heightened inflation and the subsequent impact to the
economy, including HPI reductions and, in turn, Expected Credit
Losses (ECLs).
In addition, we have introduced a new post model adjustment
(PMA) to reflect the potential risk associated from the increase in
the cost of living and higher mortgage payments for borrowers.
We have taken a deliberately cautious approach to estimating
ECLs, given the structural challenges facing our members from the
cost of living crisis, which has resulted in an increase to our
provision for ECLs, and a charge of GBP17 million (2021: release of
GBP29 million) being recognised.
At the year end, total provisions were GBP36 million (2021:
GBP19 million), of which GBP19 million (2021: GBP9 million) related
to PMAs, where the risks were not assessed as adequately captured
in the Society's core modelling.
The post model adjustments cover the following risk areas:
-- Risk relating to the impact of the cost of living on our
members where we have identified behavioural characteristics which
may lead to future difficulties (GBP14 million).
-- The potential for losses as a result of cladding remediation
on flats where fire safety standards have not been met.
-- A more granular assessment of house price information which
provides a more accurate view of indexed loan to values (LTVs) and
risks associated with pockets of negative equity.
-- Risks which cannot easily be modelled such as for fraud within the portfolio.
-- We have taken the opportunity to remove the Covid-19 payment
holiday adjustment following the end of the cure period for
impacted customers.
The remaining GBP16 million (2021: GBP10 million) of ECL
provision relates to the modelled losses, including the impact of
alternative economic scenarios. The alternative scenarios reflect a
range of possible outcomes as the economy recovers from the
pandemic but moves into a further period of uncertainty related to
the cost of living crisis and inflationary pressures.
IFRS 9 requires loans to be assessed as 'stage 2' where there
has been a significant increase in credit risk. Loans are held in
stage 2 until such a time when they are considered to have 'cured'
by performing for a sustained period of time, typically 12 months
from the stage 2 trigger event. In 2022, stage 2 accounts increased
to 9% (2021: 7%) principally due to the cost of living PMA put in
place. 90% of the book remains in stage 1 (2021: 93%).
As a result of these changes, the ECL provision now equates to
0.07% of the overall mortgage book (2021: 0.04%).
Charitable donation to the Poppy Appeal
The Society brought to an end its very successful long-standing
support for the Royal British Legion's Poppy Appeal with GBP0.6
million donated during the year (2021: GBP0.6 million), bringing
the total donated over the Society's relationship with the Legion
to GBP20 million.
Taxation
In 2022, the corporation tax charge was GBP84 million (2021:
GBP42 million), reflecting an effective tax rate of 22.8% (2021:
18.0%). In 2021, it was announced, that from 2023, the corporation
tax rate is set to increase from 19% to 25% and the banking
surcharge is set to decrease from 8% to 3%. Both rates were
substantially enacted during 2022, and so are reflected in the
deferred tax liabilities at the balance sheet date.
Balance Sheet
Overview
Mortgage balances grew by GBP1.4 billion and liquidity increased
by GBP2.4 billion. Retail savings balances grew by GBP2.4 billion
and wholesale funding increased by GBP1.3 billion.
Mortgage growth was funded by retail savings.
A summarised Balance Sheet is set out below:
2022 2021
GBPm GBPm
-------------------------------- -------- --------
Assets
-------------------------------- -------- --------
Loans and advances to customers 48,014.3 46,620.6
-------------------------------- -------- --------
Liquidity 10,009.8 7,622.0
-------------------------------- -------- --------
Other 843.0 287.1
-------------------------------- -------- --------
Total assets 58,867.1 54,529.7
-------------------------------- -------- --------
Liabilities
-------------------------------- -------- --------
Retail savings 42,288.7 39,890.2
-------------------------------- -------- --------
Wholesale funding 13,207.2 11,907.3
-------------------------------- -------- --------
Subordinated liabilities
and subscribed capital 57.0 56.9
-------------------------------- -------- --------
Other 366.5 215.7
-------------------------------- -------- --------
Total liabilities 55,919.4 52,070.1
-------------------------------- -------- --------
Equity
-------------------------------- -------- --------
General reserve 2,250.7 2,012.6
-------------------------------- -------- --------
Other equity instruments 415.0 415.0
-------------------------------- -------- --------
Other 282.0 32.0
-------------------------------- -------- --------
Total equity 2,947.7 2,459.6
-------------------------------- -------- --------
Total liabilities and
equity 58,867.1 54,529.7
-------------------------------- -------- --------
Loans and advances to customers
Our lending strategy remains focused on high quality, low loan
to value mortgages within the prime residential market. These loans
are primarily distributed through third-party intermediaries,
giving the Society a regionally diverse mortgage portfolio in a
cost-effective way.
In 2022, we advanced GBP8.7 billion of mortgages (2021: GBP9.6
billion) and mortgage balances grew by GBP1.4 billion (2021: GBP3.1
billion). The year on year growth in mortgages of 3.0% compares
with the UK mortgage market growth of 4.1%(4) and our market share
remained at 3% (2021: 3%).
The Society manages its growth according to economic conditions,
market pricing and funding conditions. As a result, with mortgage
margin pressure within the market in the first six months of the
year, this led to the overall book remaining stable at 30 June
2022. With changing conditions in mortgage pricing following
further base rate increases in the second half of the year, the
Society has taken the opportunity to grow its book by 3.0% to over
GBP48 billion at 31 December 2022.
This growth was offset by higher levels of redemptions as
customers looked for rate certainty and continued to lock into
longer-term fixed products in response to base rate rises.
New lending on owner-occupier homes accounted for 67% of total
new lending in 2022 (2021: 65%) at an average LTV of 65.3% (2021:
65.7%). The Society continues to support first time buyers;
however, with current market conditions impacting this segment of
the market, the number of loans advanced in 2022 reduced to 5,400
(2021: 7,100).
Total mortgage assets at 31 December 2022 stood at GBP48.0
billion (2021: GBP46.6 billion) which comprised GBP28.5 billion of
owner-occupier loans (2021: GBP27.4 billion) and GBP19.5 billion
buy to let loans (2021: GBP19.2 billion). The balance weighted
indexed LTV of the mortgage book at 31 December 2022 remained
broadly stable at 51.0%(5) (2021: 50.9%) when compared to the prior
year.
Possessions and forbearance remained low, with 27 cases in
possession at the year end (2021: 27), with forbearance levels
having decreased by 23.5% year on year in value terms and 12.9% in
number of cases. With the impact of the cost of living crisis
expected to materialise more fully in 2023, the Society continues
to focus on supporting its members. Despite the current economic
conditions, the Society continues to have very low arrears, with
only 0.17% of mortgages more than three months in arrears (2021:
0.17%) at 31 December 2022 compared with the latest available
industry average of 0.71%(6) .
Liquidity
Liquid assets increased to GBP10.0 billion (2021: GBP7.6
billion) as we maintained a prudent liquidity buffer, demonstrated
by our Liquidity Coverage Ratio (LCR) remaining strong at 195%
(2021: 187%), significantly above the minimum regulatory
requirement.
Liquid assets are principally held in deposits at the Bank of
England and in UK Government investment securities. This means that
asset quality remains very high, with 93% of the portfolio rated
Aaa-Aa3 (2021: 98%). 98% of liquid assets are held in UK sovereign
or UK financial institutions (2021: 99%).
Included in liquid assets are GBP1.6 billion of assets held at
fair value through other comprehensive income (FVOCI). As at 31
December 2022, the balance on the FVOCI reserve was a GBP5 million
gain, net of tax (2021: GBP5 million gain, net of tax).
Retail funding
Retail savings increased in the year by GBP2.4 billion to
GBP42.3 billion (2021: GBP39.9 billion), representing growth of
6.0%, compared with market growth of 4.1%. The Society's overall
savings market share is 2.4%4 (2021: 2.4%).
The Society continued to support the cash ISA market, increasing
our market share to 6.7%4 (2021: 6.5%).
Our increase in market share reflects a more active savings
market in 2022 and our competitive product offers, particularly
towards the end of the year.
Our mortgage book continues to be predominantly funded by retail
savings, with 88% of mortgage loans funded in this way (2021:
86%).
Wholesale funding
We use wholesale funding to diversify our sources of funding,
enabling growth and lowering risk, which then benefits savings
members through better savings rates and mortgage customers through
enabling us to offer more competitive long-term rates.
Wholesale funding increased by GBP1.3 billion in the year to
GBP13.2 billion (2021: GBP11.9 billion) driven by higher swap
valuations and the associated change in collateral impacting our
short term funding position.
There was one wholesale issuance during the year, with a EUR0.5
billion covered bond which was issued in September 2022. There was
GBP5.25 billion of Central Bank Term Funding (TFSME) outstanding as
at 31 December 2022 (2021: GBP5.25 billion).
Equity
The Society's equity is predominantly made up of 138 years of
retained profits in the general reserve and Additional Tier 1 (AT
1) capital. The Society made post-tax profits of GBP286 million in
the year and total equity increased GBP0.5 billion to GBP2.9
billion, including a GBP29 million distribution to AT 1 capital
holders and GBP250 million movement in the cash flow hedge
reserve.
Pension fund
The pension scheme assets and liabilities are recorded in the
Society's financial statements and the overall position was a
surplus of GBP3 million at the end of 2022 (2021: GBP29 million).
These assets and liabilities are impacted by market movements, and
the decrease in the year was driven by the movement in the UK
corporate bond market and the updated valuation of the pension
scheme assets. The Society continues to monitor the pension scheme
to ensure that there is no scheme deficit over the medium term.
Regulatory capital
We hold capital to protect members against unexpected future
losses. As we grow our mortgage book, the amount of capital we need
to hold to meet the UK Capital Requirements Directive (CRD) V
increases.
The Society's CRD V capital position7 as at 31 December 2022 is
summarised below. During the year, the capital resources increased
to GBP2,584 million, primarily through the increase in Common
Equity Tier 1 (CET 1) driven by profit after tax of GBP286
million.
We are not currently bound by regulatory leverage ratios, which
measure Tier 1 capital against total exposures, including
off-balance sheet items. The PRA confirmed in policy statement
PS21/21 that the UK leverage ratio framework only applies to banks
and building societies with either retail deposits of GBP50 billion
or more, or non-UK assets equal to or greater than GBP10 billion;
neither of these measures currently applies to the Society. The UK
leverage ratio increased slightly to 5.2% (2021: 4.8%) driven by
the increase in capital resources in the year. The Society expects
leverage will be its binding constraint in the future.
The increase in risk weighted assets (RWAs) in 2022 was due to
an update in the IRB modelling approach due to regulatory changes.
This increase in RWAs was partially offset by increases in capital
resources. The Society's CET 1 and Total Capital ratios
consequently reduced to 27.4% (2021: 36.2%) and 32.7% (2021: 44.1%)
respectively.
The Society continues to work towards meeting regulatory changes
for IRB models that were brought in at the beginning of 2022 and is
in the final stages of development work required to address the
updated requirements.
Until the updated models are fully approved, and in common with
many other IRB institutions, the Society has agreed to hold
additional risk weighted assets (RWAs) that represent its best view
of the change in capital requirements that will result from the new
models once they are implemented. This has contributed to the
increase in RWA and hence, the lower CET 1 ratio in 2022.
The final model output may vary from this initial assessment,
which may further lower the CET 1 ratio, effectively bringing
forward changes of increasing RWAs envisaged in Basel 3.1. The
Society expects that from 2025, Basel 3.1 changes to capital
requirements will be phased in and, as transition develops, this
will reduce the Society's reported CET 1 ratio. Applying the Basel
3.1 RWA floors to the year end figures on a full transition basis
would result in a CET 1 ratio of approximately 20%.
The Society's Total Capital Requirement (TCR) at December 2022
was GBP846 million, equating to 10.7% of RWAs (2021: GBP565
million; 10.7%). We exceed this requirement using CET 1 capital
alone.
End-point End-point
31 Dec 31 Dec
2022 2021
GBPm GBPm
========================== =================== ===================
Capital resources:
========================== =================== ===================
Common Equity Tier
1 (CET 1) capital 2,169.0 1,921.8
========================== =================== ===================
Total Tier 1 capital 2,584.0 2,336.8
========================== =================== ===================
Total capital 2,584.0 2,336.8
========================== =================== ===================
Risk weighted assets 7,911.7 5,303.6
========================== =================== ===================
Capital and leverage % %
ratios:
========================== =================== ===================
Common Equity Tier
1 (CET 1) ratio 27.4 36.2
========================== =================== ===================
Leverage ratio including
central bank reserves
and full AT1 capital
amount 4.5 4.3
========================== =================== ===================
UK leverage ratio(7) 5.2 4.8
========================== =================== ===================
1. Based on the Society's average month end savings rate
compared to the CACI Ltd's Current Account and Savings Database
rest of market average rate for savings accounts, excluding current
accounts and offset savings, for the 12 months of the year (2021:
first 11 months of the year).
2. Administrative expenses, depreciation and amortisation/Average total assets.
3. Administrative expenses, depreciation, and amortisation/Total income.
4. Source: Bank of England.
5. LTV is calculated using the Nationwide Building Society
quarterly regional house price index (HPI).
6. Source: UK Finance
7. The UK leverage ratio includes a restriction on the amount of
Additional Tier 1 capital and excludes central bank reserves from
the calculation of leverage exposures.
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